Chapter 7 Internet Cases Internet Case 7.1 The following exhibit summarizes three well-known fraud cases. Exhibit: Some noted cases of “cooking the books” Case 1—MiniScribe Corp. In the mid-1980s, much of the personal-computer industry was slumping. MiniScribe Corp., a disk-drive maker headquartered in Colorado, was no exception. In 1985, a venture-capital firm pumped $20 million into MiniScribe and installed a new CEO, Q. T. Wiles, a man with a proven track record of reviving ailing companies. Indeed, MiniScribe did revive, reporting phenomenal increases in sales and earnings over 13 successive quarters, and quintupling its stock price in just two years. However, in the fall of 1988 its suppliers, Wall Street analysts, and the company’s board of directors began to sense trouble. When 1988 results showed a fourth quarter loss of $14.6 million and a decline in net income of $5.3 million from 1987, Wiles resigned and a committee of outside directors was created to conduct an internal investigation. The six-month investigation concluded that senior management apparently “perpetrated a massive fraud on the company, its directors, its outside auditors, and the investing public.” Evidently, Wiles set unrealistic sales targets and had an abusive management style. Over time, managers were evaluated (and bonuses awarded) solely on their ability to meet sales and income objectives. These factors encouraged managers to falsify sales (by shipping disk drives that customers had not ordered and recording sales prior to passing title to the goods), understate loss reserves (for sales returns and bad debts), include defective disk drives in inventory, and even to break into locked trunks of auditors’ workpapers to alter/inflate inventory values. The outcome: MiniScribe filed for bankruptcy court protection in January 1990, and began liquidating the company in April 1991. Several lawsuits ensued, brought by former bondholders and investors. In one of
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