This question is "For Anagarwal". I have 5 cases I need the answer next Tuesday please. They are ethical accounting cases. I need the first 4 less than one page and the last one more than one page. I am attaching the instruction for the assignments and the cases.

240 Accounting Fraud Audit Responsibilities and ChaPter 5 l 7'^f case 5-t Fraud General Electric Accounting filed a civil injunctive action On August 4,2009, the SEC t""a u"o otr'o charges against General.Electric "ltii The s"'t, iittO lo-u'S' oitt'itt Court for the Company (GE). bv alieges that GE misled investors )'i**i same time its financial statements securities for sale at the instance' in ;;;il-;;,;ria11v ii*.ir'iooo, false statements' For tl GE ofLred approximatelv t snares iird;;ia;"cticut, 1ilt11 stock for sale to the public of newly issued GE "o"t*o" mllGE used approximately 342 at 531.83. In April 2004, to #;;J;A;sic and ;; i*ttu" ii""po'teo earnings or.revenues to ;;;;t agreed GE has negafive financial results' 2004' GE made addi2003, January 2004, atdDecember paid for in whole or in part with tional acquisitions that were results in its linancial reporting materially false and"misleading used improperaccountutt"g"' that GE of GE common 'stock lion shares of newly issued shares 'r**il;tsham'plc' In addition' in March 2003' June avoid reporting ;;;;$6';fi toq:*'1#,:$".'t'.t"u-1illii'&,,.,", " the cor According exceeded final GE common stock' ""&;ilt;ale per share (EPS) consensus analyst earnings 1995 through liting of its or communication of transportation the means or instuments the mails-knowingly commerce or by the use of in interstate to devices' schemes' or artifices (1) employed exoectations e,ery quarter from occasions ffil#-", *inl uo*tut'' on four separate ,";b0, ;; 20'03, high-level GE accounting executives or untru property b "rl".Uf"ttt, *t aJt irl "ttained money or''o*ittlonsY tmeln;-of aterial o state m o statements of material fu"i that was oot irnl"."ii"r"". p"t*on'"t approved accounting the improper cee-p' In one instance' conGE to avoid missing *"lytt:'final alowed in make the statements made' facts necessary in order to made' under which they were the light of the circumstances practices' ;;;;J;";.'wrtn ;.;;fu engaged in transactions' w9u1j operate as a business that operated or. of including purchasers "ou..., purchasers' fraud or deceit upon certain of GE involved- fraud' deceit' of GE securities' The "o"O*t of regulatory or deliberate or reckless disregard ttsulted in substantial o' i"dir""tly requirements, and airectly sensusEPSexpectations.Thefouraccountingviolations 2003' an improper application were (1) beginning in:anuary "", o, CBt commercial paper fundof the accounting t*a*at to disclosures and an estiing program to avoid *iu'o'utt" pretax charge to earningsl ili JJ ""pp.-*ately 5200 millionrnisapplication of financial (2) a 2003 failure to conect a in GE interest-rate swaps; (3) tii.i"rOt"g; or (3) -r*r*i". accormting standards to certain sales of locomotives that 2002 arf'2003, reported end-of-year milto utcelerate more than $370 had not yet occurrtA io ul'Jt' atimprope^r change to GE's lion in revenue; ano t+i i" 2002, aircraft engines' spare accormting for sales of commercial million' GE's 2002 net earnings by 5585 losses to other Persons' Failure R;;t KeeP Accurate Books and in Violation of Exchange Act to Section 13(bX2XA) ,* *rtil*.ased WithoutadmittingoJt'yingtheSEC'sallegations'GE to the entry ru. financial ptnuity use of of stock, directly or indirectly-bv GEfailedtomaintainandkeepbooks'records'andaccounts the ucc"tutlY.*d f1"-Yreflected that, in reasonable Aetait' in violation of and dispositions of GE's assets and consented "gr""i*," p.tma""otly tnjoining it from violating Section of an order lg3iand Sections 10(b)' 13(a)' 17(a) ofthe S"curitiesici of Exchange Act and 13(b)(21b) ofthe Securities concluded the SEC's invesof 1934. The charges u*o"""d tigation with respect to the company' transactions i".tio" 13(bX2)(A) of the Exchange Acl iiiiltrli"i, Controls Failure to Maintain lnternal Act Section iivioiution of Exchange GE Specifics of the Claims against during Offer or Sale of GE Securities the Relevant Period 13(bx2xB) shares of GE common stock Throughout the relevant period' on sale' sold' and purchased for were continuously offered offered In addition' GE itself the NewYork Stock Exchange' lsecuritiesandExchangeCommission,LitigationReleaseNo. v' Exchonge Commission ,i'i56, ;Ur;i 4,200;, securities ond (RNc) (D' conn')'www cv 123s Z:;;;; i;;;;,Companv,3oe 66'htm' I*.ilii ! t9..'"n/litreleases/2O09/1121 1 GEfailedtodeviseandmaintainasystemofinternalaccountrlasonable assurances that ing controls sufficient to provide to were recorded as necessary the company's transactlons with of financial statements in conformitv ;;##"ion and crrtena afplicable to such statements GAAP or other in violation of Section ior assets ;;;i;. ".countability Act' 13(bX2XB) of the Exchange Questions what's wrong with a compaoy 1. From an ethical perspective' ^ a period of fraud? ;;il-c shares during ,"\\ \\ !\\ l'i. j\\ {,;. f g i, t i.* {" ,.* I . \\i,, t r-l 'J *rt f ."1 $. 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Isulpre] }? reuged lrpne.tsu e sr ss1Fo3 '{cue1 'e1o(o3 d, IeulpreJ lB rolues eueceq lsnlpue ,fiprder 8urcuerrpe ueeq ssq llsopneog 'emlrg oqt ur .(ueduroc cl1qnd B lB OJJ B eruocoq u1q dleq lq8nu 1eq1 ecueusdxe 3:o eszq porq e qe8 o1 sluellc I?uollsurolq gq.,lr urrJ Ydf, pe$q ,(11eco1 e roJ lro1y\\ ol peplcop puz BuozIrV uI ruuxA YdJ eID go qred moJ IIe pessed peq u?eprueg 'ezls uI mog 8tg eq1 'euozuy'xnr rrtoleq lsnf urrrg Ydf, Joll-puoces sI tuJIJ eql -ooqd ur SUI erll roJ sree( or"r1 rog turlrorvr rege 8002 ul d'I'I e1o^fu3 ry IeulprsC Jo turlJ Vdf, eql peurol ueepneeg '(uue1 suorleraprsuo) rueTl) rlpnY 7y7 pnotg Suuunoc)Y puD san4tqrsuodsay 4pn7 9 raldeq3 248 Chapter 5 AuditResponsibilities andAccountingFraud contact litigakniw of Frazer, the attorney lbr Jost Furniture. Oloffagreed to Frazer to determine whether there are any ouistanding tion issues or other legal matters that the rirm shouli about. They all agreed to get these matters done by the end the secondday and a meeting was set for 5:00 p'm' Gabelli found out that a $1 million loan payable to Phoenix Second National Bank had been overdue before payment had been made March 15,2011' The president of ttr" Uart told Gabelli that Jost had been in violation of a debt covenant agreement that obligated Jost to maintain a current ratio of 1.5:1 at all times and that the bank was concerned about Jost's ability to continue as a going concern, pointing out that Jost had gone below the ratio twice' The iirst time Jost had violated the covenant, the bank accepted the explanation of a temporary cash flow problem' The bank granted the company a three-month extension to meet the requirements ofthe debt covenant. The bank subsequently found out the cash flow problem had been due to the fact Jerry Jost withdrew $500,000 from the Jost cash account at Second National Bank to help put a down payment on a mortgage loan to buy an upscale house in Scottsdale' The ,""ond ti-" it occurred the bank began foreclosure on the loan on January 31,2011, but by the time the process had been complete{ Jost had paid off the entire $1 million At 5:00 p'm' on March 22' the auditors met in the firm's conference room to discuss their findings' After hearing about Gabelli's concerns and oloff's lack of success with Frazer, Beaudean expressed serious concerns about taking on Jost as a client' Questions l. Why is it important to do the kind of due diligence testing and risk assessment review conducted by Cardinal & Coyote prior to determining whether to make a bid for the audit of a potential client? What are the potential red flags with respect to the Jost audit? If you were Yancy Corliss, would you go ahead and recommend to Sharon Rules that the firm should submit a bid for the Jost audit? Why or why not? 2. Regardless of your answer to question 1, assume Corliss decides to recommend to Rules that the firm should make a bid for the Jost Furniture audit. Beaudean seems surprised and asks what other factors Corliss might have considered in making the decision. Corliss is quite blunt and says: "I am a new partner in the firm' I have to bring in new business. This client is a slam dunk' If we make a reasonably competitive bid, we will get the account'" do you think there is so much pressure in public accounting to bring in new clients? Is this a good a. Why thing or are there potential risks that might go unnoticed or ignored? How might the decision by Corliss present an impediment to making sound audit deci- balance. Oloff had no luck with the Frazeq the attorney for Jost' When she called his offices, the secretary always told Oloff that Frazer was on another line and she'd take a message' When Oloff asked to leave a voice-mail message' she was told Frazer did not have voice mail. How about leaving an e-mail message? she asked. No e-mail either' Can I text him, tweet him, or just do it the old-fashioned way and set up an appointment? No, no, no were the answers' Oloffhad left five *.r.rg", for Frazer in the time before the meeting' She had nothing to report except to make an editorial comment about sions later on? b. Some CPA firms have started to add indemnification clauses to their engagement letters that state the firm is not responsible for fraud when the client knowingly misrepresented financial information during the course ofgathering evidence and testing account balances. Do you think these clauses are ethical? Why or why not? lawyer responsiveness, or lack thereof. At first, Jost had side-stepped Corliss's request for permission to speak with the predecessor auditor' Jost claimed that there had been a "personality conflict" and Jost was 3. Typically, when there is a going-concern issue with a .ilint, ttt CPA firm issues an unqualified opinion with afraid the auditor would speak negatively about the company' Jost did agree after Corliss reminded him it was a required part of the procedures auditors follow in making the client acceptance decision. Do you think the firm should consider issuing a qualified opinion or disclaim an opinion? Why or why not? How about withdrawal from the engagement? an explanatory patagtaph. Given the limited facts of the case, do you believe this type of opinion is justified? 298 Chapter Obligations Legal and Regulatory 6 in anEthical Framcwork Case 6-'l lnc' Company arud KBR' SEC u- Halliburton J's allegations, KBR m**nrtmrulffi*g*ufit*ffi tru.':#sru,m;ru*****#**ffi to otlt sarv to PaY bribes in disgorgement' rhe constructton-::#:tl],i,".iluno in order to obrain predece'*: of the *un n,rn rankingNigerial joint at reasl involved in the ,ion ,o Accord and their representatives ott,.r. *t]]lil;lHl Questions Nigeria, becomtns ":T'",Tr':#il;;1i;;;;"^'i,'*. f,our l. on. who has lived in ,s moralitv is officials tu"ai ii Nigeria is atmost *"""i;;;i;, '""llt;.;;il ;"'.,*-'P":'*'#:',,"*Ix:,''r:Hx ;;;;;.;, ffi*t.;il:T:L';,'5::1'J:l$:!iili"iT"?#;;n ;;','" 'ri ;;;;; iilii:Ht*fTt*"*i::"*:' l::i:,:*',{l,*i*f,ffifr,$yfi,]'"'l'i*'.i':ii :ii*##'frill.JilTil::l' 1;fli*,*,"":#:ffiH#ffi rn,"*u,i.nu,..,. ::HJ,;;;.,heUnitedKingdomasentto*'l'I#;;;.;, olg.:1. fuilffi r:-erception indsx (Cpl) Nieeria "i^ri."r"n'"1, ij;ffi:TilJ::lil tT:;1];tril"'H-*'I1i.1ffi iiiifl;]'"il,ffi:t?rffi*i**il;+:,',"ui;;',l LTr;';;;,,*.0*most :r"'i]:l'k[:",rgxr ",: cor *:[i;;**rm: il-xi=i:,j:#** United *ikrrO ** accounts of the and Monaco bank million' second position 'lt-lh" o"l:"".T'[','ii,il* ::::'tl.:J'H*[)'iil,h.-il l1TflX,X1ffm.i:llm:LT'[iil,ffi3tli:m:* c'un iu:i*"#:'-' *::i**.nll*"*#a'[H4il1#'f'r;x.';,"#::::.iTlfi:Ltf;11ilffi:; try and not payment in vtolat political party' statea : internal conr;asomne-tj.respond rhe SEc's ""#;;;i';.;tt:*::::;[e KBR prede- z' use"-ett'icat lhe parent company "' l"i.i[, p""r.rr a U'S' executtve: ment by trols ol Haltiburton. cash to a Nigerian to the following i,li]ljlTLt$iil':l '1;;;;';;q '"':"'::': "^*;,?;lyllirix; *::n,n[iT**iT]1:;ffi IL*{'l|,./;Tii*1*.^,3,.;[t$#',,,ffi *m*'}'*illt+**+.''1"i the into settleme*.'il;;, ;j:: :;;;;i.;';;.n-y.ui 0,.'.*."'-.: l?ffi 3ro,1i"ll1.,'.T:i;l?'*tru*ing tn. ol"."i*i,",",tigation. a senlence' is uncovered.I_uI,n..o.,. 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According to Tillerson, Exxon is going to bring XTO's expertise to bear on many of Exxon's acquisitions. XTO has been one ofthe fastest-growing energy producit expects its production to climb 23 percent by the end of 2009. Exxon, like other major oil companies, has struggled to increase its oil and gas reserves in recent years as state-owned energy companies held fast to the new energy discoveries. The purchase ofXTO would ers in the United States and increase the company's resource base about 10 percent. XTO Energy reported in 2007 total revenue of$5.5 1 3 billion with a net income of $ 1.691 billion, and in 2008 total revenue of $7.695 billion with a net income of $1.912 billion. Approval bv U.S. Congress production figures reported by the two companies in their 2008 Form 10-K filings with the SEC. Representative Ed Markey, chair of the House Energy and Environment Subcommittee, said he will hold hearings into Exxon Mobil Corp.'s takeover of XTO Energy Inc. According to The Wall Street Journal, the hearings will explore the deal's effect on competition in the natural gas industry the role ofnatural gas in U.S. energy, and environmental questions surrounding production ofgas from shalerock formations. One argument for the deal is that it secures more domestic energy in the hands of a U.S.-based player in the quest for energy independence.3 An important part of the merger agreement is payments to be made to officers and members of the board of directors at XTO. Given the distaste for large payout packages to corporate insiders during the period ofthe financial crisis in 2008-2009, it will be interesting to see whether the arrangements detailed in Exhibit 1 will influence Congress in giving its approval for the merger of XTO into Exxon Mobil. The Energy Information Administration (EIA) has stated that Exxon Mobil Corp. will emerge as the largest producer of natural gas in the United States after its expected acquisition 3Russell of XTO in 2010. The EIA based its estimate by combining 24O 527 487 04869 304 57 Cold, "Exxon Bets Big on Cas with Deal for XTO," December 1 5, 2009, http://online.wsi.com/article/SB1 0001 4 4 59 57 1 04401 67 7 26.html. euroceq e^?q plno,tt. rolcerp ee,(oldueuou qce '(t6'zt$) 600Z'I roqlueceq uo {co}s uouruoo q,{uedruoc eqt;o ecrrd Sursolc eI{} uo pes?q 'te.tte.a,r e qcns luesqY dEreug 61y reprm ;e8reru eql ;o uorlsldtuoc eql uodn unq o1 e1qe.&d euoceq el?q plno,^A esr,lA;eqlo leq] sluew,(ed eq] e.{receJ ol lr{31, s}q pa,,ue.,w .(1ue1un1o,\\ sro}rerlp Jo preoq s.,fuedtuoc eq} (600z'tl reqluocec uo Jo JOgIrJeIu se,(oldrueuou qcea uouruoc s,,(uedruoc eql Jo serBqs pe1se,L .(11n; 991'71o luer8 '.to1 e pelroter rotce.rrp es.{oldrueuou qceo '6667 frenrqeg u1 -ce.rrp ee,(oldrueuou eql o1 peluer8 .(11uacer trsour Icols uolu -ruoc q,(uedruoc eql Jo enle^ pu reuleleJ qsec Ienuue eql e Jo runs eq1 serull eeJLIl o] lenbe 1ueru.{ed qs?, tuns dunl e.\ ecoJ III. a JOlceJIp ee,(oldrueuou qcee 'lo4uo3 ur eSueqc e uodn ']eql sepr,to.id ueld ecueJeles srolceJr6l eplslno eqJ '6002 ur peurro;red secl^Jas 3o lcsdser ul 000'08I$ Jo reululer r{s?c lenuue ue pe,\\IeJer sJolceJlp ee(olduleuou eql'{co}s EOE )Lta^zaul p)ry\\fl uD 11t suolloS!1qo ttolnpSag puo 1o3a7 9 raldeql ueld e)ueJa^as sJol)eJ!o eplslno rapun slq6!u Jo re^leM 304 Chapter 6 Legal and Regulatory Obligations in an Ethical Framework in the Form 8-K about payments to officers and board entitled to receive a lump sum cash payment of approximately $1,000,000 upon completion of the merger. t.,} \\{ ,/ members raises any etlrical issues? 81 Questions { ; fne lawsuit filed by the Shareholders Foundation alleges directors of XTO beached its fiduciary / v that the board of duties. Identifu the duties allegedly violated in the XTO case. Much has been said during the recent financial crisis about top executive salaries being way too large, especially in those companies receiving a government bailout. The Obama administration sought to rein them in through t}reats of taxation or other forms of "moral suasion." Do you believe the government has an ethical right to inter- vene in a company's executive compensation program? Support your answer with reference to ethical reasoning. Review Exhibit 1. Do you believe that the agreement Under President Obama, a great deal has been said about \ een technology" and the need to find more environmentaily friendly sources ofenergy. The United States has been struggling for more than 30 yeam to become energy independent. The use ofexisting sources ofenergy such as natural gas and proven oil and gas reserves can help achieve that goal. To what extent should envlonmental considerations and other "social responsibility" issues influence decision making by management and the board of directors? How does such decision making relate to agency theory discussed in Chapter 3? In addressing this question, be sure to assess the environmental effects of the 2010 disaster along the Louisiana Coast when a British Petroleum deep water oil well exploded and leaked hundreds of millions of barrels of oil into the Gulf of Mexico. \\, b.{'iffi,,' I o*\\"Qt o'' I 'suorlcB srr{ Jo socuenbesuoc leSel sseu8uqp,t e pelecpul eH 'slueruelels IercueurJ ;o uoqelndrueru eql lnoqe Eqqlou nd.erDl preoq eql tq] pells pw pru{ Suprmocce erl} roJ .&rlrqrsuodser 11ry >1oo1 nle11 'uorsseJnoc srq uI 'qluorrJ euo urqyly\\ peu8rse; ure,(1eg go sJolcenp Jo pJeoq eql Jo srequeru mog 'Suruqcep ,ftreduroc eqt Jo qlpeq eql pue >1co1s ruedleg go secud eql qt.r1( 'serueduoc eqt ldecce '600Z'LE requa)ac 1e (,{laleturxo.rdde) 7y sX : 19, o1 o 11 eq] ,(nq o1 rego sq papurcseJ nlua os Jueruecunouue eIIl rege ,llecrleruerp pe8unld secrrd >1co1g 'erqcrulse{Jul se1&6 3o luecred 0, lnoqe pue sergedord selfehl ur dlrnbe eq1 3o luecred 001 peurrro (1ryey qnfeS seerer{a 'ue,tes go luecred 61 ueg ssel perr.^ao nfeg',{1nueg nfea eq1 go s1e -1cod sql eurl ol pepuelur eJe1tr sruJrJ oaa.1;o seseqcrnd eql lg8noqr sJolselur dueru terrerrroll 'le{Jeru eJB^\\Itos su lueru -8nu o1 le{reu emlcn4segul eq} Eur}erodrocur fq ,Qrsre,up 01 pepeeu ,(ueduroc eql Surlels eseqcmd eqt ,tusnt ot pel4 nleg 'uorlpg 9'I S roJ (se1&6 sr pre^Dl.q pelyeds ue&eS) emlcnfls.Uq selde6 pue ssrlrsdord se!fun 'suos sq srurrJ o Al .(nq o1 peul nf"U '9002 regrueceq uI fq peuno ernlcnrlsBJJul sBl^Btr{l PIIB sargedord sB1dBR[ Jo uoqrsrnbcy 'eurt tuouoq eqt flelerurxordde) o1 tqEre4s lus,n 'enue^eJ s? pepJocoJ sea(l.,(ueduroc erp olul spury leuosred.;:o uorsrgur qnlea tuo4 Surlpser (uoglu gg'g7g dleleurrxordde) uolllq Z' I sU Jo filtqett petelsreprm uV 'luelsxeuou 9Zt se,u, (uoqyu 79'19 sU Jo lserelur perucce uV 'slesw snorl4cg pue s1rgord pet?Uul o1 A1eBw1 enp pelegur se r teer1s ecueleq '.gOOZ '69 requraldeg eql ur ecuepg lrmocce {ueq ur rlsec eqlJo ([uotrlru] 9' g 1 $,,tlepuuxotddel uollyq ?0' 9 sA) wected y6 :pelelndlawrtt ere,& s1rmotue luetuelsls le:l;ltteutJ eqlgo freurums e sr 3urmol1oy eql 'ecueleq {ueq ur qs?c eql Jo selqAlocoJJo uorlsuur uB Jeglre s?./I\\ les.go er{I'peJep -ueJ Jeleu eJe,& ler11 secrlJes ro; s8uqpg snoqr]crJ Surleerc;o ecrlcerd pelsel-eurl eql o1 peuosu eq 's1ql rod 'esec eql {1e -nlc? s3,!\\ ]eqrl.t. usql ecuerruoJred rorredns ? 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One and failed decision dean of the Indian board member, Prof. M' Rammohan Rao, an indeSchool of Business, claimed the board had taken about the unrelated diverpendent view and raised concerns ifi*iot, valuation, and other issues' Two views emerged' and it" trrt'*ut why not stick to our core competencies was why venture into a risky proposition? The secondissue ,"lut"d to the valuation of the companies' Maytas Properties amount that was valued much higher than $1'3 billion, the came up with for the acquisition price am'sfinancialconditionandperformance,whichartificially chair' inflated the stock price' On January 7 , 2009, Satyam's company's board conRamalinga Raju, sent a letter to the that the fessing tI a massi re accounting fraud' Raju admitted sheet and other public disclosures conbalance "o-pu=ry', Raju wrote tained numerous false statements' For example' overstated revethat as of September 30, 2008, the company ately 2lpercent, and reported cash and bank Satyamh management ,o. When asked whether the fact that the target companiesled by ftluyrut Properties and Maytas Infrastructure--were any difference to the board' Rao said' Raju's two sons made "W" f.tt the valuation proposed by the Satyam management ties' We took was lower and conservative, despite the family an independent view on this'"2 When asked if entities. take a ' corporate governance Questions can be raised about with respict to the failed acquisition of the Maytas companies' to A conflict of interest arose when Satyam's board agreed acquire a 100 percent stake in MaJ'tas invest $1.6 billion to Properties and a 51 percent stake in Maltas Infrastructure' goih of these firms were owned by Raju's sons' They also For floated 21 other companies under the Maytas brand' the Raju family that ran the company a^lso invited "*u-pl", close friends to serve on the board of directors' family or questions These bonds created independence issues and confrontational with top about whether directors would be management when warranted' Litigation in the United States of Satyam on the NYSE and/or were investors residing in the United States traded on who purchased or acquired Satyam common stock 2Available at www.blonnet.c oml2OO8l12ll9/stories/ 20081 21 951 600400.htm. hmerican Depositary Shares (ADSs) are U'5' dollar-denominated rhrr", of a foieign-based company available for purchase "quity American stock exchange' ADSs are issued by depository on an the issuing forbanks in the United States under agreement with the entire issuance is called an American Deposi- ao*puny, "',gn neceipt (non) ana the individual shares are referred ffi ADSs. The complaint also asserted claims against Pricewaterpartners and houseCoopers International Ltd' and its Indian Satyam's outside auditors from the Indian affiliutfitu,.r. of the fraud' but ate of PricewaterhouseCoopers were aware financial statements as accurate' still certified the company's by A document (the charge sheet) filed in a Hyderabad court of Indian Central Bureau oflnvestigation (the equivalent the detailing charges the U.S. Federal Bureau oflnvestigation), Pricewateragainst numerous Satyam employees and two partners, alleged that the auditors received houseCoopers that the documentation from Satyam's banks that showed greatly overstated' The disclosed assets were "o*puny', ,tt".t further alleged that these auditors received fees fees simi"iru.g. from Satyam that were exorbitantly higher than the auditors; larly situated Indian companies paid to their outside fees as evithe Central Bureau of Investigation cited these between Satyam dence of a "well knit criminal conspiracy" and PricewaterhouseCoopers auditors' as The complaint asserted claims against other defendants members of the well. In particular, the complaint alleged that were audit committee of the Satyam board of directors-who the integrity of the company's for overseeing responsible on behalf Securities fraud class action lawsuits were filed purchased or acquired of a class of persons and entities who the American Depositary Shares (ADSs)3 upp.*i- of the board had taken into consideration companies on the possible impact of the purchase of the two the ISB dean shareholders' interests and the market reaction' on these grounds as well' responded "There were concerns diversi especially the market reaction for such an unrelated However, according to Rao, there was no way they fication." decided to could gauge the market reaction at first, so they reacted was a bit unanticiiisklBut the way the market pated he added. Uy rupees t atances of S:.61 billion rupees, ofwhich 50'4 billion (over $1 billion) didnot exist'a indicate Reports issued since the January 7 confession the scope ofthe fraud' and that he that Raju likely understated theft urO m"-U"rs tf his family have engaged in widespread funds through a complex web of intermediary Satyam's to as of financial statements, the performance and compensation the the outside auditors from PricewaterhouseCoopers' and internal accounting and finanadequacy and effectiveness of false cial controls-were responsible for the publication of public statements due to their extreme reckand misleading resulting failure lessness in discharging their duties and their accounting fraud' The to discover and prevent the massive Maycomplaint also alleged that Maltas Infrastructure and and Ramalinga Raju's two sons were respontas Properties The Raju sible for the false and misleading public statements' concerning Satyam's sons' false and misleading statements Ltd', Securities Litigotion' U'S' Southern District of New York' O9'MD-02O27 ' District Ctuft, lanuary 2009. aln re Sotyam Computer Services, ' o ll o 166lz Lo6l DlAI & LO600z/:aPruP/llp/eqd \\aaA pDuDu!1,,'3rur6 1sure6e /sddB/tuollaamlet)ueulJ'M ^M suollesn)fv ,sa^llnf,axf uer(1e5 uo ]se) lqnoo,, 'lull pleuous eqt pu? 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None of the statemiltsma&bythedefendms rhathirye been alleged to be false in tbe lewsit had any qualifing parties involved for the losses these investors incurred in its stock price crash, after the accounting fraud came to light in January 2009. The class action, which is a collective lawsuit presented by a representative-member before a court on behalf of a large number of investors, has been filed in the Supreme Court of India by New Delhi-based Midas Touch Investor Association. This is the first instance in lndia where SEBI is financially assisting investors to legally challenge wrongdoing by companies or promoters. The enforcement of lawsuits in Indian courts is complex and is explained in Appendix 3. Relief Sought United States On January ll, 2010, India stake in the company through a global competitive bidding process. Larsen & Toubro, Tech Mahindra, Spice group, the Hindujas, and some private equity firms have been in a race asked the authorities in the United States to not take any action against Satyam as it would amount to punishing shareholders twice. Satyam can face punitive action in the United States because the company's shares are listed and traded on U.S. exchanges. Satyam also is contending about a dozen class action lawsuits in U.S. courts. It is also possible that the company will face charges from the SEC. As many as 12 class action lawsuits were filed against the company by January 2009, and more are expected to be filed. The lawsuits were filed by investors in the American Depositary Shares ever since Raju confessed to having fudged the accounts ofthe company for at least seven years. The biggest liability that Satyam faces is from class action suits that have been filed in the United States by holders of Satyam's ADRs. While there is no way to put an exact figure on the liabilities, it could in theory be so large that it would make any recovery for the firm impossible. There is the option of an out-of-court settlement with those who have filed suits; but at the moment Satyam doesn't have the money to pay the settlement and may not have much money anytime soon. The charges alleged against the defendants in the lawsuits filed to date are: 1. The defendants issued misleading financial information about the company including information contained in its annual reports, which were signed by the defendants and contained fairness opinions issued by Satyam's auditoq PricewaterhouseCoopers. 2. A letter was sent by Ramalinga Raju to the board of direc- tors of Satyam and SEBI admitting to falsification of accounts, overstatement of profits and debt owed to the company, and understatement ofliabilities. The purchas- cautionary statements identifying factms lhat could cause results to differ materially from rhat stated- The plaintiffs have alleged that by defrauding the purchasers of Satyam's ADSs, the defendants have violated provisions of the U.S. Securities Exchange Act of 1934 and, therefore, the plaintiffs should be awarded unspecified compensatory damages. Indian market regulator SEBI announced in January 2010 that beleaguered Satyam can sell 5 1 percent equity to acquire the tainted firm. Questions 1. In his "mea culpa" statement, Ramalinga Raju, the CEO and cofounder of Satyam, confessed to inflating the company's profits and cash reserves over an eight-year period. He explained: "What started as a marginal gap between actual operating profit and the one reflected in the books continued to grow over the years. It has attained unmanageable proportions as the size of the company's operations grew over the years. One lie led to another. The problem further worsened as the company had to carry additional resources and assets to justify higher level of operations, leading to increased costs." Evaluate Raju's statement from the perspective of ethi- cal behavior including stakeholder effects and moral reasoning using the discussions in Chapters 1*3 for guidance. 2. Explain how PwC failed to live up to its professional 3. Evaluate the corporate governance systems at Satyam using the model of Indian governance discussed in the chapter and any other "best practices" you believe should be implemented. Did the management and directors at Satyam live up to their responsibilities for corporate governance? Be specific and provide support for your answer. Optional Question ofall of Satyam's ADSs were injured through their purchase of stock at inflated prices because they relied on the false Research the current status and misleading information provided by the defendants. occurred in the facts ofthe case? ers and ethical obligations in its audit of Satyam. Be sure to cite specific standards, whether ethical or GAAS, to support your answer. lega1 action against Satyam, its officers, and the PwC auditors. What changes have Instructions for Case Study Assignments You are assigned case studies to complete in each module; these are found at the end of the chapter following the discussion questions or appendix material. Please submit all cases for each module in one attachment - either a word or pdf file. Formatting should be one inch margins and single spaced, the professional font is up to you but should be a 11-12 font size. How long should the cases be? Most cases should be about - 1 page in length; however, there are a couple of exceptions which will be noted with an asterisk* in the syllabus - for these cases you may need to write more than one page. So - if you are assigned three cases in a module, your assignment should be about 3 pages in length (unless otherwise noted). What should be included? The cases can be quite long, as are some of the assigned questions, so all you need to include is the question number - you do NOT need to type up the case information or the question itself - just your response to the questions. Be sure to answer ALL questions for each case (unless otherwise noted). Please remember to put the case number at the beginning of each question set. Remember - these are not opinion pieces; you need to use ethical reasoning as explained in your text to support your answers, as well as the use of outside research or examples (when appropriate). How are these graded? The assessment rubric (below) will be used to grade all cases. This rubric is found in each module's drop box. When your assignment is graded you will receive an email with comments from me - and you may then return to the drop box to view the graded rubric (if you did not receive 100% on the assignment this will highlight where you lost points). See page 2 for rubric CATEGORY 10 points each 6 points each 3 points each 0 points each Focus Maintains focus on topic/subject throughout response. May exhibit minor lapses in focus on topic/subject. May lose or may exhibit major lapses in focus on topic/subject May fail to establish focus on topic/subject Quality & Relevance of Information All topics (cases) are addressed and all questions answered. All topics (cases) are addressed and most questions answered. All topics (cases) are addressed and a few questions answered. One or more topics (cases ) were not addressed. Elaboration on topic(s) Elaboration consists of specific, developed details. Elaboration consists of some specific details. Elaboration consists of general and/or undeveloped details, which may be presented in a list-like fashion. Elaboration is sparse; almost no details. Reflection Demonstrates a skillful and reflective thought process. Demonstrates reasonable reflective and thought process. Demonstrates a minimal reflective and thought process. Lacking reflection and thought. Mechanics Paper follows the conventions of English grammar, spelling, and usage. Paper follows the conventions of English grammar, spelling, and usage with almost no errors. Paper follows the conventions of English grammar, spelling, and usage with several errors. Paper does not follow the conventions of English grammar, spelling, and usage. Understanding of Professional and Ethical responsibility Paper shows a great degree of understanding professional and ethical responsibility Paper shows some understanding of professional and ethical responsibility Paper shows little understanding of professional and ethical responsibility Paper lacks evidence of understanding professional and ethical responsibility '(Z0OZ'lllH-mBl9:Y1 :4ro,,r,,r,raP) 'pa puz 'syoda1 PpuDuy u! pnDU puo stP!ww!) dwlunocty 'lA prPMoHz Itapo o1 nolq :suofiluouaqs pDuout! 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Some companies might take it to an extreme and pile on losses by creating reserves in a loss year believing that it doesn't matter whether you show a $1.2 million loss for the year or a $1.8 million loss ($0.6 million reserve). This is known as the "big red flag because they evidenced earnings management as initially record reserves were restored into net income. 3. should have provided another warning signal. Schilit provides the following for Sunbeam's operational performance in Exhibit 2 that should have created doubts in the minds ofthe auditors about the accuracy ofreported revenue amounts in relation to the collectibility of receivables as indicated by the significantly larger percentage bath theory." 2. Reserve amounts reduced after initial Receivables grew muchfaster than sales. A simple ratio ofthe increase in receivables to the increase in revenues overstatement. increase in receivables when compared to revenues. Fluctuations in the reserve amount should have raised a EXHIBIT 2 Sunbeam Corporation's Operational Performance Operational Performance ($ in millions) 9 months 9/96 ($ in millions) 9 months9/97 o/o Change $830.1 s71s.4 16Vo Cross profit 231."1 123.'l 860/o Operating revenue 132.6 4.0 32'l5o/o Receivables 309.1 194.6 59o/o lnventory Cash flow from operations 290.9 330.2 (60.8) (18.8) Revenue 4. Accrual earnings increased much faster than cash from operating activities. While Sunbeam made $189 million in 1997, its cash flow from operating activities was a negative 60.8 million. This is a $250 million difference that should raise a red flag even under a cursory analytical review about the quality of recorded receivables. Accrual earnings and cash flow from operating activity amounts are not expected to be equal but the differential in these amounts at Sunbeam seems to deff logic. Financial analysts tend to rely on the cash figure because of the inherent unreliability of the estimates and judgments that go into determining accrual earnings. Questions 1. Refer to the discussion of earnings management in this chapter. Consider the underlying objectives ofDunlap and evaluate whether earnings managemert had occurred at 12o/o N/A Sunbeam using the approaches of (1) Healy and Wahlen, (2) Dechow and Skinner, (3) Schipper, and (4) McKee. Chapter 3 addresses issues related to corporate governance and ethical management. Given the facts of the case, identifu the deficiencies in ethics and corporate governance failures at Sunbeam. 3. One of the most creative methods of producing profits at Sunbeam dealt with spare parts. Sunbeam owned a lot of spare parts that were used to fix its blenders and grills when they broke. Those parts were stored in the warehouse of a company called EPI Printers, which sent the parts out as needed. To inflate profits, Sunbeam approached EPI at the end of December to sell it parts for $11 million and book an $8 million profit. EPI balked stating the parts were only worth $2 million, but Sunbeam found a way around that. 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