Fyre Media Fraud: McFarland's Unregistered Investment Scheme - Research Paper

Introduction

In the year 2006, Fyre media was founded by McFarland. To build an online interactive platform Fyre app was developed, it would allow the customers to make a direct booking for celebrities, musicians, and other live performances talents. Later in the year, Fyre Festival was established by McFarland, it was supposed to promote the Bahamas Live Music Festival in April and May 2017 (Sec.gov. 2020). Fyre Media, whose main investment agent was McFarland, was unregistered and gave investors the right to obtain profits from the festival commercial enterprises through investment contracts. They generated publicity in models and the media; they also relied heavily on the influencers of social media to pass the message. In two days, the event had sold out without any plans apart from the idea. There was no sense of reality, and there was poor decision-making McFarland went on to produce financial statements that were false to continue furthering the market efforts he kept in his borrowing ("International," 2020). Out of at least 43 investors in Fyre Media, about 7.9 million US dollars were raised, while about 16.5 million US dollars were raised from the investors in the offering of Fyre festival in the year 2016 and 2017(Sec.gov. 2020). In the course of this period, the Fyre media and McFarland gave out false financial data and provided a false statement regarding the Fyre festival and Fyre media. Besides, he came up with fake documents that he purported to be loans from banks and investments by the Fyre media. This paper has looked at the accounting principles that were violated and the recommendations for their fix.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Accounting Principles Violated

Principle of Consistency

Consistency standards were not applied throughout the event. The real amount of hosting the event was not known until it got too late, leading to overestimating the total revenue, as well as underestimating the cost. Billy McFarland and other employees did not have enough experience in holding events of such size as this was clear through the financial and planning decisions that they made. From the documentaries that were released by Hulu and Netflix, it clearly shows that the team had not held such an event before. The main problem was contributed to by the sequencing matter. The event was a bit big, and such events take more than a year to get planned. In the case of the Fyre Festival, planning of the event only took place for six months. The shooting of the promotional videos took place in December 2016 (Kircher, 2020). Besides, between 2016 and 2017, Billy McFarland contributed $7.9 million and $16.5 million for Fyre Media and Fyre Festival, respectively ("International," 2020). Then the sale of tickets started at the beginning of 2017. And the investments of the second round were expected to follow. Then the real costs of the festival was discovered in March, which included $ 2 million that was spent on alcohol, $400,000 that was used to compensate labor, $400,000 for transportation $ 6 million for catering packages and a hundred of thousand dollars for the custom expenses or fees ("International," 2020).

Principle of Utmost Good Faith

All the involved parties failed to participate honestly. McFarland was the only person who was was responsible for the financial transactions in the company. He appointed himself as to its CEO and the CFO in Fyre Media. In any organization, these two responsibilities should be taken by different people. Arguably, there was also another financial officer and the former employee from Google- Jason Ve, who worked as the Chief Revenue Officer of the Fyre Media ("International," 2020). However, his roles were to oversee the activities of generating revenue in the organization. Thus, he never had a seat with McFarland to discuss more of the financial transactions that were taking place. McFarland, as the CEO, led the organization with optimism instead of using realism. In return, McFarland failed to observe integrity in leading the organization as the CFO. Besides, Ve was given a responsibility that required effective communication with the vendors, on various festivals' payments. In one of the interviews that he gave, he admitted that the transfer of wire was coming through, despite the company having insufficient funds. He added that there were times when the balance in the bank accounts would be less than what Billy was asking him to send the vendors (Kircher, 2020). Precisely, Billy was the only person who had a full picture of the operations as well as finances in the organization. Therefore, with minimal oversight, Billy had to falsify the bank statements, balance sheets, and the investor pitch deck to sustain the festival.

Principle of Regularity

The organization failed to have a strict establishment of rules and regulations. Despite the Fyre festival not doing what they were supposed to do, they went overboard and did what they were not supposed to do. By coming up with the festival, it was aimed at being the center of the promotion of the media Fyre. The app would help get the best talents and many users. Still, the app was overtaken, and the result was the event would be constrained due to the budget on the market, which was to be part of the company revenue. The company didn't have an actual budget, and by taking from their falsified information, the company couldn't afford $160 million on the application booking (Bloomberg.com. 2020). Their balance sheet had indications that the festival would cater for itself; there was also an indication that some people, despite purchasing tickets, had not paid their tickets. There was too much reliance on the projected sales rather than the actual revenue that the company would obtain. Treating the app and Fyre media as different units was also a mistake. They concentrated more on how much the festival would cost and not the resources available. The ideas lacked focus and allocation of money from the investors was also unclear in a real sense the investors were made to buy a dream that was being sold by McFarland. Much of the resources were set for the festival, regardless of whether other parts of the business needed finances for their operation. There was also poor planning and rising issues on accountability accompanied by poor leadership.

Recommendations

On the violated principle of accounting, Ideas related to accounting should be managed effectively by avoiding the last-minute rush. And this could be achieved by conducting enough research earlier, as well as bringing in experts on such events. By doing this, it would have shown a list of fixed costs as well as possible challenges within the costs. In return, the events would not have been overspent on marketing that left the organization without the capital of turning lights on.

Working as the CEO of the company, as well as the CFO of Fyre Media, should have been observed as two separable responsibilities. Billy did a big mistake in getting involved in the operations as well as the financial planning of the organization alone. That to say, Billy was not supposed to hide or misrepresent the financial health of Fyre. In return, he would have identified the problems with the financial operations and learn various strategies to keep the festival and the entire organization in a good line, probably through a team.

Lastly, Billy flailed to follow the actual revenue of the organization. It was indicated that the festival would have paid for the app booking but ended up spending $ 160m, in which $38m was above the affordability. Here, Billy would have formed a team to oversee the financial statements of the organization, since it seemed that it was operating without specific objectives.

Conclusion

In conclusion, Fyre Festival's story goes that the entrepreneur Billy McFarland tried to change the market for booking talent at a festival. He asked rapper, Ja Rule, for help with creating an app, making the entertainment booking process more available and accessible. The company recruited a group to develop the app with the idea of using a music event at the Fyre Festival to promote it. It also agreed on buying an island in the Bahamas and holding a music festival to promote their concept. In return, the company went for the best workforce in every category, without consideration for budget or time.

References

Bloomberg.com. (2020). Bloomberg - Are you a robot? [online] Available at: https://www.bloomberg.com/news/articles/2019-01-29/how-to-prevent-another-fyre-festival-netflix-hulu-doc-review [Accessed 15 Feb. 2020].

Kircher, M. (2020). This Is Billy McFarland's Fyre Festival Comeback Plan. Intelligencer. Retrieved 15 February 2020, from http://nymag.com/intelligencer/2019/05/billy-mcfarland-is-writing-a-memoir-about-fyre-festival.html.

Lee, Y., Jeon, K., Hong, K., & Han, J. (2019). Accounting Supervision under Principle-based Accounting. Korean Accounting Journal, 28(5), 201-241. doi: 10.24056/kaj.2019.07.002

Sec.gov. (2020). [online] Available at: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-141.pdf [Accessed 15 Feb. 2020].

International. Business Insider. (2020). Retrieved 15 February 2020, from https://www.businessinsider.com/fyre-festival-expectations-vs-reality-2017-4/.