FTE Networks Inc is a holding and investment company specializing in real estate
investments. On July 15, 2021, the SEC charged the former CEO and CFO of FTE Networks
Inc. with conducting a multi-year accounting fraud (SEC, 2021). The fraud included inflating
company revenues, hiding the company’s issuance of convertible notes, and misappropriation
of company funds for personal use. The fraud allegedly occurred between 2016 through 2019
and involved millions of dollars. The fraud was discovered by FTE in 2019 in which it had to
file restated financial statements.
The CEO and CFO were able to inflate revenues by recording revenue and accounts
receivable for construction projects that were not started (Hamilton, 2021). This is an
example of accelerated revenue recognition. The CEO and CFO used the accelerated revenue
recognition to meet earnings projections and hide their theft from the company. The restated
financials for 2016 included a reduction in revenues of 108% (Hamilton, 2021). The CEO and
CFO also improperly recorded the assets and liabilities of the company. FTE received loans
that were backed by securities but did not reveal this on their own financial statements.
Authorities have recently caught Richard J. Randolph for charges of securities fraud.
Randolph was charged in April of 2021 for misleading clients and investors. Richard
Randolph was the CEO, Chairman of the Board of Directors, and majority shareholder of
Randolph Acquisitions, Inc. The company was headquartered in Atlanta and publicly filed its
financials with the SEC. He was also in control of Gallagher Management Group and other
related entities. In 2017, Randolph began preparing to merge Gallagher Management Group
into Randolph Acquisitions and sold Randolph Acquisitions shares to multiple investors. In a
2016 audit, Randolph allegedly provided false information regarding Gallagher Management
Groups assets.
He falsely claimed that Gallagher Management Group owned two buildings valued at a
claimed $10 million combined. Neither company owned these properties. Randolph falsely
valued a different property at $10.5 million with no associated liability. Gallagher
Management Group purchased the property in September 2016 for $1.1 million with a $1.1
million mortgage loan secured by the property. It was sold in August 2017 for $1.2 million.
He provided a false bank statement showing a balance of over $2.5 million when the actual
balance was $58,198.78. The audited financials involved other misrepresentations such as
falsely stating that Gallagher Management Group has consistently maintained over $50
million dollars in assets, under management, annually. He also falsely claimed that Randolph
Acquisitions had secured a variety of large public and private contracts in the U.S. Virgin
Islands, when they never obtained. With this, Randolph allegedly induced 14 victims who
relied upon the misrepresentations to invest over $1.5 million in Randolph Acquisitions.
The five most common earnings management techniques include Big Bath, Cookie Jar
Reserves, Operating Activities, Materiality and Revenue Recognition. Cookie Jar Reserves
and Revenue Recognition relate to the Randolph case as Randolph purposefully hid accrual
liabilities for the merger and overinflated the company’s assets/apparent value when it was
little more than a shell company with limited assets.
Earnings management refers to artificial inflation or deflation of financial numbers, such as
revenues, profits, or earnings per share. It refers to the use of accounting skills to create
financial statements that present an overly positive view of a company's business activities
and financial condition. Many accounting rules and principles require a company's
management to exercise judgment in following these principles. Earnings management takes
advantage of the way accounting rules are applied to create inflated financial statements（
Tuovila 2022） Five of the more popular earnings management techniques include: recording
income too early, recording false income, boosting income with one-time gains, shifting
current expenses to later or earlier periods, and failing to record or improperly reducing
liabilities.
The first company that I want to discuss for this week is the Luckin Coffee. The company
initially made its products a household name in China in a short period of time due to its
successful market expansion and new business model. It launched an IPO of American
Depositary Shares in the United States in May 2019 and listed on NASDAQ. d In 2020, Luckin
Coffee has been the subject of a complaint by the U.S. Securities and Exchange Commission
for grossly deceiving investors in its financial reporting by misrepresenting the company's
revenues and expenses to meet the company's earnings expectations to achieve rapid growth
and increased earnings (SEC). In the case, Companies boost revenue in their financial
statements by Recording fictitious revenue. Lakin Coffee uses many coupons to attract
customers. These represented a significant portion of the revenue on the income statement.
However, over time, the company began selling coupons to a large number of fake customers.
Most of these customers were fraudulent or were impersonated by internal employees and
relatives, and even included some fake shell companies (Chung 2021). Luckin Coffee
documented these fraudulent sales in its earnings reports to deceive investors.
Another case I want to talk about is Panasonic. SEC announced in 2018 that Japan-based
Panasonic Corporation will pay more than $143 million to settle allegations of Foreign
Corrupt Practices Act (FCPA) and accounting fraud involving its global avionics business.
Panasonic Corporation's U.S. subsidiary, Panasonic Avionics Corporation (PAC) is a supplier
of in-flight entertainment and communications systems. The company fraudulently inflated
pre-tax and net income by recognizing more than $82 million in revenue in advance for the
fiscal quarter ended June 30, 2012. This fraud was accomplished by PAC backdating its
agreement with the airline and providing misleading information to PAC's auditors (SEC).
One of the most recent and spoken about financial statement fraud cases right now,
especially in NYC, is that of the U.S.’s previous president, Donald Trump. Mr. Trump is a
renowned businessman, because he has learned the inner workings of the business world.
Right now, Mr. Trump, three of his kids and their family business is being sued by NY’s
attorney general Letitia James for overvaluing assets and net worth throughout the decades.
This civil case is spanning back ten years from 2011 to last year 2021. This case follows
routine and repeated patterns in the financial statements.
Part of this investigates how Trump and his family has used their said wealth to polish their
images in society. His fame was based on name, image, and wealth... prior to his presidency.
He is also in a case with the federal government, but this NY case is just on his personal
terms. “Ms James, a Democrat, took a swipe at the former president by alluding to his 1987
memoir. "Claiming that you have money that you do not have does not amount to the 'art of
the deal', it's the art of the steal," she told reporters.” (The Independent) it was said that 23
assets had been inflated, and that James office has found over 200 examples or misleading
asset valuations. She also mentions, “"The statements of financial condition were greatly
exaggerated, grossly inflated, objectively false, and therefore fraudulent and illegal. And as a
result of that, we are seeking relief, and Mr Trump, the Trump Organization, his family --
they should all be held accountable." (The Independent) This attoerney general is hoping to
dig as deep as she can to see just how far this goes, but the actions taken has been over a
decade so far, and there are many violations. “This conduct was in violation of New York
Executive Law 63(12), which gives the Office of the Attorney General (OAG) special and
broad powers to go after persistent and repeated fraud and illegality, which in this case
includes violating other state laws prohibiting the submission of false financial statements, the
falsification of business records, and the commission of insurance fraud.” (Office of the AG,
2022)
There are many reasons as to why he may have done this. A big part of it may just be that they
wanted to keep their standing I society. High society is a different world than the average, and
they are more than comfortable in their ‘tier’. James has mentioned that white collar crime is
not victimless, if they are stealing money, hiding money, etc. then someone is getting hurt.
Should he owe more on his taxes the people and government is hurt. If they are missing
money somehow, they are the victims. And if they are just making the numbers go up for
looks the company, any shareholders, business ventures, partners would be hurt.
The idea of materiality is that some financial transactions are insignificant where they are not
worth reporting with precision. (Mintz, 2019) Could they have expected to receive more rent,
and the people have been backed-up with payments? Possibly. But it is not the case here.
James is arguing that the wealthy is getting away with unlawful behaviour, like the rules do
not apply to everyone.
The OAG is after multiple goals. “1) permanently bar Mr. Trump, Donald Trump, Jr., Ivanka
Trump, and Eric Trump from serving as an officer or director in any New York corporation or
similar business entity registered and/or licensed in New York state;
2) bar Mr. Trump and the Trump Organization from entering any New York real estate
acquisitions for five years;
3) award disgorgement of all financial benefits obtained through the persistent fraudulent
practices, estimated to total $250 million.” (Office of the AG, 2022)
They used false numbers to calculate property values, overvalued unsold residential units,
over calculated the value of the leasehold interest land and buildings more than double the
amount, (much more) and all at several locations owned by Mr. Trump. The idea of income
smoothing/ revenue recognition when the expense is recorded before it incurs, or it does not
record the profit after. He marked up most of the asset’s value over double the amounts, and
wrote off some expenses. In this case I am not sure how to apply the cookie jar reserves, as it
seems they have reversed this. (Mintz, 2019)
Rather than reserving some of the profits for the next year, they overstated by the bulks which
would cause more harm the next year. The problem with things like this is once it starts it is
hard to get out of it. He could have reported correctly in 2020 and 2021, but because of all the
over stating from the prior years, they would take an enormous hit, as it would be a large
cause for an audit. Dramatic changes like that do not happen right out of the blue. And with
the world watching him Mr. Trump would not want to look less than in the public.
Celadon Group, Inc., a transportation company providing tracking and transportation services
in the USA, Mexico, and Canada, knowingly filed false and misleading financial statements
to investors. In 2016, Quality Companies LLC (Celadon's wholly-owned subsidiary) began to
struggle due to a trucking market slowdown and having too many truck models with
mechanical issues that drivers did not want to lease. Instead of Celadon reporting Quality
Companies LLC’s struggles to investors, they falsely reported inflated profits and assets to
the investors with the help of Quality’s senior management team. They engaged in various
trades to dispose of unused trucks and to avoid disclosing losses; they inflated truck values to
hide millions of losses from investors. After allegations of misconduct arose in 2017, Celadon
and Quality’s independent auditors performed an investigation. The auditors withdrew their
audit opinion for certain Celadon financial statements, causing Celadon’s stock to drop,
which resulted in a 10-million-dollar loss. Under DPA terms, Celadon was required to pay
full restitution of $42.2 million to shareholder victims and to implement strong internal
controls and an ethical corporate culture (Business Insights, 2019).
Earning management techniques can be classified into two types: schemes that overstate
revenue and profits to enhance a company’s financial condition and schemes that understate
revenue and profits to smooth out income over time to make a company appear less volatile.
When analysing this case using the earnings management techniques, the following
techniques must be considered: recording revenue too soon or of questionable quality,
recording bogus revenue, boosting income with one-time gains, shifting current expense to a
later or an earlier period, failing to record or improperly reduce liabilities, shifting current
revenue to a later period, and finally shifting current costs to the current period as a special
charge (Mintz & Morris, 2020).
The technique that best applies to Celadon’s fraud is boosting income with one-time gains,
which refers to boosting profits by selling undervalued assets and including investment
income or gains as part of operating revenue (Mintz & Morris, 2020). Based on the article
published by business insights, Celadon reported inflated profits and assets by mainly
engaging in various truck trades in which they inflated truck values to hide the losses from
investors, which perfectly describes the boosting income with a one-time gain technique.
References:
Business Insights: Global (2019). Celadon Group, Inc. Enters Corporate Resolution for
Securities Fraud and Agrees to Pay $42.2 Million in Restitution. https://bi-gale-
com.ezproxy.snhu.edu/global/article/GALE%7CA583580584?u=nhc_main&sid=ebsco
Mintz, S., & Morris, R. (2020). Ethical obligations and decision making in accounting (5 th
ed.). McGraw-Hill Education, New York, NY.
Mintz, S. (2019). CPA Journal. A New Approach to Teaching Ethical Decision Making to
Accounting Students. https://www.cpajournal.com/2019/10/14/a-new-approach-to-teaching-
ethical-decision-making-to-accounting-students/
Office of the Attorney General. -OAG. (2022). Attorney General James Sues Donald Trump
for Years of Financial Fraud. https://ag.ny.gov/press-release/2022/attorney-general-james-
sues-donald-trump-years-financial-fraud
The Independent (London, England). (2022). “Art of the steal”: Trump sued for fraud by
lawmaker.
Tuovila, Alicia. August 09, 2022. d Earnings Management.
https://www.investopedia.com/terms/e/earnings-management.asp
SEC. Dec 16, 2020. d Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting
Fraud Charges.
https://www.sec.gov/news/press-release/2020-319
Chung, Emma. August 27, 2021. Luckin Coffee Accounting Fraud
https://sevenpillarsinstitute.org/case-study-luckin-coffee-accounting-fraud/
SEC. April 30, 2018. Panasonic Charged with FCPA and Accounting Fraud Violations
https://www.sec.gov/news/press-release/2018-73
Atlanta CEO sentenced to prison for securities fraud. The United States Department of
Justice. (2021, August 6). Retrieved October 13, 2022, from https://www.justice.gov/usao-
ndga/pr/atlanta-ceo-sentenced-prison-securities-fraud
Levitt, Arthur. The "Numbers Game". Sec.gov. (n.d.). Retrieved October 13, 2022, from
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Mintz, S. M. (2020). Ethical obligations and decision making in accounting: Text and cases.
McGraw-Hill Education.
Hamilton, B. (2021, July 15). SEC charges former CEO and CFO of FTE Networks, Inc with
Accounting Fraud. Hamilton & Associates Law Group, P.A. Retrieved September 24, 2022,
from https://www.securitieslawyer101.com/2021/sec-charges-former-ceo-and-cfo-of-fte-
networks-inc-with-accounting-fraud/
SEC. (2021, July 15). SEC Charges Executives of Network Infrastructure Company With
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