The phrase "earning management" describes a technique
implemented by management of a company to influence the
company's profits just so the figures can match a fixed goal. After
discussing the current rental market, FTE Networks, Inc. is the perfect
company to discuss. The SEC accused Florida-based FTE Networks, a
provider of network infrastructure, of running an extensive
accounting fraud as of. The corporation overstated its revenues over
100% at some times, according to a study made public by the SEC.
Following a grand jury's indictment, former FTE Networks Inc. CEO
Michael Palleschi and former FTE Networks Inc. CFO David Lethem
were detained and charged with conspiracy, securities and wire fraud,
improperly influencing the conduct of an audit, and aggravated
identity theft. Regarding some critical parts of these documents that
were improperly recorded or reported in FTE's financial statements,
the two CO'S misled FTE's internal accounting staff as well as the
company's external auditor. According to the same SEC claim,
Palleschi and Lethem wrongfully encouraged FTE to record revenue
and associated accounts for fake construction projects, which led to
an increase in the company's revenues. According to the press
statement, the embezzled money were used to pay for private aircraft
use, luxury automobile rentals, personal credit card purchases,
unlawful wire transfers, and stock issuance. In the end, FTE Networks
had to restate its 2017 net loss to $92 million due to the debt
features that were hidden.
The accelerated revenue recognition method, which can result in
misuse within accrual accounting, is portrayed in this case. Improper
revenue recognition claims by the SEC, like in this instance, are a key
cause of restatement and have been notably recognized in SEC
criminal proceeding, forcing the FASB to create a newer revenue
recognition standard to proactively eliminate fraud in this field.
Revenue from a multi-element arrangement involving software must
be allocated to each element, e.g., the separate products sold in the
combination sale, based on the fair value of that element, e.g., the
dollar value of that element, as established through evidence of a
consistent price paid by customers for the same or similar element, as
measured by vendor-specific objective evidence of fair value, under
GAAP (Mintz & Miller, 2023). This standard also offers additional
guidelines on when committed goods or services have been
delivered. FTE networks violated GAAP by failing to follow the
guidelines outlined in the accounting standards and ignoring other
factors.
"Former FTE Networks Inc CEO and CFO arrested for embezzlement
and defrauding investors." Legal Monitor Worldwide 19 July 2021:
NA. Business Insights: Global. Web. 10 Oct. 2022.
Mangan, D. (2021, July 15). Former executives of FTE networks charged
with securities fraud and Asset Swindle, sued by Sec. CNBC. Retrieved
October 11, 2022, from https://www.cnbc.com/2021/07/15/fte-
networks-executives-charged-with-securities-fraud-conspiracy.html
Mintz, S. M., & Miller, W. F. (2023). Ethical Obligations and Decision
Making in Accounting Text and Cases (5th Ed.). McGraw Hill LLC.
