week 7 assignment

ACCT 540

Week 7 Assignment

This Accounting and Auditing Enforcement Release gives an explanation for how an entity got caught up in a highly unethical accounting scheme. This company, NutraCea, was established in Phoenix, Arizona and it is known for producing and marketing health food products. Once the Securities and Exchange Commission was informed about the scheme involved with this company, it opted to press charges on January 13, 2011. The Securities and Exchange Commission claimed that the unethical act was a result of fraudulent accounting activities that the former Chief Executive Officer (Bradley Edison), Chief Financial Officer (Todd Crow), Controller (Joanne Kline), Senior VP/Secretary (Margie Adleman), and Financial Director (Scott Wilkinson) had all taken part in. Some of these activities included overstating sales revenues, recognizing false revenues and incorrectly accounting for sales in order to to suggest a higher profit margin in order to support the false increase in sales. The results of the fraudulent activity were misstated financials that failed to represent the true operating results for NutraCea’s 2007 Fiscal Year.

NutraCea and its former top management executives mentioned above falsely accounted for the company’s revenue from sales by roughly two and a half million dollars when recording their profit on sales to Bi-Coastal Pharmaceutical Corp. In actuality, Bi-Coastal’s initial payment for the two and a half million dollar sale came from a one million dollar loan to the company from NutraCea’s former COO in order to rationalize the entity’s falsely recognized earnings on the sale. This resulted in overstating earnings in product sales by about thirty five percent in the second quarter of 2007, and twenty nine percent in the quarter three of 2007. Additionally, NutraCea improperly recorded profits on a bill-and-hold transaction with regards to selling almost two million dollars worth of products to ITV Global, Inc. at the end of the year 2007. This led to a misstatement of NutraCea’s net loss of by about ninety percent in the second quarter, eighteen percent in the third quarter, and roughly seven percent total for the year ended December 31, 2007.

All of those involved in the accounting scheme, with the exception of Mr. Crow, decided to settle out of court, if approved by the United States District court of Arizona, without admitting or contesting any fault. Those who were involved include NutraCea and the individuals named above.

An actual complaint that is still in process was brought against the former Chief Financial Officer, Todd Crow. The complaint refers to Mr. Crow’s violation of anti-fraud regulations, financial reporting, accounting books and records, internal controls, federal securities laws, and abuse of the Exchange Act Rule 13a-14 by falsely signing certifications required by Section 302 of the Sarbanes Oxley Act. The Securities and Exchange Commission’s complaint asked for a permanent authoritative order, a financial penalty and a permanent officer and director ban.

References

Securities and Exchange Commission v. NutraCea, et al., United States District

Court, District of Arizona, Civil Action No. CV 11-0092-PHX-DGC. (2011, January 20). Retrieved August 19, 2015, from http://www.sec.gov/litigation/litreleases/2011/lr21819.htm