Jamaica Water

Properties
Mark Christian Butaya
Background of the Case

▪ The fraud was characterized by misapplication of purchase

method of accounting for acquisitions, recording fictitious
assets, improper accounting for NOLCO, non-recording of
appropriate allowances for uncollectible receivables, and
misapplication of the percentage-of-completion method of
accounting for long-term contracts. The fraud was made
possible by Ernest Grendi, company CFO as helped by three
senior accountants.

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From Queens to
Computers
(Background of the Company)
Origins

Began operations in 1886

as a small business that
delivered water to a few
neighbourhoods in the
Queens, NY.

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In the mid-1960s

▪ Martin Dwyer
took control of the
company

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mid-1970s

▪ Dwyer and his

management team had
driven the company to the
verge of bankruptcy.

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1978

▪ Martin Dwyer stepped

down as its top executive in
1978 and placed his 30-
year-old son, Andrew, in
charge.

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early 1990s

▪ Andrew Dwyer’s new

business model for JWP
had converted the
company into a multibillion-
dollar firm with a workforce
of more than 20,000
employees.

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Dark Secrets
(The Case)
The abusive accounting practices

▪ misapplying the purchase method of accounting for acquisitions

▪ recording fictitious assets
▪ improper accounting for net operating loss (NOL) carry forwards
▪ failing to record appropriate allowances for uncollectible
receivables
▪ misapplying the percentage-of-completion method of accounting
for long-term contracts

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Principal architect of JWP’s accounting fraud

▪ Ernest Grendi together

with three of the
company’s senior
accountants helped him
carry out and conceal the
fraud

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EGAAP instead of GAAP

▪ JWP’s accounting staff often

“front-loaded” the revenue
recognized on long-term
construction contracts to
produce sharp spikes in
revenue. This is known as
“High Sierras”.

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Secrets Revealed
(Result of the Case)
January 1992

▪ To remedy this problem, Andrew

Dwyer went in search of an
individual with a proven track record
of managing companies facing
difficult circumstances. In a matter of
weeks, Dwyer identified David Sokol
as the top candidate for JWP’s COO
position.

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1992

▪ Sokol had uncovered several suspicious items, including a $46 million

receivable in JWP’s corporate general ledger that had gone uncollected
for an extended period of time.
▪ Sokol told Dwyer that he believed JWP needed to record $125 million
in write-offs to correct the company’s accounting records and
requested to retain an accounting firm other than Ernst and Young.
▪ Dwyer agreed to retain Deloitte & Touche to carry out a large-scale
investigation of JWP’s accounting records.

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1992

▪ Sokol interviewed two of Ernest

Grendi’s subordinates and they
showed him the “High Sierras”.
▪ David Sokol resigned as JWP’s
president and COO and
terminated all ties with the
company.

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Deloitte & Touche’s investigation - 1993

▪ JWP restated (reduced) its previously reported earnings for 1990 and 1991
by approximately $40 million.
▪ The investigation also resulted in a $653 million write-down of the
company’s assets
▪ Andrew Dwyer resigned as JWP’s CEO; three months later, he resigned as
the company’s chairman of the board.
▪ Ernest Grendi had been forced to resign as JWP’s CFO
▪ JWP filed for bankruptcy in October 1993.
▪ JWP’s former creditors became the principal owners of Emcor Group Inc.

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Ernst & Young in the courts

▪ Ernst & Young officials agreed to settle the lawsuits filed by

JWP’s former stockholders. In total, Ernst & Young paid those
plaintiffs a reported $23 million.
▪ The other major class of plaintiffs that sued Ernst & Young was
a group of insurance companies that had incurred
approximately $100 million of losses on loans made to JWP.

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Philippine Setting

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Recommendations

▪ Installation of a Corporate Structure emphasizing the vital

role of the audit function
▪ Establishment of appropriate and sufficient safeguards to
reduce or even eliminate exposure to threats
▪ Establishment of Whistle Blowing System
▪ Share Based Compensation

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