dokumen.tips_financial-shenanigans-ppt.pptx

good to understand

1. THE LEMONADE STORY

2. Financial Shenanigans(FS) P RESENTED BY Ranjit Pisharody 75 Pravin Dhas 76 V. Rao Pentakota 80 N. Sharda 93 Sheryl Susan John 94 Subasri 104

3. 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

4. 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.

5. Strategies used for FS Overstated Revenue Under Reported Expenses Shifting to earlier or later period

6. Overstated revenue Recording revenue too early Recording False or Bogus revenues Inflating income with one time gains

7. 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

8. Likely Candidates For FS Fast-growth companies whose real growth is slowing down Basket-case companies trying to survive Newly public companies Private companies

9. 10 List of companies involved in accounting scandals Leasco Pergamon Press Tiphook Lemont & Hauspit Polly Pekc Trafalfar House Levitt Group Poseidon Tyco International Lockheed Quaity Software Products US Realty & Construction London & county Queens Moat Houses Vehicle & General Securities Qwest Versailles London Capital Group Rank hovis McDougall Waste Management Lonrho Reid Murray WorldCom Lucent Rite Aid WPP Maxwell Communications Rolls Razor Xerox McKesson &Robbin Rolls-Royces Yale Express Micro Focus Royal British Bank Yale Transport Microstrategy Royal mail Steamship Satyam Minsec Rush & Tomkins Ponzi Scheme National Student Saatchi & Saatchi Marketing Skandia Nortel Spring Ram Nvidia Storehouse Oxford Health Plans Sunbeam Parmalet Swedish Match Penn Central Texas Gulf Sulphur

10. 11

11. Why do shenanigans exist? After all it pays! It’s easy Discovery is difficult and unlikely Improving Liquidity

12. FINDING SHENANIGANS Press releases Securities Exchange Commission filings The auditors report Interviews with the company Commercial databases

13. 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

14. 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 2 nd half of the 90’s

15. 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 other companies phone networks: xxx (Huge Decrease) Computer expenses: xxx (Huge Decrease) NET INCOME xxx (Huge Increase) Removed From Income Statement Removed From Income Statement

16. 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

17. 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

18. 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

19. revenue profit graph

20. 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

21. 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

22. 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

23. 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

24. “The laws and professional standards represent the floor—the minimum. We should reach for the ceiling.” David M. Walker, CPA Comptroller General of the United States