Background
Accounting fraud involves the manipulation of an organization’s financial statements.This is done in an intentional manner so as to make it seem the company's financial health is good. The company can falsify the information in the declarations by understating their liabilities, overstating their assets or not putting into record their expenses (Jones, 2011). Global Crossing Ltd is an example of a company that was caught up in an accounting fraud scandal.
Global Crossing Limited was a telecommunications corporation founded in 1997. Its operations involved the provision of computer networking services throughout the world. Its customers were made up of large and small organizations and private individuals. The company experienced increased growth in the years following its foundation with its share price reaching a high of $ 61 in 2000. However, some few months later, its share had dropped to about $25, and by November 2001, the stock was trading at $5. The company was forced to file for a Chapter 11 bankruptcy protection in January 2002. The fall of Global Crossing Ltd is a perfect example company that suffered the effects of fraudulent involving organization's top and senior management ( Dinh et al., 2014).
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Responsible Parties
Global Crossing Ltd executives bore the greatest responsibilities towards the collapse of the firm. They were able to walk away with massive amounts of money as fortunes as the company sunk to the ground. According to Roy Olofson, a former vice president of finance in the firm, he stated that the executives involved themselves in inaccurate reporting of revenue to the public. The company would record their long term sales as soon as they were made instead of recording them as per their contract dates. The company would also book capacity swaps and other telecommunication carriers as cash transactions. As the internet consumption in the USA started to skyrocket, the company came up with plans to lay down fiber optic cables for more than 1.7 million miles. It was to become funded by a three year debt of more than $ 7 billion the company had taken .
By June 2001, the company had completed laying down its cables. By 1999, its share price was trading at $50, and its market capitalization had reached more than $35 billion thus it was in a position to manage its debts accruing to billions of dollars. However, all this came to change when the economy started to become turbulent as a result of carrier charges being introduced. The company executives began to introduce poker games into the firm’s accounting books in 2001. This was to allow the company to meet its goals that had been laid down by the financial markets ( Dinh et al.,2014).
Laws Violated and Financial Loss
In the provision of a professional opinion on how accurate the financial statements; internal control, compliance with set rule and regulations and financial representation of a company's audits are carried out. The audit reports have four opinions that can be used to describe them; unqualified, qualified, disclaimer and adverse. All auditors are expected to follow the laid down procedures as per the Generally Accepted Auditing Standards (GAAS) and use it as the foundation of their audit reports.
In Global Crossing Limited, they did not engage themselves in the auditing of their financial statements and internal controls. This was seen when it started reporting their long-term revenues as current income in their financial statements when the business operations started taking a nose dive. It was a clear misrepresentation of income for the income in place was not being reported in the period that it was to become earned as per the contracts. Global Crossing Ltd sold to Quest Communications Inc. telecommunication facilities of about $100 million. This was in return for the similar amount from Quest and Global Crossing recorded it as sales revenue, unlike Quest. This was incorrectly done for no cash had been exchanged between the two companies. The Company went further ahead and hired a former Arthur Andersen employee by the name Joseph Perrone. Following his previous engagement with Andersen, the executive vice-president Perrone hid any misstatements that existed in their financial statements. Perrone had the knowledge about what the auditing company would come and look for in their financial statements. Andersen also carried out auditing activities for Quest's financial reports. However, Quest and Global Crossing Ltd had not shared any business notes, and this is what made it hard for the auditing firm to trace any misrepresentations Kaplan and Douglass, 2002).
Perrone's son received funding for his project that was added to the firm's expenditure totaling to more than $1 million. Following this, Perrone was assigned other duties within the company for it had raised a conflict-of-interest concern. The founding executives at the enterprise such as Gary Winnik sold off shares worth more than $123 million before the company filed or bankruptcy. This was based on insider trading. This is whereby the privileged people get the opportunity to trade their shares using information that has not yet been made public. The company went ahead and forgave about two-thirds of a loan worth $15 million that had ben given to its CEO John Legere just before it could file for any bankruptcy (Kaplan and Douglass, 2002)
Fraud Discovery
The fraudulent activities at Global Crossing Ltd. were brought into light by Roy Olofson, who was the firm's finance vice-president. According to Olofson, Global Crossing had its metrics in place known as cash revenues and adjusted EBITDA. Using this, the company would report all the revenue it had received of example in a whole year during the first month of the year. The EBITDA (earnings before interest, taxes, depreciation and amortization) were used by the firm in the monitoring of compliance between Global Crossing Ltd and its bondholders.The investments firms and banks who would follow up on its operations and determine whether it had enough money to offset all its debts would also use EBITDA (Fabrikant and Romero, 2002). Following this presentation of favorable figures to the public, Olofson did not like the accounting irregularities that were being involved by the company. The company had also recorded and IRU sale of about $150 million as deferred revenue. It was at this point that the finance vice president brought into light all the accounting fraud that the firm was doing (Mills,2003).
Case Investigations
Investigations on the company were held on March 21, 2002, by the USA House of Representatives Subcommittee on Oversight and Investigations. The committee members held a meeting in which they would discuss the effects the company's bankruptcy had on investors, employees, and the markets. The executives from the company were to become questioned by the House Committee on the different accounting and auditing scandals they involved the company ( U.S. House of Representatives: Subcommittee on Oversight and Investigations, Committee on Financial Services, 2002). The House of Energy and Commerce Committee was also involved in the process. It is this House Committee that was able to shed light on the scandal that hit Enron. The Global Crossing Ltd had to turn over all their financial documents that related to the executive's pay and bookkeeping practices. The company also had to explain to the committee on the accounting auditing relationship that existed between them. The Federal Bureau of Investigations would also investigate the company executives including its founder Gary Winnick.
Case Outcome
Despite the government committees and the Federal Bureau of investigation trying to find out the accounting fraud that affected the telecommunications company, the executives still walked away with personal fortunes. Most of its employees lost their 401 (k) funds. The investors who had shares at the company had them trading at around 7 cents. So far, no one stood accused of any wrong doings in the enterprise. The company was also involved in a lot of political contributions that were evenly distributed between the Democrat and Republican parties. The company gave around $250,000 to the Republican and Democrats respectively. Former assistant attorney general Anne Bingaman was also hired by the firm as its Washington lobbyist. She was married to Jeff Bingaman. A Democrat New Mexico senator and paid her more than $2 million dollars so that she cold block the licensing of AT &T cable from America to Japan. These generous donations are said to be the primary reasons that up to date none of the company's executives has had criminal charges labeled against them.
References
Dinh, Tran Ngoc Huy., Nguyen, Viet Hung., & Dinh, Tran Ngoc Hien. (2014). Modern International Corporate Governance Principles and Models After Global Economic Crisis (Part Ii) . Partridge Singapore
Fabrikant, G., & Romero, S. (2002, February 11). How executives prospered as global crossing collapsed . Retrieved from http://www.nytimes.com/2002/02/11/business/how-executives-prospered-as-global-crossing-collapsed.html?pagewanted=all&src=pm.
Jones, M. (2011). Creative accounting, fraud and international accounting scandals . Chichester, West Sussex, England: John Wiley & Sons.
Kaplan, K., & Douglass, E. (2002, February 21). Former andersen partner in global crossing storm . Retrieved from http://articles.chicagotribune.com/2002-02-21/business/0202210260_1_becky-yeamans-andersen-partner-global.
Mills, D. Q. (2003). Wheel, deal, and steal: Deceptive accounting, deceitful CEOs, and ineffective reforms . Upper Saddle River, NJ: Financial Times Prentice Hall.
U.S. House of Representatives: Subcommittee on Oversight and Investigations, Committee on Financial Services. (2002). The effects of the global crossing bankruptcy on investors, markets, and employees . Retrieved from http://commdocs.house.gov/committees/bank/hba78601.000/hba78601_0.htm
