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Lecture

ETHC 3P82 Lecture Notes - Fiduciary, Livent, Murder Of Jennifer Moore


Department
Ethics
Course Code
ETHC 3P82
Professor
Thomas Mulligan

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Wednesday, March 10 - Financial Information, Insider Trading, and
Truthfulness
Truth: Correspondency (of a belief, statement, etc.) to reality; conformity to an actual
fact; affects the field of accountancy
LIES, DA MNED LIES, AND MANAGED EARNINGS by Carol J. Loomis (p. 154)
Almost a position paper: Has no fully articulated thesis
PROBLEM: "Cooking the books" (falsifying accounting records) to make business
performance appear smooth over time
p. 154: “Someplace right now, [...] an employee – probably high up and probably
helped by prople who work for him – is perpetrating an accounting fraud.”
provocative start, journalistic style
p. 154: “fundamental reason, very often, will be that the company or one of its
divisions was ‘managing earnings’ [...] to make business look smooth and predictable
when in reality it is not”
p. 155: It is not ‘managing earnings’ – it is a criminal act namely accounting fraud
p. 156: “Fundamental problem with this earning-management culture” investors’
right to know
p. 160: is often started by those on top and then everyone else gets dragged into it
WHY: to attract investors, to protect stock price, to protect executive bonuses (often
tied to consistent performance)
p. 156: Stock price should be consistent over time; CEO is strongly concerned with it
as his compensation depends on it
HOW: overstate or understate revenues or expenses by: p. 157
booking sales or expenses to wrong time period
exaggerated restructuring charges ("big bath"): artificially creating higher
profits
(hidden) "cookie jar" reserves: not detectable by investors, makes it difficult to
value a company
abuse of "materiality" (especially by auditors)
revenue recognition: wrongful booking of sales
EXAMPLE: Canadian Livent case
p. 156: Livent Corp produced theatrical performances and shows (Phantom ofthe
Opera, Ragtime); founded by Drabinsky and Gottlieb in 1990; in 1998 Ovitz invested
in company and afterwards looked into the books – discovered irregularities;
company went bankrupt; 1999-2002: Drabinsky and Gottlieb get indicted and
charged and sentence for prison in 2009
PARTIAL SOLUTION (is a journalistic paper): Respect for honest accounting
practices and regulations
WHY: because investors (and other stakeholders) should know the whole truth
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