ACC 696 Week 8 Discussion Post 16

Earnings management occurs when companies artificially inflate or deflate their revenues,

profits, or earnings per share figures. Gaa and Dunmore point out that earnings may be

managed in many ways, but they all boil down to two basic possibilities. One is to alter the

numbers already in the financial records by using discretionary accruals and other

adjustments, and the other is to create or structure real transactions for the purpose of altering

the reported numbers (Mintz, 2016). There are five earnings management techniques, these

include the Big Bath, Cookie Jar Reserves, Operating Activities, Materiality, and Expense

and Revenue Recognition methods.

A big bath is an accounting term that is defined by a company's management team knowingly

cookie jar to inflate the numbers (Investopedia.com, 2021).

The operating activities technique is used when managers plan specific events within certain

periods. It is used to flatten income, thus eliminating spikes and dramatic declines in

particular accounting periods (study.com, 2022).

Materiality plays a vital role in the financial reporting process. Earnings management abuses

often stem from misuse or misunderstanding of the proper application of the materiality

concept (journalofaccountantcy.com, 2000).

Expense and revenue recognition can also be called “Income Smoothing” This comes under

fraudulent accounting as the company records its expenses before it incurs or does not show

the profit and sales when earned. They can even accelerate the sales showing extra revenue,

or they do not recognize a bad debt in the current year and shifts it to next year as it reduces

this year’s profit (wallstreetmojo.com, YEAR).

In 2019, the SEC charged The Kraft Heinz Company and two of their former executives for

unearned discounts from suppliers and maintaining false and misleading supplier contracts,

effective internal accounting controls for its procurement division. As a result, finance and

gatekeeping personnel repeatedly overlooked indications that expenses were being

improperly accounted for (SEC.gov, 2019). In this case, Heinz violated the expense and

revenue recognition techniques, also known as Income Soothing. The fraud resulted in nearly

300 misleading transactions that, if they had been recorded properly, would have added $50

million to the company’s cost of goods sold during that time. After the Kraft Heinz merger,

management promised an aggressive push to reduce expenses. “The cost-saving strategy,

including its impact on costs of goods sold, was widely covered by analysts at the time,” the

SEC noted. But after the company “encountered significant headwinds in its effort to meet

annual budget and savings targets,” the commission said, Pelleissone “failed to adjust

expense reduction expectations for the procurement division, creating a high-pressure

environment focused on obtaining same-year cost savings” (cfo.com, 2021).

accounting and disclosure violations that allowed the company to report inflated earnings.

these misstatements took place for six straight quarters (Heller, 2021).

Group “repeatedly failed to record loss contingencies related to litigation settlements despite

arrangement exists, the price (cost) is fixed or determinable, and collectability is reasonably

assured. It seems clear to me this is a case of revenue recognition Do you agree?

In April of this year Rollins Inc., a pest control services company based in Atlanta, Georgia,

agreed to pay the Securities and Exchange Commission (SEC) $8MM. According to the SEC

press release, Rollins was found to have “improper accounting practices in order to boost its

publicly-reported quarterly earnings per share (EPS) to meet research analysts’ consensus

estimates,” (2022). This is another story of a company’s fraud being detected by the Division

of Enforcement’s EPS Initiative, which utilizes data analytics to find “hard-to detect

accounting and disclosure violations by public companies,” (SEC, 2022).

d d d d d d d d d d d In the first quarter of 2016 and the second quarter of 2017 the CFO directed reserves

accounts. The same effect can occur by increasing the distribution channels, which would

d FTE Networks Inc. was a public telecommunication company that manipulated earnings by

recording false revenue. Michael Palleschi, the former CEO, and David Lethem, the former

CFO were charged with multiple counts of fraud in July 2021 by the DOJ (Mangan, 2021).

and Mr. Letham also decided to use company funds for personal use by giving themselves

raises, leasing luxury cars, and taking vacations on private jets (SEC, 2021).

Earnings management is a technique that allows management to possibly alter the financial

statements to reflect desired rather than actual events throughout the time. Big bath charges,

creative acquisition accounting, cookie jar reserves, materiality, and revenue recognition are

the five strategies listed in our text book that management might employ to distort a

company's financial data. These are the five strategies:

minimize assets and hence, future expenses.

By making one-time charges for ongoing research and development, creative acquisition

accounting prevents future costs. Cookie-jar Reserves inflates the costs of sales returns or

warranties in prosperous times and uses these inflated costs in difficult times to lower

comparable fees.

Materiality is when inaccuracies in the financial accounts are intentionally recorded or

investors to pay off old investors. However, the perpetrators of many Ponzi schemes do not

really invest the money. They instead utilize it to reimburse others who made previous

investments and may even keep it for themselves. These projects also often last for a year or

longer, however some have been successful for ten years or more.

Using Madison Timber Properties, LLC, Arthur Lamar Adams scammed more than 150

investors in the Southeast of the United States out of more than $85 million. Investors were

informed by Mr. Adams that he was buying the lumber rights to land in Florida, Alabama,

and Mississippi. Mr. Adams guaranteed investors yearly returns of 12 to 15 percent, and the

investors' account records showed they had been profitable over time. Although Madison

Timber Properties, LLC did not own any property, the investors received gains that were

solely on paper. As an alternative, Mr. Adams made bogus cutting agreements and falsified

documents with lumber firms. To keep the Ponzi scam running, he was moving the money of

the investors around.

Earnings management occurs when companies artificially inflate (or deflate) their revenues,

earnings management, and accounting management. Operating earnings management

accounting standards to alter earnings numbers. I feel that operating earnings management

betters describes this case because Trump overvalued his property in the financial statements

Letitia James accused Trump of routinely lying about the value of his properties to secure

hundreds of millions in bank loans and tax breaks. James wants a judge to order $250 million

in penalties and to bar the Trump family from selling, buying, collecting rent, or borrowing

money in New York. Trump's objectively false 2015 claim that his Trump Tower triplex on

Manhattan's Fifth Avenue spanned 33,000 square feet. It was 11,000 square feet, a huge

exaggeration. The former president has allegedly been overvaluing the place on the financial

statements he gives to his financial institutions. Trump as part of an alleged scheme to induce

banks to lend money to the Trump Organization on more favourable terms than would

otherwise have been available to the company. To satisfy continuing loan covenants, to

induce insurers to provide insurance coverage for higher limits and at lower premiums, and to

gain tax benefits. Records show Trump acquired a 6,096-square-foot triplex apartment

company to influence the company's profits just so the figures can match a fixed goal. After

discussing the current rental market, FTE Networks, Inc. is the perfect company to discuss.

The SEC accused Florida-based FTE Networks, a provider of network infrastructure, of

running an extensive accounting fraud as of. The corporation overstated its revenues over

100% at some times, according to a study made public by the SEC. Following a grand jury's

indictment, former FTE Networks Inc. CEO Michael Palleschi and former FTE Networks Inc.

CFO David Lethem were detained and charged with conspiracy, securities and wire fraud,

improperly influencing the conduct of an audit, and aggravated identity theft. Regarding some

critical parts of these documents that were improperly recorded or reported in FTE's financial

statements, the two CO'S misled FTE's internal accounting staff as well as the company's

external auditor. According to the same SEC claim, Palleschi and Lethem wrongfully

encouraged FTE to record revenue and associated accounts for fake construction projects,

which led to an increase in the company's revenues. According to the press statement, the

embezzled money were used to pay for private aircraft use, luxury automobile rentals,

personal credit card purchases, unlawful wire transfers, and stock issuance. In the end, FTE

Networks had to restate its 2017 net loss to $92 million due to the debt features that were

hidden. The accelerated revenue recognition method, which can result in misuse within

accrual accounting, is portrayed in this case. Improper revenue recognition claims by the

SEC, like in this instance, are a key cause of restatement and have been notably recognized in

similar element, as measured by vendor-specific objective evidence of fair value, under

committed goods or services have been delivered. FTE networks violated GAAP by failing to

follow the guidelines outlined in the accounting standards and ignoring other factors.

American Renal Associates Holdings, Inc. (ARA) is one of the largest national providers of

dialysis care in the United States. The case I found against the company alleges that they used

the cookie jar technique in the fraudulent scheme. According to the SEC complaint, ARA had

a two-step process to recognize revenue. This involved estimating the amount of payment

from insurance companies which they called a contractual allowance, and second, making