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PSU FIN 301 - Financial Ethics

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FIN 301 1st Edition Lecture 7Notes are based off of power points Financial EthicsI. Scandalsa. American Insurance Group Scandali. Financial Crisis: SOX did not cure problemsb. Freddie Mac Scandali. Went down during the financial crisisii. Still a battle in congress whether to keep these aroundII. Recent Accounting Transgression in the Headlinesa. 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 workIII. The Financial Numbers Gamea. Earnings management: if wall street expects you to have a certain number, you have to hit that numberb. Income smoothing: companies will do things to try to eliminate peaks cause investors don’t like volatilityIV. Primary Accounting Issuesa. 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 screwedV. Cooking the Booksa. Recording Revenue Too Sooni. 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 revenueii. Ericson1. 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 statementsiv. Operation Braveheart1. September 30th is the last day of the quarter2. 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 bankruptThese 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.b. Recording Bogus Revenuei. 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 revenueiii. 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 Gainsi. 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 theiroperating results iii. Its ok if you do it below the line VI. A Case Study in Value Destructiona. Waste Managementi. Every time you get caught you see the stock price go down dramaticallyb. Worldcomi. One of the largest bankruptcies everii. They called the expenses a capital expense and reported higher net income. Really its an operating expense. c. Fail to Record/ Disclose all Liabilitiesi. Dell: if they sell a computer to you for $1000 they can’t book that down upfront because of warranty and stuffVII. Shift Current Revenue to a Later Perioda. 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 recognitionc. Microsoft: has been blamed to put too much in the


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