Assignment 3 - Fraud Dawna Berry, Rochelle Morton, Jose Pinto ACC 499 Undergraduate Accounting Capstone Professor Dr.

. M. Austin Zekeri November 18, 2012

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1. Discuss the nature of the fraud and the impact to the company as a result of the fraudulent activity. Beazer Homes in (Charlotte): A subprime-related corporate fraud investigation conducted by the Charlotte Field Office recently culminated in the trial conviction of the former chief accounting officer of Beazer Homes USA (Beazer). Executives at Beazer, a former Fortune 500 company located in Charlotte, North Carolina, encouraged the use of false information to finance and sell homes and to manipulate corporate earnings to meet specific goals. This manipulation of earnings, referred to as cookie jar accounting, allowed Beazer to reduce its net income during strong financial periods and provide it with excess balances and reserves, allowing it to smooth earnings during times of underperformance. On July 1, 2009, Beazer entered into a deferred prosecution agreement (DPA) acknowledging corporate culpability in this complex fraud scheme. As part of the DPA, Beazer agreed to pay restitution of $50 million and continued to cooperate with the governments criminal investigation of former Beazer executives. On October 28, 2011, Michael Rand, the former chief accounting officer of Beazer, was convicted on seven of 11 counts after a three-week trial. Sentencing is planned for later on in 2012. 2. Discuss managements responsibility to the company stakeholders to protect and secure the company from fraudulent activity. Management has the ultimate responsibility to adopt sound accounting policies, maintaining adequate internal control, and maintaining fair representations in the financial statements; therefore, main responsibilities falls on management rather than auditors (Arens, Elder, Beasley 2010 Auditing and Assurance services). As per the case of Michael T. Rand, 48, of Alpharetta, Georgia, and former chief accounting officer for Beazer Homes USA, Inc. has been convicted by a federal jury of seven crimes relating to a seven-year accounting fraud
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conspiracy at Beazer, as well as document destruction and obstruction of justice. The charges arise from an ongoing government investigation involving Beazer and its employees that began in March 2007. In July 2009, a federal bill of information was filed in U.S. District Court charging Beazer with, among other things, participation in the conspiracy and securities fraud with Rand. Beazer accepted responsibility for those charges and, in a deferred prosecution agreement, agreed to pay restitution of $50 million. Rand was indicted in August 2010 (FBI Charlotte Division, Oct 28, 20011. www.fbi.gov). Many would say, Where were the auditors but in fact, Mr. Rand and his gang were the main conspirators to this whole financial mess. Back to management, because they operate the business daily, a companys management knows more about the companys transactions and related assets, liabilities, and equity than the auditors do (Arens, Elder, Beasley 2010 Auditing and Assurance services). 3. Discuss the corporate environment and culture that may have contributed to the fraud. Rand was convicted of directing an accounting fraud conspiracy to falsify reported profits at Beazer by lying to Beazers auditors, fraudulently achieving earnings targets, falsifying Beazers books and records, and deceiving the public by boosting and lowering earnings at Beazer. According to the evidence at trial, Rand executed the conspiracy in two main ways: Between 2005 and 2006, Rand entered into a hidden oral side agreement with another company through one of its employees, which was designed to allow Beazer to obtain cash and to improperly report revenue from purported sales of model homes. This activity was in direct contravention of the accounting rules and hidden from Beazers auditors. Between 2000 and 2007, Rand directed a scheme to commit securities fraud and create false books and records at Beazer by practicing cookie jar accounting, which allowed Rand and others to falsely report profits in Beazers publicly reported financial statements (FBI Charlotte Division, Oct 28, 20011.
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www.fbi.gov). In compilation to the matter of Rand and accomplices, there is no doubt that upper management was mainly involved in the fraud of Beazers, he was found out deleting data about Beazers and destroyed thousands of documents to deceived the proper authorities. 4. Discuss the impact to the company or band as a result of the fraudulent activity. When reports of their internal accounting fraud and other business abuses became public, major, supposedly successful, companies unexpectedly sank into bankruptcy. The fraudulent corporate practices of these companies cost shareholders and employees billions of dollars and seriously damaged public confidence in the securities markets and in corporate governance and ethics. Many employees of these companies were aware of fraud and other abuses but failed to come forward from fear of retaliation. Other employees found their warnings ignored, and some who came forward faced harassment or termination. In response to the public outcry and the disclosed weaknesses in the laws regulating corporate behavior and conduct, Congress enacted the Sarbanes-Oxley Act in 2002. Sarbanes-Oxley's primary purpose is to protect shareholders by holding accountable companies and individuals engaged in corporate wrongdoing. Therefore, employees of publicly traded companies are the most obvious application of the Sarbanes-Oxley whistleblower protection clause. However, because the value of a publicly traded corporation is the sum of its constituent units, SarbanesOxley extends its protection to the employees of contractors, subcontractors, agents, and subsidiaries of such public companies. Accordingly, a whistleblower does not need to have been employed directly by a publicly traded company to benefit from Sarbanes-Oxley's protection. Rather, it is sufficient that that company's contractor, subcontractor, agent, or subsidiary employed the individual, so long as the public company acted as an employer with regard to the complaining employee. A publicly traded company acts as an employer by exercising control of
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the employee's work product or by establishing, modifying, or interfering with the terms, conditions, or privileges of his or her employment. This is why companies are getting caught in fraudulent activates with more laws put into place it is easier to get them caught. All so someone cheesing them out. 5. Discuss the measures that could have prevented and/or detected this fraud. According to documents filed in federal court, Beazer used several tactics in a mortgage and accounting fraud scheme that stretched from 2000 to 2007. Among them: Beazer charged homebuyers for discount points, which they were to pay to the lender in exchange for a lower interest rate (Headliner). But Beazer kept part or all of the money. In some cases, Beazer paid the discount points but then raised the homes' purchase prices to offset the amount paid. Beazer provided low-income homebuyers with money for a down payment as a gift, but then illegally increased the prices of homes sold to offset the cost of the gift (Headliner). Beazer adopted a strategy of willful blindness in originating mortgages, telling some staffers about the danger of knowing too much about a buyer (Headliner). In one division, mortgage loan counselors were provided a script. Instead of asking how much a client made, a loan counselor would say that it would take a certain amount each month in household income to qualify, and then ask: Can you state that you have that much household income? Beazer practiced cookie-jar accounting (Headliner). When the company's financial performance was stronger than needed to achieve bonuses and meet market expectations, executives decreased the company's net income by manipulating reserve accounts (Headliner). That left Beazer with excess reserves and balances, with the excess available to smooth earnings when times got tougher (Headliner). Measures that could have prevented or detected

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this fraud would have been of course if Beazer had good ethics. Of course those low-income individuals who took their down payment from Beazer in the form a gift also obviously did not have good ethics either. Im sure Beazer found it easy to prey upon low-income individuals because who does not want to be a home owner and unfortunately no matter how bad the deal may sound some will do whatever it takes to become a homeowner. Beazer was obviously a very smart individual in order to not even let all his employees know what was going on, like giving the mortgage loan officials a script and telling them the dangers of knowing too much about a buyer. It just seems that there were so many red flags about this situation but no one seemed to have any good ethics about them to say anything, unfortunately individuals were either concerned with becoming a homeowner or making money. For seven years this fraud went on undetected obviously I feel that the easiest way that this could have been prevented and or detected would have been the obvious if Beazer and all the other individuals involved would have had good ethics.

References:

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Headliner. Published July 2, 2009. Headline News. Beazer buys its way out of fraud case, as predicted. http://www.hadd.com/node/1183 Notes: Beazers publicly reported financial statements (FBI Charlotte Division, Oct 28, 20011. www.fbi.gov). Sarbanes-Oxley Act in 2002, http://www.soxlaw.com/

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