The Financial Numbers Game

pdf
Số trang The Financial Numbers Game 407 Cỡ tệp The Financial Numbers Game 1 MB Lượt tải The Financial Numbers Game 0 Lượt đọc The Financial Numbers Game 5
Đánh giá The Financial Numbers Game
4.9 ( 11 lượt)
Nhấn vào bên dưới để tải tài liệu
Đang xem trước 10 trên tổng 407 trang, để tải xuống xem đầy đủ hãy nhấn vào bên trên
Chủ đề liên quan

Nội dung

The Financial Numbers Game TE AM FL Y Detecting Creative Accounting Practices Team-Fly® The Financial Numbers Game Detecting Creative Accounting Practices Charles W. Mulford and Eugene E. Comiskey JOHN WILEY & SONS, INC. Copyright © 2002 by John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ @ WILEY.COM. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. This title is also available in print as ISBN 0-471-37008-8. Some content that appears in the print version of this book may not be available in this electronic edition. For more information about Wiley products, visit our web site at www.Wiley.com To Debby Mulford: Her strength and courage are an inspiration for us all. About the Authors Charles W. Mulford is the Invesco Chair and Professor of Accounting and Eugene E. Comiskey is the Callaway Chair and Professor of Accounting in the DuPree College of Management at the Georgia Institute of Technology in Atlanta. Both professors have doctorates in accounting and are professionally qualified as certified public accountants. In addition to their work at Georgia Tech, they actively consult with lenders at commercial banks in the United States and abroad. Professors Mulford and Comiskey have published articles on financial reporting and analysis issues in leading academic journals in the accounting and finance fields as well as in such widely read professional journals as the Commercial Lending Review and the Financial Analysts’ Journal. This is the authors’ third book. Their first, Financial Warnings, published in 1996, identifies the warning signs of future corporate earnings difficulties. Their second, Guide to Financial Reporting and Analysis, seeks to simplify the complexities of current-day generally accepted accounting principles as an aid to practicing financial analysts and other users of financial statements. vi Preface With a certain mind-numbing frequency, users of financial statements—investors and creditors—find themselves buffeted with announcements of accounting irregularities. These irregularities are called many things, including aggressive accounting, earnings management, income smoothing, and fraudulent financial reporting. While they may vary in the degree to which they misreport financial results, they have similar effects— financial statements that serve as a foundation for important investment and credit decisions are incorrect, improper, and worse, misleading. Companies of all sizes and types, from the start-up to the venerable, from those traded on the “Bulletin Board” to the “Big Board,” are susceptible to the problems we refer to here collectively as creative accounting practices. When these acts are discovered, adjustments are needed. Often, prior-year financial statements must be restated, sometimes more than once. Unfortunately, many learn of these accounting problems only after it is too late—after assessments of earning power have been reduced and share prices have fallen precipitously. Aware that the proper functioning of our capital markets is dependent on the reliability and transparency of financial statements, the Securities and Exchange Commission (SEC) has taken important steps in recent years to rein in the problem. Calling the problem a “numbers game,” a former chairman of the SEC increased the enforcement actions taken by the Commission against accounting practices it considered to be errant. As an example of the SEC’s newly found diligence, during one month the agency instituted action against 68 individuals at 15 different companies. Some would say the SEC has gone too far and has begun to question financial reporting practices that are well within the flexibility afforded by generally accepted accounting principles (GAAP). This appears to be a minority view. Moreover, attesting to a need for the SEC’s diligence, the problem of companies employing creative accounting practices in their financial reporting is continuing. And the problem will continue as long as there are measurable rewards, including positive effects on share prices, borrowing costs, bonus plans, and corporate regulations, to be gained by those who seek to play this financial numbers game. The Financial Numbers Game: Detecting Creative Accounting Practices was written, first and foremost, to help readers of financial statements avoid being misled by financial results that have been altered with creative accounting practices. Key chapters conclude with checklists designed to help the reader discern when creative accounting practices have been employed. These checklists, and the text that supports them, were vii Preface developed with examples of hundreds of companies that were caught in the act of playing the financial numbers game. Beyond its primary objective, the book provides a sense of perspective. It looks at the embedded flexibility within generally accepted accounting principles, why it is there, and how companies might use it to their advantage—sometimes pushing their financial reporting within that flexibility and other times pushing it well beyond. It looks at the role of the SEC in enforcing the securities laws and identifies the specific statutes used to prosecute those it considers to have pushed beyond the flexibility inherent in GAAP. It provides the results of a survey of important financial professionals, including equity analysts, lenders, and chief financial officers, among others, on their views of the propriety of many financial reporting practices and on the steps they use to detect creative accounting practices. The results of the survey are not always predictable and show disagreement not only between the groups but also within the groups as to which practices are appropriate and within GAAP boundaries, which ones go beyond them, and which ones actually constitute fraud. The Financial Numbers Game: Detecting Creative Accounting Practices was written for serious readers of financial statements, whether equity analysts or investors, credit analysts or the credit professionals they serve, serious individual investors, or any parties whose interest in financial statements goes beyond the casual read. The steps outlined here should become a standard component of financial analysis and an important future reference, ultimately helping to answer the question: Do the numbers make sense? A Special Note to Our Readers As we went to press, the details of the accounting and reporting shortcomings at Enron Corp. that facilitated the company’s demise were only beginning to come to light. Unfortunately, their investors and creditors had not fully discounted the risk associated with the firm’s trading activities, its off-balance sheet liabilities, and its related-party transactions. Given our publication deadline, we were unable to incorporate a full accounting of the events that took place at the company. However, we do believe that careful attention to all the steps outlined in the checklists that conclude Chapter 8, “Misreported Assets and Liabilities,” and Chapter 11, “Problems with Cash-Flow Reporting,” would have provided an early alert to the possibility of developing problems. viii Contents 1 2 3 Financial Numbers Game 1 Rewards of the Game Classifying Creative Accounting Practices Plan of This Book Summary Glossary Notes 2 8 13 14 15 16 How the Game Is Played 19 Accounting Policy Choice and Application Fraudulent Financial Reporting Cleaning Up after the Game Clarifying Terminology Summary Glossary Notes 19 39 44 49 50 50 52 Earnings Management: A Closer Look 57 What Is Earnings Management? Incentives and Conditions for Earnings Management Earnings Management Techniques Evidence of Earnings Management Effectiveness of Earnings Management Is Earnings Management Good or Bad? Summary Glossary Notes 58 60 62 68 74 82 84 86 88 ix Contents 4 5 6 7 8 The SEC Responds 93 The Chairman’s Speech The Action Plan Subsequent Developments Enforcing the Securities Laws Summary Glossary Notes 93 96 99 108 120 122 123 Financial Professionals Speak Out 127 Survey of Financial Professionals Survey Results Summary Glossary Notes 129 133 156 157 158 Recognizing Premature or Fictitious Revenue 159 Is It Premature or Fictitious Revenue? When Should Revenue Be Recognized? Detecting Premature or Fictitious Revenue Checklist to Detect Premature or Fictitious Revenue Summary Glossary Notes 160 165 185 191 193 194 196 Aggressive Capitalization and Extended Amortization Policies 201 Cost Capitalization Detecting Aggressive Cost Capitalization Policies Amortizing Capitalized Costs Detecting Extended Amortization Periods Checklist to Detect Aggressive Capitalization and Extended Amortization Policies Summary Glossary Notes 202 214 220 226 229 231 231 233 Misreported Assets and Liabilities 237 Link with Reported Earnings Boosting Shareholders’ Equity Overvalued Assets 238 239 240 x
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.