2009 April | Rich and Wealth

Archive for April, 2009

SUMMARY

The SEC has not been idle as numerous examples of creative accounting practices, sometimes entailing alleged fraudulent activity, have surfaced in recent years. Concerned about the integrity of the financial reporting system in the United States, the SEC has mounted a direct attack on what it views to be the causes of questionable reporting. This chapter provides details of the problems the SEC sees with the current reporting environment, identifies what the commission is doing about these problems, and discusses the tools available to the commission to ensure compliance with its reporting regulations. (more…)

Posted in: General | Posted by: Donalds | April 30th, 2009 | 1 Comment

Companies at Risk for Fraud

In their most extreme form, creative accounting practices become fraudulent. As seen in this chapter, the costs to the shareholder or debt holder of a company whose financial statements are alleged to be fraudulent can be significant. In an effort to better prepare readers to either avoid such situations or at least reduce exposure to them, the attributes of companies that are more at risk for fraudulent financial reporting are summarized in Exhibit 4.8. (more…)

Posted in: General | Posted by: Donalds | April 27th, 2009 | No Comments

Other Consequences (5)

Qualitative listing requirements, including such corporate governance standards as the need to provide shareholders with timely annual and interim reports, the need for independent directors, an audit committee, and an annual meeting of shareholders, give the exchanges more room for applying judgment in deciding whether to delist a company’s securities. For example, Nasdaq’s Marketplace Rules note that Nasdaq constantly reviews an issuer’s corporate governance activities and that it may take appropriate action, including the placing of restrictions on or additional requirements for listing, or the denial of a security’s listing, if it determines that “there have been violations or evasions of such corporate governance (more…)

Posted in: General | Posted by: Donalds | April 24th, 2009 | No Comments

Other Consequences (4)

Delisting of a Company’s Shares In addition to the SEC, companies must also be concerned about the regulatory power of the stock exchanges and associations on which their shares are traded. National securities exchanges, securities associations, and clearing agencies are self-regulatory organizations that are registered with the SEC. In the United States, there are several such bodies, including the New York Stock Exchange, the American Stock Exchange, and the National Association of Securities Dealers, Inc. The stock of most public companies is bought and sold over one or more of these exchanges. In order to have an orderly and liquid market for their stock, affording prompt trades in a fair and honest environment, it is important that companies’ shares are listed on a regulated exchange. (more…)

Posted in: General | Posted by: Donalds | April 21st, 2009 | 1 Comment

Other Consequences (3)

For example, in a class action lawsuit filed against certain representatives of Safety-Kleen Corp. by the firm of Grant & Eisenhofer, P.A. on behalf of the company’s bondholders, two institutional investors claimed more than $30 million in damages. The action was brought against Safety-Kleen’s officers, directors, controlling shareholders, accountants, and underwriters. The suit alleged, among other things, that the company’s financial statements for the years ended August 31 1997, 1998, and 1999 were “false and misleading, and had to be withdrawn by Safety Kleen and its auditors, PricewaterhouseCoopers LLP.”66 These financial statements, according to the lawsuit, had been used in connection with the sale of the bonds and also had been used after their sale, “artificially inflating the price of the bonds in the aftermarket.”67 (more…)

Posted in: General | Posted by: Donalds | April 18th, 2009 | 1 Comment

Other Consequences (2)

Criminal Prosecution In Chapter 2 we presented the example of Aurora Foods, Inc. In early 2000 the company restated its results for the last two quarters of 1998 and three quarters of 1999, wiping out $81,562,000 of pretax earnings for those two years. The company had recognized revenue prematurely and had improperly capitalized promotional expenses paid to retailers. (more…)

Posted in: General | Posted by: Donalds | April 15th, 2009 | 1 Comment

Other Consequences

The monetary fines assessed on defendants for alleged acts of fraudulent financial reporting seem low, almost inconsequential. The low amounts may suggest to some that it is worth trying to get away with reporting transgressions. It is important to keep in mind, however, that the SEC’s monetary fines are not necessarily the end of the matter. As noted, there is always the threat of criminal prosecution, which provides a dark cloud that can hang over defendants for some time. In addition, other costs may accrue to (more…)

Posted in: General | Posted by: Donalds | April 12th, 2009 | 1 Comment

Penalties

The SEC has a wide range of penalties available to it for punishment of violations of the Securities Acts. The simplest penalty is a cease-and-desist order or a permanent injunction where the defendant is enjoined from future violations on penalty of contempt of court. For more egregious acts, wrongdoers can be prohibited from ever again serving as an officer or director of a registered company. Professionals, such as lawyers and accountants, who are found to violate the securities laws can be censured, suspended, or barred from practicing before the SEC. Such suspensions can be for a set time interval or permanent. Civil (more…)

Posted in: General | Posted by: Donalds | April 9th, 2009 | 1 Comment

Application Examples (4)

The complaint alleged that Covey and Skadra caused System Software to misstate its financial results during its fiscal years 1994 through 1996 by improperly reporting revenue on sales of a development-stage UNIX-language software product. Customers who purchased the product allegedly experienced severe and continuing difficulties with its performance and often rejected it. According to the SEC, revenue was not earned and should not have been recognized because “there existed significant uncertainties about customer acceptance of the product and collectibility of the contract price and significant vendor obligations remained. . . .”58 The commission also alleged that System Software recognized revenue from sales of its UNIX product that were subject to side letters or other material contingencies that effectively negated the sales. (more…)

Posted in: General | Posted by: Donalds | April 6th, 2009 | No Comments

Application Examples (3)

The SEC maintained that the manner in which these transactions were accounted for was in violation of Section 13(a), the periodic reporting provision, Section 13(b)(2)(A), the books and records provision, and Section 13(b)(2)(B), the internal control provision, of the 1934 Act. (more…)

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