The case involved Securities and Exchange Commission as the complainant and John Mervyn Nabors and Eric J. McCracken as the defendants. The plaintiff sued the defendants on the grounds of corporate wrongdoing exercised by the defendants in their executive capacity in Aerosonic Corporation in five years. Aerosonic Company was a manufacturing company that majorly manufactured airplane instruments. Nabors was the company's Chief Executive Officer (CEO) while McCracken was the Chief Financial Officer (CFO) in the period when the frauds were exercised. The frauds of which the defendants were sued took place between January 1999 and December 2002. The aim of committing the frauds was to inflate the pre-tax earnings reported by the company thereby giving the false financial position of the corporation. The two executives made Aerosonic to release false press statements concerning the financial situation of the company. The press release indicated that the company was doing quite well financially yet it had suffered a loss of over $3.9 million. The press release and other falsified information given to the public saw an increase in the stock price, and during this period McCracken sold his shares at the artificially inflated price making him reap huge profits.
Nabors and McCracken executed number frauds that led to the inflation of the pre-tax earnings. During the relevant period, the two executives committed the following frauds. (a) Exaggerating the inventory by falsifying the inventory records; (b) Failing to value the inventory based on the actual costs. (c) Improperly capitalizing labor and overhead costs into inventory. (d) Failing to provide adequate reserves for obsolete and slow-moving inventory. (e) Inflation of earnings by recording fictitious and premature revenue. The accounting stunts were executed in the full knowledge of the two executives. To avoid exposure, Nabors and McCracken exercised total control of the company's financial information and financial records. The defendants also avoided inspection within the company by hiring unqualified human resource that they could easily direct and control. As a result, the frauds went undetected for an extended period.
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The schemes had a considerable impact on the financial statements of the company in the relevant time period. Aerosonic's pre-tax earnings were significantly inflated as a result of these schemes. The defendants resigned from their respective positions in Aerosonic Corporation in December 2002. The new management was able to identify some anomalies in the financial statements of the company. For instance, the alteration of the inventory records had an impact on the balance sheet. A balance sheet is supposed to show the assets, liabilities and the capital of the business at the end of a certain trading period. The assets include the stock value that is recorded in the inventory. The defendants falsified the inventory records hence the company records showed exaggerated values in the general ledger. Consequently, the falsified information was used to prepare the balance sheet. The value of the assets of the company was higher than the physical count value. The slow-moving and obsolete inventory had an impact on the income statement. The income statement should indicate the actual expenses incurred by the company in its operations. However, the defendants failed to record the applicable write-offs as well as the reserves for obsolete and slow-moving inventory. As a result, there was an understatement of the actual expenses incurred by the company. The income statement was thus affected and the pre-tax income consequently inflated. Inappropriate capitalization of labor and overhead costs led to inflation of the inventory and decrease in the expenses. These affected the balance sheet and the income statement respectively. The failure to value inventory based on the actual cost led to inflation of the inventory. The defendants brought back into the inventory written-off inventory at an inflated cost. The consequence was an overvaluation of the assets which affected the assets on the balance sheet.
The parties inside the company which committed the frauds were the two defendants who both held executive positions. They used their positions to hire personnel that they could direct and control hence they were able to execute their schemes. Nabors was the Chief Executive Officer, and he used his influential position to cover up the schemes. McCracken was the Chief Financial Officer and therefore had access to all the financial records. The defendants used their executive capacities to control the other employees and hence perpetuate their schemes undetected for five years. The defendants were able to avoid scrutiny successfully and ignored recommendations by the auditors to put operative controls over records (McGinty, & Maremont, 2011).
Apart from the independent auditors, there were no outside parties involved in the schemes. The auditors put forward their recommendations which were entirely ignored by the defendants.
The pressure to commit the crime is not identified in the case. However, the greed and materialistic nature of the defendants led to their scheming and execution of the frauds. The defendants knowingly devised and executed the plans to commit the frauds in Aerosonic Corporation. They also directed and supervised their juniors in implementing these improper accounting schemes.
The plaintiff requested the court to issue a prohibitory order, perpetual injunction and enjoining against the defendants. The plaintiff also requested that the defendants return all the proceeds they had acquired as a result of the fraud activities to the Company. The complainant required the defendants to pay other penalties resulting from their schemes.
Work Cited
McGinty, T., & Maremont, M. (2011). Nabors draws SEC scrutiny. The Wall Street Jan, 5.
