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This paper objectify and evaluate the events that occurred prior (causes) and subsequent (outcome) to the fraud, and the accounting schemes employed to get the fraud done. It presents examples of companies who have used inappropriate accounting practices. Enron, WorldCom, Tyco, HealthSouth and Adelphia were selected for analysis because of the availability of information regarding specific events occured before, during and after the fraud period as well as the ethical issues involved . There is abundant literature presented on the Enron and WorldCom scandal.

Tyco, Adelphia, and HealthSouth were selected to expand and support the information available in the WorldCom and Enron cases. Throughout the research process, the key findings collected suggest that: Plans and designs of a good ethical work culture already exists, their implementation is what companies failed to do and continued to monitor in the entire business operations. The scandals at all five firms involved fraudulent practices as well as a number of unethical activities carried out by top managers and executives (CEO, GO, Chairman).

Need and greed were the most motivating factor in committing fraud. Weak internal controls enabled these frauds to take place. It took 3-15 years before these frauds were being discovered. It is clear that by implementing a code of ethics and improving awareness of how other organizations have suffered from fraud and the lessons they have learned, an organization can become more proactive and put in place preventative and detective measures that can mitigate the extent and impact of fraud. Introduction Organizations Of all types and sizes are subject to fraud.

There are television and newspaper stories almost every day about all kinds of corporate chemes, scams and deceptions.. According to the Association of Certified Fraud Examiners (ACFE), fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party’. How a corporate fraud is accomplished and who does it underlies a person or a group of people who has taken what is not theirs.

And in order to help prevent future accounting fraud scandals, it is important to understand how past frauds were perpetrated and how they went undetected for so long. Fraud Triangle According to Romney & Steinbart (2008), three conditions exist in the occurrence of fraud: pressure, opportunity, and rationalization. Albrecht & Albrecht (2004) state that auditors focUS more on the elimination of opportunity by ensuring strong internal controls, however, they often fail to focus on the motivation or rationalization of the perpetrators.

Pressure is a personCs motivation to commit fraud. Financial, Emotional, and Lifestyle pressures are common types of pressure that exist for perpetrators . Opportunity is the condition or situation that allows a person or an rganization to: “commit the fraud, conceal the fraud, and convert the theft or misrepresentation to personal gain”. The final element of the fraud triangle is rationalization: a form of justification in the mind of the perpetrators of their illegal behavior (Romney & Steinbart, 2008).

Once these three fraud factors have been established, fraud will most likely be committed. As previously stated, it is most important to prevent opportunity from arising. For purposes of understanding the methods by which these past corporate accounting fraud cases were committed, schemes are broken down into two broad ategories. First, asset misappropriations are those schemes in which the perpetrator steals or misuses an organization’s resources. Examples include skimming cash receipts, submitting false invoices for payment, and forging company checks.

Second, Financial statement fraud schemes are those involving the intentional misstatement or omission of material information in the organization’s fnancial reports. Common methods of fraudulent fnancial statement manipulation include recording fictitious revenues, concealing liabilities or expenses, and artificially inflating reported assets. Association Of Certified Fraud Examiners, 201 0 Report to the Nations) HealthSouth HealthSouth Corporation, based in Birmingham, Alabama, is the united States’s largest owner and operator of inpatient rehabilitative hospitals.

It was founded in 1 984 by respiratory therapist, Chairman and CEO Richard Scrushy together with Aaron Beam and other founding member. It operated in 28 states across the country’ and in Puerto Rico. HealthSouth serves patients through its network of inpatient rehabilitation hospitals (1 01), outpatient rehabilitation satellite clinics (29) and home health agencies (25). HealthSouth ‘s hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, orthopedic, cardiac and pulmonary conditions, brain and spinal cord injury, and amputations.

By the numbers, HealthSouth became the nation’s largest chain of rehabilitation hospitals and clinics making Scrushy one of the industry’s most-paid chief executives. HealthSouth was involved in a corporate accounting scandal in which its founder, Chairman, and Chief Executive Officer, Richard M. Scrushy, was accused of irecting company employees to falsely report grossly exaggerated company earnings in order to meet stockholder expectations. (wikipedia. org) It was the first company charged under the provisions of the Sarbanes-Oxley Act.

Unhealthy Organizational Management Scrushy created a culture of fear and loathing at HealthSouth. On Monday mornings, Scrushy conducted staff meetings, which his employees came to call “Monday morning beatings” because the main purpose of the meeting was for Scrushy to call attention to some failure and then publicly berate the person(s) he deemed to be responsible for the failure (Abelson & Freudenhim, 2003). By all indications, Scrushy cultivated ruling through intimidation.

Beam, HealthSouth’s co-founder, initially find Scrushy to be a charismatic and extremely intelligent man but discovered that Scrushy’s charismatic exterior was just a show because behind closed doors, Scrushy was an egomaniac with a dark side and ran HealthSouth like a dictator. In the second quarter of 1996, Beam says HealthSouth’s growth had slowed and the company could not meet Wall Street’s expectations. Rather than report the truth, Beam says Scrushy ordered him to cook the books by generating false revenue.

So the CFO did just that, and reported fake numbers to Wall Street As CFO, Beam says he was crippled by fear so much that he became a “yes man” (www. cnbc. com). Unveiling the Truth On January 23, 2003, the SEC issued its “Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002. ” Section 704 directed the SEC “to study enforcement actions over the five years preceding its enactment in order to identify areas of issuer financial reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management. Those investigations fell into three categories: Revenue recognition, including raudulent reporting of fictitious sales, inaccurate timing of revenue recognition, and improper valuation of revenue. Expense recognition, consisting of including improper capitalization or deferral of expenses, incorrect use of reserves, and other understatements of expenses. Business combinations, relating to myriad improper accounting activities used to effect and report combined entities. The CPA Journal, 2004,p. 44) This massive scheme of fraudulent financial manipulation and falsification included “cooking” HealthSouth’s books to meet Wall Street expectations reated by HealthSouth. According to the In re HealthSouth Corporation Securities Litigation, At the end of every month and every quarter, HealthSouth’s top financial officers would provide Scrushy with HealthSouth’s actual (but not yet publicly reported) results of operations.

When Scrushy and his top lieutenants saw that actual results were significantly below forecasted results and those necessary for the scheme to continue, Scrushy and HealthSouth’s then-CFO would direct accounting subordinates to “fix” the shortfall through the entry of false accounting entries to create made-up evenue and income on HealthSouth’s records. By June 30, 2002, in reports filed with the Securities and Exchange Commission (“SEC”), HealthSouth’s fixed assets, known as property, plant and equipment, were overstated by more than Sl billion; total assets were inflated by $1. billion; the consolidated balance sheet included more than $300 million in cash that did not exist; and “Income Before Income Taxes and Minority Interests” had been artificially inflated by at least $2. 7 billion. Ernst and Young, on the other hand knowingly turned a blind eye to the very fraudulent and illegal practices y which HealthSouth falsified its financial statements and cheated Medicare and private insurers. Indeed, as alleged in detail below, as early as 1 994, E&Y learned of HealthSouth’s practice of reporting fictitious revenues and earnings, but chose to “turn its head” to retain the Company as a lucrative client.

Thus, E had actual acknowledge of the ongoing and pervasive fraud at HealthSouth since at least 1994. E profited directly from turning a blind eye to the financial wrongdoing at HealthSouth, and sought to conceal some of this profit by mislabeling payments as audit related services. (In re HealthSouth Corporation Securities Litigation) On November 4, 2003, Richard Scrushy was indicted on 85 criminal counts, including conspiracy to commit fraud. He was arrested on November 5, 2003.

A year later, however, he was convicted of six counts of felony bribery, conspiracy, and mail fraud linked to his days as the chief executive of HealthSouth Corporation. (Wang Lin and Ju,2009) According to David Lawrence (2003), the company’s destruction, resulting from profit mongering, has led HealthSouth to lay off many thousands of workers whose lives and families have been thrown into disarray, and perhaps into hopelessness. Millions of families have had their health care disrupted or threatened as a result of the corruption at HealthSouth and the companys subsequent “downsizing” considering that, as of Dec. 1, 2001, HealthSouth’s employee pension plan held approximately 3. 3 million shares of HealthSouth stock which drastically traded at a fraction of its previous value. The new HealthSouth Since the accounting scandal was first discovered in March 2003, HealthSouth took many steps to help itself recover and become a stronger company. After the raid incident at the company’s headquarters, the board of directors held n emergency meeting to discuss what actions needed to be taken. One of the first actions was the termination of Richard Scrushy as Chairman and CEO, and Bill Owens as GO.

Robert P. May was elected as interim CEO and Joel C. Gordon as Chairman. At the advice of its lender JPMorgan Chase, the company hired restructuring firm Alvarez and Marsal to bring its finances in order and immediately appointed Bryan Marsal as Chief Restructuring Officer. By the end of 2003, the company had most of its finances reorganized and was able to avoid Chapter 11 bankruptcy. (wikipedia. org) Tyco International Tyco International was founded in 1960 by Arthur J. Rosenburg.

The company was originally an investing and holding company specializing in government and military research. In 1964, the focus of Tyco’s products charged to the commercial sector and the company became publicly traded (tycofis. co. uk). However, the main focus of the company remained on high tech research and development. Tyco Incorporated was founded in 1960 by Arthur J. Rosenberg situated in Waltham, Massachusetts. In 1982, to strengthen the company, Tyco were divided into three business segments which are fire protection, electronics and packaging.

Tyco reorganized the company again in the 1 990s which included electrical and electronic components, health-care and specialty products, fire and security set-vices, and flow control. By 2000 Tyco Inc. , had acquired more than three major companies such as ADT, the CIT Group, and Raychem. In 1992, Leo Dennis Kozlowski became the CEO after climbed up from executive, company’s president, and CFO position. (tycofraudinfocenter. com) How the Fraud Happened While the case of HealthSouth involved fraudulent financial reporting Tyco International involves the misappropriation of assets at the hands of two op executives.

The leaders in Tyco International Were caught for involving in various unethical deeds. While they were holding the position of trust as board of directors, they involved themselves in issues that conflict with their positions. All the crimes they did showed that they gave priority to self interest rather than the interest of the shareholders of the company. In this case, Kozlowski exploited the company by using company fund to fulfil his own desire of having luxurious lifestyle (lawteacher . net).

Tyco accused Kozlowski of fraud and self-dealing that included, among other actions: busing Tyco’s relocation and Key Employee Loan programs and obtaining under false pretenses loans that he used to fund personal expenditures; misappropriating for himself over $100 million, including unauthorized bonuses totaling $58 million and unauthorized loans of over $43 million; taking personal credit for more than $43 million in charitable donations that actually were made by Tyco; and engaging in a number of self-dealing transactions involving property he sold the Company at inflated prices and real estate that was used by him and his family without compensating Tyco. Dennis Kozlowski, Mark Swartz and Mark A. investors-tyco. com,2002) Belnick were those Tyco’s executives who committed fraud by falsifying business record to conceal a great amount of loan without approval.

In addition, Scalzo (Tyco’s former auditor) who audited Tyco’s financials from the years 1997 until 2001 , found that he failed to conduct sufficient steps in audit procedures which related to certain executive benefits, executive compensation, and related party transactions. Aftereffects The damage done to the company as a whole was arguably less devastating than in the case of Enron and WorldCom but 1 ,500 jobs were lost with an additional 4,500 laid off. Tyco did not have to declare bankruptcy and many of its business units were unaffected by the scandal. Although share prices did drop significantly at some points, there was never any threat of bankruptcy for Tyco. After Kozlowski’s resignation, Edward Breen replaced him as CEO.

Tyco stated, ‘To hold him accountable for his misconduct, we seek not only full payment for the funds he misappropriated but also punitive damages for the serious harm he did to Tyco and its shareholders. ” The company filed suit against Dennis Kozlowski and Mark Swartz for more than $1 00 million. The SEC allows companies to sue insiders who profited by uying and selling company stock within a six-month period. According to Boostrom (201 1), Breen launched a review of the company’s accounting and corporate governance practices to determine whether any other fraud had occurred. Although the probe uncovered no additional fraud, the firm announced that it would restate its 2002 financial results by $382. 2 million.

To restore investors’ faith, Tyco’s new management team reorganized the company and recovered some of the funds allegedly taken by Kozlowski. At its annual meeting, shareholders elected a new board of directors, and voted o require the board chair to be an independent person rather than a Tyco CEO. Tyco has worked hard to overcome its negative image. The Tyco International fraud scandal was mostly fueled by opportunity and intense greed at the hands of Dennis Kozlowski and Mark Swartz, and also Mark Belnick. These were the top executives at Tyco so although others knew what was going on, they did not come forward and stand up against the executives committing fraud.

The rationalization used by the perpetrators could have been that they worked hard for the company and therefore deserved the extra compensation. Overall though, the main motivation in the scandal was greed. However,Tyco’s survival proves that some companies can survive major ethical scandals if they take the correct courses of action. In response to the scandal, Tyco took actions that went beyond the bare minimum of what was needed. Although an investigation did not uncover additional fraud, the company still restated its financial results by hundreds of millions of dollars. It took measures to restore shareholder confidence by reorganizing the company and implementing safeguards to ensure greater Objectivity on the part Of the board Of directors.

As a result of its quick actions, the company has recovered significantly and has been praised by the public. (Boostrom, 201 1) Adelphia Communications The 2002 fraud case of Adelphia Communications Corporation involves both fraudulent financial reporting and misappropriation of assets. This case involves almost excl usively the founding family of the company perpetrating the fraud. Adelphia was founded by John Rigas in 1952 in Coudersport, Pennsylvania (money. cnn. com). At the time it was charged by the SEC, it owned, operated, and managed cable television systems and other related elecommunications businesses. Adelphia was organized as a holding company and, as such, all of its assets were owned by its subsidiaries.

Even after going public, John and his three Ivy League-educated sons, Michael, Timothy, and James, held the top executive positions at Adelphia. According to the 2001 proxy Statement for Adelphia, John served as Chairman, President and CEO; Michael served as Executive Vice President of Operation and Secretary; Timothy served as Executive Vice President, CFO, Chief Accounting Officer, and Treasurer; and James served as Executive Vice President of Strategic Planning. In total, the Rigas family controlled more than 75 percent of Adelphia’s voting shares. Motivating factors in committing fraud In this fraud scandal, the Rigas family had motivation to hide the debt in order to report high earnings and keep the company operations going.

They were trying to meet Wall Street expectations. They wanted to make Adelphia look like the strongest cable company in the country. Yet this was motivated mostly by greed. Since their family founded the company, they may have justified that they deserved what they took, especially since they lso worked hard for the company. Moreover, opportunity existed for them to commit the fraud considering the top executives were primarily from the Rigas family. (Kennedy, 2012, p. 1 9) The scandal that brought down Adelphia was the result of personal greed, but was made possible by fraudulent accounting practices, poor internal controls, and a lack of proper auditor review.

The company’s Cash Management System (CMS) which held cash for Adelphia, all of its subsidiaries, and additional non-cable related entities owned by the Rigas family was critical to the success of this fraud and central o the duplicitous accounting scheme. Many individuals had access to this account to withdraw money, and the complexity of one account holding cash for almost 50 entities aided the Rigas family in hiding debt and unapproved withdrawals (Johnson & Rudolph, 2007). In addition, critical internal controls which could have prevented this cash management deception were absent at Adelphia (allFreePapers. com). These existing internal control weaknesses paved way to greater opportunity in committing fraudulent acts.

Fraudulent Behavior Adelphia scandal consisted of three principal issues: the financial statement xclusion of debt, misstatement of performance, and the concealment Of Rigas family use of Adelphia assets. First, Adelphia fraudulently excluded over $2. 3 billion of debt from its consolidated financial statements by recording the debt on the books of unconsolidated affiliates. Adelphia excluded the long-term debt from its balance sheet by (1 ) reclassifying some of its co- borrowing liabilities, (2) direct placements of securities with RFEs (Rigas Family Entities ) and (3) false sales of digital converters. Adelphia then routinely made public predictions of its expected performance like any other publicly raded entities.

The SEC asserted that the defendants artificially inflated Adelphia’s earnings before interest, taxes, depreciation, and amortization (EBITDA) through two major activities: 1) fee transactions with REES and 2) market support transactions with cable box manufacturers. Management fee transactions were charged to the RFEs. The management fees amounts were recorded after the financial periods’ “normal” results were known. In reality, additional fees were not based on actual economic events and Adelphia did not received any cash or other assets from the RFEs. The recordings of such ees were purposely designed to increase Adelphia’s EBITDA to meet market expectations and Adelphia’s predictions.

For the 2000 and 2001 fiscal years, Adelphia artificially inflated its EBITDA by approximately $400 million by recording journal entries similar to the following: Receivables from RFEs x Management Fees Revenue x x Ultimately, the SEC charged that during 1 999 through 2002, members of the Rigas family, in violation Of their fiduciary responsibilities, used Adelphia’s assets for purely personal purposes. The major assertions of SEC charges include 1) Adelphia did not disclose significant payments made to the Rigas amily, 2) Adelphia paid to satisfy margin calls for the Rigas family on stock pledged as collateral, 3) members of the Rigas family used an Adelphia airplane for personal travel, and 4) Adelphia paid for a golf course constructed primarily on Rigas family property. Many false journal entries were recorded by Adelphia and were undetected for the past few years.

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