Scandal - Copy

8/6/2019 Scandal - Copy

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SCANDAL

SCANDAL


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Origin of companies


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ORIGIN OF COMPANIES

ASIA

Kanebo Limited

BCCI Satyam

Computer

Services

AMERICA

AIG

Enron Corporation

Tyco International

Waste

Management, Inc

Health SouthCorporation

WorldCom

EUROPE

Parmalat


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ASIA

29%

AMERICA

58%

EUROPE

13%

ORI IN


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ENRONSCANDAL


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WhoWas Involved?

FOUNDER

CEO

CFO

VICE

PRESIDENT


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How was the Fraud perpetrated?


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SPES borrows fund to run business without debt showing

in B/S

Company can also sell leveraged assets and book a profit

Advantage of rule based USGAAP

using SPEs , a company is permitted to increase

leverage and ROA without having to report debt on

its balance sheet

Company contributes hard assets and related debt to an SPE inexchange for an interest in the partnership


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To avoid classification ofSPE as a subsidiary

FASB guidelines require that only 3% ofSPE be

owned by outside investor


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assets

assets

ENRON

SPE

SPE

Losses

losses

Income statement


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SHARES


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SHARES

SHARES


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Independence ofExternal Auditor


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Receive high percentage of fees

internal auditing

Staff ofEnron was the executive ofAA

Provide unqualified audit opinion

AA was consulted on and participated in setting up SPEs

In conjunction with Enron staffAA violates USGAAP

Destroyed thousands of documents related to Enron


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INDEPENDENT INVESTIGATION

REVEALEDCONSOLIDATION WAS OMMITED

UNDESTATEMENT OF LIABILITIES OF$628.

CFO OWNED THE SPE


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Though investigation found this

misstatement But AA did not find any misstatement from

1997 to 2001

and provided unqualified opinions on

Enrons financial statements since 1985


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year

1 2 3 4

105

703

893

979

570

77

645

880INFLATED INCOME


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73%

81%72%

90%

2000


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BENEFITS OF AA


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TOTALWI

15%

AUDIT FEES

41%

NONAUDIT

44%

FEES


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AA VIOLATES

CODE OF ETHICS

DOCUMENT RETENSION POLICY

INTIMEDATIONTHREAT

SELF REVIEWTHREAT

SELF INTERESTTHREAT

FAMILIARITYTHREAT


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INTIMEDATIONTHREAT

SELF REVIEWTHREAT

SELF INTERESTTHREAT

FAMILIARITYTHREAT

Sherron Watkins, an

E

nron vice-president, CPA

and auditorpreviously with Arthur Andersen for 8 years

Many ofEnrons internal accountants, CFOs and controllers

were former AA executives and employees


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INTIMEDATIONTHREAT

SELF REVIEWTHREAT

SELF INTERESTTHREAT

FAMILIARITYTHREAT

AA was not only Enrons external auditor, but also its internal

auditor


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INTIMEDATIONTHREAT

SELF REVIEWTHREAT

SELF INTERESTTHREAT

FAMILIARITYTHREAT

In 2000, AA received $25 million in audit fees and $27 million in non-audit consulting fees from Enron


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INTIMEDATIONTHREAT

SELF REVIEWTHREAT

SELF INTERESTTHREAT

FAMILIARITYTHREAT

AA was the auditor for Enron since 1985


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Title

CODE OF ETHICS

DOCUMENT RETENSION POLICY

it destroyed thousands of documents and

electronic files related to the Enron audits

before 5 years.


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THINK GREEN

MAKE WORLD CLEAN


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Capital

TaxProfit

Depreciation

Fixed Asset

Loan

Expense

Asset

Current Asset

Investment Revenue

10%

30%


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Expense

Expense

Revenue

Income Statement


management inflated earnings by improperlyeliminating and deferring current period expenses


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Assigned arbitrary salvage values to other assets that previously hadno salvage value

Avoided depreciation expenses on their garbage trucks by both assigningunsupported and inflated salvage values and extending their useful lives

Improperly capitalized a variety of expenses

Failed to record expenses for decreases in the value of landfills asthey were filled with waste,



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Environmental

Reserve

established inflated environmental reserves (liabilities) in connection withacquisitions so that the excess reserves could be used to avoid recordingunrelated operating expenses

operating expenses

How was the Fraud perpetrated? (cont.)


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No reserve to pay Taxes and Expenses

How was the Fraud perpetrated?(cont.)


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TO REDUCE EXPENSESANDTO REDUCE EXPENSESAND

INFLATE EARNINGSINFLATE EARNINGS

ARTIFICIALLY, MANAGEMENTARTIFICIALLY, MANAGEMENTPRIMARILY USED PRIMARILY USED TTOPOP--LEVELLEVEL

ADJUSTME TSADJUSTME TS"TO"TOCONFORM THE COMPANY'SCONFORM THE COMPANY'S

ACTUAL RESULTSTO THEACTUAL RESULTSTO THE

PREDETERMINED EARNINGSPREDETERMINED EARNINGS

TARGETSTARGETS



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How was the fraud covered?

primarily used "top-level adjustments" to conform the company's

actual results to the predetermined earnings targets

Accounting practices were centralized at corporate headquarters

Each

year, Buntrock, Rooney, and oth

ers prepared an annual budgetin which they set earnings targets for the upcoming year.

The inflated earnings of prior periods then became the floor for futuremanipulations.


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FINALLY REVEALED!!!!!!

R

E

VI

E

W


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1,700,000,000,000

RESTATEMENT


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Auditors Involvement

Auditor of theWasteManagement

management capped Andersen's audit fees and advised theAndersen engagement partner that the firm could earn

additional fees through"special work


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Andersen nevertheless identified the company's improperaccounting practices and quantified much of the impact of thosepractices on the company's financial statements.

Andersen annually presented Company management with what it called ProposedAdjusting Journal Entries ("PAJEs") to correct errors that understated expenses andoverstated earnings in the Company's financial statements

Management consistently refused to make the adjustments calledfor by the PAJEs

Auditors Involvement (cont.)


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How did Management fare?

receiving performance-based bonusesbased on the Company's inflated earnings

retaining their high-paying jobs

stock options

received enhanced retirement benefitsbased on the improper bonuses


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Cashing In

While stock price is risingBuntrock, Rooney, and Koenig

avoided losses by cashing intheirWaste Management stockwhile the fraud was ongoing


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As the stock price

falls, the actual

shareholders lose their

investment more than $6billion.

Who Was Hurt?


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How muchmoney they have taken?

16917761

9286124

951005 640100 472500 4037790

5000000

10000000

15000000

20000000

Burtrock Rooney Koenig Hau Getz Tobecksen

Income

Income


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SEC Reaction

"For years, these defendants cooked thebooks, enriched themselves, preserved theirjobs, and duped unsuspecting shareholders."

Th

omas C. NewkirkAssociate director

SEC's Division of

Enforcement

"Our complaint describes one of themost egregious accounting frauds wehave seen,"


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Main culprit.!!!

He set earnings targets, fostered a culture of

aggressive accounting, personally directedcertain of the accounting changes to makethe targeted earnings,

Buntrock was the driving force behind the fraud.

The spokesperson who announced theCompany's phony numbers.


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Rooney was in charge of building the profitabilityof the Company's core solid waste operations

He ensured that required write-offs were not recordedand, in some instances, overruled accounting decisionsthat would have a negative impact on operations

Main culprit.!!!Main culprit.!!!


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Fraud At HealthSouthFraud At HealthSouth

CorporationCorporation


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WHOWAS INVOLVEDWHOWAS INVOLVED

RichardRichard M.ScrushyM.Scrushy

FOU

DERFOU

DER

WilliamWilliam T.OwensT.Owens--FormerFormer

CFO

Global Associates

Ms. DianaMs. Diana HenzeHenze--FormerFormer

ACFOACFO


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WHEN?WHEN?

From 1999 To 2003From 1999 To 2003--The former executivesThe former executives

cooked the company's books to meetcooked the company's books to meet

predetermined earnings targets.predetermined earnings targets.

The following are the information that describeThe following are the information that describe

the income of those year:the income of those year:


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YearYear RevenueRevenue Net IncomeNet Income NetNet

Profit%Profit%

DEC2001DEC2001 4380.54380.5 202.4202.4 4.6%4.6%

DEC2000DEC2000 4195.14195.1 278.5278.5 6.6%6.6%

DEC 1999DEC 1999 4072.14072.1 76.576.5 1.9%1.9%


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HOWWASTHE FRAUD PERPETRATEDHOWWASTHE FRAUD PERPETRATED

Co. Former CEOCo. Former CEO ScrushyScrushy target its profit even thoughhe knewtarget its profit even thoughhe knewabout the short of profit ,he manipulated the profit;about the short of profit ,he manipulated the profit;

ScrushyScrushy & his executives agreed upon accounting entries to& his executives agreed upon accounting entries toreduce a contra revenue account or decreasing expenses&reduce a contra revenue account or decreasing expenses&

correspondently increasing assets or decreasing liabilities;correspondently increasing assets or decreasing liabilities; They also balance the co. books, false increases in increases inThey also balance the co. books, false increases in increases in

earning were matched by false increase in co. assets;earning were matched by false increase in co. assets;

The contractual adjustment account are based upon anThe contractual adjustment account are based upon anestimate of the difference between when the co. billed theestimate of the difference between when the co. billed the

patient& the amount of money insurance co. reimbursedpatient& the amount of money insurance co. reimbursedHealthsouthHealthsouth;;


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CONTINUED...CONTINUED...

There was a limited paper trail that was very difficultThere was a limited paper trail that was very difficult

for auditor to trace out the individual entries;for auditor to trace out the individual entries;

Another structural contribution was the fact thatAnother structural contribution was the fact that

most decision were made at the execution levelmost decision were made at the execution levelwhich limited checks & balances along the way;which limited checks & balances along the way;

Scrushy was also accused of using corporate funds toScrushy was also accused of using corporate funds to

buy personal items such as luxuriousbuy personal items such as luxurious

cars,boats,jewelry etc.cars,boats,jewelry etc.


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HowWas The Fraud Uncovered?HowWas The Fraud Uncovered?

In 2003,the SEC accused the co. &In 2003,the SEC accused the co. &ScrushyScrushy of inflatingof inflating

earnings to the tune of 1.4 billion since 1999.earnings to the tune of 1.4 billion since 1999.

In November2003,a federal grand jury indictedIn November2003,a federal grand jury indicted

ScrushyScrushy on 85 counts for money laundering &on 85 counts for money laundering &overstating earnings by nearly $3.0 billion.overstating earnings by nearly $3.0 billion.


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WhereWere The Auditor?WhereWere The Auditor?

HEALTHSOUTH auditor Ernest& young(E&Y) failed toHEALTHSOUTH auditor Ernest& young(E&Y) failed to

uncover the 2.5 billion systematic overstatement ofuncover the 2.5 billion systematic overstatement of

earnings;earnings;

The auditor allowed the co. to keep on its book $500The auditor allowed the co. to keep on its book $500million of overvalued A/R owed to by Financiallymillion of overvalued A/R owed to by Financially

distressed health care technology firms& did notdistressed health care technology firms& did not

insist on establishing adequate reserves for theseinsist on establishing adequate reserves for these

receivables.receivables.


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Earnest& Young InvolvementEarnest& Young Involvement

E&Yhas non audit business dealings withE&Yhas non audit business dealings with

HEALTHSOUTH;HEALTHSOUTH;

E&Y used a 50 point checklist designed byE&Y used a 50 point checklist designed by ScrushyScrushy &&

that audit score were used by HEALTHSOUTH in itsthat audit score were used by HEALTHSOUTH in itsmarketing campaign;marketing campaign;

The audit firm takes $2.6 million fee for the auditThe audit firm takes $2.6 million fee for the audit

fees but the work was not clearly audit related thatfees but the work was not clearly audit related that

raises the impartiality &independence of auditors.raises the impartiality &independence of auditors.


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Cozy RelationshipsCozy Relationships

One SEC Regulator said that he thinks theOne SEC Regulator said that he thinks the

relationship between E&Y &Co.s CFO was toorelationship between E&Y &Co.s CFO was too

cozy.cozy.

E&Y also help them to committing the fraud.E&Y also help them to committing the fraud.


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The Fraudsters schemeThe Fraudsters scheme

To reduce expenses and inflate earningsTo reduce expenses and inflate earnings

artificially, management primarily used "topartificially, management primarily used "top--levellevel

adjustments" to conform the company's actualadjustments" to conform the company's actual

results to the predetermined earnings targets.results to the predetermined earnings targets. The inflated earnings of prior periods then becameThe inflated earnings of prior periods then became

the floor for future manipulations. To sustain thethe floor for future manipulations. To sustain the

scheme, earnings fraudulently achieved in onescheme, earnings fraudulently achieved in one

period had to be replaced in the next.period had to be replaced in the next.


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WhyWas This Fraud So Important?WhyWas This Fraud So Important?

If E&Y informed co. to avoid this kind ofIf E&Y informed co. to avoid this kind of

fraudulent activity then the co. would havefraudulent activity then the co. would have

been survived.been survived.

As the Healthsouth were so many reputation.As the Healthsouth were so many reputation.

so this kind of scandal hamper their image inso this kind of scandal hamper their image in

the society.the society.

H did h


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How did mgt here.


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How did mgt here.

In 2002litigation

committeecomposed of

so calledindependent

director

Director:LARRY

D.STRI LIN

An old friend

ofScr s y

FRAUDULANCY!!!!


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The web of deceit

*Within 5 former CFOs

Th b f d it


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The web of deceit

*The company overstated earnings

to meet analysts earning

estimates, while hiding theaccounting fraud from the auditors.

* Questions were raised whetherthe auditors failed to find or simply

overlooked the fraud


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How much was taken????

Income

(loss in $

millions)

1999 2000 2001 For

6months

ended

June 30,2002

Actual $(191) $194 $9 $157

Budgeted 230 559 434 340

Misstated

amount

421 365 425 183

Misstated

percentag

e

220% 188% 4722% 119


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How much was taken????


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Cashing in.

Famouspaintings

Expensivejewelry

Antiquerugs

Luxuriouscars


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Cashing in.

*Scrushy made largedonations in churches

*To build sympath

y amongreligious conservatives

Wh h t???


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Who was hurt???


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Who was hurt???

Year Net income

($ mil.)

Employees

2005 (445.9) 2400

2004 (174.5) 40000

2003 (434.6) 40000

2002 (466.8) 51000


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SEC reaction

Inflatingcos

earnings by$1.9 bilion

since 1999

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