StephenF. Austin University Valeant Pharmaceuticals International Karen JohnstonACC 331 Honors ContractProfessor Bunn12/11/17 ValeantPharmaceuticals International is a specialty pharmaceutical company thatresearches, develops, and manufactures products in areas such as dermatologyeye healthy, gastrointestinal disorders, and neurology generic drugs, accordingto their website Valeant.com.
Its headquarters are in Laval, Quebec, butValeant is also listed on the Toronto and New York Stock Exchanges with thesymbol VRX. Because their stocks are publicly traded, they must comply tostrict guidelines that are issued by the Securities and Exchange Commission(SEC). The SEC regulates financial statements of publicly traded companies sothat the statements may be easily compared to other companies. Violations ofthose regulations can occur from negligence, or from a company attempting tomake their name seem more desirable through dishonest means. In October of 2016, the SEC issued aletter to Valeant Pharmaceuticals International that told the company it wascalculating its earnings per share in a way that was not compliant with GenerallyAccepted Accounting Principles (GAAP), and that a change must be made(McKenna). The SEC included in its letter, “Your non-GAAP measure bears astriking resemblance to your cash flows and differs drastically, includingdirectionally, from your net income.” In response, Valeant stopped reporting anadjusted Earnings Per Share (EPS) number but did not change the way itcalculated and presented their adjusted net income.
Lainie Keller, the vicepresident of corporate communications for Valeant, reported to MarketWatch- awebsite that helps investors keep track of the stock market- that Valeant doesnot report on EPS, but the company had about 350 million outstanding shares,which would bring the EPS calculation to $1.04. The significance of this isthat it is clear Keller was trying to make their EPS number public withoutdirectly publishing it on their income statement. However, that may be aviolation of Regulation G, which is a 2003 rule that details how publiccompanies disclose non-GAAP financial numbers. Valeant PharmaceuticalsInternational has always presented its financial statements in a unique way,but they are beginning to feel the repercussions of not complying with GAAP.Valeant had been reporting a figure called “cash earnings per share,” which theSEC told them to stop doing.
Those cash earnings per share make their incomelook much better than it would if they had been using standard accountingmethods, and thus attracts more investors. Valeant arrives at this skewed cashEPS by not reporting some of its acquisition-related expenses, and thereforewriting down the value of assets such as drug patents that were acquired withthe acquisition(Gandel). This affects their income statements because it lookslike the company has more revenue and less expenses, which effectively booststhe net income. Companies that do not blatantlyadhere to the rules that the SEC sets for them are generally doing so to maketheir business appear more attractive to investors by misrepresentinginformation or falsely reporting all together. Either way, that is an ethicaldilemma that they must pay the price for. Valeant Pharmaceuticals Internationalhas not only had ethical problems with reporting financial documents, but alsohas experienced a large drop in stock price due to executive turnover,accusations of accounting fraud, and activist meddling (McKenna). All of those issues combined with theirentanglement with the SEC has caused their stock prices to plummet from July of2015, and it is likely the company may not be around for longer if they do notstart adhering to the rules. WorksCitedGandel,Stephen.
“Valeant’s accounting problems: It gets worse.” Fortune,fortune.com/2015/10/22/valeant-accounting-problems/.
McKenna, Francine. “Valeant is providing the mediawith an earnings metric that the SEC told it to stop using.” MarketWatch,15 Nov. 2017,www.marketwatch.com/story/valeant-is-providing-the-media-with-an-earnings-metric-that-the-sec-told-it-to-stop-using-2017-11-09?link=MW_latest_news. OriginalArticle: https://www.marketwatch.
com/story/valeant-is-providing-the-media-with-an-earnings-metric-that-the-sec-told-it-to-stop-using-2017-11-09?link=MW_latest_news StephenF. Austin University Caterpillar Karen JohnstonACC 331 Honors ContractProfessor Bunn12/11/17 Caterpillar is a successful companyin the United States that manufactures mining and construction equipment,natural gas and diesel engines, diesel-electric locomotives, and industrial gasturbines (Gruley). The company is publicly traded in the New York StockExchange and is currently experiencing a high point in their stock prices,which may be attributed to their attractive revenue and net income figures.However, the means by which Caterpillar is reaching those net income numbersmay be illegal. Tax evasion is more common in theUnited States than the Internal Revenue Service would hope, and investigationsare common among companies that are suspected of it. Because corporations mustpay a 35 percent income tax, the corporations certainly do everything they canto make their net income appear lower, while still maintaining a healthy figurethat will attract investors(Drucker). One way to legally do this is to generateprofits offshore, because the profits are not taxed until they are brought backto the United States, which is known as repatriation. However, repatriation canallow for some illegal loopholes.
Over the past few years, Caterpillarhas been accused of moving earnings from the United States to a Swisssubsidiary for the purpose of tax evasion. The company is estimated to haveavoided paying 2.4 billion dollars in the last thirteen years, and the InternalRevenue service is seeking to collect over 2 billion dollars of income taxesand penalties on profits that were earned by the Swiss subsidiary (Drucker).
In2015, Caterpillar received a subpoena from investigators that demanded alldocuments related to the movement of cash between overseas and domesticsubsidiaries. In a report written by Dr. Leslie A Robinson, she estimated thatCaterpillar had moved 7.
9 billion dollars to the United states. The money wasstructed as loans, but Caterpillar did not report those loans for tax purposesor in their financial statements. While this is often an illegal practice,there are certain exceptions such as not owing taxes on short-term loans madeby offshore subsidiaries to a domestic parent company. PricewaterhouseCoopersworked with Caterpillar to concoct with this tax avoidance strategy, and it isunclear whether the loans fit into the exception of the law. However, the loanswere not reported to the IRS or found on any of the financial disclosures toinvestors, which effectively opened the door for an investigation of legality. Tax avoidance has a direct effect ona company’s income statement. In order to pay less taxes, a person must receivecertain deductions or be in a lower tax bracket by having a lower net income.
Caterpillar moved a portion of its revenue over to a Swiss subsidiary, whicheffectively lowered the amount of money they retained in America and owed taxeson but still kept their revenues in tact without being lowered. BecauseCaterpillar’s Income Tax Expense was lower, their net income and earnings pershare were effectively raised. Stock prices for Caterpillar declineddrastically in 2015 and 2016, following the IRS’s open investigation of thecompany (Gruley). Investigations are still ongoing because Caterpillaradamantly denied moving money overseas for the purpose of avoiding taxes,however, if they are found guilty it could be detrimental to the entirecompany. WorksCitedDrucker, Jesse.”Caterpillar Is Accused in Report to Federal Investigators of Tax Fraud.” TheNew York Times, The New York Times, 7 Mar. 2017,www.
nytimes.com/2017/03/07/business/caterpillar-tax-fraud.html. Gruley, Bryan, etal. “The Whistleblower Behind Caterpillar’s Massive Tax Headache Could Make$600 Million.
” Bloomberg.com, Bloomberg, 1 June 2017,www.bloomberg.com/news/features/2017-06-01/the-whistleblower-behind-caterpillar-s-massive-tax-headache-could-make-600-million. Original Article: https://www.nytimes.com/2017/03/07/business/caterpillar-tax-fraud.html StephenF.
Austin University Penn West Petroleum Ltd. Karen JohnstonACC 331 Honors ContractProfessor Bunn12/11/17 Penn West Petroleum Ltd. was aCanadian-based company that is a producer of oil and gas, before recentlychanging its name to attempt to side-step a bad reputation (“About ObsidianEnergy.”).
The company was formerly one of the sixty largest companies on theToronto Stock Exchange, however, recent events have almost made them barredfrom the public stock exchange altogether (Morgan). The company faced financialhardships in 2014 when the price of crude oil fell, and turned to fraudulentmeans of attempting to keep their investors satisfied. The Securities and ExchangeCommission accused Penn West of fraudulently moving hundreds of millions ofdollars from their operating expense accounts to capital expenditure accounts(“SEC Charges Oil and Gas Company and Top Finance Executives with AccountingFraud.”). According to the SEC, Penn West was able to falsely mark down theiroperating costs by almost twenty percent, which improved their profitabilitynumber on their income statement. The SEC suggests that the fraud wasimplemented by the company’s former Chief Financial Officer, Todd Takeyasu, andothers who held powerful positions in the company such as Jeffery Curran andWaldemar Grab. Penn West is accused of creating an internal budget showing theamounts of operating expenses used to get oil out of the ground which would bemoved so that it looked like that company was not spending as much money toextract crude oil. The company referred to this process as “reclassing thecapital.
” The formal complaint that was filedby the SEC accused Penn West, Takeyasu, Curran, and Grab of violatingantifraud, reporting, internal controls, and records and books provisions ofthe SEC federal law (“SEC Charges Oil and Gas Company and Top FinanceExecutives with Accounting Fraud.”). The SEC is seeking permanent injunctions,which means that Penn West must stop reclassing their capital. Penn West alsomust provide monetary relief for all of the defendants in the court case. Thefalse high profit numbers created large bonuses for the previous ChiefExecutive Officers, Murrary Nunns and David Roberts.
Both Nunns and Robertshave given the company back the bonuses they received that were derived fromthe fraudulent profits, and they will not be charged by the SEC. The fraud that Penn West committedhad an impact on their financial statements, which attributed to the companydoing so well in the stock market. The company moved their expenses on theincome statement to capitalized assets on their balance sheet, which raisedtheir net income and earnings per share figure while simultaneously boostingtheir equity. When it was apparent that every other oil and gas company wasdoing poorly due to lower crude oil prices, Penn West created the illusion thatthey were still profiting and doing well. In conclusion, fraudulent means ofboosting profit sets companies back in the long run. On June 26, 2017, PennWest officially changed its name to Obsidian Energy so that the company may beless affiliated with a negative reputation of fraud (Morgan).
The company hasdownsized dramatically as well, with production falling from 130,000 barrels ofoil per day to 35,000 barrels. Had the company honestly reported their figuresfor the past few years, it is probable that Penn West would still be Penn West,and would be thriving. WorksCited”About ObsidianEnergy.” Obsidian Energy Ltd., www.obsidianenergy.com/about-us/.
Morgan, Geoffrey.”Penn West Petroleum downsizes, changes name in hopes of turning page ontroubled past.” Financial Post, 26 June 2017,business.financialpost.com/commodities/energy/penn-west-petroleum-downsizes-changes-name-in-hopes-of-turning-page-on-troubled-past.”SEC Charges Oiland Gas Company and Top Finance Executives with Accounting Fraud.
” SECEmblem, 28 June 2017, www.sec.gov/news/press-release/2017-120. Original Article: https://www.sec.gov/news/press-release/2017-120 StephenF. Austin University Tesco Karen JohnstonACC 331 Honors ContractProfessor Bunn12/11/17 Tesco is a grocery and a generalmerchandise retailer that is headquartered in Hertfordshire, England (PLC,Tesco.).
It was founded in 1919 and has since grown to be one of the largestgrocery markets in the world with stores spanning across twelve differentcountries. Tesco has more than 25% of the British grocery market and has 3500stores and 310,000 employees However, even large and successful companies canbe susceptible to the unethical practice of fraud. In September of 2016, three formerexecutive members of Tesco were charged with fraud by the Serious Fraud Office.The Serious Fraud Office is a prosecuting authority of England, NorthernIreland, Wales, and the Channel Islands (“About us.”). This office handleslarge economic crime cases in those areas, and investigates in a similar way tothe Securities and Exchange Commission of America, however, they do only presscharges against businesses and do not directly write the regulatory laws.
Theyalso handle cases where top executives have made a profit in bonuses from thenet income of their company having been fraudulently raised, which is the casewith Tesco A criminal investigation by theSerious Fraud Office began after Tesco announced that it had overstated itsprofit by about 420 million dollars (Jolly, David, and Chad Bray.). Tesco hadbeen journalizing their profits before they were earned and delaying therecording of expenses to increase net income. This would boost their sales revenuewhile lowering their expenses on their income statement, which is an easy wayto inflate net income and attract more investors.
The company also wronglybooked payments from their suppliers, which allowed them to falsely lower theirmarketing costs and reach target sales (Butler). Carl Rogberg, ChristopherBush, and John Scouler were all charged with fraud and false accounting (Jolly).These three men were all placed on leave because of suspected fraud when DaveLewis became the new Chief Executive Officer, and were later fired when theirfraudulent scandals were confirmed. Dave Lewis, the new chief executiveofficer who initially brought light to the fraudulent schemes of hispredecessors, said in April of 2017 that Tesco was desperately trying to turnits business around and make up for the losses that were incurred after theaccounting scandal. Tesco incurred a 6.4 billion dollar loss in 2016 afterLewis announced the fraud, and Lewis fought to save the company by closingunderperforming stores and selling other large assets.
Lewis is also attemptingto reinvent the image of Tesco by focusing on simpler product lines and lowercost service. In conclusion, padding books bylowering expenses and boosting sales revenue is an easy was to look more attractiveto investors, but is also an easy way to end up in a lot of trouble withagencies such as the Securities and Exchange Commission or the Serious FraudOffice. Although Lewis has done his best as the new leader of Tesco, therestill is much debris from the scandal that has left a scar on the company’sreputation. WorksCited”About us.” SeriousFraud Office, www.
sfo.gov.uk/about-us/. Butler, Sarah.
“Former Tesco directors charged with fraud over accounting scandal.” TheGuardian, Guardian News and Media, 9 Sept. 2016,www.
theguardian.com/business/2016/sep/09/sfo-charges-former-tesco-directors-with-fraud.Jolly, David, andChad Bray.
“3 Former Tesco Executives Charged With Fraud Over AccountingScandal.” The New York Times, The New York Times, 9 Sept. 2016,www.
nytimes.com/2016/09/10/business/international/tesco-britain-fraud-accounting.html.PLC, Tesco. “Aboutus.
” Tesco plc, www.tescoplc.com/about-us/. Original Article: https://www.nytimes.com/2016/09/10/business/international/tesco-britain-fraud-accounting.htmlStephenF. Austin University Alere Karen JohnstonACC 331 Honors ContractProfessor Bunn12/11/17 Alere Incorporated is a healthcarecompany that produces and manufactures rapid point-of-care diagnostic tests(“About Alere”).
The company is headquartered in Massachusetts, but hassubsidiaries in many parts of the world including Colombia, India, and SouthKorea. In 2016, Abbott Laboratories offered to buy Alere for $5.8 billion, butaccounting issues at Alere – that will be explained further on – delayed thedeal from progressing. After agreements were amended and lawsuits against eachother were dismissed, Abbott announced it would buy Alere for a new price of$5.3 billion (“Abbott Completes Alere Acquisition.”) Abbott completed theacquisition on Oct 03, 2017. The aforementioned “accountingissues” were discovered by the SEC and boiled down to the company committing accountingfraud to meet revenue targets. They did this to keep their net income lookingattractive to investors, as well as to seem to be performing much better thanwas actually the case.
Alere also bribed foreign government officials inColombia and India in order to sell more of their products and become morewidespread across the nation(Cassin). The company’s subsidiary in South Koreareportedly recorded sales for products that were still stored in its warehousesor had otherwise not been delivered to customers yet. This drasticallyincreased their revenue, however, when some of the sales fell through, itcreated large accounting gaps because the revenue was still sitting on theincome statement, but the inventory to back the revenue was still on the balancesheet. The company was ordered by the SECto pay a sum of $13 million as restitution; $3.
3 million (plus interest ofroughly $500,000) was for profits from the sales associated with the bribery toforeign officials, while the remaining $9.2 million was a penalty fee. OnSeptember 28, 2017, the company released a statement that said, “We havecooperated with the SEC and we are pleased to fully resolve this matter” (Cassin).No other details have been released regarding how Alere has resolved the matterand what they have done to further prevent an issue like this from happeningagain.
However, Alere has since been acquired by Abbott Laboratories, a muchlarger healthcare corporation which undoubtedly has better internal controls. Regarding the effects on Alere’sfinancial statements, the company had to adjust their 2013 net revenue figureby minus $9 million, which decreased their net income for that year by $1.8million. In 2014, their net revenue figure was adjusted down by roughly $11million, but interestingly enough the company’s net income figure was adjustedup and had $4.
5 million added to it. Net income was reduced and adjusted downalso for FY 2015 and 2016. This case highlights the effects ofimproper revenue recognition, in addition to the effects of bribing governmentofficials to further your business. To conclude, both instances of fraud arosefrom lack of proper internal controls which led into the unethical decisionmaking that took place. It goes without saying that Alere and its employeeswould have been better off without the accounting fraud that took place,because if they had not, then Abbott would have bought Alere for an additional$500 million as per their initial acquisition offering.
WorksCited”Abbott CompletesAlere Acquisition.” GenomeWeb, 3 Oct. 2017,www.genomeweb.com/business-news/abbott-completes-alere-acquisition. “About Alere.” AHealthcare Management Company with POC Testing Devices – Alere,www.
alere.com/en/home/about.html. Cassin, Richard.”The FCPA Blog.” Alere pays $13 million to resolve accounting fraud andFCPA offenses – The FCPA Blog,www.
fcpablog.com/blog/2017/9/28/alere-pays-13-million-to-resolve-accounting-fraud-and-fcpa-o.html. OriginalArticle: http://www.fcpablog.com/blog/2017/9/28/alere-pays-13-million-to-resolve-accounting-fraud-and-fcpa-o.html