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Preamble

When we think of corporations today we consider them to be responsible, thanks to CEO's
and business advocates portraying it to be so. This concept of believing in corporate
goodness is naïve. The cases involving Enron and WorldCom prove just that. This leads
us to the taboos in corporate social responsibility discourse. These taboos are rarely
discussed, yet it is a very important topic. According to Berger and Luckmann, "from the
social constructionist's perspective, social reality is built around and becomes understood
through discourse. However, some discourses have a higher 'truth' value than others. As a
consequence they easily become generally accepted, sometimes even considered as
absolute truths that are not easily questioned".

Businesses, non-profit agencies and even the government are all victims of both fraud and
theft on a daily basis. Business owners are sometimes blindsided by these actions and may
be unaware of the fraud due to lack of accounting experience or expertise. In almost every
community, large or small, there are news stories about theft from employees. In several
cases, unfortunately, the theft is from those entrusted to perform accounting functions. By
the time fraud or theft is detected, sometimes thousands and even millions of dollars are
already missing.

Another downfall of accounting fraud and theft is the potential for customers and investors
to lose confidence in the company or organization’s management. According to the
Federal Bureau of Investigation (FBI), some cases of accounting fraud and theft or not
even reported. Companies fear the bad press that is associated with reporting internal
crimes. Like anything else, the best protection for accounting fraud and theft is prevention.

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International Corporate Fraud Trend

Corporate frauds are likely to be uncovered in many countries. In the leading capitalist
economy, the United States, such corporate frauds have been rising sharply in recent
years, according to data from the official investigating agency, as the accompanying chart
shows. Between 2001 and 2007, the number of corporate fraud cases that were opened by
the FBI (covering both corporate fraud per se and securities and commodities fraud)
increased by 43.7 per cent, even though convictions barely increased. And in 2008, the
number of scandals that has come to light, and the sheer extent and audacity of several of
them, almost defy description. This ought to surprise us, because after the huge corporate
accounting scandals of the early part of the decade, exemplified by the Enron scandal and
the subsequent exposure of significant firms like WorldCom, Adelphia, Peregrine Systems
and others, the US government took steps to enact legislation that would regulate
corporate markets specifically to prevent such frauds .

Source: Report of the Corporate Fraud Task Force, 2008, US Government, Page 1.19

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Financial crime poses a real and substantial threat to the stability of any business. Taking
the proper measures to prevent or react quickly to a malfeasance is critical. Fraud and
theft involving everything from intellectual property to inventory, from cybercrime to
corruption, can be critically expensive. PricewaterhouseCoopers' Global Economic Crime
Survey 2009 found that the three most common types of economic crimes experienced in
the last 12 months were asset misappropriation, accounting fraud and bribery and
corruption.

Types of economic crimes

The survey also shows that two-thirds of those respondents who have experienced
economic crime in the last 12 months reported having suffered asset misappropriation.
This type of fraud - the most prevalent since we began these surveys 10 years ago - covers
a variety of misdemeanours and while it is the hardest to prevent, it is arguably the easiest
to detect. However, our 2009 survey shows that accounting fraud has become increasing
prevalent. Of those respondents who reported economic crime in the past 12 months, 38%
reported experiencing accounting fraud. This form of economic crime has significantly
increased since 2007 and this appears to be linked to the economic cycle.

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Trends in reported frauds

For organisations that encounter economic crime, fraud, or allegations of financial
irregularity, our experienced and knowledgeable teams can manage and minimise the
threat of corporate crimes and achieve improved outcomes using the following four front
strategies:

Reduce business disruptions, financial loss, and reputational damage;
Identify the perpetrators and uncover actionable evidence;
Trace and retrieve stolen/missing assets as fully as possible; and
Recommend and/or implement effective remedial action to forestall future
incidents.

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About Peregrine Systems Inc.

Peregrine Systems, Inc., an enterprise software company, was founded in 1981 and sold
enterprise asset management, change management, and ITIL-based IT service
management software. It was founded in Irvine, California. The founders and employees
were:

 Chris Cole,
 Gary Story,
 Ed Beck,
 Kevin Keyes and
 Richard Diederich.

They started selling PNMS on a Series One computer while developing an MVS version.
The MVS client/server solutions for PNMS became available in 1995.

In 1989, John Moores, founder of BMC Software and owner of the San Diego Padres
Major League Baseball team, became a member of the Peregrine Board of Directors. He
served as Chairman from March 1990 through July 2000 and then again in 2002. He
resigned from the Board in 2003 during the company's bankruptcy filing. His involvement
in the software industry continues today with investments through his venture capital firm
JMI Equity. The legacy of his investments has been focused on ITSM software packages
with the most recent investments made in Service-now.

Peregrine had offices in the Americas, Europe and Asia Pacific and grew its product line
rapidly both organically and via acquisitions, including Harbinger Corporation in 2000
and Remedy Corporation in 2001.

Hewlett Packard acquired Peregrine Systems in 2005 for $425 million. The Peregrine
products are now sold as part of the HP IT Management Software (BTO) portfolio within
the HP Software Division.

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Peregrine System’s Accounting Fraud

In 2003, the U.S. Securities and Exchange Commission charged Peregrine with "massive
financial fraud" for the purposes of inflating the company's revenue and stock price.
Peregrine, without admitting or denying the allegations of the complaint, agreed to a
partial settlement.

The primary fraud that discovered is in the revenue section of Peregrine’s Financial
Statements. But it has a significant effect in the whole accounting procedures that have
been followed by Peregrine before the fraud came into light. These effects are shown in
the following diagram:

Primary Fraud

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Overestimation of Revenue & Stock Price
Wall Street's demand for high growth motivated Peregrine Systems' executives, to
fraudulently inflate revenues and stock prices. According to the SEC, "Peregrine filed
materially incorrect financial statements with the commission for 11 consecutive
quarters." Steven Spitzer, a member of Peregrine's sales team admitted to meeting
regularly with senior management near the end of the quarter to determine how much
revenue was needed to exceed Wall Street's expectations.

Overestimation of Accounts Receivable & Net Income
The primary fraud committed by Peregrine was done by inflating revenue by booking
revenue when sales never occurred. By recognizing revenue from sales that never
occurred, the accounts receivable balance and net income were fraudulently overstated;
the accounts receivable would never be collected, because the merchandise was never
sold.

Evidently, Peregrine Systems increased its revenues by pressuring distributors and
resellers to build up their inventories (known as "parking" their inventory). Through secret
side or oral agreements Peregrine distributors and resellers were not obligated to pay
Peregrine for their software inventories. This conduct obviously became a problem. If they
could not sell Peregrine's software, they would receive their money back. According to
GAAP, revenue recognition on the sale of software requires evidence that an arrangement
must exist, delivery must have occurred, vendor's fees must be fixed or determinable, and
collectability must be probable before recognizing revenue. Peregrine falsely recorded this
transfer of inventory to distributors and resellers as revenue.

Underestimation of Liability
According to the SEC, "senior Peregrine officers, sales personnel, and channel partners
knew through secret oral or written side agreements, that the channel partners were not
obligated to pay Peregrine, but that Peregrine would later negotiate sales to end-users and
arrange for the payment to 'flow through' them; the channel partners had 30 days or more
to back out of the software license contracts; or if the channel partners were unable to
resell Peregrine's software licenses, they could invoice Peregrine for 'services' in a dollar
amount equal to what they had not resold." Peregrine falsely recorded as much as $225
million by falsely recognizing revenue in this way and recording it as a "non-substantial
transaction," which was in violation of GAAP revenue recognition criteria for software
sales. According to FASB statement number 49,"... when a 'sale' takes place under a
product financing arrangement the company does not record sales revenue but instead
records the proceeds received as a liability on the financial statements."

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As a result of recognizing revenue without actually making a sale, Peregrine accumulated
a large number of receivables on its balance sheet that would not or could not be paid. To
remove the receivables from the balance sheet, to avoid suspicion, and to lower the days'
sales outstanding number, Peregrine assigned almost $141.6 million of its accounts
receivable balance to a bank. However, they reported the assigned receivables as a
factoring agreement. In an assignment, the borrowing company (Peregrine) usually retains
ownership of the assigned accounts, incurs any bad debts, collects the amounts due from
customers, and uses these funds to repay the bank. In an assignment, the accounts
receivable are not eliminated from the balance sheet; a liability is created, and the
receivables are sold with recourse. This recourse means the bank can demand payment
from the company if the receivables are not collected. This is what occurred with
Peregrine. Peregrine sold the receivables, transferred title to the factor, who assumed all
the risks of ownership. In this factoring agreement the accounts receivable were removed
from the balance sheet, and the receivables were sold without recourse. This meant that if
the receivables were not collected, the factor cannot demand payment.

Peregrine recorded the "factoring" and assignment of their receivables as a factoring
agreement and recorded the transaction as a sale of the receivables. They recorded the
cash received and removed the related receivables from the accounts. By removing the
receivables, they treated the receivables as if the risk of collection had passed to the bank
without recourse. According to the SEC, Peregrine concealed the revenue fraud by
violating GAAP for financing arrangements. ."..Because Peregrine had given the banks
recourse, and frequently paid or repurchased unpaid receivables from them, Peregrine
should have accounted for the financing arrangement as a liability and left the receivables
on its balance sheet. Some of the 'sold' receivables were also not valid because the
customers were not obligated to pay Peregrine. Also several of Peregrine's 'sold' invoices
were not real."

Peregrine had an agreement with the bank that they would collect the receivables from the
customers and, subsequently, submit the payments to the bank. Obviously, when the
customers did not pay Peregrine, Peregrine either repurchased the receivables or paid back
the bank. $70 million of payments were recorded on the income statement as acquisition
or investment related expenses. This action misled investors and was, again, in violation
of GAAP. As a result Peregrine's financial statements and books overstated cash flow
from operations and understated accounts receivable and their liabilities to the bank. If the
receivable was actually collected, it would have been reduced by the company twice;
when it was sold to the bank and when it was received by the company (instead of
increasing accounts payable for the liability that it did not record). This transaction
overstated cash and understated receivables. When the amount was paid to the bank, the
double dipped entries were reversed.

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Underestimation of compensating expenses
Peregrine also understated compensating expenses. They picked the lowest stock price of
the period for the compensating stock options, even though the decision to distribute these
options had been made in the previous period. According to GAAP, any difference in the
stock price between the exercise price and that on the date of measurement should be
recorded as a compensating expense. By not complying with the GAAP and fraudulently
not recognizing these expenses, Peregrine's expenses were falsely understated by nearly
$100 million (judge rules).

Falsely Recognized Revenue on Nonmonetary Transactions &
Similar Assets
Peregrine also falsely recorded and falsely recognized revenue on nonmonetary
transactions and of similar assets. Peregrine exchanged software with another software
company, exchanged checks, and recognized revenue even though they were equal trades.
Under GAAP, with the exchange of similar assets, a gain can only be recognized to the
extent that boot or cash is received, unless the boot is less than 25% of the fair market
value of the assets exchanged. By recognizing that revenue fraud was committed, boot
should not have to be given when the assets have the same fair market value.

Peregrine originally told investors and government regulators that its losses from April
1999 to December 2001 amounted to $1.54 billion. Their restatement showed these losses
to be $4.09 billion. The shares of Peregrine trades were near eighty dollars a share in the
year 2000. It was later delisted by the NASDAQ and traded at forty-one cents on an over-
the-counter stock.

Almost two-thirds of Peregrine's licensing revenue never existed; it is not understood how
the board could have approved Peregrine's financial statements when Peregrine was so
noticeably smaller. Now, the requirement for more signatures for the approval of financial
statements and the annual report are becoming more prevalent.

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Unveiling the Scandal

Peregrine filed suit against its auditor Arthur Andersen in 2002 for $1 billion in damages,
for allegedly allowing incorrect audits that overstated revenues by as much as $250
million to be filed for the 2000-2002 fiscal years

In 2003, the U.S. Securities and Exchange Commission charged Peregrine with "massive
financial fraud" for the purposes of inflating the company's revenue and stock price.
Peregrine, without admitting or denying the allegations of the complaint, agreed to a
partial settlement. In 2003, the former Peregrine CFO, Matthew Gless, pled guilty to fraud
charges.

In 2004, a federal grand jury issued an indictment charging eight former executives of
Peregrine Systems, Inc., one former outside auditor of Peregrine, and two outside business
partners of Peregrine, with conspiracy to commit a multi-billion dollar securities fraud.
The case resulted from an investigation by the Federal Bureau of Investigation, and the
Securities and Exchange Commission had pursued a parallel civil enforcement action.

In 2008, the former Peregrine CEO, Stephen Gardner, was sentenced to eight years and
one month in prison for his role in the fraud, which resulted in bankruptcy for the
company. Although former chairman of the board, John Moores, sold more than $800
million of shares during Peregrine's fraudulent period, the court of appeals determined that
there was insufficient evidence that Moores knew about the fraud that led to the
company’s bankruptcy.

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After the Scandal

Peregrine filed for Chapter 11 protection on September 23, 2002.
Obliged to lay off 1400 employees, or nearly half its workforce.
Lost more than $4 billion in shareholder equity.
Sold the Remedy division of the company to BMC Software for more than $300
million dollars.
Peregrine exited Chapter 11 reorganization in August 2003 which cost a lot.
And finally Hewlett Packard (HP) acquired Peregrine Systems in 2005 for $425
million. The Peregrine products are now sold as part of the HP IT Management
Software (BTO) portfolio within the HP Software Division.

Sentences

 Stephen Gardner (former Peregrine CEO): 97 months in custody.
 Douglas Powanda (former Peregrine Executive Vice President for World Wide
Sales): 78 months in custody followed by two years of supervised release.
 Matthew Gless (former Peregrine CFO): 63 months in custody followed by two
years of supervised release.
 Andrew Cahill (former Peregrine Executive Vice President for World Wide Sales,
after Powanda): 22 months in custody followed by two years of supervised release.
 Jeremy Crook (former Peregrine General Manager for Europe): 27 months in
custody.
 Steven Spitzer (former head of Peregrine's Alliance Sales Program): Three years
probation, a $5,000 fine and 200 hours of community service plus an $110,000
civil penalty and barred from serving as an officer or director of any public
company.

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 Berd J Rassam (former Peregrine Controller): 19 months in custody followed by
two years of supervised release
 Larry Rodda (former managing director of KPMG Consulting): Six months in
custody, six months of home detention, two years of supervised release and $100
mandatory special assessment.
 Michael Whitt (owner of Barnhill Management Group): Civil penalty of $60,000.
 Gary Lenz (former Peregrine President & COO): three years of probation.
 Ilse Cappel (former Peregrine Assistant Treasurer): Five years of probation.
 John Burnham Benjamin (former Peregrine Treasurer): Five years of probation.
 Peter O'Brien (former Peregrine Director of Alliances): One year of probation.

Charges Dismissed
 Joseph Reichner (former Peregrine Vice President of Alliances)
 Patrick Towle (former Peregrine Revenue accounting manager)
 Dan Stulac (formerly led auditing team at Arthur Andersen)
 Eric Paul Deller (former Peregrine General Counsel)

Preventive Actions to avoid the Scandal
A good way to prevent management from even feeling tempted to falsely inflate earnings
is to take away their personal gains, if the company's stocks go up. When upper level
management has too much incentive based on personal financial gain, which is directly
based on the performance of the company; it compromises their judgments. Moreover
upper level management should not be allowed to receive stock options or to even own
stock in the company as the financial statements would provide a neutral, bias-free report.
Management would have no reason to "cook the books." We also feel that any
management who still decides to falsify documents needs to be held more accountable for
their actions and receive tougher punishments. We think that these strict guidelines would
help the people in the United States and people all over the world feel more confident in
investing their money into the stock market.

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Conclusion

The FASB's first concepts statements observed that objectives of financial statements is to
provide useful information to a variety of external users for making rational investment,
credit, and other decisions (book). Accounting information should be understandable and
have decision usefulness. Accounting information is useful if it is relevant and reliable. To
be relevant, accounting information must contain the capacity to make a difference in a
decision though predictive value, feedback value, or timeliness. To be reliable, the
accounting information must be reasonably free from error or bias, and faithfully represent
what it is intended to represent through verifiability, representational faithfulness, and
neutrality.

So, it should be always kept in the mind while preparing financial statements that all the
contents or particulars shown in the statements are collected from reliable sources and
recorded, calculated and presented in that manner which is fair and have congruity with
the prescribed rules and regulations of GAAP and FASB.

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References

 www.wikipedia.com

 www.peregrinesystems.com

 www.socaltech.com/fullstory/0002394

 www.justice.gov/opa/pr/2004/october

 U.S. Securities and Exchange Commission. SEC Charges Peregrine Systems, Inc.
With Financial Fraud And Agrees To Partial Settlement

 U.S. Securities and Exchange Commission. SEC Charges Peregrine Systems, Inc.
With Financial Fraud And Agrees To Partial Settlement

 Wires. Peregrine Systems Files for Protection, Sues Arthur Andersen. Retrieved
2010-02-19.

 SEC. “Former Peregrine Systems President Settles SEC Charges for His Role in
Corporate Accounting Fraud.”

 SEC. “SEC Settles with Two Defendants in Peregrine Systems Accounting Fraud
Case.”

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