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Criminal charges also were brought against Barry Minkow of ZZZZ Best company. Minkow’s carpet- cleaning company reported revenue growth from next to nothing to $50 million over the period 1984 to 1987. During that same time period, net income surged from $200,000 to over $5 million. Unfortunately for investors, virtually all of the numbers were fabricated.61 As noted by author Mark Stevens, “In reality, (more…)
The Division of Enforcement within the SEC investigates potential violations of securities laws. Financial reporting that is deemed to be a misrepresentation or omission of important information would fall within the matters investigated by the division. The division identifies cases for investigation from many sources, including its own surveillance activities, other divisions of the SEC, self-regulatory organizations, the financial press, and investor complaints. The Division of Enforcement makes recommendations to the SEC (more…)
Fraudulent financial reporting carries a more negative stigma and connotes much greater deceit than what is implied by accounting actions considered only to be aggressive. However, identifying the point beyond which aggressive accounting becomes fraudulent is difficult. While it is easy to see fraudulent intent in the cases of Comptronix and Leslie Fay, it is much more difficult in an example such as KnowledgeWare. (more…)
This adjustment, for varying amounts, was recorded on a regular basis, typically monthly. To hide the adjustment from analysts, portions of the bogus inventory were moved to the equipment account, as it was easier to hide the overstated amounts there. Fake invoices were prepared to support the increases to equipment, making it appear that actual purchases of equipment had been made. Inventory was also reduced through the recording of fictitious sales. These sales also increased the company’s reported profits. As a result of the fictitious sales, phony accounts receivable were recorded. To show collections (more…)
Still, before the label of fraudulent financial reporting can be applied, there must be a demonstration of intent. Specifically, fraudulent financial reporting entails a premeditated intent to deceive in a material way.55
KnowledgeWare, Inc., an Atlanta-based software firm, was accused by the SEC of having fraudulently reported revenue. The company gave some customers extended payment periods that called into question the collectibility of large portions of its sales. These sales were nonetheless recorded as revenue. The SEC (more…)
At this point, in fact in December 1997, the company announced that it had discovered, “certain errors in the company’s accounting practices and procedures.”53 Things began to unravel quickly from there. Within a short period of time, the company terminated its chairman and CEO, the Nasdaq stock market took steps to delist the company, and the SEC began an informal investigation. (more…)
The company capitalized these costs as opposed to expensing them on the premise that the costs incurred would benefit future periods. As such, under the matching principle, by amortizing the capitalized costs over those future periods, the company was properly matching the costs with the revenue they helped to generate. Such a practice does appear to fit within the flexibility offered by GAAP. (more…)
