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 government’s 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 “management’s” 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

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been convicted by a federal jury of seven crimes relating to a seven-year accounting fraud

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 company’s management knows more

about the company’s 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 Beazer’s auditors, fraudulently achieving earnings targets, falsifying

Beazer’s 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 Beazer’s 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

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profits in Beazer’s publicly reported financial statements (FBI Charlotte Division, Oct 28, 20011.

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 Beazer’s, he was found out deleting data

about Beazer’s 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, Sarbanes-

Oxley 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

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complaining employee. A publicly traded company acts as an employer by exercising control of

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

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earnings” when times got tougher (Headliner). Measures that could have prevented or detected

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. I’m 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.

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References:

Headliner. Published July 2, 2009. Headline News. Beazer buys its way out of fraud case, as

predicted. http://www.hadd.com/node/1183

Notes:

Beazer’s 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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