MicroStrategy Ethic Case Study
Graduate Student Management Accounting and Business Problem Solving Overview In March of 2000, Microchemistry was the subject of an investigation alleging the backdating of contracts and accounting fraud. Executives CEO Michael Sailor, COO Asana Banana, and SCOFF Mark Lynch each paid personal fines of $350,000 and were also ordered to disgorge the combined amount of $10 million in a settlement with the SEC. Burns, 2012) contracts were backdated, revenues Inflated, reports In which the verifier knew of their inaccuracies were signed and published to the public and as a result stock ricers soared and plummeted in the wake of these transgressions. Then, finally, the results of such acts in the professional world are suffered by not just the company and responsible parties but to all others who hold a stake In the company, their practices or are affected by their actions.
Historical Background Microchemistry went public with its initial public offering (PIP) in June 1998, according to the SEC. For two years they reported profitable earnings.
In March 2000, after a review of their accounting practices, the company announced It would restate Its earnings Tort ten last two years (Haltering, 2000). I Nils restatement would effectively take them back to earnings prior to their PIP in June 1998.
The restatement of earnings for the previous two years prompted an investigation from the Securities and Exchange Commission (SEC). “The Securities and Exchange Commission today brought and settled administrative reporting charges against Microchemistry, Inc. And settled civil accounting fraud charges against its executive officers, Michael Sailor (co-founder and chief executive officer), Janssen Banana (co-founder and chief operating officer) and Mark Lynch former chief financial officer) for overstating the company’s revenue and earnings. (SEC, 2000) The SEC ordered a cease-and-desist and the company had to embark on major changes to its corporate governance for future compliance with the securities laws.
The officers also were fined approximately $10 million, consented to fraud injunctions, and to penalties of $350,000 which were to be paid by each of the three officers. The officers include Michael Sailor, Janssen Banana and Mark Lynch. The company and officers agreed to these terms without the admission or the denial of the charges.
SEC, 2000) PricewaterhouseCoopers, who was the auditing firm for Microchemistry, was also investigated according to the following quote from an article in The New York Times. “S.
E. C. Officials said the investigation was continuing, an apparent indication that charges are still possible against auditors from PricewaterhouseCoopers, who first certified Micrometeorite’s books but then concluded that the accounting violated accounting rules and forced the company to restate its earnings. A PricewaterhouseCoopers spokesman declined to comment. (Norris, 2000) Major Participants and Their Roles Michael Sailor (co-founder and chief executive officer), Janssen Banana (co-founder and chief operating officer) and Mark Lynch (former chief financial officer) were the primary parties who held direct responsibilities in this scandal.
Two other accountants, Antoinette A. Parsons (former Corporate Controller) and Stacy L. Ham (former Accounting Manager), were cited as being partially responsible for these issues, albeit in a lesser role.
SCOFF Mark Lunch’s role was to ensure the accuracy of the financial reports that were sent out and to sign the company’s periodic reports as well. He knowingly signed and leased inaccurate reports during this time period.
As a co-founder and CEO of Micrometeorites, Michael Sailor was a controlling shareholder and top executive officer. The SEC stated that he “… Signed the periodic reports and participated in the negotiation of several of the largest restated deals (SEC, 2000). As a co-Tonnage AT Malcolm – rattles, Janssen Banana’s was active In ten negotiations AT some of the deals which were restated and signed many of the contracts of which the revenues were improperly recognized (SEC, 2000).
As the Corporate Controller, Antoinette A. Parsons, had visibility and firsthand knowledge of the inconsistent and/or improper adherence to GAP guidelines and SEC reporting. Because she had known about the practices and did not raise any flags nor did she report the practices to the appropriate parties, she was considered a responsible party in the case. Stacey L.
Ham was the Accounting Manager who reported to Parsons at the time of the scandal.
She, too, had visibility and firsthand knowledge of the lack of compliance to GAP standards, through the company practices and did nothing to correct the issues. Final Outcome At the end of the day and with consideration to the settlements proposed and accepted, each of the executive officers were ordered to pay $350,000 in penalties, consent to injunctions of fraud and agree to disgorge approximately $10 million. The disgorgement was divided as follows: Sailor – $8,280,000, Banana – $1 and Lynch – $138,000).
They had to agree to a cease-and-desist order and to significant revisions to their corporate governance policies in order to be compliant to any future reporting to the SEC. Along with the officers, Parsons and Ham also agreed to a cease-and-desist order for any reporting and/or reconsidering they may be involved in for the future.
(SEC, 2000) In addition to the personal fines and disgorgement, SCOFF Lynch agreed to the “entry of an administrative order (SEC, 2000)”, which barred him for at least three years from practicing as an accountant before the SEC.
He was given the option to reapply after the three years. (SEC, 2000) Ethical Issues It is important to have at least a good understanding of what we are talking about in regards to not only ethics in general but ethics in business and for accounting specifically, as this case is focused primarily on accounting practices. The American Institute of Certified Public Accountants or CPA had developed five divisions of ethical principles that its members were expected to follow.
Those principles are “independence, integrity, and objectivity’, “competence and technical standards”, “responsibilities to clients”, “responsibilities to colleagues”, and “other responsibilities and practices” (Sellers, 1981). And even after the recent onslaught of scandals, some of the responsibilities of regulation in public companies have been transferred from them to the government in order to create the Public Accounting Oversight Board or PEPCO, the CPA does retain a good deal of authority in this area.
Accountants and their practices have traditionally been held to very high standards.
I en most recent padlocking AT ten Aspic’s cook AT Professional conduct tattles a Key position as, “… A position in which an individual..
. Has the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position. CPA, 2013)” In this definition alone, we can see that at the very least those individuals who held the CPA designation and key positions are aware or should be aware of the unique roles and powerful impact they have in their company. The organization goes on to list many examples and specific questions and answers to ethical dilemmas. As SCOFF, Lynch should have understood the impact of his decisions to be actively involved in backdating contracts and false reporting of revenues.
Parsons was the company controller.
She was in a position which gave her full visibility to the raciest and failed to act professionally and uphold standards by which she was, in the very least, ethically bound. Both of these individuals failed to act ethically in their duties. Sailor, Banana, and Ham may not have held a CPA designation but as experts in their areas they have a fiduciary duty to ensure best practices, actions and/or reports are completed to the best of their abilities. Laymen like the majority of shareholders, other employees and even some board members depend on their education, experience and integrity to serve them in the clearest and truest of fashions.
In this aspect, all of the previously mentioned people failed the public, shareholders, employees, themselves and anyone else who held a stake in the company through deception and/or incompetence.
As a result, the restatement caused stock prices to drop a staggering 60% in a single day from $260 to approximately $86 (Burns, 2012). The restated numbers decreased revenues in 1999 $54 million, in 1998 $11 million decrease, and in 1997 a decrease of $1 million. Norris, 2000) In order to put this in perspective, understand that from the time Microchemistry went public, their stock price rose from approximately 93% room $106 million to $250 million in revenue and to an all-time high of $333 per share after an announcement of plans to sell a new issue of stock in March 1999. Only to fall to approximately $86 after the restatement of revenues. These were revenues that had previously been stated to depict soaring profits to then be corrected to show negative revenues for those years. Norris, 2000) Many individuals and the company were impacted negatively due to the company having to restate their earnings.
Lessons Learned and Future Employment I Nils case Allays several Issues AT winch we can learn Trot Ana apply to our Torture employment. The blatant disregard for good practices, shown by the Parsons, Company Controller and Ham, Accounting Manager, when they recognized that the company’s policies or practices were not in alignment with GAP guidelines and incomplete with SEC regulations.
Even though these two individuals may not have been directly responsible for the backdating of the contracts and/or the release of false revenues to the public, because they did not raise any red flags, ask any questions or report their findings to the appropriate people, they effectively participated in the deception. In short, if you know there are violations being made at your company, you have one of two choices. You can bring it to the attention of the appropriate parties or you can alert no one and face the possibility of repercussions.
Let us remember that may mean prison, loss of professional status and designation, Jeopardize your career potential or a number of other unpleasant circumstances. In the case of the top executives, they bore the responsibility to perform their duties professionally and to the best of their abilities for the benefit of the public, shareholders, employees and each other. Because they admitted no wrongdoing in this case, it is impossible to determine whether or not their actions were truly due to a misinterpretation of the practices of reporting as a public company or if they were actually acting in outright malpractice.
Even if it was incompetence that drove their actions, they failed in their duties by delivering inaccurate reports and not properly ensuring they were in complete compliance with all regulations. High level professionals do not have the luxury of claiming ignorance. They are held too higher standard of behavior and performance and rightly so.
The positions discussed in this case are vital to so many aspects of the company and can be so impacting to the outside world that this behavior is unacceptable in any capacity.
Richard Walker, SEC enforcement division director had this to say when announcing the settlement of this case. “This case illustrates how critical it is for all companies and especially for companies new to public markets to implement effective internal controls and to strictly adhere to the letter and the spirit of the accounting rules for revenue recognition. ” (SEC, 2000) So, when practicing in any field it is one’s duty to act and behave to the best of your ability and to ensure accuracy every step of the way so as not to Jeopardize your company and/or your career.