Reference no: EM132584513

MINISCRIBE CORPORATION SCANDAL

• After a slump in the personal computer industry in the mid-1980s, MiniScribe Corporation, a Colorado-based manufacturer of disk drives, was also in a slump. A venture capital firm came to MiniScribe's rescue with a $20 million investment. This company hired a new chief executive officer, Q. T. Wiles, who was recognized as an expert in reviving waning companies. Wiles proved successful, and within two years, the company's sale and earnings soared and its stock price increased 500 percent.

• However, in 1988, the company had a fourth quarter loss of $14.6 million, and net income for the year declined $5.3 million from that of 1987. Wiles resigned after a committee of directors was brought to conduct an internal investigation. It was concluded that the company, the directors, outside auditors, and investors had all been victims of a massive fraud. Wiles had ruled the company like a tyrant and demanded impossible sales performances from managers, whose bonuses were based entirely on their ability to meet sales and income objectives.

• Because of this, the managers began to falsify sales, understate loss reserves (the amounts in contra assets accounts similar to allowance for doubtful accounts) for sales returns and bad debts, and include defective disk drives in inventory. They shipped disk that had not been ordered, recording the sales without passing title to the merchandise. The managers were even caught altering or inflating inventory values by burglarizing the internal auditor's working papers.

• In January 1990, MiniScribe filed for bankruptcy court protection. In April 1991, the company was liquidated. Former bondholders and investors sued Wiles as well as MiniScribe's auditing firm of Coopers & Lybrand. In just one of the cases, a Texas jury awarded $530 million in punitive damages and $20 million in actual damages. Coopers & Lybrand was found liable for $45 to $50 million for failure to detect the fraud.

Required:

Question a) What do you believe was the primary motivation for inflating sales figures for MiniScribe Corporation?

Question b) Identify any four victims in this massive accounting fraud.

Question c) Identify and explain the main instigator of the accounting fraud?

Question d) Why do you believe the auditing firm of Coopers & Lybrand was liable for $45 to $50 million in damages