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• eBook-Kapitel aus dem Buch Global Management Challenges for Internal Auditors

  Governance Works, in Principle

  Neil Baker

  …Washington in November to discuss the impact of the credit crunch, they made it clear that financial firms will face much tougher regulation in future. “We… …practice of it… The focus should be on whether the existing standards have been observed in practice.” The Code, for example, says that a company’s board… …aged.” It goes on to say that non-executive directors “should satisfy themselves on Baker 54 the integrity of financial information and that… …that doesn’t mean the principles are wrong, Boyle argued. If it is the practice, rather than the code, of corporate governance that is at fault… …training. And they suggested some quick fixes, such as holding informal meetings outside the confines of the traditional boardroom – to make it easier for… …responsibility burden of the typi- cal non-executive. No wonder companies say it is becoming more difficult to find good candidates – a problem that the current… …senior managers and directors.” It argued that over the last decade, the proportion of the board composed of hands-on, executive directors had declined… …commitment to open such dialogue,” it said. The financial firms that had the best control over their balance sheet growth and liquidity needs were those that… …: crowding out personal responsibility. “It is not help- ing us, it makes things worse,” he argued. “What compliance is doing is making sure people follow… …rules. We forget about our own responsibility for our behaviour and replace it with responsibility for compliance.” What are the implications for…

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  Case 32: Comroad (Germany, 2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …. g., navigation assis- tance and mobile Internet, emergency and breakdown services. At its peak in 2000, Comroad was valued at EUR 1.2 billion. It had… …defend itself from accusations of accounting manipulations, prominent among which was that it had “phantom partners” in Asia. Culmination of these… …it would hire a new “special auditor” to fully investigate its accounts. Comroad con- cluded this press release by stating that it was “endeavouring… …mode, just one day later, on April 24, 2002, KPMG said it would re-audit all of its 35 Neuer Markt-traded clients. Soon thereafter, the case of Comroad… …difficulty sentencing Mr. Schnabel; it specifically based its judgment on false information provided in annual financial statements and in ad- hoc disclosures… …. Still, the courts rejected most of the civil claims against Mr. Schnabel. KPMG said that it was victim of the fraud – and indeed, some observers… …German bank, was involved when the company issued new shares in 2000 after having made up sales. Concord said it carried out due diligence on the Comroad… …IPO and felt “cunningly deceived”. Hauck & Aufhaeuser said it relied on information from Con- cord, the lead IPO manager, and didn’t undertake further… …checks. A spokesman for HVB said the bank relied on positive reports from accountants and lawyers it had hired to check Comroad. Catherine the Great… …September 2002, the Frankfurt-based Neuer Markt was to be closed as it had be- come a discredited brand. “It was tarred with too many high-profile failures…

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• eBook-Kapitel aus dem Buch Accounting Fraud

  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 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 26: Juergen Schneider (Germany, 1994)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …behaviour as a serious and important businessman. It also appeared that they were seduced into taking the risk by the promise of big profits. The scam ran… …verified something as basic as the size of the property it was lending on. Accounting Fraud in European Companies 166 Schneider also appeared… …explic- itly whether there were any supplementary contracts. Deutsche Bank claimed that it was the victim of systematic fraud. Hilmar Kopper, at the… …the affair proved to be very embarrassing for the bank. The report from the auditors, Wollert-Ellmendorff, supported Deutsche Bank’s argument that it… …had been crimi- nally deceived. But it also made clear that there had been complacency in the deal- ings with the property tycoon. There were several… …ensure that it was technically possible to construct a particular building and that the building costs were in relation to what was required. – All… …asked for a “transitional loan” in a letter received on April 7, 1994. It was in the spring of this year that Schneider began to face a string of… …it is possible that one individual can collect such a volume of debt in such a short time”. Schnei- der was arrested in Miami, Florida, in January… …1995. When he was returned to Germany in February 1996, the mass-circulation newspapers made it the big story of the day. “Hello, Mr. Schneider, Your… …just before it became impossible to stave off his creditors. The German media portrayed Juergen Schneider as a sophisticated con artist. But…

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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 23: Computer Associates International (2004)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …corporations used its software products to run and manage their IT technology. At the time, Islandia, New York-based Computer Associates was the world’s… …began slowly (mainly because of the obstruction led by Computer Asso- ciates’ senior management), it steadily gained momentum in 2004. In January 2004… …participated in a scheme to inflate revenues and then lied to cover it up. He said senior management pressured him to lie, although he didn’t name names. In… …after the end of the quarter so that revenues could be counted a quarter earlier than it ought to have been. In all, the company prematurely reported… …, Accounting Fraud in U.S. Companies 150 when the company reported USD 557 million in revenues beyond the USD 1.047 billion it could properly claim. Thus… …kept scoring until it had all the points it needed to make every quarter look like a win.” Employees at Computer Associates also called the Extended… …million soft- ware license deal with a nearly insolvent customer. It then backdated the contract so it could be recorded in the prior quarter. In the next… …quarter, knowing that it would not be able to collect on the contract, Computer Associates reversed its internal records but did not publicly restate… …the first quarter of fiscal year 2001, it fell short of the Wall Street earnings estimate, and the share price dropped by more than 43% in a single day… …. This was only the second time in the company’s history that it missed Wall Street estimates. Until June 2000, Computer Associates also…

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  Case 24: AIG (2005)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …“Hank” Greenberg was credited with vastly expanding the company, turning it into one of the world’s largest and most revered insurance firms. For decades… …AIG were three primary areas of fraud (see SEC 2009): – Sham reinsurance transactions with General Re Corp. (“Gen Re”), in order to make it appear… …that AIG had increased its general loss reserves, when in fact it had not – A deal with an offshore special purpose entity called Capco Reinsurance Co… …boosted AIG’s net investment income and allowed it to improperly recognize capital gains Accounting Fraud in U.S. Companies 156 The “Gen… …it appear that Gen Re was paying AIG to share some of its claim risk. But investigators found no evidence of risk transfer from Gen Re to AIG. In… …analysts. The move helped AIG to persuade analysts that it was in better shape to pay claims, and helped to increase its share price. Without the phony… …. The SEC complaint said that AIG even lent the investors the money, hiding the loan by channelling it through various AIG subsidiaries. Using Capco to… …transactions in which it – appeared to redeem a portion of its interest in certain hedge funds back to the funds, – recorded the resulting cash payments… …financial results.” According to Spitzer, CFO Howard Smith ordered so-called “top-level adjustments” to AIG’s financial statements each quarter, to help it… …, after Greenberg and Smith were forced out by the board, AIG announced that it would restate many of its prior transactions. In addition, AIG stated that…

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  Case 34: Royal Ahold (The Netherlands, 2003)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …the most prominent and re- spected corporations in the Netherlands. For several years, it had been named the most desirable employer and the company… …and the French firm Carrefour S.A. had larger annual food retail sales than Ahold. In 2002, the com- pany’s reported sales were EUR 62.7 billion; it… …share quickly by purchasing existing grocery chains in foreign countries. In 2000, the company completed its most ambitious acquisition when it… …was forced to buy out Velox’s interest and absorb its liabilities. Ahold had failed to disclose that it had committed itself to purchase the residual… …ownership interest in the joint venture if Velox de- faulted on its outstanding debts. Now Ahold had to announce that it was taking over USD 492 million in… …subsidiary. In early 2003, Ahold surprised investors when it announced that U.S. Foodservice had overstated earnings by at least USD 500 million in 2001 and… …by USD 880 million over three years, and that it would have to take pre-tax charges of nearly USD 1 billion on group level. The size of the new… …figures shocked Ahold’s new management as much as it did analysts and investors. The company immediately authorized an investigation by law firm White &… …investigations, it was ultimately found that there were two principal sources of material misrepresentations in Ahold’s consolidated financial statements: (1)… …at USF centred around the way it accounted for “promotional allowances”. USF typically purchased products from a variety of suppliers at full price…

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  Case 27: Flowtex (Germany, 2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …precedent,” said judge Michael Meyer. He expressed his incredulity that the scam could have lasted for nearly ten years without being noticed. “It is amazing… …debts that needed to be covered.” Flowtex, based in Ettlingen near Karlsruhe in southern Germany, marketed horizon- tal drilling equipment. It… …each machine was fitted with the correct plates and documentation. It did not appear to strike KPMG as strange that machines they had chosen at… …bond to its customers as being “an attractive investment opportunity”. It would have been the first bond issue from a privately owned German… …their losses, which they refused to quantify. Why due diligence failed to expose the apparent Flowtex scam is still unclear. It is noteworthy that… …Flowtex case, said the complex structure of the Schmider-Kleiser group had “certainly played a role” in the deception. However, it emerged that KPMG… …pretend business. In 2002, the well-known auditing firm paid creditors of the bankrupt drilling equipment maker EUR 50 million. KPMG said that it made the… …against the state of Baden-Wuerttemberg after claiming that it failed to act in time against Schmider and Kleiser. The plaintiffs claimed that the tax… …records are examined before it issues securities. It is a textbook example of what can go wrong when banks and auditors place too much reliance on the…

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