Stephen for Valeant, reported to MarketWatch- a website that

Stephen
F. Austin University

 

 

 

Valeant Pharmaceuticals International

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Karen Johnston

ACC 331 Honors Contract

Professor Bunn

12/11/17

 

            Valeant
Pharmaceuticals International is a specialty pharmaceutical company that
researches, develops, and manufactures products in areas such as dermatology
eye healthy, gastrointestinal disorders, and neurology generic drugs, according
to their website Valeant.com. Its headquarters are in Laval, Quebec, but
Valeant is also listed on the Toronto and New York Stock Exchanges with the
symbol VRX. Because their stocks are publicly traded, they must comply to
strict guidelines that are issued by the Securities and Exchange Commission
(SEC). The SEC regulates financial statements of publicly traded companies so
that the statements may be easily compared to other companies. Violations of
those regulations can occur from negligence, or from a company attempting to
make their name seem more desirable through dishonest means.

            In October of 2016, the SEC issued a
letter to Valeant Pharmaceuticals International that told the company it was
calculating its earnings per share in a way that was not compliant with Generally
Accepted Accounting Principles (GAAP), and that a change must be made
(McKenna). The SEC included in its letter, “Your non-GAAP measure bears a
striking resemblance to your cash flows and differs drastically, including
directionally, from your net income.” In response, Valeant stopped reporting an
adjusted Earnings Per Share (EPS) number but did not change the way it
calculated and presented their adjusted net income. Lainie Keller, the vice
president of corporate communications for Valeant, reported to MarketWatch- a
website that helps investors keep track of the stock market- that Valeant does
not 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 is
that it is clear Keller was trying to make their EPS number public without
directly publishing it on their income statement. However, that may be a
violation of Regulation G, which is a 2003 rule that details how public
companies disclose non-GAAP financial numbers.

            Valeant Pharmaceuticals
International 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 the
SEC told them to stop doing. Those cash earnings per share make their income
look much better than it would if they had been using standard accounting
methods, and thus attracts more investors. Valeant arrives at this skewed cash
EPS by not reporting some of its acquisition-related expenses, and therefore
writing down the value of assets such as drug patents that were acquired with
the acquisition(Gandel). This affects their income statements because it looks
like the company has more revenue and less expenses, which effectively boosts
the net income. 

            Companies that do not blatantly
adhere to the rules that the SEC sets for them are generally doing so to make
their business appear more attractive to investors by misrepresenting
information or falsely reporting all together. Either way, that is an ethical
dilemma that they must pay the price for. Valeant Pharmaceuticals International
has not only had ethical problems with reporting financial documents, but also
has 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 their
entanglement with the SEC has caused their stock prices to plummet from July of
2015, and it is likely the company may not be around for longer if they do not
start adhering to the rules. 

 

 

Works
Cited

Gandel,
Stephen. “Valeant’s accounting problems: It gets worse.” Fortune,
fortune.com/2015/10/22/valeant-accounting-problems/.

McKenna, Francine. “Valeant is providing the media
with 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original
Article: 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

 

Stephen
F. Austin University

 

 

 

Caterpillar

 

 

 

 

 

 

Karen Johnston

ACC 331 Honors Contract

Professor Bunn

12/11/17

 

 

            Caterpillar is a successful company
in the United States that manufactures mining and construction equipment,
natural gas and diesel engines, diesel-electric locomotives, and industrial gas
turbines (Gruley). The company is publicly traded in the New York Stock
Exchange 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 numbers
may be illegal.

            Tax evasion is more common in the
United States than the Internal Revenue Service would hope, and investigations
are common among companies that are suspected of it. Because corporations must
pay a 35 percent income tax, the corporations certainly do everything they can
to make their net income appear lower, while still maintaining a healthy figure
that will attract investors(Drucker). One way to legally do this is to generate
profits offshore, because the profits are not taxed until they are brought back
to the United States, which is known as repatriation. However, repatriation can
allow for some illegal loopholes.

            Over the past few years, Caterpillar
has been accused of moving earnings from the United States to a Swiss
subsidiary for the purpose of tax evasion. The company is estimated to have
avoided paying 2.4 billion dollars in the last thirteen years, and the Internal
Revenue service is seeking to collect over 2 billion dollars of income taxes
and penalties on profits that were earned by the Swiss subsidiary (Drucker). In
2015, Caterpillar received a subpoena from investigators that demanded all
documents related to the movement of cash between overseas and domestic
subsidiaries. In a report written by Dr. Leslie A Robinson, she estimated that
Caterpillar had moved 7.9 billion dollars to the United states. The money was
structured as loans, but Caterpillar did not report those loans for tax
purposes or in their financial statements. While this is often an illegal
practice, there are certain exceptions such as not owing taxes on short-term
loans made by offshore subsidiaries to a domestic parent company.
PricewaterhouseCoopers worked with Caterpillar to concoct with this tax
avoidance strategy, and it is unclear whether the loans fit into the exception
of the law. However, the loans were not reported to the IRS or found on any of
the financial disclosures to investors, which effectively opened the door for
an investigation of legality.

            Tax avoidance has a direct effect on
a company’s income statement. In order to pay less taxes, a person must receive
certain 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, which
effectively lowered the amount of money they retained in America and owed taxes
on but still kept their revenues in tact without being lowered. Because
Caterpillar’s Income Tax Expense was lower, their net income and earnings per
share were effectively raised. Stock prices for Caterpillar declined
drastically in 2015 and 2016, following the IRS’s open investigation of the
company (Gruley). Investigations are still ongoing because Caterpillar
adamantly denied moving money overseas for the purpose of avoiding taxes,
however, if they are found guilty it could be detrimental to the entire
company.

 

Works
Cited

Drucker, Jesse.
“Caterpillar Is Accused in Report to Federal Investigators of Tax Fraud.” The
New York Times, The New York Times, 7 Mar. 2017,
www.nytimes.com/2017/03/07/business/caterpillar-tax-fraud.html.

Gruley, Bryan, et
al. “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

 

 

Stephen
F. Austin University

 

 

 

Penn West Petroleum Ltd.

 

 

 

 

 

 

Karen Johnston

ACC 331 Honors Contract

Professor Bunn

12/11/17

 

            Penn West Petroleum Ltd. was a
Canadian-based company that is a producer of oil and gas, before recently
changing its name to attempt to side-step a bad reputation (“About Obsidian
Energy.”). The company was formerly one of the sixty largest companies on the
Toronto Stock Exchange, however, recent events have almost made them barred
from the public stock exchange altogether (Morgan). The company faced financial
hardships in 2014 when the price of crude oil fell, and turned to fraudulent
means of attempting to keep their investors satisfied.

            The Securities and Exchange
Commission accused Penn West of fraudulently moving hundreds of millions of
dollars from their operating expense accounts to capital expenditure accounts
(“SEC Charges Oil and Gas Company and Top Finance Executives with Accounting
Fraud.”). According to the SEC, Penn West was able to falsely mark down their
operating costs by almost twenty percent, which improved their profitability
number on their income statement. The SEC suggests that the fraud was
implemented by the company’s former Chief Financial Officer, Todd Takeyasu, and
others who held powerful positions in the company such as Jeffery Curran and
Waldemar Grab. Penn West is accused of creating an internal budget showing the
amounts of operating expenses used to get oil out of the ground which would be
moved so that it looked like that company was not spending as much money to
extract crude oil. The company referred to this process as “reclassing the
capital.”

            The formal complaint that was filed
by the SEC accused Penn West, Takeyasu, Curran, and Grab of violating
antifraud, reporting, internal controls, and records and books provisions of
the SEC federal law (“SEC Charges Oil and Gas Company and Top Finance
Executives with Accounting Fraud.”). The SEC is seeking permanent injunctions,
which means that Penn West must stop reclassing their capital. Penn West also
must provide monetary relief for all of the defendants in the court case. The
false high profit numbers created large bonuses for the previous Chief
Executive Officers, Murrary Nunns and David Roberts. Both Nunns and Roberts
have given the company back the bonuses they received that were derived from
the fraudulent profits, and they will not be charged by the SEC.

            The fraud that Penn West committed
had an impact on their financial statements, which attributed to the company
doing so well in the stock market. The company moved their expenses on the
income statement to capitalized assets on their balance sheet, which raised
their net income and earnings per share figure while simultaneously boosting
their equity. When it was apparent that every other oil and gas company was
doing poorly due to lower crude oil prices, Penn West created the false image
that they were still profiting and doing well.

            In conclusion, fraudulent means of
boosting profit sets companies back in the long run. On June 26, 2017, Penn
West officially changed its name to Obsidian Energy so that the company may be
less affiliated with a negative reputation of fraud (Morgan). The company has
downsized dramatically as well, with production falling from 130,000 barrels of
oil per day to 35,000 barrels. Had the company honestly reported their figures
for the past few years, it is probable that Penn West would still be Penn West,
and would be thriving.

 

Works
Cited

“About Obsidian
Energy.” Obsidian Energy Ltd., www.obsidianenergy.com/about-us/.

Morgan, Geoffrey.
“Penn West Petroleum downsizes, changes name in hopes of turning page on
troubled 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 Oil
and Gas Company and Top Finance Executives with Accounting Fraud.” SEC
Emblem, 28 June 2017, www.sec.gov/news/press-release/2017-120.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original Article: https://www.sec.gov/news/press-release/2017-120

 

Stephen
F. Austin University

 

 

 

Tesco

 

 

 

 

 

 

Karen Johnston

ACC 331 Honors Contract

Professor Bunn

12/11/17

 

            Tesco is a grocery and a general
merchandise retailer that is headquartered in Hertfordshire, England (PLC,
Tesco.). It was founded in 1919 and has since grown to be one of the largest
grocery markets in the world with stores spanning across twelve different
countries. Tesco has more than 25% of the British grocery market and has 3500
stores and 310,000 employees However, even large and successful companies can
be susceptible to the unethical practice of fraud.

            In September of 2016, three former
executive members of Tesco were charged with fraud by the Serious Fraud Office.
The Serious Fraud Office is a prosecuting authority of England, Northern
Ireland, Wales, and the Channel Islands (“About us.”). This office handles
large economic crime cases in those areas, and investigates in a similar way to
the Securities and Exchange Commission of America, however, they do only press
charges against businesses and do not directly write the regulatory laws. They
also handle cases where top executives have made a profit in bonuses from the
net income of their company having been fraudulently raised, which is the case
with Tesco

            A criminal investigation by the
Serious Fraud Office began after Tesco announced that it had overstated its
profit by about 420 million dollars (Jolly, David, and Chad Bray.). Tesco had
been journalizing their profits before they were earned and delaying the
recording of expenses to increase net income. This would boost their sales
revenue while lowering their expenses on their income statement, which is an
easy way to inflate net income and attract more investors. The company also
wrongly booked payments from their suppliers, which allowed them to falsely
lower their marketing costs and reach target sales (Butler). Carl Rogberg,
Christopher Bush, and John Scouler were all charged with fraud and false
accounting (Jolly). These three men were all placed on leave because of their
suspected fraud when Dave Lewis became the new Chief Executive Officer, and
were later fired when their fraudulent scandals were confirmed.

            Dave Lewis, the new chief executive
officer who initially brought light to the fraudulent schemes of his
predecessors, said in April of 2017 that Tesco was desperately trying to turn
its business around and make up for the losses that were incurred after the
accounting scandal. Tesco incurred a 6.4 billion dollar loss in 2016 after
Lewis announced the fraud, and Lewis fought to save the company by closing
underperforming stores and selling other large assets. Lewis is also desperately
attempting to revive the image of Tesco by focusing on simpler product lines
and lower cost service.    

            In conclusion, padding books by
lowering expenses and boosting sales revenue is an easy was to look more
attractive to investors, but is also an easy way to end up in a lot of trouble
with agencies such as the Securities and Exchange Commission or the Serious
Fraud Office. Although Lewis has done his best as the new leader of Tesco,
there still is much debris from the scandal that has left a scar on the company’s
reputation.

 

Works
Cited

“About us.” Serious
Fraud Office, www.sfo.gov.uk/about-us/.

Butler, Sarah.
“Former Tesco directors charged with fraud over accounting scandal.” The
Guardian, Guardian News and Media, 9 Sept. 2016, www.theguardian.com/business/2016/sep/09/sfo-charges-former-tesco-directors-with-fraud.

Jolly, David, and
Chad Bray. “3 Former Tesco Executives Charged With Fraud Over Accounting
Scandal.” 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. “About
us.” Tesco plc, www.tescoplc.com/about-us/.

 

 

 

             

 

 

 

 

 

 

 

 

 

Original Article: https://www.nytimes.com/2016/09/10/business/international/tesco-britain-fraud-accounting.html

Stephen
F. Austin University

 

 

 

 

Alere

 

 

 

 

 

Karen Johnston

ACC 331 Honors Contract

Professor Bunn

12/11/17

 

 

            Alere Incorporated is a healthcare
company that produces and manufactures rapid point-of-care diagnostic tests
(“About Alere”). The company is headquartered in Massachusetts, but has
subsidiaries in many parts of the world including Colombia, India, and South
Korea. In 2016, Abbott Laboratories offered to buy Alere for $5.8 billion, but
accounting issues at Alere – that will be explained further on – delayed the
deal from any further progress. After agreements were amended and lawsuits
against each other were dismissed, Abbott announced it would buy Alere for a
new price of $5.3 billion (“Abbott Completes Alere Acquisition.”) Abbott
completed the acquisition on Oct 03, 2017.

            The aforementioned “accounting
issues” were discovered by the SEC and boiled down to the company committing
accounting fraud to meet revenue targets. They did this to keep their net
income looking attractive to investors, as well as to seem to be performing
much better than was actually the case. Alere also bribed foreign government
officials in Colombia and India in order to sell more of their products and
become more widespread across the nation(Cassin). The company’s subsidiary in
South Korea reportedly recorded sales for products that were still stored in
its warehouses or had otherwise not been delivered to customers yet. This
drastically increased their revenue, however, when some of the sales fell through,
it created large accounting gaps because the revenue was still sitting on the
income statement, but the inventory to back the revenue was still on the
balance sheet.

            The company was ordered by the SEC
to pay a sum of $13 million as restitution; $3.3 million (plus interest of
roughly $500,000) was for profits from the sales associated with the bribery to
foreign officials, while the remaining $9.2 million was a penalty fee. On
September 28, 2017, the company released a statement that said, “We have cooperated
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 matter
and what they have done to further prevent an issue like this from happening
again. However, Alere has since been acquired by Abbott Laboratories, a much
larger healthcare corporation which undoubtedly has better internal controls.

            Regarding the effects on Alere’s
financial statements, the company had to adjust their 2013 net revenue figure
by minus $9 million, which decreased their net income for that year by $1.8
million. In 2014, their net revenue figure was adjusted down by roughly $11
million, but interestingly enough the company’s net income figure was adjusted
up and had $4.5 million added to it. Net income was reduced and adjusted down
also for FY 2015 and 2016.

            This case highlights the effects of
improper revenue recognition, in addition to the effects of bribing government
officials to further your business. To conclude, both instances of fraud arose
from lack of proper internal controls which led into the unethical decision
making that took place. It goes without saying that Alere and its employees
would 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.

 

Works
Cited

“Abbott Completes
Alere Acquisition.” GenomeWeb, 3 Oct. 2017,
www.genomeweb.com/business-news/abbott-completes-alere-acquisition.

“About Alere.” A
Healthcare 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 and
FCPA offenses – The FCPA Blog, www.fcpablog.com/blog/2017/9/28/alere-pays-13-million-to-resolve-accounting-fraud-and-fcpa-o.html.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Original
Article: http://www.fcpablog.com/blog/2017/9/28/alere-pays-13-million-to-resolve-accounting-fraud-and-fcpa-o.html

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