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ELISABETH J PAGE
CASE SUMMARY
mixed-signal semiconductor platform solutions” (Corporate profile). After going public in 2011,
MagnaChip began to place enormous pressure on its employees to reach unrealistic revenue and
other operational targets. While lower level employees engaged in schemes to reach these
Officer at that time, was allegedly aware of the financial shenanigans taking place. According to
the Accounting and Auditing Enforcement Release (AAER), “although these improper practices
several of the practices, failed to remediate other practices, and understood how the practices
address mounting concerns over the company’s accounts receivables balances; the findings led to
According to the AAER, “both MagnaChip’s outside auditors and members of its Board
and Audit Committee independently raised concerns about the Company’s rising accounts
The investigation identified a number of improper revenue recognition practices and triggered
the restatement of various Forms 10-Q and 10-K between the years of 2011 and 2014. The
domino effect continued and, in 2014, “MagnaChip announced that the scope of the Audit
Committee’s investigation had expanded to include errors and adjustments to costs of goods
sold, inventory, and reserves and related business practices” (ACCOUNTING AND AUDITING
MAGNACHIP CASE STUDY 3
ENFORCEMENT release no. 3869). As the audit committee unraveled the financial statement
fraud that had been taking place, Sakai finally became implicated as a perpetrator. The
Accounting and Auditing Enforcement Release alleges over and over that Sakai was negligent in
violating multiple sections of the Exchange Act. The scope of the fraud and the blatantly
improper recognition of revenue should have been detected long before the audit committee
launched its investigation. Had there been anti-fraud measures, like a whistle-blower hotline, at
MagnaChip, this fraud and the consequences may have been detected and mitigated much earlier
on.
PRESSURE. After its initial public offering, MagnaChip applied intense pressure to its
employees to achieve revenue targets. Management did not want the company’s operating results
to fall short of its previously announced performance goals and, as evidenced by the AAER, “in
several instances when employees objected to the targets, management refused to lower them”
revenue targets were taken seriously and management strictly monitored the progress of these
initiatives. Senior managers would allegedly hold, “weekly sales meetings with the Company’s
sales and manufacturing personnel to track their progress, often berating them when they fell
short.” (ACCOUNTING AND AUDITING ENFORCEMENT release no. 3869). With all of the
downward pressure coming from management, it is no wonder that personnel began to entertain
OPPORTUNITY. The massive MagnaChip fraud remained undetected due to a weak control
accelerated the recognition of $1.8 billion improperly. MagnaChip’s then CFO, Sakai, “approved
the recording of revenue in 2011, even though she either knew or was reckless in not knowing
that the customer had always insisted on title and risk of loss transferring in 2012”
fraud and no tone-at-the-top emphasizing integrity, there was virtually nothing standing in the
operating results.
RATIONALIZATION. Fraud occurs when all three prongs of the fraud triangle are present;
while MagnaChip employees were undoubtedly subject to pressure and had ample opportunity to
improperly recognize revenue, they needed a way to legitimize their behavior. Management at
MagnaChip set revenue targets that were so unattainable it is likely that employees began to feel
that by committing fraud they were only doing what was necessary to keep their jobs. According
to the AAER, “in 2011, some MagnaChip Korean sales employees met with some manufacturing
employees to express concern about their ability to meet the sales targets set by senior
management because manufacturing could not keep up” (ACCOUNTING AND AUDITING
ENFORCEMENT release no. 3869). Soon after this meeting, manufacturing employees began to
The MagnaChip fraud could have been prevented altogether or at least detected and dealt
with long before it was discovered by the audit committee’s investigation. An utter lack of
and the material weaknesses in internal controls were not relayed to MagnaChip’s audit
MAGNACHIP CASE STUDY 5
committee and therefore were never remediated. A strong control environment goes a long way
findings from the 2014 ACFE survey, “organizations with hotlines were much more likely to
catch fraud by a tip. These organizations also experienced frauds that were 41 percent less costly,
and they detected frauds 50 percent more quickly” (Mintz 2017). Strong evidence supports the
In the AAER, the SEC lists the absence of, “prevention or detection of undisclosed
AUDITING ENFORCEMENT release no. 3869) as a contributing factor to the fraud. Sales and
Separation of duties may have been an effective deterrent to the revenue recognition scheme
taking place; however, in this case, it appears that both employees and management were aware
the fraud was happening. Because employees and management were colluding together, this
fraud would have been difficult to prevent even with separation of duties. In the end,
MagnaChip’s only saving grace was its audit committee. Had the audit committee not remained
vigilant about the company’s accounts receivable balances and launched an investigation, this
fraud may have been allowed to continue through several more reporting periods.
MAGNACHIP CASE STUDY 6
REFERENCES
profile
Mintz, S.M., & Morris, R.E. (2017). Ethical obligations and decision making in accounting (4th