Parmalat is example of Europe Enron, listed in Milan stock exchange (Hamilton .S, 2005) Italy's eight largest company having about 36000 employees across the globe (Melis .A, 2005) having market capitalisation of 3.2b Euros (Hamilton .s, 2005). A leader in diary industry came to down fall on December 2003 when it filed for bankruptcy entering in the list of biggest corporate frauds.
Having a look at financial statement allows every little room to point violation of accounting standards. The statements managed to hide true financial position of the company without missing any point from generally excepted accounting principles. What was shown is accounting statement was misguiding and gave false impression to its users. Parmalat did window dressing by creating asset which made statements look good
The ownership structure of the company was a complex web of stake holding of various companies in each other in such a way that major stake holding was in the hands of Tanzi family giving them more power than other stakeholders in all the companies in the web. This gave Tanzi family advantage of making their decision in their own interest
Tanzi had many private companies one of them was Parma ac started in 1991 which owned a local football club. In late 1990's tanzi had its tourist company parmalat which acquired hotels and tour operators across the globe
Parmalat was merged with a publically traded company owned by tanzi making it parent company of parmalat spa and it allowed parmalat to raise issues so that it can pay debt 268 m Euros by selling stocks.
Parmalat used debts to finance its acquisitions; it had raised more than $8bn in bonds. It also used non Italian private banks to finance its debt by issuing 30 bonds in 10 years span of time
The company had aggressive expansion programme in 30 countries across North America, South America, Australia and South Africa and in 15 yrs time it had global presence.
It was only from 2003 cracks in the system started appearing when company's growth reduced blaming devaluation of Latin American currency and reduction in scope of growth in European markets. Coscob a market regulator asked some question about asset investment, debenture loans and intercompany financing agreement of the company in which the companies replied which mention its investments were handled by Cayman island company epicurum fund. Epicurum fund sounded new to the world as this company was never mentioned before and looked mysterious which handled over EU 496 million of the company. It was later found that no such investment ever existed
Parmalat fraud was exposed when bank of America stated that bank accounts claimed by parmalat were fictitious and never existed (Melis. A 2005).
(((All the details in figures about the missing money spending n blah blah blah))
Royal Ahold Netherlands 2003
Ahold is another example of European Enron. Dutch retail Grocery Company which was started as a small grocery store taken over by Albert Heijin in 1887. The company was named Ahold in the year 1973 and in couple of year it was honoured with title Royal by Queen Beatrix which was given only to those companies which have served for hundred years with honour.
Royal Ahold got listed in New York stock exchange in the 1948. It went global in 1990's with aggressive expansion plan and in a decade's time became world's 3rd largest retail food and grocery chains having reach in 27 countries. The company grew by acquisition of existing companies and to finance its acquisitions company raised capital and also borrowed debts.
Along with expansion came unexpected problems. Company had to face issues related to different laws, regulations and cultural barriers which had huge impact on operation of retail branches across various countries. To overcome this problem the royal Ahold relied on executives of the subsidiaries bayed out in acquisition. There was lot of pressure from companies top executives on foreign operations to maintain their growth rate in profits.
In 2002 audit of Royal Ahold, Audit Company found evidences claiming that company's accounts have been overstated. In the year 2003 audit company raised reasonable questions of companies accounting. There was some serious problem found in financial statements of its US subsidiary. Wholesale grocery industry has very less profit margin and managers had pressure from top executives to retain their growth percentage in order to do it managers simply inflated profit margin by inflating discounts allowances received from suppliers. Since there was no internal control to tap how much allowance was received it was easy for managers of US foodservices subsidery of Royal Ahold to manipulate accounts. Knapp. M (europe's enron : royal Ahold, N.v)
Royal Ahold mostly acquired exact 50 percent of stake in its subsidiaries but it consolidated the whole financial data into its balance sheet. This method was permitted in Netherlands if the company had controlling power into its subsidiaries. Royal Ahold was listed in New York Stock exchange and US GAAP did not allow any such consolidation the company had to use equity method instead to consolidating whole financial accounts of subsidiaries.
On Monday, February 24, 2003, Ahold announced that net earnings and earnings
per share under Dutch GAAP and U.S. GAAP would be significantly lower than
previously indicated for the year ended 2002. At issue were vendor rebates, also known
as promotional allowances. Food vendors, such as Sara Lee Corp. and ConAgra Food
Inc., paid rebates to US Food Service for selling certain amounts of their products. US
Food Service booked these rebates early resulting in inflated promotional allowances and
earnings. Ahold's press release gave a preliminary estimate of $400 million. In the end,
the number was $850 million. The overstatements of the income required the restatement
of Ahold's financial statements for fiscal years 2000 and 2001 and the first three quarters
of fiscal year 2002 (Table 7).
In addition, the company announced that four current joint ventures (ICA,
Bompreço, Disco, Jerónimo Martins Retail) and one former joint venture (Paiz Ahold)
should not have been fully consolidated in its financial statements. The full consolidation
of these joint ventures was based on letters stating Ahold had control over these joint
ventures. With stated control, Ahold recorded 100% of revenue and expenses of the joint
venture and 100% of the net income under Dutch and U.S. GAAP, which boosted
Ahold's sales and earnings (Ahold's objective was doubling sales every five years). The
problem was the existence of secret side letters, known as comfort letters, nullifying the
control letters. These side letters stated that Ahold was not in control of the joint ventures
and were meant to "comfort" the other joint venture partners by ensuring them that their
shares would not be worth less due to the loss of control to Ahold. Commencing fiscal
year 2002, Ahold was forced to proportionally rather than fully consolidate these joint
ventures under Dutch GAAP and U.S. GAAP.13
In 2002, Ahold admitted that the firm had not disclosed several material off
balance sheet obligations relating to its joint ventures. The joint venture partner in Disco,
the Peirano family, was having financial problems. Ahold was required to buy the
family's stake in the joint venture at an inflated price if the Peirano family could not pay
its debts (Het Financieele Dagblad, July 3, 2002). The abnormal return on this news was
-13% (t-statistic=-7.7). In 2002, the chairman of ICA Ahold went public with the
shareholder agreement that showed Ahold was obliged to buy him and ICA Förbundet,
the other partner, out in April 2004 for an estimated price of €2.5 billion. The annual
15
report of 2001 did not mention this obligation of Ahold (Het Financieele Dagblad,
October 8, 2002). The abnormal return on the news was -11.1% (t-statistic=-4.3).
((Cop governance and accounting thingii article has many good points to raise and also has some good references on gop governance and accounting pls do refer them whn u come back))
Madoff investments 2008
Mr Bernard madoff, New York financier, philanthropist and ex-chairman of NASDAQ is one of the most hated man in America. Started his retail broking company Bernard L. Madoff Investment Securities in 1960 which also provided services like investment management and advisory. By the time it shattered in 2008 it was sixth largest in united states. company had client list containing financial institutions like banks, hedge funds and not only charity organisation but also large individual investors(peluso. R, 2009).His mastermind has given rise to world's biggest ponzi scam ever stealing over $60 billion dollars.
Ponzi scam name came from carlo ponzi who promised his investors in 1920s to double their money in 90 days. He promised an interest rate of 360 were banks could afford only 2 percent on savings account. The scheme was mouth watering and it worked in such a way that every member was paid returns with investment money received by new member. The scheme would work only if there is continues flow of new member. (Wells. J, 17/31/2009,"Accounting today"),(peuso. R, 2009)
Mr madoff promised 12 % returns on investment which he maintained even in tough times of ressesion. It seemed almost impossible for rest of investment companies because they found it highly unusual to provide so smooth results. This went for year until this recent time it came to the public that mr madoff was running a pozi fraud under the disguice of sucessfull hedge fund. Reports of trading accounts which he gave to his clients were false giving gloomy picture of returns earned on investment. In fact there was no trading done by him from a decade before the company distorted. (bbc news, 2008. http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/7785539.stm)
He paid his exsisting investors from funds that came in from new investors this went on till the money of new investor was gone and there was no additional source to keep the flow.
The biggest shock is that a ponzi scheme was on and security exchange commission missed it. No one ever questioned madoff on this activities. He carried his business advisor service from seprate floor of his office building and he always kept financial statements safe and out of reach. While discussing business with his office employees he was always obscure about his investment advisor part of the business.
On 10th dec 2008 madoff called his senior employees and admitted that this business was a big ponzi scam and the was carrying this fraud for years. the company is almost bankrupt (sec dec 11 2008)
Bright point - 2003
Brightpoint had announced a project loss of about $ 13 to $ 18 million Dollars in its UK division in Oct 1998 but the actual figure was came to around $ 29 million Dollars. There was a gap of $ 11 million dollars which seemed to be huge and would have adverse effect on share price of the company. Corporate controller Delaney and director of risk management Harcharik made up a scheme to hide additional $ 11 million dollar loss.
In 1998 AIG tailor made an insurance policy for Brightpoint company, in real the policy was nothing but flow of cash from AIG to Brightpoint and from brightpoint back again to AIG. Its actual purpose was to to distribute loss in several instead of realizing it in the same year. Brightpoint used this policy to overstate its revenue.
Directors met one of AIG's subsideries Loss mitigation unit of National insurance of fire policy in dec 1998. LMU made a policy which is would help Brihtpoint to smoothen the loss they suffered. LMU came up with a policy of $ 15 million which would cover additional losses made in uk by brightpoint. The policy was such that the cost of $ 15 million was about $ 15 million which bright point is supposed to pay in instalments on montly bases for the span of 3 years. Then bightpoint would claim for insurance for losses made. This is how it covered up about $ 11 million of loss. (http://www.sec.gov/news/press/2003-111.htm)
AIG United states - 2003
American International Group (AIG) was found in 1919 by Cornelius vander starr. Now listed in New York sock exchange along with Tokyo and Ireland stock exchanges having head office in New York city is one of the leading insurance organisation which has operations internationally in more than 130 countries proving life insurance, retirement services, institutional and personal insurance.
The company had been charged two times by SEC one in 2003 to sell a tailor made insurance which was actually a income smoothing tool used by Brightpoint to hide its losses. And another was in the year 2006
In 2003 the company charged by SEC for involving in fraudulent accounting practises, Mr. Hank Greenburg was CEO during this period and faced charges by SEC for involvement in fraudulent accounting practices in AIG.
Insurance companies provide variety of insurance policies for houses offices etc against fire, floods, rain or any other natural disaster. If any of these results in damage of the property then it is covered by the insurance policy up to the agreed policy amount. With the increase in volume of insurance the amount of risk will also increases. When there is huge risk involved insurance companies get reinsurance from other company so that they can share the loss.
In the year 2000 AIG contracted reinsurance from Gen Re worth $ 500 million of finite risk. Finite risk means that the cover is up to an agreed amount. In finite type of reinsurance most of the loss is barred by the insurance company itself but it is spread into several years instead of baring it all at once. The company pays huge premiums to Reinsurance Company and if in that period no loss occurs than the entire money or most of it is transferred back to insurance company and only fees and commission is charged.(strategy and leadership
SEC commission charged AIG for using fraudulently using reinsurance policies which provided misguiding information to its investors. AIG had used these reinsurance policies to pump its reserves for loss by $ 500 million for 4th quarter of 2000 and 1st quarter of 2001. (http://www.sec.gov/news/press/2006-19.htm). Reinsurance coverage was actually a type of loan which was treated as reinsurance which is misleading.(strategy and leadership)
Due to the reinsurance policy the reserves in the balance sheet got inflated where it should have shown a reduced balance of revenue in both the quarters.
After the charges AIG admitted that its accounting treatment was inappropriate. It had to restate its financial statement with corrected transition of reinsurance. (SEC CHARGES GEN RE EXECUTIVE FOR AIDING IN AIG SECURITIES FRAUD)
AIG paid $ 800 million as penalty for misleading accounting treatment (AIG to pay $800 Million to Settle Securities Fraud Charges by SEC)
Tyco international Bermuda 2002
Tyco international established in 1960 in Bermuda was initially started as a research laboratory which used to conduct research work for U.S government later on its focus changed to producing energy conversion products and hig-tech material science (tyco website). It went public in 1964 starting to aquire companies to bridge the difference from development till distribution.
In late 1990's tyco had taken aggressive acquisition programme. It acquired more than 700 companies by 2002 under management of Kozlowski having around 1000 business units.
In this tenure the company experience high decentralisation, improper acquisition accounting, income smoothing using reserves and inappropriate executive bonus accounting.
Tyco used improper accounting for its acquisitions a multiple times. It reduced value of assets acquired and the same time increase the value of liabilities. It created purchase accounting reserves which were used only at times to charged current expenses against them hence overstating earnings in financial report. In 1998 tyco acquired Holmes protection inc. And Wells Fargo Alarm services, inc. It valued both the company's asset less by $ 211 million thus overstating tyco's operating income by similar amount. Similarly in 1999 it understated asset value of Raychem Corporation which it had acquired by $ 34 million overstating its operating income by $ 13 million in sept 1999 and $ 21 million in sept 2000. From 1998 to 2001 tyco acquired several electronic security and fire protection companies. It used purchase accounting reserve to increase profit levels in some ongoing service contracts that it has acquired inflating tycos operating income by around $ 94 million.
Reserves were used by tyco to smooth its earnings offently. Most of its business units moved its earnings into reserves stating that these reserves won't be needed to fulfil their EBIT targets but when earnings of a unit failed to achieve its EBIT targets then reserves were used to bridge the gap. In the period of 1997 to 2001 about $ 47.1 million of reserve was dumped back into income statements to meet targets. It had reversed $14.1 million in 1998 third qauter, $ 3.55 million in 1999 and $ 26 million on june 2001
Tyco had aggressive EBIT targets for its higher executives with incentive system attached to it. Managers could receive huge incentives if they achieved their targets. It recorded bonuses in such a way that it would not effect operating income of the company. tyco had initial public offering (IPO) for Tycom LTD in the year 2000. IPO successfully completed in july 2000 and it earned onetime gain of about $ 1.76 billion. 51 executives were given totalling to about $ 95.9 million by Kozlowski. Tyco showed $ 44.6 million out of $ 95.9 million as direct expense incurred to Tyco IPO which actually an incremental cost to IPO and these $ 44.6 million were adjusted in such a fashion that it may not affect operating income of the company.
Worldcom United States 2002
Started as Long Distance Discount Service, Inc. In 1983 as Telecommunication Company, it went public in 1989 and changed its logo to LDDS Worldcom in 1995. The company's strategy was to acquire other companies to push its growth. It acquired several communication companies. In 1997 worldcom merged with MCI communications which was marked in US history of largest mergers (Wikipedia).
In 1990's worldcom was under management of Bernard Ebbers. He fuelled company's growth with acquisitions. Ebbers was responsible to manage and grow the company which had expanded vastly. Ebbers failed to meet expectation of wall street and so it started making up these numbers.
The game came to an end when in 2000 worldcom's meger with sprint corporation was abolished. It was found that worldcom used two techniques of creative accounting one is to reduce line costs and second is to show inflated revenues. This was done to show a growth of double digit which the company promised but in real the company's growth was far less then what was expected.
Line cost: line cost was largest expense in worldcom's balance sheet, almost of half of companies expenses accounted from line cost. Line cost is the cost of carrying data or voice from starting point till the end of the line. Line cost expenses was one of the key figure for anlysist and investor to measure worldcoms performance. Worldcom tried reducing expenses on balance sheet by using accruals payments. Accruals were expected cost for line and other factors which worldcom has to pay but not yet paid. Accruals were paid when the bill was less than expected reducing expenses reported and at the same time inflates reported pre tax profit. From the year 1999 to 2000 worldcom curbed its line cost expense by around $ 3.3 billion using accruals. world ran out of accruals by end of 2000, from first quarter of 2001 to first quarter of 2002 it capitalized its line cost expense by $ 3.5 billion. By doing this it transferred its expenses from income statement to balance sheet increasing its pre tax profit. this went on till june 2001 when internal audit discovered the flaw.
Inflated revenues: worldcom bridged the gap between revenue earned and target revenue by making entry from corporate unallocated account after end of each quarter from 1999 till 2002. The access to corporate unallocated account was limited to few. The figure that came from this account was mostly around figured and they were such that it filled the gap between revenue and target revenue.
There were also other concerns about accounting. Apart from fiddling with line revenue and inflating earnings worldcom had also done many improper adjustments like reducing selling and administration expenses, depreciation and income tax.
