Company Uses Aggressive Accounting Practices to Show Profit Boosts


graphThis case involves a company that included business segments focused on electrical and electronic components, healthcare and specialty products, and security services, using Quickbooks software services. The company generated $30 million in sales and a net worth of $20 million. Much of the company’s rapid growth derived from numerous small acquisitions. This strategy helped fuel a massive revenue growth rate and propelled the company’s stock price upward. Despite having made 20 acquisitions in a 2-year time period, the company never disclosed the acquisitions to the public. The CEO and CFO were fully aware of the lack of disclosure. The accounting department, comprised mostly of CPA backgrounds, underreported the pre-acquisition earnings of newly acquired companies in order to give the company an earnings boost after acquisitions. The CEO and CFO were indicted for accounting fraud.

Question(s) For Expert Witness

  • 1. Did the CEO and CFO implement deceptive accounting practices to defraud investors?

Expert Witness Response

In this case, the CEO appears to have been heavily focused on making sure the company’s accounting tactics provided the best possible results. It also appears that there was most likely a lot of pressure to achieve higher earnings, which influenced the CFO’s choice of accounting practices. Financial reports are usually made up of management decisions and estimates that can greatly transform a company’s financial picture, depending on how aggressive a company’s CEO is and how the company’s accounting department wants to apply Generally Accepted Accounting Principles (GAAP). The financial statements of companies involved in complex mergers and acquisitions can be prepared following GAAP standards and these standards allow accountants at a company to interpret the rules in both conservative and aggressive ways. In this case, the company’s accountants chose to implement accounting practices that bordered on compliance, but were not used to defraud investors.

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