Term
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Definition
Off-balance Sheet financing = liabilities were moved off the B/S and shown in the SPE books
(GAAP violation due to hiding of liabilities) |
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Term
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Definition
| Charged management fees to the SPE's = 628 million |
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Term
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Definition
recoded SPE's profit based on increase of enron's own stock
*enron case is unique because it used debt/asset ratio, focused on B/S instead of I/S |
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Term
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Definition
Capitalized maintenance expense
-GAAP says that period admin costs must be expensed in period incurred
-influenced the OCF so both OCF and NI were inflated |
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Term
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Definition
Increased balance of cookie jar accounts (allowance for doubtful accounts)
1999-2002 = overstated earnings by 11 billion
4 billion from capitalization of maintenance and other costs
3.3 billion from reductions in ADA |
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Term
| Portfolio investment theory |
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Definition
-investors are risk-averse and rational
-better to invest in a portfolio rather than a single stock |
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Term
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Definition
-relies on Efficient Market Hypothesis, idea that we make money off of private information, not public
-anomaly if people have made money off of public information
-say you can make money off of public earnings announcements
-Good and bad earnings announcements based off of how they are related to expected earnings
-drift = abnormal return based of the news |
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Term
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Definition
-redid the Ball & Brown case except based it off quarterly report vs. annual
-same result but they determined good and bad news could also be determined by how the company compared to the same quarter from prior year vs. just speculation |
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Term
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Definition
-repeated Ball & Brown study but focused on quality of earnings instead of earnings announcement
-market did not react to the strength of OCF compared to earnings quality
-higher accrual firms tended to drift downwards over time rather than right away
-high net income, low cash flow = bad earnings quality |
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Term
| Burgstahler & Dichev (1997) |
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Definition
| -study relied upon Prospect Theory, says that companies will react based off what the expected outcome will be -specifically the market has a stronger reaction to losses than gains -found that few firms report a small loss -instead larger amount of firms than expected reporting nothing or a small gain -highly likely that there is slight earnings management to prevent small losses |
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Term
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Definition
-original formula
Total Accruals = alpha coefficient + Beta 1 coefficient * change in rev + Beta 2 coefficient * PPE + discretionary accrual
- beta is not the same as received from stock information
- Beta 1 expected to be positive and Beta 2 negative |
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Term
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Definition
| Total Accruals/Total Assets = alpha coefficient/total assets + beta 1 *change in rev - change in receivables / total assets + Beta 2 * PPE/Total assets + discretional accrual |
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Term
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Definition
1) when earnings management is small, no matter how good the model, it won't be found
2) if the trigger is related to firm performance than results may not be definitive
3) watch out for non discretionary accruals and make sure discretionary aren't getting commingled
*modified jones model is the best model to uncover earnings management |
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Term
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Definition
wrote some of its inventory down to 0
-done by taking advantage of LCM and removed inventory associated with discontinued product lines
-reduced COGS making revenue from the sale pure profit/gain |
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Term
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Definition
worked with Prepaid expenses
-expected 1996 to have a huge loss so effectively paid for everything they could preemptively to increase cash flow in following years
-form of Real Earnings Management
-messed with Sloan ratio, created larger wedge between OCF and NI |
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Term
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Definition
Decreased other Current and Long-term liabilities
-used cookie jar accounts and a "big bath"
-overbooked expenses in prior year to under book in the following year |
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Term
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Definition
Reduced the amortization in its PPE and trademarks
-related to determining that there was impairment rather than selling off assets
-increased asset impairment for tangibles and intangibles |
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Term
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Definition
Capitalized its product development and advertising expenses into its PPE account
-instead of expensing, added value to PPE
-similar to MCI WorldCom when they capitalized maintenance expense |
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Term
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Definition
Cookie jar account to reduce their allowance for doubtful accounts
-increased net receivables |
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Term
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Definition
Inventory Explosion increases the inventory they possess
-real earnings management tactic
-allocated fixed overhead between EI and COGS which increases the number of units the OH is allocated to
-more OH applied to EI account than to COGS |
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Term
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Definition
Early Buy
-allowed retailers to delay their payment for the product for up to 6 months
-done in the last quarter of the year to increase sales in the last quarter
-channel stuffing
-real earnings management technique |
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Term
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Definition
Bill and hold
-would charge retailers for sales but would hold onto the inventory in their own warehouse so revenue process wasn't complete
-some cases distributors could return item without any penatliy |
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Term
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Definition
Changed the expected rate of return on pension plan assets
-needed a smaller amount in their reserve to cover the liability |
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Term
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Definition
Sold off divisions
-caused large non-recurring gains
-real earnings management strategy |
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Term
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Definition
Manipulated restructuring charges
-used to smooth out earnings so that large non-recurring gains would not overstate income |
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Term
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Definition
Bought profitable businesses
-real earnings management strategy
-in order to smooth earnings GE would manage the timing and identity of these acquistions |
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Term
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Definition
Conservative accounting
-fully depreciate an asset before a sale in order to make the entire gain on the sale recognized
-"cherry picking" |
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Term
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Definition
Controlled allocation of goodwill upon acquisition of subsidiary companies
-certain segments of acquisitions were chosen or required to be disposed of
-utilized to increase goodwill account and effectively raise the value of the investment in the books |
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Term
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Definition
| Had provided for many accruals in prior years 2003 wrote off some of these accruals through debiting operating expense (increasing net income) -Big Bath in 2001-2002- overbooked their losses had to restate 2001-2003 -company sued the executives to recover the bonus (clawback) -SEC began civil proceeding against former executives |
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Term
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Definition
Choice by a manager of accounting policies or real actions that affect earnings in order to achieve specific reported earnings objective
-Real = manipulate through operating activities
-Accruals = managing earnings through receivables and payables (cookie jar accounts) |
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Term
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Definition
| Bath (Nortel) = income up and down Income Minimization = microsoft did this in the 90's Income Maximization (Sunbeam) = most common Income Smoothing = HP beat the earnings forecast by 1 penny for 40 quarters |
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Term
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Definition
-Mislead capital market/fool investors
-Contractual (bonuses, debt covenants, stock option exercise)
-lower political heat
-meet earnings expectations
-IPO (crazy eddie)
-good selling price for merger (sunbeam) |
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Term
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Definition
-change in accounting policies (FIFO to LIFO)
-timing of adoption of new accounting standards
-creation of SPEs
-capitalize operating expenses (WorldCom)
-Cookie Jar accounts (ADA, pension, asset impairment, warranty provisions) |
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