Ponzi schemes are a specific type of investment fraud, where criminals will take money from unsuspecting victims, promising to handle their victim’s money and get great returns. In reality, they are using money from newer victims whose money they have also taken to pay back original victims. Schemers will usually offer great returns on initial investments for no risk to the investor. Ponzi schemes can be summed up in an infamous quote by Charles Ponzi, the man that ponzi schemes are named after, “the old game of robbing Peter to pay Paul”.
Ponzi schemes usually end in three ways:
Scheme creator runs off with money
No new investors, leading to a collapse of the scheme
Too many investors will ask for their return, leading to a collapse of the scheme
There are six warning signs or “red flags” the SEC, U.S. Securities and Exchange Commission, warns to look out for in order to identify a potential ponzi scheme:
No risk guaranteed returns
Suspiciously consistent returns that completely disregard changes in the market or stock values
Unlicensed / unregistered sellers or firms
Creators are shady, not open about strategies
Paperwork has numerous errors on it, like an unbalanced balance sheet
Difficulty getting money back
Development / Timeline
Ponzi schemes have been created ever since people needed money and have been created around the world, some notable ones are:
1880 – Sarah Howe’s “Ladies Deposits”
1920 – Charles Ponzi’s Stamp Scheme
1997 – Albania’s government backed ponzi schemes
2000 – Reed Slatkin’s Scientology Scheme
2001 – Haiti’s government advertised ponzi schemes
2007 – Lou Pearlman’s Investment schemes
2008 – Bernard Madoff, the biggest ponzi scheme in recorded history
*Through Madoff’s ponzi scheme, which went on for over 20 years, investors lost nearly 65 billion dollars, he is currently serving a 150 year jail sentence
The Impact
Accountants have failed to discover these frauds in timely manners, earning them bad reputations. An example would be that auditing firms and government checkers failed to notice Madoff’s scheme for nearly 20 years. The general population seems to think that “money managers [are] turning into money makers”. Auditors and even government officials are constantly criticized for their inability to catch ponzi schemes and bring the creators to justice quickly enough.
The Future Outlook
Ponzi schemes will probably never stop, as long as people need money and they are smart enough and desperate enough, they will find a way to get money, whether it is through legal means or illegal ones, like creating a massive ponzi scheme. Even when a ponzi scheme is busted, the court procedures are very long and daunting, Bernard Madoff’s case is still being looked at today by the SEC, meaning less time can be spent on finding undiscovered ponzi schemes. People looking to invest their money must be cautious and learn from the past, being careful of where they place their money, if everyone is careful enough with their money, perhaps the impact of ponzi schemes can begin to decrease.
Video
An FBI video, with testimonies from victims of ponzi schemes, and advice from FBI agents can be watched here:
Tyco international is a diversified manufacturing company. It mostly focused on fire protection, security solutions, and flow control. In 2001, company had revenue of $38 billion and about 240000 employees. Because of the one of the chairman’s, Dennis Kozlowski’s frauds, the company stood 28 billion in depts. In the frauds were involved also many employees of the company and a lot of shareholders lost millions of dollars.
He bought paintings worth $13m. And he shipped the empty boxes to one of the Tyco head quarters to avoid paying taxes, which were about 8%. When he took the loan, which was $19m, he did not pay it back and company was still paying the taxes. Nobody was told about that so even the shareholders and the company was staying on its market value until the truth was revealed. In 2001, the shares were more than $60 and they came down to about $15. Dennis Kozlowski and chief financial officer Mark Swartz stole in total $170 million and got about $430 million from deceitful stock sales.
1960 the laboratories began operate experimenting government work
1964 The company expended
1975 Dennis Kozlowski joined the company as assistant controller. Tyco began to pay more attention on packaging, fire protection and electronics
1992 Kozlowski became CEO
1993 Kozlowski became the chair of the board and expended the company into health care
1999 SEC began to analyze Tyco’s accounting practices
2002 Dennis Kozlowski was found guilty for evading about 1 mill tax payments
2002 It came to light that Kozlowski was forgiven the $19 million loans from the Tyco and company paid the income taxes on the loan. SEC began act towards the issue against Kozlowski and two other top executives who did not reveal Kazlowski’s forgiven loan
2005 Kozlowski and Mark Swarts, Tyco’s chief financial officer were found guilty for twenty two numbers of frauds and went to prison for from 8 to 25 years.
There were accounting errors but not systematic fraud problem was found. The descendant of Kozlowski replaced 220 of 250 Tyco’s top managers. Because Kozlowski was selling the stocks without telling investors they lost about $90 million. At that time such things were done more easily because nobody was watching, but now there are a lot of lowers, accountants and board of directors so it is becoming quit impossible.
lThe aspects of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can make a more competitive, cost-efficient company on the market. It helsp a growing company in a given industry grow rapidly without having to create another business entity.
Definition
Merger: when two companies(shareholders from both companies), often equal sizes, agree to exist as a single new company
Horizontal merger: the combination of two firms from the same industry
Example: Boeing-McDonnell Douglas
Vertical Merger: merging with suppliers
Example: Time Warner Inc.
Conglomerate Merger: merging with firm that has unrelated business ties, there are two types of conglomerate mergers( pure and mixed)
Example: Cardinal Healthcare-Allegiance
Acquisition: one firm is bought by another firm
Reverse merger: is a type of acquisition, a private company takes over a public listed company
Example: acclaim Entertainment (AKLM) and non-operating Tele-Communications
Takeover: the control (ownership) is transferred from one firm to another one
Distinction
Merger: shareholders of both firms agree to merge, often equal size, stocks of both companies are surrendered and the new stocks under the name of new companies are issued
Acquisition: the bigger and more powerful firm acquire another smaller firm. Unlike merger, the stocks of both firms continue to be traded on the stock market
History of Merger and Acquisition
The first wave( 1897-1904): during this period, merger occurred between firms that were monopoly in the same industries. The first wave was mostly horizontoal mergers that happened in heavy manufacturing industries. Most mergers were failed due to the fact that greater effiicency couldn’t be reached and the supreme court passed an act that anticompetitive mergers could be stopped
The second wave( 1916-1929): most mergers happened between oligopolies due to the economic boom. Lot of technological develpments such as railroads and transportation by motor vehicles let mergers occurred. Government had a policy that also encouraged companies to work together. The types of mergers were mainly horizontal and conglomerate mergers. Food products, primary metals, petroleum products, transportatins euqipments and chemicals were the indusitries that chose to merge. Also, investment banks started helping firms to merge and acquisitate. The wave was stopped by the Great Depression.
The third wave( 1965-1969): the type of merger that occurred during this phrase were mainly conglomerate mergers which were motivated by extreme high stock price, strict antitrust laws and interest rate. Invest banks didn’t play the vital role because mergers were all financed from equities. The poor performance of conglomerate mergers resulted in the end of the third wave.
The fourth wave(1981-1989): the target firms were often larger in size than the third wave mergers. Industries that went mergers were oiland gas, pharmaceuticl, banking and airline. Foreign takeovers had been common since this phrase. The antitakeover law led to the end of this wave.
The fifth wave(1992-2000): globalizatin, stock market boom an deregulation caused the rise of the fifth wave merger which mainly invloved banking and telecommunications industries. Most mergers were euqity financed and firms mainly looked for long term profit motives. The stock market bubble led to the end of the merger.
Pros and Cons
Pros
More investment
Less competition
Economies of scale
A merger is tax-free activity
A merger allows shareholders of smaller company increase their net worth
More innovated technical skills
Cons
Conflict objective between the combined firms
Diseconomis of scale
Need approval from both sets of shareholders
Example of merger and acquisition:
•b
eBay is an Americna online auction and shipping internet company
People and business can buy and sell a broad variety of goods and services worldwide
In the late 1990s, eBay made its first attempt at securing an in-house electronic payment system by acquiring Billpoint. However, Billpoint was less popular than its competitior and this lack of following led to frustration and lack of familiarity for eBay’s users, who wanted to conduct buy or sell transactions with ease. After acquiring Billpoint, eBay made a run at the much more popular PayPal in the fall of 2002, for an acquisition price of $1.5 billion.
•
PayPal is an e-commerce business. Allowing payments and money transfers to be made through the Internet.
•Shill bidding is bidding that is used to inflate the price of a certain item. It is usually carried out with “shill” account(s), either the seller under an alternate account or another person in collusion with the seller. Shill bidding is detered by eBay. However, eBay has been criticized for not doing enough to combat the problem.
Future Outlook
•By acquiring PayPal, both entities leveraged each other’s customer base and strategic positioning
By offering complementary services, It will propel more business for each operation
However, the frauds may reduce reputation and good faith degree. If they do not fix up frauds properly, It will surely exert a significant influence on the future of their developmen
Accounting ImpactThe purchase method: the purchasing company treats the taret firm as an investment, simply adding the target’s assest to its own fair market value
The pooling of interest method: two firms merge as euqal, in another word, either a new company is created or one company remains with the another company which become a part of the remaining company
Comparison:
Purchase Method: The goodwill is created due to excess of fair market value and needs to be amortized against expense.
Pooling of interest method: it dones’t result in the creation of goodwill which leads to the higher value on the income statement. The value of assests and liabilities on each company’s book are carried forward to the new combined company.
Future Outlook
M & A activity will increase in 2011, companies will pursue stragetic acquisiton and merger
The huge demand come from Asia for commodities still increase as investors have been active in Canada
Oil, gas and mining merger and acquisition will keep dominating in Canada
Most Canadian companies will contiune to acquire U.S. institutions because economy in United State has been tough on companies
The demand for renewable energy is high espeically for firms of carbon-heavy industry because they need to reduce carbon footprinting and pre-empt regulation
Government of Canada has been strict and tough on foreign acquisition that contains national security, wealth funds which could be hard for foreign companies to complete acquisition
A successful merger and acquisition
Strategy
good for the company
new market shares and customers
improving technical skills
Motive
understand why the target company is being sold
Price
a low price cant gurantee a good deal
Fit
people issues is important because it can affect financial performance
Integration
make the annoucement of integration plan as soon as the decision of acquisition is being taken into consideration
A financial arrangement designed to reduce tax liability.
Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws.
A method used by investors to legally avoid or reduce tax liabilities.
Direct Definition from the CRA AGENCY Website.
Tax shelters are defined in the Income Tax Act. In very general terms, a tax shelter includes either a gifting arrangement or the acquisition of property, where it is represented to the purchaser or donor that the tax benefits and deductions arising from the arrangement or acquisition will equal or exceed the net costs of entering into the arrangement or the property. Also, a gifting arrangement where the donor incurs a limited recourse debt related to the gift will be a tax shelter. Generally a limited recourse debt is one where the borrower is not at risk for the repayment.
The General Overview:
Tax shelters, as put in to perspective by the definition are an arrangement that reduces tax liabilities. Less tax liability means more disposable income or Retained Profit. It’s because of this that many businesses have resorted to illegal forms of Tax havens. Tax Shelters include investments in equipment leasing, breeding and cattle feeding programs, real estate, and gas and oil companies. There are some Tax Shelters which are legal and there are some which are illegal.
Legal Tax Shelter.
Tax-Free Savings Account (TFSA) is a flexible investment account that can help you meet both your short- and long-term goals.
Registered Retirement Savings Plan (RRSP) is a personal savings plan registered with the Canadian federal government allowing you to save for the future on a tax-sheltered basis.
TFSA
•No maximum age
•Not tax-deductible
•Savings grow tax-free
RRSP
•Until the end of the year in which you turn 71
•Yes, reduces taxable income
•Savings grow Tax-deferred (not taxed until withdrawn)
Major developments
Illegal forms of Tax Shelters
Financing arrangements:
This is a common form of illegal financing arrangement as it would see the business or individual paying high levels of interest to another party thus reducing the investment income even to the extent of recording a loss. However the individual will actually create a massive capital gain when one withdraws the investment. The tax benefit comes from the fact that capital gains are taxed at a lower rate than the normal investment income such as interest or dividend.
Canada has had its fair share of illicit Financial arrangements. An example would be that of the
Offshore Companies
In most jurisdictions authorities will not seek to tax companies which they treat as non-resident, save perhaps for a nominal fee -$350 BVI, £320 Isle of Man etc. Taxation legislations differ from country to country, and it is because of this that some countries will choose to avoid taxation in their home country or in a host country. This is mainly done in a bid to reduce the Tax liability and thus Tax benefits can be exploited. Example: If an Import company buys $1 of goods from India and sell for $3, Import Co. will pay tax on $2 of taxable income. However, tax benefits can be exploited if Import Co. is to setup an offshore subsidiary in the foreign nation to buy the same goods for $1, sell the goods to Import Co. for $3 and sell it again in the domestic market for $3. This allows Import Co. to report taxable income of $0 (because it was purchased for $3 and sold for $3), thus paying no tax.
For providing misleading information upon the application for a Tax shelter scheme, the principal or agent is liable to a penalty greater than a $500 minimum fee of CAD$500.
For misrepresentation in tax planning arrangements, the principal will be liable to a minimum penalty of CAD$1000
For failing to provide the tax shelter identification number, the principal is liable to pay CAD$100.
Providing an incorrect tax shelter identification number
A fine from 100% to 200% of the cost of the tax shelter interest.
Imprisonment up to two years.
Both a fine and imprisonment.
Accountants across the world have lost their integrity.
This mainly because it is the accountants that are responsible for recording overstated balances and for preparing false receipts that will be assessed by the government.
However Tax shelters were set up to promote good behavior and offer assistance to the masses. It is the poor behavior of the few that has tarnished this image and with it the Image of Accountants.
Tax shelters are usually created by the government to promote a certain desirable behaviour, usually a long term investment, to help the economy; in turn, this generates even more tax revenue. Alternatively, the shelters may be a means to promote social behaviours.
” A timeline of failure on Wall Street, from Lehman Brothers to Washington Mutual | Business | The Guardian .” Latest news, comment and reviews from the Guardian | guardian.co.uk . N.p., n.d. Web. 3 Apr. 2011. <http://www.guardian.co.uk/business/2008/sep/27/wallstreet.useconomy3>.
“Lehman Brothers: In depth news, commentary and analysis from the Financial Times.” World business, finance, and political news from the Financial Times – FT.com. N.p., n.d. Web. 3 Apr. 2011. <http://www.ft.com/lehman>.
Pulliam, Susan; Deborah Soloman. “How Three Unlikely Sleuths Exposed Fraud at WorldCom: Firm’s Own Employees Sniffed Out Cryptic Clues and Followed Hunches”. Wall Street Journal. March 25, 2011 http://www.happinessonline.org/MoralCode/LiveWithTruth/p23.htm
Grade 12 Accounting 