978-1285428710 Section 4 SECTION 4B

subject Type Homework Help
subject Pages 5
subject Words 2788
subject Authors Marianne M. Jennings

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Saul Gellerman
Answers and Key Discussion Items
1. The author has several areas that require structural modifications (Use PowerPoint Slide 127):
Boards of Directors – Need to be full-time; need to play the role of an inspector general and have
unannounced access; more of an adversarial relationship with management; outside directors are
not independent because they play the role they were picked to pay.
2. Ethics training is not effective because of its “laboratory” nature. Individuals do not face the structures
and pressures that they face when these issues arise. However, there are some decisions and
policies and rules that employees do need to know as part of the conditions for their continuing
3. The author would require continuing accountability so that officers who are given bonuses would lose
those bonuses if it turned out that they had engaged in accounting improprieties, falsified inventory, or
4. Goldman made compensation changes that tied the rewards to the longer term success of the
Answers and Key Discussion Items
1. She began by simply taking cookies from open packages at the cash register. She then graduated
into opening packages, and then she began just taking from the shelves what she wanted. The drift
was fueled by the fact that she simply could not afford snack foods on her budget. She began with
2. The problems here are many – without enforcement, Walmart faces risk related to employees not
taking their obligations to honor ownership seriously. The stakeholders include all of us who shop at
3. Ms. Winters seems to be a decent human being who was just tempted by not being supervised and a
desire for junk food. There is the challenge in being ethical even when no one is looking or when we
Use PowerPoint Slides 128 and 129.
Answers and Key Discussion Items
1. See PowerPoint Slide 129 for the chart.
2. Goldman’s emphasis on long-term survival is culturally different from the changes: “Filthy rich by 40”
is not consistent with the stated goal of making all systems more long term and tied to company
3. Friedman believes that the levels of compensation are a shareholder issue only and should be solved
by shareholders. However, emotion is fueling the debate over the compensation packages and
This topic is not only critical for accounting students, it is critical for financial managers and anyone who
has a financial interest in a company. By delving into the ethics of earnings management, one learns a
great deal about accounting and gains some insight into how earnings can be manipulated to create a
perception of value when real value may not be there. This reading introduces the basic accounting
terms and practices that are found in this section on financial frauds that evolving through the use of
loopholes in the accounting rules.
Use PowerPoint Slides 130 - 144 to help with the discussion of these accounting and financial reporting
Refer back to this reading as the students study the cases so that they are better able to understand what
happened at the various companies that had financial collapses and restatements.
Answers and Key Discussion Items
1. According to then-Chairman Levitt, there has been a gradual increase in earnings management, both
the amount of earnings management taking place, the levels and the extent of the tactics used for
2. The motivation is to keep earnings smooth and the theory is that with smooth earnings the stock price
3. While shareholders may benefit from the stable price of the shares, the downside is that they lose the
4. Earnings management allows a false impression. Warren Buffett has called earnings management a
5. The following is an excerpt from Marianne M. Jennings, “On Shareholder Value,” Corporate Finance
Review 13(6):35-40 (2009):
Since the time Jack Welch became CEO of GE, the response of MBA students to high-risk, ethically
questionable, or opaque accounting and financial reporting has been, “But it increases shareholder
value.” From EBITDA to derivatives to off-the-books debt to off-shore headquarters to mergers and
acquisitions, and all the way through to subprime lending and CDOs, this universal response
The remarkable part of this movement was that managers and shareholders alike were able to
convince themselves that shareholder value was something that existed in cyberspace, that it was
divorced from the other aspects of running a business such as customer service, quality products,
and innovation in both. Mr. Welch noted in his confession, “Shareholder value is a result . . . not a
Shareholder value based on financial tricks and sleights of hand was always a nonsustainable
business strategy. Economic systems cannot function on the one-upmanship tactics of using
Federal Reserve Chairman Ben Bernanke disclosed that of all the fall-out and failures from the
subprime crisis, AIG was the one that made him angry because it “made huge numbers of
1 “Shareholder Value Re-Evaluated,” Financial Times, March 16, 2009, p. 8.
2 Frances Guerrera, “Welch Denounces Corporate Obsessions,” Financial Times,
March 13, 2009, p. 1.
3 John Gapper, “Too Long in the Spaceship, Hank,” Financial Times, March 5,
2009, p. 11.
described here does have its systemic costs.
Economic systems, as envisioned by Adam Smith, are based on two simple concepts: building a
better mousetrap and selling it well. There is a finite time that a firm with a rotten mousetrap can
continue to appear as the market’s superior performer. During that time, rotten mousetrap producers
are focused on shareholder value even as they fail to address the product’s issues, the customers’
concerns, and the direction of the market. When the shareholder value model fails, as it has
What really increases shareholder value? A focus on competitive products, quality production, and
customer service. The Welch model for shareholder value made it seem as if it was a concept
divorced from the basic business model. When MBA students were asked whether they put
shareholders or customers first, shareholders were ranked #1 by 76% of the students. How did this
Shareholders are not really clear on how long the ride with numbers will last, and, as the examples
illustrate, the end can be catastrophic for the value of those shares. The key to shareholder value
manipulations is the same as the key to Ponzi schemes: you have to know when to fold ‘em and
Yet another component of Adam Smith’s model for free markets was morality. Markets cannot
function without trust. With trust squandered on accounting tricks and short-lived loopholes,
businesses must now rebuild. This construction project demands real mousetraps, built well,
6. The CFO has engaged in rationalization – the very simple, "Everybody does it." The CFO is not
doing the analysis of what impact the management will have on shareholders, creditors, community,
employees, and has failed to consider the long-term impact of such an approach to earnings –
Answers and Key Discussion Items
1. This problem is one that concerns law schools because they are trying to evaluate applicants on an
2. People see the issue differently and it also depends on the extent of help the consultant gives. If it is
a matter of portraying your background in the best light or polishing your thoughts in an essay, then
3. Yes, the testing help was step one, the loss of academic advisers was step two, and so forth. The
4. Certainly students get into law school without consultants’ help, but the feeling that someone has one
up on you drives some to spend money they perhaps did not need to spend. When there is a lack of
Answer and Key Discussion Items
1. Yes, there is personal benefit in both counties that elected officials were seeking. However, Ms.
Gates was seeking a business opportunity and not seeking money or gifts. She was trying to get
2. The way to discuss this issue is what did they go to prison/plead guilty for? For some shoes, and
suits, and a watch. Their appearance was important to them but they were not thinking of their
3. They always begin in small ways – first a dinner, then a trip to NYC to see the bond firm’s operations
and discuss the offering of the bonds. It just blossomed into more trips and more “stuff” each time
4. The costs in Clark County were the loss of trust and perceived corruption as well as the resignation of
the commissioner. In Alabama, the city became blighted because the government was bankrupt.

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