Peregrine System's Accounting Fraud
Wall Street's demand for high growth motivated Peregrine Systems' executives, to fraudulently inflate revenues and stock prices. According to the SEC, "Peregrine filed materially incorrect financial statements with the commission for 11 consecutive quarters." Steven Spitzer, a member of Peregrine's sales team admitted to meeting regularly with senior management near the end of the quarter to determine how much revenue was needed to exceed Wall Street's expectations. The primary fraud committed by Peregrine was done by inflating revenue by booking revenue when sales never occurred. By recognizing revenue from sales that never occurred, the accounts receivable balance and net income were fraudulently overstated; the accounts receivable would never be collected, because the merchandise was never sold. To cover up their high, outstanding, accounts receivable balance as a result of booking sales that did not occur, Peregrine fraudulently engaged in financial agreements with banks.
Evidently, Peregrine Systems increased its revenues by pressuring distributors and resellers to build up their inventories (known as "parking" their inventory). Through secret side or oral agreements Peregrine distributors and resellers were not obligated to pay Peregrine for their software inventories. This conduct obviously became a problem. If they could not sell Peregrine's software, they would receive their money back. According to GAAP, revenue recognition on the sale of software requires evidence that an arrangement must exist, delivery must have occurred, vendor's fees must be fixed or determinable, and collectibility must be probable before recognizing revenue. Peregrine falsely recorded this tra...
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... tempted to falsely inflate earnings is to take away their personal gains, if the company's stocks go up. I believe that when upper level management has too much incentive based on personal financial gain, which is directly based on the performance of the company; it compromises their judgments. I think that upper level management should not be allowed to receive stock options or to even own stock in the company as the financial statements would provide a neutral, bias-free report. Management would have no reason to "cook the books." I also feel that any management who still decides to falsify documents needs to be held more accountable for their actions and receive tougher punishments. I think that these strict guidelines would help the people in the United States and people all over the world feel more confident in investing their money into the stock market.
...not have occurred (again the out-dated accounting system shortfall). Further, analytical procedures could be used to compare budgets / forecasts to actual results and variations could be investigated (i.e. expenses higher than anticipated or profit less than anticipated). The following is article by Tracy Coenen is more critical of KOSS' management than of the auditor, Grant Thorton. She contends that while auditor should have caught this fraud, management is more to blame because of not addressing internal control issues. http://www.sequenceinc.com/fraudfiles/2010/01/koss-corp-fraud-defending-grant-thornton-no/
Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the CEO Gregory Podlucky
The Le-Nature fraud was similar to the Madoff Ponzie scheme, where Gregory Podlucky took money from new participants and investors to pay off longer-standing investors. A combination of various forms of frauds committed from January 2000 to October 2006, including but not limited to, accounting and money laundering, were the primary causes of the company’s ultimate demise. However, unlike Madoff, the Le-Nature collapse was an internal failure that was not related to external economic conditions. The lack of transparency in financial and accounting records to stakeholders was the reason for the investors to force Le-Nature into an involuntarily bankruptcy in 2006. This step led to the discovery of the fraud committed and the company’...
Dennis Kozlowski was an accounting major from modest beginnings who worked his way to the top of Tyco, but along the way he made an important career stop at Nashua Corporation, as the Director of Audit and Analysis. In keeping with his tactic to handpick his management team, along came his new CFO Mark Swartz. He was an impeccable choice for Kozlowski, fitting the requirements of being “smart, poor, and wants-to-be-rich” (Symonds) and since he began his career as a CPA auditor for Deloitte & Touche he had the perfect skill set to assist in Kozlowski’s corruption (Hamilton and Micklethwait 82). Before they could begin to pillage the company they needed to establish a way to avoid detection by the SEC, the board of directors and the auditors. In much the same way a bank robber would disable security cameras, they made their thieveries invisible or paid off those that would help them. First, Kozlowski organized the company so that the internal audit team reported directly to him ins...
The Sarbanes-Oxley Act is a legislation aimed at increasing the accuracy of financial statements that were issued by companies that are publicly held (Livingstone, 2011). The passing of this act was a response to some of the financial malpractices that took place at companies such as WorldCom and Enron. According to Livingstone, making ethical decisions is critical because ethical lapses can lead to severe unforeseen consequences (Livingstone, 2011). This paper will discuss the effects of the Act on the audit committees of public company boards of directors as well as outside independent audit firms. The main advantages and disadvantages of the Act and recommendations of the changes that should be made to the act will also be included.
Mr. Cherelstein had been informed of the company’s dual accounting records. Though he did not initiate or participate in the fraud, he engaged in the first step of Rest’s model because he was now aware of the unethical situation and its immorality as he felt compelled to do something about the situation. Furthermore, he understood that should the fraud be brought to light or suppliers refuse to stock the stores, it would result in the end of the
Suspicion into Peregrine Systems, Inc. arose when the company reported 17 consecutive quarters of revenue growth that met or exceeded Wall Street analysts’ expectations. In 1999 Stephen Gardner, CEO made $4.5 million, the highest paid CEO in all of San Diego. In March of 2000 the stock price topped $79.50. Less than one month later the stock price was just $26.06 a share. Two years later, shares are trading at a low of $7 a share, being hit hard by the tech crash. On May 7th, 2002, Peregrine revealed that its books have been manipulated. That same day, Stephen Gardner the CEO and Matthew Glass, the company’s CFO both resign. That evening the stock closes at a minimal 89 cents.
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
Net Profit Margin, = Net Loss Income, -206,458 - Net Sales, =1,838.663 = -00.9. I truly believe that marking should have caught this in the middle of the years and done some type of special promotion. To help build up revenue for the Corporation before the end of 2015.With a Corporation like this having financial difficulties, their come competitors fill they have the upper hand.
Every company or organization that operates for profit is constantly seeking new opportunities to increase its value and profitability. If the company has stocks in an open market, the pressure increases to have a profitable business that offers investors opportunities to increase their investment through dividends. To achieve this, many companies engage in unethical accounting methods to manipulate the finances of the company. One of the biggest cases in history where the hunger to have a profitable business drove the executives of a well-known chain of orthopedic hospitals to engage in numerous unethical and illegal accounting behaviors is the case of HealthSouth.
Phar-Mor was known as one of the major discount chain retailers in the late 1980’s - early 1990’s. It was founded by Mickey Monus, a gambler in nature, who with the help of senior management was “cooking the books” for years to cover up his loses. The reason why senior management agreed to do this fraud is the belief in unique ability of their leader to fix everything later on. This case is known as one of the biggest accounting frauds in the corporate history of the U.S. This paper will analyze who was affected by this fraud, the motives behind it and what systems of control failed to prevent it.
Though the numbers looked good, the process behind them was questionable. Unbeknownst to many, Jeff Skilling, a top Enron executive, was able to persuade the SEC and their accounting firm, Arthur Anderson & Company, to approve the use of mark-to-market accounting (M2M). This technique allowed the company to report profits from long term contracts up front, before all earnings had actual...
Stories of people making fortunes from the securities market have enticed many others into risky investments. Congress created the Securities & Exchange Commission (SEC) to protect investors. Many corporation managers became greedy and made self-serving decisions that created the principle-agent problems. The solutions for these problems lead to more unethical behavior from management. The creative use of financial statements even tricked analysts and brokers. Public trust began to erode with unethical corporation behavior. Analyst's suspicions of some corporations cooking the books were confirmed with an announcement from WorldCom. The public's distrust started to mount while accusing brokers of hyping stocks. People began to invest without brokers' advice. With numerous risks rising for individual investors, Congress passed the Sarbanes-Oxley Act and the SEC responded by passing the Reg AC act.
By looking at the Enron scandal, there are three major financial-related reformations that have been addressed by the SOX. First, “SOX forbids auditors of public firms from providing to their audit clients most non-audit consulting services” (Prentice, p.9, 2010). This reformation prevents Anderson’s wrongdoing from happening. Second, SOX restricts “off-balance sheet reporting, use of special purpose entities, and pro forma reporting” (Prentice, p.10, 2010). The new rule fixed the fundamental problem raised in the Enron’s scandal, which is the use of “Mark-to-market” accounting policy. Third, “SOX reforms stock analyst practices, primarily by minimizing, in several ways, the motivations they had to falsely praise the stocks of companies whose investment banking business their employers sought” (Prentice, p.10, 2010). This reform prevents stock analysts from giving good ratings
“Enron incorporated “mark-to-market accounting” for the energy trading business in the mid-1990s and used it on a huge scale for its trading transactions. These rules, when companies have outstanding energy-related or other derivative contracts (either assets or liabilities) on their balance sheets at the end of a particular financial quarter must be adjusted to fair market value, declaring unrealized gains or losses to the Balance Sheet of the period” (C. William Thomas, 2002). Andrew Fastow, the CFO, The CEO Jeff skilling and its former ...