Where are these three infamous cases now?

Over the last few issues I've explained numerous financial reporting schemes using cases that might be obscure to some. However, in this column, I revisit three cases that captured the headlines when their stories first broke. Since then, their sagas have been relegated to the back pages, but they continue to have interesting developments. I'll also discuss the common thread among the three — and, yes, it does have to do with money but also higher matters.

Satyam founder sentenced to seven years in prison

In April 2015, the former chairman of Satyam Computer Services, B. Ramalinga Raju, was sentenced to seven years in prison, along with nine others who were involved in a massive fraud that surfaced in 2009 — costing investors an estimated $2 billion. (See Founder of Satyam, Software Outsourcing Company in India, Found Guilty of Fraud, by Nida Najar and Suhasini Ray, The New York Times, April 9.)

The Indian Central Bureau of Investigation alleged that Raju's fraud lasted for at least eight years. The company recorded more than $1 billion in phony revenues to make Satyam appear more successful and attract new investors and customers. The case shocked Indians when it emerged in 2009 and reverberated throughout the business world because of its magnitude.

In fictitious revenue cases like this, classic red flags are a disproportionate increase in accounts receivable relative to revenues, large and aging accounts receivable balances and poor cash flows from operations. However, the unique Satyam fraud didn't show any of these flags because it didn't leave the phony revenue on the books as accounts receivable. Raju inflated Satyam's cash balances so it appeared that customers had paid the company for the additional recorded revenue.

Raju accomplished this by arranging for the creation of more than 7,000 forged sales invoices — supplemented by dozens of fake bank statements that showed payments coming in from the phony sales. Some of the fictitious sales involved legitimate customers (without their knowledge, Satyam recorded additional transactions) and others stemmed from the creation of completely fake customers.

As with so many financial reporting frauds, the Satyam scheme grew over time. As the company became more desperate, the amount by which it inflated its revenues each year escalated. When the U.S. Securities and Exchange Commission (SEC) filed its complaint against Satyam, it alleged these phony revenues by fiscal year:

2004 — $46 million
2005 — $69 million
2006 — $149 million
2007 — $151 million
2008 — $430 million

The SEC also alleged that phony revenues were $275 million in the first six months of fiscal year 2009. Shortly after, Raju sent his infamous resignation letter to Satyam's board of directors and exposed the entire scam. In the letter, Raju wrote that managing the growing nature of the fraud was "like riding a tiger, not knowing how to get off without being eaten."

Another interesting twist is that none of the respective heads of the business units into which the company recorded much of the fictitious revenue knew anything about the fraud. The perpetrators accomplished this by providing special log-in access to a team of employees who recorded the phony sales. So, the recording of the fake sales transactions circumvented the usual sales recording process yet still were included on the company's financial statements.

Olympus agrees to pay Japanese investors $92 million

The Olympus case, considered the largest financial fraud ever in Japan, made headlines around the world in 2011. That year, then-Olympus CEO Michael Woodford disclosed an accounting fraud associated with the payment of inflated advisory fees in connection with prior mergers. (See The Real Cost of ‘Choosing Truth Over Self,' Fraud Magazine, March/April 2012.)

In March 2015, a settlement was reached in which Olympus Corp. of the Americas (a subsidiary of the Japanese parent Olympus Corp.) will pay 11 million yen ($92 million) in an out-of-court settlement with institutional investors in Japan. (See Olympus To Pay Investors $92M Over Alleged Fraud, by Cara Salvatore, LAW360, April 2.)

Woodford later claimed that Olympus retaliated by firing him two weeks after he blew the whistle. He eventually reached a settlement with the company. (Woodford was the ACFE's 2012 Cliff Robertson Sentinel Award recipient.) In 2012, three former Olympus executives pleaded guilty to charges associated with the fraud. In 2013, the U.K. Serious Fraud Office filed criminal charges against Olympus Corp. That same year, a Pennsylvania judge approved a settlement to resolve a class action suit against the company.

The Olympus scheme at its core misclassified impaired investments as assets in the form of goodwill. By the late 1990s, Olympus had incurred more than $1 billion of unrealized losses on certain speculative securities in which it had invested throughout the preceding 10 years.

Olympus was motivated to initiate the scheme pending new accounting rules that would have resulted in the recognition of these losses in its financial statements. The company sold impaired investments at book value (not their lower fair values) to unconsolidated entities that Olympus controlled. These entities paid Olympus the inflated book values using funds borrowed from unrelated financial institutions. The controlled entities then acquired three growth companies in 2003, 2005 and 2008 but subsequently sold these companies to Olympus, which also paid inflated advisory fees in connection with these acquisitions. The inflated amounts Olympus paid enabled the controlled entities to pay off the loans used to acquire the impaired investments that started the scheme.

More simply, Olympus used the cash it received from the over-priced sales of the impaired investments to acquire the growth companies — also at inflated amounts — converting the bad investments into goodwill, which it then could justify keeping on its books.

Litigation stemming from the Olympus case still isn't complete. In April, six Japanese banks filed suit demanding 28 million yen ($233.7 million) for losses caused by the fraud. The Olympus case looks like it will continue to be newsworthy a while longer.

Hewlett-Packard sues founder of Autonomy

In March, Hewlett-Packard filed a $5 billion claim against Mike Lynch, founder of Autonomy, which was acquired by Hewlett-Packard for $11 billion in 2011. Autonomy's former finance director was also named in the recent suit. (See Hewlett-Packard sues Autonomy founder for damages, by Juliette Garside, March 31, The Guardian.)

In 2012, HP wrote its $11 billion investment in Autonomy down by $5.5 billion — a whopping 50 percent impairment loss in just one year. But HP immediately accused the Autonomy management team of fraudulently pumping up the value of the company, although specific details of exactly how Autonomy allegedly did this have been sketchy. Since then, HP and the former management of Autonomy have been locked in a battle of words and lawsuits, with no immediate end in sight.

In January 2015, the U.K. Serious Fraud Office closed its investigation into Autonomy's accounting without filing any charges, stating there was "insufficient evidence for a realistic prospect of conviction."

Common thread

The circumstances and schemes — proven or alleged — in these three cases are quite different, but the common denominator is the companies' and employees' enormous price of addressing serious allegations of fraud. It often begins with internal investigations and the ensuing costs of outside legal counsel, forensic accountants and others. Then the company has to pay a lot of those same people when multiple governmental agencies — often from different countries or jurisdictions — manage their concurrent investigations.

All the investigations wear down innocent staff members who have to comply with numerous requests for records and digital and paper information. The wear and tear can be crippling. If government agencies press criminal charges or assess sanctions against a company, it will endure additional litigation costs. Grinding civil litigation can last for years and cost millions more.

These three cases first made news in 2009, 2011 and 2012. Each company is still paying a hefty price.

Oh, would that organizations heed the ACFE's warning to proactively manage fraud risks. (See the ACFE Fraud Prevention Check-up.) Then they could avoid — or at least minimize — the financial, emotional and reputational costs shared by Satyam Computer Services, Olympus and Hewlett-Packard.

I'm always looking for recent cases and news involving alleged financial reporting fraud around the globe. Email me your links, news or information on public reports of alleged fraud.

Gerry Zack, CFE, CPA, CIA, is a managing director in the Global Forensics practice of BDO Consulting, at which he provides fraud risk advisory and investigation services. He is also the 2015 chair of the ACFE Board of Regents and is an ACFE faculty member. His email address is: gzack@bdo.com.