It advised United Airlines on its bankruptcy and helped uncover accounting shortfalls at mortgage giant Fannie Mae, which eventually led the SEC to charge Fannie Mae with fraud. In 2007, Huron was named among Business Week's hot growth companies and last year was ranked on a Fortune list of 100 fastest-growing U.S. companies.
The reputation built by Huron prior to the scandal gave the impression that that they were among the best consulting firm in the US. Having built its reputation and having the expertise in accounting, Huron should have not be involved in any accounting scandal themselves. .
In the scandal, Huron had agreements to pay some employees at four of its recent acquisitions "earn-out"" compensations based on their unit performance after the transaction was completed. These agreements were on their own are considered legally fair, but their accounting was not quite done correctly. Instead of charging these compensations to expenses as non-cash charges with negative impact on Huron's net income, they were classified as purchase price goodwill on the balance sheet, thus with no impact on net income and Earnings Per Share ("EPS ").
It was believed that executives were trying to manipulate earnings by making it seem like they paid less than they really did for the companies they acquired. This was further substantiated by the removal of the CEO, CFO and CAO; and the penalties paid by Burge and Lipski to the SEC. .
On another perspective, it was not entirely a spill over of the Arthur Andersen bad practices, but what transpired here was the result of simple universal human emotions which are fear and greed. It was the fear of not reporting a satisfactory result and performance to the market to accommodate the high expectations that was put on them; and the financial greed associated with an increasing stock price and net profits. .
b) Devise four questions that you feel will best help the executives to gain an understanding of how to conceptualize and address the dilemma using relevant theory.
