Home Solutions of America, Inc., a hurricane restoration company, is charged by the SEC with recording millions of dollars in bogus revenues and issuing misinformation to fraudulently inflate its stock price. The scheme was compounded by transactions that occurred between Home Solutions and Fireline Restoration Inc., its largest subsidiary. All of this alleged activity happened after Hurricane Katrina and other weather-related disasters.
- Explain the expense-deferral scheme that Home Solutions used to commit fraud and why it violates GAAP.
- Explain the related-party violations that are alleged.
- From 2004 to 2007, this multi-million dollar fraud continued at the direction of various Home Solutions and Fireline executives. How does the magnitude and timeline of this fraud compare with the average fraud mentioned in the Association for Certified Fraud Examiners Report to the Nation? (Hint: Go to www.acfe.com)
- Speculate on what factors and/or lack of controls allowed for the perpetration of this fraud.
WebCPA Staff. (2009). Hurricane Company Charged in Katrina Accounting Fraud. WebCPA (Retrievable online at http://www.webcpa.com/news/Hurricane-Company-Charged-Katrina-Accounting-Fraud-52563-1.html)
The SEC revised its disclosure guidelines for executive pay in late 2006. Since that time the regulator has been sending out letters to violator companies with insufficient disclosures, but has seen little compliance. Now the commission indicates that reviews will be tighter and there’s no room for a “Mister Nice Guy” approach. In fact, its deputy director, Shelley Parratt, threatened (in a recent speech) that companies who wait until receiving staff letters faulting material noncompliance with disclosure guidelines will face the arduous task of amending filings.
- According to the article, what is it that the companies are not providing the SEC in these disclosures?
- According to the article, what are some of the other kinds of disclosures that the SEC is thinking about for the coming year?
- Explain the relationship between the proxy statement and the CD&A, including the type of information contained within each.
Johnson, S. (2009). “No More Lenience on Pay Disclosure: SEC,” CFO (Retrievable online at: http://www.cfo.com/article.cfm/14454811/c_2984410/?f=archives)
According to a new study from the research firm, Audit Analytics, smaller companies that have not had auditors review their internal-control reports are more likely to have restatements than larger companies, despite their claims of effective controls. This is bad news for those small publicly traded companies who have argued that they should be exempt from this auditor-attestation requirement of the Sarbanes-Oxley Act.
- Is a restatement the same as an error change resulting from a change in accounting principle?
- Which Section of the Sarbanes-Oxley Act requires public companies to attest to the effectiveness of their internal controls over financial reporting?
- While the largest of U.S. publicly traded companies are in their fifth year of complying with auditor assessments of internal controls, what is the deadline for these smaller “nonaccelerated” filers?
- What size are these firms (those that were given extra time to design, implement, and document controls prior to auditor attestation of their effectiveness)?
Johnson, S. (2009). “Does Sarbox Reduce Restatements?” CFO (Retrievable online at http://www.cfo.com/article.cfm/14459533)
In an effort to keep their heads above water in recessionary times, many companies ignored their traditional strategic plans. They grabbed at any transactions that were above variable costs in efforts to cover fixed costs. Moving away from value-based pricing, they relied on cost-plus pricing. Unfortunately, as this article mentions, cost-cutting can only go so far and then pricing strategies must be overhauled.
- According to the article, what are five signs that a pricing strategy needs to be changed?
- According to the article, why isn’t profit margin necessarily the best metric when measuring the success of strategic pricing initiatives?
- According to the article, why does cost-plus pricing have little to do with market reality?
Ryan, V. (2009). “Price Fixing,” CFO (Retrievable online at: http://www.cfo.com/article.cfm/14456855/c_14457851?f=insidecfo)
Just a week before the Supreme Court hears oral arguments about constitutionality of the Public Company Accounting Oversight Board (PCAOB) and why it should be dissolved, the members of the Board asked for a 16% in the overseer’s 2010 budget. This amounts to an additional $25.7 million to hire 60 more employees, for international inspections, undertaking a new group of audit firms, and additional focus on increasingly complex accounting rules. The legal battle and monetary controversy has followed the PCAOB over several years, with critics displeased that PCAOB board members are paid more than the SEC commissioners and the President of the United States.
- When was the PCAOB established and why? What issues trouble academics and others about the Board’s make-up?
- What is the group that is suing to dissolve this Board and for what reason?
- What are several things that could theoretically result if the Supreme Court rules against the PCAOB’s constitutionality?
Johnson, S. (2009). “Its Future in Limbo, the PCAOB Asks for More Money,” CFO (Retrievable online at: http://www.cfo.com/article.cfm/14459825/1/c_2984347)
CEOs and CFOs are cautiously eyeing the limitations that convergence of FASB and IFRS standards may bring to lease accounting. Predictions are that a new global lease standard, anticipated in 2011, will require many traditionally classified operating leases into the capital lease status.
- What are the current FASB criteria for classifying leases as either operating or capital leases?
- What is the general concept that the FASB and IASB are considering as the way to distinguish between capital and operating leases?
- Explain how this new reclassification would cause “balance sheet blues” and companies that lease to “appear more highly leveraged?”
Johnson, S. (2009). “Balance-Sheet Blues,” CFO (Retrievable online at http://www.cfo.com/article.cfm/14457794/c_2984368/?f=archives)
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.
- 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.
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)
During the time that you thought the U.S. Congress was going to slowdown the generation of credit card fees, here comes another. American Express is sending out notices to customers who use co-branded credit cards with Delta Air Lines, JetBlue, Hilton Hotels, and Starwood Hotels that require a reinstatement fee. These fees will be levied in order to get back your reward points, in the event that you are late with a regular credit card payment.
- The article says that by charging this fee, the company will create additional fees on future balances. Explain your understanding of how this works.
- Where should the transactions (both the fees and the rewards) mentioned in this article be reported in the American Express financial statements?
- What is a co-branded card? Explain how American Express and Delta Air Lines benefits in this arrangement.
SOURCE: Weber, H.R. “Another Credit Card Fee is About to Fly.” Knoxvillebiz.com (Retrievable online at http://www.knoxnews.com/news/2009/nov/18/another-credit-card-fee-about-fly/)
On Tuesday, November 24, 2009, U.S. Airways announced several ways that it will boost its current and future liquidity. Since beginning its innovative slot transaction with Delta Air Lines, the company has been trying to realign a number of financial areas to focus on their most profitable flying operations.
- What is liquidity and explain the most common liquidity ratios?
- One of the areas that U.S. Airways is tweaking is capital expenditures by deferral of the delivery of 54 Airbus aircraft. Explain how that will affect the financial statements.
- Using numbers in the article, explain how a current ratio of 1.4:1 might be affected.
SOURCE: RTTNews. “US Airways To Defer Aircraft Delivery To Boost Liquidity,” (Retrievable online at http://rttnews.com/Content/TopStories.aspx?Id=1139103)
The biotechnology firm, Dendreon Corporation, is a company which is developing the prostate cancer drug Provenge. On Friday, November 20, the U.S. Food and Drug Administration (FDA) accepted its application to market the vaccine to treat men with advanced prostrate cancer. If the FDA approves it, the drug would be the first in a new class of treatments, which uses live human cells to activate a patient’s own immune system.
- Unfortunately, as the Seattle Times article indicates, financing of this new venture has been troublesome at times. What is the mechanism of the stock warrant that the article talks about as a way in which the company raised money to continue its work in April 2008?
- Why did the warrants result in a second-quarter loss in 2009?
- What journal entry would Dendreon Corporation make to initially record the stock warrants in April 2008?