...Comverse Technology Inc Backdating Stock Options – Overstating of Net Income Comverse Technology Inc is a provider of software and systems enabling net-work based multimedia communications services. It is a publicly traded corporation on the S&P 500 and NASDAQ-100. It was founded in 1984 and publicly traded since 1986; Comverse Technology Inc is based in New York. Comverse Technology has 5 subsidiary companies. They are Comverse, Verint, Ulticom, Startel, and Starhome. Each subsidiary is a provider of communication services. Comverse Technology Inc’s Board includes a majority of independent directors. The Board has four standing committees: Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee, and Executive Committee. Three former Comverse executives were charged August 9/2006 for creating secret slush funds and backdating stock options causing Comverse to publicly file false financial reports, deliberately misstating earnings. The scheme took place from 2001 through to 2005. The former CEO Jacob ‘Kobi’ Alexander, former CFO David Kreinberg, and former General Counsel William F. Sorin manipulated millions of stock options by backdating them to when stock prices were at low point. As part of the scheme executives made material misrepresentation to shareholders regarding stock option grants and concealed the compensation expense, thus overstating its net income and earnings per share. By using hind-sight 20-20 they were able to...
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...Is stock option backdating ethically defensible? Background Stock options are widely used to supplement the amount of non-performance-based cash compensation for executives and CEOs. Furthermore, Bishara & Schipani state that stock options, “have long been touted as a way to align the interests of the executive with the shareholder…”(2008, p. 13) and thus provide, “greater incentives for executives to improve firm performance.” (Raiborn et al. 2007, p.1) However, due to the transactional nature of options that they can be cashed in there exists motivation for executives or firms to manipulate the price so as to receive the greatest gain. Prior to 2002, a company was not required to, “report the issuance of stock options until after the close of the fiscal year.” (Raiborn et al. 2007 p.3 ) As such many firms decided to retroactively increase the value of their share options, particularly executives options. However, by 2002, the time the control measure, Section 403 of the Sarbanes-Oxley act, was passed, 1 out of every 5 companies were suspected to still utilise the practice. Widespread backdating caused a media stir in 2006, with prominent companies such as Comverse and UnitedHealth being indicted. This caused a ripple through the business community as other organisation came under investigation. In 2006, 173 companies were purported to have retroactively altered the stock options of prominent members of their organisations. Retroactively dating options is defined as...
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...Why is backdating stock options done? What must companies do to make the action legitimate? Trying to find ways to increase the value of one’s personal bank account, inventive ways of accounting have become common place in business. Companies that trade stock on the open market have been known to issue stock options to the employees. It has been found that some companies wait until the price of the stock reaches the lowest point before issuing the stock options to employees to help to achieve the maximum gain from the price increase of the stock. While attempting to predict the lowest point of the price of stock the window is missed and the stock value begins to increase. Some executives have taken it upon themselves to backdate the stocks when they are being granted to senior executives. This is not an illegal action if the proper protocol is followed. Many companies failed to follow the protocol and chose to instead cover up the backdating. Proper protocol demands the action be disclosed in full to the shareholders as well as disclosing the action correctly on taxes and have it reflected in the earnings. When backdating stock options the results can cause lower than expected earnings if reported properly. This in turn can cause a company to miss the expected earnings levels and have an effect on the overall stock price and the earnings of the executives’ stock options. Prior to 2002 the practice of backdating was done several times by KLA-Tencor...
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...TOP CORPORATE SCANDALS WorldCom The U.S.’s second-largest long-distance phone company at the time, WorldCom/MCI filed the largest Chapter 11 bankruptcy in American history in July 2002. The company used fraudulent accounting methods, namely underreporting expenses and inflating revenues with bogus accounting entries, to hide its declining financial condition between 1999 and 2002. An internal audit uncovered approximately $3.8 billion in fraud in June 2002, and in 2003, it was estimated that the company's total assets had been inflated by around $11 billion. Verizon Communications purchased the enterprise in January of 2006 and renamed it the Verizon Business division. Qwest Communications International Inc. The company was also involved in accounting scandals, and was fined $250 million by the U.S. Securities and Exchange Commission (SEC), to be split into two $125 million payments due to the poor state of Qwest's current financial health. Among the transactions in question were a series of deals from 1999 to 2001 with Enron's broadband division which may have helped Enron conceal losses. In 2005, former Chairman and chief executive officer (CEO) Joseph Nacchio, former President and chief operating officer (COO) Afshin Mohebbi and seven other former Qwest employees were accused of fraud in a civil lawsuit filed by the SEC. Separately, Nacchio was convicted of 19 counts of insider trading in Qwest stock on April 19, 2007. On March 31, 2011 US Federal Judge Marcia Krieger issued...
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...MGX5020 Ethics and Business Corruption Tutor: Jeremy St. John Ash Khan (23757175) Yan Che (24584193) Li Junyi (21771138) 9/21/2012 Introduction: Corruption is defined as wrongdoing on the part of an authority or powerful party through means that are illegitimate, immoral or incompatible with ethical standards. Business corruption has been one of the major ethical issues facing the world in modern times and there has been a lot of debate in regards to the motives of the companies that participate in it. Some even argue that corruption is not solely down to lack of honesty but more as a tool that is required to survive in the current market due to increased competition, market conditions etc. In this paper, we would try to develop a knowledge based framework to understand the motives and consequences of business corruption through an ethical perspective. In analysing the ethics of business corruption, this paper will focus on 3 different ethical theories; Kohlberg’s theory of cognitive moral development, Consequentialism and Deontological ethical theories. Each theory represents different standpoints and arguments in as to the motives behind business corruption. Literature Review: Transparency International, the leading anti-corruption nongovernmental organization, “has chosen a clear and focused definition” of corruption as “the misuse of entrusted power for private gain” (Transparency International, 2008a). According to Professors Dunfee and Hess...
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...Question #1 What was the nature of the fraud and how was it executed? In this section, describe the company and key characteristics of the fraud including but not limited to… - Describe the company Monster Worldwide, Inc. is the parent company of the well-known employment solutions website. The website serves as an intermediary between individuals seeking employment and employers seeking employees. They offer an array of services from their original “job board” to career management and employee recruitment services (Monster Worldwide, Inc.). In addition to their services Monster generates revenue by selling advertisement space on their websites. Some of Monster’s competitors include Adecco S.A., CareerBuilder, LLC and SnagAJob.com (Hoovers 2013). - The cumulative amount of the fraud and its financial statement effects and the length of its perpetration/criminal activity Monster reported “materially misleading” financial statements regarding the real grant date and exercise price of certain employee benefit stock option plans in all SEC filed documents during the years 1997-2005 (U.S.D.J. 2007). This included falsely stating the fair market value of the options further inflating their value. Monster accounted for these stock options as “in-the-money” options which is permissible under U.S. GAAP. However in doing so they forged the actual date the stocks were granted on thus recording no compensation expense for the interim days which is not an acceptable accounting...
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...Fall 16 AFM 431 -‐ Essay Group 9 Neeraj Venkatraman, Rahul Bhambhani, Steven Yang, Ahmed Husain, Dilraj Dhillon In today’s world, businesses have moved from complicated to downright complex. Firms, industries, and global business systems continue to invest in, employ, utilize, and revolve around many varying, technical, formal tools and mechanisms in the business world. In the context of global business, complexity can be loosely defined as the state of intricacy of interactions of people, objects, events, and transactions. The modern business world and the business environment is highly complex in its nature, and therefore transparency is essential for shareholders and investors to better understand their investments, as well as deter fraudulent behavior. The complexity in the modern business world, and its need for transparency can be evidenced through an examination of 3 levels: company-wide, industry, and globally. Looking on a company-wide basis, a lack of transparency on the part of individual organizations can lead to fraud and unethical practices, whereas a demonstration of strong transparency reduces the impact and likelihood of scandals. Enron, a leading energy and natural gas provider was accused of an accounting fraud in 2001. One of the primary reasons that led to this scandal was Enron’s usage of special purpose entities (SPEs) to cover up debt that the company was taking upon...
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...Abstract Over the past ten years, some refer to as the American lost decade; few companies have been able to grow amide political, economic and financial instability as Apple. Apple, what was once considered a memory of times gone by has transformed itself and is on the verge of becoming the modern day David and Goliath. Today, Apple is a prominent provider of hardware and software, including Macintosh computer, the iPod digital media player, and the iPhone. With the iMac in 1998, iPod in 2001, iPhone in 2007, and iPad in 2010 Apple set itself apart with innovative design and has extended this differentiation throughout its entire product offering. Apple PCs are popular with consumers, students/educators, and creative professionals. Apple is also the largest vendor of portable digital music players globally with 70%+ market share. It is the largest vendor of legal digital music downloads globally. Following its entry into the smartphone business only 3 years ago, the iPhone already represents 1/3 of Apple's revenues and more than 1/2 of gross profits. Apple's products are available online, in its own retail stores, through its direct-sales force, and through third-party resellers. Apple is headquartered in Cupertino, CA and has approximately 34,300 full-time employees. Apple Financial Analysis The Company and its History On April 1, 1976, the Apple computer was born. Steven Wozniak and Steven Jobs had been friends through out high school. They had both been extremely...
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...OVERVIEW Stephen Richard is an executive at Computer Associates(CA), which sells software products with licenses lasting between three and ten years. The company has a “sales-driven-culture” which is “the more you sell, the more commissions you will get”. Richard is responsible for monitoring when contracts are signed and when the payments for those contracts are assured. Obviously he failed in his job because he was incarcerated on April 24, 2006. The accounting department recorded its sales in the current quarter while these sales should be recorded next quarter, which took place at the fourth quarter of 1998 and the second quarter of 2001. According the evidence and the proclamation of prosecutors from the DOJ and SEC, the CA accounting department did not follow the GAAP. However, Richard asserted that this way of accounting was not as costly and significant as the WorldCom or Enron corruption cases because these two companies went bankrupt. Richard is also very confident that once released from prison, he will be able to continue his accounting career. The process in which CA recorded its sales revealed numerous inaccurate accounting principles and concepts. According to the article, the accounting department recognized revenue while the contract was signed. It follows the accrual concept that revenue is recognized not only when cash transactions occur. Since the contracts were signed, the revenue could be received earlier or later. Accural accounting helps to provide...
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...not only used by Richards', but it had become a company-wide practice. This naturally drew the attention of the DOJ and the SEC as they investigated the potential wrongdoings. Investigators found enough evidence to prove that the former CFO illegally facilitated the backdating of many contracts. Richards' involvement, as the global head of sales, included facilitating extensions of the fiscal quarter, allowing other employees to obtain contracts after the quarter-end (to boost reported earnings), and he failed to bring to the accounting and finance departments' attention that contracts may have been backdated. Stephen Richard's actions are notably serious because he had knowledge of the wrongdoings and he was in a position to report it, but he chose not to. 2.Suppose you were placed in Stephen Richard’s position at Computer Associates and you were under pressure to extend the fiscal quarter. How would you handle the situation differently? What would be the expected consequences? If placed in Richard's position at Computer Associates (CA) and the pressures associated with his high-level, high-stress position, I would not have extended the fiscal quarters or knowingly "overlooked" or encouraged the backdating of contracts, regardless of the overwhelming pressures by the analyst community which he writes about in his letter. I think too much emphasis was placed on achieving...
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...1.How serious were Stephen Richard’s actions? Why? Stephen Richard's actions in this can be viewed as extremely serious because he used his high position of power in sales to coerce clients into boosting sales earnings by quarter. This led to "overly aggressive accounting practices" to boost their reported earnings. Evidence supported that the managerial use of discretion to greatly influence reported earnings was not only used by Richards', but it had become a company-wide practice. This naturally drew the attention of the DOJ and the SEC as they investigated the potential wrongdoings. Investigators found enough evidence to prove that the former CFO illegally facilitated the backdating of many contracts. Richards' involvement, as the global head of sales, included facilitating extensions of the fiscal quarter, allowing other employees to obtain contracts after the quarter-end (to boost reported earnings), and he failed to bring to the accounting and finance departments' attention that contracts may have been backdated. Stephen Richard's actions are notably serious because he had knowledge of the wrongdoings and he was in a position to report it, but he chose not to. 1 Alternative: Richards, as the head of the sales at Computer Associates (1) allowed the practice of extending CA’s fiscal quarter to reach the company’s revenue target. He also allowed his subordinates to (2) negotiate and obtain contracts after the end of the quarter ignoring the fact that the revenue for...
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...After reading A Letter from Prison I have many takeaways and lessons learned. It is absolutely imperative that companies maintain their financial documents with as much accuracy and honesty as possible, and do their due diligence in taking whatever measures appropriate to have accurate financial data. If a company does not understand how to properly record revenue than it is their due diligence to comply with the accounting standards that are set and they must hire employee’s who understand how to properly handle the situation. The ethics within this case are very negative when it comes to revenue recognition and the backdating of software contracts. Recognizing revenue within certain time periods for future contracts that may or may not actually occur was another take-away from this case: you simply can’t do that and still comply with generally accepted accounting principles. The payments for these contracts were not reasonably assured because of the multi-year lengths, and, this was my “ah-ha” moment when reading this case. Safeguarding financial reporting is more about the reporting companies than anything else in my observation with a letter from prison. The company chose to backdate contracts and recognize revenue improperly without informing their auditors of these decisions or situations that were occurring. I do think that within other companies sometimes it is about the auditors and their role is to provide honest and professional auditing work of the financial statements...
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...|Topic in Mastery of the |Chapter 3 - Building Your |Chapter 4 – Brain Teasers: Using|Chapter 5 – Cases to Accompany | |Financial Accounting Research |Business Vocabulary: Defining |FARS to Untangle the Mystery |FARS [Related Assignments at End| |System (FARS) Through Cases 2nd |Terms and Solving Problems |[See Introduction and Example |of Cases] | |Edition by Wallace [Chapter 1 |Through FARS [See Introduction |pp. 4-1 to 4-7] | | |and 2 where noted] |and Example pp. 3-1 to 3-7] | | | |FASB, Standard Setting; GAAP; |Table 3.1 Accounting Standards; |1: How Many Standards Have Been |Case 12: Emerging Issues: The | |Governance; FARS [Chapter 1 – |Table 3.39 Regulated Industry; |Issued by FASB?; 2: Dissents |Agenda of FASB; [Case 8 Related:| |The Financial Accounting |Table 3.40 Specialized Industry |Portending Future?; 32: What |Does It Matter Where Guidance Is| |Research System (FARS) Primer.] |Considerations |Makes One GAAP Preferable to |Located?]; [Case 12 Related: Are| | | |Another?; 30: When Can Analogies|Accounting Rules to Blame?] | | | |Be Used?; 31: What Are the 10 | | | ...
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...Identify an example of a perceived pressure that can motivate financial statement fraud. a. the ability to obfuscate the fraud behind complex transactions b. Failure to meet Wall Street's earnings expectations c. Rationalizing that all companies use aggressive accounting practices d. A weak board of directors Failure to meet Wall Street's earnings expectations Which of the following is an example of a perceived opportunity that can lead to financial statement fraud? a. Inability to compete with other companies b. Independent audit and a strong board of directors c. Thinking that fraud is good for the company d. Inadequate internal controls Inadequate internal controls Which of the following statements is true? a. Most financial statement frauds occur in large historically profitable companies b. Most people who commit financial statement fraud are first-time offenders c. An active board of directors or audit committee does little to deter fraud d. Perpetrating fraud is much easier in an organization where decision making is spread among several individuals Most people who commit financial statement fraud are first-time offenders Company XYZ had a long-standing relationship with a leading law firm. In fact, the law firm's business with this company was one of its most profitable relationships. If the law firm decides that it no longer want to conduct business with the company, this is: a. Indicative that the company might have a lot of customer...
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...Question | ONE Accountants owe the duty to act in a professional and ethical manner concerning clients, as well an obligation to respect the laws that are involved with the profession. This is where a crossroads of ethics and legalities are formed and potentially the defining point of crucial decision-making. Stephen Richards and his actions under employment with Computer Associates (CA) are then examined in light of this concept. Accusations against Stephen Richards permitting the backdating of contracts unlawfully were confirmed, giving sanction to the unethical nature of his behaviour. Henderson describes that illegal behaviour will not be deemed unethical when the legal system, accounting profession and society all agree upon the same moral assumption (p 944, 2011). Committing fraud is against the law, which is socially unethical as it is legally unethical. In this case however, the accounting profession challenges the acceptable accounting practices undertaken at CA, leading to the result of Richards’ choices. “[a]ggressive financial reporting was not [an] uncommon… [e]vidence suggested that earnings management… was a widespread corporate practice” (Soltes, 2011). This gave CA precedence to govern their firm by societal standards, and not solely by rules and regulations. In defense, CA’s audit did assure that financial statements were in accordance with GAAP (Soltes, 2011). It was therefore believed by Richards that the manipulation of reports was merely a reflection...
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