Fortex Scandal
Fortex Scandal

Fortex Scandal

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  • Published: June 24, 2018
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Assignment 1: Scandals in Auditing Fortex Introduction Fortex was regarded as one of New Zealand’s top companies. They used innovative technology to add value to their product. They won awards, looked after employees, and paid suppliers well. But when the company collapsed in March 1994 it was revealed that the success was all based on false accounting. The management team was able to fool a company of respected auditors as well as everybody else for more than three years. Thousands of people suffered as a result.

The Organization, the time, and the place Fortex was a meat processing company formed when four companies merged in 1985. The company was listed on the Stock Exchange in 1990. Most of the firm’s business was slaughtering sheep and lambs in the south island. They also had a venison processing plant in the north island (Securities Commission, 1995). They focused on value added processing. Instead of selling the carcass whole they would process it further into vacuum packed cuts of meat. During the early 1990s Fortex was seen as one of New Zealand’s best companies.

They won many awards including 1990 Company of the Year, 1992 Trade New Zealand export award, and a Best Corporate Strategy award (MacLennan, 1996). Despite winning these awards the company gained a reputation for not achieving financial performance projections and delivering lower returns than other firms on the stock exchange (Securities Commission, 1995). The driving force behind Fortex was Grahame Thompson. He had a strong vision for the business and was very ambitious. (MacLennan, 199

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6) What happened?

On 11 March 1994 Fortex announced that they expected a $45 to $50 million 6-monthly loss. This was a huge surprise because they had reported profits of $ 4. 8 million in 1991, $9. 2 million in 1992, and a loss of $4. 8 million in 1993. The loss in 1993 could be explained by the 1992 snow storm in the south island having an adverse effect on supply. The share price plummeted and on 28 March it was announced that the company was in receivership (Securities Commission, 1995). The receivers found that the financial statements grossly overestimated the value of Fortex.

The serious fraud office and the securities commission would both be investigating the company (MacLennan, 1996). One example of fraud On investigating Fortex the serious fraud office uncovered “the Odessa file”. This file contained records of recorded sales which never happened, loans which were recorded as revenues, and inventory items which were recorded as more valuable items. (Hutching, 1995) One example is the use of the consignment lamb clearing account to hide loans. In December 1993 a loan from Indosuez Bank was due to be repaid.

As the loan had been recorded incorrectly they had no general ledger value to reduce. To fix this problem Fortex arranged for its debtors to repay Indosuez Bank. They then debited the consignment lamb clearing account to balance out the reduction in debtor accounts. Fortex then took a loan from Hong Kong Bank and put the credit against the consignment lamb clearing account instead of recognizing it as a liability. (Hutching, 1995) Stakeholders

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and what the consequences were for them {text:list-item} Shareholders equity in Fortex in early 1994 was worth about $90 million.

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