CASE STUDIES
Case Study 1 (13.1)
Issues
1. The SEC is often called the “watchdog” of corporate America. How does it assist in preventing fraud? 2. According to the summary, why did the Waste Management executives commit the fraud? 3. You are an ambitious manager in the sales department of a company and have just received the upcoming year’s targeted earnings report. You are concerned that top management has set revenue targets for your division that are practically unreachable. However, anticipating a promotion to vice president of sales if your division maintains good performance, you are determined to reach management’s goal. What actions would you take to satisfy management’s expectations and still maintain your
To reduce expenses and inflate earnings artificially, defendants then primarily used “top-level adjustments” to conform the company’s actual results to the predetermined earnings targets, according to the complaint. The inflated earnings of prior periods then became the floor for future manipulations. The consequences, however, created what Hau referred to as a “one-off” problem. To sustain the scheme, earnings fraudulently achieved in one period had to be replaced in the next.
Defendants allegedly concealed their scheme in a variety of ways. They are charged with making false and misleading statements about the company’s accounting practices, financial condition, and future prospects in filings with the Commission, reports to shareholders, and press releases. They are also are charged with using accounting manipulations known as “netting” and “geography” to make reported results appear better than they actually were and avoid public scrutiny.
Defendants allegedly used netting to eliminate approximately $490 million in current period operating expenses and accumulated prior period accounting misstatements by offsetting them against unrelated one-time gains on the sale or exchange of assets. They are charged with using geography entries to move tens of millions of dollars between various line items on the company’s income statement to, in Koenig’s words, “make the financials look the way we want to show them.”
Defendants were