Diebold

DIEBOLD

Case analysis on

earnings management

April 23, 2012

On June 2nd, 2010, the SEC filed charges against Diebold Corporation and three of the company’s executives. The SEC charged Diebold and the executives of conducting earnings management through fraudulent accounting practices that were implemented to inflate earnings and meet forecasts. From 2002 to 2007, these fraudulent practices included improper use of “bill-and-hold” situations, improper revenue recognition on a leasing agreement with a secret buy-back agreement, manipulation of reserves, improperly delaying and capitalizing expenses, and writing up the value of used inventory in an improper way. Through these means, Diebold issued 40 misleading reports and multiple ill-guided press releases with an overall overstatement of earnings estimated at $127 million.

The first executive charged, Gregory Geswein, was the CFO of Diebold from 2000 to 2005. Before that, he was Diebold’s principal accounting officer from 2000 to 2002 and principal financial officer from 2000 to 2005. He later served as another Toledo company’s, Libbey’s, CFO until the SEC allegations came out against him in June 2010. At that time, he took a vice president position governing business development for the company and remained in that role until October 2011 when he resigned.

Kevin Krakora was Diebold’s Controller from 2001 through 2005, and served as the company’s CFO from 2005 through April 2009. Krakora was Diebold’s principal accounting officer from 2003 to 2006 and principal financial officer from 2005 to 2009. When Krakora was Diebold’s Controller, he reported directly to Geswein. Although he resigned from his position as CFO of Diebold in 2009, he currently serves as Executive Vice President of Corporate Development for the company. Krakora was a certified public accountant licensed in Ohio, but his license is now inactive. Reporting to Krakora was Sandra Miller, Diebold’s Director of Corporate Accounting...