The Golden Bear after Initial Public Offer


This paper discusses the Golden Bear Golf Inc after Initial Public Offer in 1991, highlighting the accounting practices and methods were used in recognizing the company’s revenue. This paper explains the fraud occurred in recognizing the revenue and how it overstated the financial statements and increased the stock price. It also explains the fraud theory applied to the revenue recognition and the auditor’s failure in discovering the fraud and reports it to the SEC. This paper will provide methods that auditors should follow in auditing public companies and the best practices they should follow if the company changed the revenue recognition.


Jack Nicklaus began playing golf since he was young, and he mastered the golf in his teen. After he graduated from high school he was offered a scholarship in Ohio State University in his hometown of Columbus. At the age of 21 he joined the professional golf tour and was an instant success. Nicklaus won a record of 18 major golf championships and received the “Player of the Century” award in the golfing world.

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He realized at early age that winning golf games is not enough for his ambition, he won’t be an athlete forever, although he played until he was 48, ; he wanted to transfer his golf skills into the business world. He decided to establish his own business in teaching and designing golf courses and called it the Golden Bear Inc. By the mid-1970s, Jack Nicklaus became high profile popular athlete which allowed him to endorse deals and other business opportunities.

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He hired executives to run the Golden Bear Inc day to day operation. Jack Nicklaus was not aware of the accounting details of his company until Richard Bellinger; an accountant employed by Golden Bear, approached him and explained to him that the company was on the edge of bankruptcy. After a brief investigation Jack realized that he allowed his company to become part of dozens of unrelated business, and no one was aware of the accounting situation even his own executives. At this point he decided with the help of Richard Bellinger to run his own company and fix all the challenges the company faced. He named himself the CEO, and placed Mr. Bellinger the COO. Within couple of years Nicklaus and his COO were able to turn the company around and made profitable again. In 1996, Nicklaus decided to expand his business operation by creating a subsidiary company from the Gold Bear to design and build golf courses. He decided starting this company through Initial Public Offer.

The new company became public and named the Golden Bear Golf Inc and its stock traded on the NASDAQ exchange under the ticker symbol JACK, Nicklaus retained more than 50% of the commons stock, but allowed a subsidiary company Paragon International, a wholly owned company by the Golden Bear Inc, to manage the daily operation of the company and Nicklaus will manage his private business. Nicklaus appointed John Boyd and Christopher Curbello as the two top executives of Paragon international, Boyd became the president and principal operating officer, while Curbello assumed the title of Paragon’s vice president of operation.

Because of Nicklaus’s success and popularity, a lot of requests came to Paragon Inc for Jack Nicklaus-designed golf courses; in few months the company had more than half dozen of contracts to design and build golf courses in different locations all over the United States. In 1998, John Boyd, Curbello, and some of Paragon top management attempted to purchase Paragon from Golden Bear Inc. but when they failed to purchase it from Nicklaus they resigned their positions, and new management came on. The new management quickly discovered that Paragon operating results had been misrepresented for the year of 1997 and the first quarter of 1998. The Fraud Case

When Nicklaus appointed Boyd and Curbello to be the executives of Paragon International to manage the Golden Bear Inc., he offered them incentive compensation packages each, grated them a large number of Golden Bear stock options, and offered them sizable bonuses if Paragon met certain operating benchmarks. Unfortunately, one year after the public offer Boyd and Curbello have realized that their forecasting of the gross profit margins from the construction projects was unrealistic, and instead of earning profits they were incurring losses on most of these projects. In order to avoid the public embarrassment if the losses information about the construction projects was released to the public, and to prevent the potential customers from knowing that the Golden Bear Inc was not profitable, they decided to overstate the company’s financial statements from the operating results. The public embarrassment was not the only factor to overstate the financial statements, there are some other key factors contributed to their decision of embellishing the reported operating results.

The first key factor was the incentive that offered to them was conditioned with meeting the goals that Nicklaus has set for them, second the fear of having a bad reputation if the industry found out that they were not making any profit for Jack Nicklaus. They worked for famous, popular, and successful athletes and if they lost his confidence, they would lose the industry’s confidence. These factors created a fear from failure and in the same time a desire to be as successful as the man they work for. Usually construction projects take more than one year to be completed, and the best accounting method in recognizing revenue related to these projects is the “cost-to-cost” percentage-of-completion method. In the beginning, Paragon Company used the “cost-to-cost” percentage-of-completion method that required management to determine the percentage of a project’s total estimated construction costs incurred in a given accounting period.

Then the same percentage of the total revenue (and gross profit) to be earned on the project is booked that period. In 1997, the company was incurring losses based on the use of “cost-to-cost” percentage of completion method in recognizing the revenue. At this point the executives have instructed the controller to switch from the original method to a different method referred to as the “earned value” percentage-of-completion method, this method was new, untested, and unrecognized by the Generally Accepted Accounting Standards. In this accounting method instead of relying on the cost already incurred, they relied on management’s estimates for the project’s progress. Based on the management’s estimation, in 1997 and 1998 the financial statements were overstated by $17.9 million.

The executives also instructed the accounting staff to complete transactions to increase the revenue because they received new amendments to the original project’s contracts “change of order”, the staff had never seen any back up documentation to these requests. This change of method was not enough for the executives, so they started recognizing revenue for potential projects that Paragon’s sales department had identified while looking for new opportunities, even though the company did not have any verbal agreement or written contracts with these potential clients.

In this particular case there are more than one fraud theory applies to the executives who committed the fraud. The first one is the Fraud Triangle, and the second one is the Conflict Theory. The Fraud Triangle

The fraud triangle describes three factors contributing to business fraud: motive, opportunity, and rationalization. If the three factors are present in an organization, fraud will probably occur, but not all three facts are requirement in the same amount. In the Golden Bear Inc. case all these factors existed in the company. The Motive in this case was the incentive that was offered to the Boyd and Curbello if they reached their yearly goals. In addition to their incentive, the prestigious life style they had with famous athletes’ and how they should be as successful as they are. Rationalization in this case is the financial pressure that they were facing in this industry and the pressure of failing. They realized that if they fail, they won’t be able to keep their jobs, and they won’t be able to make ends meet. Their whole life was depending on the success in this job.

Opportunity existed in this situation because the lack of internal control and no review of the managements method of estimation. In public companies the board of directors should form an audit committee that review policy, procedures, and accounting method with management and independent auditors. But in the Golden Bear Inc, this practice failed to provide efficient internal control to catch these misstatements before it was filed with the SEC. Another opportunity that the auditors, Arthur Anderson, didn’t report any misstatements during their audit in 1997 and have not provided any advices against changing the accounting method to unfamiliar and untested method “earned value” percentage-of-completion, especially the change was material in the financial statements.

The Conflict Theory

The conflict theory was presented by Karl Marx and in general it claims society is in a state of constant conflict due to competition for limited resources. The theory holds that social order is maintained by domination and power, rather than consensus and conformity. According to conflict theory, those with wealth and power try to hold on to it by any means possible. In the Golden Bear Inc case, the Conflict Theory applies to executives because their feeling of the importance of holding on their powers and their wealth at all possible means. Boyd and Curbello had a unique situation which in the first year of managing the Golden Bear, they already committed fraud. In different cases, the executives usually misrepresent the financial to match previous years’ success, and hoping that the economy will improve this misrepresentation will be corrected in different period.

In this case, the company was brand new in the market, and had no previous years to compare to, and the executives realized early on that this type of projects won’t be as profitable as they thought it will be, so they wanted to keep the incentives and they wanted to keep their positions and their power, so intestinally they have committed this fraud to keep all their power. I believe that the power is not only money in this case; it is also connection and the prestigious life style that the executive were hoping for and got accustomed to. Working with one of the most prestigious athletes and businessman like Nicklaus they could not afford to lose this type of power or wealth, they couldn’t risk failing in these project because of the public consequences and the private consequences. In addition to this kind of power, they have used Nicklaus’s popularity and hide behind his image hoping that no one will question a company owned by a respectable member of the society. Basically they thought they can get away with anything because of the power Nicklaus and they held. The Discovery of the Fraud

At the end of 1998, Boyd, Curbello, and some of their top employees tried to purchase the Paragon International from the Golden Bear, but all their efforts failed as Jack Nicklaus was not willing to sell this company to them. They have realized they can’t keep this accounting practices for long without being discovered, so Boyd and Curbello resigned from their position in Paragon International. After their departures, a new management team was appointed and quickly they have realized that the financial statements from the construction projects were overstated by almost $17.9million for 1997 and the first quarter of 1998. Immediately The Golden Bear Inc requested collaboration from Arthur Anderson, which they have been the auditors for Paragon International, PricewaterhouseCoopers, and the Golden Bear internal legal team to investigate the financial statements of 1997 and the first quarter of 1998 and the operating accounting practices.

After the investigation The Golden Bearn Inc. had to restate the financial statements for 1997 and the first quarter of 1998 to recognize losses of $20million. At this point The Security and Exchange Commission started its own investigation of the Golden Bear Inc, focusing on the auditor’s who issued unqualified opinion for 1997. The auditor was Michael Sullivan a partner at Arthur Anderson since 1984. The SEC have released the results of the investigation of The Golden Bear Inc and included a section titled “Sullivan’s Audit Failures”. In the SEC released results they have stated that Sullivan was well aware that changing the “cost-to-cost” percentage-of-completion method to the “earned value” method will increase the revenue by material amount, knowingly that this method is new and untested.

They also have stated that there was $4million of un-invoiced construction costs had been booked as an adjusted entry at year end 1997, Paragon’s management have said these cost are the proximate revenue that would have been recorded if they were using the “cost-to-cost” method, and Sullivan did not investigate this transaction further, the $4million was fictitious. Sullivan knew that Paragon booked costs for which no invoices had been received and which were not reflected in the company’s accounts payable system and that recording of these un-invoiced costs would have substantially reduced the gap between the results produced by the two estimation methods. Furthermore, the SEC stated that when Paragon executives switched to the earned value method, they had assured Sullivan that they would bill their customers on those bases, but in reality they were billing their customers effectively on a cost-to-cost basis, because they could not bill the customers for the full amount of earning that they were recording on the construction projects since those customers were generally aware of the real stages of completion of the project.

Sullivan and his team didn’t test the amounts of unbilled revenue and didn’t confirm with the customers on the amounts was billed to them. Sullivan and his team relied only on Paragon’s verbal explanation to confirm the unbilled revenue and the billed amounts. Finally, Paragon had another tactic to inflate its revenue which was to overstate the total revenues to be earned on individual construction project, this total revenue being used in the “earned-value” percentage-of-completion computations exceeded the revenue figure documented in the construction original contract. The executives explained to Sullivan and his team verbally that these differences were verbal agreement between the client and Paragon on adding a new addition to the original project, or change of orders during this project, the Paragon executives have explain to Sullivan and his team that most of these projects managers work better verbally and they provide contracts or change of order documentation later, and Sullivan was satisfied with this explanation. Internal Control

In The Golden Bear Inc case, unfortunately the tone at the top was set to commit this fraud and there was no sufficient internal control to prevent it in time. The board of directors of The Golden Bear Inc have not reviewed the method of accounting used by Paragon Management team, and discussed if it is in compliance with Generally Accepted Accounting Standards or not. Also the board of directors has not met with the independent auditor to discuss their finding and try to improve their process and procedures. If the internal control in The Golden Bearn Inc. was insufficient, but the independent auditor Arthur Anderson failed to discover this fraud in earlier time. Sullivan and his team, should have realized that this company is brand new company and they went public in 1996, this company should been high risk company and they should have done more testing and reviewing more backup documentation to support any transactions.

First, Sullivan and his team, failed to test the accounts receivable confirmation, they should have contacted the project managers or the owners, someone aware of the stages of the project, outside Paragon to confirm the receivables, and to also confirm the current stage of the project and if it matches the transactions on book. In addition to the receivable’s confirmation, the change of order transactions, Sullivan shouldn’t have accepted the verbal explanation from the executives that these were verbal change of order from the project manager. Second, Sullivan and his team should have not agreed to the change of method from “cost-to-cost” percentage-of-completion to “earned value” method, because this method is not recognized by GAAP and it have not been tested before. Even if they decided to test this new method and issued two schedules with the two methods, once they have realized that the amounts are overstated by a material amounts, then they should have stopped using this method immediately.

Last, but not least, Sullivan and his team should have reviewed the original construction projects contracts and match the revenue recognized with the amount agreed on, because Paragon recorded revenue from potential clients’ project not from actual clients. The writer understand that this case occurred before the Sarbanes-Oxley Act in 2002 and there was no strict process and procedures on the internal control and the consequences of the managements signing off on the financial statements, but we believe if the board of directors have took better measure in reviewing the financial and they created an audit committee to work with the auditors, that Fraud could have been prevented. In addition to the board of director, we believe that the auditor should have better role in discovering the fraud and notifying Nicklaus as he was the major owner of The Golden Bear Inc Stock. The Final Action

In August 1998, a class-action lawsuit was filed against The Golden Bear Inc, Paragon executives, and the principle owner Jack Nicklaus by one of the stockholder. In the same month NASDAQ delisted the company’s common stock, which was trading for less than $1 per share after it was trading for $20 per share. In December 1999, Golden Bear reached to agreement on the lawsuit and settled for $3.5 million dollar to be paid the stockholders, and to purchase their shares at the price of $0.75. After this settlement the Golden Bear folded into Nicklaus private companies. In November 2002, Michael Sullivan was suspended from practicing before the SEC for one year.

Arthur Anderson was put out of business because of the Enron Fraud Case In August 2002, Paragon’s controller received two years suspension from practicing front of the SEC. The SEC sanctioned three former Golden Bear executive by ordering them to “cease and desist from any future violations of the federal securities laws”. Finally, in March 2003, a federal grand jury indicted John Boyd and Christopher Curbello on charges of securities fraud and conspiracy to commit securities fraud. Curbello was arrested in Sand Antonio, Texas, and Boyd was apprehended in Bogota, Columbia, a few days later by Secret Service and FBI agents who immediately flew him to the United States. In June 2003, Curbello pleaded guilty to conspiracy to commit securities fraud and was sentenced to three and half years. A few months later, Boyd pleaded guilty to similar charges and was given a five year prison sentence. Lesson Learned

The Golden Bear Inc management

The Golden Bear Inc’s subsidiary company Paragon was responsible for managing the public company and it’s financial, but there was still responsibilities fall on The Golden Bear major owner Jack Nicklaus. He should have reviewed the financial statements with Paragon’s management’s team. He should have talked to the auditors separately from management to address any concerns the auditor might have. He also should have visited some of the construction sites some time with managements and sometime without managements. In addition to individual reviews, Nicklaus should have appointed audit committee to be dedicated to review the financial statements and work directly with the auditors and decide what is the best process and procedures Paragon Inc should have followed in choosing accounting methods. The Accounting Staff

I understand that the tone at the top was set by the executives, and all their requests to the accounting staff was based on their own decision, but as an accountant they should have requested more documentation to backup the transactions they have been requested to complete, they should have questioned the “Change of Order” verbal requests they have received from managements by the client. I also understand that no one likes whistleblowers, but if the accounting staff questions some of the practices, they should have notified the board of directors, or the auditors as anonyms. They at least should have documented their concerns and provided to managements. The Auditors

The auditors had big responsibility toward the public in auditing the Paragon’s Inc financial statements. The company was new, so they had to factor a high risk testing process and procedures. They should have tested more account receivables confirmation, and talked directly to the client. They could have also read all the contracts and compare the original amount to what was on the books. They should have talked about the client’s that had no contract and requested a document to prove that there are contracts should to be on the books. Their work shouldn’t stop at that, they should have visited the construction sites and discuss the given projects with project managers, architects, and other appropriate personnel.

The main reason behind these visits and interviews is to assess the stage of completion and estimated cost to complete this project, and compare notes between management’s representations and the actual stages of the project. One of the most elements that the auditor should have notices was the change of revenue recognition. Once the managements decided to change the method of revenue recognition, the auditor should have advised against this change, as the new method was new, untested, and didn’t follow Generally Accepted Accounting Standards. They should have requested a schedule with both methods, test the difference, and determine if this method will accurately recognize the revenue, and if the change was material enough that they shouldn’t use this method to begin with.


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The Golden Bear after Initial Public Offer. (2016, Apr 01). Retrieved from

The Golden Bear after Initial Public Offer

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