Fraud- Nortel trial- Nearly billiton dollars in reserves "incorrectly" booked

It is reported that Nortel conducted a comprehensive review and found out that nearly a billion dollars worth of accounting reserves ``incorrectly'' booked, dating to as far back as 1999. The internal review also found two ``material weaknesses'' tied to the use of the accrued liabilities, the first being a breach in public disclosure rules, the second a violation of Nortel's own accounting practices.

It is evident that certain management of Nortel had manipulated the results by using the accrued liabilities account.

$952 million in accrued liabilities were set up without the appropriate documentation, and weren't filed in accordance with generally accepted accounting practices (GAAP). Citing one account, called the ``out-of-balance'' provision that was stored within the firm's corporate or non-operating books, the accountant said: ``It's not warranted to have an out-of-balance account.''

Tens of millions of dollars in backlogged provisions were entered to cover anticipated costs such as contract liabilities and lawsuits. When those costs weren't realized, Nortel flowed the provisions back into earnings in later periods. Yet, they ``should have been recognized in real-time,'' not deferred.

This so-called ``earnings management'' practice was used by the three top executives in Nortel to tip the flagging tech giant back into profitability in 2003, triggering $73-million in bonuses, of which they collected $12-million combined.

Inappropriate accounting for payment- Diamond Foods, Inc

As published in Diamond Foods' website on 08 February 2012. Diamond Foods, Inc announced that audit committee's investigation of the Company's accounting for certain crop payments to walnut growers is substantially completed. The findings shows that financial statement for FY 2010 and FY 2011 will need to be restated.
"The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting." [ Quoted from the Company's announcement]

It is not mentioned on the accounting treatment for the payment to walnut growers. Questions we are interested in is:
- what was the accounting treatment that had been recorded for payment to Walnut Growers
- what should be the appropriate accounting treatment
- how would the financials been affected
- will the profit & loss of the Company been affected immediately
- are there any interested party relationship between Diamond Foods, Inc and those walnut growers
- had a proper review of the financials been reviewed earlier

For the 12-month-ended July 2011, Diamond Foods recorded a net profit before tax of about US$69mil. Shareholder's Equity amounted to US$495mil as at 31 July 2011. In our opinion, US$80mil of payment ( i.e. US$20mil + US$60mil) represents a significant amount to the Company's financial statement.

In addition, the audit committee also identified mateiral weakness in the Company's internal control. As evidenced, it is crucial to have a sound internal control environment to support the financial statement closing process of the Company.

Implication of Singapore Tiger Airway's Q3 results.

Tiger Airways Singapore posted a net loss of S$17.4mil in Q3 FY 2011, as compared to a net profit of S$22.5mil in same period last year.

The net loss for the Group was largely attributable to: losses generated from Tiger Airways Australia as a result of the CASA suspension, under-utilisation of aircraft fleets (due to 38.8% increase in the average size of the operating aircraft fleet and significant increase in fuel costs. Fuel costs (net of gain/losses on fuel hedging) has increased from S$54.5mil in Q3 FY 2010 to S$75.7mil in Q3 FY 2011.
Tiger Airways made the following comments in the outlook statement of its announcement:

“The Group expects to report a significant net loss for the financial year largely as a result of the CASA suspension in Australia, the under-utilisation of the Group’s aircraft fleet and exposure to high and volatile jet fuel prices.”
Implication of Tiger Airways’ results.

Tiger Airways’ results are alarming to audit clients involved in airlines, shipping, transportation, and logistics industries. This is because:

- global economy is experiencing slow down of business activities, which may likely to result in under-utilisation of capacities (e.g. under utilisation of vessels, fleets, trucks). Your audit clients may experience significant over capacities in current period of review;
- fuel costs have increased significantly during the period of review. Your audit client may record substantial fuel costs in current period.

The above factors, individually or in combined, may result in the audit clients record substantial operating losses. In addition, the above factors may trigger potential impairment on property, plant & equipments, going concern issue, capabilities of repaying creditors / borrowings.