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发表于 2011-3-22 11:47 | 只看该作者

Reading 40: Financial Reporting Quality: Red Flags and Accou

center, warning, methods, accounting, 2011
Session 10: Financial Reporting and Analysis: Applications and International Standards Convergence
Reading 40: Financial Reporting Quality: Red Flags and Accounting Warning Signs

LOS e: Describe common accounting warning signs and methods for detecting each.

 

 

Charles Nicholls, chief investment officer of Gertmann Money Management, is reviewing the year-end financial statements of Zartner Canneries. In those statements he sees a sharp increase in inventories well above the sales-growth rate, and an increase in the discount rate for its pension assets. To determine whether or not Zartner Canneries is cooking the books, what should Nicholls do?

A)
 Calculate Zartner’s turnover ratios and review the footnotes of its competitors.
B)
 Check Zartner’s cash-flow statement and review its footnotes.
C)
 Analyze trends in Zartner’s receivables and consider the changing characteristics of its work force.

 

To assess the meaning of the inventory increase, look for declines in industry turnover. And if Zartner changes its pension assumptions, Nicholls should see how those new assumptions compare to those found in the footnotes of financial statements from other companies in the same industry.

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1215

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发表于 2011-3-22 11:48 | 只看该作者

Junior analyst Xander Marshall sends an e-mail to his boss, Janet Jacobs, CFA, suggesting that Peterson Novelties is manipulating its results to artificially inflate profits. He cites four reasons for his conclusion:

  • The LIFO reserve is declining. 
  • Earnings are much higher in the September quarter than in other quarters.
  • Many nonoperating and nonrecurring gains are being recorded as revenue.
  • Much of Peterson’s earnings come from equity investments not reflected on the cash-flow statement.

Jacobs is less concerned about Peterson’s earnings than Marshall is, though she does resolve to check out one of his concerns. Which of Marshall’s observations best supports his conclusion?

A)
 Nonoperating and nonrecurring gains recorded as revenue.
B)
 Equity investment earnings not reflected on the cash-flow statement.
C)
 The declining LIFO reserve.

On its own, a declining LIFO reserve is not a sign of fraud. Peterson Novelties could have simply moved a lot of inventory and disclosed the LIFO liquidation in its footnotes. When unusual gains are recorded as revenue they will artificially boost sales growth. Each of the above issues are potential danger signs, but can also be easily explained in a manner beyond reproach. However, earnings from equity investments that do not generate cash flow are of very low quality and warrant further examination.

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3#
发表于 2011-3-22 11:48 | 只看该作者

Frank Brill, CFA, is concerned that Moses Aviation is overstating its profits. The best indicator of such action would be Moses Aviation’s:

A)
 recognition of revenue from barter transactions.
B)
 sales-growth rate of nearly twice the industry average.
C)
 rising inventory.

While an unusually high sales-growth rate may indicate fraud, it could also indicate good management. It’s a yellow flag, but not the best indicator of accounting shenanigans. Rising inventory is also a dual signal. It could be meant to overstate profits, or it could simply reflect an actual buildup of inventory in response to market forces or corporate operations. However, companies should not recognize revenue from barter transactions. The additional revenue is likely to improperly boost profits.

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