The sarbanes oxley act was passed to

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© 2011 Wiley Periodicals, Inc. Published online in Wiley Online Library (wileyonlinelibrary.com). DOI 10.1002/jcaf.20691

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George Nogler and Inwon Jang

Years after its adoption, the Sar-banes-Oxley Act continues to generate controversy. Initially dividing the audit pro- fession into registered firms and unregistered firms, the Act forced firms to either come under the purview of the Public Company Accounting Oversight Board (PCAOB) or cease doing public company audits. The recent implementa- tion of the requirement that audi- tors of private broker-dealers also be PCAOB-registered has also caused some firms to withdraw from this area of practice. The private broker-dealer rule, long suspended by the SEC, came into sharp focus after the Madoff Ponzi scheme came unraveled. Many firms also found a lucra- tive niche in performing some of the internal review functions for- bidden to the public company’s auditor under Section 201.

IMPLEMENTING SECTION 404

On October 2, 2009, the Securities and Exchange Com-

mission announced that the extensions granted on imple- menting Sarbanes-Oxley Section 404—Assessment of Internal Controls to small public filers, those with a public float (market capitalization) below $75 mil- lion, would expire June 15, 2010. This represented the final stage in full implementation of Sec- tion 404. Congressional action to exempt small public filers was incorporated in the Wall Street Reform and Consumer Protection Act which passed in July 2010. In June 2010, the Supreme Court ruled on a case challenging the constitutionality of aspects of the Act, specifically the legality of the PCAOB itself (Free Enterprise Fund v. Public

Company Account- ing Oversight Board, 08-861). The Supreme Court upheld the Act and the PCAOB’s authority, with the technical exception that the Court ruled that the provision calling for removal of members by the SEC only for good cause was inconsistent with the separation of powers of the Constitu-

tion and substituted removal at the discretion of the SEC at will.

The Sarbanes-Oxley Act of 2002 was passed in the aftermath of the bankruptcy of Enron in December 2001. The act passed within two weeks of the bank- ruptcy of WorldCom, an even larger bankruptcy. Both of these bankruptcies were attended by allegations of financial fraud. The perception that corporate financial statements could not be trusted due to pervasive fraudu- lent financial reporting provided much of the impetus for the pas- sage of this act.

The intent of Congress in passing the act was to restore confidence in the American capital markets system. The

Does the level of discovered fraud in publicly traded companies justify the “one-size-fits-all” philosophy of the Sarbanes-Oxley Act? Especially considering the costs to implement Section 404? We know that Congress has made attempts to exempt firms with market capitalization below $75 million. Given the relatively low discovered financial fraud in companies at this level, the authors of this article believe the change may be justified. © 2011 Wiley Periodicals, Inc.

Sarbanes-Oxley Act: Was the “One-Size- Fits-All” Approach Justified?

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a way as to minimize the cost to smaller companies. An effort to exempt smaller companies entirely from many provisions of Sarbanes-Oxley, the DeMint amendment, was defeated at that time. The Wall Street Fraud and Consumer Protection Act (also called the “Dodd-Frank Act”) Section 989 G(a), passed July 21, 2010, amended Sarbanes- Oxley by adding Section 404(c), which explicitly exempts fil- ers with market capitalization less than $75 million. The SEC was also charged with studying how Section 404 costs could be reduced for filers with market capitalization between $75 and $250 million.

The intent of this article is to determine to what extent fraudulent financial reporting, such as that engaged by Enron and WorldCom, is typi- cal among publicly traded firms, and, by extension, whether the provisions of Sarbanes-Oxley are war- ranted for smaller firms.

LITERATURE REVIEW ON THE CONSEQUENCES OF SARBANES-OXLEY COMPLIANCE

Three specific consequences have been associated with com- pliance with the Act:

out-of-pocket costs of com-• pliance (evaluation of inter- nal controls, increased audit fees, etc.) primarily associ- ated with Section 404, firms “going private” or • “going dark” to avoid the costs of compliance, and firms issuing securities • (initial public offerings) on foreign exchanges to avoid the need to comply with the Act.

regulation mandated by Sar- banes-Oxley, smaller compa- nies, which by far comprise the majority of public filers, sought changes in the act to exempt them from the more costly requirements. The Committee on Capital Markets Regulation (a not-for-profit research orga- nization), for example, produced a report in 2006 that recom- mended amending the scope of Section 404 requirements for smaller companies. Implementa- tion of Sarbanes-Oxley Section 404 was delayed by the Securi- ties and Exchange Commission (SEC) for so-called nonacceler- ated filers, those with less than $75 million in market capitaliza-

tion. Congress exempted these firms permanently as part of the Wall Street Reform and Con- sumer Protection Act in July 2010.

Since fraudulent financial reporting was a significant factor in the passage of the Sarbanes-Oxley Act, the preva- lence of such fraudulent finan- cial reporting by smaller firms is relevant to any consideration of whether or not to exempt such firms. In 2007, the US Senate unanimously passed the Dodd-Shelby amendment to the America Competes Bill direct- ing the SEC and PCAOB to implement Section 404 in such

legislation has four major components:

It limits public account-• ing firms from providing a wide variety of potentially lucrative consulting services to audit clients (Section 201). This provision was meant to ensure that the auditor was truly independent. It requires the CEO/CFO • to sign off on the “appro- priateness of the financial statements and disclosures contained in the periodic report” (Section 302). This requirement was intended to provide the CEO and CFO with an incentive to assure the accuracy of the financial statements under threat of crimi- nal, as well as civil, liability. It requires a comprehen-• sive review of the inter- nal control structure of the firm (Section 404). This section mandates the adequacy of internal control in an effort to prevent fraud. It mandates certain • requirements related to the Board and Audit Com- mittee structure, including the designation of a “finan- cial expert” on the audit committee (Section 407). This part is intended to strengthen the oversight role of the Board by providing greater accountability.

The primary direct costs of this act relate to Section 404. Indirect, and often unintended, costs associated with the act included public firms going pri- vate and a reported decrease in initial public offerings (IPOs). Due to the perceived direct and indirect costs of the increased

Due to the perceived direct and indi- rect costs of the increased regulation mandated by Sarbanes-Oxley, smaller companies, which by far comprise the majority of public filers, sought changes in the act to exempt them from the more costly requirements.

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buyout. The act of “going dark” also represents a deregistration; however, under the Securi- ties and Exchange Act of 1934 (SEA) SEA Section 12(g), which provides that filers with less than 300 shareholders or filers with 500 shareholders and assets less than $10 million in assets are not required to file with the SEC. Firms taken private no longer trade publicly; firms that “go dark,” however, may still be traded but are not required to file with the SEC.

Carney (2006) reports that in 2001 (pre-Sarbanes) there were only 115 leveraged buyouts (LBOs), and only 109 in 2002. In 2004 (post-Sarbanes), there

were 521 LBOs in the first three quarters alone. He also reports that firms going private increased from 92 in the 16-month period preceding Sarbanes to 120 in the post-Sarbanes period. Detailed year-to- year statistics are con- founded by the collapse

of small market stocks in 2000– 2001 due to the dot-com collapse and other factors. Such a loss in value could drop a “small cap” firm below the SEC rules man- dating filing.

Engel, Hayes, and Wang (2007) find some evidence that there has been only a modest increase in firms going private in the post-Sarbanes environment in a sample of 182 firms from 1998 to 2004. Generally, these firms were smaller, closely held firms.

Hsu (2004) classifies the motivations for going private into three categories: (1) companies with fundamental problems, (2) undervalued companies taken private by investors, and (3) firms going private to avoid regu- latory costs. In a random sample of 30 of the 142 identified com- panies going private, Hsu found

Section 404 Compliance Costs

While most sections of the Act required little direct cost for compliance, the mandatory Sec- tion 404 Management Assess- ment of Internal Controls com- ponent is viewed as an onerous and costly regulation (Salierno, 2004). By far, Section 404 com- pliance is viewed as the most costly aspect of the Act, and the cost/benefit aspects are still being discussed (D’Aquila, 2004).

One of the significant issues in determining the cost/ benefit aspects of Sarbanes- Oxley is the measurement and observability of both costs and benefits. Observable costs include audit fee increases; however, the costs to the firm itself of additional staff are not directly observable and are subject to some level of manipula- tion. That is, costs, like certain internal audit costs, that would have been incurred in the normal course of business may be allo- cated to Sarbanes-Oxley compli- ance costs, distorting the true cost of compliance.

A number of trade organi- zations have done studies and conducted member surveys on the cost of Section 404 compli- ance. Such studies rely on self- reported data, and the organiza- tions themselves often have an advocacy or lobbying role. The Financial Executives Institute (FEI), an organization composed of CFOs and “other financial executives,” projected first-year compliance costs to average $2 million with the larger compa- nies (defined as exceeding $5 billion in revenues) incurring compliance costs of $4.6 million (FEI, 2004).

Eldridge and Kealey (2005) addressed Section 404 compli-

ance costs, primarily as they related to observable increases in audit fees. This study found that audit fees alone increased by an average of $2.3 million in a sample of larger (Fortune 1000) firms.

In general, these studies, whether industry or academic, conclude that the costs of com- pliance in this area are signifi- cant. However, such costs, as a percentage of total assets, rev- enues, or market capitalization, are clearly, in audit terminology, “immaterial.” A study by Maher and Weiss (2008) suggests that annual Sarbanes-Oxley compli- ance costs as a percentage of sales range from .289 percent

to .618 percent in the first four years of Sarbanes-Oxley compli- ance. To put these numbers in perspective, this represents a cost between $2,890 and $6,180 for each $1,000,000 of sales.

The Risk of Companies “Going Private” or “Going Dark”

A number of researchers have considered whether the compliance requirements of Sarbanes-Oxley have caused some companies to deregister to avoid these costs. There are two aspects to firms voluntarily delisting from SEC registration. Technically, “going private” represents a transaction or trans- actions involving the purchase of publicly traded shares in the firm and a decision to take the firm private, such as a leveraged

One of the significant issues in determining the cost/benefit aspects of Sarbanes-Oxley is the measurement and observability of both costs and benefits.

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citing the increased sophistication of foreign capital markets such as the London Stock Exchange and the increasing globalization of capital markets in general.

Academic research has not been so definitive about the effect of Sarbanes-Oxley on the decline of US IPOs.

Stephens and Schwartz (2006) conducted a survey of 71 private high-tech companies and found that these companies did not appear to be dissuaded from going public by the Sarbanes- Oxley regulation.

Leon (2006) finds that Sarbanes-Oxley has made the United States less competitive in attracting international IPOs.

Zingales (2006), how- ever, analyzes the trend in IPOs from 2000 through 2005 and finds that the likely causes of the decline in US IPOs relates to mul- tiple factors, including the improvement in foreign markets and the increase in US regulation related to Sarbanes-Oxley. Specifi- cally, he also shows that the initial decline in US

IPOs predates both Sarbanes- Oxley and the failure of Enron and WorldCom.

OUR STUDY

Our current study consid- ers whether financial statement fraud that the act was intended to address is commonplace among the population of firms filing bankruptcy. Previous studies have not addressed this issue. It is of particular interest, as it is this issue that led to the passage of the Sarbanes-Oxley Act.

Sarbanes-Oxley was passed as a direct response to the two largest bankruptcies historically at that point. The initial impetus came in December 2001 from

the one-size-fits-all regulation may impose substantial costs on firms, there is not sufficient evi- dence to support this conclusion.

The evidence in this area, while often contradictory, is sug- gestive. Most studies agree that the regulatory burden imposed by Sarbanes-Oxley is a factor in a firm’s decision to deregister; however, most firms opting for this route are small firms, often in financial difficulties.

The Loss of Initial Public Offerings

Most of the reports of Sar- banes-Oxley causing a decrease in IPOs and suggesting that

firms considering IPOs are more likely to use overseas markets come from the popular press and anecdotal reports.

For example, Copeland (2006) states definitively that the reason high-tech IPOs by both foreign and some Ameri- can companies are moving to overseas markets is the cost of Sarbanes-Oxley compliance.

Businessweek (“Taking Their Business Elsewhere,” 2006), in a more tempered piece, notes that the NASDAQ and New York Stock Exchange (NYSE) cite Sarbanes-Oxley as the cause of the decline in IPOs in American markets. The article notes, how- ever, that blaming increased regu- lation is a simplistic argument,

that most were having financial difficulties, and a majority were either recently delisted or noti- fied they would be delisted. Hsu concludes most companies in his sample did not go private to avoid regulatory costs.

Block (2004), however, in a sample of 110 firms, is unable to reject the hypothesis that increased regulatory costs, directly tied to Sarbanes-Oxley, are not a causal factor on compa- nies’ decisions to go private.

Leuz, Triantis, and Wang (2008) conclude that a large portion of the increase in firms going dark is related to the regu- latory burden of Sarbanes-Oxley. They find, however, that there is no significant increase in firms going private after Sarbanes-Oxley but a sig- nificant increase in firms going dark. Their paper traces approximately 480 firms that deregistered with the SEC in the period 1998–2004.

Hostak, Lys, and Yang (2006), in a study of 87 delisting decisions by for- eign firms covering the post Sarbanes-Oxley period of 2002-2006, find that most firms that delisted exhibited weak gov- ernance structures and chose not to improve these structures. They find no evidence that direct costs of the Act were a factor in the decision.

Zhang (2007) traces stock returns in an events study involv- ing the passage and implemen- tation of Sarbanes-Oxley. This study concludes that the regula- tory framework of the Act did impose significant costs on firms traded on American exchanges.

Leuz (2007) indicates that several key findings of previ- ous studies may not be directly attributable to Sarbanes-Oxley. This study suggests that while

Most studies agree that the regulatory burden imposed by Sarbanes-Oxley is a factor in a firm’s decision to deregister; however, most firms opting for this route are small firms, often in financial difficulties.

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DATA AND METHODOLOGY

In total, 1,215 firms fil- ing bankruptcy from January 1, 1998, to December 31, 2005, were identified. The ending date of December 31, 2005, is chosen to allow enough time to resolve these cases. A preliminary data analysis indicates that the total assets of these firms are severely skewed (by the existence of some extremely large firms). Such conditions are common in financial populations. When populations reflect such condi- tions, they violate the require- ments for parametric statistical analysis (e.g., means become

less relevant) and mandate the use of nonparametric measures (e.g., the use of medians). A frequent response to this issue is to use the log of total assets. In this situation, Hotelings T2, a statistical test useful in identifying outliers1 in a population, indicates that 18 firms were still outliers even when using the log of total assets.

The population of 1,215 firms filing bank- ruptcy in the period January 1, 1998, to

December 31, 2005 (an eight- year period) was drawn from the population of publicly traded firms required to file with the Securities and Exchange Com- mission (SEC). An SEC report of 2005 details a variety of statistics for publicly traded firms, by market capitalization. In the period March/June 2005, the SEC provided a breakdown of publicly traded firms on the dimensions of market capitaliza- tion and trading venue.

Pink-sheet-traded compa- nies are often not required to file with the SEC and represent only 3.8 percent of market

assessed a fine or settlement related to that activity.

Fraudulent financial state- ments necessarily involve a lim- ited number of often overlapping techniques. In a 2004 study of corporate fraud at 459 publicly traded companies, KPMG Foren- sic found that financial statement fraud was one of the rarest forms of fraud, representing only about 4 percent of the incidents of fraud reported, but the average cost per incident was $258 mil- lion. The KPMG study defines the fraud categories of financial fraud as asset/revenue misstate- ment, concealed liabilities and

expenses, improper revenue rec- ognition, and inadequate or inap- propriate disclosures.

An effort is made in the cur- rent study to identify the primary method utilized, usually the income statement component. For example, a firm may be referred to as having “overstated assets”—a description often used in regard to the WorldCom fraud. The method used here was to capitalize as assets certain items that should have been classified as expense. It is equally accurate, therefore, to refer to World- Com as having “understated expenses.”

the bankruptcy of Enron, an energy company with a reported $60 billion in total assets prior to entering bankruptcy. While the legislation was being debated in Congress, WorldCom entered bankruptcy in July 2002, with total assets of $100 billion, mak- ing it the largest bankruptcy to date. Both of these firms were ultimately found to have engaged in fraudulent financial reporting, and both were the target of suc- cessful criminal fraud prosecu- tion as well.

Since Sarbanes-Oxley was a direct response to the abuses per- ceived in these large firms, both of which entered bankruptcy, it is rel- evant to test whether smaller firms in the capital mar- kets that filed bankruptcy also engaged in fraudulent financial reporting. In other words, were Enron and WorldCom exceptions? Or is such behavior common among all firms trading on capital markets?

For purposes of this study, a strict definition of fraud is employed. Fraud is considered to have been proven if there is evidence of:

successful securities class • action litigation resulting in the payment or assessment of damages against the firm, its management, underwriters, investment bankers, brokers, or auditors, and/or if the firm, its management, • or its auditors were the sub- ject of an SEC Accounting and Auditing Enforcement Release (AAER), and/or there is other legal evi-• dence (e.g., loss of a civil or criminal suit) indicating that the firm engaged in certain fraudulent activities and has been found guilty or

Since Sarbanes-Oxley was a direct response to the abuses perceived in these large firms, both of which entered bankruptcy, it is relevant to test whether smaller firms in the capital markets that filed bankruptcy also engaged in fraudulent financial reporting.

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on Compustat according to the SEC study (6,754 firms), which reported median total assets of $134 million. This suggests that the population of firms filing bankruptcy does not differ sys- temically from the population of all publicly traded firms. The significance of this finding is that it suggests that firms filing bank- ruptcy are not, for example, the smaller firms in the market, but rather represent a random subset of firms of all sizes in the market.

RESULTS

Outlier Firms

Exhibit 1 lists largest bank- ruptcies (outliers) by asset size in our study. An analysis of the

18 outlier firms indicates that 14 of the 18 largest bankruptcies (77.8 percent) were the target of fraud litigation resulting in some settlement paid by the com- pany, its officers, insurers, investment bankers, or brokers. Thirteen of the 18 firms were the subject of

litigation under the Securities Act. Seven of these cases also resulted in SEC AAERs. Details of the prosecuted fraudulent activities of all firms in this group are provided in Exhibit 2.

In the two largest cases, WorldCom and Enron, criminal prosecutions for financial mis- statement were litigated suc- cessfully. Sarbanes-Oxley was, in large part, a response to what was viewed as rampant financial fraud by public companies based on the highly publicized actions of these large companies.

Eleven of the 14 compa- nies engaged in financial state- ment fraud. The other two were accused or fraudulent activities in manipulating markets (NRG) or providing a misleading

percent of the total market capi- talization.

Of the 6,754 firms reported, there are 1,406 companies with a market capitalization of $25 mil- lion or less. The median value of the assets of these companies is $5.4 million. There are 312 com- panies with market capitalization in excess of $10 billion. The median assets of this group are 21.8 billion, or over 4,000 times the median assets of the smallest companies.

For this study, firms are divided into three groups. The 18 extremely large firms identified as outliers in the population are identified as outlier firms. The total assets of all 1,215 com- panies entering bankruptcy in this period were slightly over $1

trillion. These 18 outlier compa- nies combined represented $489 billion, or 47.85 percent, of that sum alone.

The remaining 1,197 firms were divided into two groups by the median value of total assets for these firms. The median value was $129.5 million. Firms above these median are referred to as second-tier firms and firms below the median are referred to as third-tier firms. From these two groups, random samples of 40 firms were obtained and traced.

The median assets of the nonoutlier firms entering bank- ruptcy of $129.4 million are not statistically different, at the 1 percent level, from the median total assets of all firms reporting

capitalization. Under SEA Sec- tion 12(g), a company with less than 300 shareholders or 500 shareholders and total assets less than $10 million is not required to file annual reports with the SEC. Many pink-sheet com- panies meet these criteria. As a result, the SEC study shows approximately 9,428 companies were likely required to file with the SEC. The population of 1,215 firms filing bankruptcy may initially appear large in this context; however, the observed bankruptcies occurred over a period of eight years, or a rate of about 152 bankruptcies per year. This constitutes a bankruptcy rate among publicly traded com- panies of approximately 1.6 per- cent per year.

NYSE-traded compa- nies make up only 2,553 firms, or 27 percent of the 9,428 companies identi- fied above; however, these firms represent 75.2 per- cent of total market capi- talization. Initial NYSE listing requirements man- date the firm have $40 mil- lion in net tangible assets.

The SEC data also provides further information that is rel- evant to the current research. The SEC staff analyzed only those firms for which data was avail- able on Compustat consisting of 6,754 firms, or about 71.6 percent of the firms identified as being potentially required to file with the SEC.

The SEC data provide insight into the structure of capital markets. While only 19.5 percent of public companies are on the NYSE, these companies represent 75.2 percent of the total market capitalization. The NASDAQ (combined national market and capital market) holds 24.2 percent of the public com- panies but represents only 17.9

While only 19.5 percent of public companies are on the NYSE, these companies represent 75.2 percent of the total market capitalization.

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in some settlement paid by the company, its officers, insurers, investment bankers, brokers, or auditors.

Thirteen of the 40 companies (32.5 percent) were involved in, or were cited for, fraudulent activities for which a claim was paid. Of these, nine were the sub- ject of securities class action liti- gations. Six were the subject of

energy industry, were involved in market manipulation of the energy market. Firms were also cited for consumption of exces- sive perquisites (Adelphia).

Second-Tier Firms

Fraud was reported, as above, if the firm was the tar- get of fraud litigation resulting

management discussion and analysis (Kmart, Federal-Mogul).

The nature of the fraudulent activities was diverse, with six of the companies involved in two methods. Six firms overstated revenues and assets, and nine firms understated expenses and liabilities. Four firms misstated their financial statements by both methods. Three firms, all in the

Largest Bankruptcies (Outliers) by Asset Size: January 1, 1998, to December 31, 2005

Company Industry Bankruptcy Date Assets (in 000) Fraud

WorldCom,Inc. Telecommunications 07/21/2002 103,914,000 YES

Enron Corp. Energy 12/02/2001 65,503,000 YES

Conseco, Inc. Insurance 12/18/2002 61,392,300 YES

Global Crossing, Ltd. Telecommunications 01/28/2002 30,185,000 YES

Calpine Corp. Energy 12/20/2005 27,216,088 YES

UAL Corp. (United Airlines, Inc. parent)

Passenger Airline 12/09/2002 25,197,000 NO

Delta Air Lines, Inc. Passenger Airline 09/14/2005 21,801,000 NO

Adelphia Communications Corp.

Telecommunications 06/25/2002 19,610,014 YES

Mirant Corporation Energy 07/14/2003 19,415,000 YES

Delphi Corporation Automotive 10/08/2005 16,593,000 YES

Kmart Corp. Retail Stores 01/22/2002 14,630,000 YES

Finova Group, Inc. Financial Services 03/07/2001 14,050,293 YES

Northwest Airlines Corporation Passenger Airline 09/14/2005 14,042,000 NO

NTL, Inc. Telecommunications 05/08/2002 13,026,100 YES

Century Communications Corp.

Telecommunications 06/10/2002 11,491,703 NO

NRG Energy, Inc. Energy 05/14/2003 10,883,688 YES

Federal-Mogul Corporation Automotive 10/01/2001 10,255,000 YES

ARM Financial Group, Inc. Insurance 12/20/1999 9,786,264 YES

TOTAL ASSETS/OUTLIERS 488,991,150

Exhibit 1

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SEC AAERs. Ten were accused of financial statement fraud; this includes one company convicted of Medicare fraud and one cited for credit card fraud (arguably, these fraudulent activities over- stated revenues and so also con- stitute financial statement fraud).

Additionally, two were accused of making false statements to analysts, and another firm was cited under both the Foreign Cor- rupt Practices Act (FCPA) and the Racketeer Influenced and Corrupt Organizations (RICO) statute.

The nature of the fraudu- lent activities in this group is less diverse than the outlier firms. Nine of the 10 cited for fraudulent financial reporting overstated revenues and assets. Only two used understatement of expenses and liabilities. Only

Descriptions of the Fraudulent Activities: Nature of the Fraud—Outlier Firms

• WorldCom: Accounting and financial statements fraud overstating assets and understating expenses. Much of the fraud was in treating items that should have been expensed (generally the cost of interconnections with other providers) as capitalizable assets and inflation of revenue (AAER No. 2231).

• Enron: Primary financial statement fraud involved the use of off-balance-sheet special purpose entities (SPEs) to hide losses and debt. In effect, this understated the actual expenses and liabilities of the parent Enron (AAER No. 1811). In response, the Financial Accounting Standards Board issued Financial Interpretation No. 46(R) in 2003, which mandates the consolidation of many previous off-book SPEs.

• Conseco: Financial fraud resulted in false and misleading financial statements and overstating earnings by hun- dreds of millions of dollars in SEC filings according to an SEC complain (AAER No. 2465). This was accomplished, in part, by failing to make appropriate write-downs and booking nonexistent gains.

• Global Crossing: Securities fraud based on inadequate internal controls, overstatement of earnings and under- statements of costs (AAER No. 2231). The fraud was accomplished by booking long-term contract gains as cur- rent income and by booking barter transactions as cash transactions. In the SEC settlement, officers agreed to civil penalties, but no definitive finding of fraud was made regarding the barter (capacity swap) transactions.