ComROAD - From Whence Those Sales?
Story The Neuer Markt of the Frankfurt Stock exchange, Europe's version of Nasdaq-style capital raising and equity trading, closed its doors in late 2002. Deutsche Borse set up the Frankfurt-based Neuer in 1997 to latch onto the technology boom and provide a source of financing for German tech startups. In the first three years it brought nearly 350 companies public, peaking at above 8,500 in March 2000, a near-ten-fold increase. In the next two years, plagued by scandal and hurt by the global economic and technology downturn, the Neuer's main index plummeted more than 95 percent, wiping out more than $200 billion in market value. (Rombel 2002) The most notorious scandal to hit the Neuer involved ComROAD Aktiengesellschaft, a German navigation-technology company that went public in 1999. It was delisted from the exchange in 2002 following the revelation that 97 percent of its claimed $94 million in revenue in 2001 was non-existent. Bodo Schnabel, the chief executive of ComROAD, was tried for insider trading and financial manipulation. (Ewing & Byrnes 2002) ComROAD licensed technology it had developed to companies in the telecommunications, security and automotive markets (GTTS Partners). The GTTS Partner would pay a start-up fee of from e200,000 to e500,000 for ComROAD to deliver and install telematic service centers. The GTTS Partner then bought the car computer, StreetGuard software, StreetMachine software, and StreetPC, and marketed them through telecommunications, security, and automotive markets distribution channels. GTTS Partners generated monthly income from the use of their services and ComROAD would receive 10 percent of their gross profit. In early 2001, a reported 32 telematic service centers were installed. (ComROAD 2001) ComROAD invented revenues from a non-existent client in Hong Kong, VT Electronics, which contributed between 63 percent and 97 percent of ComROAD's revenue between 1998 and 2000. (Smith 2002) It was a German journalist who discovered the fraud at ComROAD. She found it odd that almost all ComROAD's sales came from a company in Hong Kong. While on vacation, she went to Hong Kong at her own expense and tried to locate the company. She could find no record it existed. (Ewing 2003) KPMG, ComROAD's external auditor, resigned in February 2002 after withdrawing its opinion on the accounts for 1998, 1999 and 2000. During those audit periods KPMG also assisted the company with its cash-flow statements. KPMG said it had helped compile the cash-flow statement, but that the cash flow statements had not been audited and were based on second-hand information from the company. (Smith 2002)
Discussion Questions
¦ What are the typical audit procedures to test for existence of revenue?
¦ What additional procedures would an auditor perform if a majority of sales came from a single customer?
¦ What aspect of ComROAD's business model made revenue recognition fraud relatively easy?
¦ Did the existence of the Neuer reduce scrutiny of revenue?