THE LEMONADE STORY

Financial
Shenanigans(FS)
PRESENTED BY

Ranjit Pisharody 75
Pravin Dhas 76
V. Rao Pentakota 80
N.Sharda 93
Sheryl Susan John 94
Subasri 104
 OVERVIEW
§ What are shenanigans ?
§ Strategies used for FS
§ Likely candidates for FS
§ Why do Shenanigans exist?
§ Finding Shenanigans
§ Case study: Worldcom, Xerox
§ Road to Reform
What does FS mean?

Actions or omissions
intended to hide or distort
the real financial
performance or financial
condition of an entity.
They range from minor
deceptions to more serious
misapplications of accounting
principles.
 Strat egies use d f or FS

§ Overstated Revenue
Overstated revenue
Ø Recording revenue too early

Ø Recording False or Bogus revenues

Ø Inflating income with one time gains

Under reported expenses
Moving current expenses to a later
period
Failure to disclose liabilities
SHIFTING TO EARLIER OR LATER PERIOD

Moving current income to a later period

Moving future expenses to the current period
 Likely Candidates For FS
§ Fast-growth
companies whose
real growth is
slowing down
§ Basket-case
companies trying
to survive
§ Newly public
companies
 List of companies involved in accounting
scandals
Leasco Pergamon Press Tiphook
Lemont & Hauspit Polly Pekc Trafalfar House
Levitt Group Poseidon Tyco International
Lockheed Quaity Software Products US Realty &
Construction
London & county Queens Moat Houses Vehicle & General
Securities Qwest Versailles
London Capital Group Rank hovis McDougall Waste Management
Lonrho Reid Murray WorldCom
Lucent Rite Aid WPP
Maxwell Communications Rolls Razor Xerox
McKesson &Robbin Rolls-Royces Yale Express
Micro Focus Royal British Bank Yale Transport
Microstrategy Royal mail Steamship Satyam
Minsec Rush & Tomkins Ponzi Scheme
National Student Saatchi & Saatchi
Marketing Skandia
Nortel Spring Ram
Nvidia Storehouse
Oxford Health Plans Sunbeam
Parmalet Swedish Match
Penn Central Texas Gulf Sulphur
10
 Why do shenanigans exist?

§ After all it pays!

§ It’s easy
§ Discovery is
difficult and
unlikely
§ Improving Liquidity
 FINDIN G SHEN ANIG ANS
§ Press releases
§ Securities Exchange
Commission filings
§ The auditors report
§ Interviews with the
company
§ Commercial databases
 AN INTER ES TING Q UO TE

“How do you explain to

an intelligent public
that it is possible for
two companies in the
same industry to follow
entirely different
accounting principles
and both get a true and
 Th e W orl dco m S aga – CAS E
STUD Y
It was 1983 in a coffee shop, that Mr.
Bernie Ebbers came up with a concept
that became WorldCom
From Humble Beginnings to a Giant
Telecom industry faced low margins and
Mr. Ebbers decided ‘growth=survival’
Purchased over 60 firms in 2nd half of
the 90’s
 Ho w the F ra ud t oo k plac e

q Opera ti ng E xpe nse s to Ass ets

-CFO’s directions affected the income statement:

Revenues xxx (no change)
COGS xxx (no change)
Operating Expenses:
Fees paid to lease other
companies phone networks: xxx (Huge Decrease)
F rom ent
o ve d ta t e m
R e mom e S Computer expenses: xxx (Huge Decrease)
In c
NET INCOME xxx (Huge Increase)
F rom e n t
o ve d tat e m
R e mom e S
I nc
 Post -Fra ud Ha pp eni ng s
17,000 jobs cut to save $1 billion.
WorldCom was renamed MCI in 2004
when it emerged from bankruptcy
Sullivan pleaded guilty to 3 federal
criminal charges for fraud and
conspiracy
10 former directors agreed to pay $54
million to settle a shareholder class-
action lawsuit
XER OX S CAM – CAS E STU DY
Xerox, a global document management
company, was founded in 1906 in
Rochester

How it started?
Xerox revealed in 2002 that it overstated
it’s revenue by $2 billion
SEC, however, began investigation prior to
Xerox’s announcement and planned to
conduct an audit which revealed a $6
billion overstatement
Manipulations Used
Cookie-Jar Method
Acceleration of revenue from short-term
equipment rentals, which were improperly
classified as long-term leases
Escalating reported earnings to match
expected earnings

Effects
Xerox could count as earnings what was
essentially future revenue
Allowed the company to meet profit
expectations
revenue profit graph
Why?

Declining revenue in the early 1990’s

Pressure from investors to keep up
short term earnings
Top executives, whose incomes are bound
up with stock options.

Role of KPMG
It was the auditing firm of Xerox
The auditing firm knew what was going on
and decided to allow it to continue
 Consequence

Xerox Corp. agreed to pay $670 million while

KPMG had to pay $80 million, to settle an
eight-year-old securities lawsuit filed on behalf
of Xerox investors
The Roa d t o R ef orm : P rotec ting the
Publ ic I nteres t
Government regulation &
oversight
Strengthening the Auditors
Profession
Public trust & confidence in
the integrity of auditors
Public understanding of the
auditor’s role
Corporate governance &
responsibility
Importance of ethical
behavior and doing the “right”
thing
 Concl usion
From these scandals, it is important
to learn the know how and know why
so that we can understand how to avoid
these situations in the future.
WHAT WE CAN DO?

“Ev er yon e sh ould hab ituall y b e a ware o f t he

mo ral im pli cati ons of wh at he or sh e is
ask ed to do and, each by eac h , sh ould
sta nd up f or th e righ t to be mo ral.”
- Jane Jac obs – Sy stems of S ur vival
“The l aws an d
professi onal
stan dar ds rep re se nt
th e f loo r—th e
mi nimum. W e sh ould
reac h f or th e
ceilin g.”

David M. Walker,
CPA
Comptroller General