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). b
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.
