esm government securities, inc. ("esm")

Project Description:

this is a sample case: esm government securities, inc. ("esm") was in the business of selling and repurchasing government securities through repurchase and reverse repurchase transactions. esm is whollyowned by esm group, inc. ("group") who also owned financial group, inc. ("financial"). financial has been insolvent since 1978.

a repurchase transaction is one in which esm would purchase government securities and then sell the securities to a customer with the stipulation that at the maturity of the security, esm would buy back, or repurchase, the security from the customer. these repurchase transactions had a defined term, and were therefore called term repos. a reverse purchase transaction is the opposite of a term repo; esm would agree to purchase securities from a customer with the understanding that the securities would be repurchased upon the maturity of those securities.

at the end of 1984, the intercompany account between group and financial showed financial owed group $246,922,347 and the net amount owed by group to esm on net intercompany repos was $297,009,000.

financial made significant personal loans to individual officers of esm companies which had grown to approximately $38,000,000 as of march 31, 1985.

1.using these facts, and the attached pdf financial statements, describe the
potential fraud schemes employed by esm.

2. are there any other issues that tweak your curiosity with respect to these financial statements?

3. should the disclosures in esm's financial statements report the intercompany transactions
with group?

please see the attached pdf for balance sheets
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