Topics: U.S. Securities and Exchange Commission, Financial statements, Enron Pages: 7 (2014 words) Published: October 20, 2013
caseF&C INT

CASE 4.2



Over two centuries, the Fries family of northern Kentucky and southern Ohio built a dynasty of sorts in the flavor industry. Alex Fries, a German immigrant with a background in chemistry, settled in Cincinnati during the early nineteenth century and a few years later established a flavor company. Throughout the nineteenth and twentieth centuries, Fries and his descendants owned, operated, or oversaw several flavor companies, the last of which was F&C International. In the early 1990s, F & C’s chief executive, Jon Fries, orchestrated a large-scale financial fraud that proved the undoing of the company and the family’s proud history in the flavor industry. This case examines the role of three F&C officials in Jon Fries’ fraudulent scheme. Those individuals include the company’s chief operating officer who became F&C’s president and chief executive following Jon Fries’ departure, the company’s chief financial officer, and a controller of F&C’s important Flavor Division. Each of these individuals uncovered or stumbled across various evidence that indicated or at least strongly suggested that top management was manipulating the company’s financial records. The company’s chief operating officer failed to heed the warning of a subordinate, an F&C cost accountant, who insisted that the company had a multi-million dollar inventory “problem.” When a subordinate attempted to hand the division controller a document that contained written evidence of Jon Fries’ fraudulent scheme, the controller refused to accept the item. Finally, F&C’s frustrated chief financial officer resigned after discovering extensive irregularities in the company’s accounting records.


F&C International, Inc.--Key Facts

1.The Fries family of Cincinnati had a long and proud history in the flavor industry that Alex Fries founded during the nineteenth century.

2.At least ten F&C executives or high-level employees participated in a fraudulent scheme to misrepresent the company’s operating results, principally by overstating revenues and period-ending inventories.

3.F&C’s officers used the firm’s misrepresented financial statements to sell equity securities and obtain significant bank loans.

4.Company officials went to great lengths to conceal the fraud, including establishing a fictitious warehouse for accounting purposes and creating false documents to mislead the company’s independent auditors.

5.The controller of F&C’s Flavor Division ignored and avoided subordinates’ efforts to make her aware of evidence indicating the existence of an ongoing fraudulent scheme within the company.

6.F&C’s COO instructed the controller of the Flavor Division not to tell him why she believed the company’s financial records were misleading.

7.F&C’s CFO resigned from the company after realizing that the company’s financial records were unreliable.

8.The SEC subsequently sanctioned F&C’s CFO, COO, and the controller of its Flavor Division for not disclosing the company’s “significant accounting problems.”

9.The SEC permanently banned Jon Fries from serving as an officer or a director of a public company; Fries also forfeited $2 million he realized from the sale of F&C securities and was sentenced to fifteen months in federal prison for his role in the F&C fraud.

10. F&C filed for bankruptcy in 1993 and was liquidated the following year.

Instructional Objectives

1.To confirm the critical role of corporate accountants in the financial reporting domain and the SEC’s recognition of the importance of that role.

2.To illustrate ethical dilemmas that corporate accountants may face when a company’s executives are dishonest and to examine accountants’ professional responsibilities in such...
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