Difference between revisions of "Accounting fraud"

24 bytes removed ,  14:02, 4 October 2021
Line 72: Line 72:
* Defendants improperly took excess operating expense amounts that had been accrued in prior accounting periods, but not expended, which should have been written off, and instead reduced those accruals in subsequent periods to reduce Penn West’s operating expenses and make them appear more consistent over the course of the year. This practice was referred to internally as “accrual softening.”
* Defendants improperly took excess operating expense amounts that had been accrued in prior accounting periods, but not expended, which should have been written off, and instead reduced those accruals in subsequent periods to reduce Penn West’s operating expenses and make them appear more consistent over the course of the year. This practice was referred to internally as “accrual softening.”


'''<u>Channel-Stuffing</u>'''
=='''Channel-Stuffing'''==


*'''<u>SEC v. Symbol Technologies Inc.</u>'''
*'''<u>SEC v. Symbol Technologies Inc.</u>'''
Line 82: Line 82:
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>'''
=='''Fraudulent Management Estimates and “Cookie Jar” Reserves'''==


*'''<u>SEC v. Computer Sciences Corporation</u>'''
*'''<u>SEC v. Computer Sciences Corporation</u>'''
Line 88: Line 88:
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>'''
=='''Improper Post-Closing Entries'''==


*'''<u>SEC v. Weatherford International</u>'''
*'''<u>SEC v. Weatherford International</u>'''
Line 94: Line 94:
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>'''
=='''Auditor-Independence Violations'''==


*'''<u>SEC v. E&Y</u>'''
*'''<u>SEC v. E&Y</u>'''
Line 100: Line 100:
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>'''
=='''Improper Asset Valuations'''==


*'''<u>SEC v. Miller Energy Resources Inc.</u>'''
*'''<u>SEC v. Miller Energy Resources Inc.</u>'''
Line 106: Line 106:
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>'''
=='''Misleading Non-GAAP Financial Measures'''==


*'''<u>SEC v. SafeNet, Inc.</u>'''
*'''<u>SEC v. SafeNet, Inc.</u>'''
Line 112: Line 112:
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>'''
=='''Retaliating Against Whistleblowers'''==


*'''<u>SEC v. SandRidge Energy Inc.</u>'''
*'''<u>SEC v. SandRidge Energy Inc.</u>'''
Line 118: Line 118:
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>'''
=='''Largest Accounting Scandals'''==


The table below identifies some of the largest SEC enforcement actions against companies for accounting fraud:
The table below identifies some of the largest SEC enforcement actions against companies for accounting fraud: