In: Business and Management

Submitted By esesezz
Words 1149
Pages 5

To: Ed Furticella
From: Xu Huang
Date: April 2, 2014
RE: Financial Shenanigans Assignments

There are seven earnings manipulation techniques that companies may use to give investors the mistaken impression that its company is performing better than the underlying economic reality, include: recording revenue too soon; recording bogus revenue; boosting income using one-time or unsustainable activities; shifting current expenses to a later period; employing other techniques to hide expenses or losses; shifting current income to a later period and shifting future expenses to an earlier period.

Recording Revenue Too Soon
In order to shift revenue or gains in future-period to current period or to oversize bonuses and stock options, management may shift revenues or gains from future period to current period through recording revenue before completing any obligations under the contract; recording revenue far in excess of work completed on the contract; recording revenue before the buyer’s final acceptance of the product or recording revenue when the buyer’s payment remains uncertain or unnecessary. To mitigate the risk of such misrepresentation, investors should ware some warning signs of shenanigans: extended end date, sharp jump in accounts receivable, especially long-term and unbilled ones, using percentage-of-completion accounting or aggressive assumptions, inappropriately low discount rate, premature revenue recognition policy, Inappropriate use of mark-to-market or bill-and-hold accounting, consignment arrangements, incorrect shipping or liberalizing customer collection terms.

Recording Bogus Revenue
To accelerate its revenue, companies may create fake revenue through recording revenue from transactions that lack economic substance, like faking nonexistent transaction; or lack a reasonable arm’s-length process, such as transactions with…...

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