77001371600540005431155Peregrine Systems Inc.Ethics paperJoey Delorme7900035000Peregrine Systems Inc.Ethics paperJoey Delormeright23002311402019760098002019BackgroundPeregrine Systems, Inc. was an enterprise software company, developed in 1981, that made and sold IT-based service management programs. It was founded in Irvine, California (Later moved to San Diego) by Richard Deiderich, Ed Beck, Gary Story, Kevin Keyes and Chris Cole. CITATION Wik l 4105 (Wikipedia, n.d.) In 1989, founder of BMC Software and owner of Major League Baseball’s San Diego Padres team, John Moores, became a member of the Peregrine Board of Directors.
John would serve as Chairman from March of 1990 until July of 2000, and then again in 2002. CITATION Wik l 4105 (Wikipedia, n.d.) He would officially resign from the Board in 2003 when the company filed for bankruptcy. Peregrine was purchased by Hewlett-Packard in 2005 and HP uses the Peregrine software as part of its IT Management solutions. CITATION Wik l 4105 (Wikipedia, n.d.) Accounting Falsifications8 former executives of Peregrine Systems were indicted on charges of conspiracy to commit a multi-billion-dollar securities fraud.
CITATION Dep04 l 4105 (Department of Justice, 2004) They, along with the help of outside auditors, falsified financial statements in order to maintain or surpass analysts’ projections of their quarterly numbers. CITATION Dep04 l 4105 (Department of Justice, 2004) By falsifying these numbers, it caused an increase in the value of their shares. So much so, that from the time of their IPO’s (Initial Public Offering’s) value of $2.25, shares were valued as high as $79.50 per share on March 27, 2000. The defendants conspired between March of 1999 up until May of 2002, the better part of 11 straight quarters.
CITATION Tod04 l 4105 (Weiss, 2004) As of June 30, 2001, shares were valued at roughly $29 each, and Peregrine had issued over 162.76 million shares, resulting in roughly $4.72 billion in market capitalization. CITATION Dep04 l 4105 (Department of Justice, 2004) During this 3 year span, John Moores and 4 other Peregrine executives sold roughly $194 million worth of stock. Moores himself sold $177 million of the stock, and eventually an additional $487 million worth of stock while the statements were being falsified. Throughout his time with the company, it is estimated that Moores sold over $600 million worth of stock, basically all the stock he owned. CITATION Don04 l 4105 (Bauder, 2004) The falsification of the financial statements was done by counting software license revenue on bogus transactions in order to give the appearance of increased revenue. CITATION Tod04 l 4105 (Weiss, 2004) This in turn led them to being able to deceive banks and investment companies into extending them credit. This allowed Peregrine to give off the impression that they were doing very good financially, when, it was just used to cover up their large amount of uncollectible accounts receivable. They also kept the bad depts associated with these bogus deals off the books. CITATION Tod04 l 4105 (Weiss, 2004) Peregrine filed for Chapter 11 bankruptcy in September of 2002 and in March of 2003, restated its financials. The new financial statements revealed overstated revenues of $509 million. CITATION Tod04 l 4105 (Weiss, 2004) This resulted in charged being laid by the Securities and Exchange Commission in July of 2013. Moores resigned and new CEO and president, John Mutch, fully cooperated with the investigations. CITATION Tod04 l 4105 (Weiss, 2004) After the crash, Peregrine admitted that revenue had been overstated by 38%. CITATION Don04 l 4105 (Bauder, 2004)Violations of the Conceptual FrameworkRevenue Recognition was the main violation of the conceptual framework. This was done when Peregrine listed bogus transactions as revenue, thus giving off overstated revenue. CITATION Tod04 l 4105 (Weiss, 2004) Materiality was a huge violation because Peregrine’s falsified statements led to investors believing the company was doing better than they were, so they invested. It also impacted the banks that extended their credit due to these falsified financial statements. CITATION Tod04 l 4105 (Weiss, 2004) This was the company making immaterial stuff seem material. Verifiability was violated because investors and banks were led to believe that what was on the financial statements was the economic reality of the situation, when it really wasn’t. I would also argue that timeliness was violated because this was all done in a timely manner (11 consecutive quarters) which led to investors purchasing stocks. CITATION Tod04 l 4105 (Weiss, 2004) The AuditorsThe external auditor for Peregrine during this time was Arthur Andersen. They did not properly notify the public because during board meetings, the audit committee wouldn’t keep minutes or take down any notes, so they used this as the reasoning for not being able let anyone know of the fraud that was happening. CITATION Don04 l 4105 (Bauder, 2004) Apparently, Arthur Andersen was uncomfortable with Peregrine from the get-go because of Peregrine’s sell-in method of accounting. The sell-in method was Peregrine would record a sale to a distributor as revenue, when they only received the revenues when the distributor would sell the product. CITATION Don04 l 4105 (Bauder, 2004) Andersen insists they were uncomfortable with this practice if the sales were more than 25% to distributors. The reality was that this number frequently floated around 40% and even as high as 52%. Despite this, Andersen still approved quarterly financial statements. Legal Actions TakenThere were several executives of Peregrine that were either charged or faced jail time in relations to the fraud scandal. Stephen Gardner (Former CEO) received a 97-month jail sentence. CITATION Wik l 4105 (Wikipedia, n.d.)Douglas Powanda (Former Executive Vice President of world-wide sales) received a 78-month jail sentence, followed by 2 years of supervised release. CITATION Wik l 4105 (Wikipedia, n.d.)Matthew Gless (former CFO) received a 63-month jail sentence and 2 years of supervised release. CITATION Wik l 4105 (Wikipedia, n.d.)Jeremy Crook (Former Manager of Peregrine Europe) received a 27-month jail sentence. CITATION Wik l 4105 (Wikipedia, n.d.)Andrew V. Cahill, Jr (Douglas Powanda’s successor) received a 22-month jail sentence. CITATION Wik l 4105 (Wikipedia, n.d.)Berd J Rassam (Former Controller) received a 19-month jail sentence. CITATION Wik l 4105 (Wikipedia, n.d.)Larry Rodda (Former managing director) received a 6-month jail sentence. CITATION Wik l 4105 (Wikipedia, n.d.)Richard Nelson (Former Corporate Counsel) received one day in jail. CITATION Wik l 4105 (Wikipedia, n.d.)Steven Spitzer ($115,000) and Michael Whitt ($60,000) received fines.Sarbanes-Oxley Act, 2002It is an Act that was passed by U.S. Congress to protect investors of companies from fraudulent accounting activities. This was created in response to huge accounting scandals like Enron. CITATION Wil18 l 4105 (Kenton, Investopedia, 2018) Some of the critical areas of the act are Corporate Responsibility (holding corporations responsible for delivering trustful information to investors), Increased Criminal Punishment, Accounting Regulation and New Protections. CITATION Ken18 l 4105 (Kenton, Investopedia, 2018) As stated above, the main purpose of the Act is to protect investors from fraud and losing their investments for reasons out of their control. CITATION Wil18 l 4105 (Kenton, Investopedia, 2018) In response to the Sarbanes-Oxley Act, Canada passed Bill 198, which accomplishes the same thing as SOX, in fact it was be referred to as the Canadian SOX or C-SOX. CITATION Pat15 l 4105 (Patterson, 2015) It was introduced for the same reasons as its American counterpart, Corporate scandals that shook investor confidence. CITATION Pat15 l 4105 (Patterson, 2015)Works Cited BIBLIOGRAPHY (2004, October 6). Retrieved from Department of Justice: D. (2004, May 6). Retrieved from San Diego Reader: (n.d.). Company Overview of Peregrine Systems Inc. Retrieved from Bloomberg: K. P. (2008, December 17). News Release Summary. Retrieved from W. (2018, May 31). Retrieved from Investopedia: W. (2018, May 31). Retrieved from Investopedia: J. (2015, June 5). Retrieved from Resolver: W. (2004, October 7). Retrieved from The San Diego Union-Tribune: T. R. (2004, October 6). Retrieved from Computerworld from IDG: (n.d.). Peregrine Systems. 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