Parmalat was an Italy based dairy company that was started in 1961 by Calisto Tanzi. The company became a multinational company in the 1980's and employed over 30,000 people in 30 countries. The company was Europe's biggest dairy company until its collapse in 2003.
In 2003 the CFO, Fausto Tonna, announced a 500 million euro bond issue, and was forced to resign. The new CFO appointed, Albert Ferraris, did not have access to some of the companies accounting books and began suspecting the companies debt was larger than it reported. Soon after going through a few more CFO's and the resignation of CEO Calisto Tanzi, Bank of America released a document showing a 3.95 billion euro bank account was forged. A fraud investigation began, and investors suffered huge losses when the company declared bankruptcy. The former CEO Tanzi was arrested and admitted an 8 billion euro hole in Parmalat's books. The auditors of the organization found the companies debt to be 14.3 billion euro which was almost eight times the amount originally reported. Tanzi later admitted to diverting funds from Parmalat to other subsidiaries of the company. He was charged with fraud and money laundering, and was sentenced to 10 years in prison.
The company's questionable accounting practices included selling itself credit-linked notes. They basically placed a bet on their own debt, and created an asset from nothing.
This is another of the huge accounting scandals outside of the United States, along with Satyam in India, that many people in the United States may not know about. It is important for accountants and auditors in the United States to recognize and know about the frauds that have occurred in recent years around the world. Knowing about these frauds will educate auditors on how to better recognize when fraud is occurring in a company.
Saturday, April 28, 2012
Health South Corporation Accounting Scandal
HealthSouth Corporation was statrted in Alabama in February of 1984 by Richard Scrushy. The company went public in 1986, and continued to grow throughout the late 1980's and 1990's through a series of mergers and acquisitions.
The company began having accounting problems in early 2002 when CEO Scrushy sold $75 million in stock a few days before HealthSouth corporation posted a huge loss. The SEC accussed the company of inflating their revenues by $1.4 billion. The CEO Scrushy allegedly instructed the company's senior officers to falsify the company's earnings to meet the expectations of investors, and inflated the company's income by as much as 4,700 percent!
The SEC investigated the stock sale by Scrushy, and determined the sale and huge loss posted were not related. The FBI searched the company headquarters after the CFO failed to get Scrushy to talk about the fraud while wearing a wire. In June of 2005, Scrushy was acquitted on all of the accounting fraud accounts against him including the charge that he violated the Sarbanes-Oxley Act. Following the search of the company headquarters the board of directors terminated CEO Richard Scrushy.
The company hired a restructuring firm Alvarez and Marsal to get its finances in order, and to deal with their cash flow problems. The company cut all ties with Scrushy and was able to avoid Chapter 11 bankruptcy in 2003. The company began selling divisions of the company over the next three years, and was able to again file with the SEC and be publically traded on the New York Stock Exchange in 2006.
The company began having accounting problems in early 2002 when CEO Scrushy sold $75 million in stock a few days before HealthSouth corporation posted a huge loss. The SEC accussed the company of inflating their revenues by $1.4 billion. The CEO Scrushy allegedly instructed the company's senior officers to falsify the company's earnings to meet the expectations of investors, and inflated the company's income by as much as 4,700 percent!
The SEC investigated the stock sale by Scrushy, and determined the sale and huge loss posted were not related. The FBI searched the company headquarters after the CFO failed to get Scrushy to talk about the fraud while wearing a wire. In June of 2005, Scrushy was acquitted on all of the accounting fraud accounts against him including the charge that he violated the Sarbanes-Oxley Act. Following the search of the company headquarters the board of directors terminated CEO Richard Scrushy.
The company hired a restructuring firm Alvarez and Marsal to get its finances in order, and to deal with their cash flow problems. The company cut all ties with Scrushy and was able to avoid Chapter 11 bankruptcy in 2003. The company began selling divisions of the company over the next three years, and was able to again file with the SEC and be publically traded on the New York Stock Exchange in 2006.
Satyam accounting scandal
In January of 2009 Satyam, an Indian based IT services company was involved in an enormous accounting scandal. The CEO, Ramalingam Raju, admitted to overstating the companies assets. Satyam overstated cash by $1.5 billion, overstated accounts receivable by $100 million, and understated their liabilities by $250 million. The ICAI which is India's regulator of chartered accountants issued a show-cause notice to PricewaterhouseCoopers which was Satyam's auditor. SEBI which is a stock market regulator said that if found guilty with their involvement in the scandal PricewaterhouseCoopers could lose its license to work in India. Satyam was the winner of the 2008 Golden Peacock Award for Corporate Governance under risk management and compliance issues. They were stripped of the award after the scandal broke. The Indian division of PricewaterhouseCoopers announced that it relied on potentially false information that was given to them by the management of Satyam. They said this false information may have rendered its audit reports inaccurate and unreliable. The CEO Mr. Raju had allegedly been withdrawing around $4 million from the company every month to pay 13,000 employees that were not working for the company. The computer services company restated financial results for a period of six years from 2002 to 2008 and published the results in September of 2009.
India's PricewaterhouseCooper's firms agreed to pay a class action securities settlement of $25.5 million which included fines and penalties of $7.5 million to the SEC and PCAOB for noncompliance with generally accepted auditing standards. The SEC and PCAOB said that quality failures had occurred in the Satyam audit over a period of a number of years, and compliance failures were occuring across PricewaterhouseCoopers entire practice in India. PricewaterhouseCoopers auditors failed to maintain control and did not confirm with a third party the information they were given by Satyam's management.
India's PricewaterhouseCooper's firms agreed to pay a class action securities settlement of $25.5 million which included fines and penalties of $7.5 million to the SEC and PCAOB for noncompliance with generally accepted auditing standards. The SEC and PCAOB said that quality failures had occurred in the Satyam audit over a period of a number of years, and compliance failures were occuring across PricewaterhouseCoopers entire practice in India. PricewaterhouseCoopers auditors failed to maintain control and did not confirm with a third party the information they were given by Satyam's management.
Friday, April 27, 2012
Le-Nature scandal
Gregory Podlucky is the former head of a Pennsylvania soft drink maker, Le-Nature Inc. He was sentenced to 20 years in prison for a massive accounting fraud and money laundering scheme. He and four other employees at the company were involved in an $806 million fraud.The CEO Podlucky cooked the companies books to get loans and equipment leases. The fraud resembled a corporate ponzi scheme. He and his associates falsified their level of business activity and created fraudulent company financial statements that inflated their assets by substantial amounts. They transferred funds among various accounts to document fictitious transactions that gave the appearance of sales revenues. They used two sets of books to inflate financial statements which helped them obtain $875 million in credit and equipment leases. The company was forced into bankruptcy in 2006 by creditors which helped uncover the fraud. The fraud cost investors and lendors $684 million. Podlucky stole an estimated $30 million from the company to fund his lavish lifestyle. His wife and son were just recently sentenced to prison for their involvement in the scandal.
Monday, April 16, 2012
Spotting Fraud: Going beyond your legal obligation
On March 7, 2012 Japanese prosecutors filed charges against Olympus Corp.
and executives allegedly involved in the company's $1.5 billion accounting
scandal. Olympus Corp. is a Japanese company that specializes in making cameras
and medical-imaging equipment. The company admitted to hiding investment losses
for more than a decade in one of Japan's biggest corporate scandals.
On March 29, 2012 Ernst and Young ShinNihon was cleared of legal responsibility for its involvement in the Olympus Scandal. Ernst and Young ShinNihon commissioned an independent panel to investigate the matter, and they were cleared of any legal responsibility in its audit of Olympus Corp. The panel found that while no significant flaws were found that would that would cause a legal violation of duty, the scandal shows that accounting firms need to go beyond their legal responsibilities when looking for potential fraud.
The Olympus scandal is one of the many scandals in recent years where corporate executives and upper level management hid investment losses and misstated their company’s financial statements. In all of these scandals in recent years of large public companies, an accounting firm was involved that gave these companies a clean bill of health. In the current financial crisis accounting firms are being scrutinized more and more for not spotting inaccuracies and fraud in publically traded companies. Accounting firms and their auditors need to go beyond the legal obligations of an audit, and dig deeper when trying to determine potential fraud areas. By doing this, and spotting frauds earlier and more often, auditors and their respective accounting firms will gain a better reputation in the industry. Accounting firms will also start to gain back the trust of investors and the public, by spotting fraud earlier and more often. It would be much better for accounting firms to be in the news for recognizing frauds, and not for being a part of them.
On March 29, 2012 Ernst and Young ShinNihon was cleared of legal responsibility for its involvement in the Olympus Scandal. Ernst and Young ShinNihon commissioned an independent panel to investigate the matter, and they were cleared of any legal responsibility in its audit of Olympus Corp. The panel found that while no significant flaws were found that would that would cause a legal violation of duty, the scandal shows that accounting firms need to go beyond their legal responsibilities when looking for potential fraud.
The Olympus scandal is one of the many scandals in recent years where corporate executives and upper level management hid investment losses and misstated their company’s financial statements. In all of these scandals in recent years of large public companies, an accounting firm was involved that gave these companies a clean bill of health. In the current financial crisis accounting firms are being scrutinized more and more for not spotting inaccuracies and fraud in publically traded companies. Accounting firms and their auditors need to go beyond the legal obligations of an audit, and dig deeper when trying to determine potential fraud areas. By doing this, and spotting frauds earlier and more often, auditors and their respective accounting firms will gain a better reputation in the industry. Accounting firms will also start to gain back the trust of investors and the public, by spotting fraud earlier and more often. It would be much better for accounting firms to be in the news for recognizing frauds, and not for being a part of them.
Tuesday, April 3, 2012
Do you remember who you work for?
An auditor is hired and paid by an accounting firm. The success of the accounting firm depends on the ability to maintain good working relationships with clients. A client of an accounting firm wants to have a clean audit report every time their financial statements are audited.
A clean bill of health gives the client opportunities such as increased shareholder confidence, the ability to borrow money when needed, and an established reputation of being a well run organization. If an auditor for an accounting firm finds a material problem with a clients financial reporting they have an obligation to disclose that information to the public, and to give the client a qualified or adverse opinion. A qualified or adverse opinion can be detrimental to a client's future. It can cause stock price to drop, can decrease revenues and profits for the accounting period if financial reports are misstated, and can be detrimental to the client's ability to continue doing business. An adverse or qualified opinion can also result in the client firing the audit firm and seeking out another opinion. As a result auditors are put in situations with conflicting interests which can compromise an auditor's independence. As an auditor you need to maintain independence no matter what the consequences, and remember who you are really working for.
As an auditor you are working as a public watchdog. You are conveying to average people the financial health of companies with your audit reports, and assuring the accuracy of companies financial statements. You are working for the thousands of people who lost their jobs and retirement savings in investments such as WorldCom, Enron, and Bernie Madoff's ponzi scheme. Do not forget that you work for the public, and the public is where your loyalties should lie.
A clean bill of health gives the client opportunities such as increased shareholder confidence, the ability to borrow money when needed, and an established reputation of being a well run organization. If an auditor for an accounting firm finds a material problem with a clients financial reporting they have an obligation to disclose that information to the public, and to give the client a qualified or adverse opinion. A qualified or adverse opinion can be detrimental to a client's future. It can cause stock price to drop, can decrease revenues and profits for the accounting period if financial reports are misstated, and can be detrimental to the client's ability to continue doing business. An adverse or qualified opinion can also result in the client firing the audit firm and seeking out another opinion. As a result auditors are put in situations with conflicting interests which can compromise an auditor's independence. As an auditor you need to maintain independence no matter what the consequences, and remember who you are really working for.
As an auditor you are working as a public watchdog. You are conveying to average people the financial health of companies with your audit reports, and assuring the accuracy of companies financial statements. You are working for the thousands of people who lost their jobs and retirement savings in investments such as WorldCom, Enron, and Bernie Madoff's ponzi scheme. Do not forget that you work for the public, and the public is where your loyalties should lie.
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