September 17, 2019

Accounting Fraud Watch: Disney’s Magic (Accounting) Kingdom and Ex-SEC Chief ‘Suspicious’ of GE Report

Our pal Francine McKenna at MarketWatch broke a pretty big news story today regarding an accountant who blew the whistle on Walt Disney Co.

Disney whistleblower told SEC the company inflated revenue for years [MarketWatch]
According to the whistleblower, Sandra Kuba, a former senior financial analyst in Disney’s revenue operations department who worked for the company for 18 years, employees working in the parks-and-resorts business segment systematically overstated revenue by as much as $6 billion in 2008-09 by exploiting weaknesses in the company’s accounting software.

Kuba’s whistleblower filings, which have been reviewed by MarketWatch, outline several ways employees allegedly boosted revenue, including recording fictitious revenue for complimentary golf rounds or for free guest promotions. Another alleged action Kuba described in her SEC filing involved recording revenue for $500 gift cards at their face value even when guests paid a discounted rate of $395.

Kuba has also alleged that employees sometimes recorded revenue twice for gift cards, both when guests bought the gift card and when it was used at a resort. Sometimes, revenue was recorded even though a gift card was given to a guest for free following a customer complaint, for instance, according to the whistleblower’s allegations.

Kuba told Francine that she has met with officials from the SEC on several occasions to discuss her claims. Disney calls her accusations “utterly without merit” and “unsubstantiated” and “definitely not supercalifragilisticexpialidocious.” (OK, not the last part.)

Harvey Pitt

Ex-SEC chief: Markopolos targeting GE for a short-seller and not as a whistleblower ‘suspicious’ [CNBC]
Harvey Pitt, who was chairman of the SEC during the Enron scandal, had lots of things to say on CNBC yesterday about forensic accountant and Madoff whistleblower Harry Markopolos and his report on General Electric’s $38 billion accounting fraud.

On Markopolos’ motives:

“One of the ways you can test Markopolos’ bona fides, however, is the fact that the SEC has a whistleblower provision. And if he had brought all of his data to the SEC first, he would reap potentially up to 30% of the potential recovery that the SEC might obtain in connection with this case,” Pitt told CNBC.

“Instead what he did was go public, blast the company without giving the company a chance even to address his concerns,” Pitt said. “Those are factors that make this look suspicious.”

On Markopolos disclosing that he conducted the research into GE at the behest of a hedge fund, which he has refused to name:

“Until the SEC and the DOJ unravel the fundamental question of whether General Electric’s accounting was appropriate, I think Markopolos becomes, to some extent, a secondary issue,” said Pitt, acknowledging that GE is under investigation by the Justice Department and the Securities and Exchange Commission over its accounting practices.

On GE audit committee chair Leslie Seidman’s comments that she stands behind the company’s financial reporting:

“Seidman used to work for FASB, which sets the accounting standards. These are not people who are ignorant of the critical facts,” Pitt said, adding that any suggestion that “they somehow either were not smart enough to figure out these problems” or “refused to see the issues they knew about” would take a lot to prove.

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