Peregrine Systems Accounting Scandal
Assignment 1 – ACC557 – Peregrine Systems Accounting Scandal
Heather Glover
Strayer University
Peregrine Systems, Inc. was an enterprise software company that was founded in 1981 and sold enterprise asset management, change management, and ITIL-based IT service management software. Following an accounting scandal and bankruptcy in 2003, Peregrine was acquired by Hewlett-Packard in 2005.HP now markets the Peregrine products as part of its IT Service Management solutions, within the HP Software Division portfolio. Wall Street's demand for high growth motivated Peregrine Systems' executives, to fraudulently inflate revenues and stock prices. Peregrine apparently filed materially incorrect financial statements with the commission for 11 consecutive quarters. A member of Peregrine's sales team admitted to meeting regularly with senior management near the end of the quarter to determine how much revenue was needed to exceed Wall Street's expectations. The primary fraud committed by Peregrine was done by inflating revenue by booking revenue when sales never occurred. By recognizing revenue from sales that never occurred, the accounts receivable balance and net income were fraudulently overstated; the accounts receivable would never be collected, because the merchandise was never sold. To cover up their high, outstanding, accounts receivable balance as a result of booking sales that did not occur, Peregrine fraudulently engaged in financial agreements with banks. Evidently, Peregrine Systems increased its revenues by pressuring distributors and resellers to build up their inventories. Through secret side or oral agreements Peregrine distributors and resellers were not obligated to pay Peregrine for their software inventories. This conduct obviously became a problem. If they could not sell Peregrine's software, they would receive their money back. According to GAAP, revenue recognition on the sale of software requires evidence that an arrangement must
Heather Glover
Strayer University
Peregrine Systems, Inc. was an enterprise software company that was founded in 1981 and sold enterprise asset management, change management, and ITIL-based IT service management software. Following an accounting scandal and bankruptcy in 2003, Peregrine was acquired by Hewlett-Packard in 2005.HP now markets the Peregrine products as part of its IT Service Management solutions, within the HP Software Division portfolio. Wall Street's demand for high growth motivated Peregrine Systems' executives, to fraudulently inflate revenues and stock prices. Peregrine apparently filed materially incorrect financial statements with the commission for 11 consecutive quarters. A member of Peregrine's sales team admitted to meeting regularly with senior management near the end of the quarter to determine how much revenue was needed to exceed Wall Street's expectations. The primary fraud committed by Peregrine was done by inflating revenue by booking revenue when sales never occurred. By recognizing revenue from sales that never occurred, the accounts receivable balance and net income were fraudulently overstated; the accounts receivable would never be collected, because the merchandise was never sold. To cover up their high, outstanding, accounts receivable balance as a result of booking sales that did not occur, Peregrine fraudulently engaged in financial agreements with banks. Evidently, Peregrine Systems increased its revenues by pressuring distributors and resellers to build up their inventories. Through secret side or oral agreements Peregrine distributors and resellers were not obligated to pay Peregrine for their software inventories. This conduct obviously became a problem. If they could not sell Peregrine's software, they would receive their money back. According to GAAP, revenue recognition on the sale of software requires evidence that an arrangement must
References: Summary of Peregrine Scandal - http://www.freerepublic.com/focus/news/854680/posts Article relating to Peregrine’s Scandal – http://accounting.smartpros.com/x46099.xml LA Times Article regarding Peregrine – http://articles.latimes.com/keyword/peregrine-systems-inc FBI website press release regarding Peregrine – http://www.fbi.gov/news/pressrel/press-releases/executives-and-auditor-of-peregrine-systems-inc.-indicted-on-securities-fraud-charges | |