Fraudulent Accounting Practices: Easy to Commit, Hard to Find


We hear almost daily reports of companies engaging in accounting shenanigans to boost their apparent performance. As of late, companies like Diamond Foods (DMND), Green Mountain Coffee Roasters (GMCR) and Avon Products Inc. (AVP) are grabbing headlines for their alleged bad behavior.

Avon has been under the shadow of bribery allegations, in violation of the Foreign Corrupt Practices Act (FCPA), since at least 2008. The company has spent hundreds of millions of dollars conducting internal investigations, has lost at least four executives linked to bribery in China, and has been suffering from poor financial performance. And now it appears that Avon may have been aware of bribes being paid as far back as 2005, meaning the company’s problems may soon get even worse.

Diamond Foods is alleged to have reported “momentum” payments of $20 million and $60 million to almond growers in the wrong periods, effectively delaying expense recognition to boost net income. The company reported in November that it was investigating the situation, and in December Robert Willens (an expert hired by KeyBank to give an opinion on Diamond Foods) seemed to give the company an “all clear”.

However, on December 14, 2011, Diamond Foods received a formal order of investigation by the SEC, and last week the company announced that its CEO was being put on administrative leave after the audit committee determined that the payments were accounted for in the wrong periods and the financial statements would need to be restated:

“After an extensive and thorough investigation, the Audit Committee concluded that the Company’s internal controls were inadequate and that certain grower payments for the 2011 and 2010 crops were not accounted for in the correct periods. As a result, the Company will restate its fiscal years 2010 and 2011 financial statements,” said Robert Zollars, Diamond Foods’ Chairman. “The Board takes the Company’s control and the integrity of its financial statements very seriously, and we are moving aggressively to implement corrective measures, including changes to the Company’s leadership.”

Diamond Foods isn’t the only company that has been given the thumbs-up by Robert Willens. He gave the all-clear to Tyco in 2002, saying, “The accounting they employ is of very longstanding validity.” The SEC apparently disagreed with that when it brought civil charges against Tyco for improperly inflating its income by over $1 billion.

Green Mountain Coffee Roasters is another company under fire for its accounting practices. Robert Willens is again quoted, saying about GMCR that their “…accounting is not objectionable or questionable. It seems quite sound.” This, despite being investigated by the SEC, having to restate multiple years’ financials, and many legitimate concerns raised by investor David Einhorn.  And the company doesn’t score too well in the Beneish Earnings Manipulation Model. Only time will tell if “expert” Robert Willens was wrong again when saying that a company’s accounting practices are good.

The types of wrongdoing that these companies are alleged to be involved in are easy to commit, but hard to find. It is simple to manipulate the financial statements, and hope no one ever gets to dig deep enough into the financial statements to find out the truth. Instances of bribery are typically well-covered, with the transactions booked in a way that makes them look like legitimate business expenses. Phony supporting documentation is easy to come by, further bolstering the company’s case that these were business expenses.

Companies (and government agencies) rely on whistleblowers to help uncover these kinds of fraud. Without someone on the inside, it is difficult to find the wrongdoing, especially since fraudsters are often so adept at covering their tracks.

A robust compliance program is necessary, and the company needs experienced people in positions of authority within the compliance realm. Internal investigations must be initiated quickly, and the need for having these investigations completed by outside, neutral third parties cannot be emphasized enough.

If we learn nothing else from Avon, Diamond Foods, and Green Mountain Coffee, we should learn this…. when the company has reason to believe laws have been violated (especially ones being pursued with a vengeance by the government, such as FCPA), action must be taken quickly and swiftly.


2 thoughts on “Fraudulent Accounting Practices: Easy to Commit, Hard to Find

  1. USANA has been recruiting Chinese Nationals into their Multilevel Marketing Company for many years now. USANA’s CEO Dave Wentz even admitted it during one of the quarterly share holders conference calls.

    “Do you know what the percentage of your Hong Kong associates that are actually Chinese nationals?” asks John San Marco at Janney Montgomery Scott LLC

    Dave Wentz responds with “We definitely have a number of people who are building in Hong Kong. We do not have a percentage or have a number that we could point to with any accuracy.”

    There you go, admitted fraud. USANA recruits Chinese Nationals from within mainland China into their MLM compensation plan through the Hong Kong office. This violates China’s laws as well as the Foreign Corrupt Practices Act.

    USANA also admits to corruption in an internal document that had surfaced. Thanks to Tracy for holding a copy of that document.
    “IV. What is the biggest market that buys our products that we are not eligible to operate in?

    i. Once again I couldn’t give you an exact answer on this. Since I work with our Asian markets, I know that a large sum of product ends up in China, but I’m sure product somehow gets shipped to other unauthorized markets as well… ”

    Now, USANA has a special deal known as “USANA in China: Rewards for Referrals” –
    Here is a good quote from the document:
    You have to be a Chinese National Citizen to build a business with USANA in China, but you can still benefit from the lucrative bonus possibilities available to other USANA Associates. With the USANA Partnership Program, you will receive a residual bonus for every qualified person you refer to USANA in China who begins building a business.

    The USANA Partnership Program is better than anything you’ve seen in the past—instead of a one-time bonus, you will receive an ongoing percentage of everything your referrals generate. Although you can’t add Chinese National Citizens to your own downline, you can still make residual income from the points they generate as they build their own businesses in China!

    You see, USANA purchased Babycare, a single level marketing company authorized to do business in mainland China. What USANA is now doing is allowing USANA distributors all over the world to recruit (I mean REFER) Chinese Nationals into Babycare, and then those sponsors will get paid commission from the purchases by that Babycare Chinese National (and their sales)!

    That’s fraud! It basically means these Chinese Nationals are paying commissions to their upline MLM sponsors. They are all in a MLM, but cannot themselves recruit. How USANA is able to get by with this one is beyond me.

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