Chapter 5 - CHAPTER FIVE Standards and Principles...

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CHAPTER FIVE 5 Chapter Introduction: Accounting Standards and Principles Standards and Principles Surrounding the Financial Statements 5.1 NEL “Ladies and gentlemen of the jury, I put it to you that the defen- dants, Market Darling Inc.’s top managers on trial here, willfully circumvented accounting standards in preparing the set of finan- cial statements that are the heart of this lawsuit. When investors, ordinary Canadians like yourselves, bought Market Darling shares, they were putting their faith in the company as well as their savings, and part of that faith was that they would get honest infor- mation in the company’s financial reports. That faith was destroyed by the company’s self-serving accounting, and the evidence shows that such accounting also led to the collapse of the whole business and the loss of investors’ money as well as their faith. I’ll summarize the main parts of this sad story: Market Darling began ten years ago with a solid business concept and good employees. But top managers, there at the defendants’ table, wanted faster growth. •T o fuel the rapid growth those managers wanted, the company needed large amounts of money, which it got from share issues and bank borrowing, and spent on increasingly grandiose and dubious investments and acquisitions of other companies. o convince investors and lenders that it was doing well, and so keep their money coming in, the company had to show strong growth in earnings. op managers found accounting too conservative and cautious for their liking, so they started to find ways of reporting revenues that were not real and delaying expenses, and so produced artifi- cially high earnings, retained earnings and assets like receivables and inventories. The continuous and increasing demand for earnings growth became a treadmill. The company began making business deals and acquiring other companies because they made the accounting numbers look good, not because they made busi- ness sense. Trusting investors supported the company, and the share price rose more than ten-fold in a few years. Getting increasingly good accounting results became the whole goal. But it was a house of cards. The accounting was unfair, unreliable, unconventional, unconservative, and ulti- mately unbelievable. When investors realized this, they ran for cover, and the share price collapsed. Faithful investors lost their shirts, when the share price fell over 95% in a few weeks and the company was forced into bankruptcy. Ladies and gentlemen, this lawsuit is fundamentally about accounting standards and the company’s failure to follow them. If the company had followed accepted accounting stan- dards, instead of trying to get around them, it would not have gotten into this mess, investors would not have suffered the huge losses, and you would not be here thinking about accounting on this fine summer’s day.”
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Using Principles to Produce Accounting Information How do accountants decide what accounting is needed and then put their decisions into practice? This section outlines the conceptual background that guides accountants.
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Chapter 5 - CHAPTER FIVE Standards and Principles...

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