ACCT 4800 - Test 2 Frauds

What was the original purpose of LDDS?

They planned to offer reduced service plan rates for phones that made calls outside of the local area.

Who was Bernie Ebbers?

He was one of WorldCom’s founders. He already owned 7 motels before investing in LDDS. His strategy was to acquire companies that would increase WorldCom’s EPS. WorldCom’s stock was one of the most widely held stock due to Ebber’s expansion of WorldCom when he was CEO. 

Who was Scott Sullivan?

He was WorldCom’s CFO and was the main leader in the acquiring of other companies.

Who was David Meyers?

He was WorldCom’s Controller.

What were the main reasons as to why WorldCom began to suffer?

They no longer had anymore telecom companies to acquire and in the early 2000s “.com” came out and the expected growth of internet was no longer the driving bull market for telecom stocks.

Who created adjusting entries to reduce line costs and inflate the company’s earnings in the WorldCom fraud?

Scott Sullivan pressured David Meyers, Buford Yates (accounting director), and two other accountants to make these entries.

What happened to the amounts that were reduced on the reduce line costs?

These amounts were not automatically reversed at the end of each quarter, so each quarter became an even more slippery slope.

Who was Arthur Andersen?

He was originator of the firm “Arthur Andersen,” was born in 1885 in Chicago, and started working at PwC in 1907 and passed the CPA while working there. His personal motto was “think straight, talk straight.”

What led to the ultimate fall of Arthur Andersen?

Its association with the Enron fraud.

What kinds of fraud did Andersen commit while in association with the Enron scheme?

The ignored whistleblower callers, allowed charges against net income to remain as non-recurring when they were actually recurring, allowed Enron to use SPE methodologies, shredded tons of documents, deleted significant computer files, and Duncan emailed with the attorney and asked to alter a memo. 

Who was David Duncan?

Was as Andersen CPA who was charged with ordering the shredding of Enron documents (motive was to keep away from the government. He was more for the client than the public. He did not proclaim that the SPE’s were fraudulent even though they actually were.

Who founded HealthSouth in 1984?

Richard Scrushy and Aaron Beam

What was HealthSouth?

It was an outpatient rehab and surgery facility. They did an IPO very early into their existence, had only been a company for two years.

Who was Richard Scrushy?

He was the CEO of HealthSouth and was originally a respiratory therapist before starting this company. He created HealthSouth because he saw a need for better services rather than Medicare and a better place for sports therapy. He bought many companies related to the health industry. He was strongly arrogant and created a poor tone-at-the-top from the beginning of HealthSouth. 

Who was Aaron Beam?

He originally took a job with Scrushy and was apart of Life Mark, and later on he created HealthSouth with Scrushy and became the CFO. His reaction to Scrushy lying to him on the first day was unethical as he went along with it. 

What was the pressure of the HealthSouth fraud?

To inflate earnings fraudulently and to keep the stock price high to meet Wallstreet’s expectations. This was done by have a poor tone-at-the-top poorly influencing CFOs and financial officers to participate in this scheme.

Who is KPMG?

They are a big 4 firm, located in 154 countries who provides audit, tax, and advisory services.

What was the background of the Isle of Man scheme?

The Isle of Man was located where there were really low to almost zero tax rates. It was a scheme where KPMG helped Canadian corporations avoid paying corporate taxes altogether. KPMG only focused on wealthy clients for this scheme and these clients were charged a $100,000 fee to start up an account with Isle of Man.