June 22, 2018

Weatherford International Gets in Trouble for Letting Execs Choose Their Own Numbers

Going Concern history buffs will recall a period in 2011-2012 when oil services company Weatherford International had some chronic problems with its tax accounting. Manipulations by two of its former accounting executives — James Hudgins and Daryl Kitay — resulted in a $500 million restatement in 2011. This was followed by two more restatements in February and July 2012 of $256 million and $186 million respectively.

Today, the SEC got around to announcing the settlement with the company, fining it $140 million, as well as Hudgins and Kitay who are paying fines and agreeing to bans.

Anyway, here's how the SEC put it:

James Hudgins, who served as Weatherford’s vice president of tax, and Darryl Kitay, who was a tax manager, made numerous post-closing adjustments to fill gaps and meet its previously disclosed effective tax rate (ETR), which is the average rate that a company is taxed on pre-tax profits.  Weatherford regularly touted its favorable ETR to analysts and investors as one of its key competitive advantages, and the fraud created the misperception that Weatherford’s designed tax structure was far more successful than reality. 

Reading through the SEC's order, you'll find that starting in late 2006, the company's new CFO was a lawyer and did not have a lot of accounting experience. This meant that the tax function in the company was more "strategy and planning" rather than "accounting." Since Kitay and Hudgins did not report to the new chief accounting officer, "the tax department had virtually no accounting oversight." That's sorta where things started going wrong. The new CFO was insisting on a low ETR and to meet those targets, Kitay and Hudgins came up with everyone's favorite — "plugs" — to close the gap.

If you fancy yourself a FIN 18 or FAS 109 guru, you'll enjoy the finer points of the order, but it's far too boring to recount here. However, there are a few amusing details worth sharing, including:

Hudgins demanding he get promoted for meeting the target ETR:

An eagle-eyed EY audit team finding a spreadsheet error that sent Hudgins into panic mode:

The subsequent over-the-counter remedy he offered EY that they promptly rejected:

And, during the third restatement, some good ol' fashioned carelessness:

SEC Director Andrew Ceresney summed it up nicely: "Weatherford denied its investors accurate and reliable financial reporting by allowing two executives to choose their own numbers when the actual financial results fell short of what was previously disclosed to analysts and the public."

[Press Release, Order]

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The SEC Takes a Trip to India

140px-United_States_Securities_and_Exchange_Commission.pngThe SEC sent a team to India in order to make sure that everything was hunky-dory re: Satyam. The three-member team met with Ashwani Kumar, the Central Bureau of Investigation (CBI) Director, and the Securities and Exchange Board of India (SEBI). The SEC also met with the KPMG team that is responsible for restating Satyam’s balance sheet.
No details were given on any of the meetings but we imagine that the SEC/KPMG meeting went something like this:
SEC Bureaucrat: Hello KPMG India.
KPMG Paper Pusher: Hello SEC America.
SEC: How are things progressing?
KPMG: Oh this is a blast. Restating balance sheets is a dream job. We were just talking about how we wish we could work in the States so we could do stuff like this all the time.
SEC: What do you mean?
KPMG: Well, there seems to be much more fraud and other problems in the United States than here in India so the need for forensic accountants would be extremely high.
SEC: Are you insinuating that the Commission is unable to detect fraud?
KPMG: Well there have been some signficant fraud over there lately that you guys pretty much ignored or missed. Either way, it makes for a high demand for forensic accountants. Plus, we hear that the guy who tried warning you about the Madoff fraud has issues but still won an award.
SEC: This meeting is over. Keep us informed.
Satyam scam: SEC team meets CBI, SEBI, KPMG officials [The Hindu Business Line]

Huron Consulting is Clearly Not a CPA Firm

iStock_000006509640XSmall.jpgFridays are great for lots of reasons. They’re especially great for announcing bad news long after everyone has left work to get their drink on.
Huron Consulting announced late last Friday that the CEO, CFO, and Chief Accounting Officer were all quitting and that their financial results for 2006-2008 were being restated. The restatements result in total net income for that period being reduced by nearly 50% from $120 million to $63 million.
According to Reuters:

The restatements are being made because Huron’s board audit committee discovered that shareholders of four businesses that Huron acquired between 2005-2007 redistributed portions of their acquisition-related payments among themselves and to certain Huron employees.

More, after the jump


Soooo, regardless of what Huron is saying, the CEO, CFO, and CAO sounds like someone might have been taking kickbacks, which we totally understand considering the economy and whatnot.
Huron was ranked 43rd on Fortune’s list of 100 fastest growing companies just last year. They help their clients “face complex matters that demand extraordinary combinations of financial, technical, and industry expertise.” Clearly they are not using any of this expertise on their own books but whatevs, nobody’s perfect.
What’s also strange is that Huron really goes out of their way to put the universe on notice that they are not a CPA firm and do not provide attestation services.
“Huron is a management consulting firm and not a CPA firm, and does not provide attest services, audits, or other engagements in accordance with the AICPA’s Statements on Auditing Standards.” This is stamped at the bottom of virtually every page on the website because THEY WANT TO MAKE THAT CLEAR.
Btw, Huron’s auditors are PwC, who really don’t need any additional bad publicity. If any of you Chicago P. Dubs peeps got any inside info on this story, shoot it our way to [email protected]. The stock is getting hammered today so we’ll continue to watch this to see how it plays out.
Huron CEO, CFO quit as restatements slash profits [Reuters]