Discuss the culpability of the accountants in preparing the questionable accounting estimates for the cost to compete.

Fraudulent Behavior

Beazer homes was the sixth largest U.S. home builder during the 1998-2006 housing boom.  Like other major home builders, Beazer’s market value grew by a factor of 8-10 during that period.  However, the new home market slowed in 2006 and then collapsed in 2007.

The SEC alleged that Michael T. Rand, Beazer’s chief accounting officer, understated Beazer’s reported profits in every quarter but one from 2000 through 2005 by understating Beazer’s “land inventory” account and by overstating its “cost to complete” reserve.  The SEC further alleged that during each of the four quarters in 2006, and in the first quarter of 2007, Mr. Rand increased Beazer’s reported profits by increasing the “land inventory” account, decreasing the “cost to complete” reserve, and fraudulently recording sale-and-leaseback transactions for model homes.

The case provides an excellent overview of the U.S. housing boom and collapse.  It can be used prior to New Century Financial Corp (Chapter 3), which covers the collapse of a sub-prime and Alt A mortgage lender.  The case is also excellent for covering the practical issues of accrual accounting in uncertain environments.

The SEC charges imply that it is relatively simple to estimate the value of the firm’s “land inventory” and “cost to complete” accounts.  When a home builder acquires land for a new housing development, some land is set aside for streets and sidewalks, some for parks or lakes, and some for open space near busy roads.  The builder then subdivides the remaining land into lots it hopes to sell.  Lots near a park or lake are more desirable, while lots near the entrance to a subdivision are typically less desirable.  Someone assigned a cost of the land to individual lots, and that assignment process is clearly arbitrary.  In addition, as the property becomes more or less desirable, the remaining land becomes more or less valuable than when the firm first estimated the value of each lot.  The SEC’s complaint made the valuation process seem far more objective than it is in practice.

The cost-to-complete reserve covers the cost to complete sold homes.  That includes, for example, cracked driveways or basement floors, leaking faucets, roofs, or windows, or faulty painting or landscaping.  The average cost per home might be $5,000 or $10,000, depending on the home cost and the history of the development.  After 6-12 months, the allowance for a particular home might be reduced to zero as the warranty expired or as the likelihood of claims declined.  The SEC complaint made that valuation process seem far more objective than it is in practice, particularly for a rapidly growing firm that almost certainly was relying on less experienced managers and workers, and less experienced accountants.

The case also covers a sale-and-leaseback transaction.  Those accounting rules are complex, so again, it might not be clear that Mr. Rand engaged in fraud.

Finally, the cumulative alleged profit understatement for 2000-2005 was about $72 million for a firm that had about $2 billion of operating profits.  In addition, during nine quarters from 2007-2009, Beazer recorded about $1 billion of impairment charges.  Given the implicit subjectivity in those nine impairment charges, it seems highly likely that the “land inventory” and “cost to complete” accounts were also highly subjective numbers.

I use this case to consider the subjectivity of various accrual accounts.  I also use it to consider who would make the accrual calculations.  Beazer constructed housing developments throughout the nation.  Michael T. Rand almost certainly was not personally responsible for preparing accrual estimates at the operating level.

  • Discuss the motives of the executives to commit fraud. Discuss the culpability of the accountants in preparing the questionable accounting estimates for the cost to compete.
  • In the Beazer Homes USA case (i.e., Case 10), the chief accounting officer was accused of duping the external auditors through the use of an earnings manipulation scheme. Imagine that you were the auditor of the mortgage company. Design an audit plan to address the important accounting issues highlighted in the case. For each issue identified, recommend a risk mitigation strategy.
My Homework Nest
Calculate your paper price
Pages (550 words)
Approximate price: -

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.


Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.


Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.


Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.


Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.