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• eBook-Kapitel aus dem Buch Accounting Fraud

  Types of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …, managers, and employees of organizations, ranging from petty thefts to sophisticated financial statement frauds. It is illustrated in Exhibit 3 (see Wells… …three major categories, there are several sub-categories of fraud scheme types. It should be noted, however, that a number of cases described in… …misappropriation, or both accounting fraud and corruption. In these cases where there are multiple schemes, it is impossible to subdivide the losses in order to… …show exactly how much of the loss was attributable to each of the component schemes. As a consequence, it is necessary to address each of the three… …the property, but has “misappropriated” it. Asset misappropriation is the most common of the three primary categories of occupational fraud… …Skimming Cash is stolen from an organization before it is recorded on the organization’s books and records - Employee collects payment from a customer… …but does not record the sale Cash larceny Cash is stolen from an organization after it is recorded on the organization’s books and records -… …steals outgoing check to a vendor and deposits it into his own bank account Register disbursements An employee makes false entries on a cash… …sub-categories are very similar in nature, and it is important to understand the differences that exist among these categories. Sub-category Description… …, rather than to influence it - Purchasing agent is lavished with an expensive vacation or other items when a vendor’s contract is approved Economic…

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  The Warning Signs of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …. Although the red flags cover a broad range of situations, they are only examples and, accordingly, it may be helpful to consider additional or different… …frequency of occurrence. And, to say it clearly, a positive answer to any of the following red flags does not necessarily imply that fraud has occurred… …controls over interim financial reporting) – Management override of controls – Ineffective IT department; ineffective accounting and information systems… …turnover rates of accounting, internal audit, compliance, or IT staff – No clear separation of duties – Inadequate system of authorization and approval of…

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  Case 2: ZZZZ Best Company (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …started his own rug-cleaning business and called it “ZZZZ Best” (pronounced “Zee Best”). Minkow soon learned that carpet-cleaning was a difficult way to… …company and collect insurance money. He stole his grandmother’s jewel- lery and sold it for USD 2,000. When he urgently needed cash in 1984, he forged… …had been committing fraud. When he wasn’t directly stealing money, he was raising it fraudulently. Nonethe- less, he was able to expand his company and… …“carpet-cleaning king of California”, he slacked on his schoolwork, hired more employees and made it on to the local television news. The publicity began to… …you have revenue. When you have revenue, you have income.” As in many of the more recent corporate scandals, it was not the auditors who… …, the auditors scared Minkow by ask- ing him three months later to see the finished project. But Minkow pulled it off again, by re-renting the still… …unfinished building and, astonishingly, completing it in Accounting Fraud in U.S. Companies 32 just 20 days, at a cost of USD 2 million. It was a… …individuals involved in the restora- tion contract.” ZZZZ Best became unravelled almost as rapidly as it rose. In June 1987, just two days before it was… …bankruptcy, though the ZZZZ Best name was so tarnished by then that it is unlikely it would have been able to stay in business in any case. Investors lost a… …counts of racketeering, securities fraud, embezzlement, tax evasion and bank fraud. It also accused Minkow of setting up dummy companies, writing phony…

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  Case 3: Crazy Eddie (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …multi-pronged fraud, probably one of the twentieth century’s most infamous frauds. And even though the fraud is more than two decades old, it provides vivid… …financial statement fraud of all time, but for outrage- ousness, it is going to be very hard to beat.” In 1969, Eddie Antar, a 21-year old high school… …dropout, opened a modest con- sumer electronics store in Brooklyn, New York City. It was at this tiny store that Antar acquired the nickname “Crazy Eddie”… …. That inventory shortage, concealed from the public, was larger than the total profits the company had reported since it went public in 1985. The… …Accounting Fraud in U.S. Companies 38 inventory. Besides, Antar’s underlings shipped stock from one store to another overnight, so that it could be… …periods without being recorded. (As a result, Crazy Eddie never knew what it really owed.) – Improper disclosures: In one year, Antar stated that… …risky. – The accounting firm had allegedly “lowballed” to obtain Crazy Eddie as an audit client, realizing that it could make up for any lost audit… …revenue by selling the company consultancy services. – It was further alleged that the field auditors were very young and inexperi- enced. Antar… …altered documents. (Crazy Eddie used an outdated manual inventory system. The absence of a computer-based system made it much more difficult for the… …private holdings in Crazy Eddie stock at a time when the company’s financial condition was deteriorating, but when it was still being portrayed as healthy…

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  Case 4: MiniScribe (1989)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …times in the mid-1980s. It lost its biggest customer, IBM Corp. (which decided to make its own disk drives), as well as several other critical supply… …stock quintupled, becoming a Wall Street favourite. MiniScribe appeared to have achieved a remark- able turnaround. “It looked for three years like Q.T… …, 1987 and the first three quarters of 1988. In May 1989, the company reported to the SEC that it had uncovered “inaccurate reports about earnings”… …existing records and documentation were so inadequate that it was extremely difficult for a specially appointed independent evaluation committee to… …at the end of a quarter to boost sales (a practice known as “channel stuffing”), MiniScribe went far beyond that. On multiple occasions, it shipped… …more than twice as many disk drives to computer manufacturers as had been ordered. It later said to the customers that it had shipped the excess disk… …and packaging them as finished products. It was only when those boxes were opened that the true value of their content was seen. – Eventually, some… …1992 settlement, it agreed to pay a total of USD 140 million for failing to detect the accounting fraud committed by MiniScribe. In July 1994, the… …being duped: “He was as much a victim of it as anyone else.” Eventually, the attor- ney pointed out that during his long career, Wiles was the… …MiniScribe accountant said, “Q.T. Wiles was saying, ‘This is the number we want to hit first quarter, second quarter, third quarter and so on,’ and it was…

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  Case 5: Phar-Mor (1992)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …dis- count” drugstore in Cleveland and decided they had seen the future. They acquired a single drugstore in Youngstown, Ohio, and dreamt of building it… …un- covered the fraud. Phar-Mor’s board of directors insisted that it was plenty active, but fully deceived until it got a tip in late July 1992. Monus… …, but it was disbursed on a Phar-Mor bank account. The travel agent thought it odd that Phar-Mor would be paying these expenses. Since she was an… …“Cookies”. The fraud team used these entries to inflate inventory and earnings. As it would not have been practical to carefully scan all the packets, the… …the operating GLs, the fraud would have been all over. Because the physical inventories were completed during the fiscal year, it was ne- cessary… …did account for a portion of the spike, investigations indicated that a large part of it was due to fraud. The spike was clearly a big red flag that… …Coopers & Lybrand recklessly overlooked. It should have caused an experienced retail auditor to have suspicions about inventory at Phar-Mor. But Coopers &… …(for example, at Christmastime it would be the same concept), and that they relied on their tests of the gross profit schedules. If any large or… …fraud was uncovered, it was determined that Phar-Mor’s actual gross mar- gins were really much lower than the budgeted 15.5%. Accounting Fraud in… …master chef”, the company’s board said. As a private company, Phar-Mor was not exactly structured for scrutiny. It didn’t have to file with the SEC…

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  Case 6: Bausch & Lomb (1994)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …with a strong position in the optical products and eye-care sector. It was a leading manu- facturer of contact lenses and sunglasses, and it had charmed… …contact lenses, which were marketed to be worn for short intervals of several days. Bausch & Lomb had entered the disposable lens market late because it… …had not wanted to cannibalize existing product lines, and it wished to continue to maximize its traditional SVS sales. Unfortunately, during 1993, it… …optical practitioners. In September 1993, the CLD concluded a particularly aggressive promotion campaign whereby it sold its distributors a large amount… …estimates indicated that it might take some dis- tributors up to two years to sell the SVS lenses that CLD management was expect- Accounting Fraud in U.S… …US- GAAP, with respect to revenue recognition. Under GAAP, revenue should not be recognized in company statements until it is realized and earned… …date. The accounting scandal led to the departure of several CLD executives, and it severely tested inves- Accounting Fraud in U.S. Companies 53… …After the scheme was discovered, company management replaced all Hong Kong personnel that it held responsible for the fraud. There was no evidence that…

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  Case 7: Waste Management (1997)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …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)… …, using fraudulent accounting practices that allowed the company to hide about USD 1.7 billion in expenses from 1992 through part of 1997. It also… …client”. It indicated that WMI actively managed re- ported results, had a history of making significant fourth quarter adjustments, and was in an industry… …later described it as a “boondoggle”. Obviously lacking auditor independence, Andersen had too cozy a relationship with WMI. Eventually, Andersen… …Ander- sen’s willingness to bend on such issues was a result of the fees it was receiving from WMI. Andersen had actually quantified the misstatements and… …had annually presented company management with what it called “Proposed Adjusting Journal Entries” (PAJEs) to correct the misstatements. But WMI… …equipment”; then, it depreciated these costs over forty years) – avoided depreciation expenses on their garbage trucks by assigning unsup- ported and… …those assumptions, keeping the revi- sions hidden from the subsidiaries. “Keeping the process secret and centralizing it made it especially easy for top…

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  Case 8: Sunbeam (1998)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …relied on question- able accounting gimmicks and outright fraud to enhance earnings. It happened under the direction of now disgraced CEO Albert J… …write-off as it closed plants and laid off employees, but its re- ported profits soared in 1997, persuading many analysts that Dunlap had turned the company… …investors had bid the stock so high that it did not appear to be a good value, even if the reported profits were accurate (though they did not turn out to… …attractive than it actually was to potential buyers: “This Accounting Fraud in U.S. Companies 64 was a primer in the techniques of financial fraud, in… …, he wanted X dollars in profit, and go get it.” Dunlap had always assured him that the exaggerated profits could be made up, and the falsifica- tions… …tough and powerful CEO is a pattern that frequently crops up in accounting fraud. “It is a fairly common theme to have a personality like ‘Chainsaw Al’… …Dunlap’s corporate carrier in his book “Chainsaw”, made it clear: “Dunlap’s so-called turnaround of Sunbeam in 1997 was little more than a manufactured… …turning underperforming companies around. It is perhaps noteworthy that during his 23-month reign at Sunbeam, Dunlap cut about half of the 12,000…

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  Case 9: Cendant/CUC (1998)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …revenue and ex- pense recognition policies followed the matching principle. But in retrospect, it became clear that this was not the case. CUC sold club… …solicitation costs to future periods. In other words, it recorded the revenue early and the expenses later. Thus, the company was able to successfully boost… …totally fictitious, including, for exam- ple, USD 500 million over the three-year period from fiscal 1995 to 1997. One fraud investigator commented: “It… …, each quarter, senior management would review the opportunities available for inflating the company’s earnings, and it would determine how many… …who had served under Forbes and Shelton at CUC. On April 15, 1998, the fraud was disclosed to the public: Cendant announced that it had dis- covered… …“accounting irregularities” and that it expected to lower its 1997 earnings. The disclosures sent Cendant stock into a tailspin: the stock price dropped 46% in… …covered it up. The auditors, however, denied the allegations, but agreed to pay USD 335 mil- lion to settle litigation. Ultimately, Cendant sued Walter A… …Corigliano. “It was a culture that had been developing over many years,” Corigliano said in a statement, emphasizing that they had been following orders. “It… …September 2006, it split into four companies. Its real estate and hotel businesses were spun off as stand-alone companies, and a third company, Travelport…

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