An Accounting Investigation after the UK based super market restated its profits
Issue: Tesco restated its accounts due to overstatement of earnings and an accounting investigation is looking into the matters. The company is unable to account for its problems as well as its earnings.
Synopsis: UK based super market chain Tesco restated its accounts last month due to overstatement of profits by $250 million in the half yearly reports. After the profits were slashed and the dividend cut off, the company had suspended 4 of its senior level executives to delve further in the matter. Now the UK based firm is unable to account for its own problems. It can be inferred that the income from suppliers has been accounted in the first half and expenses must have been deferred. But the amount is huge due to which there are a lot of questions being raised for the company’s management. Manipulation of accounts by senior management could have led to this situation. This comes as a warning sign for all the investors. The company has lost the faith from customers as well as employees. The brand is not looking into restructuring and nor are they adding real value to the UK market. Any strategic move could lead to a further reduction in the profits of the company. The company might have to set up a financial committee to sort the matters. The solution might take some time because the company has many problems to address. It is argued that the accounting issues are stretched in a different manner and none of them seem fraudulent hence it requires an in-depth investigation. The company has not come up with a strategy to deal with the issue and the new finance director has not started it. The employees are demoralized and customers have lost faith in the company.
Stakeholders: The main stakeholders in this case are the employees and the investors who have no idea about the overstatement of the profits. The amount of profit overstated is as high as the total profits of a particular period. The investors also will lose a large sum of money due to the misstatements. Employees have lost support and faith towards the company. Investors may lose a large amount in lieu of the final decision that the company may face.
Nortel settles the fraud accounting allegations
Issue: Nortel Networks Corp. and Nortel Network Ltd. will pay a fine of $35 million to the SEC to settle allegations that the company carried out fraudulent activities.
Synopsis: The investigations started in 2004 when the company inflated its financial results to show that its making profits and to lure investors. The SEC terms it as a pattern of fraud and fired four senior level executives from the company. The manipulation of accounts has been seen as a civil fraud and hence had to fine the company. Senior level executives were responsible for the manipulation of accounts. The investigations went on for a while and Nortel has now agreed to pay $35 million to SEC as a final settlement on the case. The final settlement shows that the manipulation did take place and the fine will ensure that no other company does the same thing. In case a manipulation is detected, it will be fined and the company will suffer in terms of fine and lack of goodwill. The consumers may also lose faith in the company. It is paid as a civil penalty and to finally resolve the matter. The investigations revealed that the profits were manipulated to meet the Wall Street expectations and to pay fat bonus to the employees. The company faced severe investigations from the SEC and the allegations were only settled with the fine. The financial reporting was not done properly and the company faced scrutiny from the SEC. The shareholders lost a certain amount and faith in the company. The shares of the company has lost value. In addition to the fine, the company has also agreed to provide quarterly reports to show the financial results and aim to strengthen the financial reporting process. This will ensure that no such act happens again and the company will be able to plan and report according to the statutory requirements.
Stakeholders: The stakeholders in this case were the investors who were lured to believe that the company was generating good revenues and the share prices reflected it. Instead it was a manipulation of accounts which put the shareholders in a fix. The final settlement shows that the company will not establish internal control and pay adequate attention towards financial reporting. It also shows that those participating in such issues will not be taken lightly.
Value of Salix shares plunge due to an accounting restatement
Issue: Salix Pharmaceuticals announced a revision into their accounting statements which showed that the company had lower drug sales than expected.
Synopsis: The Pharmaceuticals company announced a lower drug sale as expected in the quarter. The sales were not as strong as expected by the wall street, due to this announcement the value of shares went down by almost 38%. This announcement followed a review and a resignation by the chief financial officer. The company was already looking into a takeover by Allergan Inc. but issues with the inventory levels could not help the deal. The company has high levels of inventory due to which the profits were overstated. Also, the sales did not show a high level as expected by the wall street. The sales were expected to be high but the higher levels of inventory did not show a fair result.
The takeover also did not work out because Salix maintained more inventory than needed. The company declared that its top selling drug has a nine month supply and wholesalers haven’t been able to sell enough to retailers. Due to this the inventory of drugs is growing more than expected. Expected income of Salix has fallen from earlier levels and so has the value of its shares. As of now, the company is negotiating with the retailers to increase the sales and reduce inventory levels. Though this announcement may take a while to work out. The Board has hired outside lawyers and is looking into the matters independently. The major reason for this is the inventory levels maintained by the company. Its bestselling drug also had an inventory of nine months which shows that the other drugs must be maintained at a lower but similar level.
An unqualified opinion was provided by Ernst & Young in the previous year, the auditor stated that the results of sales in terms of inventory has at all times been correct. This may show that the auditor did not raise a question regarding the inventory levels maintained by the company at all times. Salix was trying to negotiate with the dealers so as to improve the visibility and to increase the sales.
Stakeholders: Stakeholders in this case were the investors in stock who believed the higher sales figure and invested in the company. They lost a large amount due to the fall in profits and the fall in share price. The wall street expectations of sales may have lured many investors to invest in the company. But the actual figures did not meet the expectations which led to such a situation.