What is a company to do when it wants to hide losses? Manipulation of the financial statements is the obvious first choice. It’s not hard. Sure companies have “internal controls,” which are supposed to include policies and procedures which ensure that financial information is properly recorded. But companies of all sizes have problems with their internal controls, such that it’s not terribly difficult to issue fraudulent financial statements.

Michael Woodford was dismissed in October as CEO of Olympus, and subsequently disclosed that he was fired because he raised questions about some acquisitions by the company. He alleges that Olympus paid incredibly high prices for companies it acquired, and also paid huge “advisory fees” to agents who supposedly represented Olympus in the transactions. The purpose behind these transactions? To cover up investment losses that were decades old without drawing any attention to the issue.

It’s crunch time for Groupon (GRPN). The roadshow for the company’s Initial Public Offering went live last week, and Groupon’s offering will happen this week. Demand for the shares is apparently through the roof. The company was hoping to sell 30 million shares at $16 to $18 each, but word is that Groupon is now looking at increasing the offering price.

You can see the slide deck for the roadshow here. The presentation highlights the company’s massive growth, marketplace penetration, and ability to earn revenue.

A couple of weeks ago, David Einhorn bashed Green Mountain Coffee Roasters (NASDAQ:GMCR) in a 110-slide presentation called “GAAP-uccino” at the Value Investing Conference, sending the company’s shares down. The stock opened at $91.66, and closed at $82.50 the day of his presentation. Over the next two weeks, the stock closed as low as $61.59, with the stock ending last week at $70.99.

The stock had been hovering between $100 and $110 a share in September, despite warnings by others that Green Mountain has been manipulating numbers and could become the target of a full-blown investigation by the Securities and Exchange Commission.  Sam Antar, the former CFO of massive fraud Crazy Eddie, has been critical about Green Mountain for some time. He has been vocal about the company’s disclosures, accounting irregularities, and GAAP violations.

Rob Shuter, known as “Naughty But Nice Rob,” has been busy over at Huffington Post, trashing Bethenny Frankel for her sale of the Skinnygirl cocktail line to Fortune Brands earlier this year. In an October 11 story, Bethenny Frankel’s Skinnygirl Business Was Not Sold For $120 Million, Rob claims that the drink line was actually sold for $8.1 million.

He states the following based on his reading of the 10-Q for Beam Inc. (formerly called Fortune Brands Inc.) for the period ended June 30, 2011:

A U.S. Securities and Exchange Commission quarterly report form clearly shows that the Fortune Brands, Inc. acquisition of the Skinnygirl ready-to-drink cocktail business was for $8.1 million.

The problem is, that’s not what the filing says. The 10-Q reports on page 10 that the company booked $8.1 million in intangible assets related to the sale:

In July, critics attacked Groupon (GRPN) and it use of a made-up accounting measure management called Adjusted CSOI. I suggested that the company made up the measure to exclude many of the company’s expenses to make the company look more successful.

There was more to the story, however, as the Grumpy Old Accountants revealed Generally Accepted Accounting Principles (GAAP) violations in reporting revenue. Essentially, Groupon was recording more than twice the amount of revenue it should have been reporting under GAAP. The Grumpies explained:

United States Attorney’s Office
Southern District of Florida
July 21, 2011 Press Release

Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, and John V. Gillies, Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, announced that defendant Barry Minkow, 44, of San Diego, California, was sentenced today on one count of conspiracy to commit securities fraud, in violation of Title 18, United States Code, Section 371, for his participation in a scheme to manipulate the stock price of Lennar Corporation (Lennar) through false and misleading statements about Lennar’s business operations and management. At today’s hearing, U.S. District Court Judge Patricia A. Seitz sentenced Minkow to five years in prison, to be followed by three years of supervised release. In addition, the Court ordered Minkow to pay $583,573,600 in restitution.

In the United States, Generally Accepted Accounting Principles (GAAP) are required to be used by public companies so that users of the financial statements can properly interpret results. It makes sense to have a set of rules common to all businesses, such that financial statement users can know what various line items and metrics mean.

If companies were allowed to make up their own accounting rules and measures, no one would know what the numbers really mean. And that is precisely what Groupon (GRPN) is hoping will happen when would-be investors look at the company’s numbers.

In cases of corporate fraud, including embezzlement, financial statement fraud, earnings management, bribery, and the like, it’s easy to blame the auditors. After all, they have very deep pockets, often with large malpractice policies.

Even though the task of auditors is usually well-defined and agreed-to by shareholders, management, and the board of directors, it doesn’t seem to matter to them that the financial statement auditors aren’t responsible to find fraud during their audits. People quickly forget that the auditors disclaim responsibility for finding fraud multiple times before, during, and after the audits, and that management is ultimately responsible for preventing and detecting fraud in their own companies.

Last week Navistar sued their former auditors, Deloitte & Touche, for fraud, fraudulent concealment, breach of contract, and malpractice.  The lawyers say Deloitte lied about its competency in performing audits, and the company ultimately restated its financial statements for 2002 through 2005.  Whose fault is it that Navistar overstated its pre-tax income by $137 during those years? According to them, Deloitte.

In February, I wrote about China MediaExpress Holdings Inc. (NASDAQ:CCME) and several fraud allegations that had surfaced via researchers at Muddy Waters and Citron Research. After looking at the allegations and the support (or lack thereof), my conclusion was that there was something wrong at the company. I wrote that even if some of the allegations were false or exaggerated, there were just too many unanswered questions and too many red flags of fraud.

I was attacked here by supporters of CCME. No bit of logic or common sense could sway the fans. Their arguments did not hold water. The main arguments were that I hadn’t done any due diligence on CCME (I had only looked at the work of several others), that auditors from Deloitte Touche Tohmatsu had verified the numbers (At least someone out there knows how unreliable audits are when it comes to fraud, though.), that due diligence was performed by Global Hunter Securities, and that Hank Greenberg’s Starr Investments put many millions into CCME. Surely all of these things meant that the company and its reported revenues and profits were legitimate?

UPDATE: In March 2011, CFO Jacky Lam of China Media Express and the auditors (Deloitte) resigned. Deloitte said they could no longer rely on the representations of management, and they suggested an investigation was in order. Ping Luo, the analyst from Global Hunter who gave CCME rave reviews resigned. Maurice Greenberg’s Starr Investments sued CCME for fraudulently inducing it to invest $13.5 million. The stock was delisted from the NASDAQ in May 2011.

Deloitte raised the following issues: questionable authenticity of bank statements, supicioius bank confirmation procedures, existence of advertisers/customers, undisclosed bank accounts and bank loans, financial filings with the State Administration of Industry and Commerce differing from information provided to auditors, questionable authenticity of tax filing documents, cash payments to employees, and double counting of buses.

Last month, I wrote a piece on China MediaExpress Holdings (NASDAQ: CCME) and the allegations of fraud by researchers at Citron Research and Muddy Waters. The story grew quickly with the reaction of the company and its supporters. China Media Express Holdings responded to the allegations with a letter posted on their website, but the letter failed to definitively address several of the issues. The supporters of CCME were rabid, attacking anyone who would question the company.

Citron and Muddy Waters made many accusations, but the most concerning items included: