All sources Flashcards
Maynard (2017)
textbook
The Economist (2012)
differences between the US GAAP and the IFRS
slow convergence efforts, but the two systems do not seem to merge
Katz (2014)
GAAP and IFRS convergence efforts have failed
the US standards board is not giving up on the rules-based system
The Economist (2014)
Discusses goodwill and the value of brands
Brands cannot be properly accounted for
Enache et al (2019)
R&D for digital companies is a necessary spending to maintain oprations
e.g. product development is necessary to survive
companies have fixed employees for the job
innovation is the driver of economic activity
therefore, R&D sohuld not be considered as discretionary spending
The Economist (2018)
Companies have increasing amounts of goodwill on their statements
e.g. 50% of the Fortune 500 companies have 1/3 or more goodwill
Impairment testing is subjective
Accounting is not prepared for a shift to intangibles
Measurement of the value of goodwill is subjective - there is no better solution that the current system
Barrett et al (2014)
Tesco’s accounting problems
The estimation of rebates was very subjective
Tesco underestimated its expenses
Audit (PwC) did not notice the problem
Deloitte (2022)
FASB was considering introducing the amortisation of goodwill
For convergence reasons it abandoned the plan
Impairment tests remain
Jiang & Lin (2017)
SecurePower gor fined for not reporting separately for its operational segments
CEO is responsibel for identifying the segments and allocating resources to them
talks about what an operating segment is
segment aggregation
Sherman & Young (2016)
statements depend on estimates and judgement
financial metrics might not be enough to compare companies, especially with innovative companies, which gives rise to unofficial measures
4 problems:
1- No universal accounting standards
2- revenue recognition only occurs when the transactions take place, so potential cannot be accounted for
3- unofficial measures
4- measuring fair value is really subjective, e.g. Twitter reported different EPS (profit vs loss) with different measures in 2014
5- strict rules undermine the company’s ability to manupilate costs, whihc leads to short-term focus
Govindarajan et al (2018)
Uber and Twitter both generated loss at the time of the IPO
In contrast, GE’s stock price dropped sharply when it reported loss
Digital companies have intangible assets that generate high returns in the long run - not recognised on statements
Intangible assets might enhance with use
e.g. network effects
for digital companies, expenses are reported at early stages, while user costs are close to 0
it would be important to allow digital companies to capitalise on their intangible assets
Bazerman (2002)
Frauds are not always intentional, they could result from unconscious bias
Why good accountants do bad audits?
1. Ambiguity: information can be interpreted in several ways
2. Attachment: accountants want to remain on good terms with the client and approve their finances
3. Approval: the CEO have already approved the finances - priming
4. Familiarity: the accountant knows the firm
5. Discounting: auditors might not want to lose the client for a small problem, but that could add up in the long run
6. Escalation: auditors might slowly adapt to the mistakes
Collingwood (2001)
The earnings game
SmithKline: ‘not anouther dollar of profit’
earning management is widespread
A slight drop in earnings could lead to a large drop in price
because earnings management is expected, falling short of expectations signals huge problems to investors
Techniques:
- channel stuffing: selling goods to customers who aren’t ready to buy yet (e.g. Sunbeam)
- premature revenue recognition: e.g. MicroStrategy - booked the revenue from selling the software and the future revenue from updates as well
- nudges and winks: analysts and executives might agree on expectations before the reports
- margin of error: e.g. provision for bad debts
Gu &Lev (2016)
earnings management is time consuming and costly
the solution is to make companies disclose specific, relevant information about their activities
Journal of Accountancy (2002)
Enron accounting scandal
Enron transitioned from historical cost to market-to-market accounting, and claimed profits on investments immediately
It the investments were unprofitable then he company would write them off to off-site subsidiaries
