Difference between revisions of "Accounting fraud"

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Tangoe paid $1.5 million to settle charges that it reported revenue prematurely for work that had not been performed and for transactions that did not produce any revenue at all. According to the complaint, the violations included: “1) counting customers’ prepayments for future services as current revenue; 2) improperly recording a loan from a business partner as revenue; 3) recording revenue in the wrong reporting periods; 4) prematurely recording revenue from contingent fee arrangements; 5) recording revenue from customers who were unlikely to pay; 6) violating the accounting rules for bad debt reserves; and 7) prematurely counting revenue from long-term contracts with ongoing obligations.”
Tangoe paid $1.5 million to settle charges that it reported revenue prematurely for work that had not been performed and for transactions that did not produce any revenue at all. According to the complaint, the violations included: “1) counting customers’ prepayments for future services as current revenue; 2) improperly recording a loan from a business partner as revenue; 3) recording revenue in the wrong reporting periods; 4) prematurely recording revenue from contingent fee arrangements; 5) recording revenue from customers who were unlikely to pay; 6) violating the accounting rules for bad debt reserves; and 7) prematurely counting revenue from long-term contracts with ongoing obligations.”


=='''Inadequate Internal Controls over Financial Reporting (ICFR)'''==
'''Inadequate Internal Controls over Financial Reporting (ICFR)'''


*'''[https://www.sec.gov/news/pressrelease/2016-25.html SEC v. Monsanto]'''
*'''[https://www.sec.gov/news/pressrelease/2016-25.html SEC v. Monsanto]'''
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On February 9, 2016, the SEC announced that Monsanto agreed to pay an '''$80 million''' penalty for inadequate [https://www.zuckermanlaw.com/rewards-and-bounties-for-whistleblowers/internal-accounting-controls-whistleblower-rewards-bounties/ 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 [https://www.zuckermanlaw.com/rewards-and-bounties-for-whistleblowers/internal-accounting-controls-whistleblower-rewards-bounties/ 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.


=='''Improper Accounting of Expenses'''==
'''Improper Accounting of Expenses'''


*'''[https://www.sec.gov/litigation/complaints/2017/comp-pr2017-120.pdf SEC v. Penn West Petroleum]'''
*'''[https://www.sec.gov/litigation/complaints/2017/comp-pr2017-120.pdf SEC v. Penn West Petroleum]'''
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* 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.”


=='''Channel-Stuffing'''==
'''Channel-Stuffing'''


*'''[https://www.sec.gov/litigation/litreleases/2015/lr23247.htm SEC v. Symbol Technologies Inc.]'''
*'''[https://www.sec.gov/litigation/litreleases/2015/lr23247.htm SEC v. Symbol Technologies Inc.]'''
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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.


=='''Fraudulent Management Estimates and “Cookie Jar” Reserves'''==
'''Fraudulent Management Estimates and “Cookie Jar” Reserves'''


*'''[https://www.sec.gov/litigation/admin/2015/33-9804.pdf SEC v. Computer Sciences Corporation]'''
*'''[https://www.sec.gov/litigation/admin/2015/33-9804.pdf SEC v. Computer Sciences Corporation]'''
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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.


=='''Improper Post-Closing Entries'''==
'''Improper Post-Closing Entries'''


*'''[https://www.sec.gov/news/pressrelease/2016-194.html SEC v. Weatherford International]'''
*'''[https://www.sec.gov/news/pressrelease/2016-194.html SEC v. Weatherford International]'''
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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.


=='''Auditor-Independence Violations'''==
'''Auditor-Independence Violations'''


*'''[https://www.sec.gov/news/pressrelease/2016-187.html?_ga=1.86134815.641111032.1470880180 SEC v. E&Y]'''
*'''[https://www.sec.gov/news/pressrelease/2016-187.html?_ga=1.86134815.641111032.1470880180 SEC v. E&Y]'''
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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 [https://www.zuckermanlaw.com/rewards-and-bounties-for-whistleblowers/auditor-independence-whistleblower-lawyers/ violated independence rules] designed to ensure that firms maintain their objectivity and impartiality during audits. In one of the SEC’s [https://www.sec.gov/litigation/admin/2016/34-78872.pdf 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 [https://www.sec.gov/litigation/admin/2016/34-78873.pdf 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 [https://www.zuckermanlaw.com/rewards-and-bounties-for-whistleblowers/auditor-independence-whistleblower-lawyers/ violated independence rules] designed to ensure that firms maintain their objectivity and impartiality during audits. In one of the SEC’s [https://www.sec.gov/litigation/admin/2016/34-78872.pdf 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 [https://www.sec.gov/litigation/admin/2016/34-78873.pdf 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.


=='''Improper Asset Valuations'''==
'''Improper Asset Valuations'''


*'''[https://www.sec.gov/litigation/admin/2015/33-9881.pdf SEC v. Miller Energy Resources Inc.]'''
*'''[https://www.sec.gov/litigation/admin/2015/33-9881.pdf SEC v. Miller Energy Resources Inc.]'''
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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.


=='''Misleading Non-GAAP Financial Measures'''==
'''Misleading Non-GAAP Financial Measures'''


*'''[https://www.sec.gov/litigation/litreleases/2009/lr21290.htm SEC v. SafeNet, Inc.]'''
*'''[https://www.sec.gov/litigation/litreleases/2009/lr21290.htm SEC v. SafeNet, Inc.]'''
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Recently, the SEC issued [https://www.sec.gov/corpfin/non-gaap-financial-measures 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 [https://www.sec.gov/corpfin/non-gaap-financial-measures 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.


=='''Retaliating Against Whistleblowers'''==
'''Retaliating Against Whistleblowers'''


*'''[https://www.sec.gov/news/pressrelease/2016-270.html SEC v. SandRidge Energy Inc.]'''
*'''[https://www.sec.gov/news/pressrelease/2016-270.html SEC v. SandRidge Energy Inc.]'''