FIN 301 1st Edition Lecture 7 Notes are based off of power points Financial Ethics I II III IV V Scandals a American Insurance Group Scandal i Financial Crisis SOX did not cure problems b Freddie Mac Scandal i Went down during the financial crisis ii Still a battle in congress whether to keep these around Recent Accounting Transgression in the Headlines a CEO was going to buy Pringles from Pepsi b Wanted their numbers to look good then they got caught and the Pringles deal didn t work The Financial Numbers Game a Earnings management if wall street expects you to have a certain number you have to hit that number b Income smoothing companies will do things to try to eliminate peaks cause investors don t like volatility Primary Accounting Issues a Why do companies do this i Expedia last year missed their earnings and it dropped ii If you don t keep up with wall street you re stock is screwed Cooking the Books a Recording Revenue Too Soon i Krispy Kreme to meet wall streets expectations they started becoming aggressive If it were coming before the end of the quarter they would build their customers before the quarter ends to bulk up their revenue ii Ericson 1 Got in trouble because they were selling things to companies that they figured out would never be able to pay them but they were doing it to meet wall street expectations iii Hewlett Packard Writes 1 Stock price fell by 50 because they company they bought had shady financial statements iv Operation Braveheart 1 September 30th is the last day of the quarter 2 They recorded the revenue just because they signed the contract 3 In the end there was no cable in the ground and it was 2 years before they went bankrupt These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute VI VII b Recording Bogus Revenue i Crazy Eddie Eventually started buying parking lots in the poconos to store electric stuff and recorded the sales ii Krispy Kreme Got a loan from a bank and would record it as sales or revenue iii Reliant Resources would sell electricity contracts to each other back and forth They were boosting their revenues to impress wall street to make their sales look better c Boosting Income with One Time Gains i General Electric owns a lot of assets and every quarter for every GE was behind meeting wall street and they would sell one of their assets and wall street expected it ii Include Gains in Operating Revenues topline Boston Market would mislead their operating results iii Its ok if you do it below the line A Case Study in Value Destruction a Waste Management i Every time you get caught you see the stock price go down dramatically b Worldcom i One of the largest bankruptcies ever ii They called the expenses a capital expense and reported higher net income Really its an operating expense c Fail to Record Disclose all Liabilities i Dell if they sell a computer to you for 1000 they can t book that down upfront because of warranty and stuff Shift Current Revenue to a Later Period a Weren t charged but have been accused of things b Have to record 3 million in 1 year and record the rest in other years in terms of revenue recognition c Microsoft has been blamed to put too much in the future