Final Project Guidelines and Rubric
Running head: CELADON GROUP, INC. FINANCIAL SCANDAL 0
Celadon Group, Inc. Financial Scandal
Southern New Hampshire University
Table of Content
I. Background…………………………………………………………………………………….. 3
II. Ethical Violation……………………………………………………………………………….4
III. Theoretical Models……………………………………………………………………………8
IV. Influence and Standards……………………………………………………………………… 8
V. Ethical Framework……………………………………………………………………………..9
Celadon Group, Inc. Financial Scandal
Celadon Group Inc. is a truckload freight transport provider. Through its subsidiary companies, the company provides long haul, regional, local, dedicated, intermodal, temperature-protect, and expedited freight services across the United States, Canada, and Mexico. Furthermore, the company offers freight brokerages, freight management as well as supply chain management solution. The services include logistics, warehousing, and distribution. The operating segments of the company are asset-based, asset-light, and equipment leasing and services. Celadon Group Inc, is headquartered in Indianapolis, Indiana, USA, and is one of the top ten largest trucking carriers trading at over-the-counter markets (OTCMKTS).
According to Catarevas, (2019), celadon had Quality companies LLC as it owned a subsidiary that operated by leasing tractors and trailers to owner operator truck drivers. Between 2013 to 2016, Quality Companies LLC’s inventory grew to approximately 750 tractors and trucks to more than 11,000. In 2016, the subsidiary’s financial performance was hit by a slowdown in the trucking market (FreightWaves, 2019). The company owned a significant number of truck models with mechanical issues which many drivers did not want to lease. In the same year, Quality Companies trucks most of them were idle, not leased and overvalued and quality book by tens of million dollars.
The company generated revenue from leasing its trucks and trailers but when demand was low the company could not generate profit as it used to. The financial scandal was reported when Quality Company and celadon participated in a scheme that led to falsely reporting inflated profit and an inflated asset to the investing public through a celadon financial statement. By June 2016 and October 2016, Quality Company engaged in a variety of activities that involved trading and disposing of its unused and aging trucks. The trades were made via invoices which allowed the company not to disclose the losses connected to the trucks and it allowed the executive to inflate the truck’s values above market value.
Celadon uses these invoices as a scheme to hide the inflated truck values and millions of dollars of losses made for investors. Celadon admitted it had inflated over 1000 used trucks through a false transaction with a third party. The reason for selecting accounting fraud is to examine the unethical fraud made by Celadon. The company is accused of two accounts of fraud that is trying to massage book of accounts by falsifying books, records, and accounts of a public company and the other fraud activity include making a false statement to the public company accounts (FreightWaves, 2019). The consequence of restating the financial statement led to a stock crash which led to delisting the company from the New York stock exchange in April 2018. Now the company trade on the OTC.
II. Ethical Violations
Celadon Group Inc. was accused of complex securities and accounting fraud scheme that cost shareholders around $60 million and federal prosecution for accounting violation. The firm was accused of two accounts of fraud which include massaging financial statements to hide loss and overvalue the truck value and falsify books, records, and accounts of a public company. The celadon and the Quality Company LLC senior exchange orchestrated a securities and accounting fraud scheme that misled shareholders, banks, accountants, and the investing public (FreightWaves, 2019). Celadon and Quality Company had acquired hundreds of 2012 international Prostar Tracts with defective MaxxForce Engines. Those tractors lost their value because the drivers were unwilling to drive or lease them.
The market value for the 2012 Prostar owned by quality was valued at $15,000 apiece but the company accounting record listed them as high as $60,000 apiece. Meek, Peavler and Williams, and other top executives of Celadon and Quality Company knew the real value of the substantial portion of Celadon trucks had declined significantly. Company executive instead of accounting for the decline in truck values the executive only devised a scheme to conceal millions of dollars in losses from Celadon shareholders, Bank, and Investigating public (FreightWaves, 2019). This ethical accounting practice was conducted after the Celadon executive traded hundreds of the older and unused trucks with Prostars for newer used trucks.
The transaction was recorded as independent purchases and the invoices obtained after the sales purchase were all inflated to avoid scrutiny. In 2016, William stated that Celadon needed to sell $70,000 in excess to meet the records as indicates the company accounting record. Meek further claimed that if the truck were sold in less than its market value then the company would suffer losses (FreightWaves, 2019). As result, around 1000 trucks were traded at inflated prices and as a result, more than 600 tracks that were to be sold at a loss were hidden from shareholders. The purchases of the trucks were financed through a revolving line of credit from banks.
The company was on verge of violating the bank covenant by September 2016 therefore Celadon asked the truck dealer to pay $25 million before the quarter ending on September 30, 2016. Celadon agreed to pay back the money to the truck dealer with a similar amount three days after the quarter ends. Despite having such an agreement Celadon’s quarterly financial statement did not reflect the secrete arrangement with the truck dealer and the money acquired from the banks was used to pay down part of its debts owed to its banks before the close of the quarter (FreightWaves, 2019). According to International Financial Reporting Standards (IFRS) on the cost model, an asset, an item of property, plant, and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
According to IFRS standards, the asset should be depreciated at least each year-end and dealt with change in estimate. Furthermore, the revaluation model applied should be done with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the value at end of the reporting period. Celadon did not use a valuation model that was aligned with regularity and also failed to depreciate the machines based on fair market value. The executive scheme to report the assets at higher market value to hide losses indicated that the company violated IFRS compliant standards. Furthermore, the internal auditors are guided by a code of ethics that stipulates the governing behavior of individuals and organizations in conducting internal auditing.
The internal auditors are supposed to perform their work with honesty, diligence, and responsibility and shall observe the law and make disclosure expected by the law (Mashayekhi, & Yazdanian, 2018). The internal auditor shall perform internal audit services following the international standard of professional practice of internal auditing. According to the accounting fraud, the internal auditors failed to follow the right accounting standards to record material facts and any transaction and agreement. The internal auditors were supposed to provide an independent, objective, and constructive view of the company’s financial performance but the internal control bend to executive wishes to committed organizational fraud.
The external or independent auditors began to question the truck trades in later 2016 and early 2017. In responding to independent auditors, the Celadon executive made a false and misleading statement about the nature of the truck’s trades and failed to reveal agreement. Celadon management had approved a memorandum that falsely stated that the trucks involved were purchased and sold at fair market value and those transactions were as well accounted for in the right way contrary to the truth (FreightWaves, 2019). Quality and Celadon management even represented to the auditors that the transactions were done at fair market value. They claimed that those transactions were not trades.
Lack of transparency and intent to hide the information was also experienced when Peavler one of the Company executives directed other senior executives to delete emails after the auditors requested the relevant document. This act shows the extent the executive were willing to go to conceal information about transactions and secrets behind those transactions. The independent auditors after failing to secure the right information that could help to give the right opinion regarding the statement they decided to withdraw theirs opinion on Celadon financial statements (FreightWaves, 2019). The external auditor’s disclosure led to a significant drop in the price of celadon stock where investors lost millions of dollars.
The company faced several expenses that included paying shareholders around $44.2 million in restitution. The company was required to pay this amount after the stock clash and when the company revealed that the financial statement for the physical year 2016 reported in May 2017 was not reliable as well as the independent report from the auditors (Al-Mulsim, 2019). Meek, Peavler were both arrested and charged with accounting fraud but were later released on bail. Their action at Celadon that involves a scheme of lies, fraud, and misrepresentation significantly damaged Celadon’s integrity of the market and its shareholders. Furthermore, the company had to reach a $7.5 million settlement with U.S Securities and Exchange Commission (SEC) that prohibited the carriers from violating certain sec regulations (Al-Mulsim, 2019).
III. Theoretical Models
The theoretical model that can be used to explain the behavior committed by the Celadon and Quality Company LLC executive include deontology theory. Deontology theory stated that people should always act morally following a certain set of principles and rules regardless of the outcome (Misselbrook, 2013). These theory advocates for the truth or doing the right thing because wrong acts violate rules of laws and those acts are usually judged independently of their outcome. Some wrong acts may yield a favorable outcome an outcome that may be achieved out of deceit. For example, the company can massage financial statement to look appealing so that the company stock performance improve allowing shareholder make significant gain in short-term but at long-term, the shareholder will incur losses.
According to Kant, the motivation behind an action must always be based on obligation and well thought before an action takes place. Deontology is a rule-based theory that claims that humans can reason which enables people to know their obligation towards one another. Virtue ethical theory can be used to judge a person by his character rather than his action that might deviate from his or her normal behavior (Annas, 2018). A person moral is influenced by his reputation and motivation for one to engage on account when rating an unusual and irregular behavior that is considered unethical.
IV. Influences and Standards
Celadon and Quality company LLC accounting fraud influenced standard set for recognizing cost for the tangible asset and valuation. Trucks are tangible assets after each financial year whether in use or not in use the trucks will incur depreciation. The equipment needs to be evaluated each year to estimate the market value of the truck. The market value is the fair value of the trucks. Celadon violated accounting and reporting for property, plant, and equipment (PP&E) which is IAS16 and IFRS 13. Celadon instead of valuing the trucks with their true market value after accounting for depreciation expenses for the year the machine was acquired, the company inflated the value of that machine so that the value of that machine would look more valuable as one way of hiding its losses.
According to ISA 24.16 and IFRS 12 on the relationship between parents and subsidiaries require transaction between parent and subsidiary to be disclosed and the senior parents executive that participate must also be disclosed (Beerbaum, & Piechocki, 2017). Celadon despite having a transaction with Quality Company LLC the information about the transaction was not revealed or disclosed and that affected the set standard on disclosure rules. Celadon’s financial statement violated the IFRS 1 standards that require all firms using IFRS accounting standards to comply with IFRS reporting policies (Kieso, Weygandt, & Warfield, 2020). Celadon instead of following IFRS reporting policies by preparing financial statements according to IFR standards and show a high level of objectivity, integrity, and competence it chooses to conceal important information to stakeholders.
V. Ethical Framework
Deontology state that some people action may turn out to be wrong even when the action leads to an admirable outcome. The actions according to deontology are always judged independently of the outcome. Celadon and Quality Company’s executive actions were wrong because they resulted in a favorable outcome which is short-term and long-term effects on shareholders. The executive collided with internal auditors to massage the book of accounts, conceal information about the transaction, and even deceived external auditors with truck transaction true value. The action violated IFRS, ISA standards on equipment, plant and land valuation, reporting, and disclosure on the relationship of parent company and subsidiary.
Furthermore, the executive action violated the Sarbanes-Oxley Act (SOX) that was enacted with the intent of promoting accuracy and reliability of corporate disclosure in a financial statement. Executive actions we wrong and did not yield any benefit to the company or shareholders as they led to tarnishing the company brand image, loss of market value, and stock clashes. The company had to compensate shareholders and pay U.S Securities and Exchange Commission for violating its rules. The three executive behavior and character can be assessed with virtue ethical theory whereby Peavler’s ethical character was put into test. He was the one that directed other executives to delete emails from independent auditors meaning that he was ready to go to any extend to violate accounting standards.
To prevent a similar incidence of ethical violations, new company executives should always do what is right by abiding by the standards, laws, and ethical code developed to guide internal auditors, asset valuation, and reporting. As well, the company executive should be ready to follow IFRS on disclosure rules. The company executive should find a way of ensuring there are right corporate governance and positive corporate culture to prevent similar unethical issues from being repeated. A proper code of conduct should be developed that would guide the internal auditors, executives, and employees. That ethical code of conduct should be implemented in the company as a policy of promoting transparency, integrity, competency, follow rule of law.
Al-Mulsim, A.(2019, April 25). Celadon Agrees to Pay $42.2 Million to Settle Accounting Fraud Claims: The Wall Street Journal: Retrieved from https://www.wsj.com/articles/celadon-agrees-to-pay-42-2-million-to-settle-accounting-fraud-claims-11556213014
Annas, J. (2018). 1. Virtue Ethics: What Kind of Naturalism?. In Virtue ethics, old and new (pp. 11-29). Cornell University Press.
Beerbaum, D., & Piechocki, M. (2017). Related Party Transactions–Empirical Study based on IFRS and SEC Disclosures. Maciej, Related Party Transactions–Empirical Study based on IFRS and SEC Disclosures (September 12, 2017).
Catarevas, M.(2019, April 25).Celadon to pay $42 million for accounting fraud. Fleet Owner: Retrieved from https://www.fleetowner.com/news/article/21703751/celadon-to-pay-42-million-for-accounting-fraud
FreightWaves, (2019, Dec. 6). Two Former Celadon Executives Charged With Securities Fraud. Finance.Yahoo: retrieved from https://finance.yahoo.com/news/two-former-celadon-executives-charged-135817448.html
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate accounting IFRS. John Wiley & Sons.
Mashayekhi, B., & Yazdanian, A. (2018). A Survey on Key Components of Internal Audit. Accounting and Auditing Review, 25(1), 135-158.
Misselbrook, D. (2013). Duty, Kant, and deontology. British Journal of General Practice, 63(609), 211-211.