Module 6 Discussion
1-Answer the initial question (About 250 words)
Find a recent instance of financial statement fraud. Please make sure that you are posting about a unique fraud that your classmates have not previously discussed. Include discussion of the details of the fraud, how the fraud was discovered, who was involved, and who the victims were. Include appropriate citations.
2-Reply to 2 student posts by commenting about their posts and building on the subject
(About 100 words each)
APA reference.
Student posts: See page 2 (one per page so you can answer following)
1-WorldCom's Fraud
Maurice Naylon
Find a recent instance of financial statement fraud. Please make sure that you are posting about a unique fraud that your classmates have not previously discussed.Include discussion of the details of the fraud, how the fraud was discovered, who was involved, and who the victims were. Discuss how the fraud could have been prevented or detected. Include appropriate citations.
Financial statement fraud, as the name suggests, is “a type of fraud whereby an individual or individuals purposefully misreport financial information about an organization in order to mislead those who read it” (Wells, 2013, p. 297).Individuals can conduct this type of fraud in a variety of ways, but financial statement fraud broadly falls into one of two categories: 1) overstating assets or revenues; or 2) understating expenses or liabilities.While numerous examples exist, the WorldCom scandal – and subsequent bankruptcy – proves informative due to its massive scale.
When the tech bubble burst in the early 2000s, WorldCom turned to accounting fraud to hide its falling profitability.Specifically, “WorldCom inflated net income and cash flow by recording expenses as investments. Bycapitalizingexpenses, it exaggerated profits by around $3 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss” (Kenton, 2019).Quite quickly, investors became suspicious of this profitability in the face of such dire post-“dot.com” market circumstances, despite CEO Bernie Ebbers public support of the financial statements.However, as Arthur Andersen – WorldCom’s auditor – collapsed in the face of the Enron scandal at the same time, WorldCom became collateral damage.The giant audit firm’s collapse and bankruptcy exposed WorldCom’s manipulation of expenses, and Ebbers would eventually be sentenced to 25 years in prison, and his CFO, Scott Sullivan, to five years.Though seemingly steep punishments, these prison sentences need to be weighed against the victims of the fraud: the thousands of employees who lost their jobs as WorldCom entered bankruptcy, despite the company eventually emerging as a going concern.
In retrospect, this fraud could have been detected earlier if the WorldCom board of directors mandated – and empowered – an internal audit committee.“The primary purpose of a company’s audit committee is to provide oversight of the financial reporting process, the audit process, the company’s system of internal controlsand compliance with laws and regulations” (CFA Institute, n.d.).Such an internal organization, though potentially ignored by the CEO, could have at least caught and publicized these fraudulent reporting practices prior to financial reports actually being published.
References
CFA Institute.(n.d.).Audit Committee Role and Practices.Accessed 8 April 2019 at https://www.cfainstitute.org/en/advocacy/issues/audit-committee-role-practices
Kenton, W. (2019).WorldCom.Investopedia.Accessed 8 April 2019 at https://www.investopedia.com/terms/w/worldcom.asp
Wells, Joseph T.Principles of Fraud Examination, 4th Edition. Wiley, 2013-10-14. VitalBook file.
2-Module 6 Discussion - Hertz
Michelle King
Hertz has recently been charged by the Securities and Exchange Commission (“SEC”) for public filings of materially misstated pre-tax income which is due to accounting errors made as well as improper accounting methodologies being used (SEC Charges, 2019). According to Feeley & Melin, 2019, executives at Hertz pressured employees to “use fraudulent accounting techniques to inflate income and earnings, (Feeley & Merlin, 2019). According to the SEC, “improper methodologies were used to determine allowances and write-offs of aged receivables (Feeley & Melin, 2019). Also, once certain methodologies were used, in order to obtain a more favorable outcome these methodologies were changed (SEC Charges, 2019).
The fraud was discovered by the SEC. The individuals who were a party to the fraudulent activity are Frissora, the ex chief financial officer and other former senior managers (Feeley & Melin, 2019). The victims were the stockholders, employees of Hertz, investors and creditors. Due to the fraudulent activity the fraudsters were awarded $70 million of incentive compensation which takes profits away from the company (Feeley & Melin, 2019). Also, with the inflated revenues, this affected the stock prices. Innocent stockholders and creditors relied on the financial information provided in order to make decisions on their investments.
The fraud could have been prevented through obtaining an auditor to verify the public filings with the SEC that could have found accounting methods used that did not follow GAAP. Another prevention tactic could have been implementing a whistleblower hotline for all Hertz employees. The employees were in a “high pressure environment where it was expected of them to find non-traditional accounting approaches to fill the gaps between Hertz’s actual and expected performance” in order for senior management to receive bonus incentives (Feeley & Merlin, 2019).
References:
Feeley, J., & Melin, A. (2019, April 1). Hertz seeks $70M in clawbacks tied to accounting scandal. Retrieved fromhttps://www.accountingtoday.com/articles/hertz-seeks-70m-in-clawbacks-tied-to-accounting-scandal
SEC Charges Hertz with Inaccurate Financial Reporting and Other Failures. (2019, February 1). Retrieved April 9, 2019, from SEC website:https://www.sec.gov/enforce/33-10601-s