The Avandia Disaster

Posted by & filed under Accounting Principles, Advanced Accounting, All Articles, Auditing, Cost Accounting, Financial Accounting, Financial Reporting and Analysis, Financial Statement Analysis, Fraud Accounting, IFRS, Intermediate Accounting, International Accounting, Managerial Accounting, Uncategorized.

GlaxoSmithKline (GSK)’s $3.4 billion legal charge on the diabetes drug Avandia probably isn’t the last of the costs the company will record against this drug. That means Avandia will probably be a lossmaker for GSK, proving that former CEO Jean-Pierre Garnier 1999 failure to follow up on worries about heart attack deaths associated with Avandia was a strategic disaster for the company, costing it billions in actual dollars and billions more in lost-opportunity dollars. Avandia had only been on the market for one month in 1999 at the time the CEO raised concerns in an email to his staff, yet the drug remained on the market until 2010.

Questions:

1.  What are some examples of opportunity costs this drug had for the company?

2.  Based on the article by Edwards, what types of contingency disclosures do you think the company should disclose for 2011?

3.  According to the 2010 article by Edwards, what settlement was made in July?  How should that be reported in the accounting records?

 Source:
Edwards, J. (2011). How GSK’s CEO Ignored His Own Worries and Wasted $16B on a Failed Diabetes Drug, BNET.com, January 18 (Retrievable online at http://www.bnet.com/blog/drug-business/how-gsk-8217s-ceo-ignored-his-own-worries-and-wasted-16b-on-a-failed-diabetes-drug/7094?tag=mantle_skin;content)

Edwards, J. (2010) Glaxo CEO Worried in Email Over Heart Attacks From Avandia — in 1999, BNET.com, July 13 (Retrievable online at http://www.bnet.com/blog/drug-business/glaxo-ceo-worried-in-email-over-heart-attacks-from-avandia-8212-in-1999/5110?tag=content;drawer-container)

Is it the End for Borders’ Books?

Posted by & filed under Accounting Principles, Advanced Accounting, All Articles, Auditing, Cost Accounting, Financial Accounting, Financial Reporting and Analysis, Financial Statement Analysis, Fraud Accounting, IFRS, Intermediate Accounting, International Accounting, Managerial Accounting, Uncategorized, Video Updates.

Borders (BGP), the second largest bookstore chain in the country, may soon be nothing more than a memory. But the big question is: who’s going to pick up the business?  Borders had five rounds of layoffs in 2010 and began 2011 with the departure of five top executives, including the CIO and general counsel. It closed 200 shops in the U.S. and also plans to close its Tennessee distribution center which employs more than 300 people. The company is heavily in debt to the tune of over $445 million as of October 30, 2010.  Some publishers have stopped shipping books to them altogether and in-store appearances have ended. While some insiders want to strike a deal, others hope for the company to declare bankruptcy, so at least they will have legal protection for recent shipments. Without a top down overhaul of everything from its management to merchandising the remaining stores and a digital plan, it’s not likely that Borders can survive in the long term.

Questions:

1.  What is the difference between Chapter 11 and Chapter 7?

2. Do the Borders brothers still own the chain?

3. According to Rosenwald, what led to the downturn in Borders’ success?

Source: Dishman, L. (2011). Borders’ Death Knell: Chapter 11,7, or Simply the Final Chapter. BNET.com, January 13. (Retrievable online at http://www.bnet.com/blog/publishing-style/borders-8217-death-knell-chapter-11-7-or-simply-the-final-chapter/1259?tag=mantle_skin;content)

Rosenwald, M.S. (2011). Borders struggles to hold off final chapter, Washington Post, January 20 (Retrievable online at http://www.washingtonpost.com/wp-dyn/content/article/2011/01/20/AR2011012006155.html)

You Tube Video. (2009). A Tribute To Borders Bookstore (UK), December 22 (Retrievable online at http://www.youtube.com/watch?v=TB3hENjJx7k)

Lawsuit Loans

Posted by & filed under Accounting Principles, Advanced Accounting, All Articles, Auditing, Cost Accounting, Financial Accounting, Financial Reporting and Analysis, Financial Statement Analysis, Fraud Accounting, IFRS, Intermediate Accounting, International Accounting, Managerial Accounting, Uncategorized.

The business of lending to plaintiffs in court cases arose over the last decade as part of a trend in which banks, hedge funds and private investors are putting money into other people’s lawsuits. But the industry, which now lends plaintiffs more than $100 million a year, remains unregulated in most states, free to ignore laws that protect people who borrow from most other kinds of lenders. The interest rates charged by lawsuit lenders often exceed 100 percent a year, according to a review by The New York Times and the Center for Public Integrity.
While a growing number of lawyers, judges and regulators say that the regulatory vacuum is allowing lawsuit lenders to siphon away too much of the money won by plaintiffs, the lending companies justify their practices saying that they are not lenders because plaintiffs are not required to repay the money if they lose their cases.

Questions:
1. Explain why, as the article says, that lawsuit lenders are much better than venture firms at picking winners.
2. How much did the article say that lawsuit lending companies typically lose on their clients?
3. Do you think that lawsuit lenders should be subject to state consumer protection laws?  Why or why not?

Source:
Appelbaum, B. (2011). Lawsuit Loans Add New Risk for the Injured, The New York Times, January 16 (Retrievable online at http://www.nytimes.com/2011/01/17/business/17lawsuit.html?src=me&ref=business)

The Accountant Did It

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A 43-year-old CPA who volunteered to do the books for the Libertyville Boys Club turned himself in after $66,700 of the not-for profit group’s youth football program funds were missing. Jacobsen had been volunteering his services to the club since February 2009 as the treasurer of the club based at Butler Lake Park, Illinois. Libertyville police said Jacobsen had exclusive power to collect monies and pay bills related to the programs. In March, board members became suspicious after Jacobsen refused to bring the financial records to monthly meetings. He finally did so in October.

Questions:
1. What basic premise of internal controls was violated?
2. Why do you think that not-for-profit organizations are so susceptible to frauds like this one?
3. Suggest two or three ways that the Club could have prevented this event.

Source:
News-Sun Staff. (2011). Accountant Accused of Stealing From Libertyville Boys Club. January 8 (Retrievable online at http://newssun.suntimes.com/news/3207508-418/libertyville-club-jacobsen-police-66700.html)

Tax Refunds on Debit Cards

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A new pilot program for low-income Americans could allow individuals to get their tax refunds on prepaid debit cards. The government said it will offer 600,000 low- and medium-income taxpayers the chance to put their tax refunds on prepaid debit cards. Half the 600,000 offers from Treasury will carry a $4.95 monthly fee, while the rest will be free. Consumer advocates say the goal is to get more people who lack bank accounts to receive their money in direct-deposit-like style, which costs the IRS less. It is also an attempt to discourage people from seeking costly refund anticipation loans, also known as RALs.

Questions:

1. Do you think that cardholders should foot these card fees or should the IRS?

2. Research RALs.  What is the average interest rate on these loans?

3. What is the difference between a RAL and a RAC?

Source: CNN Video. (2011). Tax Refunds on Debit Cards, January 14. (Retrievable online at www.cnn.com/video/)

Hunsberger, B. (2011). Tax refunds via debit cards….with fees. The Oregonian, January 17 (Retrievable online at http://blog.oregonlive.com/finance/2011/01/post_10.html)

2011 Prediction

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According to William K Black, the FBI and the DOJ will not be likely to prosecute the elite bank officers that ran the enormous “accounting control fraudss that drove the financial crisis. While over 1,000 elites were convicted of felonies arising from the savings and loan crisis from the 1980’s and 1990’s , there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.

Black proposes that the U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature — as well as the data on fraud and analytics are all readily available. The FBI must end its “partnership” with the MBA. Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs.

Questions:

1. According to the author, what is the four-part recipe for maximizing fraudulent accounting income in the short-term?

2. According to the author, what is the downfall of the FBI in the role of successful investigation and prosecution of accounting control fraud?

3. What are liar’s loans and what is their role in the financial crisis? 

4.  How do you see this lack of criminal prosecution affecting the accounting and finance profession? Do you agree with Black’s proposals?

Source: Black, W.K. (2010). 2011 Will Bring More de Facto Decriminalization of Elite Financial Fraud, The Huffington Post.com, December 28 (Retrievable online at http://www.huffingtonpost.com/william-k-black/the-role-of-the-criminal_b_802115.html)

Cooking the Books for Lehman?

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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) 

Who Holds the Note? A Loaded Question for Credit Scores.

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Before Steven Marks started looking for debt relief on his Reno, Nev. home, he sent a simple request to Bank of America to ask who owned his mortgage.  He also wanted documentation of this.  What he got in return was an initial decline regarding who owned his loan by Bank of America and a lowering of his credit score.  This caused his insurance rates to go up also.  Marks had never been late on his payments, but all he wanted was information.  

Marks asked the bank for this information through a “Where’s the Note? website, which was created by the Service Employees International Union and the African American grassroots-advocacy group Color of Change.  Amid reports of widespread fraud in the foreclosure process, resulting in everything from illegal fees to improper evictions, the site’s stated purpose is to offer borrowers legal leverage to challenge bank wrongdoing.  More than 100 complaints similar to Marks’ have occurred since the launch of “Where’s the Note?” with the overwhelming majority coming from the activities of Bank of America. Currently , it’s not clear whether BofA is intentionally attempting to intimidate borrowers, or whether this is a mistake created by a high-volume business that is not above cutting corners by coding all inquiries as disputes in order to reduce costs.

Questions:

1.  Do you think the Bank of America is deploying an automated process to handle the requests?  Why or why not?  Use Steven Marks’ template as an example.

2. What does the term “servicing” a note or loan mean?

3. Do you believe this was a retaliatory act against borrowers that exercise rights under consumer protection acts?  What recent legislation was enacted to combat some of these incidents? Do you think more is needed?

4.  According to your understanding, is the website at fault? Research its disclosures.

Source:

Carter, Z. and A. Delaney. (2011). Honey, I Shrunk the Credit Score. Huffington Post.com, January 5 (Retrievable online at http://www.huffingtonpost.com/2011/01/05/honey-i-shrunk-the-credit-score_n_804105.html)

Extreme Dress Code

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You’ve hear of Extreme Sports, but what about Extreme Dress Code?  UBS sought to downplay a new 43-page dress code widely lampooned in the international press for detailed instructions to staff extending as far as the color of their underwear and the care of nasal hair and nails. The memo said the dress code was first created in 2009 for reception staff, event attendants and chauffeurs, but was being extended to customer-facing staff in Switzerland to help the bank present a consistent image.

Questions:
1.  Does the way you dress influence the way you work? Discuss.
2.  Do you think all accounting firms should have dress codes?  Is it tied to a “brand” effect?  Discuss.
3.  The company insists that this measure is needed to develop a consistent corporate image.  Do you think there will be any other effects regarding customer-facing staff?  Discuss.

Source:
CNN Video. (2010). UBS dress code raising eyebrows, December 16 (Retrievable online at http://www.cnn.com/video).
Reuters. (2010). UBS Internal Memo Responds to Dress Code Jibes, CNBC.com, December 17 (Retrievable online at http://www.cnbc.com/id/40715987/UBS_Internal_Memo_Responds_to_Dress_Code_Jibes)

Return Fraud

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Return fraud costs the retail industry billions of dollars in lost revenues every year. The growing crime is expected to cost retail stores across the nation an estimated $3.7 billion this holiday shopping season alone, according to the National Retail Federation. If that estimate holds true, it will represent 35 percent increase over last year’s $2.74 billion loss for the holiday period.
Questions:

1. What is wardrobing? What factors do you think increase this type of fraud? Discuss.
2. What is price arbitrage? What factors do you think increase this type of fraud? Discuss.
3. What internal controls do you think are the most effective in combating return fraud? Discuss in terms of costs and benefits.  Why don’t all retailers have a no return policy to combat this fraud?

Source:
CNN.com Video. (2010). Fake returns: A $14 Billion Crime, December 18 (Retrievable at http://www.cnn.com/video).
Turner, Kevin. (2010). Merchants Are Watching For Return Fraud. Jacksonville Florida Times-Union, December 19 (Retrievable online at http://jacksonville.com/business/2010-12-19/story/merchants-are-watching-return-fraud)
Six.Wise.com Staff. (2007). The Biggest Crime You’ve Never Heard Of—Return Fraud—And How The Criminals Do It, Six.Wise.Com Newsletter, January 7 (Retrievable online at http://www.sixwise.com/newsletters/07/01/17/the-biggest-crime-youve-never-heard-of—-return-fraud—-and-how-the-criminals-do-it.htm)