Scrushy Back in the News

The U.S. Supreme Court on Tuesday ordered a new review of the convictions in the government corruption case against former Alabama Gov. Don Siegelman and ex-HealthSouth CEO Richard Scrushy.

Questions:

1. What is the “honest services” fraud law?

2. What is a “quid pro quo” agreement?

3. A judge issued a $2.9 billion civil judgment against Scrushy. According to the opinion, what did Mr. Scrushy do and why?

 

Sources:

Johnson, B. (2010). Court Orders New Review of Siegelman, Scrushy Case, Associated Press, June 29 (Retrievable online at http://www.google.com/hostednews/ap/article/ALeqM5gEFj4h2WLTpKm2g7jltY0N0opHMgD9GL1FQO1

Memorandum Opinion in the 2002 Derivative Litigation for Jefferson County Alabama Circuit Court Case of Wade Tucker, et.al. versus Richard M. Scrushy, et. Al., June 18, 2009. (Retrievable online at http://www.hwnn.com/images/stories/files/Scrushy%20Memorandum%20Opinion.pdf)

Supreme Court Rules on Constitutionality of the PCAOB

The U.S. Supreme Court ruled on June 28, 2010, that the Public Company Accounting Oversight Board (PCAOB) violates the U.S. Constitution’s separation of powers principle because board members are not appointed by the president.  In a 5-4 decision, the Court stated that the president must have more power to remove PCAOB members. The five-member board is appointed by the U.S. Securities and Exchange Commission after consultation with the Federal Reserve System’s chairman of the board of governors and the Secretary of the Treasury.

Question:

1.  How was the PCAOB originally established and why?

2.  Look at the ruling.  Which justices joined to support the ruling and which justices dissented?

3.  According to the sources listed, how do you think the ruling will affect the Board’s operations and why does Barry Melancon, president and CEO of the American Institute of Certified Public Accountants (AICPA), see this as a victory for investors and for the accounting profession?

Source:
Supreme Court Opinion No. 08–861 (2010). Free Enterprise Fund et.al. versus Public Company Accounting Oversight Board, June 28 (Retrievable online at http://www.supremecourt.gov/opinions/09pdf/08-861.pdf)
Accounting WEB staff. (2010). UPDATE: Supreme Court Rules PCAOB Violates Constitution’s Separation of Powers Principle, Accounting WEB, June 28  (Retrievable online at http://www.accountingweb.com/topic/accounting-auditing/supreme-court-rules-pcaob-unconstitutional)

Small Discrepancies Grow Into a Giant Fraud

Satyam Computer Services, a leading Indian outsourcing company that served more than a third of the Fortune 500 companies, was at the heart of a huge 2009 fraud perpetrated through the significant inflation of earnings and falsification of accounts and assets for a number of years.  Chairman, Ramalinga Raju, resigned  in January 2009 after revealing that 94 percent or about $1.04 billion in assets were nonexistent and revenue was actually 20 percent lower than that reported.

Questions:

1. Who were Satyam’s auditors? What are some of the audit procedures that should have helped in the detection of this fraud?

2. What prior incident led to scrutiny of the company in October 2008?  What does this indicate to you about the corporate culture of the company?

3. Is Satyam still in business?  Provide a brief summary of its demise. What happened to the Satyam’s Chairman?

Sources:

Khanzode, R. (2010). Satyam Not out of Woods, Likely to Seek Time for Audited Results. The Financial Express, June 7. (Retrievable online at http://www.financialexpress.com/news/satyam-not-out-of-woods-likely-to-seek-time-for-audited-results/630308/)

Video (January 8, 2009). Satyam Auditor PwC Under Lens. (Retrievable online at http://www.youtube.com/watch?v=c_TvuhOtln0&feature=related)

 Timmons, H. (2009). Satyam Chief Admits Huge Fraud, New York Times, January 7 (Retrievable online at http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html)

Research and Development (R & D): Does This Indicate a Crack in the Foundation of IFRS Convergence?

When the IASB and FASB began the convergence process in 2002, they considered R & D as a high-priority project, where differences between US GAAP and IFRS were seen as particularly straightforward. However, as this article notes, still no consensus has been reached because IASB’s R&D treatment  appears to defeat comparability in the eyes of the FASB.

Questions:

1. The author refers to SFAS 2 as support for R & D reporting under U.S. GAAP.  What is SFAS 2?

2.  What are the capitalization criteria from IAS 9 that became part of IAS 38 to distinguish research costs from development costs?

3.   Briefly summarize the article’s presentation of why FASB ruled  in the 1970’s that all R&D expenditures must go straight to the income statement.

Source:

Selling, Tom (2010). Failed Convergence of R & D Accounting: Only Politicians and Opportunists Would Have Downplayed the Implications, The Accounting Onion, June 5 (Retrievable online at http://accountingonion.typepad.com/theaccountingonion/2010/06/failed-convergence-of-rd-accounting-only-politicians-and-opportunists-would-have-downplayed-the-implications.html)

Donated Inventory

Over the next five years, Wal-Mart plans to donate about 1.1 billion pounds of food to food banks and provide $250 million to help them buy refrigerated trucks, improve storage and develop better logistics.

The plan to contribute $2 billion in cash and food to the nation’s food banks is considered to be one of the largest corporate gifts on record.

Wal-Mart began taking on hunger as a cause in 2005, when it distributed 9.9 million pounds of food to food banks; last year, it provided 116.1 million pounds of food. The company also has donated the services of its staff to help food banks improve lighting and refrigeration, and develop ways to increase the amount of fresh food on their shelves.

Questions:

1.According to Robert Midler, when are merchandisers eligible for enhanced deductions for a charitable contribution of inventory under the U.S. tax code?  Would Wal-Mart’s effort qualify?

2. Using the video, can you identify which accounts of a merchandiser would be affected when making the journal entries for donated inventory? 

3. Assuming that Wal-Mart’s revenue on the donated food would be $1.5 Billion, its cost would be $0.875 Billion, $250 million was donated for trucks and $250 million was donated through services of Wal-Mart staff, create the journal entries for the cash merchandise and service donation for the financial statements.

Source:

Midler, Robert (1993). Tax benefits of donating inventory – some donations may also qualify for enhanced deduction.The Tax Adviser, January 1 (Retrievable online at http://www.allbusiness.com/accounting-reporting/corporate-taxes/351023-1.html)

Strom, Stephanie (2010). Wal-Mart donates $2 billion to food banks, New York Times, May 13. (Retrievable online at http://www.postbulletin.com/newsmanager/templates/localnews_story.asp?z=7&a=452224)

Nerdenterprises.  (2010). “Accounting For Donated Inventory In QuickBooks video,” May 4 (Retrievable online at http://www.youtube.com/watch?v=B9-N2ZmUMhs)

Financial Instrument Accounting

On Wednesday, May 26, 2010, the FASB released an exposure draft for the purposes of improving accounting for financial instruments. The new rules, projected to take effect in 2013, incorporate both amortized cost and fair value information about financial instruments held for collection or payment of cash flows.

Questions:

1. According to the article, how does the proposal plan to provide more timely information for financial statement users about anticipated credit losses?

2. What is the deadline for comments and when does FASB plan to hold roundtable meetings?

3. How many members are on the AICPA’s Accounting Standards Executive Committee, that has weighed in on the proposal and who are those represented on the committee?

Source:

Lamoreaux, Matthew (2010). FASB Proposes Comprehensive Changes to Financial Instruments Accounting, Journal of Accountancy, May 26 (Retrievable online at http://www.journalofaccountancy.com/Web/20102977.htm)

Bond Rating Under Fire

E-mails and other documents were presented as evidence at a hearing examining the causes of the financial crisis on Capitol Hill on April 23, 2010.  This hearing is part of an 18-month investigation by the Senate Permanent Subcommittee on Investigations, led by Senator Carl Levin. Subcommittee assertions are that the rating agencies were well aware of the risks in the housing market and recklessly used rating models that they knew inflated the grades given to securities.

Questions:

1.  Briefly summarize the level of complexity and problems with Congress to regulate the ratings agencies, as noted by Arturo Cifuentes, former V.P of Moody’s (as shown in the video)?

2. What high profile investment firm was implicated as pressuring the ratings agencies? How do you think Congress can prevent this from happening in the future?

3. In 2007, what percentage of AAA-rated mortgage securities were downgraded to junk status?

Source:

Ellis, Blake. (2010). “How credit watchdogs fueled the financial crisis,” CNN Money.com, April 24 (Retrievable online at http://money.cnn.com/2010/04/23/news/economy/credit_rating_agencies_hearing/index.htm?postversion=2010042411)

The Effects of Converting to IFRS

The Effects of Converting to IFRS

The primary question raised in this article is:  “What effects would switching to IFRS have for companies, if forced to switch by the SEC?” Based on a panel of four executives from four major companies, most agreed that there will be almost no material effects in areas that investors care about. 

Questions:

1.  Based on the opinion of Jack Klinger, director of accounting research at Alcoa, what would be the greatest impact of IFRS for his company?

2.  What did Aaron Anderson, director of IFRS policy at IBM see as the benefit of converting to IFRS?

3.  Based on comments by HSBC’s chief accountant, John McGinnis, what was a benefit to the bank of reporting U.S. results in IFRS?

 Source:

Leone, M. (2010). Unfazed by IFRS. CFO.com, Today in Finance, April 30. (Retrievable online at http://www.cfo.com/article.cfm/14495043/c_14494842?f=TodayInFinance_Inside)

New Year Resolutions for Audit Committees?

The Sarbanes-Oxley Act of 2002 increased audit committees’ responsibilities and authority, and raised the bar on the independence of members. As a result, the SEC and the stock exchanges also proposed new regulations and rules to strengthen audit committees. A recent report by the KPMG Audit Committee Institute presents New Year’s guidance for audit committees and their upcoming 2010 agendas.

Questions:

1. One of the points presented in the article is that audit committees need to monitor management’s assumptions underlying critical accounting estimates. Pension funding is included as one of these priorities. What are some of the estimates that impact pension funding?

2. In the article’s focus on financial communication, audit committees are urged to understand the company’s policy on the use of Twitter and other social media networks to reach investors. How could these networks impact earnings guidance?

3. In particular, the report urges audit committees to engage early on in reviewing 2010 proxy disclosures. What are contained within proxy disclosures?

SOURCE:

WebCPA Staff. (2010). “KPMG Lists Top 10 Priorities for Audit Committees,” WebCPA (Retrievable online at http://www.webcpa.com/news/KPMG-Lists-Top-10-Priorities-Audit-Committees-52937-1.html)

What are Non-GAAP Financial Measures?

Amgen is a biotechnology firm that develops and manufactures human therapeutics that fight cancer, kidney disease, rheumatoid arthritis and other serious illnesses. As part of its 2008 financial report, the Company issued non-GAAP financial measures to facilitate additional analysis by investors.

QUESTIONS:

• In one paragraph, briefly describe non-GAAP financial measures and how they differ from GAAP.
• Does the SEC allow non-GAAP financial measures?
• What non-GAAP financial measures did Amgen report? Explain some of specific issues they addressed in this supplemental information.

SOURCES:

PR Newswire. (2009). Amgen’s Fourth Quarter 2008 Adjusted Earnings Per Share Increased 6 Percent to $1.06; Full Year 2008 Adjusted Earnings Per Share, Fierce BioTech (Retrievable online at http://www.fiercebiotech.com/press-releases/amgens-fourth-quarter-2008-adjusted-earnings-share-increased-6-percent-1-06-full-year#ixzz0Yk4GRVCZ)

U.S. Securities and Exchange Commission. (2002). Final Rule: Conditions for Use of Non-GAAP Financial Measures, Release No. 33-8176; 34-47226; FR-65; FILE NO. S7-43-02 (Retrievable online at http://www.sec.gov/rules/final/33-8176.htm)

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