The Economic Implications of Corporate Financing Reporting - Assignment Example

ETHICS –CASE STUDY OF A LETTER FROM PRISON Name of Student: Student ID: Lecturer: Course: Assignment: Date of Submission: Question1. During his tenure as the Head of sales globally for the Computer Associates, Richard’s actions can be said to be very serious accounting malpractices that could be challenged the General Acceptable Accounting Principles (GAAP). His conduct to procure and fix the extension the fiscal quarters permitted the colleagues in his docket to acquire the contracts even after the quarter end and conspired to withhold this information not letting the accounting and finance department have the knowledge that the contracts probably have been backdated. His misreporting had massive affects earnings and revenues at the period particularly between the 2000 and 2001 fiscal years. This is both unethical and gross misconduct in the profession.( Wall Street Journal, May 7, 2000) If Computer Associates achieved the same financial results with ‘allowed accounting flexibility’ my opinion would still hold, that ethics and good practises in business must be upheld at all cost, acts of fraud and conspiracy is short lived. Richard had good intention of achieving his targets, but acts were interfering with the CA,s revenue. Question2. Leaders or senior managers are the most powerful and significant influence on the organizational culture and have the duty of bringing trust credibility. Its well know phenomena that majority of employees would be more productive when they discharging duties that they believe in. Picconi and Hribar, (2000). There is a lot that work requires than what is generally assumed. There is an ideal chance for leaders in an organization to appeal high than just seeking for the material rewards. Leaders who are great bring meaning and not simply money. The very type of ethical code occurs in accounting profession because it’s a framework of public service. Despite this, accountants normally find themselves got into serious ethical problems, there comes moments when their bosses and their employers collude and request them to alter or twist the company’s financial position perhaps because the year is perceived to have been a bad one. The assumptions is usually that this will be covered in the next coming months when the organization will be making profits and the deficits be settled as quickly as possible. This usually leaves the accountants perplexed of what to do, whether to show loyalty to the organization that got them the job or to stick with their professional ethics and this is what is generally referred to as the ‘gray areas of accounting’. I agree with Richard’s sentiment when he describes the operations in the ‘gray areas of accounting’ as not easy and asked for guidance for the top notch management. Of course there was immense pressure and there were targets to be achieved. Computer Associates sales strategy for the last quarter contracts singing where they were giving discounts to customers were committed in contracts at this time of were faulted by the some consultancy firms who purportedly advised their clients to be reluctant in CA deals until such a time when they will enjoy great discounts and as a result many orders were indeed coming during this period and their revenues could not be reflected in that quarter and the chance was that the targets might not be met, therefore as the Head of sales he definitely faced the challenge and he had to pursue a solution to counter this. His idea to aid and perhaps facilitating fellow colleagues to backdate the contract so that they actually fit within the ideal fiscal dates was not a really culpable act because it was not intended to doctor the financial results and to deliberately present cooked figures to the Board, No because the sales had been prequalified and it was only an issue of timing otherwise all this deals would still come to CA. The operations under such ‘gray areas of accounting’ is difficult because of the trust and ethical concerns, whether to asked for guidelines from his seniors to share the knowledge of what is going and just to hang on to it and bear the responsibility is really had to answer. If I were in Richard’s shoe, maybe I would have done exactly the same thing in order to meet my targets because of the pressure and because technically all these backdated contracts are real deals and no fear that they will not count towards the reconciling the accountants that was what promoted the act. What I would have done differently is however, to change the quarterly sales promotional discounts to perhaps better purchase incentives that would lure customers in to placing their orders at any time of the month and not necessarily waiting until when they will get big discounts from the Computer Associates and also see the possibility of making some changes in the contract document so that it would allow deals that arrive late. Berenson Alex cited in New York Times, May 21, (2001) Question3. Earnings management is the managerial decision to effect the earning reported by an organization. It’s also widely known by other phrases such as ‘income smoothing’, financial statement management’ and ‘aggressive accounting’ commonly used in describing earnings management. This process normally originates from the flexibility in accounting options and the ability and willingness by the management to time and alter actual business decisions. (Griffin Peter, 2007) Corporate governance and Accounting Scandals Computer Associates is highly profit driven organizations and as a result there pressure is also high to ensure that the goals are met. And at some point the management of the CA realized that there was growing difficulty in precisely foresting for the company’s gross sales and revenues and the earnings in every quarter. In other instances the management of the CA realized that it was not able to raise a red flag to analysts concerning the perceived revenue shortfalls until the quarter elapse. During the last quarter of the fiscal year 2001, CA announcements that their financial quarter results are likely to be below what the Wall Street had projected impacting on the CA’s stocks recording dwindling performance and going down by at least 42%, this motivated the management to pursue for alternatives methods of countering this effects and as a result came up with some way to manage earning and the values of finances to be shown in the in the statement of financial portfolio. So they opted for ‘aggressive accounting’ so that the senior management would have some authority over some accounting choices to maintain their high turnovers and strong brand identity as a high profits making organization to ensure stability of their stocks and attract more sales. They would make choices to periodically results in higher earning as oppose to the actual financial status. Another choice they made was ‘real earning management’ through the changing of the dates of the signing of the contracts. Computer Associates press release, (2001) The research identified that firms that have stakeholder corporate governance orientation are prone to make quick choices in management of the earning and further manipulate the outcomes of the financial results, because of concerns such as creditor protection, to income smoothing. The most recent scandals of accounting are common in firms like HealthSouth, Tyco, and WorldCom have absolutely threatened the confidence of the investor. In the onset of these scandals, most of the organizations witnessed their equity values abruptly doing down and experienced a reduction on the credit ratings of some of their debt concerns. A good number of them were compelled to file for bankruptcy protection from their creditors. These earning managements are normally blamed on the weak and compromised internal controls. Graham and Shiva, (2002). The relation between organizations developing great accounting problems and some particular corporate governance mechanisms is witnessed through mis-statements of their earnings/. Common corporate governance concerns rottenly come on table are the independence of the audit and the board committee, conflict of interest that arise from the competition among many audits providing the same services to the firm, the impact and influence of the CEOs on audit committee and the Board . Question4. The Generally Accepted Accounting Principles (GAAP) stands that permits firms in the operating in software industry to identify the whole value of contract licensing as revenue realized in that fiscal quarter , is a business practice that as a matter of fact is widely spread in most of the companies that deal with software. In my opinion the process is misleading and can plunge an organization in major financial crisis and deadly liabilities but on the other hand from the sales point of view, it’s an advance way of ensuring that you achieve you targets and the sales forecast for a financial year is obtained. When this is done this boosts the investor confidence and the stocks will go up and more business will come. Laura Johnson, cited in Wall Street Journal, May 7, 2000 Yes, I strongly believe that this accounting treatment resulted in the culture at the Computer Associates, the company has set goals in each docket that has to be achieved and there must the strategies in order to achieve these goals, there are also competitors and there market environment is the same, and this was just one way through which the CA ensured that they remain competitive in the market. And in any case the sales are real only that they are reported earlier. Question5. Exhibit 4 gives an overview of revenue that were inflated and recorded. Most often we listen to them during the financial news, when their quarterly reports breaks or makes an organizations performance on the stock markets. ESP is the firm’s earnings over a particular time length divided among the firm’s outstanding shares and expresses in terms of figures in dollars which can either be negative or positive. When a company surpasses the estimates of the analyst, the chance that its stocks will rise is very high though in short term basis and can also go down incase the performance is below the analyst estimate. ESP may differ depending on certain accounting policies and other financial assumptions of the organization that is giving out its reporting. In a regulation that companies comply with specific assumptions when reporting its EPS to the SEC, the company may create other EPS figures to build it public image through earning announcements. Bereson Alex The estimates of the analyst are very important in providing revenue forecast for the firms these is a guage meter to evaluate firm’s performance. It give various parameters that company’s might adopt to enable achieve their overall financial objectives and to remain competitive in the market. Meeting the analyst estimates not only indicates good business performance but it also boost the public confidence in the firm and is reflected on the company’s stock trading as its share prices will remain stable and be on the upward trend. Question6. Earning could be managed when the bonus of the management greatly depends on the earnings reports and during when the company wants to violate debt agreements or contracts or even when the organizations present earnings deemed to fall below the previous performance, to escape losses and stocks analyst estimates. Accounting manipulation results in ‘inefficient’ pricing on equity securities and debt, due the fact that it generates inflated and deflated financial reports either way the results generated are unrealistic. Accounting manipulations reporting can lead to overpricing of the stock prices and securities and massive detrimental borrowing by the organization because most of the borrowing contracts rely on the accounting figures. The figures obtained through accounting manipulation may deceive a firm to lower firms that they have high gross margins and lower operating costs and may decide to increase or lower its prices or the market quantities or the market share vise a vi its competitors. Richard’s action prompted false CA financial position and lured public and the stock price went up. In April 2001, the New York Time showed that CA adopted aggressive accounting practice that saw it boosted its earning and this resulted in their increase in the share prices and during this time Richard was at the helm of the docket directly responsible was the CA’s financial standing. References: 1. The Bank of Deutsche Equity Research, ‘Computer Associates’ November 10, 2001 2. Computer Associates press release June 4, 2001 3. Griffin Peter, 2007 ‘After Long Months’ New Zealand Herald, 4. Wells Amanda, Rising Through Ranks’, InfoTech weekly, March 2, 2001 5. Berenson Alex, ‘The Past May Haunt Computer Associates’ , New York Times , May 21, 2001 6. Computer Associates, Form 8-K May 29, 2000 7. Laura Johnson, ‘Computer Associates, Latest Results and Contracts Delay’ , Wall Street Journal, May 7, 2000 8. Picconi Marc and Paul Hribar, 2009. ‘Making the sense of cents’ 9. Levitt Arthur, ‘ The Numbers Games’, ‘Speech at NYU center for Business and LAW, August 20, 2000 10. Graham Campbell and Rajgopal Shiva., (2005), The Economic Implications of Corporate Financing Reporting, Journal on Economics and Accounting, 30 page 30-75 11. Douglas Skinner and Myers James.,(2006), Earnings Momentum’ Journal of Auditing, Finance and Accounting , pg 250-270 Read More