Running head AN EMPIRICAL STUDY ON ACCOUNTING AND AUDITING ENFO.docx

Running head: AN EMPIRICAL STUDY ON ACCOUNTING
AND AUDITING ENFORCEMENT RELEASES CASES
An Empirical Study on Accounting and Auditing Enforcement
Releases Cases
Xin Tan
Southeast Missouri State University
Author Note
This paper was submitted in partial fulfillment of the
requirements of the degree of Masters in Business
Administration
AN EMPIRICAL STUDY ON ACCOUNTING AND
AUDITING ENFORCEMENT RELEASES CASES
31

Abstract
The objective of the paper is to provide an empirical study
about the characteristics of accounting fraud and fraudulent
financial reporting occurrences, including violation length,
industry, audit tenure and violation types. To do so, I collected
Accounting and Auditing Enforcement Releases (AAERs) issued
by the Securities and Exchange Commission (SEC) for
accounting fraud committed by companies during 2009-2011,
which provides a fraud sample consisting of 66 companies. I
analyzed each incident and explore key company characteristics
in instances of fraudulent reporting in AAERs.
APPLIED RESEARCH ACCEPTANCE SHEET
An Empirical Study on Accounting and Auditing Enforcement
Releases Cases

Submitted by Xin Tan in partial fulfillment of the
requirements for the degree of Masters in Business
Administration.
Accepted on behalf of the Faculty of the School of
Graduate Studies and Research by the Applied Research Project
Committee.
(Date)
Advisor/Chair (Name,Ph.D.)
______________________________ (Date)
MBA Coordinator (Name, Ph.D.)
CONTENTS
ABSTRACT..............................................................
.............................. ……………. i
ACCEPTANCE
PAGE.............................................. ………………… ii
CONTENTS....................................... ………….......................
................ …………iii
INTRODUCTION…………………………………………………….
…...1
LITERATURE
REVIEW……………………………………………….....3
METHOD…………………………………………………….………
……… 4
RESEARCH DESIGN AND
RESULT………………………………...… 5
CONCLUSION………………………………………………………
….....15
LIMITATION…………………………………………………..... ....
…...... 16
REFERENCES………………………………………………………

…. …18
APPENDIX
…………………………………………………………. ……. 20
I. Introduction
While the United States experienced an unprecedented storm of
accounting fraud, like Enron and WorldCom, around the
beginning of twenty-first century, it is still unclear to what
extent the typical fraud profile has changed in recent years. In
the last decade, the accounting industry has made a variety of
legislative and regulatory changes because of accounting fraud,
such as the Sarbanes-Oxley Act of 2002. This act was enacted
as a reaction to major accounting scandals and it enhanced
standards for all U.S. public companies boards, management
and public accounting firms. Fraudulent financial reporting can
have significant consequences for companies, stockholders,
investors, auditors and regulators. High profile fraud cases may
decrease the credibility of the financial reporting system and
erode the confidence of capital markets.
Whether or not companies are likely to engage in accounting
fraud is not easy to determine or obvious to track. That’s why
this research analyzed the firms who were involved in
fraudulent financial reporting and aimed to provide a useful
understanding of fraud occurrences. The Committee of
Sponsoring Organizations of the Treadway Commission (COSO)
conducted studies (Beasley et al, 1997) about fraudulent
financial reporting in order to provide a comprehensive analysis
of fraud incidents investigated by the SEC. It offered a great
method for researchers to analyze companies who committed
fraud and fraud occurrences.
This paper follows COSO’s method to collect sample firms and
make an empirical study of those cases. Every sample firm in
this paper was investigated by the SEC and presented in
Accounting and Auditing Enforcement Releases (AAERs)

during a three year period from 2009 to 2011. The AAERs
summarizes the actions brought by the SEC against public
companies, audit firms, mangers and auditors. Moreover, those
releases contain the process of the fraud occurrences, such as
name of firms or people, violation date, time period, types of
fraud and the main purpose of fraud. Some of those cases even
indicate the dollar amount of money involved in the fraud and
monetary penalties for the firms who committed fraud.
This paper identifies 66 organizations involved in fraudulent
financial reporting. There are two advantages to analyzing
sample organizations. On one hand, it will help people to obtain
a better understanding of organizations involved in fraudulent
reporting and the fraud process. Most of the occurrences of
accounting fraud behavior are the result of behavior tending
towards the firms’ benefit. For example, Farber (2005)
indicated that 60 percent of the fraud involved in fictitious
transactions, such as creating phony invoices, which tend to
overstate net income. Finding out the key features of recent
fraudulent activity will help outsiders, such as auditors,
regulators and potential investors to more accurately evaluate
organizations.
This research differs from previous studies in the following
aspects: first, data from previous studies are outdated and may
not represent the current relationships and facts. Second, the
present research focuses on AAER cases against companies, not
individual people.
The remainder of this paper is organized as follows. In section
II, a brief review of the relevant literature is provided. Section
III presented the research method and a description of the
sample. Section IV contained the research design and empirical
results. A summarized conclusion is provided in Section V.

II. Literature review
There is much research available on fraudulent financial
reporting based on the empirical study. Previous researchers
have tested and verified almost every aspect of firms identified
by SEC as fraudulently reporting.
One study supported by COSO in 1997 analyzed 347 accounting
fraud cases, providing an extensive updated analysis of
financial statement fraud occurrences. One of the finding was
that “most fraud overlapped at least two fiscal periods,
frequently involving both quarterly and annual financial
statements.”(Beasley et al, 1997, P.7)
Most of the literature clustered in governance mechanisms.
Beasley (1996) found that larger proportions of outside
members on the board of directors significantly reduced the
likelihood of reporting fraud and that fraud does not have a
connection with committees meets. Farber (2005) examined the
association between the credibility of the financial reporting
system and the quality of governance mechanisms. Sample firms
tend to have poor governance relative to control sample firm.
He found that firms who committed fraud have fewer audit
committee meetings and a small percentage of Big
Four[footnoteRef:1] audit firms. He also mentioned that
improve governance would results in superior stock price
performance. [1: The Big Four present the four largest
professional services networks in accountancy and professional
services, which handle the vast majority of audits for publicly
traded companies. This group is known for the following
companies: PricewaterhouseCoopers, Deloitte Touche
Tohmatsu, Ernst & Young and KPMG. Others present other
auditors except Big Four.]
Coffee (2002) and Cox (2003) highlighted some cases of
fraudulent financial reporting of public accounting firms to
indicate the undeniable link between auditors and fraud
companies. The sample firms showed an obvious preference for

inflated profit rather than the inflated net assets in fraudulent
financial reporting. With inflated profit, fictitious income is the
most common technique and obtained by the inflated sales’
revenue. Lennox and Pittman (2010) conducted a research study
about whether the Big Four public accounting firms are
associated with higher quality financial statements. They
suggested that the clients of the Big Four firms are less apt to
engage in fraudulent financial reporting.
Maksimovic and Titman (1991) found that companies are more
likely to commit fraud when they have longer audit firm tenure
because they suffered from financial distress. The General
Accounting Office (GAO) indicated that “mandatory audit firm
rotation may not be the most efficient way to strengthen audit
independence” (2003, Highlights). Thus an increasing number
of researches papers to address this point have emerged in
recent years. Carcello (2004) examined the relation between
audit firm tenure and fraudulent financial reporting and found
that in the first three years of engagement relationship is more
likely to detect fraudulent financial reporting. However, he
failed to find evidence to prove longer client relationship would
lead audit failure. O’Mally (2002) examined auditor tenure and
auditor performance but failed to detect a relationship between
tenure and fraudulent financial reporting. New York Stock
Exchange (2003) advised that companies should periodically
change their audit firms for high profile audit quality.
III. Methods
Sample collection
In order to conduct this research, samples are quite essential in
every aspect. The researcher use AAERs as a proxy for the
occurrence of fraud. Consistent with Beasley (1996), this proxy
is intended to capture extreme cases of fraud in the error-to-
fraud continuum. The analysis period is restricted to three years
to make data collection more accessible. The AAERs appear to
be reasonable sources for identifying financial statement fraud
occurrences because they depict the detail of each fraud and it

is controlled by Securities and Exchange Commission (SEC).
Another source of my research is the EDGAR database. It
provides access to corporate information, including a company’s
financial information, registration statements, prospectuses and
periodic reports.
An illustrative example of SEC’s justification for issuing
AAERs follows (per AAER No. 3093, in the case of UTstarcom,
Inc.):
The SEC's complaint charges UTStarcom with violations of the
anti-bribery, books and records, and internal controls provisions
of the FCPA (Sections 30A, 13(b) (2) (A) and 13(b) (2) (B) of
the Securities Exchange Act of 1934, respectively). UTStarcom
agreed, without admitting or denying the charges, to the entry
of a permanent injunction against FCPA violations and to
provide the SEC with annual FCPA compliance reports and
certifications for four years, in addition to paying the $1.5
million penalty.
According to Vinod (2002), “An industry is a collection of
firms offering goods or services that are close substitutes of
each other”. That’s why all fraud firms in this paper were
reviewed to identify with the four-digit SIC code. The
researcher obtained this data from SEC 10-K Form. The first
two-digit as general SIC code is taken in order to facilitate the
analysis of the sample firm’s industry distribution.
IV. Research Design and Results
Table 1 provides the information about the sample. The SEC
issued 437 AAERs related to the violation of regulations from
the year from 2009 to 2011. Three hundred and twenty two of
them are firms not involved in financial statement fraud or are
cases against individual CPA or auditors. I abandoned 21 firms
because they did not file any financial statement to the SEC and
23 more firms because financial statement data was unavailable.
Finally, 5 more samples were deducted from the final sample
because the cases were duplicative. Thus, there are 66 firms
allegedly engaged in fraudulent financial reporting and

investigated by SEC that were used as research.
Table 1: Sample Selection of 66 Firms Subject to AAERs
Number of AAERs issued between 2009 and 2011
437
Less:
AAERs against individual CPA or auditors
322
Firms without SEC files
21
Firms without proxy or financial statement data
23
Duplicate firms
5
Final Sample
66
After making sure all the information is accurate, the researcher
started to manage the data to generate results in an effective
way. Inputting or uploading the data into a spreadsheet. Then,
based on the shape of the charts and the data itself, the
researcher was able to categorize each fraud firm by SIC Code.
Table 2 indicates that sample firms were widely distributed
among industries. Consistent with COSO’s 1999 and 2010
study, fraud occurred in a variety of industries but unlike their
findings, manufacturing account for about 42% of the incidents,
with 28 firms out of 66 in this research. According the 2010
COSO study, the most frequent industries cited were computer
hardware and software, with a number of 20%. One reason of
the different results is that the COSO study measured samples

by numbers of schemes occurred in total while the researcher
measured samples by numbers of firm. In general, Table 2
shows no significant difference in industries so it is a good idea
to limit behavior of prevention in any particular industry.
Table 2: Sample Firms Distribution by Types of Industry
Table 3 reports summary statistics of the sample. The company
data are picked from their SEC 10-K filings and those financial
numbers are cited at the first year of violation date. It shows
zero in net sales and total assets because one incidence is
startups with not assets or revenues in its construction phrase.
There is a significant difference between median and mean in
net sales, net income and total assets, which implies that some
big numbers occurred and greatly pull up the average number.
Johnson et al. (2002) stated that “In the United States, there is
no mandatory audit firm rotation and companies tend to change
auditors after relatively long tenure. Consequently, the age of
the client and the tenure of the audit firm may be correlated”.
Consistent with their research, the researcher measured the
audit firm tenure as the number of consecutive years that the
audit firm has audited the client and used SEC files to collect
audit tenure. The table indicates that most schemes lasted
several years. They average violation period is 4.36 years, with
median fraud period 4 years. In another point of view, frauds or
violation behaviors are not easy to prevent in a single fiscal
year.
The average audit tenure is about 2 times longer than the length
of GAAP violation. Since client-specific knowledge is useful in
detecting material misleading presentation in the financial
reports, the longer tenure of the audit firm, the more likely the
auditor will be able to detect financial fraud or errors.

Table 3: Descriptive Statistics of Sample Firms
Note: One observation reported zero in net sales and total assets
because it is startups with no assets or revenues in its
construction phrase.
In order to obtain a more comprehensive understanding between
audit tenure and violation length, the author makes a scatter
diagram and use a Pearson correlation test to determine if the
two variables are linearly related. Consistent with peer research,
Table 4 shows a positive liner relationship connects audit tenure
and length of violation. The correlation coefficient r = 0.25
(p=0.04).
Table 4: Scatter Diagram about Audit Tenure and Violation
Length
Table 5 presents the violation length by audit tenure type of
audit firm. Because the average audit tenure is 7.89 years, the
researcher defined short audit tenure as less than eight years,
and long audit tenure as eight years or more. Even though
client-specific knowledge is useful in detecting material
misleading presentation in the financial reports, sample firms
which maintain longer audit tenure have longer length of
violation. On the one side, it supports the advice of New York
Stock Exchange (2003) which states mandatory audit firm
rotation would have positive effect on financial reporting. On
the other side, the results of independent samples t-test show
mean of 4.0 for Short and 4.67 for Long Tenure, p=.26, which
indicates the means of the two factors do not indeed differ
significantly.
There are 50 out 66 sample firms (76%) employ Big Four

auditors. The difference of audit tenure between Big Four
auditor and other auditors seems significant, compared 9.24
years to 3.69 years. It implies that Big Four auditors are likely
to maintain longer client-customer relationship than other
auditors. One important finding is that there is no significant
difference between length of violation and audit tenure when
sample firms employ Big Four auditors. However, firms employ
non Big Four auditors show about 2-year difference in length of
violation.
Table 5: Exhibit Violation Length by Audit Tenure Type of
Audit Firm
Based on information provided by AAERs cases, the researcher
identified techniques used for fraudulent financial reporting.
Table 6 offers a recap about methods of fraud. Misleading
presentation includes all frauds related to the financial
statement, including misreported statement and note disclosure,
such as fictitious transactions, misstatement of assets and
improper use of accounting practice. Overstated income
techniques represent fraud behavior driven to boost income
illegally, such as fictitious revenue recognition, and
understatement expenses or liabilities. Insufficient internal
controls would lead a company to unreliable financial reporting
and ineffective operations, examples include improper payment
and bribery. Regulation violation relate to other miscellaneous
issues related to legal regulations, like illegal procedures in
acquisitions.
Among the 66 observations, 58 (88%) of them are investigated
by SEC because of misleading presentation and 38 (58%) of
them overstated their income. The main motivation for violation
and fraud behavior is to boost profit and bolster financial
performance. In speaking of internal controls, they have
significantly impacted on the reliability of financial reporting
and effectiveness of operations, which may lead to fraud
occurrence. When more than half of the observations are
involved in insufficient internal control, it is not surprising to

notice they are on the list of AAERs.
Table 6: Exhibit Fraudulent Reporting Methods
Types of Violation
Numbers of Firms
Percentage of Total
Mislead Presentation
58
88%
Overstate Income
38
58%
Insufficient Internal Controls
28
42%
Regulation Violation
5
8%
Total
-
-
Note: Most AAERs describe multiple infractions. Thus, the
table does not sum to 100%.
As noted in Table 7, the most common scheme used for
fraudulent reporting is improper payment (32%), which is the
result of insufficient internal controls. One instance for
improper payment is Watts Water Technologies, Inc. (AAERs
No.3328). Its subsidiary (CWV) in China made illegal
payments to employees of an institute, who assisted in design
and construction to CWV’s project. The purpose and effect of
those payments was to force the institute to recommend its
value of products and facilitate its sales. The improper
payments generated profits for Watts of more than $2.7 million.
Twenty-seven percent of the 66 sample firms’ financial
statements were misstated through the understatement of
expenses or liabilities. Cablevision Systems Corporation
(AAERs No. 2920) is a diversified entertainment and

telecommunications company. From 1999 through 2003, it
recognized certain costs as current expenses when the cost
should not have been recognized in those periods. It overstated
expense in earlier fiscal periods and understated expenses in
later periods. The improper recognized expenses understated
$7,895 million expenses from 2001 to 2003, which results 5.1%
understatement in net loss of 2003.
Even though bribery has relatively small percentage compared
to others, it is a very specific scheme and cannot be neglected.
The SEC alleges that a subsidiary of Maxwell Technologies,
Inc. (AAERs No.3236) for repeatedly paying bribes to
government officials in China to obtain business from several
Chinese state-owned entities. Maxwell manufactures energy
storage and power delivery products. A Maxwell subsidiary paid
over $2.5 million in bribes from 2002 through May 2009 for
contracts that generated more than $15 million in revenues.
There are 7 incidents (11%) found related to backdate stock
options. One example is about Hain Celestial Group, Inc.
(AAERs No. 3045). At least from1998 to 2002, Hain
fraudulently backdated stock options granted to Company
officers, directors, and employees, concealing millions of
dollars in expenses from the Company's shareholders. It granted
stock options at earlier dates in order to gain profit of low stock
prices and misreport it on its SEC filings.
Misconduct inventory is one of the most common techniques to
overstate of assets. Among all 66 samples firms, there are 6 of
them committed misconduct inventory. Thor Industries, Inc.
(AAERs No.3280) was filed by SEC because Thor engaged in a
fraudulent accounting scheme to understate Dutchmen’s cost of
goods sold. Thus, it would avoid recognizing inventory costs
that were not reflected in Dutchmen’s financial accounting
system.
Table 7: Exhibit Types and Frequencies of Schemes
Note: Those are the most common schemes employed by sample
firms and most of firms committed multi-schemes at single

fiscal year. Thus, the sum of percentage does not equal to 100
percent
Table 8 indicates the detail information about descriptive
statistics of dollar amount money involved in the incidents and
the penalty by the schemes presented in Table 7. In this
research, the researcher found 51 AAERs cases (77%)
specifically indicated the dollar amount of money involved in
schemes and 45 cases (68%) were fined by monetary penalties.
One important discover provided by Table 8 is that bribery
comes with a heavier penalty than other GAAP violation. The
average dollar amount associated with bribery is $5 million,
which is the smallest number compared to other four violations.
However, the average penalty for firms committed bribery is
about $42 million, which is almost 10 times higher than
improper payment and inventory misconduct, and 70 times
higher than backdating stock options. It is not difficult to
understand this finding because bribery is not only a business
behavior violation, but also relates to ethical or moral issue.
Table 3 of Appendix presents the detail information of
percentage distribution about penalty over dollar amount of
fraud. The average percentage influence of penalty over fraud
amount is 37% while the median percentage is 11%.
As mentioned above, each AAERs case engaged in more than
one GAAP violations and detailed information is not presented
well in the documents, so I cannot clearly allocate the specific
dollar amount in every violation. In other words, numbers
shown in the table for infractions are overlapped and overstated.
However, Table 8presents the general relationship tendency
between dollar amount of fraud and penalties.
Table 8: Descriptive Statistics about Dollar Amount of Fraud
and Penalty by Types of Scheme.

In Table 9 and Table 10, the changes are varied in every
percentage number and the influence of net income is much
greater than net sales. The average impact percent on net sales
is 3.75% and on net income is 8%. Those tables provide
distribution of Penalty impact on net sales and net income by
penalties respectively. Most changes are less than 1 % of both
net sales and net income, which implies that monetary
punishment may not enough to prevent fraud.
Table 9: Distribution of Penalty Amount as a Percentage of Net
Sales
Table 10: Distribution of Penalty Amount as a Percentage of
Net Income
Note: Percentage changes are both negative and positive,
because 20 out of 66 sample firms have net loss and 1 firm is a
startup with no net income and net sales.
V. Conclusion
Based on the results and the discussions above, this study
explores several key conclusions. Firstly, fraudulent financial
reporting occurs in a variety of industries. Even though
fraudulent financial reporting is more likely to occur in some
particular industries, we can never limit behavior of prevention
fraud in those industries. Secondly, fraud reporting needs to be
watched and prevented at the very first time, because the
occurrence is not easy to prevent in a single fiscal year.
Thirdly, audit tenure and length of violation are linearly related
to each other, and longer audit tenure tends to have longer
length of violation. Big-Four audit firms tend to obtain longer
audit tenure compared with others. Moreover, whether or not
periodically change audit firms would shorten the length of
violation is still unclear because the means of violation length
and audit tenure do not differ significantly.

Fourthly, improper revenue recognition is the leading type of
fraud, which implies the main motivation for violation and
fraud behavior is to boost profit and bolster financial
performance.
Fifthly, the consequences of fraudulent scheme are severe to
fraud firms and monetary punishment differs in types of
scheme. Penalties do not have significant impact on companies,
because percentage changes on both net sales and net income
are less than 1 %.
VI. Limitations
There is a significant time lag between the occurrence of fraud
and the issuance of AAERs case, and most of frauds are
happened before 2009. Thus, the information and conclusion
offered in this study may be behind.
The use of AAERs has limitations. For example, because the
SEC selects cases for which it has the best chance of winning
a judgment, they are likely to include instances of the most
extreme misleading reporting. Therefore, the results of this
study are not likely to be generalized to the entire population of
firms that report fraudulently.
Almost every sample firms committed more than one scheme at
the same time period. The researcher is unable to allocate the
specific dollar amount of fraud for each scheme and according
penalties. The data in Table 8 is inevitably overrated and
inaccurate.

References
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Appendix
Table1: Table of Sample Firms from AAERs
AAERs No.
Firm Name
State location

Industry
2951
Allion Healthcare, Inc.
NY
Bituminous Coal & Lignite Mining
3348
Aon Corporation
IL
Crude Petroleum & Natural Gas
2972
Apogee Technology, Inc.,
MA
Drilling Oil & Gas Wells
3242
ArthroCare Corporation
TX
3109
Assurant, Inc.
NY
3021
Avery Dennison Corporation
CA
3069
Bancinsurance Corporation
OH
2920
Cablevision Systems Corporation
NY
Oil & Gas Field Services, Nec
3063
China Holdings, Inc.
CA

Food And Kindred Products
3127
Collins & Aikman Corporation
MI
Converted Paper & Paperboard Prods
2982
CSK Auto Corporation
AZ
Industrial Inorganic Chemicals
3048
Dana Holding Corporation
OH
Agricultural Chemicals
2955
Delphi Corporation
MI
Fabricated Plate Work
3134
Diatect International Corp.
UT
Miscellaneous Fabricated Metal Products
3007
Doral Financial Corporation
PR
Industrial Trucks, Tractors, Trailors & Stackers
3060
ECO2 Plastics, Inc.
CA
Pumps & Pumping Equipment
3036
Entrade, Inc.
IL
Computer & Office Equipment
3321
Escala Group, Inc.
CA

Computer Storage Devices
3108
General Re Corporation
CT
Computer Peripheral Equipment, Nec
3201
GlobalSantaFe Corp.
TX
Calculating & Accounting Machines
3283
GSI Group, Inc
MA
Electric Lighting & Wiring Equipment
3045
Hain Celestial Group, Inc.
NY
Telephone & Telegraph Apparatus
2935
Halliburton Company
TX
Radio & Tv Broadcasting & Communications Equipment
3026
Helmerich & Payne, Inc.
OK
Communications Equipment, Nec
2968
Ingram Micro Inc.
CA
Semiconductors & Related Devices
3254
International Business Machines Corporation
NY
Miscellaneous Electrical Machinery, Equipment & Supplies
3050
Isilon Systems, Inc.
WA

Miscellaneous Electrical Machinery, Equipment & Supplies
2934
ITT Corporation
NY
Motor Vehicles & Passenger Car Bodies
3268
Kentucky Energy, Inc.
KY
Motor Vehicle Parts & Accessories
2941
Krispy Kreme Doughnuts, Inc.
NC
3297
LaBarge, Inc,
MO
3213
LocatePlus Holdings Corporation
MA
Motor Homes
3015
LSB Industries, Inc.
OK
Search, Detection, Navagation, Guidance, Aeronautical Sys
3236
Maxwell Technologies Inc.
CA
Measuring & Controlling Devices, Nec
3022
MedQuist Inc.
NJ
Surgical & Medical Instruments & Apparatus
3067
Merge Healthcare Incorporated
IL

Electromedical & Electrotherapeutic Apparatus
2970
Monster Worldwide, Inc.
NY
Water Transportation
3102
NATCO Group Inc.
TX
Airports, Flying Fields & Airport Terminal Services
3165
Navistar International Corporation
IL
Cable & Other Pay Television Services
3229
NIC Inc.
KS
Hazardous Waste Management
3206
Noble Corporation
TX
Wholesale-Computers & Peripheral Equipment & Software
3199
Office Depot, Inc.
FL
Wholesale-Jewelry, Watches, Precious Stones & Metals
2943
Pediatrix Medical Group, Inc.
FL
Wholesale-Drugs, Proprietaries & Druggists' Sundries
3203
Pride International, Inc.
TX
Wholesale-Farm Product Raw Materials
2949
Quest Software, Inc.
CA

Retail-Food Stores
3274
Rockwell Automation, Inc.
WI
Retail-Auto Dealers & Gasoline Stations
3068
SafeNet, Inc.
MD
Retail-Auto & Home Supply Stores
2963
Stratum Holdings, Inc.
TX
Retail-Miscellaneous Shopping Goods Stores
3189
Sunopta, Inc.,
ON
Commercial Banks, Nec
3157
Sunrise Senior Living, Inc.
VA
Mortgage Bankers & Loan Correspondents
3064
Symbol Technologies, Inc.
NY
Accident & Health Insurance
3047
Tenet Healthcare Corporation
TX
Hospital & Medical Service Plans
3035
Terex Corporation
CT
Fire, Marine & Casualty Insurance
3280
Thor Industries, Inc.
OH

Fire, Marine & Casualty Insurance
3207
Tidewater Inc.
LA
Insurance Agents, Brokers & Service
3202
Transocean Inc.
TX
Services-Help Supply Services
3154
Trident Microsystems, Inc.
CA
Services-Prepackaged Software
3187
True North Finance Corporation
FL
Services-Prepackaged Software
2995
Ulticom, Inc.
NJ
Services-Computer Integrated Systems Design
3093
UTStarcom, Inc.
F4
Services-Computer Integrated Systems Design
3044
VeriFone Holdings, Inc.
CA
Services-Computer Processing & Data Preparation
3117
Verint Systems Inc.
NY
Services-Computer Processing & Data Preparation
3217
Vitesse Semiconductor Corporation
CA

Services-Nursing & Personal Care Facilities
3328
Watts Water Technologies, Inc
MA
Services-Hospitals
2971
WellCare Health Plans, Inc.
FL
Services-General Medical & Surgical Hospitals, Nec
3019
West Marine, Inc.
CA
Services-Management Consulting Services
Table 2: Exhibit Violation Types Information of Each Sample
Firms
Company Name
Types of Violation
Description
Amt of Fraud ($)
Penalty
($)
Allion Healthcare, Inc.
5,1,2
It understated interest expense for the warrants in conformity
with GAAP
932,517
N/A
It overstated its net income and understated its loss per share in
2005.

It failed to maintain an adequate system of accounting controls.
Aon Corporation
2,4,1
It failed to maintain an adequate internal control system
designed to detect and prevent the improper payments.
3,600,000
1,764,000
Its subsidiaries made over $3.6 million in improper payments to
foreign government officials between 1983 and 2007 to get
favorable business treatment.
Apogee Technology, Inc.
1
It is a publicly traded company alleged to inflate earnings in
2003 and 2004.
200,000
35,000
ArthroCare Corporation
2,1,5
It lacks internal control over sales.
It materially overstated sales revenue.
N/A
N/A
Assurant, Inc.
1
It is an insurance company and improper booked $10 million
payment as a bona fide reinsurance recovery.

10,000,000
3,500,000
It materially overstated the net income that it reported for the
quarter ended September 30, 2004 to the public and in
Commission filings.
4,2
Its subsidiary in China made illegal payment about $30,000 to
foreign officials.
81,000
318,470
It failed to accurately record these payments in books and
records.
5,
It failed to account properly for more than $2 million of
reinsurance claims
2,000,000
60,000
Cablevision Systems Corporation
2,4,5
It o overstated expenses in earlier fiscal periods, and understate
expenses in later periods.
56,049,900
N/A
It made improper prepays to its subsidiary.

China Holdings, Inc.
3
It made material misrepresentations in nine public filings in
2008 and 2009, including improper audit reports from current
and former auditors.
N/A
N/A
Collins & Aikman Corporation
2,1
It inflated reported income between 2001 and 2004.
N/A
7,200,000
It used false documents from suppliers designed to mislead its
external auditors.
CSK Auto Corporation
3
It made material misrepresentations in 2009 in public filings.
N/A
N/A
Dana Holding Corporation
2,1,4,5,
It improperly recognized revenue or income on several
transactions and delayed recording expenses in the appropriate
period from 2004 and mid-2005.
43,000,000
N/A
It filed materially false and misleading periodic reports with
SEC.

It understated steel surcharge costs.
Its deficient system of internal controls contributed to the
restatement of its financial statements for the first two quarters
of fiscal year 2005, fiscal year 2004 and prior years.
Delphi Corporation
4
It filed materially false and misleading financial statements in
the company's 2001 Form 10-K.
20,000,000
30,000
It improperly recorded a $20 million payment from an IT
company in December 2001, made in connection with a new
contract between the IT company and Delphi.
Diatect International Corporation
5
It filed materially false and misleading financial statements.
N/A
216,281
2,1
It overstated income by approximately $921 million or 100
percent on a pre-tax, cumulative basis between 2000 and 2004

by improperly accounting for the purported sale of non-
conforming mortgage loans.
921,000,000
123,000,000
$ 123 million to its investors harmed by accounting fraud.
ECO2 Plastics, Inc.
3
It has never registered a class of securities under the Exchange
Act but has registered offerings of securities under the
Securities Act of 1933.
N/A
N/A
Entrade, Inc.
3,2
It did not maintain adequate books and records of liabilities
arising from acquisition.
N/A
N/A
It lacked a system of internal accounting controls designed to
assure accurate transactions.
Escala Group, Inc.
4,1
It overstated $80 million to its revenues to boost its stock price
in 2003.
80,000,000
164,584
1,2

Its foreign subsidiary made sham transactions with AIG in 2000.
200,000,000
8,100,000
It improperly recognized more than $200 million in revenues
from 2000 to 2002.
GlobalSantaFe Corporation
2,4,
It made illegal payments to its customers brokers from January
2002 through July 2007.
N/A
5,900,000
GSI Group, Inc
1,2,
It improperly recognized revenue $7.8 million from 2004 to
2008.
7,800,000
N/A
It has numerous deficiencies of internal controls that were
attributable to its fraud.
Hain Celestial Group, Inc.
1,5,7,
It backdated stock options granted to Company officers,
directors, and employees, concealing millions of dollars in
expenses from the Company's shareholders.
20.500,000
N/A

It materially understated expenses and overstated its income in
disclosures to the Commission and the investing public, and
falsely represented in filings that Hain had incurred no expenses
for option grants.
Halliburton Company
2,6
It paid bribes to official within the Nigerian Government in to
obtain the construction contracts.
6,000,000
177,000,000
Its internal control failed to detect bribery.
2,4,5,
It made improper payment to its subsidiaries.
185,673
375,681
Ingram Micro Inc.
1,4,5,2,8
It overstated revenues by $622 million from 1998 to 2000.
622,000,000
15,000,000
It made illegal payments to its suppliers and take extraordinary
sales discounts.
It improperly recorded excess inventory fees.

International Business Machines Corporation
2,4,6,
It subsidiaries paid cash bribes and provided improper gifts and
payments of travel and entertainment expenses to various
government officials in South Korea in order to secure the sale
of IBM products.
N/A
2,000,000
Isilon Systems, Inc.
1
It cut secret side deals with Isilon customers to allow the
company to report inflated sales to its shareholders.
4,800,000
N/A
It misreported $4.8 million in improper revenue during 2006
and 2007.
ITT Corporation
1,2,4
Its subsidiaries made illicit payments to generated sales and
realized improper profits of more than $1 million.
4,000,000
1,678,650
Kentucky Energy, Inc.
1,4,
It accounted for warrants it had issued before and overstated its
assets by 43%.
13,000,000
N/A
Krispy Kreme Doughnuts, Inc.
1,2

It fraudulently inflated earnings in 2003.
528,323
N/A
LaBarge, Inc,
5,1,2
Its internal controls lapses and inaccurate records misstatement
in fillings in 2006 and 2007.
437,000
200,000
LocatePlus Holdings Corporation
1
It fraudulently inflated revenue as well as a scheme to
manipulate the stock of another company.
2,000,000
N/A
LSB Industries, Inc.
1,5,8
It failed to comply with GAAP in connection with LSB’s change
in inventory pricing methodology from LIFO to FIFO.
250,000
N/A
4,1,2,6
Its subsidiary paid over $2.5 million in bribes to officials at
several Chinese state-owned entities through a third-party sales
agent for contracts that generated more than $15 million in
revenues for Maxwell
15,000,000
8,000,000
MedQuist Inc.
1,2
It inflated customer bills to increase revenues and profit
margins
6,600,000
75,000
Merge Healthcare Inc.

1,2,4
Its misstatements to the public, Merge’s stock price dropped
from $24.50 to $7.30 per share, reflecting a $500 million loss in
market capitalization.
500,000,000
870,000
7
Its multi-year scheme to secretly backdate stock options granted
to thousands of Monster officers, directors and employees.
399,500,000
2,500,000
NATCO Group Inc.
5,2,3,7
Its subsidiaries created and accepted false documents in filings.
80,000
N/A
Its subsidiaries bribed Kazakstan’s officials to get contract
interest.
5,1,2, ,
It overstated its pre-tax income by a total of approximately
$137 million as the result of various instances of misconduct.
137,000,000
1,049,503
NIC Inc.
4
It failed to disclose more than $1.18 million in perquisites to
Fraser from at least 2002 to 2007.
1,800,000
500,000

It failed to disclose its payment of $1 million to fly and operate
planes.
Noble Corporation
2,4,
It made improper payments through its custom agents to
officials of the Nigeria Customs Service to obtain permits and
permit extensions necessary for operating offshore oil rigs in
Nigeria.
N/A
5,576,998
Office Depot, Inc.
2
It violated fair disclosure regulations when selectively
conveying to analysts and institutional investors that the
company would not meet analysts' earnings estimates.
30,000,000
1,000,000
It recognized approximately $30 million in funds received from
vendors in exchange for the company's merchandising and
marketing efforts.
Pediatrix Medical Group, Inc.
7,5
It backdated stock options grants to executives and employees
and with reporting false financial information to shareholders.
8,800,000
N/A
It illegally avoided expense for in-the-money options.

Pride International, Inc.
1,6
It and its subsidiaries bribed government officials in Venezuela,
India, Mexico, Kazakhstan, Nigeria, Saudi Arabia, the Republic
of the Congo, and Libya. The bribery schemes allowed Pride
and its subsidiaries to extend drilling contracts, obtain the
release of drilling rigs and other equipment from customs
officials, reduce customs duties, extend the temporary
importation status of drilling rigs, lower various tax
assessments, and obtain other improper benefits.
2,500,000
23,529,718
1, 7
It improperly granted undisclosed in-the-money stock options to
executives and employees by backdating millions of options
from 1999 through 2002.
113,600,000
150,584
1,4
Its subsidiary made payment not directly related to business
purposes for employees and customers.
1,700,000
400,000
SafeNet, Inc.
7
It engaged in a scheme to backdate option grants to senior
executives and employees in order to take advantage of low
points in the company's stock price, without recording the
requisite compensation expense for these option grants.
1,600,000
1,000,000
Stratum Holdings, Inc.

3
It failed to comply with Item 307 and 308T of Regulation S-B in
its 10-KSB report filed in 2008.
N/A
N/A
Sunopta, Inc.
8, 5,1,2
It failed to identify necessary downward adjustments to account
for such inventory at its net realizable value and understated its
cost.
N/A
46,200
Sunrise Senior Living, Inc.
1
It made improper adjustments to its reserve for self-insured
health and dental benefits and its accrual for corporate bonuses
to meet public earnings forecasts.
N/A
50,000
1
It engaged in a fraudulent scheme to inflate revenue, earnings
and other measures of financial performance in order to create
the false appearance that Symbol had met or exceeded its
financial projections.
3,091,539
250,000
1
It inflated its earnings by exploiting Medicare's outlier
reimbursement regulations, which provided for additional
reimbursement to hospitals to cover the additional costs for
treating extraordinarily sick patients.
11,000,000
2,000,000
Terex Corporation

1
It aided and abetted the fraudulent accounting by URI for two
year-end transactions that were undertaken to allow URI to meet
its earnings forecasts. These fraudulent transactions also
allowed Terex to prematurely recognize revenue from its sales
to URI.
N/A
8,000,000
2,5,8
Its subsidiaries engaged in a fraudulent accounting scheme to
understate Dutchmen’s cost of goods sold in order to avoid
recognizing inventory costs that were not reflected in
Dutchmen’s financial accounting system.
27,000,000
1,900,000
Tidewater, Inc.
2,4,5,6,
It paid bribes to foreign government officials in Azerbaijan
disguised as payments for legitimate services.
1,600,000
217,000
It authorized improper payments to customs officials in Nigeria
that were inaccurately recorded as legitimate expenses in the
Company's books and records.
Transocean, Inc.
1, 4,
It made illicit payments through its customs agents to Nigerian
government officials to extend the temporary importation status
of its drilling rigs, to obtain false paperwork associated with its
drilling rigs, and obtain inward clearance authorizations for its
rigs and a bond registration.

10,243,056
7,265,080
5,1,7
It backdated stock option documentation to make it appear as if
options had been granted on earlier dates, resulting in disguised
"in-the-money" option grants to Company employees, officers,
and on at least one occasion to directors.
37,000,000
350,000
It engaged in a fraudulent and deceptive scheme to provide
undisclosed compensation to executives and other employees,
concealing millions of dollars in expenses from the Company's
shareholders.
True North Finance Corporation
1
It improperly recognized revenue on interest from borrowers
which were not paying True North and which were in poor
financial condition.
74,000,000
N/A
Ulticom, Inc.
7
It improperly recorded the grant dates of eight company-wide
grants of employee stock options.
2,677,000
25,000
It involved certain long-standing and improper accounting
practices that were not in conformity with GAAP.

UTStarcom, Inc.
4,6
It subsidiary paid nearly $7 million between 2002 and 2007 for
hundreds of overseas trips by employees of Chinese
government-controlled telecommunications companies that were
customers of UTStarcom, purportedly to provide customer
training.
7,000,000
3,000,000
1
It made unsupportable alterations to its records to compensate
for an unexpected decline in gross margins, overstating
VeriFone’s operating income by a total of 129 percent.
37,000,000
25,000
Verint Systems, Inc.
1,2
Its books and records falsely and inaccurately reflected, among
other things, the Company's liabilities, expenses, net income,
and general financial condition through at least the fiscal year
ended January 31, 2005.
6,500,000
N/A
It failed to maintain a system of internal accounting controls
sufficient to provide assurances that its reserve activity was
recorded as necessary to permit the proper preparation of
financial statements in conformity with GAAP.
1,5,7
It manipulated grant dates in order to award in-the-money

options and failed to ensure that Vitesse properly recorded
compensation expenses for the backdated grants.
184,000,000
162,320
It compounded their fraudulent revenue recognition practices by
failing to timely record credits related to the invalid accounts
receivable that were generated by the distributor's return of
product.
1,2,4
Its subsidiary made improper payment to its employees in order
to facilitate its sales.
2,700,000
3,776,606
4,1
It fraudulently retained over $40 million it was required to
return to Florida state agencies under programs that provided
mental health services to Medicaid recipients and health care
services to uninsured children.
40,000,000
10,000,000
West Marine, Inc.
1,8
It filed numerous false financial statements from 2004 to 2006
after making undisclosed accounting changes designed to offset
an unexpected earnings shortfall.
13,200,000
N/A

It improperly increased its pre-tax income for the year,
offsetting the undisclosed reduction in earnings caused by the
change in inventory valuation.
Note:
1-Overstate Revenue;
5-Undserstate Expense
2-Insufficient Internal Controls
6-Bribery
3-Regulation Violation
7-Backdated Stock Option
4-Improper Payment
8-Inventory Misconduct
Table 3: Exhibit Penalty Percentage Impact on Dollar Amount
of Fraud
Name
Dollar Amount of Fraud ($)
Penalty
($)
Penalty as Percent of Fraud Amount
37,000,000
25,000
0.07%
184,000,000
162,320
0.09%

113,600,000
150,584
0.13%
Delphi Corporation
20,000,000
30,000
0.15%
Merge Healthcare Incorporated
500,000,000
870,000
0.17%
Escala Group, Inc.
80,000,000
164,584
0.21%
399,500,000
2,500,000
0.63%
137,000,000
1,049,503
0.77%
Ulticom, Inc.
2,677,000
25,000
0.93%
37,000,000
350,000
0.95%
MedQuist Inc.
6,600,000
75,000
1.14%

Ingram Micro Inc.
622,000,000
15,000,000
2.41%
2,000,000
60,000
3.00%
Office Depot, Inc.
30,000,000
1,000,000
3.33%
200,000,000
8,100,000
4.05%
27,000,000
1,900,000
7.04%
3,091,539
250,000
8.09%
921,000,000
123,000,000
13.36%
Tidewater Inc.
1,600,000
217,000
13.56%
Apogee Technology, Inc.,
200,000
35,000
17.50%

11,000,000
2,000,000
18.18%
1,700,000
400,000
23.53%
40,000,000
10,000,000
25.00%
Assurant, Inc.
10,000,000
3,500,000
35.00%
ITT Corporation
4,000,000
1,678,650
41.97%
NIC Inc.
1,180,000
500,000
42.37%
UTStarcom, Inc.
7,000,000
3,000,000
42.86%
LaBarge, Inc,
437,000
200,000
45.77%
15,000,000
8,000,000
53.33%

SafeNet, Inc.
1,600,000
1,000,000
62.50%
Transocean Inc.
10,243,056
7,265,080
70.93%
2,700,000
3,776,606
139.87%
185,673
375,681
202.33%
81,000
318,470
393.17%
Industry Distribution
Mining
12%
Manufacturing
42%
Transportation,
communications, electric, gas and sanitary services
6%
Retail trade
6%
Finance, Insurance and real estate
11%
Services

17%
Mining Manufacturing Transportation,communications,
electric, gas and sanitary services Wholesale trade Retail
tradeFinance, Insurance and real estate Services
0.12121212121212174 0.42424242424242431
6.0606060606060622E-2 6.0606060606060622E-2
6.0606060606060622E-2 0.10606060606060662
0.16666666666666666 Violation Length 3 3 4
2 3 9 10 12 3 1 1 2 2 4 5
8 9 13 13 14 17 6 2 3 3 8 12
12 14 3 4 2 9 10 12 16 2 6 6
8 10 11 12 13 13 14 2 3 4 5 4
6 9 9 10 11 17 18 8 9 5 6 11
5 15 15 1 1 1 1 1 1 1 1 2
2 2 2 2 2 2 2 2 2 2 2 2
2 3 3 3 3 3 3 3 4 4 4 4
4 4 4 5 5 5 5 5 5 5 5 5
5 6 6 6 6 6 6 6 6 6 6 6
6 7 7 8 9 9 12 14 15
Violation Length (In Years)
Audit Tenure
(In Years)
Improper payment Understate expense Bribery Backdate
stock option Misconduct inventory 0.31818181818181951
0.27272727272727282 9.0909090909091064E-2
0.10606060606060649 9.0909090909091064E-2 Less
than 1% 1%-5% 5%-10% 10%-100% Over 100%
0.75555555555555565 8.8888888888889475E-2
2.2222222222222251E-2 0.1111111111111111
2.2222222222222251E-2 Less than 1% 1%-5% 5%-
10% 10%-100% Over 100% 0.46666666666666801
0.17777777777777778 0.13333333333333341
0.15555555555555556 6.666666666666668E-2
No. of SampleMedianMeanStd. DeviationMaxMin
Company Data:
No. of Employees663,92022,14568,259426,7516

Net Sales (In
thousands)66$502,604$3,547,150$7,190,884$38,300,0000
Net Income (In
thousands)66$16,926$371,785$1,679,639$13,425,000($370,000
)
Total Assets(In
thousands)66$491,949$5,406,624$14,791,796$109,022,000,0
Auditor Data:
Audit Tenure (In years)6687.894.72181
Violation Data:
Length of Violation (In years)6644.362.92151
Money Involved (In
thousands)51$8,800$72,340$173,685$921,000$80
Penalty (In thousands)45$1,000$9,800$31,497$177,000$25
Violation Length
Short TenureLong Tenure
Average
Tenure
Others No.of Sample1614216
Mean (In Years)3.693.575.503.81
St.Dev (In Years)2.392.923.503.13
Big FourNo.of Sample50163450
Mean (In Years)9.244.384.624.54
St.Dev (In Years)4.432.203.032.79
TotalNo.of Sample66303666
Mean (In Years)7.894.004.674.36
St.Dev (In Years)4.682.633.062.90
Average Audit Tenure
Dollar amount of fraudNo. %MeanMedianSt.DeviationMaxMin
Type of Fraud Involving
Improper payment
2132%82,984,63113,000,000177,189,488622,000,00081,000
Understate
expense1827%75,930,27920,500,000155,046,949622,000,00018
5,673
Bribery69%5,036,0002,500,0005,348,08215,000,00080,000

Backdate stock
option711%109,439,57137,000,000133,307,340399,500,0002,67
7,000
Misconduct
inventory69%139,890,00027,000,000241,375,327622,000,00025
0,000
Penalty
Type of Fraud Involving
Improper payment
2132%4,254,0591,839,3254,800,24915,000,00030,000
Understate
expense1827%1,881,415283,5004,048,29515,000,00046,200
Bribery69%42,149,3448,000,00067,923,279177,000,000217,000
Backdate stock
option711%637,581162,320936,9742,500,00025,000
Misconduct
inventory69%4,242,800973,1006,257,14315,000,00025,000
Watch Out for Pro Forma
Pro forma reporting, in which companies provide investors a
choice in reported income numbers, is popular among
companies in the S&P 500. For example, in 2008–2009, in
addition to income measured according to generally accepted
accounting principles (GAAP), nearly 50 percent of S&P 500
companies also reported an income measure that is adjusted for
certain items. Companies make these adjustments because they
believe the items are not representative of operating results.
How do these pro forma numbers compare to GAAP? As shown
in the chart below, ap-proximately 30 percent of the S&P 500
companies report pro forma income in excess of operating
income in the third quarter of 2009. In general, pro forma
profits were 18 percent higher than operating earnings.
Characteristic of pro forma reporting practices is Amazon.com.
It has adjusted for items such as stock-based compensation,
amortization of goodwill and intangibles, impairment charges,
and equity in losses of investees. All of these adjustments make

pro forma earnings higher than GAAP income. In its earnings
announcement, Amazon defended its pro forma reporting,
saying that it gives better insight into the fundamental
operations of the business.
Some raise concerns that companies use pro forma reporting to
deflect investor attention from bad news. Skeptics of these
practices often note that these adjustments generally lead to
higher adjusted net income and, as a result, often report
earnings before bad stuff (EBS). In addition, they note that it is
difficult to compare these adjusted or pro forma numbers
because companies have different views as to what is
fundamental to their business.
In many ways, the pro forma reporting practices by companies
like Amazon represent implied criticisms of certain financial
reporting standards, including how the information is presented
on the income statement. In response, the SEC issued
Regulation G, which requires companies to reconcile non-GAAP
financial measures to GAAP. This regulation provides investors
with a roadmap to analyze adjustments companies make to their
GAAP numbers to arrive at pro forma results. Regulation G
helps investors compare one company's pro forma measures
with results reported by another company.
The FASB (and IASB) are working on a joint project on
financial statement presentation to address users' concerns
about these practices. Users believe too many alternatives exist
for classifying and reporting income statement information.
They note that information is often highly aggregated and
inconsistently presented. As a result, it is difficult to assess the
financial performance of the company and compare its results
with other companies. This trend toward more transparent
income reporting is encouraging, but managers still like pro
forma reporting, as indicated by a recent survey in response to
the FASB financial statement presentation project. Over 55

percent polled indicated they would continue to practice pro
forma reporting, even with a revised income statement format.
Source: A. Stuart, “A New Vision for Accounting: Robert Herz
and FASB Are Preparing a Radical New Format for Financial
Statements,” CFO Magazine (February 2008), pp. 49–53. See
also SEC Regulation G, “Conditions for Use of Non-GAAP
Financial Measures,” Release No. 33-8176 (March 28, 2003)
and Compliance & Disclosure Interpretations: Non-GAAP
Financial Measures (January 15, 2010), available at
www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.

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