Read “Major Case 5: Vivendi Universal” on page 545 of your text…

Question Read “Major Case 5: Vivendi Universal” on page 545 of your text… Read “Major Case 5: Vivendi Universal” on page 545 of your text under the Major Cases section.The following is a synopsis of the case:”Some of my management decisions turned wrong, but fraud? Never, never, never” (as cited in Mintz & Morris, 2013). This statement was made by the former chief executive officer (CEO) of Vivendi Universal, Jean-Marie Messier, as he took the stand in November 20, 2009, for a civil class action lawsuit brought against him, Vivendi Universal, and the former chief financial officer (CFO), Guillaume Hannezo (Mintz & Morris, 2013).The class action suit accused the company of hiding Vivendi’s true financial condition before a $46 billion three-way merger with Seagram Company and Canal Plus. The case was brought against Vivendi, Messier, and Hannezo after the following were discovered:The firm was in a liquidity crisis and would have problems repaying its outstanding debt and operating expenses (contrary to the press releases by Messier, Hannezo, and other senior executives that the firm had “excellent” and “strong” liquidity).It participated in earnings management to achieve earnings goals.It had failed to disclose debt obligations regarding two of the company’s subsidiaries.The jury decided not to hold either Messier or Hannezo legally liable because scienter (i.e., knowledge of the falsehood) could not be proven. In other words, the court decided that it could not be shown that the two officers acted with the intent to deceive other parties.The stock price of the firm dropped 89%—from $111 on October 31, 2000, to $13 on August 16, 2002—over the period of fraudulent reporting and press releases to the media.As you read the case, consider whether Messier was accurate in his belief that fraud was not committed and whether this was an ethics failure.Once you have read the case, answer the following questions.What is the purpose of Section 1103 of the Sarbanes-Oxley Act (SOX) from an ethical reasoning perspective?Internal controls are established by management to help facilitate what behavior in an organization?What describes the problems with internal controls at Vivendi with respect to its relationships with Cegetel and Maroc Telecom?In general, why are disclosures in financial statements important?Why are disclosures important in the relationship between Vivendi and Cegetel and Maroc Telecom?What best describes disclosure fraud?Financial analysts look at what measures to evaluate financial results?How does operating cash flow differ from accrual basis accounting required under U.S. Generally Accepted Accounting Principles (GAAP)?What does the term scienter mean as it is used in this case?What was the sanction issued by the Securities and Exchange Commission (SEC) to Vivendi Universal?What statement was made by the CEO of Vivendi Universal on November 20, 2009?What were some of the main failures in the organization that led to fraud? Vivendi Universal”Some of my management decisions turned wrong, but fraud? Never, never, never.” This statement was made by the former CEO of Vivendi Universal, Jean-Marie Messier, as he took the stand in November 20, 2009, for a civil class action lawsuit brought against him, Vivendi Universal, and the former CFO, Guillaume Hannezo. The class action suit accused the company of hiding Vivendi’s true financial condition before a $46 billion three-way merger with Seagram Company and Canal Plus. The case was brought against Vivendi, Messier, and Hannezo after it was discovered that the firm was in a liquidity crisis and would have problems repaying its outstanding debt and operating expenses (contrary to the press releases by Messier, Hannezo, and other senior executives that the firm had “excellent” and “strong” liquidity); that it participated in earnings management to achieve earnings goals; and that it had failed to disclose debt obligations regarding two of the company’s subsidiaries.1 The jury decided not to hold either Messier or Hannezo legally liable because “scienter” (i.e., knowledge of the falsehood) could not be proven. In other words, the court decided it could not be shown that the two officers acted with the intent to deceive other parties.The stock price of the firm dropped 89%, from $111 on October 31, 2000, to $13 on August 16, 2002, over the period of fraudulent reporting and press releases to the media.As you read the case, consider whether Messier was accurate in his belief that fraud was not committed and whether this was an ethics failure. BackgroundVivendi is a French international media giant, rivaling Time Warner Inc., that spent $77 billion on acquisitions, including the world’s largest music company, Universal Music Group (UMG). Messier took the firm to new heights through mergers and acquisitions that came with a large amount of debt.In December 2000, Vivendi acquired Canal Plus and Seagram, which included Universal Studios and its related companies, and became known as Vivendi Universal. At the time, it was one of Europe’s largest companies in terms of assets and revenues, with holdings in the United States that included Universal Studios Group, UMG, and USA Networks Inc. These acquisitions cost Vivendi cash, stock, and assumed debt of over $60 billion and increased the debt associated with Vivendi’s Media & Communications division from approximately $4.32 billion at the beginning of 2000 to over $30.25 billion in 2002. In July 2002, Messier and Hannezo resigned from their positions as CEO and CFO, respectively, and new management disclosed that the company was experiencing a liquidity crisis that was a very different picture than the previous management had painted of the financial condition of Vivendi Universal. This was due to senior executives using four different methods to conceal Vivendi Universal’s financial problems:Issuing false press releases stating that the liquidity of the company was “strong” and “excellent” after the release of the 2001 financial statements to the public.Using aggressive accounting principles and adjustments to increase EBITDA and meet ambitious earnings targets.Failing to disclose the existence of various commitments and contingencies.Failing to disclose part of its investment in a transaction to acquire shares of Telco, a Polish telecommunications holding company.Earnings Releases/EBITDAOn March 5, 2002, Vivendi issued earnings releases for 2001, which were approved by Messier, Hannezo, and other senior executives, that their Media & Communications business had produced $7.25 billion in EBITDA and just over $2.88 billion in operating free cash flow. These earnings were materially misleading and falsely represented Vivendi’s financial situation because, due to legal restrictions, Vivendi was unable unilaterally to access the earnings and cash flow of two of its most profitable subsidiaries, Cegetel and Maroc Telecom, which accounted for 30% of Vivendi’s EBITDA and almost half of its cash flow. This contributed to Vivendi’s cash flow actually being “zero or negative,” making it difficult for Vivendi to meet its debt and cash obligations. Furthermore, Vivendi declared $1.44 per share dividend because of its excellent operations for the past year, but Vivendi borrowed against credit facilities to pay the dividend, which cost more than $1.87 billion after French corporate taxes on dividends. Throughout the following months before Messier’s and Hannezo’s resignations, senior executives continued to lie to the public about the strength of Vivendi as a company.In December 2000, Vivendi and Messier predicted a 35% EBITDA growth for 2001 and 2002, and, in order to reach that target, Vivendi used earnings management and aggressive accounting practices to overstate its EBITDA. In June 2001, Vivendi made improper adjustments to increase EBITDA by almost $85 million, or 5% of the total EBITDA of $1.61 billion that Vivendi reported. Senior executives did this mainly by restructuring Cegetel’s allowance for bad debts. Cegetel, a Vivendi subsidiary whose financial statements were consolidated with Vivendi’s, took a lower provision for bad debts in the period and caused the bad debts expense to be $64.83 million less than it would have been under historical methodology, which in turn increased earnings by the same amount. Furthermore, after the third quarter of 2001, Vivendi adjusted earnings of UMG by at least $14.77 million or approximately 4% of UMG’s total EBITDA of $360.15 million for that quarter. At that level, UMG would have been able to show EBITDA growth of approximately 6% versus the same period in 2000 and to outperform its rivals in the music business. It did this by prematurely recognizing revenue of $4.32 million and temporarily reducing the corporate overhead charges by $10.08 million.Financial CommitmentsVivendi failed to disclose in its financial statements commitments regarding Cegetel and Maroc Telecom that would have shown Vivendi’s potential inability to meet its cash needs and obligations. It was also worried that, if it disclosed this information, companies that publish independent credit opinions would have declined to maintain their credit rating of Vivendi. In August 2001, Vivendi entered into an undisclosed current account borrowing with Cegetel for $749.11 million and continued to grow to over $1.44 billion at certain periods of time. Vivendi maintained cash pooling agreements with most of its subsidiaries, but the current account with Cegetel operated much like a loan, with a due date of the balance at December 31, 2001 (which was later pushed back to July 31, 2002), and there was a clause in the agreement that provided Cegetel with the ability to demand immediate reimbursement at any time during the loan period. If this information would have been disclosed, it would have shown that Vivendi would have trouble repaying its obligations.In December 2000, Vivendi and Messier predicted a 35% EBITDA growth for 2001 and 2002, and, in order to reach that target, Vivendi used earnings management and aggressive accounting practices to overstate its EBITDA. In June 2001, Vivendi made improper adjustments to increase EBITDA by almost $85 million, or 5% of the total EBITDA of $1.61 billion that Vivendi reported. Senior executives did this mainly by restructuring Cegetel’s allowance for bad debts. Cegetel, a Vivendi subsidiary whose financial statements were consolidated with Vivendi’s, took a lower provision for bad debts in the period and caused the bad debts expense to be $64.83 million less than it would have been under historical methodology, which in turn increased earnings by the same amount. Furthermore, after the third quarter of 2001, Vivendi adjusted earnings of UMG by at least $14.77 million or approximately 4% of UMG’s total EBITDA of $360.15 million for that quarter. At that level, UMG would have been able to show EBITDA growth of approximately 6% versus the same period in 2000 and to outperform its rivals in the music business. It did this by prematurely recognizing revenue of $4.32 million and temporarily reducing the corporate overhead charges by $10.08 million.Financial CommitmentsVivendi failed to disclose in its financial statements commitments regarding Cegetel and Maroc Telecom that would have shown Vivendi’s potential inability to meet its cash needs and obligations. It was also worried that, if it disclosed this information, companies that publish independent credit opinions would have declined to maintain their credit rating of Vivendi. In August 2001, Vivendi entered into an undisclosed current account borrowing with Cegetel for $749.11 million and continued to grow to over $1.44 billion at certain periods of time. Vivendi maintained cash pooling agreements with most of its subsidiaries, but the current account with Cegetel operated much like a loan, with a due date of the balance at December 31, 2001 (which was later pushed back to July 31, 2002), and there was a clause in the agreement that provided Cegetel with the ability to demand immediate reimbursement at any time during the loan period. If this information would have been disclosed, it would have shown that Vivendi would have trouble repaying its obligations.In December 2000, Vivendi and Messier predicted a 35% EBITDA growth for 2001 and 2002, and, in order to reach that target, Vivendi used earnings management and aggressive accounting practices to overstate its EBITDA. In June 2001, Vivendi made improper adjustments to increase EBITDA by almost $85 million, or 5% of the total EBITDA of $1.61 billion that Vivendi reported. Senior executives did this mainly by restructuring Cegetel’s allowance for bad debts. Cegetel, a Vivendi subsidiary whose financial statements were consolidated with Vivendi’s, took a lower provision for bad debts in the period and caused the bad debts expense to be $64.83 million less than it would have been under historical methodology, which in turn increased earnings by the same amount. Furthermore, after the third quarter of 2001, Vivendi adjusted earnings of UMG by at least $14.77 million or approximately 4% of UMG’s total EBITDA of $360.15 million for that quarter. At that level, UMG would have been able to show EBITDA growth of approximately 6% versus the same period in 2000 and to outperform its rivals in the music business. It did this by prematurely recognizing revenue of $4.32 million and temporarily reducing the corporate overhead charges by $10.08 million.Financial CommitmentsVivendi failed to disclose in its financial statements commitments regarding Cegetel and Maroc Telecom that would have shown Vivendi’s potential inability to meet its cash needs and obligations. It was also worried that, if it disclosed this information, companies that publish independent credit opinions would have declined to maintain their credit rating of Vivendi. In August 2001, Vivendi entered into an undisclosed current account borrowing with Cegetel for $749.11 million and continued to grow to over $1.44 billion at certain periods of time. Vivendi maintained cash pooling agreements with most of its subsidiaries, but the current account with Cegetel operated much like a loan, with a due date of the balance at December 31, 2001 (which was later pushed back to July 31, 2002), and there was a clause in the agreement that provided Cegetel with the ability to demand immediate reimbursement at any time during the loan period. If this information would have been disclosed, it would have shown that Vivendi would have trouble repaying its obligations.In December 2000, Vivendi and Messier predicted a 35% EBITDA growth for 2001 and 2002, and, in order to reach that target, Vivendi used earnings management and aggressive accounting practices to overstate its EBITDA. In June 2001, Vivendi made improper adjustments to increase EBITDA by almost $85 million, or 5% of the total EBITDA of $1.61 billion that Vivendi reported. Senior executives did this mainly by restructuring Cegetel’s allowance for bad debts. Cegetel, a Vivendi subsidiary whose financial statements were consolidated with Vivendi’s, took a lower provision for bad debts in the period and caused the bad debts expense to be $64.83 million less than it would have been under historical methodology, which in turn increased earnings by the same amount. Furthermore, after the third quarter of 2001, Vivendi adjusted earnings of UMG by at least $14.77 million or approximately 4% of UMG’s total EBITDA of $360.15 million for that quarter. At that level, UMG would have been able to show EBITDA growth of approximately 6% versus the same period in 2000 and to outperform its rivals in the music business. It did this by prematurely recognizing revenue of $4.32 million and temporarily reducing the corporate overhead charges by $10.08 million.Financial CommitmentsVivendi failed to disclose in its financial statements commitments regarding Cegetel and Maroc Telecom that would have shown Vivendi’s potential inability to meet its cash needs and obligations. It was also worried that, if it disclosed this information, companies that publish independent credit opinions would have declined to maintain their credit rating of Vivendi. In August 2001, Vivendi entered into an undisclosed current account borrowing with Cegetel for $749.11 million and continued to grow to over $1.44 billion at certain periods of time. Vivendi maintained cash pooling agreements with most of its subsidiaries, but the current account with Cegetel operated much like a loan, with a due date of the balance at December 31, 2001 (which was later pushed back to July 31, 2002), and there was a clause in the agreement that provided Cegetel with the ability to demand immediate reimbursement at any time during the loan period. If this information would have been disclosed, it would have shown that Vivendi would have trouble repaying its obligations. Accounting Business Financial Accounting ACCT 450 Share QuestionEmailCopy link Comments (0)