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Accounting Principles &Creative Accounting

Techniques

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ADEQUATE DISCLOSUREADEQUATE DISCLOSURE means there is enough information means there is enough information in financial statements and in financial statements and footnotes for stakeholders to make footnotes for stakeholders to make informed decisions.informed decisions.

CONSISTENCYCONSISTENCY requires requires applying the same recording applying the same recording methods and procedures from methods and procedures from period to period.period to period.


CONSERVATISMCONSERVATISM provides that provides that accounting for a business should accounting for a business should be fair and reasonable and be fair and reasonable and neither overstates nor neither overstates nor understates the results of understates the results of operation.operation.

OBJECTIVITY EVIDENCEOBJECTIVITY EVIDENCE means there is independent means there is independent documentation to support documentation to support accounting entries.accounting entries.


INDEPENDENT ENTITYINDEPENDENT ENTITY is is that accounting and reporting that accounting and reporting relate only to the activities of relate only to the activities of a specific business entity and a specific business entity and not to the owners of the not to the owners of the entity.entity.

MATCHINGMATCHING requires the requires the recognition of all costs that are recognition of all costs that are directly associated with the directly associated with the revenue reported within a period.revenue reported within a period.


MATERIALITYMATERIALITY is the magnitude is the magnitude of a change to accounting of a change to accounting information that would influence information that would influence the decisions of a reasonable the decisions of a reasonable person.person.

GOING CONCERNGOING CONCERN is the is the underlying assumption that the underlying assumption that the business will remain in business will remain in existence for many years into existence for many years into the future.the future.


Creative AccountingTechniques

Management’sViolation ofAccountingPrinciples


CAT 1- “The Big Bath"CAT 1- “The Big Bath"

AA company sets up a large restructuring charge company sets up a large restructuring charge which "cleans up" their balance sheet -- giving which "cleans up" their balance sheet -- giving them a so-called "big bath.” They might write-off them a so-called "big bath.” They might write-off an asset they don’t think is worth anything. The an asset they don’t think is worth anything. The charge is "conservatively estimated" or padded charge is "conservatively estimated" or padded with an extra cushion. When future earnings fall with an extra cushion. When future earnings fall short, the cushion or excess is reversed and short, the cushion or excess is reversed and ends up as income. This violates Consistency ends up as income. This violates Consistency and is a manipulation of Conservatism.and is a manipulation of Conservatism.


CAT 2- “In-Process Charges”CAT 2- “In-Process Charges”

SomeSome companies classify a large portion of the companies classify a large portion of the price to purchase another company as "in-price to purchase another company as "in-process" Research and Development, which can process" Research and Development, which can be written off in a "one-time" charge -- removing be written off in a "one-time" charge -- removing any future earnings drag. Sometimes, large any future earnings drag. Sometimes, large liabilities for future operating expenses are liabilities for future operating expenses are created to protect future earnings. This violates created to protect future earnings. This violates the Consistency principle.the Consistency principle.


CAT 3- “Cookie Jar Reserves"CAT 3- “Cookie Jar Reserves"

Some companies estimate excessive liabilities Some companies estimate excessive liabilities for such items as sales returns, loan losses or for such items as sales returns, loan losses or warranty costs. They may even set up excessive warranty costs. They may even set up excessive allowances for bad debts. In doing so, they stash allowances for bad debts. In doing so, they stash accruals in "cookie jars" during the good times accruals in "cookie jars" during the good times and reach into them when needed in the bad and reach into them when needed in the bad times. This violates the Consistency principle.times. This violates the Consistency principle.


Cookie Jar Accounting

Balance Sheet Income StatementAsset Claims Revenue $18,000

$200,000 $200,000 -20,000Expenses

Net Inc. - 2,000

3,000-17,000$203,000 $203,000

1,000

By taking too much expense in the past and artificially lowering either asset or liabilities, you

can now reverse a portion of that entry and improve the current net income.


CAT 4- "Materiality"CAT 4- "Materiality"

Some companies misuse the concept of Some companies misuse the concept of materiality. They “intentionally” record errors materiality. They “intentionally” record errors within a defined percentage ceiling. This is within a defined percentage ceiling. This is justified on the basis that the effect on the profit justified on the basis that the effect on the profit is too small to matter. When management is is too small to matter. When management is questioned about these clear violations of questioned about these clear violations of accounting principles, they answer sheepishly, accounting principles, they answer sheepishly, “It doesn't matter. It's immaterial.” This is a “It doesn't matter. It's immaterial.” This is a manipulation of Materiality.manipulation of Materiality.


CAT 5- Revenue (expense) recognitionCAT 5- Revenue (expense) recognition

Some companies try to boost earnings by Some companies try to boost earnings by manipulating the recognition of revenue. They manipulating the recognition of revenue. They recognize Revenue before a sale is complete, recognize Revenue before a sale is complete, before the product is delivered to a customer, or before the product is delivered to a customer, or at a time when the customer still has the option at a time when the customer still has the option to terminate, void or delay the sale. This violates to terminate, void or delay the sale. This violates the Matching and Consistency principles.the Matching and Consistency principles.


CAT 5- Recognition (continued)CAT 5- Recognition (continued)

Rather than recognizing revenue early, some Rather than recognizing revenue early, some companies boost earnings by delaying the companies boost earnings by delaying the recognition of an expense, often pushing it into a recognition of an expense, often pushing it into a future year. This is easy to do because invoices future year. This is easy to do because invoices are sometimes not received until long after the are sometimes not received until long after the year is over. This violates the Matching and year is over. This violates the Matching and Consistency principles.Consistency principles.


By shifting Revenue or Expenses from one year to the next, one year looks great, but

the next year is terrible.

Revenue/Expense Recognition

2,0002,0002,0002,0002,0002,0002,0002,0002,0002,0002,000

JANFEBMARAPRMAYJUNJULAUGSEPOCTNOVDEC

Revenue

1,5001,5001,5001,5001,5001,5001,5001,5001,5001.5001,500

Expense

2,000JANFEB

1,500

1,500

2,000

2,0004,000

01,500

0

3,000


CAT 6- “Off Balance Sheet” Accounting CAT 6- “Off Balance Sheet” Accounting

Some companies own Fixed Assets, but finance Some companies own Fixed Assets, but finance them using an operating lease. Since the asset them using an operating lease. Since the asset is leased it does not appear as an asset or a is leased it does not appear as an asset or a liability on the Balance Sheet. The economic liability on the Balance Sheet. The economic reality is that the asset is in fact owned by the reality is that the asset is in fact owned by the company and should be treated as such. This company and should be treated as such. This violates the Adequate Disclosure principle. violates the Adequate Disclosure principle.


CAT 6- “Off Balance Sheet” (continued)CAT 6- “Off Balance Sheet” (continued)

Some companies set up Special Purpose Entities and Some companies set up Special Purpose Entities and transfer assets and liabilities to a subsidiary company transfer assets and liabilities to a subsidiary company that are never shown on the parent company’s books. If that are never shown on the parent company’s books. If the parent company is still at risk then the SPE should the parent company is still at risk then the SPE should be disclosed. be disclosed. SPVSPV or or SSpecial pecial PPurpose urpose VVehicle is a ehicle is a synonym for SPE. synonym for SPE. VIE or VVIE or Variableariable I Interest nterest EEntity is now ntity is now the term used by the FASB in place of SPE. Not the term used by the FASB in place of SPE. Not disclosing VIES is a violation of the Adequate Disclosure disclosing VIES is a violation of the Adequate Disclosure principle. principle.

http://www.fei.org/rf/download/SPEIssuesAlert.pdfhttp://www.fei.org/rf/download/SPEIssuesAlert.pdf


Off Balance Sheet

Balance Sheet Income StatementAsset Claims Revenue $18,000

Expenses -16,000$200,000 $200,000

Net Inc. 2,000

30,000

By taking the asset and liability off the books the performance (net income per assets) is higher.

30,000$170,000 $170,000


CAT 7- “Manipulating Cash-flow”

Some companies manipulate the categorization of investing, and financing cash-flows on the Statement of Cash-Flows to improve operating cash-flow. They even sell Accounts Receivable, dump inventory, or hold off paying Accounts Payable to improve operating cash-flow.


Case #1: EnronCase #1: EnronEnron officials used complex structures, straw men, hidden payments, and secret loans to appearance that entities they funded and controlled were independent of Enron. They moved their interests in these entities off Enron’s balance sheet when they should have been consolidated into the company’s financial statements. As a result, Enron engaged in various transactions with these entities that were designed to improve its apparent financial results. Executives exploited the fiction that these entities were independent to misappropriate millions of dollars representing undisclosed fees and other illegal profits.

http://www.sec.gov/news/press/2002-126.htm


Enron SPE Deception


Case #2: AdelphiaCase #2: Adelphia

According to the SEC complaint, filed on July 24, 2002, Adelphia, at the direction of the individual defendants: (i) fraudulently excluded billions of dollars in liabilities from its consolidated financial statements; (ii) falsified operations statistics and inflated Adelphia's earnings to meet Wall Street's expectations; and (iii) concealed rampant self-dealing by the Rigas Family that founded and controlled Adelphia.

http://www.sec.gov/litigation/litreleases/lr17837.htm


Case #3: Bristol-MyersCase #3: Bristol-Myers Bristol-Myers inflated its results primarily by: (1) stuffing its distribution channels with excess inventory near the end of every quarter---to meet sales and earnings targets ("channel-stuffing"); and (2) improperly recognized about $1.5 billion in revenue from sales associated with the channel-stuffing. When Bristol-Myers' results fell short of the Wall Street analysts' earnings estimates, the Company used improper accounting, including "cookie jar" reserves, to further inflate its earnings.



Case #4: Symbol TechnologiesCase #4: Symbol Technologies[Symbol Technologies, Inc.] used fraudulent schemes: (a) a "Tango sheet" process where baseless accounting entries were made to conform quarterly results to projections; (b) the fabrication and misuse of restructuring and other non-recurring charges to artificially reduce operating expenses and create "cookie jar" reserves; (c) channel stuffing and other revenue recognition schemes, involving both product sales and customer services; and (d) manipulate inventory levels and accounts receivable data to conceal the adverse side effects of the revenue recognition schemes.



Case #5: DelCase #5: DelDel improperly (1) recognized revenue when it prematurely shipped products to third-party warehouses, and recorded sales on products not yet manufactured; (2) accounted for inventory by recording obsolete inventory at full value and overstating certain engineering work-in-process values; and (3) characterized certain ordinary expenses as capital expenditures. These actions resulted in the overstatement of Del's reported pre-tax income by at least $3.7 million (110%) in fiscal year 1997, $5.2 million (161%) in fiscal year 1998, and $7.9 million (466%) in fiscal year 1999.



Case #6: LucentCase #6: LucentLucent improperly granted, and/or failed to disclose, various side agreements, credits and other incentives (collectively "extra-contractual commitments") to induce Lucent's customers to purchase the company's products. These extra-contractual commitments were made in at least ten transactions in fiscal 2000, and Lucent violated GAAP by recognizing revenue on these transactions both in circumstances: (a) where it could not be recognized under GAAP; and (b) by recording the revenue earlier than was permitted under GAAP.



Case #7: DynegyCase #7: Dynegy

Dynegy negligently failed to disclose that increases in energy trading volume, revenue and notional trading value were materially attributable to “round-trip trades.” Because the round-trip trades lacked economic substance, Dynegy's statements were materially misleading to the investing public. This case was the first enforcement action resulting from an energy trading company's misleading disclosures regarding use of "round-trip" or "wash" trades.



Case #8: U.S.FoodservicesCase #8: U.S.Foodservices

U.S. Foodservices carried out a fraudulent scheme by improperly inflating promotional allowance income. A significant portion of operating income was based on payments by its suppliers, referred to as promotional allowances. Typically, USF would pay the full wholesale price for a product, then receive rebates of a portion of that price from the supplier if certain purchase volume and other conditions were met. They "booked to budget" by, recording fictitious promotional allowances sufficient to cover shortfalls to budgeted earnings.



Case #9: Netopia, Inc. Case #9: Netopia, Inc.

Netopia, Inc. an Emeryville, California corporation provided broadband and wireless products and services. In 2002 and again in 2003, Netopia improperly reported revenue on two major software deals with a thinly capitalized customer who did not have the legal obligation to pay for the software. As a result, Netopia reported inflated revenue in two fiscal quarters and posted its first profitable quarter in over three years.

Mar. 29, 2006 http://www.sec.gov/litigation/complaints/comp19630.pdf


Case #10: StarMedia Network, Inc.Case #10: StarMedia Network, Inc.

StarMedia Network, Inc. a former New York City-based Internet portal, during 2000 and the first two quarters of 2001, utilized (1) certain barter transactions, (2) certain round trip transactions; and (3) certain other sales transactions that had undisclosed contingencies or side agreements to inflate it’s revenue by over $18 million, in order to meet the company’s revenue projections and persuade corporate investors to purchase $35 million in convertible preferred shares.



Case #11: AremisSoft Case #11: AremisSoft

AremisSoft Corporation engaged in a number of fraudulent practices to make it appear as if AremisSoft was an international software company with accelerating sales growth. AremisSoft booked fictitious sales and accounts receivable and overstated earnings in two Cyprus-based sybsidiaries. In its 2000 Annual Report it reported that $97.5 million of its 123.6 million in revenues (nearly 80%) came from these two subsidiaries, when in fact the two combined had just $1.7 million in revenues for the year.,.



Case #12: NetEase,com, Inc. Case #12: NetEase,com, Inc. NetEase improperly recorded revenue from transactions, recognizing revenue for unperformed advertising and e-commerce contracts and for other agreements that lacked economic substance. NetEase prematurely recognized revenue by artificially bifurcating advertising contracts, a technique that its employees referred to as “revenue-brought-forward.” For example, a six-month contract would be documented in two separate agreements, one with a three-month term and another “bonus contract” pursuant to which NetEase supposedly would provide free services for three additional months. According to the complaint, NetEase concealed the “bonus” contracts from its independent auditors and recognized revenue over the 3-month term instead of the true 6-month term.

Feb. 27, 2006 http://www.sec.gov/litigation/complaints/comp19578.pdf


Case #13: AIG, Inc. Case #13: AIG, Inc. In Dec. 2000 and Mar. 2001, American International Group, inc. (AIG) entered into two sham reinsurance transactions that had no economic substance but were designed to improperly add a total of $500 million in phony loss reserves to its balance sheet. The transactions were initiated to quell analysts’ criticism of a prior reduction of the reserves. In addition, in 2000, AIG engaged in a transaction to conceal approximately $200 million in underwriting losses in its general insurance business by improperly converting them to capital (or investment) losses to make those losses less embarrassing to AIG. In 1991, AIG established Union Excess Reinsurance Company Ltd. an offshore reinsurer, to which it ultimately ceded approximately 50 reinsurance contracts for its own benefit. Although AIG controlled Union Excess, it failed to consolidate Union Excess’s financial results with its own, and took steps to conceal its control over Union Excess from its auditors and regulators. As a result AIG fraudulently improved its financial results.

Feb. 9, 2006 http://www.sec.gov/litigation/complaints/comp19560.pdf


Case #14: Applix, Inc.Case #14: Applix, Inc.

Applix prematurely recognized $898,000 in revenue for the year ended December 31, 2001. The revenue, generated in a December 31, 2001 transaction, enabled Applix to meet its publicly announced year-end revenue goal of $40 million. The company recognized the revenue during 2001 despite knowing it was prohibited from doing so under generally accepted accounting principles. Officers received year-end bonuses based on the company's falsely inflated financial results. The company also improperly reported $341,000 in revenue from a transaction with a German customer for the quarter ended June 30, 2002. The company did so even though it knew the customer had a six-month right to return the software product and that no revenue should have been recorded until the customer had definitively accepted the product. By reporting this revenue, Applix falsely trumpet a "74% improvement in Net Loss."

Jan. 4, 2006http://www.sec.gov/litigation/litreleases/lr19521.htm


Case #15: McAfee, Inc. Case #15: McAfee, Inc.

McAfee defrauded investors into believing that it had legitimately met or exceeded its revenue projections and Wall Street earnings estimates during the 1998 through 2000 period. McAfee engaging in “channel stuffing,” and improperly recorded sales to distributors as revenue. McAfee offered its distributors lucrative sales incentives that included deep price discounts and rebates in an effort to persuade the distributors to continue to buy and stockpile McAfee products. McAfee also secretly paid distributors millions of dollars to hold the excess inventory, rather than return it to McAfee for a refund and consequent reduction in McAfee’s revenues. McAfee also used an undisclosed, wholly-owned subsidiary, Net Tools, Inc., to repurchase inventory that McAfee had oversold to its distributors. All of these actions were inconsistent with Generally Accepted Accounting Principles and led to McAfee’s October 2003 restatement of its financial results for 1997 through 2003.

Jan. 4, 2006http://www.sec.gov/litigation/litreleases/lr19520.htm


Case #16: Friedman’s, inc.Case #16: Friedman’s, inc.

From at least fiscal year-ended 2001 through September 2003, Friedman’s systematically inflated earnings to meet Wall Street’s expectations, while concealing the fact that a growing percentage of its credit accounts receivable were likely not collectible. Friedman’s made material misrepresentations concerning its credit program and its write-off policy, and systematically under-reserved for bad debts using various non-GAAP accounting practices. Friedman’s also used certain “one-off” actions to manipulate its earnings and improve the appearance of its balance sheet, including, among others: (i) prematurely recognizing as a reduction in its cost of sales merchandise discounts that it received from its suppliers; (ii) failing to account properly for the sale of receivables that Friedman’s had written off; and (iii) using certain related party transactions to capitalize expenses that Friedman’s should have recognized immediately.

Nov. 30, 2005http://www.sec.gov/litigation/litreleases/lr19477.htm


Case #17: Arthur Anderson, LLP.Case #17: Arthur Anderson, LLP.

During its fiscal year 2000, American Tissue fraudulently inflated reported assets and earnings by improperly capitalizing $15.6 million of previously expensed supplies and overvaluing its finished goods inventory by at least $12.5 million. Arthur Anderson auditors reviewed and approved the audit of American Tissue's fiscal year 2000 financial statements and failed to request sufficient accounting documentation to verify the financial information provided by the company or to conduct required testing of American Tissue's finished goods inventory figures. Consequently, they knew or were reckless in not knowing that American Tissue's finished goods inventory was overstated. They issued an unqualified audit report on the company's fiscal 2000 financial statements, failing to exercise the due professional care and skepticism required by generally accepted auditing standards. They also knew, or were reckless in not knowing, that supplies that American Tissue used in its manufacturing processes had been improperly classified as inventory instead of as expenses.

Oct. 6, 2005 http://www.sec.gov/litigation/complaints/comp19630.pdf


Case #18: Metropolitan Mortgage Case #18: Metropolitan Mortgage and Securities company, Inc.and Securities company, Inc.

Metropolitan's management falsified 2002 financial results by reporting profits from circular real estate sales where Metropolitan purported to sell property to buyers who, in fact, received all of the money to pay for the purchase from Metropolitan or its affiliates. The fraud made Metropolitan appear profitable - facilitating further sales of its bonds and preferred stock to investors. The bogus deals - known internally as "rabbits" (as in, pulling a rabbit out of a hat) - all materialized in the final days of Metropolitan's fiscal year 2002, allowing the company to report a profit rather than the loss it had anticipated. In the largest of these deals, Metropolitan and a customer agreed to make it appear that a property was being purchased by an unrelated third party, in reality a shell company set up by an eighteen year old high school student, the son of the customer’s creditor, in exchange for a motorcycle.

Sep. 26, 2005http://www.sec.gov/litigation/litreleases/lr19394.htm


Case #19: WRC Media, Inc.Case #19: WRC Media, Inc.

WRC fraudulently recognized $1.2 million in revenue from a purported fourth quarter 2002 sale of educational software to the Monroe City, Louisiana School District. At the time, WRC was millions of dollars behind its fourth quarter 2002 revenue expectations and was in danger of defaulting on its public debt covenants. To facilitate the fraud, the CEO procured an unauthorized sales contract from the superintendent of the Monroe City School District that was contingent upon approval by the entire school board. The contract failed to reflect the school board contingency. The CEO concealed the contingency from WRC's internal accountants and independent auditors so they would not reject fourth quarter 2002 revenue recognition. After learning that the school district would not proceed with the transaction, the CEO permitted WRC to record a bad debt reserve for the purported Monroe receivable in the first quarter of 2003, when it should have restated fourth quarter 2002 results.

Sep. 13, 2005http://www.sec.gov/litigation/litreleases/lr19373.htm


Case #20: KmartCase #20: Kmart

Former Kmart executives caused Kmart to issue materially false financial statements by improperly accounting for millions of dollars worth of vendor "allowances." Kmart obtained allowances from its vendors for various promotional and marketing activities. According to the Commission, defendants caused Kmart to recognize allowances prematurely on the basis of false information provided to the company's accounting department. Vendor representatives participated in the violations by co-signing false and misleading accounting documents. As a result, Kmart's net income for the fourth quarter and fiscal year ended January 31, 2001, was overstated by approximately $4.8 million as originally reported. The company restated its financial statements after filing for bankruptcy to correct these and other accounting errors.

Aug. 30, 2005http://www.sec.gov/litigation/litreleases/lr19353.htm


Case #21: Gerber Scientific, Inc.Case #21: Gerber Scientific, Inc.

In June 2000, while Gerber was finalizing its annual report on Form 10-K for fiscal year 2000, executives learned that, due to a clerical error, the company had failed to record approximately $1.5 million of a required $6 million inventory write-down. Instead of correcting the mistake, the company went ahead and filed its Form 10-K, which contained materially inaccurate financial statements and related disclosures. Then, without disclosure, the executives sought to eliminate the error by improperly amortizing the $1.5 million charge over the next four fiscal quarters. As a result, Gerber's reported earnings for the fourth quarter of fiscal 2000 were overstated by 100% and reported earnings for the year were overstated by 3.5%. After discovering the $1.5 million error the CEO signed a subsequent events letter to the company's auditor that omitted any reference to the error.

Jul. 26, 2005http://www.sec.gov/litigation/litreleases/lr19310.htm


Case #22: Roadhouse Grill, Inc.Case #22: Roadhouse Grill, Inc.

During Roadhouse Grill's 1999 and 2000 fiscal years, the CFO caused Roadhouse Grill to inflate its earnings by understating various accrual accounts. Accrual accounts contain provisions for anticipated expenses that companies expect to incur within a fiscal year. At the end of certain periods during the 1999 and 2000 fiscal years, he made improper reductions in these accrual accounts in order to improve the earnings. The CFO also caused Roadhouse Grill to overstate its fiscal 2000 net income by recording a non-existent rebate receivable from one of the company's suppliers. This rebate never existed and Roadhouse Grill never received it. Based on these various improper entries, The CFO caused Roadhouse Grill to overstate its fiscal 1999 net income by 5% and its fiscal 2000 net income by 35%. In both of those fiscal years, Roadhouse Grill met the expectations set by the Wall Street analyst.



Case #23: i2 Technologies, Inc.Case #23: i2 Technologies, Inc.

Certain i2 software products (vaporware) lacked functionality essential to the needs of i2's customers. Executives knew that i2 was recording material software license revenues on transactions involving the non-functional software, in violation of generally accepted accounting principals ("GAAP"). Also, i2 sold Enron a $10 million software license during the first quarter of 2000 while simultaneously agreeing to buy an identical amount of broadband services from an Enron subsidiary. Executives knew they could not properly recognize this entire license revenue in the first quarter of 2000, but caused the company to do so, without disclosure to the public about the true nature of the transaction. i2's concealed these maters from the external auditors and the audit committee of i2's board of directors, for fear that disclosing them would cause i2's stock price to decline, thereby damaging defendants' ability to exercise lucrative stock options.



Case #24: Worldcom, Inc.Case #24: Worldcom, Inc.

In its sixth civil enforcement action related to the WorldCom fraud the SEC alleges that Ebbers, along with other WorldCom senior officers, caused numerous fraudulent adjustments and entries in WorldCom's books and records, often in the hundreds of millions of dollars, in furtherance of a scheme to make the Company's publicly reported financial results appear to meet Wall Street's expectations. The complaint further alleges that these market expectations were based on financial performance targets set by Ebbers that Ebbers knew could not be attained by legitimate means. In addition, the Commission alleged that Ebbers made numerous false and misleading public statements about WorldCom's financial condition and performance, and signed multiple SEC filings that contained false and misleading material information.



Case #25: Suprema Specialties, Inc.Case #25: Suprema Specialties, Inc.

Suprema engaged in fraudulent "round-tripping" transactions that resulted in total misstatements of Suprema's reported revenue of between approximately 35% and over 60% in each of the 1999, 2000, 2001, and 2002. The scheme resulted in total misstatements of Suprema's reported accounts receivable of 60% or more in each of the fiscal years. The transactions were effectuated through "circles" of entities, each of which included Suprema, a third-party "customer," and a related "vendor." The customer and vendor in each circle tended to have a common owner. False paperwork was created documenting the fictitious transactions, and checks were circulated in purported payment for the transactions. Participants received a kick-back or "commission" on each transaction, the funds for which were generally drawn from Suprema's line of credit, which increased as Suprema's accounts receivable grew. No goods were actually sold, purchased, or exchanged in these transactions.

Aug. 30, 2005http://www.sec.gov/litigation/litreleases/lr19353.htm


Case #26: aaiPharma, Inc.Case #26: aaiPharma, Inc.

Prior to aaiPharma's 2003 fiscal third quarter end, the chief operating officer arranged three fraudulent sales transactions with customers to create the illusion that aaiPharma had met or exceeded its sales goals for the quarter. Although the sales the COO arranged were either consignment sales or other types of non-final sales, aaiPharma falsely recorded the sales as final. These fraudulent sales, totaling approximately $20.6 million, were reflected in aaiPharma's financial statements included in filings made with the Commission and publicly disseminated in November 2003 and February 2004.

Jun. 30, 2005http://www.sec.gov/litigation/litreleases/lr19290.htm


Case #27: Take-Two, Inc. Case #27: Take-Two, Inc. Take-Two systematically recognized sales revenue from approximately 180 "parking" transactions in which the company, at or near the end of fiscal quarters or year end, shipped hundreds of thousands of video games to distributors who had no obligation to pay for the product, fraudulently recorded the shipments as if they were sales, and then accepted return of the games in subsequent reporting periods. In many cases, Take-Two created fraudulent invoices to disguise the returns as "purchases of assorted product." Take-Two also improperly recognized sales revenue for games that were still being manufactured and could not in fact be shipped, and in fiscal year 2000, improperly accounted for the acquisition of two video game publishers. In addition, from fiscal year 2000 through the third quarter of fiscal year 2003, Take-Two failed to establish proper reserves for reductions in the prices of its games at the retail level (referred to in the industry as "price protection" or "price concessions").



Case #28: Fischer Imaging, Corp.Case #28: Fischer Imaging, Corp.

Executives were responsible for Fischer’s improper recognition of revenue on sales of equipment that Fischer had not delivered to customers, but instead had shipped to third party warehouses where Fischer controlled the equipment, paid to store it, and insured it. Additionally, the executives were involved in formulating or reviewing contingent sales terms, which were documented in side letters, with knowledge that Fischer improperly recognized revenue before the contingencies were resolved. The executives were responsible for Fischer’s material misstatements of its inventory account and its gross profits based on various other improper accounting practices. Each executive provided false or misleading documents or information to Fischer’s accountants or auditors in an attempt to conceal Fischer’s improper accounting practices.



Case #29: Huntington Bancshares, inc.Case #29: Huntington Bancshares, inc.

In 2001 and 2002 Huntington reported inflated earnings in its financial statements, enabling Huntington to meet or exceed Wall Street analyst earnings per share ("EPS") expectations that determined bonuses for senior management. The misstatements included up front recognition of loan and lease origination fees that were required by accounting rules to be deferred and amortized over the term of the loan or lease; improper capitalization of commission expenses and deferral of pension costs that were required to be recognized in the period incurred; misstated reserves; improper deferral of income; and misclassification of non-operating income as operating income. Without the misstatements, Huntington's EPS would have fallen short of analysts' earnings expectations in 2001 and 2002, 2002 bonuses for executives would have been eliminated or reduced. The executives attended due diligence meetings at which the misstatements were discussed, and it was decided that none of the items were material.



Case #30: Chesapeake, Corp.Case #30: Chesapeake, Corp.

Chesapeake failed to offset $1 million in credit memos issued by U.S. Display to its customers in the first quarter of 2000 against first quarter 2000 revenues, and then improperly amortizing the $1 million in credit memos over the second and third quarters of 2000; It also, failed to correct a $4.8 million overstatement of inventory in the first quarter 2000, opting instead to improperly amortize the $4.8 million incrementally over the second and third quarters of 2000; It improperly recognized a purported $1.5 million contingent receivable in the first quarter of 2000; and it failed to write off approximately $1.1 million of this same receivable in the second quarter of 2000 when it became apparent that U.S. Display was unlikely to collect that amount, opting instead to improperly amortize the uncollectible portion in $214,000 increments each month through the close of the fiscal year.

May. 3, 2005http://www.sec.gov/litigation/litreleases/lr19215.htm


Board QuestionsBoard Questions

1.Does Net Income translate into Cash Flow?2.What’s causing the growth in Revenue?3. Is there substantial non-operating activity?4.Are entries based on estimates disclosed?5.Are the external auditors free to do their job?6.Are financial ratios consistent over time?7.Are Internal Controls a high priority?8.Do you have any reason to doubt management?9.Are Related Party Transactions fully disclosed?10.Are changes to A/R, Inventory, and A/P proper?

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