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The SEC started an investigation to Enron and the partnerships headed by Andrew Fastow
Enron admits that there was an actual loss of $586M dating from 1997 after they have revised their financial statements
January 9
Andersen was fired by Enron because of destroying the company's documents
Enron scandal became a symbol of corruption for the whole Western economic system as 4, employees lost their jobs and their pension fund was abolished. During this period, citizen's trust in the economic system was destroyed and financial market suffered to the worst stock value loss in peaceful times
THE ENRON SCANDAL
Skilling suddenly resigns citing personal
reasons. Lay returns as CEO but analysts became weary of the
company's state and lower their ratings
on Enron stock. Enron's share drops to $39.95 per share, a 52-week low.
T H E F A L L O F A W A L L S T R E E T D A R L I N G
Enron was founded by Kenneth Lay in the merger of two natural gas transmission companies, Houston Natural Gas Corporation and InterNorth, Inc.
Jeff Skilling was hired by Lay and led the company's effort to focus on trading commodities in the deregulated markets
Andrew Fastow became the chief financial officer; He manage the creation of the company's partnerships that help hide Enron's losses
Arthur Andersen legal counsel instruct auditors to destroy Enron's files except the basic documents
$618M first quarterly loss was reported by Enron and disclosed a $12B reduction in shareholder's equity owing in part to Fastow's partnership
Arthur Andersen was convicted because of obstruction of justice 78 charges of conspiracy, fraud, money laundering and other counts was charged to Fastow
The SEC extended its investigation to Arthur Andersen
Enron's shares rose to an exceptional high of $90.56 per share
Jeffrey Skilling became CEO of Enron after Lay decided to retire
The Department of Justice started its criminal investigation to Enron
Economic Implications Fraudulent Energy Crisis
Enron defrauded California by creating imaginary shortages in energy supplies during the 2000-2001 California energy crisis that drive up prices and reap vast profits in the state's newly deregulated energy market.
This was passed by the congress in response to the scandal, to protect the interest of investors and further the public interest in the preparation of informative, accurate and independent audit reports
Sarbanes-Oxley Act
Skilling introduced the Mark-to-Market accounting technique—recognizing unrealized future gains, from some trading contracts into current income statement, presenting an illusion of higher profits. With its troubled assets, the company started to dump those in SPEs (Special Purpose Entities) to keep it off from ENRON’s book to make the losses look less severe than they really were. Because of MTM, the company boosted its stock price attracting more investors to the company.
Enron filled for chapter 11 bankruptcy
Skilling and Lay's trial began in
October 31 Houston,Texas
1985
(^1990 )
2000
2001
February 12
August 14
October 12 October 16
October 22
November 8
December 2 November 29
2002
January 17
June 15
2005
January 30
Creative Accounting
Brondo · Kallos · Petalio
OBJECTIVITY PRINCIPLE
The objectivity principle states
that accounting information and
financial reporting should be
independent and supported with
unbiased evidence. WORLDCOM violated
this principle by fabricating non-existent
revenues, without actual and valid
documents supporting the entries made.
MATCHING PRINCIPLE
Matching principle requires expenses to
be matched with revenues. WORLDCOM
violated this principle by capitalizing
period expenditures, overstating both
assets and equity. -Since expenses are
understated, cash flows and profit
inflated having no real matching of
revenues and expenses.
WorldCom's CFO fraudulently took
billions of dollars in operating expenses
and spread them out across so-called
property accounts—a type of capital
expense account. As a result, in 2001, the
company inflated revenue by roughly $
billion and reported a $1.4 billion profit
instead of a loss. Had the operating costs
been correctly reported, WorldCom
would have lost money for the 2001
fiscal year and first quarter of 2002. The
fraud was characterized mainly by the
improper reduction of line costs and
false adjustments to report revenue
growth.
Date of discovery : JUNE 2002
Person behind the discovery : Cynthia
Cooper , vice president of the
company’s internal audit unit
The fraud was uncovered through the
discovery of over $3.8 billion fraudulent
balance sheet entries. Eventually,
WORLDCOM was forced to admit that it
had overstated its assets by over $
billion.
This spate of corporate crime led to the
Sarbanes-Oxley Act in July 2002, which
strengthened disclosure requirements
and the penalties for fraudulent
accounting. In the aftermath,
WorldCom left a stain on the reputation
of accounting firms, investment banks,
and credit rating agencies that had
never quite been removed.
It is America's second-biggest long-
distance phone company, built up over
the years through a dizzying array of
mergers and acquisitions by its founder,
Bernard Ebbers. At the peak of the
telecoms boom, WorldCom was valued
at $180bn (£118bn) and employed
80,000 people. Mr Ebbers had a
personal fortune of $1.4bn.
WorldCom came into existence as a
result of a merger between an obscure
long-distance resale company, LDDS
(Long Distance Discount Service), and
two smaller firms, MFS
Communications and UUnet in the
early 1990s. The acquisition spree
culminated in the 1998 $37bn merger
with MCI, America's second-largest
long-distance phone company after
AT&T.
ACCOUNTING
PRINCIPLES VIOLATED
The meteoric rise and fall
of WorldCom has been
intimately linked to Wall
Street investment firms --
in particular Salomon
Smith Barney and its
parent company
Citigroup.
HOW DID WORLDCOM
BEGIN?
WHO WERE THE
PEOPLE INVOLVED?
From left to right - Bernard Ebbers (Chief
Executive Officer), Scott Sullivan (Chief
Financial Officer and Secretary), and
David Myers (Controller and Senior Vice
President)
WHEN WAS
WORLDCOM IN
TROUBLE?
HOW WAS THE FRAUD
DISCOVERED?
EFFECT OF THE FRAUD
IN THE FIELD OF
ACCOUNTING
WHAT IS WORLDCOM?
Tyco International Ltd. is a diversified manufacturing and service company, with four main operating
groups: healthcare and specialty products, fire and security services, flow control, and electrical and electronic components.
JUN 4, 2002
In early 2002, the Board of Directors of Tyco learned that one of its members Frank Walsh was paid $ 20 million commission (findets fee) for the role he played in aiding and securing the CIT merger, a payment that the rest of the board were unaware of. This prompted Tyco to carry an in depth internal investigation which uncovered many expense misemployments. In the same year, they observed the transfers of large sums of money from Tyco's accounts to Kozlowski's personal accounts. TYCO CANDAL The former executives were accused of giving themselves interest free or low interest loans for personal purchases of property, jewelry and other frivolities. According to SEC, these loans were never approved or repaid. Kozlowski, CEO, and Schwartz, CFO, were accused of issuing bonuses to themselves and other employees without the approval of Tyco's Board of Directors. It is alleged that bonuses were acted and used to buy the silence of those who suspected the former CEO and CFO of fraud. They are also indicted with charges for selling their company's stock without telling investors. Commingling of assets occured when Kozlowski considered the assets of Tyco as his own personal assets. He used Tyco's funds to pay for his personal expenses like his second wife's birthday party.
JUL 20, 2002
Kowlowski and Swartz accused of enterprise corruption for stealing $170 million from Tyco and taking $430 by fraud in the sale of company shares. Kzlowski splits Tyco into four publicly traded companies which causes the price of Tyco shares to fall. Edward Breen reaplces Kozlowski and immediately starts to revise accounting processes. Kozlowski and Swartz found guilty for stealing $150 million from Tyco and sentenced up to 25 years in prison.
ABOUT THE COMPANY
JAN 30, 2002
Kozlowski and Swartz Lie About Selling Stock (^) JUN 3, 2002 As Kozlowki resigns he is said to be under a sales tax evasion investigation. Kozlowski is accused of conspiring to avoid $1 million in sales tax on art purchases.
WHO WERE INVOLVED?
DENNIS KOZLOWSKI MARK SWARTZ FRANK WALSH MARK BELNICK
TIMELINE 1960
Tyco is founded as a research laboratory.
FEB 11, 1992
Dennis Kozlowski Hired as CEO 1997 The company merges with Bermuda-based security-systems- provider ADT.
MAR 13, 2001
Tyco spends $9.2 in cash and stock to acquire CIT group through Frank Walsh. JAN 22, 2002
SEP 12, 2002
JUL 20, 2002
Frank Walsh pleads guilty to trying to hide $20 million in fees from the CIT Group deal.
OCT 7, 2003
Trial of Kozlowski MAR 17, 2004 and Swartz Begins Mistrial Declared Second Trial for Kozlowski and Swartz Begins
JAN 26, 2005
MAR 17, 2005
Kozlowski, Swartz, Benick, and Walsh, the four major stakeholders are found guilty.
HOW DID THE FRAUD HAPPEN?
HOW WAS IT DISCOVERED?
JUN 17, 2005
WHAT HAPPENED...
WIRECARD, WHICH OFFERED ELECTRONIC PAYMENT TRANSACTION SERVICES, RISK
MANAGEMENT AS WELL AS PHYSICAL AND VIRTUAL CARDS, COLLAPSED ON JUNE 25, OWING
CREDITORS ALMOST $4 BILLION AFTER DISCLOSING A GAPING HOLE IN ITS BOOKS THAT ITS
AUDITOR EY SAID WAS THE RESULT OF A SOPHISTICATED GLOBAL FRAUD. $2 BILLION OF THE
REVENUE WAS BOOKED FROM A CLIENT NAMED LONG SHOT SHADY INC. THE COMPANY
DISCLOSED THE FOLLOWING INFORMATION REGARDING THIS:
WIRECARD FRAUD:
THIS IS AN AGREEMENT WITH A CREDIT CARD PROCESSOR IN
THE PHILIPPINES THAT WIRECARD USED TO PROCESS CREDIT
CARD TRANSACTIONS, WHERE THEY ACTUALLY DON'T HAVE
LISCENCE TO OPERATE IN THE JURISDICTION, THEY JUST SEND
THE TRANSACTIONS TO THEIR WAY AND THEY GIVE WIRECARD A
COMMISSION OUT OF IT.
THE REVENUES ARE BEING DIRECTED TO ESCROW ACCOUNTS
IN TWO OFFSHORE BANKS IN THE PHILIPPINES--BDO UNIBANK &
BANK OF THE PHILIPPINE ISLANDS
WIRECARD FRAUD
CASE ANALYSIS NO. 8
FINANCIAL REPORTING, FRAUDS AND ETHICS
THE AUDITOR SHOULD HAVE RESORTED TO TESTING THE CASH RECEIPTS OF BANK ACCOUNTS WHERE CASH WAS RECEIVED
FOR THESE REVENUES.
THE AUDITOR REQUESTED AND SET OUT BANK CONFIRMATIONS TO THE OFFSHORE BANKS IN THE PHILIPPINES REGARDING THE ESCROW ACCOUNTS; ANY OF THEM HAVE NOT RESPONDENT.
COPIES OF THOSE BANK ACCOUNTS; ANY OF THEM HAVE NOT RESPONDED
THE AUDITOR RELIED ON THESE STATEMENTS INSTEAD OF INSISTING TO GET BANK CONFIRMATIONS.
WHAT SHOULD HAVE HAPPENED...
THE AUDITOR SHOULD HAVE ASKED FOR A CONTRACT PERSON AT THE CLIENT'S SIDE TOT INDEPENDENTLY VERIFY THE INVOICE BALANCES.
STEVE ROGERS NO RESPONSE FOR A WEEK...
WHAT HAPPENED...
ESCROW ACCOUNTS (PHILIPPINES)
THESES ARE THE SAME ONES THAT THE AUDITORS SENT OUT THE CONFIRMATION LETTERS TO GET INDEPENDENT CONFIRMATION, BUT WERE NOT ABLE TO GET ANY ANSWERS.
THE AUDIT TEAM DID NOT RECEIVE ANY RESPONSE FROM ANY OF THESE BECAUSE THESE ACCOUNTS ACTUALLY DID NOT EXIST.
THE AUDIT TEAM DECIDED THAT THEY WON'T BE ABLE TO
ISSUE AN AUDIT REPORT WITHOUT THESE BANK
CONFIRMATIONS
