Power of Auditing: Equity Funding Corp. of America
Many businesses fall into the fatal error of ignoring the bookkeeping essentials every business needs. Let us take a trip back to memory lane as we explore the power of proper bookkeeping for businesses.
The specific example here is of Equity Funding Corporation of America and how proper auditing (with the help of a bit of whistleblowing) led to the downfall of a household company name in America.
The Equity Funding Corporation of America (EFCA) was a Los Angeles-based asset management firm that rose to prominence in the 1960’s and 70’s. Founded in 1965 by entrepreneur Robert Vesco and his associates, the company grew to become one of the largest asset management firms in the world, managing over $2 billion of assets at the peak of its success. The purpose of this blog post is to explore the rise, expansion, and eventual downfall of EFCA, as well as its lasting legacy.
Rise and Expansion of EFCA
The company was initially funded by Robert Vesco and his associates, who pooled their money to start the firm. Initially, the company provided mutual fund and stockbroker services, but soon expanded into other services such as real estate, commodities, and insurance. As the company grew, it began to invest heavily in advertising and marketing campaigns, which helped attract more customers and increase profits.
The Rise and Expansion of Equity Funding Corporation of America is a story of corporate ambition and financial savvy. Founded in the early 1970s, Equity Funding Corporation of America (EFCA) was a fast-growing financial services company that specialized in the sale of high-yield securities and the underwriting of corporate debt. By the mid-1980s, EFCA had become one of the largest and most successful publicly-traded companies in the United States.
EFCA’s history is a testament to the power of vision, hard work, and luck. The company was founded by entrepreneur Maurice R. “Hank” Greenberg, who had a passion for the securities industry and a deep understanding of the financial markets. With the help of two other early investors, Greenberg purchased a small securities firm and renamed it Equity Funding Corporation. He then proceeded to grow the company rapidly, introducing innovative products and services and opening new offices in major cities across the country.
One of the keys to EFCA’s success was its ability to take advantage of the deregulation of the financial markets in the 1970s. This allowed the company to access capital from a variety of sources, including banks, pension funds, and insurance companies. In addition, EFCA was able to structure securities and corporate debt offerings in ways that made them attractive to investors. This allowed the company to rapidly expand its operations, and by the 1970s, it had become one of the largest securities firms in the country.
According to Michael C Napp in Contemporary Auditing Issues and Cases, the company reached an asset valuation of $500 million. However, The university of Mississippi published in their Deloitte Collection that the valuation was of the range of $737 million dollars (source references below).
EFCA’s success continued into the 1980s, as the company continued to aggressively pursue new opportunities and expand its operations. In 1983, EFCA became the first publicly-traded company to offer both common stock and convertible bonds. This allowed the company to raise additional capital, which it used to fund new investments. In addition to expanding its securities business, EFCA also began offering banking services, including bank accounts, credit cards, and mortgages.
As the company continued to grow, Equity Funding looked for new ways to expand its business. In the early 1970s, Equity Funding began to look into other areas of financial services that it could offer. It was at this time that the company started to enter into the realm of real estate, commodities, and insurance.
The real estate sector was of particular interest to Equity Funding, as it provided the company with an opportunity to diversify its portfolio and increase its revenue. Equity Funding began to invest heavily in real estate, working with developers to build new buildings and acquire existing properties. The company also started to offer mortgages to customers, which allowed them to purchase homes without having to pay a large down payment.
Equity Funding also began to venture into the commodities markets. As a large financial services company, Equity Funding had access to a wide variety of commodities, such as gold and oil. The company took advantage of these opportunities by trading in these commodities, allowing it to generate a profit from the price differences between different markets.
Finally, Equity Funding began to offer insurance services. This allowed the company to provide its customers with a wide range of coverage and protection. Equity Funding had the ability to offer life insurance, health insurance, automobile insurance, and many other types of coverage.
With its expansion into real estate, commodities, and insurance, Equity Funding was able to become one of the largest financial services companies in the United States. However, the company’s success was short-lived. In the mid-1980s, Equity Funding was caught up in a scandal involving the misuse of customer funds. The company was eventually forced to declare bankruptcy and its assets were liquidated.
Despite its eventual end, Equity Funding’s expansion into other services was a testament to its commitment to innovation and customer service. The company’s foray into real estate, commodities, and insurance provided it with the opportunity to diversify its portfolio and increase its profits. Although the company’s end was unfortunate, its expansion into other services was an impressive and admirable feat.
EFCA’s success was not without its challenges. In the mid-1980s, the company became embroiled in a massive scandal involving the fraudulent sale of bonds and other securities. This scandal caused EFCA’s stock price to plummet and led to the eventual collapse of the company.
Despite its eventual demise, EFCA’s rise and expansion had a lasting impact on the financial markets. The company’s success in the 1970s and 1980s paved the way for other large securities firms to enter the market and for the deregulation of the financial markets to continue. Today, EFCA’s legacy can still be seen in the competitive and innovative nature of the financial services industry.
The Downfall of EFCA
Unfortunately, the company’s success was short-lived. It was soon revealed that the company had engaged in fraudulent practices, including misrepresentation of financial statements and bribery of government officials. These activities led to multiple investigations and lawsuits, which eventually resulted in the conviction and sentencing of several executives.
The fraud was led by Equity Funding’s chairman, Robert Vesco, and was facilitated by the company’s Chief Financial Officer, John DeBoer. Vesco and DeBoer had been manipulating the company’s financial statements for years, misrepresenting both their company’s assets and liabilities. To do this, they had created thousands of false life insurance policies and sold them to unsuspecting customers, while overstating the value of the company’s investments and understating its liabilities. This fraudulent practice allowed Equity Funding to artificially inflate its profits and appear to be more successful than it actually was.
The fraud was eventually discovered by a group of employees, who reported the scheme to the Securities and Exchange Commission (SEC). The SEC investigation revealed that Vesco and DeBoer had been engaging in a wide range of fraudulent activities, such as filing false tax returns, misstating the company’s financial statements, and selling bogus life insurance policies. The SEC also found that Vesco and DeBoer had been using the company’s money for personal use, such as buying luxury cars and real estate.
The discovery of the fraud caused a massive scandal and led to the company’s collapse. Vesco and DeBoer were both sentenced to prison and the company’s stock price plummeted. The scandal also had a significant impact on the insurance and investment industries, as it showed just how easy it was to manipulate financial statements.
The Equity Funding Corporation of America scandal serves as a cautionary tale of the dangers of financial misrepresentation and fraudulent practices. It shows that even the most successful companies can be brought down by unethical behavior, and that those responsible must be held accountable for their actions. It is a reminder that companies have a responsibility to their shareholders and customers to maintain honest and accurate financial statements. Without this, the integrity of the financial system is at risk.
Legacy of EFCA
The demise of EFCA had a significant impact on other corporations, as it exposed the risks associated with fraudulent practices. As a result, new regulations and laws were put in place to protect investors and prevent similar occurrences in the future. Additionally, the collapse of EFCA serves as a cautionary tale for other companies, demonstrating the importance of ethical behavior and accurate financial reporting.
In conclusion, EFCA was a large asset management firm that rose and fell within a short period of time. Its fraudulent practices and misrepresentation of financial statements led to multiple investigations and lawsuits, and the conviction and sentencing of several executives. The company’s demise had a lasting impact on other corporations, leading to new regulations and laws, as well as a cautionary tale for other companies.