Regina Company
REGINA COMPANY
POINT OF VIEW: Regulator – National Commission on Fraudulent Financial Reporting
CASE CONTEXT: Regina Vacuum Cleaner Co. seemed to be doing excellent as manifested in its healthy 1988 annual Financial Statements. However, Regina Company ended up as a tragic story that served as cautionary epic to investors, creditors, auditors, the public and the government. The Company was acquired through a leveraged buyout by a group of Top Executives led by Donald Sheelen, former head of the Marketing department of Regina’s parent company. He was appointed CEO and became the majority stockholder after investing only $750,000.
Sheelen had big plans of increasing Sales and diversifying the product line. He had a tremendous forecast of the Company’s growth which unfortunately fell short due to product quality issues, only months after it went public. Rather than tell the shareholders’ of the shortfall, CEO chose to show that the company was making money than it really was by illegally inflating Regina’s financial picture.
PROBLEM DEFINITION: Based on the causal factors identified, what are the recommendations to prevent fraudulent financial reporting in public companies?
A well-orchestrated fraud will often succeed, at least for a certain period of time even against well-intentioned, hard working and the most diligent professionals. This is true with the case of Regina Company where the auditors were not able to discover, nor even recognize the material misstatements in the financial statements.
Sheelen’s small and high-performance management team was able to perpetuate anomalies in financial reporting through premature revenue recognition and huge understatement of expenses. This could have been prevented and the investor’s interests could have been preserved had the public, auditors and the government been able to look beyond the numbers to see if the financial statements really made sense.
FRAMEWORK FOR ANALYSIS
I. Identify and
POINT OF VIEW: Regulator – National Commission on Fraudulent Financial Reporting
CASE CONTEXT: Regina Vacuum Cleaner Co. seemed to be doing excellent as manifested in its healthy 1988 annual Financial Statements. However, Regina Company ended up as a tragic story that served as cautionary epic to investors, creditors, auditors, the public and the government. The Company was acquired through a leveraged buyout by a group of Top Executives led by Donald Sheelen, former head of the Marketing department of Regina’s parent company. He was appointed CEO and became the majority stockholder after investing only $750,000.
Sheelen had big plans of increasing Sales and diversifying the product line. He had a tremendous forecast of the Company’s growth which unfortunately fell short due to product quality issues, only months after it went public. Rather than tell the shareholders’ of the shortfall, CEO chose to show that the company was making money than it really was by illegally inflating Regina’s financial picture.
PROBLEM DEFINITION: Based on the causal factors identified, what are the recommendations to prevent fraudulent financial reporting in public companies?
A well-orchestrated fraud will often succeed, at least for a certain period of time even against well-intentioned, hard working and the most diligent professionals. This is true with the case of Regina Company where the auditors were not able to discover, nor even recognize the material misstatements in the financial statements.
Sheelen’s small and high-performance management team was able to perpetuate anomalies in financial reporting through premature revenue recognition and huge understatement of expenses. This could have been prevented and the investor’s interests could have been preserved had the public, auditors and the government been able to look beyond the numbers to see if the financial statements really made sense.
FRAMEWORK FOR ANALYSIS
I. Identify and