Fortex Scandal Essay Example

period shocked everyone. This revelation was particularly surprising because they had previously reported profits of $4.8 million in 1991, $9.2 million in 1992, and a loss of $4.

In 1993, Fortex Company experienced a loss of 8 million as a result of supply disruptions caused by a snowstorm in the south island in 1992. This event led to a substantial decrease in share price and on March 28, it was declared that the company had gone into receivership, according to the Securities Commission (1995). The receivers discovered that Fortex's financial statements had significantly overestimated its worth. Consequently, both the serious fraud office and securities commission initiated investigations into the company, as MacLennan (1996) reported.

One instance of fraud was discovered during the investigation of Fortex by the serious fraud office. The investigation revealed the existence of a file known as "the Odessa file". This file contained records of sales that were never actually made, loans that were recorded as revenue, and inventory items that were falsely recorded as more valuable items (Hutching, 1995). A specific example of this fraudulent activity involved the use of the consignment lamb clearing account to conceal loans. In December 1993, a loan from Indosuez Bank was scheduled to be repaid. However, due to a recording error, the loan had no value in the general ledger to be deducted from.

To address the issue, Fortex implemented a solution by arranging for their debtors to repay Indosuez Bank. They balanced out the reduction in debtor accounts by debiting the consignment lamb clearing account. Instead of recognizing it as a liability, Fortex applied the credit from a loan obtained from Hong Kong Bank to the consignment

lamb clearing account. This had consequences for stakeholders as the shareholders' equity in Fortex was valued at approximately $90 million in early 1994 (Hutching, 1995).