earnings.
earnings.
The purpose of this article analysis is to identify situations that may lead to unethical practices and behavior in accounting. Brooke Corporation and founder Robert Orr are an example of how Sarbanes Oxley (SOX) laws have not been as effective as most want to believe as based on the article, “Eight Years after the Fact is SOX working? A Look at the Brooke Corporation” by Beth Hazels. Brooke Corporation was, “once the largest franchisors of property and casualty insurance in the United States” (Hazel, p.19) until both company and founder filed for bankruptcy in 2008. Robert Orr and Brooke Corporation committed fraud on their financial statements as well as misappropriated commissions and funds due to their franchisee agents, customers and lenders during their 24-year reign of deceit. Lawsuits alleging anywhere from “fraud and civil racketeering to business valuations and financing were brought up against Brooke corporation and most were dropped. Brooke was also in violation of several SOX laws that have yet to be raised against them” (Hazel, p.23).…
In 2002, after accounting fraud at Enron and WorldCom, Congress passed the Sarbanes-Oxley to establish a system of federal oversight of corporate accounting practices in response to corporate accounting scandals, and restore stakeholders’ confidence. The Sarbanes-Oxley Act requires that corporations take “greater responsibility for their decisions and to provide leadership based on ethical principles”. For instance, the Sarbanes-Oxley Act makes the CEOs and CFOs personally liable for the credibility and accuracy of their companies’ financial statements.…
Top-level employees manipulated transactions and the financial statements to minimize expense recognition. This was accomplished through a variety of ways. These ways include: “Avoided depreciation expenses on their garbage trucks…, assigning arbitrary salvage values to other assets…, failed to record expenses for decreases in the value of landfills as they were filled with waste, refused to record expenses necessary to write off the costs of unsuccessfully and abandoned landfill development projects, established inflated environmental reserves (liabilities)…, improperly capitalized a variety of expenses, and failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses.” (Beasley, pg. 106) The SEC determined that these fraudulent practices were executed at the executive level. These transactions were manipulated or perpetrated at company headquarters.…
On March 19th 2003, the Securities and Exchange Commission filed civil fraud charges against HealthSouth and CEO and Chairman Richard Scrushy of “allegedly duping investors into believing the company had met earnings targets” (washintonpost.com staff, 2004). The SEC’s complaint “alleges that since 1999, at the insistence of Scrushy, HealthSouth systematically overstated its earnings by at least $1.4 billion in order to meet or exceed Wall Street earnings expectations. The false increases in earnings were matched by false increases in HealthSouth’s assets. By the third quarter of 2002, HealthSouth’s assets were overstated by at least $800 million, or approximately 10 percent” (sec.gov, March 19th 2003). Leading officials at the healthcare giant became entangled in the scandal as well as auditors at the time of the scandal, Ernst & Young and investment bankers, UBS (Freudenheim, 2004).…
Based on information given, there was intent or knowledge of wrongdoing which constitutes part of a crime, as opposed to the action or conduct of the accused. It is very difficult to argue 'no knowledge' of a 1.2 billion dollar write down. In a public company, it is the CEO's responsibility to report any and all information that details the health of the company, immediately. Any sign of trouble needs to be reported to the SEC and shareholders as soon as it is found. An organizational restructuring around the same time of several hundred million dollars being reported at a loss sounds too convenient to claim ignorance.…
In Robert Kemp v. Universal American Financial Corporation, Fed. Sec. L. Rep. P94,147 (S.D.N.Y. 2007) an action is brought on behalf of those who purchased the securities of Universal American Financial Corporation (Universal) during the Class Period. Plaintiffs allege that Universal, a health and life insurance company, issued false and misleading statements regarding the financial performance of its senior health care segment, and allowed insiders to sell their privately held shares while the shares were artificially inflated. As a result, plaintiffs purchased inflated common stock that dropped in value after the company announced a decline in net income.…
Scandal erupted at HealthSouth in 2003 when Richard M. Scrushy was accused by the Securities Exchange Commission (SEC) of falsely inflating HealthSouth earnings. Mr. Scrushy’s story began in Selma, Alabama, the middle child of a modest family. He was a high school dropout at the age of seventeen and was married to his first wife with whom he had two children. Richard Scrushy worked diligently to provide for his family. Residing in a trailer park, Mr. Scrushy became dissatisfied by the mundane role of pumping gas and bricklaying. This frustration preceded Scrushy to pursue a college degree as a respiratory technician. Following his clinical training, Scrushy flourished as an instructor of respiratory therapy at the University of Birmingham. Richard Scrushy eventually became the director of the respiratory unit at a Birmingham hospital and in 1979; he started working for Life-mark Corporation, a proprietor who managed hospitals. Mr. Scrushy held various positions including vice president of a corporate development and vice president of Lifemark Shared Services. At the age of twenty-eight, Mr. Scrushy transformed from a blue collar worker to a corporate director (Kellion, 2007).…
Have you ever invested your hard-earned money into the stock market? If so, you know the risks involved when investing money into a publically traded company. For thousands of people whom had money tied up in stocks with companies such as; Enron, WorldCom, and Health South, their investments were doing great for a very long time. But as time went on, the good times quickly ended. It was discovered that over the past several years the accountants and CEOs of these corporate giants were “cooking the books,” the act of fooling the market into believing profits are higher than they actually are. The unlucky individuals who had believed their money was invested in high earning companies were hoodwinked, and their money was lost forever…
It is obvious that the author hates Richard with all he has. There are several places in the text that Aaron launches into a name calling tirade at Richard. Quotes Like “Richard was a terrible Friend” and sure, Richard and Aaron were two of the four founding members on HealthSouth. Aaron and Richard shared an office and a condo in the early days. Before the company went public the two gentle men traveled together extensively. One…
HealthSouth problems started to show in the middle of 2002. Scrushy sold about $75 million of HealthSouth stock several days before the company announced those big losses, on top of that the 7.7 million shares that he sold between the year 1999 and 2001. The Securities and Exchange Commission started investigating in…
The unique characteristics in L&H that made it prone to engage in fraudulent accounting practices were the rapid expansion and acquisition of companies beyond their boundaries, and the inability to oversee these operations. Another important factor that stands out is the lack of ethical values portrayed by the founders of L&H. The top management did not set code of ethics, but instead wanted to maximize their future software value. Mr. Hauspie’s creative but legally acceptable financing plans help him to retain control of the company by selling minority interests. The desperate ambition to succeed together with the accounting knowledge, the company was in a prime position to engage in fraudulent practices.…
Thank you for your great postings sharing your opinions with others. Many of you already have commented to these issues, but I would like to recap once more for your own organization and study aid. 1. What are several red flags that E&Y either was or should have been aware of in the audit of HealthSouth? E&Y was aware that there was an undue emphasis on analysts' reaction to quarterly profits. They were also aware of the centralized power exerted by Scrushy. Other red flags included the high turnover in the CFO position, and the rapid growth in net income. They also accepted explanations of whistle-blower accusations that might have revealed the fraud if followed up. 2. What procedures can auditors perform to detect fraudulent entries made during the consolidation process? Auditors should understand and test controls over the consolidation process just as they do over purchasing, sales, payroll, etc. SAS 99 requires specific procedures to ensure against management override of controls, which occurred at the consolidation process. These procedures would include reviewing the consolidation entries, adjusting journal entries, as well as the controls over such entries. 3. HealthSouth has sued Ernst & Young and Ernst & Young is also the target of a federal securities class action suit. What are Ernst & Young’s likely defenses against HealthSouth? Against the class action suit? In March 2009, E&Y settled with HealthSouth Shareholders for $109 million. If the case would go to court, E&Y’s first defense should be that they performed their work in accordance with professional standards. They also should be able to claim HealthSouth contributed to, and was the primary cause, of any damages it incurred. In the securities suit, they should only have to show that plaintiffs’claims of Scienter are untrue. 4. HealthSouth concealed the fraud by keeping the fraudulent transactions below $5,000. What recommendation would you have to Ernst & Young to improve its sampling practices?…
At the end of 2010, Excello faced the possibility of not meeting earnings estimates, which affects bonuses, stock options, and shareholders’ earnings (Mintz & Morris, 2011). Terry Reed, the Chief Financial Officer (CFO) of Excello contemplates recording a $1.2 million sale at the end of 2010 instead of in January 11, 2011. The issue at hand is that according to Generally Accepted Accounting Principles (GAAP) Excello must record this sale according the revenue recognition principle. If recorded according to GAAP, the accounting department records the $2.1 million sale to the accounts receivable account until the product ships, at which time the transaction records to the earned revenue account. If Reed records the $1.2 million sale in 2010 instead of 2011, he deceives the internal and external users of the financial reports by artificially inflating the end of year reports for 2010. This is an ethical breach as well as an impropriety against GAAP standards. If Excello inflates earned revenue for 2010, they risk defrauding shareholders according to the Securities and Exchange Commission (SEC). Intentionally reflecting inaccurate information in the financial statements not only breaks state and federal law but also breaches the codes within the Sarbanes-Oxley Act of 2002…
This creative accounting lead to Fastow to create "outside companies" that were directly involved with Enron to hide the losses the companies made. These companies were named after Star Wars characters. Enron has a lot of special purpose entities to hiding its financing debts and reveal only ‘bright side’ of performance that misleading investors. Firstly, its debts and the losses were not reported in its financial statements because much of its profits and revenue were deals with special purpose entities. Hence, it caused balance sheet understated liabilities and overstated its equity& earnings. Example is White- winged Dove that bought assets from Enron but transfer of assets is not true and should have been treated as loan due to financing from this special entity. It reflect by behavior of Andrew Fastow CFO of Enron, he creates a network of shell companies designed solely to do business with Enron for dual purposes of sending Enron money and hiding its increasing debts. He has a vested stake in these ventures and using them to defraud Enron millions of dollars. Fastow also using Wall Street Investment banks who’s invested its entities and conduct business deals with him. It is a manipulation by top executives toward financial performance data.…
The details of how the company came to be a giant and how its fraudulent finances were noticed…