Equity Funding's Accounting Lessons
        from the late 1960s...

Equity Funding was a Los Angeles-based U.S. financial conglomerate that marketed a package
of mutual funds and life insurance to private individuals in the 1960s and 70s.   According to a 1969
article in Forbes magazine, Equity hired 150 new salesmen every month.  Every quarter its
earnings got better and better until 1969.  After the firm's final collapse in 1974, one newspaper
speculated that up to 1,000 people at the company knew about the fraud.  These employees kept
quiet, perhaps out of fear; intimidation and even threats of violence were rumored to have kept
the scheme running.

                http://www.thehallofinfamy.org/inductees.php?action=detail&artist=equity_funding

          What does a good accountant say when asked by his CEO
               what the next earnings will look like: "Whatever you would like it be, sir."



     Preface: Accounting Fraud Is Very Easy  

                        The following is is taken from Wikopedia.
"It is fairly easy for a top executive to reduce the price of his/her company's stock – due
to information asymmetry. The executive can accelerate accounting of expected expenses,
delay accounting of expected revenue, engage in off balance sheet transactions to make
the company's profitability appear temporarily poorer, or simply promote and report severely
conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings
news will be likely to (at least temporarily) reduce share price. (This is again due to
information asymmetries since it is more common for top executives to do everything
they can to window dress their company's earnings forecasts). There are typically very
few legal risks to being 'too conservative' in one's accounting and earnings estimates.

A reduced share price makes a company an easier takeover target. When the company
gets bought out (or taken private) – at a dramatically lower price – the takeover artist gains
a windfall from the former top executive's actions to surreptitiously reduce share price.
This can represent tens of billions of dollars (questionably) transferred from previous
shareholders to the takeover artist. The former top executive  is then rewarded with
a golden handshake for presiding over the firesale that can sometimes be in the
hundreds of millions of dollars for one or two years of work. (This is nevertheless
an excellent bargain for the takeover artist, who will tend to benefit from developing
a reputation of being very generous to  parting top executives)." "

   Equity Funding was a typical 1960s' conglomerate.   Its CEO, a man named Goldblum,
  decided to take over other companies using the fast rising shares of his own EQF stock.
  This made it essential for Goldblum to maintain the price of the stock of Equity Funding.
  (He seems never to have thought what would happen if a bear market came along.)
  Real growth was too slow.  He decided in 1965 to fabricate even better earnings
  He instructed EQF's chief financial officer to make fictitious entries in certain receivable
  and income accounts
               www.hancoxandsulem.com/publications/a1equityfunding.htm
  By inflating these accounts, the earnings per share beat expectations and EQF
  could buy more companies out. 

   Fictitious entries alone did not bring in cash.  But selling policies to fictitious customers
   could.  So, EQF executives decided to sell imaginary policies to other insurance companies
   via the redistribution system known as reinsurance. Reinsurance companies pay money
   for policies they buy .  Reinsurance is used to spread the risk around.   At the end of the
   first year, the issuing insurance companies have to pay the re-insurers part of the
   premiums paid in by the policyholders.   So in the first year, selling imaginary policies
   to the re-insurers brought in large amounts of real cash.  Before the premiums
   came due, Equity " killed " imaginary policyholders with heart   attacks, car accidents
   and cancer. Reporter Robert Cole wrote for the New York Times back on April 15, 1973,
  "Those closest to (the scam) were believed to have cleverly concealed their tracks through
   intimidation, subterfuge, threats of violence and the use of doctored computer tapes."

   Keep in mind, in 1973 computers were new.  Auditors accepted computer printouts as proof
   that policies existed.  Just one month before it all unraveled, Cowen & Co. recommended
   purchase of Equity Funding "for aggressive accounts."  Burnham & Co., Inc. said on
   January 30  "We regard the stock, selling at 9.9 times estimated 1973 earnings,
  an excellent value and rate it a Buy."

     http://www.davehancox.com/hancox---sulem---public-speaking/publications/equity-funding

   The scheme fell apart when an angry over-worked employee (Raymond Dirks( told the
   authorities about Equity's lies and fraud.  Soon, rumors spread throughout Wall Street
   and the insurance industry. Within days, the Securities and Exchange Commission had
   informed the California Insurance Department.  In 1974, the officers of the company were
   arrested, tried and condemned to prison terms.  Equity president Stanley Goldblum
   got 8 years and a fine of $20,000. Five other top execs served sentences ranging
   between 3-7 years. 

   http://www.buyandhold.com/bh/en/education/history/2004/ray_dirks.html
   http://www.networkworld.com/newsletters/sec/2002/01190226.html     ."