8/6/2019 Scandal - Copy
1/73
8/6/2019 Scandal - Copy
2/73
SCANDAL
SCANDAL
8/6/2019 Scandal - Copy
3/73
Origin of companies
8/6/2019 Scandal - Copy
4/73
ORIGIN OF COMPANIES
ASIA
Kanebo Limited
BCCI Satyam
Computer
Services
AMERICA
AIG
Enron Corporation
Tyco International
Waste
Management, Inc
Health SouthCorporation
WorldCom
EUROPE
Parmalat
8/6/2019 Scandal - Copy
5/73
ASIA
29%
AMERICA
58%
EUROPE
13%
ORI IN
8/6/2019 Scandal - Copy
6/73
ENRONSCANDAL
8/6/2019 Scandal - Copy
7/73
WhoWas Involved?
FOUNDER
CEO
CFO
VICE
PRESIDENT
8/6/2019 Scandal - Copy
8/73
How was the Fraud perpetrated?
8/6/2019 Scandal - Copy
9/73
SPES borrows fund to run business without debt showing
in B/S
Company can also sell leveraged assets and book a profit
Advantage of rule based USGAAP
using SPEs , a company is permitted to increase
leverage and ROA without having to report debt on
its balance sheet
Company contributes hard assets and related debt to an SPE inexchange for an interest in the partnership
8/6/2019 Scandal - Copy
10/73
To avoid classification ofSPE as a subsidiary
FASB guidelines require that only 3% ofSPE be
owned by outside investor
8/6/2019 Scandal - Copy
11/73
assets
assets
ENRON
SPE
SPE
Losses
losses
Income statement
8/6/2019 Scandal - Copy
12/73
SHARES
8/6/2019 Scandal - Copy
13/73
SHARES
SHARES
8/6/2019 Scandal - Copy
14/73
Independence ofExternal Auditor
8/6/2019 Scandal - Copy
15/73
Receive high percentage of fees
internal auditing
Staff ofEnron was the executive ofAA
Provide unqualified audit opinion
AA was consulted on and participated in setting up SPEs
In conjunction with Enron staffAA violates USGAAP
Destroyed thousands of documents related to Enron
8/6/2019 Scandal - Copy
16/73
INDEPENDENT INVESTIGATION
REVEALEDCONSOLIDATION WAS OMMITED
UNDESTATEMENT OF LIABILITIES OF$628.
CFO OWNED THE SPE
8/6/2019 Scandal - Copy
17/73
Though investigation found this
misstatement But AA did not find any misstatement from
1997 to 2001
and provided unqualified opinions on
Enrons financial statements since 1985
8/6/2019 Scandal - Copy
18/73
year
1 2 3 4
105
703
893
979
570
77
645
880INFLATED INCOME
8/6/2019 Scandal - Copy
19/73
73%
81%72%
90%
2000
8/6/2019 Scandal - Copy
20/73
BENEFITS OF AA
8/6/2019 Scandal - Copy
21/73
TOTALWI
15%
AUDIT FEES
41%
NONAUDIT
44%
FEES
8/6/2019 Scandal - Copy
22/73
AA VIOLATES
CODE OF ETHICS
DOCUMENT RETENSION POLICY
INTIMEDATIONTHREAT
SELF REVIEWTHREAT
SELF INTERESTTHREAT
FAMILIARITYTHREAT
8/6/2019 Scandal - Copy
23/73
INTIMEDATIONTHREAT
SELF REVIEWTHREAT
SELF INTERESTTHREAT
FAMILIARITYTHREAT
Sherron Watkins, an
E
nron vice-president, CPA
and auditorpreviously with Arthur Andersen for 8 years
Many ofEnrons internal accountants, CFOs and controllers
were former AA executives and employees
8/6/2019 Scandal - Copy
24/73
INTIMEDATIONTHREAT
SELF REVIEWTHREAT
SELF INTERESTTHREAT
FAMILIARITYTHREAT
AA was not only Enrons external auditor, but also its internal
auditor
8/6/2019 Scandal - Copy
25/73
INTIMEDATIONTHREAT
SELF REVIEWTHREAT
SELF INTERESTTHREAT
FAMILIARITYTHREAT
In 2000, AA received $25 million in audit fees and $27 million in non-audit consulting fees from Enron
8/6/2019 Scandal - Copy
26/73
INTIMEDATIONTHREAT
SELF REVIEWTHREAT
SELF INTERESTTHREAT
FAMILIARITYTHREAT
AA was the auditor for Enron since 1985
8/6/2019 Scandal - Copy
27/73
Title
CODE OF ETHICS
DOCUMENT RETENSION POLICY
it destroyed thousands of documents and
electronic files related to the Enron audits
before 5 years.
8/6/2019 Scandal - Copy
28/73
THINK GREEN
MAKE WORLD CLEAN
8/6/2019 Scandal - Copy
29/73
8/6/2019 Scandal - Copy
30/73
Capital
TaxProfit
Depreciation
Fixed Asset
Loan
Expense
Asset
Current Asset
Investment Revenue
10%
30%
8/6/2019 Scandal - Copy
31/73
8/6/2019 Scandal - Copy
32/73
Expense
Expense
Revenue
Income Statement
How was the Fraud perpetrated?
management inflated earnings by improperlyeliminating and deferring current period expenses
8/6/2019 Scandal - Copy
33/73
Assigned arbitrary salvage values to other assets that previously hadno salvage value
Avoided depreciation expenses on their garbage trucks by both assigningunsupported and inflated salvage values and extending their useful lives
Improperly capitalized a variety of expenses
Failed to record expenses for decreases in the value of landfills asthey were filled with waste,
How was the Fraud perpetrated?
8/6/2019 Scandal - Copy
34/73
Environmental
Reserve
established inflated environmental reserves (liabilities) in connection withacquisitions so that the excess reserves could be used to avoid recordingunrelated operating expenses
operating expenses
How was the Fraud perpetrated? (cont.)
8/6/2019 Scandal - Copy
35/73
No reserve to pay Taxes and Expenses
How was the Fraud perpetrated?(cont.)
8/6/2019 Scandal - Copy
36/73
TO REDUCE EXPENSESANDTO REDUCE EXPENSESAND
INFLATE EARNINGSINFLATE EARNINGS
ARTIFICIALLY, MANAGEMENTARTIFICIALLY, MANAGEMENTPRIMARILY USED PRIMARILY USED TTOPOP--LEVELLEVEL
ADJUSTME TSADJUSTME TS"TO"TOCONFORM THE COMPANY'SCONFORM THE COMPANY'S
ACTUAL RESULTSTO THEACTUAL RESULTSTO THE
PREDETERMINED EARNINGSPREDETERMINED EARNINGS
TARGETSTARGETS
How was the Fraud perpetrated?
8/6/2019 Scandal - Copy
37/73
How was the fraud covered?
primarily used "top-level adjustments" to conform the company's
actual results to the predetermined earnings targets
Accounting practices were centralized at corporate headquarters
Each
year, Buntrock, Rooney, and oth
ers prepared an annual budgetin which they set earnings targets for the upcoming year.
The inflated earnings of prior periods then became the floor for futuremanipulations.
8/6/2019 Scandal - Copy
38/73
FINALLY REVEALED!!!!!!
R
E
VI
E
W
8/6/2019 Scandal - Copy
39/73
1,700,000,000,000
RESTATEMENT
8/6/2019 Scandal - Copy
40/73
Auditors Involvement
Auditor of theWasteManagement
management capped Andersen's audit fees and advised theAndersen engagement partner that the firm could earn
additional fees through"special work
8/6/2019 Scandal - Copy
41/73
Andersen nevertheless identified the company's improperaccounting practices and quantified much of the impact of thosepractices on the company's financial statements.
Andersen annually presented Company management with what it called ProposedAdjusting Journal Entries ("PAJEs") to correct errors that understated expenses andoverstated earnings in the Company's financial statements
Management consistently refused to make the adjustments calledfor by the PAJEs
Auditors Involvement (cont.)
8/6/2019 Scandal - Copy
42/73
8/6/2019 Scandal - Copy
43/73
How did Management fare?
receiving performance-based bonusesbased on the Company's inflated earnings
retaining their high-paying jobs
stock options
received enhanced retirement benefitsbased on the improper bonuses
8/6/2019 Scandal - Copy
44/73
Cashing In
While stock price is risingBuntrock, Rooney, and Koenig
avoided losses by cashing intheirWaste Management stockwhile the fraud was ongoing
8/6/2019 Scandal - Copy
45/73
As the stock price
falls, the actual
shareholders lose their
investment more than $6billion.
Who Was Hurt?
8/6/2019 Scandal - Copy
46/73
How muchmoney they have taken?
16917761
9286124
951005 640100 472500 4037790
5000000
10000000
15000000
20000000
Burtrock Rooney Koenig Hau Getz Tobecksen
Income
Income
8/6/2019 Scandal - Copy
47/73
SEC Reaction
"For years, these defendants cooked thebooks, enriched themselves, preserved theirjobs, and duped unsuspecting shareholders."
Th
omas C. NewkirkAssociate director
SEC's Division of
Enforcement
"Our complaint describes one of themost egregious accounting frauds wehave seen,"
8/6/2019 Scandal - Copy
48/73
Main culprit.!!!
He set earnings targets, fostered a culture of
aggressive accounting, personally directedcertain of the accounting changes to makethe targeted earnings,
Buntrock was the driving force behind the fraud.
The spokesperson who announced theCompany's phony numbers.
8/6/2019 Scandal - Copy
49/73
Rooney was in charge of building the profitabilityof the Company's core solid waste operations
He ensured that required write-offs were not recordedand, in some instances, overruled accounting decisionsthat would have a negative impact on operations
Main culprit.!!!Main culprit.!!!
8/6/2019 Scandal - Copy
50/73
8/6/2019 Scandal - Copy
51/73
Fraud At HealthSouthFraud At HealthSouth
CorporationCorporation
8/6/2019 Scandal - Copy
52/73
WHOWAS INVOLVEDWHOWAS INVOLVED
RichardRichard M.ScrushyM.Scrushy
FOU
DERFOU
DER
WilliamWilliam T.OwensT.Owens--FormerFormer
CFO
Global Associates
Ms. DianaMs. Diana HenzeHenze--FormerFormer
ACFOACFO
8/6/2019 Scandal - Copy
53/73
WHEN?WHEN?
From 1999 To 2003From 1999 To 2003--The former executivesThe former executives
cooked the company's books to meetcooked the company's books to meet
predetermined earnings targets.predetermined earnings targets.
The following are the information that describeThe following are the information that describe
the income of those year:the income of those year:
8/6/2019 Scandal - Copy
54/73
YearYear RevenueRevenue Net IncomeNet Income NetNet
Profit%Profit%
DEC2001DEC2001 4380.54380.5 202.4202.4 4.6%4.6%
DEC2000DEC2000 4195.14195.1 278.5278.5 6.6%6.6%
DEC 1999DEC 1999 4072.14072.1 76.576.5 1.9%1.9%
8/6/2019 Scandal - Copy
55/73
HOWWASTHE FRAUD PERPETRATEDHOWWASTHE FRAUD PERPETRATED
Co. Former CEOCo. Former CEO ScrushyScrushy target its profit even thoughhe knewtarget its profit even thoughhe knewabout the short of profit ,he manipulated the profit;about the short of profit ,he manipulated the profit;
ScrushyScrushy & his executives agreed upon accounting entries to& his executives agreed upon accounting entries toreduce a contra revenue account or decreasing expenses&reduce a contra revenue account or decreasing expenses&
correspondently increasing assets or decreasing liabilities;correspondently increasing assets or decreasing liabilities; They also balance the co. books, false increases in increases inThey also balance the co. books, false increases in increases in
earning were matched by false increase in co. assets;earning were matched by false increase in co. assets;
The contractual adjustment account are based upon anThe contractual adjustment account are based upon anestimate of the difference between when the co. billed theestimate of the difference between when the co. billed the
patient& the amount of money insurance co. reimbursedpatient& the amount of money insurance co. reimbursedHealthsouthHealthsouth;;
8/6/2019 Scandal - Copy
56/73
CONTINUED...CONTINUED...
There was a limited paper trail that was very difficultThere was a limited paper trail that was very difficult
for auditor to trace out the individual entries;for auditor to trace out the individual entries;
Another structural contribution was the fact thatAnother structural contribution was the fact that
most decision were made at the execution levelmost decision were made at the execution levelwhich limited checks & balances along the way;which limited checks & balances along the way;
Scrushy was also accused of using corporate funds toScrushy was also accused of using corporate funds to
buy personal items such as luxuriousbuy personal items such as luxurious
cars,boats,jewelry etc.cars,boats,jewelry etc.
8/6/2019 Scandal - Copy
57/73
HowWas The Fraud Uncovered?HowWas The Fraud Uncovered?
In 2003,the SEC accused the co. &In 2003,the SEC accused the co. &ScrushyScrushy of inflatingof inflating
earnings to the tune of 1.4 billion since 1999.earnings to the tune of 1.4 billion since 1999.
In November2003,a federal grand jury indictedIn November2003,a federal grand jury indicted
ScrushyScrushy on 85 counts for money laundering &on 85 counts for money laundering &overstating earnings by nearly $3.0 billion.overstating earnings by nearly $3.0 billion.
8/6/2019 Scandal - Copy
58/73
WhereWere The Auditor?WhereWere The Auditor?
HEALTHSOUTH auditor Ernest& young(E&Y) failed toHEALTHSOUTH auditor Ernest& young(E&Y) failed to
uncover the 2.5 billion systematic overstatement ofuncover the 2.5 billion systematic overstatement of
earnings;earnings;
The auditor allowed the co. to keep on its book $500The auditor allowed the co. to keep on its book $500million of overvalued A/R owed to by Financiallymillion of overvalued A/R owed to by Financially
distressed health care technology firms& did notdistressed health care technology firms& did not
insist on establishing adequate reserves for theseinsist on establishing adequate reserves for these
receivables.receivables.
8/6/2019 Scandal - Copy
59/73
Earnest& Young InvolvementEarnest& Young Involvement
E&Yhas non audit business dealings withE&Yhas non audit business dealings with
HEALTHSOUTH;HEALTHSOUTH;
E&Y used a 50 point checklist designed byE&Y used a 50 point checklist designed by ScrushyScrushy &&
that audit score were used by HEALTHSOUTH in itsthat audit score were used by HEALTHSOUTH in itsmarketing campaign;marketing campaign;
The audit firm takes $2.6 million fee for the auditThe audit firm takes $2.6 million fee for the audit
fees but the work was not clearly audit related thatfees but the work was not clearly audit related that
raises the impartiality &independence of auditors.raises the impartiality &independence of auditors.
8/6/2019 Scandal - Copy
60/73
Cozy RelationshipsCozy Relationships
One SEC Regulator said that he thinks theOne SEC Regulator said that he thinks the
relationship between E&Y &Co.s CFO was toorelationship between E&Y &Co.s CFO was too
cozy.cozy.
E&Y also help them to committing the fraud.E&Y also help them to committing the fraud.
8/6/2019 Scandal - Copy
61/73
The Fraudsters schemeThe Fraudsters scheme
To reduce expenses and inflate earningsTo reduce expenses and inflate earnings
artificially, management primarily used "topartificially, management primarily used "top--levellevel
adjustments" to conform the company's actualadjustments" to conform the company's actual
results to the predetermined earnings targets.results to the predetermined earnings targets. The inflated earnings of prior periods then becameThe inflated earnings of prior periods then became
the floor for future manipulations. To sustain thethe floor for future manipulations. To sustain the
scheme, earnings fraudulently achieved in onescheme, earnings fraudulently achieved in one
period had to be replaced in the next.period had to be replaced in the next.
8/6/2019 Scandal - Copy
62/73
WhyWas This Fraud So Important?WhyWas This Fraud So Important?
If E&Y informed co. to avoid this kind ofIf E&Y informed co. to avoid this kind of
fraudulent activity then the co. would havefraudulent activity then the co. would have
been survived.been survived.
As the Healthsouth were so many reputation.As the Healthsouth were so many reputation.
so this kind of scandal hamper their image inso this kind of scandal hamper their image in
the society.the society.
H did h
8/6/2019 Scandal - Copy
63/73
How did mgt here.
8/6/2019 Scandal - Copy
64/73
How did mgt here.
In 2002litigation
committeecomposed of
so calledindependent
director
Director:LARRY
D.STRI LIN
An old friend
ofScr s y
FRAUDULANCY!!!!
8/6/2019 Scandal - Copy
65/73
The web of deceit
*Within 5 former CFOs
Th b f d it
8/6/2019 Scandal - Copy
66/73
The web of deceit
*The company overstated earnings
to meet analysts earning
estimates, while hiding theaccounting fraud from the auditors.
* Questions were raised whetherthe auditors failed to find or simply
overlooked the fraud
8/6/2019 Scandal - Copy
67/73
How much was taken????
Income
(loss in $
millions)
1999 2000 2001 For
6months
ended
June 30,2002
Actual $(191) $194 $9 $157
Budgeted 230 559 434 340
Misstated
amount
421 365 425 183
Misstated
percentag
e
220% 188% 4722% 119
8/6/2019 Scandal - Copy
68/73
How much was taken????
8/6/2019 Scandal - Copy
69/73
Cashing in.
Famouspaintings
Expensivejewelry
Antiquerugs
Luxuriouscars
8/6/2019 Scandal - Copy
70/73
Cashing in.
*Scrushy made largedonations in churches
*To build sympath
y amongreligious conservatives
Wh h t???
8/6/2019 Scandal - Copy
71/73
Who was hurt???
8/6/2019 Scandal - Copy
72/73
Who was hurt???
Year Net income
($ mil.)
Employees
2005 (445.9) 2400
2004 (174.5) 40000
2003 (434.6) 40000
2002 (466.8) 51000
8/6/2019 Scandal - Copy
73/73
SEC reaction
Inflatingcos
earnings by$1.9 bilion
since 1999