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ETHC 3P82 (34)

8_March 10.doc

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Thomas Mulligan

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, DAMNED 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 WHAT IS REALLY UNETHICAL ABOUT INSIDER TRADING? by Jennifer Moore (p. 176) p. 176: Definition ‘An insider trader is someone who trades in material, nonpublic information – not necessarily a corporate insider’; buys stock
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