Topics: Risk, Financial statements, Generally Accepted Accounting Principles Pages: 6 (1809 words) Published: July 5, 2013
I THE RED FLAGS and the Allegations by the SEC
-1996, Ruttenberge family sold a large chunk of stocks for $49.6m on the second public offering while the financial statements continuously showed positive trends - The financial statements analysis

- Cash flows were negative while profit was reported. Early 1999, liqutity problem arised, sold $200M of high-yield or Junk bonds in mid 1999. - Justice Department:
Adam Gilburne: guilty to conspriracy to commit wire and securities fraud to inflate earning 96-99. He was alleged of drawing up a list of good and bad items to adjust income to meet analyst's expectations. Imporperly recogmnzing unearned and fictitious recievales from its vendors - SEC: 3 Financial Fraudent Schemes

1 Imporperly recogmnzing unearned and fictitious recievales from its vendors * GAAP: Revenue recognition when realized or realizable and earned (Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises.)

A/R-vendor allowance XX
Revenue XX
Advertising Exp XX
A/P or CashXX

the allowance not to be offsets against advertising expense until the related marketing had been carried out and completed. -By aggressively “front” loading vendor allowance for marketing expenses. - Without implicit nor explicit agreement with the vendors about the commitment to the marketing allowance; instead, it was more up to the vendors to decide when and how much to pay. - AFRF departure: capitalized opening store exps. Cummulated effect of $2.1M in 1996. (Wall Street 1995) - Unusual in increase in A/R: $400k in ’97 and $29M in ‘98 - $14.4M vendor allowance was recorded at year end – 50% of the account balance at year end (recall Health management and its booking of inventory $1.8M). No support docs nor payments for $11.3M, even 3 month after year end - $16M (out of $22M total confirms sent) Non standard confirmations: ambiguous language including “the company had earned, accrued, or had available during the year”,and other clearly stated that “no additional funds” were due. -Continuous investigation by the seniors **(Discussion)

2 Failing to properly account for inventory
a. GAAP: Lower cost or Market rule
b. Overstated Inventory for $150K in ’97 and ’98
c. Inventory nearly double: $209M in Jan. ’98 and $400 in Jan. ’99 Under booking allowance for obsolete ~$150K in ’97 and ‘98

3 Improperly recording as income the value of display booths provided by its vendors d. Bogus Booth rental income booked without vendors’ knowledge, 80% in ‘98 “Booth Asset”$9M

- THe Redflags arising from Financial Reporting Fraudulent: AU-C 240.A75 the Fraud Triangle 1. Incentives and Pressures
Financial stability or profitability is threatened by economic, industry and the operation condition * High degree of competition and market saturation: only has a small % of market share and the declining of demand at one point. * Father and son are in the business, and family owned large portion of stocks * High vulnerability to product obsolescence: constant demand of new styles * Significant declines in customer demand and increasing business failure in the industry: overall decline in demand in 19XX * Rapid growth or unusual profitability especially compared to that of the other companies in the same industry 19XX * Operating loses making the threat of bankruptcy, foreclosure: the need to raise more capital from investors to sustain the losses over the years that was not shown in the Financial Statements * Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earning growth PRESURES

* Profitability and trend level expectation of management. * Need to obtain addional capital
* Delphi Investments’s anylytical report was included a strong “buy”...

Cited: Former 'Just for Feet, Inc. ' Executive Pleads Guilty to Conspiracy to Commnit Wire, Securities Fraud. (2003, May 12). Retrieved from U.S. Department of Justice:
SEC Charges Deloitte & Touche and Two of Its Personnel for Failures in Their Audits of Just for Feet. (2005, April 26). Retrieved from U.S. Securities and Exchange Commission :
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