Is it Possible to Forecast Financial Schenanigans Essay

The Enron and WorldCom scandals were arguably the incidents that permanently changed the procedures for accounting controls. In response to these incidents, the Sarbanes-Oxley Act (SOX) of 2002 was passed. Once the knowledge of these scandals was made public, a number of subsequent accounting scandals were discovered in public companies such as Tyco International, HealthSouth, and American Insurance Group. In addition, a then-employee-owned company, Post, Buckley, Schuh & Jernigan, Inc. (dba PBS&J, now known as “Atkins North America, Inc.”), was also hit by a similar accounting scandal. Henceforth, a case study of PBS&J is presented where we will examine the fraudulent transactions that

Throughout history and in our own time, legitimate accounting methods have been utilized to fraudulently engage in manipulating activities that results in illicit gains to the perpetrators and losses to individuals and financial institutions.

| The flexibility in U.S. GAAP gives management discretion to use its professional opinion to choose from a range of guidelines and standards in selecting those that suit the needs of a company (e.g., FIFO or LIFO inventory methods).

After reviewing the financial information of the Tech Tennis, USA, there was a concerned due to some unusual changes in the company’s accounts. Financial statements play a crucial part in the determination of the progress of an organization. It assists the relevant personnel to identify whether the company is making profits or making losses. Although unethical, some companies will tend to deliberately misrepresent some of their financial statement information to create a false impression of the company’s success. There are various techniques that organizations utilize to manipulate their financial statements such as overstating their revenues (Bierstaker, Brody, & Pacini, 2006). In addition, some organization will tend to inflate their sales without considering their cash flow amount that the organization has acquired which will be a red flag to investigate. Consequently, financial statements provide vital information that helps both internal and external users to understand the position of the organization. Some companies in an attempt to continue in the market, they end up manipulating their financial statements that create an illusion of the success of the organization.

This subject company in this case study is WoolEx Mills. The top management team at the Mills had to act fast to prevent the accusations charged upon them, so that they may venture deep into the United States market. In the process, they had to act in a way that will present the company’s financial statements; cash flows in a way that they did not show any suspicious fraudulent activities. The type of fraud in this case study is known as manipulation of accounts which involves the act of offering the accounts in the way they are not in reality.

Members of management even went as far to further control the timing and release of these already fictitious revenues and profit. Throughout the span of these fraudulent schemes, members of management including Wiles, Goodman, Schleibaum, and Wolfe, deliberately overstated reserves in certain periods of high earnings and subsequently released these reserves into income in less

Managers have been known to instruct employees to exaggerate and mislead some financial documents to have some office petty cash fatten up their own pockets. Maybe even going out to extravagant dinners at the company’s expense and using it as business write-offs. If caught with some of these practices, charges can be brought up against the employees, as well as, immediate termination.

1. Identify legitimate business practices that corporate executives can use for the primary purpose of manipulating or “managing” their company’s reported operating results. Are such practices ethical? Defend your answer.

The WMI accounting fraud case described a financial fraud committed by senior management of WMI during the period of 1992-1997, with the help of Arthur Andersen their external auditing partners. The case depicts the effort of several years to inflate profits at WMI, employing aggressive accounting practices which enabled the WMI to conceal $1.7 billion in expenses (Riley and Rezaee, 12). By eliminating or deferring expenses, WMI managed to meet earnings targets and improve its share value. The fraud enabled the former top officials to enrich themselves in performance-based bonuses. Additionally, the case depicts a financial fraud committed by senior ranking executives at

Phar-Mor Inc. fell prey to greed from the top. Unfortunately, the auditing firm assisted the organization with the conspiracy to defraud the users of financial reporting, the government, and the stakeholders. The chief officers used the funds for personal usage and appropriated funds to functions that were not related to the organization business. The financial statements were riddled with material misstatements and fraud acts of theft were blatant. For example, the senior financial officers including the CEO grossly over stated inventory to hide losses.

Off Balance Sheet Techniques. The research of Giroux (2008) revealed that Enron resourced to complex and deceptive initiatives of fabricating fictitious and guaranteeing its own Special Purpose Entities (SPE) and off-shore accounts to move debt off the balance sheet and transfers the liabilities of the special purpose entity by recording cash as a cash from operations rather than cash from financing (p.1216). The research of Ahmad et al. (2013) on WorldCom indicated that the top executives overstated earnings by routinely manipulating and treating operation expenses as capital (pp.8-10). Likewise, Crumbley et al. (2013) research on WorldCom indicated that the internal auditor discovered the shift of line cost expenses to capital accounts (p.4121). The research of Crumbley et al. (2013) on Adelphia Communication specified that the company’s management and owners falsified number of cable TV subscribers, created false management fees and were hiding off-balance sheet debt from investors (p.4191). Ahmad et al. (2013) research on Tyco International showed that the companies inflated its cash flow by improperly recording booking expenses as capital (pp.8-10).

In my opinion, Peregrine recorded the "factoring" and assignment of their receivables as a factoring agreement and recorded the transaction as a sale of the receivables. They recorded the cash received and removed the related receivables from the accounts. By removing the receivables, they treated the receivables as if the risk of collection had passed to the bank without recourse. Peregrine concealed the revenue fraud by violating GAAP for financing arrangements. Because Peregrine had given the banks recourse, and frequently paid or repurchased unpaid receivables from them, Peregrine should have accounted for the financing arrangement as a liability and left the receivables on its balance sheet.

The executives of Waste Management, in order to save their jobs and keep/increase their personal bonuses, manipulated financial records in order to give the appearance to investors that certain earnings targets were

$6 million in 2007 or by 20 percent. Its assets totaled $3 million at the end of

Therefore, managers or directors mean to depict good performance and position by manipulating figures hence in such way the stakeholders will be shown positive indicators from the financial statements. By this way, investors will more likely to be attracted and given confidence with this superb financial report. This can be achieved by modifying the figures in the statements using the tricks of creative accounting. In addition, how many bonuses directors will receive in a year may base on the percentage of the profit reported (Shafren, 2009). For this reason of their private interest, directors may manipulate financial figures to meet their desire. Lttner, Larcker and Rajan (1997) have the same perspective. They illustrate that when the directors or managers private interest (such as stock options and bonuses) is rely on the performance of the company, they are more likely to use creative accounting to manipulate the figures in order to achieve their favourable results.