Financial Shenanigans Ppt

THE LEMONADE STORY

Financial Shenanigans(FS) PRESENTED BY Ranjit Pisharody Pravin Dhas V. Rao Pentakota N.Sharda Sheryl Susan John Subasri

75 76 80 93 94 104

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.

Strat egies use d f or FS §

Overstated Revenue

Overstated revenue Ø Recording revenue too early Ø Recording False or Bogus revenues Ø 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

List of companies involved in accounting scandals Leasco Lemont & Hauspit Levitt Group Lockheed Construction London & county Securities London Capital Group Lonrho Lucent Maxwell Communications McKesson &Robbin Micro Focus Microstrategy Minsec National Student Marketing Nortel Nvidia Oxford Health Plans Parmalet Penn Central

Pergamon Press Polly Pekc Poseidon Quaity Software Products

Tiphook Trafalfar House Tyco International US Realty &

Queens Moat Houses Qwest Rank hovis McDougall Reid Murray Rite Aid Rolls Razor Rolls-Royces Royal British Bank Royal mail Steamship Rush & Tomkins Saatchi & Saatchi Skandia Spring Ram Storehouse Sunbeam Swedish Match Texas Gulf Sulphur

Vehicle & General Versailles Waste Management WorldCom WPP Xerox Yale Express Yale Transport Satyam Ponzi Scheme

10

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

FINDIN G SHEN ANIG ANS § Press releases § Securities Exchange Commission filings § The auditors report § Interviews with the company § Commercial databases

AN INTER ES TING Q UO TE

“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

Th e W orl dco m S aga – CAS E STUD Y 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

Ho w the F ra ud t oo k plac e q

Opera ti ng E xpe nse s to Ass ets -CFO’s directions affected the income statement: Revenues xxx (no change) COGS xxx (no change) Operating Expenses:

rom ent F ve d ta t e m o R e mom e S In c

Fees paid to lease other companies phone networks:

rom e n t F ve d tat e m o R e mom e S I nc

xxx (Huge Decrease)

Computer expenses:

xxx (Huge Decrease)

NET INCOME

xxx (Huge Increase)

Post -Fra ud Ha pp eni ng s 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 classaction lawsuit

XER OX S CAM – CAS E STU DY 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 Roa d t o R ef orm : P rotec ting the Publ ic I nteres t

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

Concl usion 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? “Ev er yon e sh ould hab ituall y b e a ware o f t he mo ral im pli cati ons of wh at he or sh e is ask ed to do and, each by eac h , sh ould sta nd up f or th e righ t to be mo ral.” - Jane Jac obs – Sy stems of S ur vival

“The l aws an d professi onal stan dar ds rep re se nt th e f loo r—th e mi nimum. W e sh ould reac h f or th e ceilin g.”

David M. Walker, CPA Comptroller General