Task 1: Questions regarding a corporate accounting scandal

Businesses listed on the stock exchange are required to make public a set of signed audited financial statements. At the same time, management knows that the better their financial results look, the higher the share price will be and, consequently, the happier the shareholders will be. However, this can lead to conflicts of interest, as was the case with Livent Inc. and their auditors, in the following example describing an ethical issue. Read about it now, and then answer the questions that follow using the online submission tool.

Livent and the auditors

Livent Inc. was a Toronto, Ontario-based company that produced live theatrical entertainment, generally at one of its own theatres, but also obtained touring engagements, when warranted. They produced established musicals, such as The Phantom of the Opera and Joseph and the Amazing Technicolor Dreamcoat, as well as new productions originated by the company, such as Ragtime, Kiss of the Spider Woman, Sunset Boulevard, and Fosse. Livent owned and operated theatres in Toronto, New York, and Vancouver.

The company's revenue was derived from performance revenue, the sale of merchandise, corporate sponsorships, gains on sale of rights and exclusivity arrangements, royalties, concession income, and other related fees. Livent became a public company in Canada in May 1993, and its stock was traded on the Toronto Stock Exchange in Canada and on the NASDAQ national stock exchange in the U.S. However, Livent declared bankruptcy on November 18 and 19, 1998, in the United States and Canada, respectively.

The Offer of Settlement between the U.S. Securities and Exchange Commission (SEC) and the company lists the following allegations against the company:

During the period 1990-1994 (prior to the time Livent became a SEC registrant), Livent was involved in a fraudulent kickback scheme whereby Drabinsky and Gottlieb (Livent's main executives) received directly, or through a company Gottlieb owned, approximately $7 000 000. About $4 000 000 of that amount was capitalized as pre-production costs.

Livent transferred pre-production costs for shows to fixed assets, where the amortization period was significantly longer.

Livent simply removed certain expenses and corresponding liabilities from the accounting records at the end of each quarter to improve quarterly results.

Livent transferred costs from a currently running show to a show that had not yet opened or which had a longer amortization period.

The dollar effect of items 2 to 4 was to understate expenses by $3 500 000 in 1995, by $18 100 000 in 1996, and by $8 500 000 in 1997.

During 1996-97, Livent entered into a series of transactions that supposedly represented the sale of rights to present certain Livent shows in return for fees from the counterparties, or buyers. These fees were reflected in revenues. Side agreements were signed that obligated Livent to repay the fees. As a result, Livent overstated revenues by $34 000 000 ($16 400 000 in 1996 and $17 600 000 in 1997).

The Securities Exchange Commission (SEC) alleged that misstatements were dealt with in the accounting records in the following ways:

The accounting records were fraudulently manipulated.

Senior management, including Drabinsky, Gottlieb, Topol, Eckstein, Winkfein, Malcolm, Craib, Fiorino, and Messina, were involved in the manipulations. They were, respectively, the chairman of the board and CEO, the president (who was also a director), the senior executive vice president and COO, the senior vice president finance & administration, the senior corporate controller, the senior production controller, the senior controller budgeting, the theatre controller, and the chief financial officer (who was also the engagement partner for the 1995 audit).

Drabinsky, Gottlieb, Topol, Eckstein and others concealed the manipulations by concealing information from the auditors, and Drabinsky and Gottlieb signed false and misleading management letters of representation to the auditors.

It appears that the auditors were the victims of a massive scheme to fraudulently misrepresent the company's financial position, a scheme that involved most of the senior management (especially the senior financial management).

Questions:

a) Determine the facts of the situation.

Livent was involved in ...

Livent transferred pre-production costs for shows to ...

Livent removed certain expenses and corresponding liabilities from the accounting records at the end of each quarter to ...

Livent transferred costs from a currently running show to ...

b) Identify the primary ethical issues.

The accounting records were ...

Senior management was ...

c) Name at least two of the stakeholders that the fraud affected.

Task 2: Report on a corporate accounting scandal you have researched

Your job is to research a famous corporate scandal, an issue dealing with corporate social responsibility, or an ethical issue of a corporate nature, and report on your findings using PowerPoint or any sharable presentation method. (You will choose one topic from the list that follows.) Your report/presentation should be engaging and may include video clips, links to websites, and so on. For instructions on how to create such presentations, search the Internet for "How to create PowerPoint presentation," along with the name of your preferred version of PowerPoint; or search for "How to create Prezi presentation."

Your report should contain the following seven items of information, which form the basis for solving ethical dilemmas:

Determine the facts of the situation. (Background information about the company or issue in question)

Identify the ethical circumstances. (Describe the scandal, the issues, and the important stakeholders)

Identify the values related to the situation. Find out what the responsibilities and obligations were for everyone involved.

Identify the action taken and the consequences of those actions. How did those actions affect the company and/or the industry?

Specify the alternative courses of action that could have been taken and evaluate them, applying your personal code of ethics or your organization's code of ethics to the situation.

Describe the consequences of the alternative courses of action you specified.

If you were personally involved in this case/issue, what decision would you have made and what action would you have taken? Choose one of the alternative courses of action you identified and explain why you chose this one to deal with the situation.

Topics

Here is a list of some famous scandals or issues involving corporate social responsibility and ethics. Choose one topic from this list.

Bernie Madoff - Ponzi scheme

Bre-X - falsified mineral discovery

Compass Group - bribed the United Nations to get business

Conrad Black - hidden executive compensation in the range of $200 million

Enron - directors and executives fraudulently concealed large losses in Enron's projects

Exxon - over-reporting oil reserves

Fannie Mae - under-reporting profit

Halliburton Company - overcharging on government contracts

Lance Armstrong - doping charges

Maple Leaf Foods - Listeria outbreak

Martha Stewart - insider trading

Nike - sweatshops

Nortel - accounting irregularities

Parmalat SpA - questionable accounting practices

Scott Thompson - Yahoo executive lies about his credentials

Swissair - miscalculated expansion

Tyco International - executives steal from company

WorldCom (now MCI, Inc.) - misrepresented profits

Xerox - alleged accounting irregularities involving auditor KPMG

Any other accounting scandal that relates to corporate responsibility and ethical behaviour