Rhode Island Nearly Broke?

The current general treasurer of Rhode Island, Gina Raimondo, warns that the state will soon be broke due to its debt problems. After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers and that figure will climb perilously toward 20 cents. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent. This article explains some of the challenges facing the state and Ms. Raimondo.

Questions:
1. How many reform plans has Rhode Island tried to institute since 2005 to fix the pension system? Do you agree with Ms. Raimondo’s approach? Why or why not?
2. Who did Ms. Raimondo learn was investigating the state and city finances of Rhode Island, as soon as she was sworn in? Why were they investigating?
3. What do the percentages in the article refer to in terms of the calculations made to calculate pension expenses? How do these changes affect the amount of pension expense?
4. In recent months, Ms. Raimondo has crisscrossed the state trying to sell a different plan that would allow the pensions to survive and avoid additional plans within the next couple of years. What type of pension structure is she trying to save? Explain this structure and whether or not it is the most common type for most companies.
5. The article mentioned that when the board voted to lower the projected long-term investment return assumption to 7.5 percent, the state’s pension shortfall instantly rose to $9 billion from $7 billion. Make the journal entry to show this effect.

Source:
Walsh, M.W. (2011) The Little State With a Big Mess. The New York Times, Oct. 22 (Retrievable online at http://www.nytimes.com/2011/10/23/business/for-rhode-island-the-pension-crisis-is-now.html?src=me&ref=business)

What good is a logo?

Australia, which has already banned the public display of tobacco products in retail outlets, wants to outlaw logos on cigarette packs and force them to be sold in plain dark-olive packaging, carrying health warnings instead of company logos. Cigarette brand names will appear on the packages in the same size and style of printing. The legislation, if passed by Parliament, would come into force in 2012.

“The forced removal of trade marks and other valuable intellectual property is a clear violation of the terms of the bilateral investment treaty between Australia and Hong Kong,” Anne Edwards, a spokeswoman for Philip Morris Asia, said in the statement. “We believe we have a very strong legal case and will be seeking significant financial compensation for the damage to our business.”

Questions:

1. How are trademarks valued?

2. Where do trademarks appear on the financial statements? Where will costs regarding this litigation be reported in the financial statements of Philip Morris?

3. Do you agree or disagree with Australia’s approach? Discuss.

Source:

Bloomberg News Staff. (2011). Philip Morris Sues Australia Over Cigarette Packaging. The New York Times, June 26 (Retrievable online at http://www.nytimes.com/2011/06/27/business/27tobacco.html?ref=business)

Do great products translate into great profits?

So far the summer of 2011 has seen its share of giant wildfires. Recently GelTech Solutions, Inc. was profiled in CNN – Your Money’s segment on small businesses for its product – FireIce. The company is committed to continuing the work of developing sustainable solutions that solve common problems and maintain the integrity of the earth – today and for generations to come. The FireIce product appears to be incredible stuff if you are in the path of these destructive fires. While it appears to be remarkable, why isn’t the company doing so well? See if you can come up with some answers, based on their financial statements.

Questions:
1. Go to the company’s website at http://geltechsolutions.com/geltech/default.aspx. Then look at GelTech Solutions, Inc. 10K for 9/28/10 (found at http://ir.stockpr.com/geltechsolutions/filings?qm_page=8102). What amount has the company spent on Research and Development over the last two years? What was most of this spent on? Explain how you would account for R & D in terms of journal entries.
2. What is the company’s experience and expenditures for marketing?
3. Where is the company headquartered?
4. How old of a process did they say the FireIce concept was on the video?
5. What are the contingencies that the company is facing?
6. Are there any clues to why the company is not profitable? What are they?
7. Would you consider buying this stock? Why or why not? Explain.

Sources:
CNN.com. (2011). Blowtorch your hand without a wince, June 6 (Retrievable online at http://money.cnn.com/video/smallbusiness/2011/06/06/n_fireice.cnnmoney/)

Not too squeaky clean

A suit called GSP Finance LLC v. KPMG LLC was filed on March 29 with GPS alleging that KPMG “was well aware of the desperate financial condition of Hicks Sports” — specifically, the Texas Rangers and Dallas Stars — when it was hired to conduct the ’08 audit. The suit says Hicks Sports Group suffered losses of $113 million in 2002, $67.8 million in ’03 and $95 million in ’04. Till the Stars are sold, it won’t be clear exactly how much Hicks’s lenders have lost.

Questions:

1. What issues are in question regarding the clean audit?
2. What was the related party issue that is coming to light?
3. Identify all the financial statement users impacted by this clean opinion.

Source:
Wilonsky, R. (2011)KPMG Sued For Giving Tom Hicks “Clean Audit” a Year Before $525-Million Loan Default, March 30 (Retrieved at http://blogs.dallasobserver.com/unfairpark/2011/03/kpmg_sued_for_giving_tom_hicks_clean_audit_a_year_before_525-million_loan_default.php)

Will Debit card transactions change?

JPMorgan Chase, one of the nation’s largest banks, is considering capping debit card transactions at either $50 or $100, according to a source with knowledge of the proposal. And the cap would apply even if you run your debit card as credit. The reason for this is interchange fees. as part of the Wall Street reform legislation that was passed last year, these fees are being slashed. As part of the Wall Street reform legislation that was passed last year, these fees are being slashed from $0.44 to about $0.12 per transaction. Banks say that they need this additional revenue to offset money lost from fraudulent transactions and without it, they will have to limit their losses with these caps.

Questions:

1. Based on this video and article, who will be most affected if the banks set these limits? Would this change affect you?

2. What is the name of the Wall Street reform legislation?

3.  From the accounting point of view, is there a difference in how a merchant records a debit card purchase as compared to a credit card purchase? Explain the journal entry or entries.

Sources:

Ellis, B. (2011) Debit Cards: $50 spending limit coming? CNN.com, March 10 (Retrievable online at http://money.cnn.com/2011/03/10/pf/debit_cards_limit/index.htm?hpt=T2)

CNN video. (2011). Rumored Debit Card Limit, March 10.

Cooking the Books for Lehman?

N.Y. Attorney General Cuomo filed charges against Ernst & Young on December 21, 2010, alleging that the firm helped Wall Street Investment bank Lehman Brothers conceal its deteriorating financial condition before the bank’s historic collapse in the fall of 2008.  The civil lawsuit, which seeks more than $150 million, is the first law enforcement action to stem from Lehman’s failure. The bankruptcy of the firm, which was an important cog in the machinery of the capital markets, caused immense collateral damage. The allegations center on sham trades that allowed Lehman to window-dress its balance sheet before filing quarterly financial reports, making it seem like it had more cash than it actually did. Cuomo’s lawsuit aims to hold accountable one of the less-mentioned players in the saga – Ernst & Young, Lehman’s auditor, which allegedly turned a blind eye to the accounting machinations. The case does not resolve the fate of senior Lehman executives, such as former chief executive Richard Fuld, who have been under investigation by the Securities and Exchange Commission.

Questions:

1.  Explain the boomerang trade referred to as “Repo 105″ that is at the heart of the allegations.

2.  Explain leverage and what impact it played in the scenario.

3. Based on what you know about the Lehman situation, do you think they should have been included in the government bailout?  Why or why not?

4.  Read Matthew Lee’s letter  and critique it. Do you agree with the way he handled the situation as a whistleblower?  Based on what you know, would you have handled it any differently? 

Source:

Goldfarb, Zachary A. (2010). N.Y. Attorney General Cuomo Sues Ernst and Young, alleging Lehman Accounting Fraud, The Washington Post, December 22 (Retrievable online at http://www.washingtonpost.com/wp-dyn/content/article/2010/12/21/AR2010122103973.html?sid=ST2010122106931)

Lee, Matthew. (2010). The Lehman Whistleblower Letter Everyone Ignored. Hereisthecity.com, December 21, 2010 (Retrievable online at http://news.hereisthecity.com/news/business_news/10215.cntns)  

The Alyona Show,  The Next Arthur Andersen?, Dec. 22, 2010. (Retrievable at http://www.youtube.com/watch?v=5B_esTl9FS8&feature=related) 

Did Bernie Madoff Have Help?

HSBC prolonged disgraced financier Bernard Madoff’s ability to burn investors by “engineering a labyrinth” of international sources of funding for his epic Ponzi scheme, a court-appointed trustee alleged Sunday.

Trustee Irving Picard announced a lawsuit in federal bankruptcy court in Manhattan that seeks to recover $9 billion in illicit earnings and damages from the Britain-based bank.

The suit alleges that HSBC ignored warnings from its own accountants that Madoff’s phenomenal investment record was suspect.

Questions:

1. What is Irving Picard’s role in this scandal?

2. What is Irving Picard’s background and why is this important from an accounting standpoint?

3.  What is the alleged motivation of HSBC in this scandal?

Source:

Fox News Video with Robert Gray (2010). Picard Sues HSBC, December 6 (Retrievable online at

http://www.youtube.com/watch?v=cwf7UHRX0-A)

 Hays, Tom (2010). Madoff Trustee Sues HSBC for $9 Billion, HuffingtonPost.com, December 5 (Retrievable online at http://www.huffingtonpost.com/2010/12/06/madoff-trustee-sues-hsbc-_n_792365.html)

Put Me First In Line

Former Denver Broncos quarterback John Elway and his business partner gave $15 million to a hedge-fund manager now accused of running a Ponzi scheme.  In court papers filed by Elway and Mitch Pierce the two claim that their investment was supposed to be kept in a separate account from Mueller’s Over Under Fund. Therefore, the Denver Broncos legend is seeking a declaratory judgment for the return of their money, ahead of other investors. Mueller Capital Management has just $9.5 million left to cover liabilities of $140 million.

Questions:

1.  What is a hedge fund?

2.  What accounting guidance for hedge accounting is available under International Financial Reporting Standards (IFRS)?

3.   What accounting guidance for hedge accounting is available from the Financial Accounting Standards Board (FASB)?

4.  As one accountant said of this story: “It’s hard to feel sorry for rich people who play in games without rules (hedge funds).” Do you agree or disagree? Explain.

 

Source:

Staff. (2010) Hall of Famer Elway Seeks Mueller Money Now. FINAlternatives, October 19 (Retrievable online at http://www.finalternatives.com/node/14212).

Accept Credit Cards at Garage Sales and Bake Sales

Why can’t everyone accept credit cards? Now there is no good reason because the Square Up system eliminates card reading equipment by providing cell phone users with an app that snaps into a headphone jack. The plug is free and you are spared the contracts, the minimums and the monthly fees. For each transaction, Square charges you 2.75 percent of the total, plus 15 cents. Alternatively, you can accept credit card payments without the card itself — over the phone, for example. You just need the card number, expiration date and security code, although these transactions cost you more (3.5 percent).

Questions:

1. Assume that you sold a surfboard on Craigs List to someone who paid you $100 and gave you a credit card. If you swipe the card, how much would you pay to Square for the use of their system?
2. Assume the same facts as in Question 1, except that you do not have the card to swipe, but enter the number, expiration date and security code. How much would you pay for Square to process the transaction?
3. Assume that you sold the surfboard from your small business. What journal entry would you make in Questions 1 & 2?
4. Why do you think that Square has restrictions on deposits over $1,000 for first time users?

Source:
Pogue, D. (2010). A Simple Swipe on a Phone, and You’re Paid, The New York Times, September 30 (Retrieved online at http://www.cnbc.com/id/39438067/)

The Fabulous Fab is Back in the News

Fabrice Tourre, a controversial personality in the Goldman Sachs Group Inc transaction of 2007, asked a judge to throw out a U.S. regulator’s fraud lawsuit against him.  About two and a half months ago, the bank settled its part of the case for $550 million.

In his filing, Tourre asked that the U.S. Securities and Exchange Commission case be dismissed because the 2007 “Abacus” transaction, which involved collateralized debt obligations (CDOs) tied to subprime mortgages, took place outside the United States.

Questions:

1. What are collateralized debt obligations?

2. Where would CDOs appear in the financial statements of the bank that bought them?

3. Do you think he will prevail in his dismissal of the charges?

4.  How do you think the Goldman Sachs Group reported the $550 million settlement in its financial records?  

Source:

Stempel, J. (2010). Goldman’s Tourre says SEC suit should be dismissed, Reuters, September 30 (Retrieved online at http://www.reuters.com/article/idUSTRE68T3L120100930?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28News+%2F+US+%2F+Business+News%29)

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