RCJM01 - Copy - The Economic and Institutional Setting for...

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Unformatted text preview: The Economic and Institutional Setting for Financial Reporting Revsine/Collins/Johnson/Mittelstaedt: Chapter 1 Financial Statements and Acctg Fraud The Company The CEO The Fraud The Conviction The Outcome Madoff Investment Bernard Madoff $50 bill in a Ponzi scheme Confessed, 12/08 Sentenced to150 years Worldcom Bernie Ebbers $11 bill wrongfully capitalized Convicted, 7/05 Sentenced to 25 years Computer Associates Sanjay Kumar Recorded sales in a wrong year Pleaded guilty, 4/06 Sentenced to 12 years Rite Aid Corp. Martin Grass Recorded rebates before realization Pleaded guilty, 6/03 Sentenced to 8 years ZZZZ Best Barry Minkow Recorded non-existing revnues Convicted, 12/88 Sentenced to 25 years WorldCom w First Quarter, 2002, an analyst reported: The company has $2.3 billion in cash, which translates into a $20.50 book value per share, And you have to pay only $2 for this gem! w Third quarter of 2002, WorldCom made a $3.8 billion reclassification from assets to expenses w CFO fired, Controller resigned w Stock lost 90% of its value w Could you have seen it? 1-4 Epilogue to WorldCom w In June 2002, WorldCom says $3.8 billion in line cost expenses were wrongly transferred to the balance sheet. w Shares fall to $0.06. w $11 billion of improper transfers are eventually uncovered. In July 2002, the company declares bankruptcy. $3. 8 b ? FUTU RE BENEFI TS NO FUTURE BENEFI TS ASS ET EXPEN SE 1-5 Consequences: w Five executives indicted for fraud. w Four plead guilty. w Chief Executive Officer and Chief Financial Officer sentences to lengthy prison sentences. w Profits restated downward by $74.4 billion. w Became the largest bankruptcy ever in the United States, far bigger than Enron....
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RCJM01 - Copy - The Economic and Institutional Setting for...

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