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Audit Project

In: Business and Management

Submitted By odette89
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Question #1
What was the nature of the fraud and how was it executed?
In this section, describe the company and key characteristics of the fraud including but not limited to…

- Describe the company
Monster Worldwide, Inc. is the parent company of the well-known employment solutions website. The website serves as an intermediary between individuals seeking employment and employers seeking employees. They offer an array of services from their original “job board” to career management and employee recruitment services (Monster Worldwide, Inc.). In addition to their services Monster generates revenue by selling advertisement space on their websites. Some of Monster’s competitors include Adecco S.A., CareerBuilder, LLC and SnagAJob.com (Hoovers 2013).
- The cumulative amount of the fraud and its financial statement effects and the length of its perpetration/criminal activity
Monster reported “materially misleading” financial statements regarding the real grant date and exercise price of certain employee benefit stock option plans in all SEC filed documents during the years 1997-2005 (U.S.D.J. 2007). This included falsely stating the fair market value of the options further inflating their value.
Monster accounted for these stock options as “in-the-money” options which is permissible under U.S. GAAP. However in doing so they forged the actual date the stocks were granted on thus recording no compensation expense for the interim days which is not an acceptable accounting technique. The dates chosen were used because of their low closing price. The results were an understated compensation expense balance and inflated earning figures. The approximate amount by which earnings were inflated was $339,000,000 according to the U.S. Department of Justice.
Monster paid a $2.5 million penalty in settlement of the SEC’s charges against them. Charges alleged that Monster “defrauded investors” by backdating certain employee “in the money” stock options and failing to account for “required non-cash charges for option-related compensation expenses” (SEC 2009). In other words Monster intentionally deluded their investors by not recording significant expenses and appearing more profitable. Although they did not admit or deny the SEC’s allegations; payment was remitted to enjoin the company from violating the “antifraud, reporting, recordkeeping and internal controls provisions of the federal securities laws” (SEC 2009).
- Names and positions of the individuals involved
On Feb. 15th, 2007 the SEC charged Myron F. Olesnyckyj, former Monster Worldwide, Inc. General Counsel member, with “securities fraud” for fraudulently dating stock option plans given to “thousands of Monster officers, directors and employees, including himself” (SEC 2007). Olesnyckyj bore most of the heat for the company’s fraudulent financial reporting although there were other contributors. Olesnyckyj pled guilty to the following indictments “one count of conspiracy to commit securities fraud, make false statements in SEC filings, make false statements to auditors, and falsify corporate books and records; and one substantive count of securities fraud” (U.S.D.J. 2007).
In addition the SEC charged former executive members “CEO Andrew McKelvey, President and COO, James Treacy and Controller, Anthony Bonica” for their suspected contributions to Monster’s backdating scheme (SEC 2009). Although CEO Andrew McKelvey was not issued the options himself they were granted to four of his personnel employees. McKelvey was also charged with filing materially misstated financial statements with the Commissions. The SEC alleged that James Treacy and Anthony Bonica “personally benefited from the fraudulent scheme by receiving and exercising backdated grants of the in-the-money options (SEC 2007).

The financial statement fraud techniques employed - Options Backdating
Monster engaged in a fraudulent options backdating scheme ultimately resulting in a 339 million dollar overstatement of earnings throughout the years 1997-2005. The idea was to provide a grant measurement date prior to the actual grant date in order to take advantage of a lower stock price. The end results ultimately being higher profits when the options are exercised (Alexander 2007).
The major difference was the disclosure and approval of the stock option elements to shareholders. Acceptable accounting procedures include granting in-the-money, at-the-money and out-of-the-money employee stock option plans. In-the-money stock options “permit the employee to exercise the option” at a strike price that is lower than the fair market value “of the company’s stock on the date of the grant” (U.S.D.J. 2007). By fabricating the date on which these options were granted Monster also failed to account for a non-cash compensation expense which the company was liable for. Failure to increase compensation expenses resulted in significant overstatement of earnings (Associated Press 2007).
The compensation expense Monster should have recorded was the difference between the strike price and the value of their stock on the grant date. Olesnyckyj and his associates created false documentation to fabricate the date at which the options were granted in order to avoid accruing a compensation expense. The goal was to date the options at a particularly “low point” in time that way the options seemed as if they were “in-the-money” upon issuance and thusly not to require a charge to earnings (U.S.D.J. 2007).
When discussing fraud techniques contrast them with the appropriate treatment under
- U.S. GAAP and/or SEC Staff Accounting Bulletins provide specific references to the relevant guidance
Under U.S. GAAP accounting for stock based compensation has required use of the fair value method of accounting under SFAS 123 ® (Alexander 2007). Compensation cost is measured at the grant date and recognized over the period of service or investment. “Under SFAS 123, companies could use the intrinsic-value method of accounting as stated by APB Opinion 25” (Alexander 2007). The intrinsic value method measures compensation cost as the excess value of market price over the employee’s purchase price at the measurement date.
Compensation expense should correspond to the total amount by which the stock options are “in-the-money” at the measurement date (Alexander 2007). When the measurement and grant date’s values are equal no employee compensation cost is recognized under APB Opinion 25.
“Under paragraph 10(b) of APB Opinion 25, the measurement date for determining the compensation cost of a stock option is the first date on which both of the following are known: the number of options that an individual is entitled to receive; and the option strike price (or stock purchase price)” (FASB 2013).
The Codification of Staff Accounting Bulletins, Topic 14: Share Based Payment does not specify a particular valuation technique or method to be used for stock options accounting. As stated in FASB ASC paragraph 718-10-55-11 in order to meet the fair value measurement objective, a company should select a valuation technique or model that the chosen valuation technique or model must meet all three of the requirement” as follows
 (a) is applied in a manner consistent with the fair value measurement objective and other requirements of FASB ASC Topic 718
 (b) is based on established principles of financial economic theory and generally applied in that field
 (c) Reflects all substantive characteristics of the instrument.

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