shenanigans described by Schilit and provide examples of each.
66.
Explain what is meant by “quality of earnings” including links to earnings management and
audit committee responsibilities in evaluating the quality of earnings?
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67.
Categorize the financial shenanigans in the fraud cases at Gemstar-TV Guide and Lucent.
Lucent’s financial shenanigans involved almost all categories identified by Schilit whereas
Gemstar-TV Guide mostly used revenue shifting techniques to manipulate recorded
revenue.
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68.
The Xerox case deals with accounting for multiple deliverables. Explain what this means in
the context of the Xerox fraud.
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69.
Assume you are a CPA and the accounting manager of a small privately-owned business
that has three co-equal shareowners. Your company receives $1,000 from a cash sale of
merchandise taken by the customer. Your boss tells you to recognize only $700 and put
the other $300 in reserves. What would you do and say and why? Use ethical reasoning to
support your position.
70.
In Chapter 7 we discuss the work of Sam Antar, a convicted felon and former CFO of Crazy
Eddie, in helping to analyze and ferret out the fraud at Green Mountain Roasters in
September 2012. Today Antar works very closely with the FBI, IRS, SEC, Justice
Department, and other federal and state law enforcement agencies in training them to
identify and catch white-collar criminals.
In October 2015, Andy Fastow, also a CFO (at Enron) and convicted felon, spoke at the
University of Missouri on “Pride and Repentance: The Enron Story,” focusing on his
personal shortcomings and similar number-fudging he says is still occurring in companies
across the world. Despite the damage he caused, Fastow said he didn’t break any rules
while at Enron but instead found ways around the rules for his own and the company’s
benefit.
Do you believe that convicted felons should be allowed to benefit from their work and
speeches in a financial or reputational way? Use ethical reasoning to support your answer.
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71.
March 26, 2015, A San Francisco federal judge allowed Zynga Inc. shareholders to proceed
with their class-action lawsuit alleging the online gaming company failed to disclose
slumping revenue growth before its market value declined by several billion dollars in
2012. According to the plaintiffs, Zynga concealed declining user activity, masked how
changes in a Facebook platform for its games would affect demand, and inflated its 2012
revenue forecast. The shares fell from a peak of $15.91 on March 2, 2012 to below $3 on
July 26, 2012, when Zynga posted disappointing earnings and cut its outlook.
Zynga says it recognizes revenue after it determines that a service has been provided to a
player and the collection of fees is “reasonably assured.” But determining that a service
has been provided seems a little more complicated than it would appear, because Zynga
needs to differentiate between the types of goods it sells its players.
Zynga, which makes games like FarmVille and Mafia Wars for social networking platforms
like Facebook, classifies the game items it sells to players as either “consumable” or
“durable” goods. The former category is for goods that players can immediately use, like
energy in the game CityVille; the latter is for goods that players buy and keep for the
duration of the game, such as tractors in FarmVille.
The company recognizes revenue for the consumable goods as soon as they are
consumed. The durable goods present a problem, however, because things like virtual
tractors don’t depreciate, but potentially live forever, and the company is obligated to
ensure that the virtual game pieces continue to exist in the game world. That’s forced
Zynga to come up with a system of determining how long that may be.
Discuss the challenges of recognizing revenue for the online products/services Zynga
provides to its customers. Draw an analogy between how Zynga should go about
recognizing revenue and when gift cards are sold to be used at a later date.
