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 analyzing 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).
I believe 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). a 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 into
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.
