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:
• The one-time overstatement of restructuring costs known as
"Big-Bath Charges" is done to 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 ignored on the presumption that they
will not have a substantial impact.
• Recording revenue before it is generated, or when a corporation
registers revenue to match earnings expectations in order to
boost year-end profits and shares, is known as revenue
recognition.
In the Madison Timber Properties LLC case, the business was accused
of participating in a Ponzi scheme. An financial scam called a Ponzi
scheme uses money raised from new 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.
For this specific case, I think that the company engaged in big bath
charges and revenue recognition charges. These two, in my opinion,
apply to the situation since Mr. Adams utilized a technique of income
manipulation by exaggerating costs and losses to give the investor
the impression that they were continually making money.
References:
Mintz, S. M., & Morris, R. E. (2020). Ethical Obligations and Decision-
Making in Accounting: Text and Cases (Vol. 5th Edition). McGraw-
Hill. SEC.
SEC Shuts Down $85 Million Ponzi Scheme and Obtains Asset
Freeze. Retrieved from SEC:
https://www.sec.gov/litigation/litreleases/2018/lr24129.htm
Wells, J. T. (n.d.). Ponzi Schemes. Retrieved from ACFE:
https://www.acfe.com/ponzischemes.aspx
