Quiz 8: Tall Tales
Case Study Corporation A is presented in this chapter mainly as an example of " failure to disclose related-party transactions and its improper use of non-GAAP transactions ". a Undisclosed related-party transaction: 1. Incorporation B CFO Mr. GG had 10% shareholder in Incorporation HW and he was a director. Incorporation HW was implemented by G and two owners of EDP. "EDP billed Incorporation B for payment of salary about $1,394,777. This amount made to the employees of Incorporation HW. These related-party transactions did not revealed in Incorporation B's 10-K annual financial statements for the year of 2000 and 2001. 2. A disclosures note in the financial statements indicates that, company is doing transactions with "foremost shareholders, officers or directors" of the business. Incorporation A note on related-party transactions revealed that Incorporation A engaged with a partnership possessed by R family. They are the directors, officers, and shareholders of Incorporation A. The disclosure note did not express the transaction fully and other transactions were misplaced. Likewise, Incorporation B's note on related-party transactions in its 10-K filing for the year ended December 31, 2000, states that "a management agreement with a member of its Board of Directors to present for certain management and administrative services." Even though this transaction was not considered as a challenging one, other related-party transactions were improper and were not disclosed. Incorporation B related-party transaction notes for 2000 and 2001 included in the disclosure of a "management agreement with its former parent company, P Restaurant Incorporation" (having transaction with former shareholder). The transactions specifically disclosed were not the improper related-party transactions, but the existence of such transactions gives the alert that other improper undisclosed related-party transactions could be occurring. Internal control weakness: b.Corporation A, misuse and misleading disclosure of related-party transactions states that the "intermingling of a company's assets or liabilities with the personal assets or liabilities of its major shareholders, officers, or directors. This weakness could be broken to loot a company's assets". In Adelphia's case, members of the R family were co-borrowers under credit facilities. In B's case, SEC's Complaint that a company in which G-Incorporation B's CFO was a shareholder and director, had its offices in a portion of office complex of Incorporation b.Hence, Incorporation B mingled its office space (an asset)with a company (HW)that was an entity in which G was a 10% shareholder and a director. Incorporation B case, this mingled of its assets with its CFO's outside company's assets was not disclosed in the financial statements. The intermingling was accompanied by the misuse and misleading nondisclosure of related-party transactions.
Financial Disclosures Financial disclosure refers to all material, significant and relevant information concerning the reporting organization that is essential to understand the financial statements of the organization. They are either provided on the face of the financial statement or as notes to the financial statements as supporting schedules. Publicly traded companies require inclusion of Management Discussion and Analysis section in order to do financial filings with Securities and Exchange Commission. A company's financial health and the operative results that help users to have an effective understanding of the financial statements of the company are described in this section. It required for the accurate reflection of the financial position of the company. Hence, the given statement is true. Therefore, the correct answer is .
Financial Disclosures Financial disclosure refers to all material, significant and relevant information concerning the reporting organization that is essential to understand the financial statements of the organization. They are either provided on the face of the financial statement or as notes to the financial statements as supporting schedules. According to Securities and Exchange Commission (SEC), School E did not disclose the existence and amounts of "District-Paid Expenses". However, it has inaccurately stated in its Management Discussion and Analysis (MDA). Hence, the given statement is "False". Therefore, the correct answer is .