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MBAB 5P25 Finalized Version
Transcript of MBAB 5P25 Finalized Version
Cost shareholders hundreds of millions of dollars Key Concepts Earnings Management (EM) Key Concepts Within GAAP Why Earnings Management Exists? Shareholders' Expectations
High Compensation Theatrical Production Firm
Roots in Toronto
Acclaimed shows and 20 Tony-awards $20 million investment from Michael Ovitz
Restructure Directors of Board MBAB 5P25 Business Ethics
CLORIS YU Key Concepts Livent Inc. Reason:
BASIC Cultural Change
the credibility of financial reporting systems “Occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.”
-- Healy and Wahlen, 1999 Conservative Accounting Earnings Management (EM) Aggressive Accounting Violates GAAP Earnings Management (EM) Fraudulent Accounting Key Concepts Five Accounting Problems “Big Bath” restructuring charges - “the attempt to increase reported earnings in subsequent periods by charging items that may have a negative future impact to expenses in the current period, further worsening current period business results in an accounting period in which results are bad”
- - Itoh 2007, p.207 Acquisition accounting - undervaluing acquired assets, overvaluing acquired liabilities, and overestimating reserves Key Concepts Five Accounting Problems Cookie-jar reserves - establishing reserves for contingencies Materiality - 'Materiality is an expression of the relative significance or importance of a particular matter in the context of financial statements if its omission would reasonably influence the decisions of an addressee of the auditors’ report'
-- Nolan, 2005 Revenue recognition - "mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue"
- - Accounting Standard (AS) 9 Fake Solution ONLY way to make business look smooth is to “ADJUST” expenses and/or revenue. Challenges Wall Street's Expectations
Attitude - NOT revealed, NOT a biggie Solutions Punishments
Culture Change Livent Inc. Background Garth Drabinsky
Myron Gottlieb Co - Founders Kickback Scheme
Erase Expenses & Liabilities
Two Sets of Books Triggers Livent Inc. Issues Thank You! Livent Inc. Co-Founder - Garth Drabinsky Co-Founder - Myron Gottlieb VP - Gordon Eckstein CFO - Maria Messina ? Senior Controller for Budgeting - Christopher Craib Livent Inc. Discussion 1: Who were the "Bad Guys"? Discussion 2: What happened to Auditors? References CIULLA, J. B., MARTIN, C. W. & SOLOMON, R. C. 2011. Honest work: A business ethics reader, Oxford University Press.
GLADWELL, M. 2007. Open secrets. The New Yorker, 8.
LARMER, R. A. 1992. Whistleblowing and Employee Loyalty. Journal of Business Ethics, 11, 125-128.
LOOMIS, C. J. 1999. Lies, damned lies, and managed earnings. Fortune, 140, 74-92.
ROSSBACHER, H. H. 2004. Whistleblowing and the American experience: has anything changed? Journal of Financial Crime, 11, 260-261.
SUDDABY, R., GENDRON, Y. & LAM, H. 2009. The organizational context of professionalism in accounting. Accounting, Organizations and Society, 34, 409-427.
TAYLOR, E. & CURTIS, M. 2010-04-01. An Examination of the Layers of Workplace Influences in Ethical Judgments: Whistleblowing Likelihood and Perseverance in Public Accounting. Journal of Business Ethics, 93, 16.
VANDEKERCKHOVE, W. & TSAHURIDU, E. 2010-12-01. Risky Rescues and the Duty to Blow the Whistle. Journal of Business Ethics, 97, 15.
ZEFF, S. A. 2003a. How the U.S. Accounting Profession Got Where It Is Today: Part I. Accounting Horizons, 17, 189-205.
ZEFF, S. A. 2003b. How the U.S. Accounting Profession Got Where It Is Today: Part II. Accounting Horizons, 17, 267-286.
Healy, P. M. and J. M. Wahlen. 1999. A review of the earnings management literature and its implications for standard setting. Accounting Horizons (December): 365-383.
Itoh, K.  Corporate Valuation, Nihon Keizai Shimbun-sha.
Nolan, R., Materiality and Misstatements No Simple Formula! Accountant Ireland, (April 2005), pp. 18-20.
Accounting Standard (AS) 9 - Revenue Recognition http://www.mca.gov.in/Ministry/notification/pdf/AS_9.pdf