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  Case 7: Waste Management (1997)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 55 Case 7: Waste Management (1997) The Waste Management case provides an anatomy of an accounting… …scandal that is far more than just a financial history lesson. It portrays a multiyear effort to inflate reported profits at Waste Management, Inc. (WMI)… …investments. Waste Management, Inc. was a Delaware corporation with its principal place of business in Oak Brook, Illinois. Through its subsidiaries, WMI… …services. During the early years of the 1990s, WMI began to dominate the field of waste management and trash hauling. By 1995, its sales exceeded USD 10… …Andersen’s WinSMART system, a computerized risk management classification program using data input by the engagement team, classified WMI as a “high risk… …agement’s netting of the gains and charges and the lack of disclosures. We have communicated strongly to management that this is an area of SEC exposure. We… …personal style that fit well with the Waste Management officers”. During his tenure as engagement partner for WMI, Allgyer held the title of “Partner in… …had annually presented company management with what it called “Proposed Adjusting Journal Entries” (PAJEs) to correct the misstatements. But WMI… …management consistently refused to make these adjustments. Instead, WMI secretly entered into an agree- ment with Andersen to write off the accumulated… …unsuspecting shareholders.” As the company’s reve- nues and profits were not growing fast enough to meet the predetermined earnings targets, WMI management…

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  A Practice Aid for Company Executives: The Ethics Barometer

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …management team have a clear picture of the ethi- cal issues occurring at all levels of the organization. But to develop a sophisticated understanding of an… …agree, 2 = disagree, 1 = strongly disagree). A. Leadership/“Tone at the Top” A.1 In my opinion, the management team sets a good example in… …management team communicates the importance of ethics and integ- rity clearly, convincingly and consistently. The CEO and the other senior executives set the… …. A.12 It is easy for me to comply with the company’s standards of conduct because there is a strong level of commitment from top management and… …: everyone treats one another with respect; there is a relationship of trust between management and employees. B.6 In my immediate working environment… …violation of the company’s standards of conduct to local management, I believe my report would be handled confidentially and I would be protected from… …of em- ployees through speeches from senior management, internal newsletters, in-house magazines and training sessions. C.15 The company’s… …: Practice Aids 295 The management team can use the results of the ethics barometer to develop a com- prehensive integrity profile for the organization… …. 12–13): – Management commitment: Of course, the management team needs to stand behind the survey and to make its commitment clear to the… …to the organization or a particular industry. By consulting the employees, the organization not only shows that integrity receives management…

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  Case 19: Adelphia Communications (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …of all the cases. It should become a show-and-tell in all busi- ness schools as the antithesis of public company management and stewardship.” In… …resigned from management positions and the Adelphia board of directors, after a series of questionable transactions between the family and the company had… …the Rigas entities participated jointly in a cash management system operated by Adelphia (the “CMS”). This resulted in the commingling of funds… …centralized cash management system (which pooled cash from Adelphia and the Rigas entities) to their personal advantage. – Many Rigas entities were so…

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  Case 9: Cendant/CUC (1998)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …president and COO. Commenting on the fraud, one FBI agent said: “Some people have referred to this as a case of earnings management. But this is an attempt… …appears to have been simple. People just made things up.” In another scheme, CUC’s senior management imposed moratoriums on recognizing expenses at the… …, each quarter, senior management would review the opportunities available for inflating the company’s earnings, and it would determine how many… …. Forbes and Shelton also used CUC’s inflated earnings and earnings projections to entice HFS management into the merger in late 1997. Soon after Cendant…

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  A Practice Aid for Auditors: Fraud Interviews – An Inquiry Guide

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …management communicate with employees its views about busi- ness practices and ethical behaviour? How does management ensure that these communications are… …understood by all employees? How does manage- ment determine if employees are complying with or disregarding these communications? – Does management… …processes that are under- going significant changes (restructuring, competition, management and/or employee turnover, etc.) that may provide opportunity for… …profitability goals that are putting excessive pressure on senior management and employees? If so, what are these goals and how are management and employees… …reacting to these pressures? – At what point in the quarter does management know whether the company will meet or miss targeted financial performance… …to the budgeting/forecasting process? What is the company’s history in meeting budgets/forecasts? – Has management established programs and controls… …to mitigate fraud risks or help to prevent and detect fraud? If so, what are these programs and controls? How does management monitor these programs… …report to? – Has management reported to the audit committee on the process for identify- ing and responding to the risk of fraud? Has management reported… …Appendix: Practice Aids 299 – Are you concerned about the integrity of any member of senior management, any other member of management or any… …disseminated to all stakeholders at the same time? – Are there accounting rules or estimates that management or employees can easily manipulate? If so, what…

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  The Warning Signs of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …– Excessive pressure on management or operating personnel to meet financial targets set up by the board of directors or management – Need to obtain… …managers to meet higher-level management expecta- tions – Adverse consequences on lower-level managers if subsidiaries or divisions fail to meet budgeted… …, projected, or forecasted results – Overly unstable organizational structure (e.g., high turnover of senior management or board members) Fraud Case… …(monitoring of management, internal control components) – Ineffective board of directors or audit committee oversight over the financial reporting process… …– Directors with apparently little experience – Family relationships among directors and/or officers – Domination of management by a single person… …or small group without compensating controls – Ineffective internal audit department – Management and internal auditors exhibiting a… …controls over interim financial reporting) – Management override of controls – Ineffective IT department; ineffective accounting and information systems… …functions Fraud Case Analysis: Lessons Learned 271 (4.) Top management – Ineffective implementation, communication, or enforcement of the… …other laws and regulations (criminal record) – Claims against the entity, its senior management, or board members alleging fraud or violations of… …Fraud Case Analysis: Lessons Learned 272 (5.) Relationship between management and auditor – Frequent disputes with the current or predecessor…

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  Case 29: Infomatec (Germany, 2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …. Share- holders that had acquired Infomatec shares after the release of the incorrect publica- tion sued Infomatec as well as the company’s management team… …shareholders. The disclosures have a particular importance for both groups, since at the time of the notification only management has the details of this… …management team, not all of them were successful. However, in its famous “Infomatec decisions”, the German Federal Supreme Court (BGH) ruled in 2004… …for the first time that members of the management board of a public corporation can be held personally liable to shareholders for intentionally issuing… …investigation, and in October 2000 a search order was issued for the offices of Infomatec and the pri- vate homes of the management team. The managing banks…

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  Case 43: Sanyo Electric (Japan, 2007)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …March 2007, Tomoyo Nonaka quit as CEO and chairwoman of the troubled elec- tronics firm. Nonaka, a former TV journalist with little senior management… …falsely reported a profit instead of a loss. Sanyo apologized to investors, saying it would strengthen its management team and internal controls, but… …, but also for a string of management failures that badly dented Sanyo’s image. The company had repeatedly promised a turnaround under what was billed as… …“innova- tive management”, but Nonaka failed to engineer Sanyo’s recovery. She announced a bold programme (dubbed “Think Gaia”) to transform Sanyo into a…

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  Fraud Theories

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …conditions � Excessive pressure for management to meet the requirements or expectations of third parties � Management‘s personal financial situation… …threatened by the entity‘s financial performance � Complex or unstable organizational structure � Ineffective monitoring of management � Deficient internal… …control components � Inappropriate values or ethical standards of management � Strained relationship between management and auditor Incentive/ Pressure… …effective risk management policies) is decisive for any fraud prevention program. Moreover, opportunity often represents the only element an organization… …organization (=> Management override of controls) (2) Intelligence (“brains”), creativity and experience (3) Strong ego and great confidence (4) Coercion… …bosses and will say: “Management is dis- honest, so I can be dishonest, too.” Fraud Case Analysis: Lessons Learned 282 – The “Low-Hanging…

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  Chapter 4: Conclusion and Outlook

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …guidelines for “best practice” in fraud risk management. For a summary of basic anti-fraud strategies, see Exhibit 9 (the definitions are extracted from… …barometer is a good tool for setting the process of “integrity management” in motion. (For further details on how to develop and implement an ethics… …barometer, see Appendix I.) – Senior management must create an appropriate tone at the top and communi- cate the importance of a zero tolerance attitude… …and hiring and promotion standards. – A comprehensive fraud risk assessment helps senior management to under- stand their fraud risks, identify gaps… …elements of any integ- rity management approach. Integrity management does not only prevent major fraud risks and save significant costs. In the long run… …Exit Plan?), www.theconglomerate.org, January 2010 KPMG: Fraud Risk Management: Developing a Strategy for Prevention, Detection, and Response…

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