FIN 301 Lecture Notes - Lecture 8: Crazy Eddie, Specialty Pharmacy, Ca Technologies

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9 Feb 2017
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1. Financial Ethics
a. GAAP vs GAP
i. GAAP
1. Generally accepted accounting principles
2. Issued by FASB. Ultimate regulation is by the SEC
ii. GAP
1. Games accountants play
2. Actions or omissions intended to hide or distort the real financial
performance of a business
b. Financial numbers game
i. Aggressive accountings
ii. Earnings management
iii. Income smoothing
iv. Fraudulent financial reporting
v. Creative accounting practices
c. Primary accounting issues
i. aggressive fraudulent revenue recognition
ii. Aggressive - fraudulent capitalization of expenses
iii. Failure to record liabilities
iv. Companies do this to meet wall street expectations
d. Cooking the books
i. Recording revenue too soon
ii. Recording bogus revenue
iii. Boosting income with one time gains
iv. Shifting current expenses to a later or earlier period
v. Failing to disclose all liabilities
vi. Shifting current revenue to a later period
vii. Shifting future expense into the current period
2. 7 Financial Shenanigans
a. Recording revenue too soon
i. Revenue should be recognized once an exchange has occurred
ii. Shipping goods before sale is finalized
1. Billing in advanced (krispy Kreme)
2. Shipping defective goods (Informix gave out BETA versions and
charged)
3. Using an aggressive revenue approach (CA technologies)
iii. Recording revenue when important uncertainties exist
iv. Recording revenue when future services are still due
1. Operation Braveheart (Enron and Blockbuster)
b. Recording bogus revenue
i. Crazy eddie - load up tractor trailers and park them pretending to be
selling
ii. Recording cash received from lender as revenue (Krispy Kreme)
iii. Recording sales lacking economic substance
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