1. How serious were the alleged accounting misstatements? As part of your answer, consider whether they were material and whether they were fraudulent.
2. Suppose you were defending Mr. Rand. Could you argue that the impairment charges Beazer made beginning in the second quarter 2005 indicate that accounting is highly imprecise and that his alleged fraudulent adjustments were minor disagreements about estimates? Explain.
3. Evaluate Beazer’s financial condition at the end of 2007.
4. Evaluate Beazer’s financial condition at the end of the third quarter, 2009.
5. Were investors harmed by Mr. Rand’s alleged fraudulent entries? Explain.
6. What was more serious, the allegations against Beazer Homes for possible mortgage fraud or the allegations against Mr. Rand for possible accounting fraud?
7. Discuss the Wells notice issued to Beazer Homes USA’s CEO.
Beazer Homes, a home builder based in Atlanta, Georgia, was one of the nation’s fastest growing homebuilders from 1998 through 2006. As interest rates declined, many Americans bought homes for the first time, and many others bought more expensive homes. This increase in home purchasing led to a rapid growth in new home construction throughout the United States and to the growth of 10 large home builder companies. At the end of 2005, Beazer was the sixth largest home builder in the United States in terms of numbers of homes built (18,401). Exhibits 1 to 3 show Beazer Homes USA’s 2000 income statements, balance sheets, and statements of cash flow from its 2000 10-K; Exhibits 4 to 6 show those same financial statements from its 2007 10-K. As can be seen from Exhibits 1 and 4, Beazer’s 2006 revenues were more than five times greater than 1998 revenues, whereas 2006 net income was more than 15 times greater than 1998 net income. Similar increases in revenue and net income were common for the 10 largest home builders as their market values increased by a factor of 10 or more from 1998 to early 2006. Sales growth for home building began to slow in 2006 as mortgage rates climbed. The following year, 2007, mortgage finance companies began to fail and the market for securitized low- quality mortgages disappeared. Home builders throughout the nation had large inventories of raw land, homes under construction, and completed homes as the housing market collapsed. As shown in Exhibit 4, Beazer’s revenues declined from $ 5.356 million in 2006 to $ 3.490 million in 2007, and Beazer went from a $ 369 million profit in 2006 to a $ 411 million loss in 2007. However, Beazer still had $ 454 million of cash in 2007 (Exhibit 5), and its cash flows from operating activities in 2007 were $ 509 million (Exhibit 6).