Reference no: EM133559472

Assignment: Accounting Fraud at Roadrunner Transportation Systems

Roadrunner, a prominent shipping and linguistics enterprise based in the state of Illinois, found itself entangled in a legal dispute with the Securities Exchange Commission (SEC). On February 14, 2023 the SEC took action against Roadrunner Transportation Systems, accusing them of engaging in deceptive accounting practices over a period of 4 years, ultimately resulting in charges of accounting fraud.

Following an extensive investigation, the SEC uncovered multiple violations committed by Roadrunner. These violations encompassed antitrust regulations, as well as laws pertaining to books, records, reporting, and internal accounting practices. As a consequence, Roadrunner reached a settlement with the SEC, agreeing to pay a substantial fine of $19.5 million. Additionally, the company has committed to refraining from any future involvement in such illicit activities, ensuring compliance with the law and ethical accounting practices going forward.

During the period from 2013-2017. Roadrunner engaged in a series of unethical and illegal practices aimed at manipulating its financial reports. The company deliberately manipulated its earnings to meet prior guidance and projections by improperly deferring expenses and strategically spreading them across different quarters. By doing so, they minimized the impact on their net earnings and avoided the need to write down worthless assets and uncollectible receivables. Additionally, Roadrunner intentionally manipulated the liabilities from acquisitions, using the resulting income to offset expenses. These deceptive practices were carried out with the intentions of concealing from auditors, allowing Roadrunner to continue these illicit activities undetected.

History

In its early days, Roadrunner started as a carrier specializing in long-haul transportation between metropolitan areas. Their primary customers were small businesses shipping less than a truck load of cargo. In 2005, they made the strategic decision to merge with Dawes Transport, forming a power alliance in the transportation industry. This collaboration allowed Roadrunner to expand its capabilities and enhance its services, creating new opportunity for growth and success.

After successfully navigating through the challenges of the Great Recession and going public in 2010, they decided to embark on an expansion spree. The company made the strategic decision to acquire 25 privately help transportation companies over the next few years. This aggressive growth strategy allowed them to significantly increase its size and presence in the industry.

By 2016, Roadrunner had transformed into a major player in the transportation and logistics sector. The company's acquisitions had propelled its growth, enabling it to become a prominent force in the market. With its expanded network and resources, they had established itself as a significant player, solidifying its position as a leading provider of transportation services.

Acquisition Period

The lack of a strategic plan for Roadrunner's acquisitions had unintended consequences for the company. As it expanded into the intermodal business and acquired multiple companies, its original focus on less than a truck load service became diluted. This led to a larger organization with numerous divisions and complexities. This shift in focus deviated from its core competencies and had negative implications for its operations.

During this period, they devised an illicit accounting maneuver to manipulate earnout liabilities stemming from their acquisitions. This enabled them to gain access to surplus income, which they utilized to offset future quarters. These deceptive tactics allowed them to manipulate their financial reports and minimize the immediate impact on their net earnings. By deferring expenses in this manner, Roadrunner aimed to present a more favorable financial picture to stakeholders and investors, potentially misleading them about the true financial health of the company.

Impact of Fallout

Roadrunner, in an effort to resolve the allegations of accounting fraud, reached an agreement to compensate a total of $19.5 million. Upon revising their financial statements, it became evident that their reporting earnings were significant inflated, reaching a staggering $66 million. The revelation of this restatement, coupled with the exposure of accounting irregularities, had a profound impact on the value of the company's stocks. Shareholders who had placed their trust in Roadrunner faced substantial financial setbacks, as the stock price experience a drastic decline of more than 50%.

Peter Armbruster, the CFO, was convicted of engaging in securities fraud as a result of his involvement in the accounting scheme. Consequently, he was sentenced to a two-year imprisonment term and mandated to provide restitution to the shareholders who were adversely affected.

In a bid to put this situation behind them, Roadrunner underwent a change in leadership. By 2020, the company made the decision to divest its truckload business, refocusing its effort on being a standalone less than a truckload carrier. This move proved to be a turning point for Roadrunner, as it successfully regained its financial stability and returned to profitability.

Recommendation

Acquisitions/Growth

I would have suggested that they scale their operations at a pace that aligns with their available resources. Unfortunately, their growth was so rapid that their resources became thinly spread. Additionally, they lacked the opportunity to establish a standardized operating procedure or an effective communication mechanism across various operating channels.

Core Competencies

Their primary expertise revolved around transporting cargo that occupied less than a truckload, specifically catering to metropolitan regions. However, through acquisition, they expanded their services to encompass various modes of cargo. Unfortunately, this diversification led to a dilution of their competitive advantage as their focus shifted towards different customers. To rectify this, they should have catered their acquisition strategy around less than a truckload shipping.

Ethical Accounting Practices

The CFO should have practice ethical accounting principles and ensured that everyone in the organization was held to the same high standard. However, it is the CEO's responsibility to have the right people on the team and to implement effective checks and balances within the organization.

Task

Question A. What precautionary measure could they have implemented to safeguard themselves from fraudulent activities?

Question B. What criteria or analytical tool could they have employed to effectively identify prospective companies to acquire?

Question C. What strategies or approaches could they have employed to handle the aftermath more effectively?

Question D. How can they regain the trust of their customers and shareholders?