Cassidy Purcell – Assignment 4

A number of companies have reported accounting irregularities or fraud in recent years. Some of

the companies reporting such fraud include Adelphia, Ahold, Cendant, Enron, Lucent, Sunbeam,

Xerox, Waste Management, and WorldCom. Required:

a. Use an Internet search engine to find information on two of the companies listed.

Prepare a memorandum describing the accounting irregularity or fraud.

Fuji Xerox New Zealand had introduced Managed Service Agreement (MSA) contracts that

combined the sale of equipment with maintenance services, enabling it to collect monthly copy

charges covering payment for the equipment itself, as well as charges for consumables and

maintenance, interest, and other charges.

MSA contracts took the form of capital leases that permitted revenue equivalent to the sale price

of the equipment to be recorded in a lump sum for the fiscal year in which equipment was

installed, after which payments would be collected in the form of monthly copy charges. Copy

charges comprised a unit price per copy determined according to a monthly target copy volume,

multiplied by the actual number of copies made.

For a lease contract to be treated as a capital lease for accounting purposes, it must meet certain

accounting criteria, but in Fuji Xerox New Zealand’s case, all lease contracts were treated as

capital leases, including those that did not originally meet the accounting criteria that would

qualify them as capital leases subject to lumpsum recording of revenue. For example, it should

be reasonable to anticipate collection of the total minimum lease fee payment and there should

be no risk of incurring additional costs that cannot be collected from the lessee

However, copy volume sometimes failed to reach the target originally set, or a minimum

monthly usage charge was not always clearly stipulated in the contract. For these and other
reasons there were some transactions which made it impossible to collect the total copy charges

anticipated when the contract was originally executed. This situation then became the norm.

Similar accounting practices were employed at Fuji Xerox Australia.

Cendant Corporation was created by merging an ethical company with an unethical company.

The unethical company was CUC International (CUC) and the ethical company was Hospitality

Franchise Services (HFS). Although both companies were highly acquisitive before their 1997

merger, CUC used deceptive accounting practices to inflate its reported earnings. After the

merger, CUC management (led by Walter Forbes) took over and continued these practices in the

new Cendant Corporation. An investigation revealed that CUC had practiced unethical

accounting since at least 1988, continuing until these deceptive practices came to light in 1998.

Further investigation suggested that CUC management’s fraudulent practices went back even

further, starting as early as 1983. CUC came to depend on an ongoing stream of falsified

financial statements, hiding their fraud and projecting an image of growth and health.

b. Extend your search to identify two additional companies that have recently reported an

accounting irregularity or fraud. Prepare a memorandum describing the accounting

irregularity or fraud

An Austin Public Library accountant fraudulently bought USD $1.5 million in printer toner,

and reportedly sold it for a profit for USD $1.3 million. The employee, Randall Whited was an

accounting associate who misused his responsibilities such as approving his own purchases, cash

receipts, billing and other transactions. Security camera footage from the library shows Whited

would take toner boxes from the office and then put them in his vehicle. He also had access to 10
city credit cards, which were used to purchase personal items like video games, VR headsets and

a drone, all worth at least USD $18,000.

The audit report also revealed “multiple examples of inadequate records” including the

employee’s home address on the shipping form for office orders. “The Department takes fraud,

waste, and abuse seriously and has fully cooperated with investigations conducted by the City

Auditor, as well as the Austin Police Department and the District Attorney’s office, when

requested, ” Director of Libraries, Roosevelt Weeks told the media.

Luckin Coffee hoped to capture a piece of Starbucks’ large market in China but fell short after

being hit by a penalty of USD $180 million by the US Securities and Commission (SEC) for

accounting fraud. The Commission says Luckin overstated its revenue, expenses and losses by

almost USD $300 million; the coffee start-up neither admitted nor denied the claim but agreed to

pay the penalty.

“Luckin employees attempted to conceal the fraud by inflating the company’s expenses by more

than USD $190 million, creating a fake operations database, and altering accounting and bank

records to reflect the false sales,” according to the SEC. The debacle made headlines only a year

after Luckin had a roaring IPO worth USD $651 million.