Download - Financial Shenanigans PPT
THE LEMONADE STORY
Financial Shenanigans(FS)
PRESENTED BY
Ranjit Pisharody 75 Pravin Dhas 76 V. Rao Pentakota 80 N.Sharda 93 Sheryl Susan John 94Subasri 104
OVERVIEW
What are shenanigans ? Strategies used for FS Likely candidates for FS Why do Shenanigans exist? Finding Shenanigans Case study: Worldcom, Xerox Road to Reform
WHAT DOES FS MEAN?
Actions or omissions intended to hide or distort the real financial performance or financial condition of an entity.
They range from minor deceptions to more serious misapplications of accounting principles.
Strategies used for FS
Overstated Revenue
Under Reported Expenses
Shifting to earlier or later period
OVERSTATED REVENUE
Recording revenue too early
Recording False or Bogus revenues
Inflating income with one time gains
UNDER REPORTED EXPENSES
Moving current expenses to a later period
Failure to disclose liabilities
SHIFTING TO EARLIER OR LATER PERIOD
Moving current income to a later period Moving future expenses to the current
period
LIKELY CANDIDATES FOR FS
Fast-growth companies whose real growth is slowing down
Basket-case companies trying to survive
Newly public companies
Private companies
10
LIST OF COMPANIES INVOLVED IN ACCOUNTING SCANDALS
Leasco Pergamon Press TiphookLemont & Hauspit Polly Pekc Trafalfar HouseLevitt Group Poseidon Tyco InternationalLockheed Quaity Software Products US Realty & ConstructionLondon & county Queens Moat Houses Vehicle & General Securities Qwest VersaillesLondon Capital Group Rank hovis McDougall Waste ManagementLonrho Reid Murray WorldComLucent Rite Aid WPPMaxwell Communications Rolls Razor XeroxMcKesson &Robbin Rolls-Royces Yale ExpressMicro Focus Royal British Bank Yale TransportMicrostrategy Royal mail Steamship SatyamMinsec Rush & Tomkins Ponzi SchemeNational Student Saatchi & Saatchi Marketing SkandiaNortel Spring RamNvidia StorehouseOxford Health Plans SunbeamParmalet Swedish MatchPenn Central Texas Gulf Sulphur
11
Why do shenanigans exist?
After all it pays! It’s easy Discovery is
difficult and unlikely
Improving Liquidity
FINDING SHENANIGANS
Press releases Securities Exchange
Commission filings The auditors report Interviews with the
company Commercial databases
AN INTERESTING QUOTE
“How do you explain to an intelligent public that it is possible for two companies in the same industry to follow entirely different accounting principles and both get a true and fair audit report?”
M. Lafferty
THE WORLDCOM SAGA – CASE STUDY It was 1983 in a coffee shop, that Mr.
Bernie Ebbers came up with a concept that became WorldCom
From Humble Beginnings to a Giant Telecom industry faced low margins
and Mr. Ebbers decided ‘growth=survival’
Purchased over 60 firms in 2nd half of the 90’s
HOW THE FRAUD TOOK PLACE Operating Expenses to Assets
-CFO’s directions affected the income statement:Revenues xxx (no change)COGS xxx (no change)Operating Expenses:
Fees paid to lease othercompanies phone networks: xxx (Huge Decrease)
Computer expenses: xxx (Huge Decrease)
NET INCOME xxx (Huge Increase)
Removed From
Income
Statement
Removed From
Income
Statement
POST-FRAUD HAPPENINGS
17,000 jobs cut to save $1 billion. WorldCom was renamed MCI in 2004
when it emerged from bankruptcy Sullivan pleaded guilty to 3 federal
criminal charges for fraud and conspiracy
10 former directors agreed to pay $54 million to settle a shareholder class-action lawsuit
XEROX SCAM – CASE STUDY
Xerox, a global document management company, was founded in 1906 in Rochester
How it started? Xerox revealed in 2002 that it overstated it’s
revenue by $2 billion SEC, however, began investigation prior to
Xerox’s announcement and planned to conduct an audit which revealed a $6 billion overstatement
Manipulations Used Cookie-Jar Method Acceleration of revenue from short-term
equipment rentals, which were improperly classified as long-term leases
Escalating reported earnings to match expected earnings
Effects Xerox could count as earnings what was
essentially future revenue Allowed the company to meet profit expectations
REVENUE PROFIT GRAPH
Why?
Declining revenue in the early 1990’s Pressure from investors to keep up short
term earnings Top executives, whose incomes are bound up
with stock options.
Role of KPMG It was the auditing firm of Xerox The auditing firm knew what was going on
and decided to allow it to continue
Consequence
Xerox Corp. agreed to pay $670 million while KPMG had to pay $80 million, to settle an eight-year-old securities lawsuit filed on behalf of Xerox investors
THE ROAD TO REFORM : PROTECTING THE PUBLIC
INTEREST Government regulation &
oversight Strengthening the Auditors
Profession Public trust & confidence in the
integrity of auditors Public understanding of the
auditor’s role Corporate governance &
responsibility Importance of ethical behavior
and doing the “right” thing
CONCLUSION
From these scandals, it is important to learn the know how and know why so that we can understand how to avoid these situations in the future.
WHAT WE CAN DO?“Everyone should habitually be aware of the moral implications of what he or she is asked to do and, each by each ,
should stand up for the right to be moral.”
- Jane Jacobs – Systems of Survival
“THE LAWS AND PROFESSIONAL STANDARDS REPRESENT THE FLOOR—THE MINIMUM. WE SHOULD REACH FOR THE CEILING.”
David M. Walker, CPAComptroller General of the United States