QUALITY OF EARNINGS.doc

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1、Financial and Management Accounting CommitteeFebruary 2003QUALITY OF EARNINGS:A Case Study CollectionIssued by the International Federation of AccountantsThe mission of the International Federation of Accountants (IFAC) is the worldwide development and enhancement of an accountancy profession with h

2、armonized standards, able to provide services of consistently high quality in the public interest.The Financial and Management Accounting Committee (FMAC) of IFAC welcomes any comments you may have on this booklet. Comments should be sent to: Technical Manager, FMACInternational Federation of Accoun

3、tants535 Fifth Avenue, 26th FloorNew York, NY 10017-3610USAFax: +1 212-286-9570E-mail: EDCommentsifac.orgCopies of this Case Study Collection may be downloaded free of charge from the IFAC website at www.ifac.org. Hard copies may be purchased from IFAC through the bookstore on the website or by call

4、ing +1 212-286-9344.Copyright February 2003 by the International Federation of Accountants and the American Institute of Certified Public Accountants, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, me

5、thod or device, electronic, mechanical, photocopying, recorded or otherwise, without the prior written permission of the International Federation of Accountants and the American Institute of Certified Public Accountants.For information about the procedure for requesting permission to make copies of

6、any part of this work, for commercial purposes, or for purposes other than classroom use, please call the AICPA Copyright Permissions Hotline on 201-938-3245. ISBN: 1-931949-00-XFOREWORDThe Financial and Management Accounting Committee (FMAC) of the International Federation of Accountants (IFAC) exp

7、lores emerging trends and seeks to represent contemporary best practice in the domain of accounting work concerned with the management of organizations. This is done primarily through a range of publications: annual theme booklets, an annual collection of articles of merit, research studies, Interna

8、tional Management Accounting Practice Statements (IMAPS) and guides for practitioners. Periodically, a member body makes available its own work for distribution to a broader audience through FMAC in an effort to share that work. Such is the case with this collection of case studies on earnings quali

9、ty.“Earnings Quality” has been a subject of investigations by regulators in many countries, articles in most, if not all, business publications, and significant debate in recent years. It is a matter of importance in the financial reporting and regulatory communities, and it impacts the confidence o

10、f investors in global financial markets. For this reason, the American Institute of CPAs in the U.S. engaged authors and experts to assemble this collection of case studies, to put the reader in the seat of executives making decisions that could impact the future of their company, and their own and

11、their employees livelihoods.The concept of Quality Earnings goes back to preparers understanding the economic substance of a transaction, then reflecting it properly in the books and records of the company. However, this is not always easy, as accounting rules are not simply black and white, and the

12、 nature of transactions is ever more complex. This understanding can be improved when the chief financial officer (CFO), an expert in the management of process, technology and resources, is part of the decision-making process in a company and can help guide and shape decisions to make better sense w

13、ithin the context of the applicable accounting standards and regulatory reporting requirements.Managing the business and its operations to achieve a desired outcome or hit a target is entirely appropriate, (the emphasis here is placed on managing the business); managing earnings as we all agree, is

14、not an acceptable practice to hit earnings targets. This fact is critical to professional accountants in management throughout the globe, and especially to our brethren in the United States where the profession has been challenged by corporate scandals and government regulation. As practitioners in

15、the global financial reporting community we must report high quality earnings and the necessary disclosures to enable the investing public to make better informed decisions.One way to do this is through the creation of a robust performance measurement system incorporating both financial and non-fina

16、ncial measures that not only measure current positions but also are predictive of future conditions in the business. Knowing and understanding key metrics in a company can lead to better decision-making and reporting, and thus higher quality earnings. Having an effective early-warning system in plac

17、e could obviate the need for managing earnings by giving more of an opportunity for managing operations.We hope you use these cases as an education opportunity for yourself and for your colleagues. You may want to create an interactive discussion session by distributing the cases for discussion, and

18、 then introducing the expert commentary for review. If you learn something about earnings quality, and it sensitizes you to the importance of this topic to your company, and to the integrity of the broader financial markets, then we will have achieved our objective.Bill Connell, FCMAJohn F. Morrow,

19、CPAChairmanAICPA Vice PresidentIFAC FMACThe New FinanceMembers of the 2002 Financial & Management Accounting Committee:Santiago Lazzati, ArgentinaDavid Jeffries, AustraliaGerhard Prachner, AustriaRaymond Darke, CanadaPatrick Rochet, FranceSrinivasan Ramanathan, IndiaGhasem Fakharian, IranRodolfo Di

20、Dato, ItalyYeo Tek Ling, MalaysiaPeter Sampers, NetherlandsMuhammad Aslam, PakistanZein El Abdin El Boraie Ahmed, SudanRecep Pekdemir, TurkeyWilliam L. Brower, Jr., United States TABLE OF CONTENTS The Experts1Cases: Index By Issue4Do the Right Thing5By Howard Fowler, MS, CPA, CFM, FHFMAA Controllers

21、 Challenge15By Timothy L. Riedinger, CPAAccounting For Loan Losses at County National Bank23By Larry M. Prober, Ph.D., CPAAccounting for In-Process R&D at Simpco Incorporated32By Larry M. Prober, Ph.D., CPAVision Technologies Incorporated: Issues in Revenue Recognition41By Larry M. Prober, Ph.D., CP

22、ARestructuring At Exozol?51By Larry M. Prober, Ph.D., CPAAccounting Issues At National Technology Corporation59By Larry M. Prober, Ph.D., CPAIs it Okay to Buy Earnings?69By Lorri Carpenter, CPAA Troubled Acquisition for Websave79By a Fortune 100 ExecutivePolicy and JudgmentThe X Systems Group89A Cor

23、porate Training Case StudyInventory Valuation Issues at AKL97By Grace S. Morin, CPAAccounting for a Windfall105By Grace S. Morin, CPAThe Aker Computer Company111By Russell F. Briner, CPARestatements at Vesania Networks117By Jim MoultThe Case of Barter Transactions and Revenue Recognition127By Chris

24、BakerReferences137THE EXPERTS Quality of Earnings ExpertCase CommentariesAnwer S. Ahmed, Ph.D., is Associate Professor of Accounting at the School of Management, Syracuse University. He is the author of “Bank Loan Loss Provisions: A Reexamination of Capital Management, Earnings Management and Signal

25、ing Effects,” (with C. Takeda & S. Thomas), Journal of Accounting & Economics, August 2000. Accounting For Loan Losses at County National Bank 23Bob Stefanowski, CPA, CFE, M.B.A., is an adjunct professor at the Stern School of Business and holds an M.B.A. in Finance from Cornell University. The Aker

26、 Computer Company 111Restatements at Vesania Networks 117Carol A. Purcell, CPA, is the Chief Financial Officer at the Roman Catholic Archdiocese of Newark (NJ). Carol spent 10 years at Coopers & Lybrand specializing in hospitals and not-for-profit organizations, in addition to having experiences in

27、large commercial organizations. Following her years at Cooper & Lybrand, Carol was a senior financial executive at a major hospital corporation in Northern New Jersey, before taking her current position as CFO at the Roman Catholic Archdiocese of Newark. Do the Right Thing 5Restatements at Vesania N

28、etworks 117Dan Hugo, CPA, is Director of External Reporting for EBay Inc. Ebay pioneered a Web-based community in which buyers and sellers are brought together. EBay also engages in the traditional auction business and in online payment processing. Vision Technologies Incorporated: Issues in Revenue

29、 Recognition 41A Troubled Acquisition for Websave 79The Case of Barter Transactions and Revenue Recognition 127Dan M. Guy, Ph.D., CPA, lives and practices in Santa Fe, New Mexico. Dans practice is limited to consulting services, including litigation involving accountants malpractice issues. His most

30、 recent book is Audit Committees: A Guide for Directors, Management, and Consultants (Aspen Law & Business). A Controllers Challenge 15Is it Okay to Buy Earnings? 69Inventory Valuation Issues at AKL 97Accounting for a Windfall 105Restatements at Vesania Networks 117Grace Pownell, Ph.D., joined the G

31、oizueta Business School Faculty, Emory University in the fall of 1993. She is the author of “How Frequently Do Managers Disclose Prospective Earnings Information?” The Journal of Financial Statement Analysis, Spring 1998. (Co-authors: C. Kile & G. Waymire).A Controllers Challenge 15Accounting for In

32、-Process R & D at Simpco Incorporated 32Restructuring At Exozol? 51Lota Zoth, CPA, was appointed Senior Vice President and Corporate Controller at PSINet Inc on August 7, 2000. PSINet Inc is a global facilities-based provider of Internet access services and related products to businesses. PSINet Inc

33、. also provides Internet Protocol and network backbone services. Prior to joining PSINet, Ms. Zoth was Controller and Chief Accounting Officer for Sodexho Marriott Services, Inc. (NYSE: SDH).Is it Okay to Buy Earnings? 69A Troubled Acquisition for Websave 79The Case of Barter Transactions and Revenu

34、e Recognition 127Marshall Pitman, Ph.D., CPA, CMA, is Associate Professor of Accounting at The University of Texas in San Antonio. The Aker Computer Company 111Martin S. Fridson, CFA, is Chief High Yield Strategist and Managing Director at Merrill Lynch. Mr. Fridson is author of several books on Fin

35、ancial Statement Analysis. Do the Right Thing 5Accounting Issues At National Technology Corporation 59Policy and JudgmentThe X Systems Group 89Maureen F. McNichols, Ph.D., CPA, is Marriner S. Eccles Professor of Public and Private Management, Stanford University. She is the author of “Does Meeting E

36、xpectations Matter: Evidence from Analysts Forecast Revisions and Share Prices,” (with R. Kasznik), Stanford University Graduate School of Business working paper, 2001. Policy and JudgmentThe X Systems Group 89The Case of Barter Transactions and Revenue Recognition 127Mike Cohen, CPA, is Director of

37、 Technical Services for the NJSCPA. He previously worked at Ernst & Young as a specialist in technical matters and before that he was a project manager with the FASB. Accounting for In-Process R & D at Simpco Inc. 32Restructuring At Exozol? 51Nita Clyde, Ph.D., CPA, is a partner at Clyde Associates.

38、 Clyde Associates is a boutique consulting firm located in Dallas, TX where Nita specializes in accounting education with a particular emphasis on issues of professional ethics. She chairs the AICPA/NASBA Joint Committee on Continuing Professional Education Standards, as well as a Special Committee

39、on Ethics in the CPA Profession. She is a past member of the AICPA Board of Directors, and is currently a member of its governing Council. Nita was a university professor for almost 20 years. Accounting for In-Process R & D at Simpco Incorporated 59Policy and JudgmentThe X Systems Group 89Inventory

40、Valuation Issues at AKL 97Accounting for a Windfall 105Paul Bialek, CPA, is Chief Financial Officer and Senior Vice President, Finance and Operations of RealNetworks, Inc. RealNetworks is a provider of media delivery and digital distributions solutions designs for the internet. A Controllers Challen

41、ge 15A Troubled Acquisition for Websave 79The Case of Barter Transactions and Revenue Recognition 127Paul Munter, Ph.D., CPA, is KPMG Peat Marwick Professor of Accounting at the University of Miami. He is editor-in-chief of The Journal of Corporate Accounting & Finance and the author of “Progress on

42、 Impairments and Business Combinations”, The Journal of Corporate Accounting & Finance, November/December 2000. Vision Technologies Incorporated: Issues in Revenue Recognition 41Accounting Issues At National Technology Corporation 59Robert M. Tarola, CPA, is Chief Financial Officer and Senior Vice P

43、resident of W.R. Grace & Co. Do the Right Thing 5Stephen J. Cosgrove is Vice President, Consumer Sector Finance, at Johnson and Johnson Inc. Johnson and Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Accounting for

44、 In-Process R & D at Simpco Incorporated 32Restructuring At Exozol? 51Stephen L. Key is the retired Executive Vice President and Chief Financial Officer of Textron Inc. He is a former Executive Vice President and Chief Financial Officer of ConAgra and a former managing partner of the Ernst and Young

45、 New York office. Vision Technologies Incorporated: Issues in Revenue Recognition 41Is it Okay to Buy Earnings? 69Steven M. Mintz, Ph.D., is a leading expert in the field of professional ethics for CPAs. Dr. Mintz is Visiting Professor of Accounting at Chapman University. He is the author of more th

46、an twenty published papers in ethics and a casebook in accounting ethics. Accounting For Loan Losses at County National Bank23Is it Okay to Buy Earnings? 69Inventory Valuation Issues at AKL 97Accounting for a Windfall 105Steven Wallman, J.D., is founder and CEO of FOLIOfn founded in 1998. Using the

47、FOLIOfn system, investors can purchase customized portfolios. He is a former commissioner of the U.S. Securities and Exchange Commission and a former partner, Covington and Burling. He is a non-resident senior fellow of economic study at Brookings. Vision Technologies Incorporated: Issues in Revenue

48、 Recognition 41Accounting Issues At National Technology Corporation 59Policy and JudgmentThe X Systems Group 89William McLucas, J.D., is a Partner with Wilmer, Culter & Pickering. His practice focuses on securities enforcement, regulation and litigation matters. McLucas served as Director of Enforcement at the Securities and Exchange Commission for eight years. Do the Right Thing5Accounting For Loan Losses at County National Ban