Answer:
GAAP:
Generally accepted accounting principles (GAAP) are the accounting standards that are commonly used by companies and must be followed when the companies accumulate their financial statements.
Non-GAAP:
Non- GAAP financial measure are the statistical measure of the future or past performance of the company, which includes that amount that are not the part of or excludes the most directly comparable GAAP measure.
There is pressure to show the company's position favorable which compels the companies to report such incomes that exclude unusual events that show any depress earnings. Financial performance measures were used by the companies for a long time, rather than using GAAP. These measures show the favorable part of the company and mislead consumers.
Sarbanes- Oxley Act had an objective to eliminate any misleading or manipulative use of non-GAAP financial measures. This use can be allowed only to that extent till it is not misleading.
Thus, it can be said that the use of non-GAAP measures is not ethical but it cannot be said that the use of such measures is 100% unethical.
Answer:
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.
Answer:
Facts:
The case is that of accounting and financial fraud committed by Canada's N Telecom, one of the world's premier Telecommunications companies.
The Company during 1990's engaged in a series of accounting fraud such as recording revenue which is not yet received by the company and the company maintained secret cash reserves which are not revealed in the books.
The company's efforts are to improve the stock price of the company in the stock exchanges, investments made by the company backfired and as a result the company filed for bankruptcy in U.S, Canada and Europe.
Investigating agencies launched a full scale investigation into the financial fraud committed by the company.
Revenue Recognition:
GAAP offered specific guidelines based on which revenue recognition can be done, for example, GAAP mentions that revenue resulting from financial transactions can be recorded only when a particular transaction takes place and the revenue is measurable.
Reserve accounting:
It is an accounting practice in which profits are reserved for a particular purpose such as purchase of fixed assets, purchase of machinery etc.
This categorized use of profits for a special use is referred as reserve accounting.
Contingent liability accounting:
Contingent liabilities are recorded as liabilities which are most likely to happen and the expenses are recorded only when the exact amount of expenses to meet the liability are known.
1.
Discussion:
The Company engaged in accounting and financial fraud by resorting to fraudulent revenue recognition, reserve accounting and contingency liability accounting procedures.
They are done in the following manner:
Revenue recognition:
The company had huge surplus of inventory left with them and is unable to sell them in the market because of lack of orders.
In order to convert this into revenue, the company opted for a technique called as "bill and hold", in which customers can order certain equipment, bill for it and wait to take the delivery at a later period of time.
Reserve Accounting:
The company resorted to creation of unrecorded reserves of funds and engaged in activities such as releasing the reserves into income to boost the income whenever needed.
Contingency planning:
The company kept hidden reserves which are off the records so that they can be used at a later period whenever it is necessary.
They are not in confirmation with the GAAP regulations because of improper recording of information and failure to use proper accounts management principles.
2.
The accounting practices followed by N Telecommunications Company in the case and the discretion they have adapted in keeping the information are in total disagreement with the statement offered by accounting experts.
Accounting experts say that a certain amount of discretion is required by the firms when disclosing key financial information.
However, basic factual information cannot be neglected and left out from the records, similarly key information such as profits and reserves cannot be left out of records. Thus, the accounting practices are in total disagreement with the opinion of the experts.
3.
Judge M's statements regarding the justification of the accounting practices advocated by the defendants are not justified.
This is because the actions of the defendants are in practice for a long time, during the later period of 1990's and at a time when the company is facing a slowdown in the market.
Thus judge M's comments are not justified.
4.
The auditors of N Telecommunications failed to display professional responsibility while performing the audit of the N T's case.
This is because they have failed to suggest correction measures to correct the accounting irregularities in the financial statements.
Also, the auditors failed to suggest proper internal controls for controlling and preventing accounting irregularities.
Thus, the auditors failed to perform their professional responsibilities.