Wednesday, February 5, 2020

Accounting Scandals Case Study Example | Topics and Well Written Essays - 2000 words

Accounting Scandals - Case Study Example Refco became a public company on August 11, 2005 when a large number of shares were floated to the public to raise 583 million dollars. In October, the Company's financial crisis was made public through an announcement that the CEO, Philip R Bennett had concealed as much as 545 million dollars in bed debts from the Company's investors and auditors by keeping them off the account books, in order to artificially inflate earnings and boost up the Company's stock price.(White and O'Hara 2005:D01). This anomaly in the accounts was discovered during a process of internal review which was carried out over the preceding weekend. Refco's stock prices plunged immediately once the announcement was made, resulting in losses of more than $1 billion in shareholder value, with its bonds also plummeting to insolvency levels.(White and O'Hara 2005:D01).The Company reportedly engaged in a series of circular transactions, whereby an unnamed business entity owned by Mr. Bennett was buying off Refco's bad debts at every quarter, so that they did not show up on Refco's books. The unidentified company owned by Mr. Bennett assumed those deb ts of third parties which were likely to be difficult or impossible to collect (Teather, 2005). The Chairman arranged for a Refco subsidiary, Refco Capital Markets to lend money to a hedge fund company named Liberty Corner Capital, which in turn lent the money to Refco Group Holdings, which paid off the debt to Refco Inc.(White and O'Hara 2005:D01). In this way, at the end of every quarter when accounting statements became due, debt was temporarily moved off Refco's books and onto Liberty's account. Such accounting scandals generate fears of a liquidity squeeze and market contagion, highlighting the need for tighter regulation and higher levels of disclosure and transparency in hedge funds (The Herald 2005). Accountants and banks are being sued as a part of the shareholder class action suits against Refco, because the circular pattern of transactions which occurred regularly at the end of every fiscal quarter and then unwound after the quarters ended were themselves a warning alarm bell which should have sounded in the minds of auditors and accountants (White and O'Hara 2005:D01). Goldman Sachs, CSFB and other leading investment banks are being sued for negligence in underwriting and advising on Refco's float issue and on its bond issues, which led to the perpetration of accounting fraud.(Walsh, 2005). Refco Capital Markets is at the centre of the regulatory investigations, because this was the corporate entity through which Bennett was able to receive loan funds, which were hidden from Company auditors and officers. A commodity funds Company is suing Refco for diverting its assets to an insolvent entity like Refco Capital markets, while senior executives at an Australian bank, Bawag, are also being scrutinized for their role in the scandal, because the bank approved a loan of 420 million dollars which was just prior to the accounting manipulation that was taking place.(Fortune, 2006:5) The Polly Peck Scandal: Polly Peck was initially a small clothing company on the London stock exchange which did not demonstrate any remarkable profits, but its fortunes began to change when it came under the management of Asil Nadir, a Turkish businessman, in 1980. Over the next ten years, the Company experienced an unprecedented level of growth. In 1980, it also moved into the fruit packing business through a public share funded acquisition of Uni-Pac, which was a company already owned by Nadir.(Wearing, 2005: 41). The move away from clothing into fruit packing represented a risk for the

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