Research Paper on Weatherford International Ltd

Weatherford International Ltd was convicted of committing an accounting fraud in 2016. The oil services company was accused of inflating its incomes by employing misleading income tax accounting. Two of the business's former employees were charged with committing the unethical act. James Hudgins who worked for the company as the vice president of tax and Darryl Kitay who was the tax manager are blamed for the scandal. The two chief tax accountants were in stress to show the public, investors and analysts the purported paybacks of the corporation moving its legitimate headquarters from Houston to Bermuda to Switzerland and finally to Ireland in exploration of a small effective tax rate. The case involves financial reporting and disclosure fraud. The company issued significantly false and deceptive statements concerning its net income, effective tax rate and other vital financial figures. Weatherford International Ltd began to search for an effective tax rate in 2002 when its CEO Duroc-Danner moved the company to Bermuda to achieve tax inversion. Majority of the company's operations remained in Houston, but for legal and tax determinations, the company's headquarters was located in a low-tax country. The company had misleadingly stated its net income expense for about $100-$150 million per year in 2007, 2008, 2009 and 2010 and therefore, its results could no longer be trusted. The reason as to why the company misled investors concerning its actual effective tax rate was to meet or beat Wall Street consensus earnings per share ("EPS"). The company also desired to use this scheme to cause an upward movement of the stock price and to drive the rating agencies to upgrade its credit rating. Further, the company committed the fraud to allow it to raise $5.6 billion from the sale of debt securities. The artificially inflated stock price allowed the company to acquire numerous firms. Weatherford boosted its earnings to create an illusion of financial growth and success to investors during times of economic downturn. Additionally, it wanted to validate the unwarranted compensation and additional bonuses given to its leaders (Tomlinson, 2016).

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

2. How the fraud was accomplished (i.e. what specific fraud schemes were employed)?

The two employees made abundant post-closing alterations to seal openings to meet Weatherford's earlier revealed effective tax rate (ETR). ERT is the average rate that a business is taxed on pretax profits. Further, the company had been flaunting to its investors and analysts about its positive ERT as one of its competitive advantages. The company intentionally deprived of its investors correct and dependable financial reporting by permitting its employees to write their figures which fell short of the real financial results that had been previously disclosed. The two employees colluded to lower income tax by $100 million per year in four years. They ended up inflating the company's incomes by over $900 million which resulted in the raising of the stock price. Therefore, people who were thinking of buying or selling Weatherford international stock at that time, they were transacting on the fabricated figures (Tomlinson, 2016).

3. Actual or potential fraud symptoms that were or may have been indicators that fraud was possible?

The tax rate was adjusted to ensure that the stock prices matched with what analysts had predicted. Hudgins and Kitay changed the books by $290.4 million in 2009 and $286.6 million in 2010. This creative accounting caused a $441 million tax credit by the end of the year 2010, and this attracted the attention of auditors. Weatherford did not have adequate internal accounting controls to allow it to detect and appropriately account for its accounting of income taxes during the relevant period.

The company's effective tax rates had been on a steady rise from 2004 to 2006. However, the effective tax rates began to decline rapidly causing it to become one of the lowest in the industry. The average tax rate for its competitors was substantially higher at 32% during the four-year duration. In 2007, the company manipulated its books with a false intercompany deferred tax asset which caused it to report an effective tax rate that fell sharply. The company's accounting misstatements increased tremendously in 2008 and 2009 where the effective tax rate fell to 17% in 2008 and 10% in 2010. The tax rate was 15% lower than that of its top US competitors (Chuck Gallagher, 2018). These warning signs attracted the attention of auditors.

4. What was the final resolution of the fraud case (negotiated settlement, court outcome, fines, prison etc.)?

The company agreed to pay a fine of $140 million demanded by the Securities and Exchange Commission after its employees overstated it's earning by over $900 million between 2007 and 2010. The two employees who were responsible for the behavior were forbidden from appearing or practicing before the SEC as accountants for five years. They were not supposed to participate in financial reporting or reviews of public entities. Hudgins was prohibited from acting as an executive of a public firm for five years while Kitay Hudgins was demanded to pay a fine of $334,067 in the money acquired illegally, interest and fine while Kitay was asked to pay 30,000 in a fine. The two employees agreed to pay the fine to resolve the case that they were responsible for the scandal. The directive allowed the two employees to apply for restoration after five years (Business Insider, 2018).

References

Tomlinson, C. (2016). Weatherford was caught but CEO didn't face the consequences. HoustonChronicle.com. Retrieved 26 October 2018, from https://www.houstonchronicle.com/business/columnists/tomlinson/article/Weatherford-CEO-should-resign-for-earnings-scandal-9694544.php

Chuck Gallagher. (2018). Accounting Ethics: Weatherford International False Reports Lead to Unethical Behavior - Chuck Gallagher. [online] Available at: https://www.chuckgallagher.com/2016/12/02/accounting-ethics-false-reports-lead-unethical-behavior/ [Accessed 26 Oct. 2018].

Business Insider. (2018). SEC says Weatherford Intl paying $140 million penalty for accounting fraud. [online] Available at: https://www.businessinsider.com/r-sec-says-weatherford-intl-paying-140-million-penalty-for-accounting-fraud-2016-9?IR=T [Accessed 26 Oct. 2018].