Quiz 7: Earnings Management

Business

1. It is true that auditors are requested to assess the fraud risks and consider it as their ethical and professional responsibilities. In case of N, the significant characteristics that could identified as high risk audit were non separation of duties of accountants as checker and maker, there was weak internal control found in N working, also ineffective monitoring of management. The fraud triangle is a framework designed to explain the reasoning behind a worker's decision to commit fraud. 2. T has used following method of financial shenanigans to manipulate earning: (i) Recording revenue too soon, (ii) Recording bogus revenue. (iii) Restatement of financial statements is creating excess reserves, boosting earning. 3. We are not agreeing with decision of M by not holding trio liable for such wrong doing. It is because that they belong to management side and they knew that misleading financial statement was published. Also they knew the fact that reserves were being created excessively. Every such thing were done in presence of them and they did not inform anything to auditors which is against their duty.

In the given statement, A thinks that sales are recognized prematurely or sales may have booked prior to prices have been fixed or finalization of contracts or booking of sales revenue even when a customer is in a condition to void or terminate or delay the sale. He describes the practices of improperly booking of revenues. Financial reporting is the base for investor, creditor and other stake holders to judge the performance of the company. They all feel that company that has quality built in financial reporting is much safer to invest and such company will be able to raise fund from market easily. The financial analyst plays an important role in earning expectation and reporting quality of earning. The auditors meet their ethical obligation properly and hence show true picture of company and protect interest of public and help in detecting fraud. In view of financial analyst, quality of earning is also an important consideration. When earnings are reported properly without any error then financial analyst can clearly derive its conclusion and clearly report it as what it meant to report.

1. Recording of revenue by the companies is to help meet analyst's earning projections, improve the share price, and increase yearend bonus. The rules regarding revenue recognitions are as follows: • When cash are received in exchange for goods or services then revenues are realized. • Revenues are only earned when such goods or services are transferred. For revenue recognition, both payment assurance and final delivery is required. After considering the rules, the two transactions were not recognized as revenue. The first transaction was with DSS which was not completed till December 31 st. Hence, it would be difficult to account such revenue. The second transaction is with L but have the side agreement giving right to the customer to return the product after 30 days. Therefore, in first transaction the services was not finally delivered and in second transaction, the customer can return the system before 30 days. In this way, revenue cannot be recognized properly. This also shows that revenue is not accounted properly according to the rules for accounting revenue recognition. 2.a. The percentage changes in revenue from 2009 through the projected amounts (in millions) in 2013 are as follows: In the year 2009 change in revenue (in millions) is $27.8 img The percentage changes in revenue for 2009: img Therefore, percentage change in revenue from 2008 to 2009 is img In the year 2010 change in revenue (in millions) is $26.4 img The percentage changes in revenue in the year 2010: img Therefore, percentage change in revenue from 2009 to 2010 is img In the year 2011 change in revenue (in millions) is $27.6 img Percentage changes in revenue in the year 2011: img Therefore, percentage change in revenue from 2010 to 2011 is img In the year 2012 change in revenue (in millions) is $37.7 img Percentage changes in revenue in the year 2012: img Therefore, percentage change in revenue from 2011 to 2012 is img In the year 2013 change in revenue (in millions) is $20 img Percentage changes in revenue in the year 2013: img Therefore, percentage change in revenue from 2012 to 2013 is img b. The percentages of net income to revenues from 2008 through the projected amount in 2013 are as follows: The percentage of net income to revenues for the year 2008: img Therefore, percentage of net income to revenues for the year 2008 is img The percentage for the year 2009: img Therefore, percentage of net income to revenues for the year 2009 is img The percentage for the year 2010: img Therefore, percentage of net income to revenues for the year 2010 is img The percentage for the year 2011: img Therefore, percentage of net income to revenues for the year 2011 is img The percentage for the year 2012: img Therefore, percentage of net income to revenues for the year 2012 is img The percentage for the year 2013: img Therefore, percentage of net income to revenues for the year 2013 is img c. Sometimes mangers disagree on considering the earning management as ethically acceptable. It is also reflected by them to consider manipulating earning via operating decisions more ethically than manipulation by accounting method. Therefore, it will be considered ethical if P will include DSS transactions in 2013 year. 2. If author was S and has decided to change the mind of P then firstly author will make him aware about the accounting principles, rules and regulations regarding fraud and allegations of fraud. The author will discuss the effects of such manipulations with P as it will have distortion effect which compromises the dependability of the statements. Moreover, author will also give examples of various other companies who were engaged in such manipulations and suffered in future. Author believes that P will definitely change his mind regarding the accounting for December transactions after considering the ill effects of false accounting.