View the step-by-step solution to:

240 Accounting Fraud Audit Responsibilities and ChaPter 5 l 7'^f case 5-t Fraud General Electric Accounting filed a civil injunctive action On August...

This question is "For Anagarwal".
I have 5 cases I need the answer next Tuesday please. They are ethical accounting cases. I need the first 4 less than one page and the last one more than one page. I am attaching the instruction for the assignments and the cases.

l 7'^f case 5-t General Electric Accounting Fraud On August 4,2009, the SEC filed a civil injunctive action )'i**i "ltii t""a u"o otr'o charges against General.Electric Company (GE). The s"'t, iittO lo-u'S' oitt'itt Court for the iird;;ia;"cticut, alieges that GE misled investors bv reporting materially false and"misleading results in its linancial #;;J;A;sic utt"g"' that GE used improperaccount- ;;;;t ;; i*ttu" ii""po'teo earnings or.revenues and avoid reporting negafive financial results' GE has agreed to ;;;;$6';fi "q:*'1#,:$".'t'.t"u-1illii'&,,.,", According to the cor exceeded final consensus analyst earnings per share (EPS) exoectations e,ery quarter from 1995 through liting of its ffil#-", *inl uo*tut'' on four separate occasions ,";b0, ;; 20'03, high-level GE accounting executives or irnl"."ii"r"". p"t*on'"t approved accounting that was oot ;;;;J;";.'wrtn cee-p' In one instance' the improper ;.;;fu alowed GE to avoid missing *"lytt:'final con- sensusEPSexpectations.Thefouraccountingviolations were (1) beginning in:anuary 2003' an improper application of the accounting t*a*at to CBt commercial paper fund- ing program to avoid *iu'o'utt" disclosures and an esti- ili JJ ""pp.-*ately 5200 million pretax charge to earningsl (2) a 2003 failure to conect a rnisapplication of financial accormting standards to certain GE interest-rate swaps; (3) in 2002 arf'2003, reported end-of-year sales of locomotives that had not yet occurrtA io ul'Jt' to utcelerate more than $370 mil- lion in revenue; ano t+i i" 2002, atimprope^r change to GE's accormting for sales of commercial aircraft engines' spare ,* *rtil*.ased GE's 2002 net earnings by 5585 million' WithoutadmittingoJt'yingtheSEC'sallegations'GE "gr""i*," ru. financial ptnuity and consented to the entry of an order p.tma""otly tnjoining it from violating Section 17(a) ofthe S"curitiesici of lg3iand Sections 10(b)' 13(a)' iiiiltrli"i, and 13(b)(21b) ofthe Securities Exchange Act of 1934. The charges u*o"""d concluded the SEC's inves- tigation with respect to the company' Specifics of the Claims against GE Offer or Sale of GE Securities during the Relevant Period Throughout the relevant period' shares of GE common stock were continuously offered for sale' sold' and purchased on the NewYork Stock Exchange' In addition' GE itself offered lsecuritiesandExchangeCommission,LitigationReleaseNo. ,i'i56, ;Ur;i 4,200;, securities ond Exchonge Commission v' Z:;;;; i;;;;,Companv,3oe cv 123s (RNc) (D' conn')'www I*.ilii t9. .'"n/litreleases/2O09/1121 1 66'htm' securities for sale at the same time its financial statements ;;;il-;;,;ria11v false statements' For instance' in ii*.ir'iooo, GE ofLred approximatelv t tl 1ilt11 snares of newly issued GE "o"t*o" stock for sale to the public at 531.83. In April 2004, GE used approximately 342 mll- lion shares of newly issued shares of GE common 'stock to 'r**il;tsham'plc' In addition' in March 2003' June 2003, January 2004, atdDecember 2004' GE made addi- tional acquisitions that were paid for in whole or in part with GE common stock' ""&;ilt;ale of stock, directly or indirectly-bv use of the means or instuments of transportation or communication in interstate commerce or by the use of the mails-knowingly "rl".Uf"ttt, (1) employed devices' schemes' or artifices to *t aJt irl "ttained money or property bY meln;-of untru statements of material fu"i o''o*ittlons to state material facts necessary in order to make the statements made' in the light of the circumstances under which they were made' "", tii.i"rOt"g; or (3) engaged in transactions' practices' o, "ou. .., of business that operated or. w9u1j operate as a fraud or deceit upon certain purchasers' including purchasers of GE securities' The "o"O*t of GE involved- fraud' deceit' -r*r*i". or deliberate or reckless disregard of regulatory requirements, and airectly o' i"dir""tly ttsulted in substantial losses to other Persons' Failure to KeeP Accurate Books and R;;t in Violation of Exchange Act Section 13(bX2XA) GEfailedtomaintainandkeepbooks'records'andaccounts that, in reasonable Aetait' ucc"tutlY.*d f1"-Yreflected the transactions and dispositions of GE's assets in violation of i".tio" 13(bX2)(A) of the Exchange Acl Failure to Maintain lnternal Controls iivioiution of Exchange Act Section 13(bx2xB) GEfailedtodeviseandmaintainasystemofinternalaccount- ing controls sufficient to provide rlasonable assurances that the company's transactlons were recorded as necessary to ;;##"ion of financial statements in conformitv with GAAP or other crrtena afplicable to such statements and ;;;i;. ".countability ior assets in violation of Section 13(bX2XB) of the Exchange Act' Questions 1. From an ethical perspective' what's wrong with a compaoy ^ ;;il-c shares during a period of fraud? ! 240 ChaPter 5 Audit Responsibilities and Accounting Fraud
Background image of page 1
{,;. \ ,"\ j\ !\ l'i. - 11 I r-l . *rt 'J f ."1 $. '\i \i,, ' t \"*'\ 1 f g i, i.* t {" \, I 9.: ,.* "' epne.s eql lcolep ro lue.terd o1 pedleq e,req '(eu leql slortuoc l€uopppe ,(ue ereql erv ePn".II eql Euruoderpqpelop-w tueplseul orel{r ro }slxe lou plp rel{rle e^e}loq no'( op slo4uoc ytr7 pnotg SutrunucY puD segrlqrsuodsag ilpnv S 'raldeqf oarrrceds eql lo r{clqi\{'es?r aC eql uI slceJ petlu4l eq} \ f p".rs.zr pon 1 1 .oon "nb uorssncsrp uil:"-r1lilljflr;n dlsq o1 Euruosser Isclgle es11 isuorleErlqo 'fielcnpg 4eq1 leru srolce{pJo preoq eqt pue luerue8euetu aD {u]t1} nof, 061 'suo4c?-t aC fq pelco:Ue sreploqelels aq 'lBuePI Z
Background image of page 1
selr14l rllm drqsuorleler sseusnq lsed e peq .solo 'procer lueru,(ed sll olul lceqc pu? sseusng seop ,(ueduroc etll aJeq'4A s{u€q o {l eq} lc?luoc 01 Heqsc Pe{s? u?epnses '6002 .{E tor,{t 9gg7 sree,( eqtr ro3 sgoder }lpn" oql ut Peslsr eJelr\ leql senssr urecuoc-EuroE o1 enp ,(pueredde eru4 5o poued uoqs ? ur seEueqc rorprc Jo roqumu lensilm eql pessncsry srolrpn€ eq1 ,{ep $rlJ eq} Jo pue eql 13 EUI}eeuI eql lY 'ss1Fo3,(cue1 fq euop eg pFogs slql rleJ srollpne eerl{r IIY'(s)roltpne rosseceperd eql qceordde ol uorssruuod JoJ luellc eql Eul -{se lsrlJ ,Q leamrpqpt ro lessllllslp roupne roud '(ue Jo secu?lsumcrp eql ,$FeA :8uyrro11o5 eq] o1 eurec ,(eql ueq,u peddols pue sluellc l\eu roJ senssl lueussessB {su Jo lslplceqc e qSnorql luaat ^(eq1'penssl uoeq peq sgderS -ered,fio1eueldxe utecuoc-EuroE erurl qcrqlt Euunp sreed mo; lsed eql.ro; emlflund lsofJo slueuels]s IEIcusIrJ eql pe/\\er^er solo puz IIIeqeo 3o dleq eq] q]l^\ 'u?epnBeg '9 'relloJ}uoc eql qI1t\,!eso1c >For'r plnol( turlJ vd3 agl ecqs uolslcep FulJ egr qly( dleq o1 req Pelu? \ eq pu€ seleprpu?c olru peq ,(ueduroc eqt seFu plot lsof 'uorlrsod leql 19 re^olrml ? uesq Peq ereql sres,( moJ rn aIuB pnql eqt 11nb ,(11uecer per{ JelloJtuoc q,(ueduroc eq} 1BI{1 seln{ plotr osle eH 'pe^loser uoeq peq senssl Ilrecuoc-8utoE eql se1ng pemss? lsot lnq 'sroypne snouel q1r.tr sruelqord lsed pzq,fuedutoc eql t€qt selnU 01 peu+upe peq Nof l"ql peleclpq sspS ,(q perederd ellJ eqr 01 umplrsroluetu Y 'gZ qc&h[ .(q Pegturqns eq Plq 3r{r l?qt pe{s? lsot 'llpru lsot eql roJ prg e }Iuqns ot reg pe{se pue lue^e,$nmuruoc ? 1? selnu uoreIIS peqceordde'1so1 dr:e1 'emlumd lsotJo OgJ eql'lI0Z'6I qcreIAI uo pue pelpne ueeq trou pBq 0I0z roJ slueluel€ls IeIsu€uIJ eqJ, 'sreer( o.tr1 rege pessfllrslp sBA\ 13q1 IruIJ p4q1 e,Q pellPne era \ 6002 pu? 8002 roJ sluetuel€ls IeIcusuIJ s.lsof 'luerueEeueur dol s.lsof,(q pessnusp se.,rr prre suousenb urecuoc-Euro8 peslsr osle IrI{J }etII 'LOOZ toJ slueluelBls IBIoITBUIJ erll Pollpns rIUIJ puoces Y 'z 'turcueur; Popeeu emces o1 ,(151ge q.fuedruoc eql peueleerql 1eq1 ssssol 3ur -lerado luelsrsred;o esneceq luecuoc Euro8 e se enuquoc ot lsofJo &I1qe eqt fnoqe suorlsenb pssrer 1eq1 qder8ered ,&oleueldxe uB qll^\ uorutdo per;llenbtm uB penssl peq urrlJ oIIJ 'sluoluelsls IsIcITBuIJ 9002 eW uo uorutdo per; -rpou ? Jo ecuenssl eq1 Euurol1o3 'L002 ut lrmocce eql peu8tser urJIJ oql 'sree,( errr; ro3 ,ftredruoc oql Jo sluetu -elqs IeIcueuIJ eql petlpru pue Euuego c1lqnd lerltut s1r qll&\ orntllunJ 6o1 pedleg peq tu{J rosseceperd eq1 '1 :sEutPug eql Jo lsll Jeuq ? sI ereH 'uollslruoJul eJ?tls ol polguessser ureet eql 'fup eqr go pue eq1 lY '{ro \ neql uels o1 dn e>1orq ,fuql ueql pu" 5lslr Jo seere ,(a1 'uolrturoJul eql roJ el€p 'seqllrqrsuodser lenlnru pessncslp rueel etlJ ngy rc 3u1 -Imocc€ Jo rosse3:ord e sI oql\ pueqsnq rel{ gI.^a o8e sree'( o1,r1 xrueoqd o1 peaoru p?q eDIc€[ 'Irrcet egl urol ol 'sllodseu -ulhtr Jo e IlBu ? golo eqcel po{se osle Ireepneeg "&o1sq InJroloc sll lnoq? ureel pue xlueoqd Jo e^Il?u e q[i\{ {ro/( ol drrtryroddoeqrpeuocra,t\eql:fl fr.|ffif, fj:lJ,5,t3*_ pue plrelsl uetuls uI 1r e{Btu lou plnoc ogla euoeruos se'tt Jeed ,fi1cgd e lqEnoql meqeC nSV 1e werEord Eullrmocce 3o qrelsew eql uI sqluolu 9I lueds peq eq qEnoqt ue^e ?uozlrv ur rete.& Jo no qslJ ? e{II s?1( UegBC 'xrueorld 1u (nSV) flrsrerrrug elels €uozlJv ruog pelunper8 peq oq'/( eirrleu u'! -1oorg pelueldsrmr1 ? 'IIIeqeg eIIruIA qll^{ leru u€epneeg 'lueu$sessB luellc 1lleu uo {ro1( ot.&nryroddo }srIJ slq lnoqe percxe sB A ueepnueg 'lusruuErsse eql qlP\ dleq o1 sroqrueu ssls regto ol!\1 e^Bq plno a u?eprceg 'eurq pq1 SqmC 's,fup orrtl ut ssIIJoJ ol {ceq goder pue luerussesse eq} dn peeq 01 u?ePneeg pe{s? ssllro3 'ernllurnJ lsof lnoq? uollsuljoJul rerpo pue prmorSlceq oql AteIAeJ o1 ru?e1 stg pelgtuesse ssITJoC 'emlry eql uI secllJes d;osnPe Jerpo pue suorysrnbce uo ecllpe elnber 1p.tr pu€ epou uors -uedxe ue ur ueeq seq fireduroc eql ecurs ,{llercedse lrmocce e^rlBJcnl B eq IIUy\ 1I so^elleq ruJI.J eIIJ'lunocc? eql JoJ rurlJ vd3 rer{lo euo gtrI1( eledruoc pue plq e ilurqns plnotr e1o'(o3 T' Ieulpref, ueqtr ??eq? o3 o1 sr uorsrcep eqlJl 'uo4epueuruo -ceJ B q1r^\ selnu o1 lceq goder pue {ro,^a eqtr op o1 s'(ep esrql uelr8 se,u ssIIroC 'luellc emtrIg ? sB lsof Jo {su ssousnq I?q -ue1od eq1 ssess? o1 (resseceu srs,t sepmbur JeAelBq'{\ o{€ru pu? tsof uo s{ceqc punorElceg op ol ssIIroJ pe{se seln6 'plq elgBuoseer ? pe$Fuqns 1r se Euol s? lrpne eqlleE PFo l lurr3 eqt teqt,!dun 01 peueos 1so1 1e luerue8eueu do;'emlrg Ilslslp-ool-lou eql ur edorng o1 puedxe o1 sueld ptre epeueJ uI eclgo ue peuedo ,(11uecer 11 'uo eloru uoql pIrB os Jo sree,( oml rog '(1tc e ur e'u1 lqErru oqrrr sl"nPl{pq elecsdn Ermof, ol Eurrelec l?luer orn1ru -JlU euorlJo ul?qc lrJelse.4aqlnos etrel ? sI lsof 'l?uollBrrJelql emtrrund 1so1 '1ueqc .'rneu e .(g psqceordde ueeq p?q eqs leql ssllroJ plot solnu 'ulrlJ eql go reugzd EurSeueul eql 'selnu uoJBI{S Jo eclJo el{l o} peuouluns s31'r ssqlo3 &p eug 'e1o,(o3 ? Isulpre] }? reuged lrpne.tsu e sr ss1Fo3 '{cue1 'e1o(o3 d, IeulpreJ lB rolues € eueceq lsnlpue ,fiprder 8urcuerrpe ueeq ssq llsopneog 'emlrg oqt ur .(ueduroc cl1qnd B lB OJJ B eruocoq u1q dleq lq8nu 1eq1 ecueusdxe 3:o eszq p€orq e qe8 o1 sluellc I?uollsurolq gq.,lr urrJ Ydf, pe$q ,(11eco1 e roJ lro1y\ ol peplcop puz BuozIrV uI ruuxA YdJ eID go qred moJ IIe pessed peq u?eprueg 'ezls uI mog 8tg eq1 rrtoleq lsnf urrrg Ydf, Joll-puoces € sI tuJIJ eql 'euozuy'xnr -ooqd ur SUI erll roJ sree( or"r1 rog turlrorvr rege 8002 ul d'I'I e1o^fu3 ry IeulprsC Jo turlJ Vdf, eql peurol ueepneeg '(uue1 suorleraprsuo) rueTl) rlpnY 'n 'c 7y7 pnotg Suuunoc)Y puD san4tqrsuodsay 4pn7 9 raldeq3
Background image of page 1
248 Chapter 5 AuditResponsibilities andAccountingFraud Frazer, the attorney lbr Jost Furniture. Oloffagreed to contact At 5:00 p'm' on March 22' the auditors met in the firm's Frazer to determine whether there are any ouistanding litiga- conference room to discuss their findings' After hearing tion issues or other legal matters that the rirm shouli kniw about Gabelli's concerns and oloff's lack of success with about. They all agreed to get these matters done by the end of Frazer, Beaudean expressed serious concerns about taking on the secondday and a meeting was set for 5:00 p'm' Jost as a client' Gabelli found out that a $1 million loan payable to Phoenix Second National Bank had been overdue before payment had been made March 15,2011' The president of ttr" Uart told Gabelli that Jost had been in violation of a debt covenant agreement that obligated Jost to maintain a current ratio of 1.5:1 at all times and that the bank was con- cerned about Jost's ability to continue as a going concern, pointing out that Jost had gone below the ratio twice' The iirst time Jost had violated the covenant, the bank accepted the explanation of a temporary cash flow problem' The bank granted the company a three-month extension to meet the requirements ofthe debt covenant. The bank subsequently found out the cash flow problem had been due to the fact Jerry Jost withdrew $500,000 from the Jost cash account at Second National Bank to help put a down payment on a mortgage loan to buy an upscale house in Scottsdale' The ,""ond ti-" it occurred the bank began foreclosure on the loan on January 31,2011, but by the time the process had been complete{ Jost had paid off the entire $1 million balance. Oloff had no luck with the Frazeq the attorney for Jost' When she called his offices, the secretary always told Oloff that Frazer was on another line and she'd take a message' When Oloff asked to leave a voice-mail message' she was told Frazer did not have voice mail. How about leaving an e-mail message? she asked. No e-mail either' Can I text him, tweet him, or just do it the old-fashioned way and set up an appointment? No, no, no were the answers' Oloffhad left five *.r.rg", for Frazer in the time before the meeting' She had nothing to report except to make an editorial comment about lawyer responsiveness, or lack thereof. At first, Jost had side-stepped Corliss's request for per- mission to speak with the predecessor auditor' Jost claimed that there had been a "personality conflict" and Jost was afraid the auditor would speak negatively about the company' Jost did agree after Corliss reminded him it was a required part of the procedures auditors follow in making the client acceptance decision. Questions l. Why is it important to do the kind of due diligence testing and risk assessment review conducted by Cardinal & Coy- ote prior to determining whether to make a bid for the audit of a potential client? What are the potential red flags with respect to the Jost audit? If you were Yancy Corliss, would you go ahead and recommend to Sharon Rules that the firm should submit a bid for the Jost audit? Why or why not? 2. Regardless of your answer to question 1, assume Corl- iss decides to recommend to Rules that the firm should make a bid for the Jost Furniture audit. Beaudean seems surprised and asks what other factors Corliss might have considered in making the decision. Corliss is quite blunt and says: "I am a new partner in the firm' I have to bring in new business. This client is a slam dunk' If we make a reasonably competitive bid, we will get the account'" a. Why do you think there is so much pressure in pub- lic accounting to bring in new clients? Is this a good thing or are there potential risks that might go unno- ticed or ignored? How might the decision by Corliss present an impediment to making sound audit deci- sions later on? b. Some CPA firms have started to add indemnification clauses to their engagement letters that state the firm is not responsible for fraud when the client know- ingly misrepresented financial information during the course ofgathering evidence and testing account bal- ances. Do you think these clauses are ethical? Why or why not? 3. Typically, when there is a going-concern issue with a .ilint, ttt CPA firm issues an unqualified opinion with an explanatory patagtaph. Given the limited facts of the case, do you believe this type of opinion is justified? Do you think the firm should consider issuing a qualified opinion or disclaim an opinion? Why or why not? How about withdrawal from the engagement?
Background image of page 1
298 Chapter 6 Legal and Regulatory Obligations in anEthical Framcwork Case 6-'l SEC u- Halliburton Company arud KBR' lnc' J's allegations, KBR m**nrtmrulffi*g*ufit*ffi tru.':#sru,m;ru*****#**ffi sarv to PaY bribes to otlt in order to obrain rhe constructton-::#:tl],i,".iluno ott,.r. in disgorgement' of the predece'*: *t]]lil;lHl *un n,rn rankingNigerial Questions involved in the joint ":T'",Tr':#il;;1i;;;; at reasl f,our ,ion ,o on. who has lived in Nigeria, becomtns ;;;;;.;, officials and their representatives "^'i,'*. tu"ai l. Accord ii Nigeria is atmost *"""i;;;i;, ,s moralitv is ffi*t.;il:T:L';,'5::1'J:l$:!iili"iT"?#;;n '""llt;.;;il ;"'.,*-'P":'*'#:',,"*Ix:,''r:Hx 'ri ;;;;; ;;','" iilii:Ht*fTt*"*i::"*:' l::i:,:*',{l,*i*f,ffifr,$yfi,]'"'l'i*'.i':ii :ii*##'frill.JilTil::l' fuilffi 1;fli*,*,"":#:ffiH#ffi rn,"*u,i.nu,. .,. ::HJ,;;;.,heUnitedKingdomasentto*'l'I#;;;.;, olg.:1. r:-erception indsx (Cpl) "i^ri."r"n'"1, Nieeria ij;ffi:TilJ::lil tT:;1];tril"'H-*'I1i.1ffi iiiifl;]'"il,ffi:t?rffi*i**il;+:,',"ui; ];',l *:[i;;**rm: il-xi=i:,j:#** ** LTr;';;;,,*.0* ",: :r"'i]:l'k[:",rgxr and Monaco bank accounts of the United *ikrrO million' second position 'lt-lh" most cor l1TflX,X1ffm.i:llm:LT'[iil,ffi3tli:m:* o"l:"".T'[','ii,il* ::::'tl.:J'H*[)'iil,h.-il ]H4il1#'f'r;x.';,"#::::.iTlfi:Ltf;11ilffi:; iu:i*"#:'-' *::i**.nll*"*#a'[ c'un cash to a Nigerian political party' : internal con- try and not a payment in vtolat rhe SEc's ""#;;;i';.;tt:*::::;[e KBR prede- z' use"-ett'icat r;asomne-tj.respond to the following state- trols ol Haltiburton. lhe parent company "' l"i.i[, p""r.rr ment by a U'S' executtve: *::n,n[iT**iT]1:;ffi i,li]ljlTLt$iil':l '1;;;;';;q '"':"'::': "^*;,?;lyllirix; IL*{'l|,./;Tii*1*.^,3,.;[t$#',,,ffi *m*'}'*illt+**+.''1"i into a settleme- ;j:: :;;;;i.;';;.n-y.ui senlence' the *.'il;;, is uncovered.I_uI,n. .o.,. can be quite. qurte 0,.'.*."'-.: l?ffi 3ro,1i"ll1.,'.T:i;l?'*tru*ing tn. ol"."i*i,",",tigation. And longest in the .tttsto;1;;'"':";; .;rt the federal govern- ligh ut tl,e end of the dav' ;f* ol foreign ofiicials-also sienal t]1 ment,s willing. ... i"'r""k t"ng prison terms rather than fines res include the Transparencv lnternational corruption u,,o.o*t inj,rnctions ,T::;nlfl:l: [:{:;i{:^!##JI,yit,#;1[T. l s e cu * e s, ^ o *;!,1:?"" q p # : .+,*Il. .. iiffi?::*';J.::,];.l Ll;',#:i#{.;.*i; H,n::'il:'r; inq Enforcement ' i." n) t,',i ri o n Co m p a n v- a n d .KB R'' n c'' www' : iitr"[aieslzoos/l12o897a'htm'
Background image of page 1
'ogc s.uoxxa 'uosrellrJ xeu o1 Eulprocce . .'lgoc ro IIo u-eJl eler relsq rlI€E -"rrtq".1 p,torE o1 Suro8 qlt lsecrnos-'(3reue Joleur eqlJo Eur,nor8 lseNeJ eql eq o1 pelcedxe sr se8 1zmle5l" 'plroa eql prmoJe seNeseJ JoJ {ool o} Euuels eJe uoxxg e41 seruud -ruoc po 8rq'alou lng 'seruedruoc uoltcnpord pue uorleroldxe sn t""p*i.p"r ,{q p"pt'1*op ueeq reJ os seq tuetudolercp {eql pue 'ecueury t1po51 u' ""no'"' 'ueu e8nq 'flepuelod z su pe8reure eleq secJnoseJ eserll 'JeAocoJ o1 senbruqcsl 8ur -grrp p"r*ope elnber 1eql 'q111qe-erured 'to1 qlt't-spues ut ;;dr; se8 io seE pue IIo elegs Surpnlcur secrnoser leuoq lornoo".r. ;o sredoler'ep Eurpeel eql Jo euo q orx 's11sar Eurcnpord Qeu 1'997'91) ssor8 gg7'59 ur Nerelul uB perrnao.(ueduroc eql'8002'15 rsqurece6So sy 1ro3o .1.rrrq ooIIIIur 9S pue 'sprnbq se8 pmleuJo sleJleq uoll -in" ,'i, tet 3o pe; clgnc uo{Ilg 16'I s€ \ uorpnpord '!tep ,anri*sll'8002 '1g regruecsq pepue ree'( eq1 Eurm6 '3667 '1g requreceq ls selreseJ pedole'rep p-e'tord eran selreseJ p*-aio r"".od 19 'slseq luelerrrnbe seE Pmlsu]oleeJ crgnc i*r"oqt e uo '8002 '1g requrec-e6 te tuel,4ye-feJ clqnc uoIIIIJI 98'€I erea se^Jesor pe'rord slr 'srseq lueleirmbe-'(6reua .rn ug 11o Jo sleueq uollltu 892 pue 'spl'nbll sBB [€rtt}?u Jo rr"r*]q uorru* 91 'se8 lemteuJo leeJ clqnc uonl'4 08'I I ere ^' .g002 'I€ reqruece( l€ sel-reser pe'tord peleun'6e q'(ueduoc eq1 'se8 Iemleu pIIe IIo Jo uopsuodsuel gue 'Euqeryeur ]#tt".ori 'oo11. .,po'o tq1 ur pue 'seqredord pe'rordun pue *iu.o"ro *a p* go Surcnpord qoq;o uorleroldxe pue 'uoBel -roldxe lueurdllenep'uoqrsrnbce eqt u pe8e8ue-sl' seF?lpFqns .rt wt^ iuqn sn*.r'w,oLr uoc uI peluco[ ''cu1 "tHreug 91y @ 'eSueqcxg >1co1s {rol^\eN eql uo 98',?$ o1 luecred E1 u?rp eroru p"do*t t"*qt OIX o1ul d' lueuecunouue eql rege 69'i9g or 1*rr"o g'y n"3 tt*[t qt'oog 't"p1oq"'nqt orx 6ul Iffiq qyg^rr,^,(qereq191y ro5 Suptedrepll eq '{cu gqo11 "o"*i '".rrntue4 pesodord sgl ol luensrnd ?ue u:tlceswa srql ollur Euuelue eroJeq ptmor? Jleqr peddoqs flelenbepe e'req r* fn* ,ftredruoc eql reqpqr^' (g) pue lslserelut lseq 'sreploq -"r*.I, OIX ur Eu4ce 1ou '(q serlnp drepnpU n€ql pegceerq e,retl,fuur oJx Jo srolcerp eql retlloq^\ (7) :srsplorlereqs s{ pue',teOuroreql atmu.leq '(qereql ecud 'ne;un u€ }e OIX 11es o1 Eureer8e .(q sreploqereqs oJX 01 sepnp 'ftu1cnpg 4egr peqc?erq sroperlp Jo prnuq '{8"t'g OIX oq} req}eql'r (1) :6u1 l^oloJ .q, p.*-nr" srrrrrJ 1(er ,(q suo4e8qser'ut ti:*Tfr*. uoqrec Irelmc plnoc leql suorlep8er 8ullur?a 1eqo13'emrrg ,texr to esnBceq oJo1u r{uora sr '(8reug O1y reW pu€ "ssoc -ri'""r;*.rr,, q8norq, '(uedruoc eql fles o1 pee-r8e sroperlp pue tue:tus8eturu orx eql lerp srulelc -#pul'eld eqr '[qow uoxxa q ,(8reug oIX fles o1 ldurege 4eql Jo 1no Eulspe 'surelqord llaql ol suollnlos a1qe11nba oup suoqsanb JlaLll o] sJamsue pull sJolsalul pu" 'laploqaJeqs fu;; .r"; "rrrritttn pue 'voddns 'd;aq srago dnorb aLlr 'lar -tpLu lp!)ueullll)ols aql ol sMau palelal 1e6a1 laqlo pue 'sluaLu -bn;i ;;r"rt'lt"t "rotlrn ss,lf, sa!]un)as,o srolsa^ur stxrolu! pue sanss! iaploqaleqs o1 p"1n1"'tlf,lPasal saop leql dnor6 irnronpn lolt"n'i ue sl ''rul 'uollepunoj sraploqare-qs .allrz jLroozotno-xi+/x-g-lNt-,\culNl-orx/s tz [6olsbulll]-ras 66l;;il; ',,i'io.,"ur orx '6002 ''r raquar-oo 'tE6r 1o py "6rnqrrf sarllrnlas a$ lo (p)9! ro I uolpas-o] luens -rnd 'Uodau )-8 trllol uolssltlluo) aoueqlq pue sallln)asI d8reug 61y Jo srolce4p Jo pr?oq-eql 'q &np &qcnpu Jo **"10"-":t-.i,r -spq"Id eql 'luleldruoc eq1 o1 Etnproccy 'd8reug OIX Jo srolcerP Jo pruoq eqt {q rrnP ,(mpnpglo qceerq ps8elle rc o c6002 ''I rcqruece( "ro;"q ,"*q' gjl rlegl peseqcrnd oqr'r "(8reug oJx ur srolse^ul 1,r"r*" io lfnqtq uo unoc rcl-uslo (sexel) O"noC luerl?I q peIIJ ueeq p?q lmst\?I € }?tll pecunoulrB .':co1;.ror1np.mod sreploqereqs eql '6002 6LI ,"q.uece( uo 'ecud semltg se8 lernleu luermc oql JIeq re,ro lsnf luelelrnbe se3 ;o 1ee; 'Iqnc pu?snoql red E6'7g lnoqe le selreser pe'rord q9111 senle'r eseqcmd ;l;;r-"t re,tod p,e ,(Ereue eql ur rsa's lse8rel qlq8te eqr pi ,Oo1;- q Uqohi peseqcrnd tr ecurs 1se33tq s(uoxxg eq i*" :oioarii i.ur"r puoces eID uI esol' o1 pelcedxe pue le,rordde reploqereqs oIX 01 pe[qns- 9l qclqm 'luep eq1 ',fuedruo3 ry rerurequeddg 1e 1s'(1eue rre'llel{D Ieped plss ..'secud seE lernleu q &ryre1o'l o1 luelllser aroru 6."p;i eql e1€o, IIIrd lI pue 'sl,ep eseql J: "lo* eq runn .r"q1,, :r1"rrn e^rtrcsrle qll^\ sre'fu1d rellerus dn {3s o} elolu *rl[,.r'q""t seruedwoc qcu-qs,c se d4snpul '(8:eue egl ul uor1np11orro, Jo ole e e ;o uorlelcedxe permds plq eq1 .;s.&1d se8 olel{s Jo s1o1 q1r't pterds e1eone 13nq e 8ulue8 .rr'rt"q1,, 'pres 'srerqle4 '(Ereug uo1sno11 1e re8euetu purg e .uoslo urlof ...e,re{ }.uPP 1I umlueluolu cqseuop eluos qll.'ld oo**f ,.priord pep srqa,,'q8norqt seoE uoltrlspbcu orx er0 ,"un ir"p"ro te8 lemleu Sn dor "qr "*o"eq ppo't pue 'ftmd -,rio, ,{8re,r" pepe4 ,ficqqnd lseErel eq1 ^(pteqe sI uoxxa r'sreploq{cols OIX ol umruerd luecred 97 e pslueserder re'Uo eql pue trueru -"J.ian "q, pe.tordde soruedu,oc qloq Jo srolcerlp Jo spreoq aq1 ',Grsuf OIX o1 Surproccy'OIxJo or?qs uoumroc qc€e roJ ser€qs uouruoc 860L'0 enssl ol se^a IIqoI I uoxxg '1ueru -eer8e eql;o suuel eql -repun 'Ilqohl uoxxg '(q re'roe{e} sr o1 tuensrnd JgS eql qtl/Y\ rurod )-8 ue pelu ^Breua OIx '71 requreceq uo 'uolmg Ir$ te penlB uo4c?srre4 {colslle ,rru, .:ao1 t3reug olx ralo eryl ol uorluelur sr poclmouu? uorlerodro3 IIqoI I uoxxg eql '6002 '71 reqrueceg ug 'cul'.(3"reug OIX LOE lro$awDtl lntqlg uD ur suottroSlqo t'totoln*ay puo 1o&a7 9 'ra1deq3 E-9 ese)
Background image of page 1
302 Chapter 6 Legal and Regulatory Obligations in an Ethical Framework XTO's resource base is the equivalent of 45 trillion cubic feet of gas and includes shale gas, tight gas, coal bed meth- ane, and shale oil and is intended to complement Exxon Mobil's holdings in the United States, Canada, Germany, Poland Hungary and Argentina. According to Tillerson, Exxon is going to bring XTO's expertise to bear on many of Exxon's acquisitions. XTO has been one ofthe fastest-growing energy produc- ers in the United States and it expects its production to climb 23 percent by the end of 2009. Exxon, like other major oil companies, has struggled to increase its oil and gas reserves in recent years as state-owned energy companies held fast to the new energy discoveries. The purchase ofXTO would increase the company's resource base about 10 percent. XTO Energy reported in 2007 total revenue of$5.5 1 3 billion with a net income of $ 1.691 billion, and in 2008 total revenue of $7.695 billion with a net income of $1.912 billion. Approval bv U.S. Congress The Energy Information Administration (EIA) has stated that Exxon Mobil Corp. will emerge as the largest producer of natural gas in the United States after its expected acquisition of XTO in 2010. The EIA based its estimate by combining production figures reported by the two companies in their 2008 Form 10-K filings with the SEC. Representative Ed Markey, chair of the House Energy and Environment Sub- committee, said he will hold hearings into Exxon Mobil Corp.'s takeover of XTO Energy Inc. According to The Wall Street Journal, the hearings will explore the deal's effect on competition in the natural gas industry the role ofnatural gas in U.S. energy, and environ- mental questions surrounding production ofgas from shale- rock formations. One argument for the deal is that it secures more domestic energy in the hands of a U.S.-based player in the quest for energy independence.3 An important part of the merger agreement is payments to be made to officers and members of the board of direc- tors at XTO. Given the distaste for large payout packages to corporate insiders during the period ofthe financial crisis in 2008-2009, it will be interesting to see whether the arrangements detailed in Exhibit 1 will influence Congress in giving its approval for the merger of XTO into Exxon Mobil. 3Russell Cold, "Exxon Bets Big on Cas with Deal for XTO," December 1 5, 2009, http://online.wsi.com/article/SB1 0001 4 24O 527 487 04869 304 57 4 59 57 1 04401 67 7 26.html.
Background image of page 1
euroceq e^?q plno,tt. rolcerp ee,(oldueuou qc€e '(t6'zt$) 600Z'I roqlueceq uo {co}s uouruoo q,{uedruoc eqt;o ecrrd Sursolc eI{} uo pes?q 'te.tte.a,r e qcns luesqY dEreug 61y reprm ;e8reru eql ;o uorlsldtuoc eql uodn unq o1 e1qe.&d euoceq el?q plno,^A esr,lA;eqlo leq] sluew,(ed eq] e.{receJ ol lr{31, s}q pa,,ue.,w .(1ue1un1o,\ sro}rerlp Jo preoq s.,fuedtuoc eq} Jo JOgIrJeIu se,(oldrueuou qcea (600z'tl reqluocec uo '6002 ur peurro;red secl^Jas 3o lcsdser ul 000'08I$ Jo reululer r{s?c lenuue ue pe,\IeJer sJolceJlp ee(olduleuou eql'{co}s uouruoc s,,(uedruoc eql Jo serBqs pe1se,L .(11n; 991'71o luer8 e pelroter rotce.rrp es.{oldrueuou qceo '6667 frenrqeg u1 '.to1 -ce.rrp ee,(oldrueuou eql o1 peluer8 .(11uacer trsour Icols uolu -ruoc q,(uedruoc eql Jo enle^ pu€ reuleleJ qsec Ienuue eql Jo runs eq1 serull eeJLIl o] lenbe 1ueru.{ed qs?, tuns dunl e e.\recoJ III. a JOlceJIp ee,(oldrueuou qcee 'lo4uo3 ur eSueqc e uodn ']eql sepr,to.id ueld ecueJeles srolceJr6l eplslno eqJ ueld e)ueJa^as sJol)eJ!o eplslno rapun slq6!u Jo re^leM EOE )Lta^zaul p)ry\fl uD 11t suolloS!1qo ttolnpSag puo 1o3a7 9 raldeql
Background image of page 1
304 Chapter 6 Legal and Regulatory Obligations in an Ethical Framework entitled to receive a lump sum cash payment of approximately $1,000,000 upon completion of the merger. Questions { t.,} fne lawsuit filed by the Shareholders Foundation alleges \{ ,/ that the board of directors of XTO beached its fiduciary duties. Identifu the duties allegedly violated in the XTO case. Much has been said during the recent financial crisis about top executive salaries being way too large, espe- cially in those companies receiving a government bailout. The Obama administration sought to rein them in through t}reats of taxation or other forms of "moral suasion." Do you believe the government has an ethical right to inter- vene in a company's executive compensation program? Support your answer with reference to ethical reasoning. Review Exhibit 1. Do you believe that the agreement in the Form 8-K about payments to officers and board ; members raises any etlrical issues? 81 Under President Obama, a great deal has been said about / \reen technology" and the need to find more environmen- v taily friendly sources ofenergy. The United States has been struggling for more than 30 yeam to become energy inde- pendent. The use ofexisting sources ofenergy such as nat- ural gas and proven oil and gas reserves can help achieve that goal. To what extent should envlonmental consider- ations and other "social responsibility" issues influence decision making by management and the board of direc- tors? How does such decision making relate to agency theory discussed in Chapter 3? In addressing this question, be sure to assess the environmental effects of the 2010 disaster along the Louisiana Coast when a British Petro- leum deep water oil well exploded and leaked hundreds of millions of barrels of oil into the Gulf of Mexico. \, b.{'iffi,,' I o*\"Qt o'' I
Background image of page 1
'suorlcB srr{ Jo socuenbesuoc leSel eqt ldecce o1 sseu8uqp,t e pelecpul eH 'slueruelels IercueurJ ;o uoqelndrueru eql lnoqe Eqqlou nd.erDl preoq eql t€q] pel€ls pw pru{ Suprmocce erl} roJ .&rlrqrsuodser 11ry >1oo1 nle11 'uorsseJnoc srq uI 'qluorrJ euo urqyly\ peu8rse; ure,(1eg go sJolcenp Jo pJeoq eql Jo srequeru mog 'Suruqcep ,ftreduroc eqt Jo qlpeq eql pue >1co1s ruedleg go secud eql qt.r1( 'serueduoc o 11 eq] ,(nq o1 rego sq papurcseJ nlua os Jueruecunouue eIIl rege ,llecrleruerp pe8unld secrrd >1co1g 'erqcrulse{Jul se1&6 3o luecred 0, lnoqe pue sergedord selfehl ur dlrnbe eq1 3o luecred 001 peurrro (1ryey qnfeS seerer{a 'ue,tes go luecred 61 ueg ssel perr.^ao nfeg',{1nueg nfea eq1 go s1e -1cod sql eurl ol pepuelur eJe1tr sruJrJ oaa.1;o seseqcrnd eql lg8noqr sJolselur dueru terrerrroll 'le{Jeru eJB^\Itos su lueru -8nu o1 le{reu emlcn4segul eq} Eur}erodrocur fq ,Qrsre,up 01 pepeeu ,(ueduroc eql Surlels eseqcmd eqt ,tusnt ot pel4 nleg 'uorlpg 9'I S roJ (se1&6 sr pre^Dl.€q pelyeds ue&eS) emlcnfls€.Uq selde6 pue ssrlrsdord se!fun 'suos sq fq peuno srurrJ o Al .(nq o1 peul nf"U '9002 regrueceq uI ernlcnrlsBJJul sBl^Btr{l PIIB sargedord sB1dBR[ Jo uoqrsrnbcy 'eurt tuouoq eqt o1 tqEre4s lus,n (uo{Fu gg'g1g flelerurxordde) uorlpu 88S st{ Jo senue^er petuuul 'enue^eJ s? pepJocoJ sea(l.,(ueduroc erp olul spury leuosred.;:o uorsrgur qnlea tuo4 Surlpser (uoglu gg'g7g dleleurrxordde) uolllq €Z' I sU Jo filtqett petelsreprm uV 'luelsxeuou se,u, (uoqyu 79'19 ,(lslerurxordde) uolpru 9Zt sU Jo lserelur perucce uV 'slesw snorl4cg pue s1rgord pet?Uul o1 A1eBw1 enp pelegur se r teer1s ecueleq '.gOOZ '69 requraldeg eql ur ecuepg lrmocce {ueq ur rlsec eqlJo ([uotrlru] 9' g 1 $,,tlepuuxotddel uollyq ?0' 9 sA) wected y6 :pelelndlawrtt ere,& s1rmotue luetuelsls le:l;ltteutJ ,(e.,n eqlgo freurums e sr 3urmol1oy eql 'ecueleq {ueq ur qs?c eql Jo selq€AlocoJJo uorlsuur uB Jeglre s?./I\ les.go er{I'peJep -ueJ Jeleu eJe,& ler11 secrlJes ro; s8uqpg snoqr]crJ Surleerc;o ecrlcerd pelsel-eurl eql o1 peuosu eq 's1ql rod 'esec eql {1e -nlc? s3,!\ ]eqrl.t. usql ecuerruoJred rorredns ? A\oqs 01 sSurutee pu? senueler 3lo uorlelndrueu elduls JeqleJ oq otr sreedde sree,( eql re^o euop pBq nfsu 1?rll'\ '6002 frenuel ur ruedleg Jo preoq eql ol lueruetr?ls leuorsseJuoc sq .(q Eurog 'senssr ecu?[re,lo8 elerodroc se 1e.ra. se 'e1or s.n[e5 pue ,(uedruoc eqlJo srrejg€ eql eqord ot poprcep '.IggS toleln8er le{reru eql pue 'lueruure,toE e}els eq} 'srregy eler -odro3 go ,ftts1ul6 eqI 'seprs I?reles uro{ se8reqc Surcu; gel se.r\ nfeU fep eqtJo pue eqt.{g'tuecred 9'6 epEerg e ol luecred g9'8 uro{ e{ets .srelouord eq1 umop lq8norq '600Z'LE requa)ac 1e (,{laleturxo.rdde) 7y sX : 19, srerpo pue $nrJ Sg?-II ,(q sereqs pe8psld eglJo Eurpeolgo eq;'seruedtuoc uo4cn4suoc pue 'sroluredo leeg 'sJopuel ol enp slunoure tprm peprmoduroc eJel( sso,r sr11 '8uro8 suo4eredo eql dee{ o} sereqs peu,ro-,(yrureg eql Sur8peld ,(g eroru (uoqpur g9'g7g {eleurrxordde) uoqlq €Z'I sU esrar ol pecroJ se1rr nfeA pueq Jo ]no lue ^. sEuql sv 'slsoc pes€eJcur o1 Eurpeel'suor1 -eredo go 1erre1 req8rq e ,!r1snl o1 slesw pue secrnoseJ I?uorl -rppe drrec ol peq,fuedruoc eql s? peuesJo/( reqlrrg ruelqord eqJ .reqlouE 01 pel erl eu6 'sree,( oql Jo^o merS suorleredo q,(ueduroc erll Jo ezrs eql se suoruodord elqee8eueunm peure$B peq 11 'sree,( eql JeAo,rorE o1 penu4uoc s{oog eq} ut pelcegeJ ouo eql pue lrgord Surleredo 1en1ce ueertrleq du8 leurEreru B sB peg?ls Wq lerld 'pellos se.& ruelqord qrue -d1eg ecuo pefelep eq plnoc sel,fuW o1 slueufed eql tq8noql nlea 'slesse sefe141 eql qll^\ sree,( reao ll1nq ur",qes Jo selreser qs€c snorlrlcrJ erp delm ol se,tt lI 'uo{llq 9'I$ roJ seruedruoc sefeyq elnbce ol plq 9I reqrueceq eql puqeg ellloru IeeJ erp peleeleJ nleg 'srolse,rur pu€ sJeqsr^\ IIoA\ srq Suruunlg 'seruel?q {usq pue qsec lue}srxeuou ol lcedser q1r.& ,(u€duroc eq1 3o sern8rg I?rcu?urJ Eur,frsyeg o1 8ur11rupe '6697 ,ftenue1 ,(pea ur uznop peddels nfel nlBU,(q suorlcv luelnpnBrd 'Surnurluoc s:e 1r lsureEe suorluErlseaur pue pne{J eql ur peleclydrur osl? eJe \-sJedoo3esnoqreleaa.ecud-sJolrpne eqJ 'odc eq] 6rrrBurelps^ se lulrls pu€ 'oac pue ropmoJ -oc eql 'nle11 e8urleureg o1 ue,rr8 eJelr\ srure] pe[ pue pel; eJeA\ Jo peu8rser reqle sre8eueu do1 lereleg 'se8ueqcxe {co1s uerpq pue 'Sn eql q}oq uo enlul q tuecred 06 lsorule peullcep {cols s.ufilqes 'e1orq pne4 eqlJo s^\eu eq} ue%& 'I00e ecus a8uegcxa4cols lrol.,lreN erll uo pelsrl s?itr {cols s,uetpg 'eryq peqetep,fil w penlmnbpeeq q?not1lly "'L$n&,, ol selslsue4 qcrgttt'otLos ptot* llDIsu€S eq1 ruo.g pe^rrop sr ..ruef1eg,, eureu eql tllecruorl ..'uorug qelpul, se 1r Jo Suqeqel eqt ol pel pnurg qrue.(1eg 3o edocs leqoy8 eql's1uele,rrnbe qs?c pue qsec qfuuduroc eql go luecred V6 tloqe pelueserder s1q1 ,'(uo1111q y6'19) uollllq 0g (seedru) sU serrr sessol Jo 1rmoruu Ietrol eqJ 'slueru -elels {ueq e{eg Jo suezop pue osecrolur pe8rog 966'4 ueqt erou 's1oog Surlrmocce Iunp pellolur rue,$eg 1u pneg Eur -lunocce eq1'porred ree.(-lq8re rle JeAo selresoJ qsec pu? slr -gord q,fueduroc eq1 Eu4egur ol pesseJuoc 'nfeg z8uryeuea 'reprmo3:oc pu" OgC oqt uoq \ '6667 ,ftenue1 I4un erpul ur rsgodxe eJe.rgos lseErel qgno; eql s? a,(uedruoc eql'suo4 -n1os 8urcrnoslno pue 'uorlur8elur surels,(s '8ur1lnsuoc ur sezt -lerceds 1eql fuedruoc socrlJes ,(8o1ouqce1 uorleruJoJur pu? sseusnq 1eqo13 peseq-erpul uB sr seorlJes relndruo3 ur€d1us uoJufl s6Brpul :urB,&BS EEV suouruaptsuo) a)uDutalog alolodto2 puD s4qtg :8ut1.rcday pnuDuq lDuottDuatzT g leldeq3 E-8 esP)
Background image of page 1
434ChapterSlnteruationalFinancialReporting:EthicsandCorporateGovernanceConsiderations A important question is how independently did the "inde- pendenti directors of Satyam act in the now highly questioned and failed decision to acquire the Ma1'tas companies? One board member, Prof. M' Rammohan Rao, dean of the Indian School of Business, claimed the board had taken an inde- pendent view and raised concerns about the unrelated diver- ifi*iot, valuation, and other issues' Two views emerged' it" trrt'*ut why not stick to our core competencies and why venture into a risky proposition? The secondissue was ,"lut"d to the valuation of the companies' Maytas Properties was valued much higher than $1'3 billion, the amount that Satyamh management came up with for the acquisition price When asked whether the fact that the target companies- ftluyrut Properties and Maytas Infrastructure--were led by Raju's two sons made any difference to the board' Rao said' "W" f.tt the valuation proposed by the Satyam management was lower and conservative, despite the family ties' We took an independent view on this'"2 When asked if the board had taken into consideration the possible impact of the purchase of the two companies on shareholders' interests and the market reaction' the ISB dean responded "There were concerns on these grounds as well' especially the market reaction for such an unrelated diversi fication." However, according to Rao, there was no way they could gauge the market reaction at first, so they decided to take a iisklBut the way the market reacted was a bit unantici- pated he added. ' Questions can be raised about corporate governance with respict to the failed acquisition of the Maytas companies' A conflict of interest arose when Satyam's board agreed to invest $1.6 billion to acquire a 100 percent stake in MaJ'tas Properties and a 51 percent stake in Maltas Infrastructure' goih of these firms were owned by Raju's sons' They also floated 21 other companies under the Maytas brand' For "*u-pl", the Raju family that ran the company a^lso invited family or close friends to serve on the board of directors' These bonds created independence issues and questions about whether directors would be confrontational with top management when warranted' Litigation in the United States Securities fraud class action lawsuits were filed on behalf of a class of persons and entities who purchased or acquired the American Depositary Shares (ADSs)3 of Satyam on the NYSE and/or were investors residing in the United States who purchased or acquired Satyam common stock traded on 2Available at www.blonnet.c oml2OO8l12ll9/stories/ 20081 21 951 600400.htm. hmerican Depositary Shares (ADSs) are U'5' dollar-denominated "quity rhrr", of a foieign-based company available for purchase on an American stock exchange' ADSs are issued by depository banks in the United States under agreement with the issuing for- "',gn ao*puny, the entire issuance is called an American Deposi- ffi neceipt (non) ana the individual shares are referred to as ADSs. Indian exchanges between January 6,2004, and January 6' 2009 (the class Period). The complaint alleged that Satyam, certain of its direc- tors and officers, and the companyh outside auditors (PwC) made false and misleading public statements regarding Saty- am'sfinancialconditionandperformance,whichartificially inflated the stock price' On January 7 , 2009, Satyam's chair' Ramalinga Raju, sent a letter to the company's board con- fessing tI a massi re accounting fraud' Raju admitted that the "o-pu=ry', balance sheet and other public disclosures con- tained numerous false statements' For example' Raju wrote that as of September 30, 2008, the company overstated reve- ,o. Uy upp.*i- ately 2lpercent, and reported cash and bank t atances of S:.61 billion rupees, ofwhich 50'4 billion rupees (over $1 billion) didnot exist'a Reports issued since the January 7 confession indicate that Raju likely understated the scope ofthe fraud' and that he urO m"-U"rs tf his family have engaged in widespread theft of Satyam's funds through a complex web of intermediary entities. The complaint also asserted claims against Pricewater- houseCoopers International Ltd' and its Indian partners and utfitu,.r. Satyam's outside auditors from the Indian affili- ate of PricewaterhouseCoopers were aware of the fraud' but still certified the company's financial statements as accurate' A document (the charge sheet) filed in a Hyderabad court by the Indian Central Bureau oflnvestigation (the equivalent of the U.S. Federal Bureau oflnvestigation), detailing charges against numerous Satyam employees and two Pricewater- houseCoopers partners, alleged that the auditors received documentation from Satyam's banks that showed that the "o*puny', disclosed assets were greatly overstated' The "iru.g. ,tt".t further alleged that these auditors received fees from Satyam that were exorbitantly higher than the fees simi- larly situated Indian companies paid to their outside auditors; the Central Bureau of Investigation cited these fees as evi- dence of a "well knit criminal conspiracy" between Satyam and PricewaterhouseCoopers auditors' The complaint asserted claims against other defendants as well. In particular, the complaint alleged that members of the audit committee of the Satyam board of directors-who were responsible for overseeing the integrity of the company's financial statements, the performance and compensation of the outside auditors from PricewaterhouseCoopers' and the adequacy and effectiveness of internal accounting and finan- cial controls-were responsible for the publication of false and misleading public statements due to their extreme reck- lessness in discharging their duties and their resulting failure to discover and prevent the massive accounting fraud' The complaint also alleged that Maltas Infrastructure and May- tas Properties and Ramalinga Raju's two sons were respon- sible for the false and misleading public statements' The Raju sons' false and misleading statements concerning Satyam's aln re Sotyam Computer Services, Ltd', Securities Litigotion' U'S' District Ctuft, Southern District of New York' O9'MD-02O27 ' lanuary 2009.
Background image of page 1
' o ll o 166 lz Lo6l DlA I & LO600z/:aPruP/llp/eqd /sddB/tuollaamlet)ueulJ'M ^M \aaA pDuDu!1,,'3rur6 1sure6e suollesn)fv ,sa^llnf,axf uer(1e5 uo ]se) lqnoo,, 'lull pleuous eqt pu? rue,qes uro4 uotlesuedruoc Sutlees sI trIns./r{?l eqJ 'sJolceJrp pue 'sroltpne 'srelourord rew.ro; s11 'ue,,{1e5 lsure8e llns^rsl uorlc€ sselc e pellJ sBI{ l€q} uoIlBICOsss .SJolse^ur crlseuop B puru IIr,^d, ll pl€s ISAS oql '6002 '41 .{n1 ug e!pul sllns/u'BT uollcY ssel] s'8002 'I t qcrel I uo 3'u'4 'Qgo peu8rs ererrt slueruetels IBIcueuIJ qfuedruoc eqJ 'l^ad ,(q pelcelep 1.usur't ll .^aoq pue 'uoITIIIu 8tg rluo ,(11eer sert qsec ul uolmq I$ pepode.r e laor{ pu€lsJaplm l.uppoc sJo}selul 'pne{ uolllq I$ ueql erolu sqtJo 1q3q uI uollce u3 qcns e>lB] ol sell -uoqlne eql pemsserd peq sJolse^ur uelpul snolJnd 'rue,$eg 1e uor1e34se,ru1 pne4: eql qll^\ uoqceuuoc ur Eurleeqc pue ,(cerdsuoc IeululJc Jo seEreqc uo 31(d Jo Iure uelpul erll Jo sreqred o,/rq pelseJJe ecqod uerpul '600Z'9Z,fienue1 ug 'llpne u€ ut empecord crseq e '(salqe,uecer rog) srolqep pue (secueleq qsec rog) s{ueq ruor; e.ueleq Jo uop€urllJuocJo ]uetuelels € JoJ {s€ tr.uprp sJoIpn€ oql 'eurocul sB llperc lseJelur IsuoIlcIJ e peprocer nfea "eumueE se pePJoceJ oJe.^a sJeruolsnc qlle\ seclo^ul snollqcl{ :Eurrrrollo; egl op 01 pelreJ ro pessru urJI.J eql otunuflurru e 1y'ecue8118eu leuotsseS:ord go ftpn8 se&\ 'lseel fue^ oql le 'urrlJ eID leql reedde pporn 1y 'ure,!eg 1e SuropEuor.r IeIcu?uIJ eql ,fuuePl 1ou pp turlJ eql leql ue^Ic 'slueruel€ls IBICU?uIJ arll Jo slueluoc eql Eur -ururexo roJ sllec spreprr?ls Surlrpne peldecce ,(11ereue8 qpm ecuBpJocc? q llpne u? eculs euoselqno4 lstl reulos sI sIt[J ..'ecuoprle lrpne elerrdordde ,(g pelroddns erer't pue spr?p -ue1s Su4rpne elqeclldde qllrrr ecueprocce uI pelcnPuoc ere \ s1rpru eql,, 1eq1 Ermurelc luetuel€1s puoces B qyrrr dn eruec 3.r,r4 'q8noue trou s?1y\ slq] }"ql Eutzlleeg .,'lueruelels 0tl1 Jo slueluoc eq1 Surururexe,, se,la ]I }€q} palels pue ..,{1t1et1uept3 -uoc luorlc,, purqeq prq flerlrur 'uref1e53o srollpnu erll'3^\d Slad lsurBSB suorlcY '1cy setuedtuo3 pue epo3 Ieued uBIpuI eql.Io suoltrcos snou?,\ Jeprm lsrulJo rlc?eJq pue sputuJo uoll -eudorddesrtu e{ll sesue.go req}o JoJ pelr} eq osle uec n[e11 'srurou lggg eql Jo uollelor^ o1 uoqlppe uI 'pn€r; IeIcusuIJ lrunuoc o1 rue.{1eg Jo srecrf;o 3ur11eqe roJ se IIo d' se uoIlBI -n8er setlunces eq1 8ur1e1or.t rog peqsrund eq pFoc n[e11 leqt ueeru plnoa srql .,.Iopun eJol{l epelu suo4ep8er ro sapr fire Jo Jo lcy sqlJo uorslloJd eqt;o uolluel?rluoc eql strege Jo eueleruoc o1 sldruege ro seuelsrluoc uosred r(ue;t,, popre.te oq plnoc ,{lleued dreleuour pue }ueuuosrrdtut tcy 1gg5 eql repun 'Eurpe4 replsur pu? secrlcerd epe4 {uJtm opnlcul qcrgrrr 'suot1e1or.r. ,fiolqels snouB^ olul {ool m.,\(\ Iflgs '1e{ -Jeru serllJnces ur s8uleep o1 Eurureged suorlepEer snoIJ?A aql peplor,r seq nleA gr lno puIJ 01 senssl esaql olw ,ftrnbut rle perepro seq fpee4e 1gg5 roleln8er ]e{r?I J '(uol1Jtu 7'99 ,(lelerurxordde) uorllru 0gZ sU ol puelxe ,(eru qctqlt 'eutg e qlrrtr 8uo1e lueruuosudufi sree,( 91 o1 dn ece; uec n[eA e8ur {eru?U JIBr{c JeruJoJ .secrlJes relndruo3 urufteg 'srurlJ .a.rBI 'S'n o \l ,(q ure,fieg lsure8e peg; ueeq ,(peerle el?q slmslrrol uorlcs ssuls o,,rr1 .fpee4y 'nfe; ro3 dn Surruoc slmsaBl Jo Joq -umu e eq III^\ ereqf iISiN aql uI pelstT sr ue,Qe5 ecur5 'sree,( 91 puB srpuolu t uee.&!eg ereqrrrdue Jo uilel requrg B ro; pepef eq uec .(eq] 'eurJ eq] ded lou op,fuq1g'(uoqlur Z'gg.(leleurlxordde) uoSlttu gEZ sU ol dngo eur; e pesodutt pue sree,( g1 o1 dn ro3 peuosrrdtur eq uBc srolcorrp e^llncexe 'lcY IggS eLIl Jo lZ uo4cos repun 'spJoJer eql Iuo.u lueredde sr ,$rcrlduroc 4er0 JI elry{ pleq og ppoc srol -cerrp ..luepuedepul,, eIIJI.^a'(suorlcesue4 peuSndun eqlJo e8pel,rourl;o 1ce1 Sur.tord leql ol lcelqns) uotlncesord o1 elq€l eq 'o1ce; osdr plnorrr sleeqs ocueleq eq] o] selroleu -3I s eql Eurpnl cur **-";:il'ffi,"r,. JJ;";l'-; 'ldl A0ZI uortces repun elqeqsrund epetu sI qcql( .(cefldsuoc I?ururlrcJo sesueJJ:o eql seulJep Y0ZI uoqces 'qloq qll^a ro 'euIJ qtr.t\ ro 'srea( orrrl 01 puelxe .(eur 1eq1 urrel e ro3 uorlducsap reqye 3o lueuruosudrul glpe '3dI s9t uorlces reprm elqeqsrund ep?tu sr qcq1yL .(re3ro33o sesueJJ.o eID seurJep €9, uollces 'euIJ ol elqBII eg osle Ileqs pue 'sree.( ueles o1 puelxe feur 13q1 ruJel e ro.;; uoqducsep roqlle Jo lueuruosudur qll^t olq?gsrund epeur sr qcrqa Eutleeqc;o esueJlo eql seulJop gzt uorlces 'qloq qlr.& Jo 'euIJ qlra ro 'sree,{ eerql 01 puelxe ,&ru 1eq1 uuel e roJ uo4ducsep reqllo Jo lueru -uosrrdtur qlpt'JdI 90, uollces Jopun elq?qsrmd st lsn4 Jo qr€erq l?urrurrc Jo esueJo eq1 s,fus CdI 90t uollces :8uvrrol1og erll sepl^ -ord ,nre1 eql 'luorueluqe puu tceldsuoc leururuc 'sprocsr 3ur,!rs1e3 'fre8rog '3ur1eeqc '1snr13o Ilc€erg Ieururlrc se qcns sesueJlo snouea repm (361) opo3 Ieued uelpul oq1 repun peqsrund eq IrBo rueel lueure8eueur erllJo sregtueru pue n[e; '1sru1 go qc€eJq IsuIIuIJc ot sllmotue esec ruu,Qeg eql eculs urB1llBS lsurBBB uorlcY Jo sesrnoS IeBeT 'uorlrpuoc enn que,qes EurpreSer semsolcslpJo llnser lceJlp e se seulTcep eJe.{os pocuelredxe erpul w pu€ sopls pellun eql ur qloq sellunces s.,(ueduroc eq1 go secud eql ueq,{{ sJol -solw ol ss8eurep luucr;ru8rs pesnec prl? porrsd sselc eql Surmp serlunces pep?4 ,!c11gnd qfuedruoc eql;o secud oql petr?uur ,!lercr;4re ecueur-ro;red pue uo4lpuoc IBrcuuuIJ gw Suollruaplsuo) a)uDuD^oD atuod,to3 puo sctqlg :Suutoday lotcuDuu lDuoltDubluJ 8la1deq3
Background image of page 1
436 Chapter a Insnaiml Fmortal RWrtq: Effia od @ae tu C-rlcidrltfrs parties involved for the losses these investors incurred in its stock price crash, after the accounting fraud came to light in January 2009. The class action, which is a collective law- suit presented by a representative-member before a court on behalf of a large number of investors, has been filed in the Supreme Court of India by New Delhi-based Midas Touch Investor Association. This is the first instance in lndia where SEBI is finan- cially assisting investors to legally challenge wrongdoing by companies or promoters. The enforcement of lawsuits in Indian courts is complex and is explained in Appendix 3. United States On January ll, 2010, India asked the authorities in the United States to not take any action against Satyam as it would amount to punishing shareholders twice. Satyam can face punitive action in the United States because the compa- ny's shares are listed and traded on U.S. exchanges. Satyam also is contending about a dozen class action lawsuits in U.S. courts. It is also possible that the company will face charges from the SEC. As many as 12 class action lawsuits were filed against the company by January 2009, and more are expected to be filed. The lawsuits were filed by investors in the American Deposi- tary Shares ever since Raju confessed to having fudged the accounts ofthe company for at least seven years. The biggest liability that Satyam faces is from class action suits that have been filed in the United States by holders of Satyam's ADRs. While there is no way to put an exact figure on the liabilities, it could in theory be so large that it would make any recovery for the firm impossible. There is the option of an out-of-court settlement with those who have filed suits; but at the moment Satyam doesn't have the money to pay the settlement and may not have much money anytime soon. The charges alleged against the defendants in the lawsuits filed to date are: 1. The defendants issued misleading financial information about the company including information contained in its annual reports, which were signed by the defendants and contained fairness opinions issued by Satyam's auditoq PricewaterhouseCoopers. 2. A letter was sent by Ramalinga Raju to the board of direc- tors of Satyam and SEBI admitting to falsification of accounts, overstatement of profits and debt owed to the company, and understatement ofliabilities. The purchas- ers of Satyam's ADSs were injured through their purchase of stock at inflated prices because they relied on the false and misleading information provided by the defendants. 3. None of the statem€iltsma&bythedefendms rhathirye been alleged to be false in tbe lewsit had any qualifing cautionary statements identifying factms lhat could cause results to differ materially from rhat stated- Relief Sought The plaintiffs have alleged that by defrauding the purchasers of Satyam's ADSs, the defendants have violated provisions of the U.S. Securities Exchange Act of 1934 and, therefore, the plaintiffs should be awarded unspecified compensatory damages. Indian market regulator SEBI announced in Janu- ary 2010 that beleaguered Satyam can sell 5 1 percent equity stake in the company through a global competitive bidding process. Larsen & Toubro, Tech Mahindra, Spice group, the Hindujas, and some private equity firms have been in a race to acquire the tainted firm. Questions 1. In his "mea culpa" statement, Ramalinga Raju, the CEO and cofounder of Satyam, confessed to inflating the company's profits and cash reserves over an eight-year period. He explained: "What started as a marginal gap between actual operating profit and the one reflected in the books continued to grow over the years. It has attained unmanageable proportions as the size of the company's operations grew over the years. One lie led to another. The problem further worsened as the company had to carry additional resources and assets to justify higher level of operations, leading to increased costs." Evaluate Raju's statement from the perspective of ethi- cal behavior including stakeholder effects and moral reasoning using the discussions in Chapters 1*3 for guidance. 2. Explain how PwC failed to live up to its professional and ethical obligations in its audit of Satyam. Be sure to cite specific standards, whether ethical or GAAS, to support your answer. 3. Evaluate the corporate governance systems at Satyam using the model of Indian governance discussed in the chapter and any other "best practices" you believe should be implemented. Did the management and directors at Satyam live up to their responsibilities for corporate governance? Be specific and provide support for your answer. Optional Question Research the current status ofall lega1 action against Satyam, its officers, and the PwC auditors. What changes have occurred in the facts ofthe case?
Background image of page 1
Instructions for Case Study Assignments You are assigned case studies to complete in each module; these are found at the end of the chapter following the discussion questions or appendix material. Please submit all cases for each module in one attachment – either a word or pdf file. Formatting should be one inch margins and single spaced, the professional font is up to you but should be a 11-12 font size. How long should the cases be? Most cases should be about ¾ - 1 page in length; however, there are a couple of exceptions which will be noted with an asterisk* in the syllabus – for these cases you may need to write more than one page. So – if you are assigned three cases in a module, your assignment should be about 3 pages in length (unless otherwise noted). What should be included? The cases can be quite long, as are some of the assigned questions, so all you need to include is the question number you do NOT need to type up the case information or the question itself – just your response to the questions. Be sure to answer ALL questions for each case (unless otherwise noted). Please remember to put the case number at the beginning of each question set. Remember – these are not opinion pieces; you need to use ethical reasoning as explained in your text to support your answers, as well as the use of outside research or examples (when appropriate). How are these graded? The assessment rubric (below) will be used to grade all cases. This rubric is found in each module’s drop box. When your assignment is graded you will receive an email with comments from me – and you may then return to the drop box to view the graded rubric (if you did not receive 100% on the assignment this will highlight where you lost points). See page 2 for rubric
Background image of page 1
CATEGORY 10 points each 6 points each 3 points each 0 points each Focus Maintains focus on topic/subject throughout response. May exhibit minor lapses in focus on topic/subject. May lose or may exhibit major lapses in focus on topic/subject May fail to establish focus on topic/subject Quality & Relevance of Information All topics (cases) are addressed and all questions answered. All topics (cases) are addressed and most questions answered. All topics (cases) are addressed and a few questions answered. One or more topics (cases ) were not addressed. Elaboration on topic(s) Elaboration consists of specific, developed details. Elaboration consists of some specific details. Elaboration consists of general and/or undeveloped details, which may be presented in a list-like fashion. Elaboration is sparse; almost no details. Reflection Demonstrates a skillful and reflective thought process. Demonstrates reasonable reflective and thought process. Demonstrates a minimal reflective and thought process. Lacking reflection and thought. Mechanics Paper follows the conventions of English grammar, spelling, and usage. Paper follows the conventions of English grammar, spelling, and usage with almost no errors. Paper follows the conventions of English grammar, spelling, and usage with several errors. Paper does not follow the conventions of English grammar, spelling, and usage. Understanding of Professional and Ethical responsibility Paper shows a great degree of understanding professional and ethical responsibility Paper shows some understanding of professional and ethical responsibility Paper shows little understanding of professional and ethical responsibility Paper lacks evidence of understanding professional and ethical responsibility
Background image of page 2
Sign up to view the entire interaction

Top Answer

Please find the answers... View the full answer

8471348_Case 7.docx

Case 7-7
Sunbeam Corporation
The approaches of (1) Healy and Wahlen, (2) Dechow and skinner, (3) Schipper and (4)
Mckee are all directed towards the earnings management research design. Like Healy...

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online