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  Case 10: MicroStrategy (2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …previous year), and that its earnings rose to 29 cents per share (from 16 cents in 1998). A few days later, it was the host of a Super Bowl party with… …share (more than 80 times its price when it went public in June 1998). At the time, 34-year-old Michael Saylor was one of the most famous entrepreneurs… …it would restate its financial results for the fiscal years 1997, 1998 and 1999. The restatement reduced revenues over the three-year period by USD… …66 million, nearly one-fifth of the total USD 365 Accounting Fraud in U.S. Companies 72 million reported. It also wiped out USD 56 million in… …billion in market value. Nevertheless, the share price continued to drop in the following weeks. The once USD 333 stock did not bottom out until it… …reached USD 33 on April 13, 2001. Following the meltdown, the SEC launched an investigation into MicroStrategy’s accounting practices. It turned out… …it were separate from the service obligations, thus improperly recognizing material amounts of revenue prematurely. In other transactions, the… …, once again, MicroStrategy recognized revenue before it should have been recognized. It booked revenue from any ele- ments of these deals upfront… …in U.S. Companies 73 Eventually, MicroStrategy engaged in several unusual transactions in which it essentially swapped millions of dollars… …them is a home run,” said MicroStrategy lawyer Ralph Ferrara of Debevoise & Plimpton. “It was a tough case to bring to conclusion.” Indeed, the SEC…

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  Case 11: American Tissue (2001)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …the books – in what the indictment later said was a futile effort to gain new Accounting Fraud in U.S. Companies 76 financing, even as it was… …contained the material misrep- resentation that the company was in compliance with its loan covenants with its lenders (when it was not), and omitted to… …the same time, Gabayzadeh and Elghanayan set up a labyrinth of 45 companies, described as affiliates of American Tissue, but held apart from it by the… …affiliated companies down with it. Money moved all around these related companies – and away from creditors, as the suit later alleged. By September 30, 2000… …. In a separate lawsuit, Elghanayan was accused of constructing a transaction that saw ATI buy machinery for USD 3.3 million, and then sell it to… …Elghanayan for USD 1 two months later. Gabayzadeh and Elghanayan were later alleged to have used American Tissue’s treasury as if it was their personal… …. In July 2001, the fraud was uncovered when it was figured out that the numbers at American Tissue didn’t add up. Two months later, the company… …. Shortly before, the prosecutor had said in his closing arguments that it was com- pletely unreasonable to believe or even to consider that the CEO simply…

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  Case 12: Enron (2001)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …become synonymous with corporate malfeasance. However, compared to other accounting frauds, the Enron fraud was very complicated; it involved many… …reports. They didn’t have to lie. All they had to do was to obfuscate it with sheer complexity – although they lied, too.” The impact of the fraud was… …far-reaching, to say the least. It led to the bankruptcy of the once high-flying energy company in late 2001, marking one of the biggest corporate failures in… …since October 1929”. Besides, the fraud ushered in a wave of prosecutions against white-collar crime at the highest levels of American business, and it… …originated a strong reaction (possibly an overreaction) from the regulatory bodies as well. Thus, it is of great importance to understand what actually… …business model: create a “gas bank” in which Enron would buy gas from a network of suppliers and sell it to customers, contractually guaranteeing both the… …outside the United States. The market endorsed Enron’s “new economy” business strategy. In 2000, Enron reported revenues of USD 101 billion, making it… …of these negative developments, it is quite astonishing that by the end of the year, Enron’s image was in tatters and its stock price had plummeted… …(primarily for the water and broadband businesses). It also disclosed a mysterious USD 1.2 billion reduction in shareholder equity, mainly as a result of the… …reversal of dealings with certain off-balance-sheet partnerships, called “the Raptors” (October 16). - Enron announced that it had changed plan…

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  Case 13: WorldCom (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …was going to be the next fraudulent company. It turned out to be WorldCom, Inc., at the time the second largest long-distance telecommunications… …SEC said that WorldCom’s accounting improprieties were of “unprecedented magnitude”. But as enormous as the fraud was, it was accomplished in a… …relatively mundane way. The modus oper- andi of the fraud was rather simple, and it was carried out over a comparatively short period of time. Yet the… …Corp. because of antitrust objections. WorldCom’s position as fast-growing provider of integrated telecommunications services (it provided a broad… …demanded that his subordinates met those expectations. It was when he had the greatest need to keep WorldCom’s stock price up that the largest part of the… …standards others will follow.” It was shortly after Ebbers had left that the fraud was discovered and disclosed. Fraud detection and disclosure As… …that it was not her problem. When she continued to raise her concerns, she was told by WorldCom’s CFO, Scott Sullivan (to whom internal audit reported)… …advised of the issue, took it seriously and directed prompt attention to it. On June 20, Cooper attended an audit committee meeting at which Sullivan was… …. Accounting Fraud in U.S. Companies 95 WorldCom announced that it intended to restate its financial statements for 2001 and the first quarter of… …2002. It stated that certain transfers from “line cost expenses” to asset accounts, totalling USD 3.85 billion during this period, were not made in…

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  Case 14: Dynegy (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …, Deutsche Bank and Credit Suisse First Boston), but to make it appear that the loan was cash generated from operations. Boosting operations-based cash flow… …failed to disclose the true financing nature of the USD 300 million cash flow related to Project Alpha. Thus, it created the appearance that its… …operations were generating far more cash than they actually were. Furthermore, it concealed from the investing public the true extent of the gap between its…

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  Case 15: Xerox (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …copier). Xerox was defined as “the copier company” in its very DNA, and it was even in the dictionary as a syno- nym for photocopy. The copiers were “money… …machines” nonpareil. The 1990s, however, would be a time of crisis for the company. It was confronting intense product and price competition from its… …focus on high-margin, high-end copying equipment. To succeed in the new digital age, the company needed to reinvent itself. However, it was far better at… …management. In May 2000, Xerox made a public announcement that it had discovered accounting irregularities associated with its Mexican operations. CEO… …outside auditors. KPMG was so concerned about ROE and margin normalization that it internally referred to these methodologies as “half-baked revenue… …“Rank reserve” for items unrelated to any risks arising from the acquisition. It continued to draw down on this reserve for unrelated expenses each… …quarter until it was exhausted at the end of 1999. Internally, Xerox regarded the reserve as “interdivisional opportunity” or “unencumbered reserve”… …receivables at a deep discount. In other words, it sold its future stream of cash at far less than its full value to realize instant cash.) – In certain… …the lease term. US-GAAP prohibited increasing the estimated residual value for any reason after it was first established. However, Xerox often… …actions to “close the gap” between its actual results and the numbers it wished to and did report to the public. Yet the company continued to portray…

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  Case 16: Tyco International (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …and speciality products, packaging materials, as well as undersea telecommunications networks and financial services. It operated in 100 countries… …, while being nominally based in a tax haven, Tyco continued to operate out of Exeter, New Hampshire, and Boca Raton, Florida. (At this point, it is also… …shareholder suits.) – Tyco accumulated a massive amount of so-called “goodwill” on its balance sheet. It paid high prices for acquired companies, and rather… …than writing this cost off as an expense (which would have to be reported to shareholders as a reduction in earnings), it created goodwill. Since the… …middle of 2000, Tyco accumulated over USD 20 billion of goodwill on companies that it acquired for USD 24 billion. In other words, the actual hard assets… …acquisitions would create in the course of the further development of the companies. – Tyco did not report acquisitions that it stated were small enough to be… …con- sidered “immaterial” under US-GAAP. From 1991 through 2001, Tyco spent USD 8 billion on more than 700 acquisitions that it said were not material… …acquisitions, but it had ultimately decided not to take action. In Kozlowski’s view, the SEC probe qualified as an endorsement, and he emerged from the… …York City’s Upper East Side. (Later on, Kozlowski became the object of ridicule after it was revealed that the furnishings at his opulent Fifth Avenue…

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  Case 17: Global Crossing (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 118 Case 17: Global Crossing (2002) Had the attention not been for Enron (the scandal that had it all at… …Crossing abruptly collapsed into bankruptcy in early 2002. On January 28, the company filed for Chapter 11, making it one of the biggest bankruptcies in… …is also part of the wider story of the meltdown in the telecom- munications industry. It epitomized the boom and bust of the so-called “broadband… …network and to sell capacity on that network to other providers and users of telecommunications services. Within four years, it built a 100,000-mile… …registered in Hamilton, Bermuda and run from Florham Park, New Jersey) was a stock market darling during the high-tech mania. But in 2001, when it became… …clear that there were not enough customers paying for the network, Global Crossing began its descent. Ultimately, the company had to acknowledge that it… …not have met analysts’ estimates. In its disclosures, Global Crossing stated that it had sold substantial amounts of capacity to customers to… …whom it had also made substantial cash commitments. The company disclosed the gross dollar amounts of these sales and purchases as well. Nevertheless… …specify that it was becoming increasingly reliant on the reciprocal transactions as a source of cash revenue. Eventually, it failed to disclose that in… …several reciprocal transactions, it purchased capacity that would not be ready for service until some time after the end of the quarter (in some cases…

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  Case 18: Qwest Communications International (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …capacity as an investment. Doing so had the effect of inflating reve- nues, making it seem as if the communications markets were far more robust than they… …aries even further: instead of accounting for revenue from these deals over the life of the contracts, Qwest accounted for much of it upfront, producing… …of USD 1.9 billion in August 2002, a 98% decline for the period. In September 2002, the company announced that it would restate its financial… …Wall Street that it used any means necessary to meet its “outrageously optimistic revenue projec- tions”. “Qwest senior management created a… …employees inter- nally referred to such transactions as “one hit wonders”). When senior management realized that it could not meet the projected growth… …through increases in recurring revenue, it directed the sale of portions of Qwest’s fiber optic network originally held for own use. Thus, Qwest began… …fourth- largest long-distance telephone service provider, he had been ultimately swayed by greed. In 1999 and 2000, it had become apparent that the revenue…

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  Case 19: Adelphia Communications (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …prosecutions in U.S. history. The SEC called it “one of the most extensive financial frauds ever to take place at a public company”. However, the thing that… …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… …March 27, 2002, when it disclosed that the Rigas family had borrowed USD 2.3 billion from banks through various family-owned partnerships, using… …was already too deeply in debt. Barraged with questions, the company stated that it reviewed its accounting and would not meet the deadline for filing… …series of sham transactions (backed by fictitious documents) to give the false impression that it had actually repaid debts when, in truth, it had simply… …shifted them to off-balance sheet affiliates. Furthermore, it cre- ated misleading financial statements by giving the false appearance (through the use of… …footnotes) that the listed liabilities included all outstanding bank debt. Because Adelphia massively understated its liabilities, it falsely represented in… …public filings that it was complying with financial covenants and related financial ratio require- ments, when it was not. Misrepresentations… …secretly inflated its basic cable subscription numbers to make inves- tors think it was still growing at a healthy pace and expanding its customer base. For… …plant that had been “rebuilt” or made “two-way capable”, in order to convey the false impression that it had modernized its network. For Adelphia…

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