Difference between revisions of "Accounting fraud"

74 bytes added ,  13:06, 28 September 2021
no edit summary
(Created page with "'''Increase in Accounting Fraud Whistleblower Tips''' In a 2016 keynote speech, the SEC Enforcement Director confirmed the SEC’s continued focus on issuer reporting and...")
 
Line 24: Line 24:
'''<u>Improper Revenue Recognition</u>'''
'''<u>Improper Revenue Recognition</u>'''


According to a Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002, during the five years preceding the enactment of SOX, the “SEC brought the greatest number of actions [involving issuer financial-report violations] in the area of improper revenue recognition: 126 of the 227 enforcement matters involved such conduct, including the fraudulent reporting of fictitious sales, improper timing of revenue recognition, and improper valuation of revenue.” The following enforcement actions are examples of improper revenue recognition schemes that could qualify for an SEC award.
According to a [[Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002]], during the five years preceding the enactment of SOX, the “SEC brought the greatest number of actions [involving issuer financial-report violations] in the area of improper revenue recognition: 126 of the 227 enforcement matters involved such conduct, including the fraudulent reporting of fictitious sales, improper timing of revenue recognition, and improper valuation of revenue.” The following enforcement actions are examples of improper revenue recognition schemes that could qualify for an SEC award.


*'''<u>SEC v. Garthright</u>'''
*'''<u>SEC v. Garthright</u>'''
Line 56: Line 56:
*'''<u>SEC v. Monsanto</u>'''
*'''<u>SEC v. Monsanto</u>'''


On February 9, 2016, the SEC announced that Monsanto agreed to pay an $80 million penalty for inadequate internal accounting controls. According to the SEC’s order, the company failed to properly account for millions of dollars in rebates offered to retailers and distributors of Roundup after generic competition had undercut its prices and caused the company to lose significant share in the market. Monsanto booked substantial amounts of revenue from sales incentivized by the rebate program, but failed to recognize all of the related program costs at the same time. A whistleblower received a more than $22 million award for disclosing this fraud to the SEC.
On February 9, 2016, the SEC announced that Monsanto agreed to pay an '''$80 million''' penalty for inadequate [[internal accounting controls]]. According to the SEC’s order, the company failed to properly account for millions of dollars in rebates offered to retailers and distributors of Roundup after generic competition had undercut its prices and caused the company to lose significant share in the market. Monsanto booked substantial amounts of revenue from sales incentivized by the rebate program, but failed to recognize all of the related program costs at the same time. A whistleblower received a more than '''$22 million award''' for disclosing this fraud to the SEC.


'''<u>Improper Accounting of Expenses</u>'''
'''<u>Improper Accounting of Expenses</u>'''
Line 62: Line 62:
*'''<u>SEC v. Penn West Petroleum</u>'''
*'''<u>SEC v. Penn West Petroleum</u>'''


Penn West, a Canadian-based oil and gas company has agreed to pay $8.5 million in civil penalties for fraudulently moving hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This accounting fraud artificially reduced the company’s operating costs by as much as 20 percent in certain periods.  The object of the scheme was to deceive investors about a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil.
Penn West, a Canadian-based oil and gas company has agreed to pay '''$8.5 million''' in civil penalties for fraudulently moving hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This accounting fraud artificially reduced the company’s operating costs by as much as 20 percent in certain periods.  The object of the scheme was to deceive investors about a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil.


As alleged in the SEC’s complaint, Defendants engaged in three principal types of improper accounting practices in furtherance of their scheme:
As alleged in the SEC’s complaint, Defendants engaged in three principal types of improper accounting practices in furtherance of their scheme:
Line 76: Line 76:
*'''<u>SEC v. Symbol Technologies Inc.</u>'''
*'''<u>SEC v. Symbol Technologies Inc.</u>'''


On April 27, 2015, the SEC obtained a $131 million judgment against Symbol Technologies Inc. for fraudulent revenue-recognition practices, including quarter-end “stuffing” of Symbol’s distribution channel to help meet revenue and earnings targets imposed by its CEO.
On April 27, 2015, the SEC obtained a '''$131 million''' judgment against Symbol Technologies Inc. for fraudulent revenue-recognition practices, including quarter-end “stuffing” of Symbol’s distribution channel to help meet revenue and earnings targets imposed by its CEO.


*'''<u>SEC v. Bristol-Myers Squibb</u>'''
*'''<u>SEC v. Bristol-Myers Squibb</u>'''


On August 4, 2004, Bristol-Myers Squibb agreed to pay a $150 million fine for selling excessive amounts of pharmaceutical products to its wholesalers ahead of demand in order to falsely inflate earnings. The channel-stuffing resulted in the company improperly recognizing revenue from $1.5 billion in sales to its two largest wholesalers. In addition, the SEC filed charges against two former Bristol-Myers officers for the fraudulent earnings management scheme.
On August 4, 2004, Bristol-Myers Squibb agreed to pay a '''$150 million''' fine for selling excessive amounts of pharmaceutical products to its wholesalers ahead of demand in order to falsely inflate earnings. The channel-stuffing resulted in the company improperly recognizing revenue from $1.5 billion in sales to its two largest wholesalers. In addition, the SEC filed charges against two former Bristol-Myers officers for the fraudulent earnings management scheme.


'''<u>Fraudulent Management Estimates and “Cookie Jar” Reserves</u>'''
'''<u>Fraudulent Management Estimates and “Cookie Jar” Reserves</u>'''
Line 86: Line 86:
*'''<u>SEC v. Computer Sciences Corporation</u>'''
*'''<u>SEC v. Computer Sciences Corporation</u>'''


On June 5, 2015, Computer Sciences Corporation agreed to pay $190 million to settle charges that the company engaged in a wide-range accounting-and-disclosure fraud that materially overstated its earnings and concealed from investors significant problems with its largest contract. According to the SEC’s order, the company’s former Finance Director prepared a fraudulent accounting model in which he included made-up assumptions to avoid reporting a negative hit to the company’s earnings. The company also overstated its earnings by using “cookie jar” reserves and by failing to record expenses as required.
On June 5, 2015, Computer Sciences Corporation agreed to pay '''$190 million''' to settle charges that the company engaged in a wide-range accounting-and-disclosure fraud that materially overstated its earnings and concealed from investors significant problems with its largest contract. According to the SEC’s order, the company’s former Finance Director prepared a fraudulent accounting model in which he included made-up assumptions to avoid reporting a negative hit to the company’s earnings. The company also overstated its earnings by using “cookie jar” reserves and by failing to record expenses as required.


'''<u>Improper Post-Closing Entries</u>'''
'''<u>Improper Post-Closing Entries</u>'''
Line 92: Line 92:
*'''<u>SEC v. Weatherford International</u>'''
*'''<u>SEC v. Weatherford International</u>'''


On September 27, 2016, Weatherford International agreed to pay a $140 million penalty to settle charges that it inflated its earnings by using deceptive income-tax accounting. According to the SEC’s order, Weatherford fraudulently lowered its year-end provision for income taxes each year so the company could better align its earnings results with its earlier-announced projections and analysts’ expectations. The company lowered its year-end provision for income taxes by making numerous post-closing adjustments to fill gaps and meet its previously disclosed effective tax rate.
On September 27, 2016, Weatherford International agreed to pay a '''$140 million''' penalty to settle charges that it inflated its earnings by using deceptive income-tax accounting. According to the SEC’s order, Weatherford fraudulently lowered its year-end provision for income taxes each year so the company could better align its earnings results with its earlier-announced projections and analysts’ expectations. The company lowered its year-end provision for income taxes by making numerous post-closing adjustments to fill gaps and meet its previously disclosed effective tax rate.


'''<u>Auditor-Independence Violations</u>'''
'''<u>Auditor-Independence Violations</u>'''
Line 98: Line 98:
*'''<u>SEC v. E&Y</u>'''
*'''<u>SEC v. E&Y</u>'''


On September 19, 2016, the SEC announced that public accounting firm Ernst & Young had agreed to pay $9.3 million to settle charges that two of the firm’s audit partners had “inappropriately close personal relationships” with their clients and thereby violated independence rules designed to ensure that firms maintain their objectivity and impartiality during audits. In one of the SEC’s orders, an EY audit partner was having a romantic relationship with a client’s Chief Accounting Officer. The main EY audit partner on the account noticed signs of this romantic relationship but failed to perform a reasonable inquiry. In the SEC’s second order, an audit partner was accused of excessive socializing with a client’s Chief Financial Officer. This socializing included attending sporting events, taking vacations, and incurring other significant entertainment expenses that did not serve a proper a business purpose.
On September 19, 2016, the SEC announced that public accounting firm Ernst & Young had agreed to pay '''$9.3 million''' to settle charges that two of the firm’s audit partners had “inappropriately close personal relationships” with their clients and thereby violated independence rules designed to ensure that firms maintain their objectivity and impartiality during audits. In one of the SEC’s orders, an EY audit partner was having a romantic relationship with a client’s Chief Accounting Officer. The main EY audit partner on the account noticed signs of this romantic relationship but failed to perform a reasonable inquiry. In the SEC’s second order, an audit partner was accused of excessive socializing with a client’s Chief Financial Officer. This socializing included attending sporting events, taking vacations, and incurring other significant entertainment expenses that did not serve a proper a business purpose.


'''<u>Improper Asset Valuations</u>'''
'''<u>Improper Asset Valuations</u>'''
Line 104: Line 104:
*'''<u>SEC v. Miller Energy Resources Inc.</u>'''
*'''<u>SEC v. Miller Energy Resources Inc.</u>'''


On August 6, 2015, Miller Energy Resources Inc. was charged with inflating values of oil and gas properties, resulting in misstated financial statements. According to the SEC’s order, the company overstated the properties’ value by more than $400 million as a result of the CFO’s relying on a reserve report that did not reflect fair value of the assets. In addition, the CFO double-counted $110 million of fixed assets already included in the reserve report.
On August 6, 2015, Miller Energy Resources Inc. was charged with inflating values of oil and gas properties, resulting in misstated financial statements. According to the SEC’s order, the company overstated the properties’ value by more than '''$400 million''' as a result of the CFO’s relying on a reserve report that did not reflect fair value of the assets. In addition, the CFO double-counted $110 million of fixed assets already included in the reserve report.


'''<u>Misleading Non-GAAP Financial Measures</u>'''
'''<u>Misleading Non-GAAP Financial Measures</u>'''
Line 110: Line 110:
*'''<u>SEC v. SafeNet, Inc.</u>'''
*'''<u>SEC v. SafeNet, Inc.</u>'''


Recently, the SEC issued new guidance on its interpretation of the rules and regulations on the use of non-GAAP financial measures. In a previous enforcement action, the SEC fined a company more than $1 million for misleading non-GAAP financial measures.
Recently, the SEC issued new guidance on its interpretation of the rules and regulations on the use of non-GAAP financial measures. In a previous enforcement action, the SEC fined a company more than '''$1 million''' for misleading non-GAAP financial measures.


'''<u>Retaliating Against Whistleblowers</u>'''
'''<u>Retaliating Against Whistleblowers</u>'''
Line 116: Line 116:
*'''<u>SEC v. SandRidge Energy Inc.</u>'''
*'''<u>SEC v. SandRidge Energy Inc.</u>'''


On December 20, 2016, the SEC settled an internal-whistleblower retaliation claim with an Oklahoma energy company, SandRidge Energy Inc., for $1.4 million. According to the SEC order, the company used illegally restrictive separation agreements forbidding former employees from cooperating in SEC and other government investigations, and that SandRidge fired an employee who raised concerns about its accounting.
On December 20, 2016, the SEC settled an internal-whistleblower retaliation claim with an Oklahoma energy company, SandRidge Energy Inc., for '''$1.4 million'''. According to the SEC order, the company used illegally restrictive separation agreements forbidding former employees from cooperating in SEC and other government investigations, and that SandRidge fired an employee who raised concerns about its accounting.


'''<u>Largest Accounting Scandals</u>'''
'''<u>Largest Accounting Scandals</u>'''