THE LEMONADE STORY

Financial Shenanigans(FS)

PRESENTED BY

Ranjit Pisharody 75 Pravin Dhas 76 V. Rao Pentakota 80 N.Sharda 93 Sheryl Susan John 94Subasri 104

OVERVIEW

What are shenanigans ? Strategies used for FS Likely candidates for FS Why do Shenanigans exist? Finding Shenanigans Case study: Worldcom, Xerox Road to Reform

WHAT DOES FS MEAN?

Actions or omissions intended to hide or distort the real financial performance or financial condition of an entity.

They range from minor deceptions to more serious misapplications of accounting principles.

Strategies used for FS

Overstated Revenue

Under Reported Expenses

Shifting to earlier or later period

OVERSTATED REVENUE

Recording revenue too early

Recording False or Bogus revenues

Inflating income with one time gains

UNDER REPORTED EXPENSES

Moving current expenses to a later period

Failure to disclose liabilities

SHIFTING TO EARLIER OR LATER PERIOD

Moving current income to a later period Moving future expenses to the current

period

LIKELY CANDIDATES FOR FS

Fast-growth companies whose real growth is slowing down

Basket-case companies trying to survive

Newly public companies

Private companies

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LIST OF COMPANIES INVOLVED IN ACCOUNTING SCANDALS

Leasco Pergamon Press TiphookLemont & Hauspit Polly Pekc Trafalfar HouseLevitt Group Poseidon Tyco InternationalLockheed Quaity Software Products US Realty & ConstructionLondon & county Queens Moat Houses Vehicle & General Securities Qwest VersaillesLondon Capital Group Rank hovis McDougall Waste ManagementLonrho Reid Murray WorldComLucent Rite Aid WPPMaxwell Communications Rolls Razor XeroxMcKesson &Robbin Rolls-Royces Yale ExpressMicro Focus Royal British Bank Yale TransportMicrostrategy Royal mail Steamship SatyamMinsec Rush & Tomkins Ponzi SchemeNational Student Saatchi & Saatchi Marketing SkandiaNortel Spring RamNvidia StorehouseOxford Health Plans SunbeamParmalet Swedish MatchPenn Central Texas Gulf Sulphur

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Why do shenanigans exist?

After all it pays! It’s easy Discovery is

difficult and unlikely

Improving Liquidity

FINDING SHENANIGANS

Press releases Securities Exchange

Commission filings The auditors report Interviews with the

company Commercial databases

AN INTERESTING QUOTE

“How do you explain to an intelligent public that it is possible for two companies in the same industry to follow entirely different accounting principles and both get a true and fair audit report?”

M. Lafferty

THE WORLDCOM SAGA – CASE STUDY It was 1983 in a coffee shop, that Mr.

Bernie Ebbers came up with a concept that became WorldCom

From Humble Beginnings to a Giant Telecom industry faced low margins

and Mr. Ebbers decided ‘growth=survival’

Purchased over 60 firms in 2nd half of the 90’s

HOW THE FRAUD TOOK PLACE Operating Expenses to Assets

-CFO’s directions affected the income statement:Revenues xxx (no change)COGS xxx (no change)Operating Expenses:

Fees paid to lease othercompanies phone networks: xxx (Huge Decrease)

Computer expenses: xxx (Huge Decrease)

NET INCOME xxx (Huge Increase)

Removed From

Income

Statement

Removed From

Income

Statement

POST-FRAUD HAPPENINGS

17,000 jobs cut to save $1 billion. WorldCom was renamed MCI in 2004

when it emerged from bankruptcy Sullivan pleaded guilty to 3 federal

criminal charges for fraud and conspiracy

10 former directors agreed to pay $54 million to settle a shareholder class-action lawsuit

XEROX SCAM – CASE STUDY

Xerox, a global document management company, was founded in 1906 in Rochester

How it started? Xerox revealed in 2002 that it overstated it’s

revenue by $2 billion SEC, however, began investigation prior to

Xerox’s announcement and planned to conduct an audit which revealed a $6 billion overstatement

Manipulations Used Cookie-Jar Method Acceleration of revenue from short-term

equipment rentals, which were improperly classified as long-term leases

Escalating reported earnings to match expected earnings

Effects Xerox could count as earnings what was

essentially future revenue Allowed the company to meet profit expectations

REVENUE PROFIT GRAPH

Why?

Declining revenue in the early 1990’s Pressure from investors to keep up short

term earnings Top executives, whose incomes are bound up

with stock options.

Role of KPMG It was the auditing firm of Xerox The auditing firm knew what was going on

and decided to allow it to continue

Consequence

Xerox Corp. agreed to pay $670 million while KPMG had to pay $80 million, to settle an eight-year-old securities lawsuit filed on behalf of Xerox investors

THE ROAD TO REFORM : PROTECTING THE PUBLIC

INTEREST Government regulation &

oversight Strengthening the Auditors

Profession Public trust & confidence in the

integrity of auditors Public understanding of the

auditor’s role Corporate governance &

responsibility Importance of ethical behavior

and doing the “right” thing

CONCLUSION

From these scandals, it is important to learn the know how and know why so that we can understand how to avoid these situations in the future.

WHAT WE CAN DO?“Everyone should habitually be aware of the moral implications of what he or she is asked to do and, each by each ,

should stand up for the right to be moral.”

- Jane Jacobs – Systems of Survival

“THE LAWS AND PROFESSIONAL STANDARDS REPRESENT THE FLOOR—THE MINIMUM. WE SHOULD REACH FOR THE CEILING.”

David M. Walker, CPAComptroller General of the United States