The fraudulent revenue recognition done by FTE Networks, Inc., a holding, and investment
company that specializes in real estate. The Company’s revenue was inflated by as much as
108% by shifting their revenue earned by sales into future periods to mitigate their less than
stellar performance related to projections (Third Former Executive of Telecommunications
company Charged in Scheme to Defraud Investors, 2022).
The “revenue recognition” technique clearly applies to this case due to the nature of the
fraudulent activity. FTE Networks, Inc. attempted to boost their earnings and mislead
investors by manipulating the recognition of their revenue (Levitt, 1998). The Company
delayed shipments from customer purchases to shift the revenue into underperforming future
periods, so the revenue was fraudulently and incorrectly recognized (Third Former Executive
of Telecommunications company Charged in Scheme to Defraud Investors, 2022).
In the present context, the Wells Fargo company has been selected, which is a highly
prestigious bank in the United States. Wells Fargo is currently providing a wide range of
financial services to its potential customers in the US. In September 2016, the report of the
Wells Fargo scandal was out revealed that the employees had faked nearly 3.5 million
customer accounts to achieve the bank's sales goals (Welch, 2022). However, the company
has admitted its mistake of falsifying the information of the customers by opening
unauthorized customer accounts. It has been identified that the reputed bank's agents are even
involved in forging the customer's signature and manipulating and transferring assets between
the accounts. These activities were conducted without the knowledge and consent of the
customers (Cruz, 2018). The main reason behind the selection of this Wells Fargo Scandal is
that it has been a popular example of ethical violation, unethical sales practices, or sales
integrity violation in the US. As the question has aimed to analyse the Wells Fargo case and
apply one of the earnings management techniques, the description is given below.
The earnings management techniques
The earnings management techniques and strategies executed by many big companies to
achieve their financial goal. This technique has the potential to paint a better picture for
stakeholders and intentionally influence financial reporting. This earning management
techniques have five common factors that include the Big Bath, Operating Activities, Cookie
Jar Reserves, Revenue Recognition and Materiality methods (Strakova, 2021).
The application of earnings management technique in the case of Wells Fargo
The big bath is one of the earnings management techniques that has been applied to the Wells
Fargo case. In general, when a company is experiencing a bad period because of external
factors, it can directly affect its organization's profit. Currently, the company makes it even
worse by restructuring costs, writing off all bad debts, overvaluation of assets depreciation,
and other expenses to evade tax and show more loss (Swaminathan, 2022). In the context of
Wells Fargo, the company was running in a bad situation, but it committed a mistake by
falsifying the information of the customers and opening unauthorized customer accounts.
During the critical situation, the company has decided to reconstruct and made all investors
and creditors, customers and suppliers, management and employees understand the expected
effects. The application of the big bath technique in the business setting has affected their
brand image and the customers' trust level.
Wirecard, a payment processor and financial services provider, headquartered in Munich,
Germany, filed for insolvency in June 2020. Three former employees including the CEO have
been charged with accounting fraud and manipulation. Wirecard is suspected to have engaged
in a series of fraudulent accounting activities to inflate its profit. There was chatter of
irregularities in the balance sheet and money laundering as far back as 2008. In 2018 an
investigation began after a whistleblower alerted of a plan to fraudulently send money to
India via third parties. Nothing came of this investigation but in 2019 the Financial Times
published documents showing that profits were being fraudulently overstated. Wirecard then
requested that KPMG conduct an independent investigation to address the allegations to
which they could not provide sufficient document to disprove the accounting irregularities.
Their Auditor EY refused to sign off on Wirecard’s accounts and were unable to prove the 1.9
billion Euros in cash on trust accounts existed.
Earnings managements occurs when companies artificially inflate or deflate their revenues,
profits, or earnings per share figures. The five most common techniques include Big Bath,
Cookie Jar Reserves, Operating Activities, Materiality and Revenue Recognition. Revenue
recognition applies to the Wirecard case. The head of accounting was accused of creating
forged and backdated contracts to artificially inflate profit. One instance, money was moved
between subsidiaries and external businesses in a practice known as round-tripping. Round
tripping usually refers to the unethical practice of purchasing and selling shares of the same
security repeatedly to manipulate observers into believing that the security is in higher
demand than it is. Wirecard's combined banking and non-banking operations make its
financial results harder to compare, so investors had to rely on adjusted versions of the
financial statements. The "adjusted" accounts, unlike the reporting required by IFRS, resulted
in inflated earnings and cash flow numbers.
Kraft's former Chief Operating Officer Eduardo Pelleissone and its former Chief Procurement
Officer Klaus Hofmann were involved in accounting fraud in the last quarter of 2015 to the
end of 2018. They maintained false and misleading supplier contracts, which improperly
reduced the company's cost of goods sold and allegedly achieved cost savings. Earning
management techniques is used by management to produce financial information that present
an overly positive view of a company activities and financial activities and financial position.
Kraft Heinz COO and CPO manipulated the financial information used by investors to make
a good investing decision. Investors seek to obtain information that will be useful to them in
predicting the future performance of the business.
In this case, Income Smoothing is technique used by Kraft Heinz COO and CPO. This
technique comes under fraudulent accounting as the company records its expenses before it
incurs or does not show the profit and sales when earned. They can even accelerate the sales
showing extra revenue, or they do not recognize bad debt in the current year and shifts it to
next year as it reduces this year’s profit.
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ed%20any%20such%20services.
