Class 10 - ACCT361 AccountingInformationSystems Click to...

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Click to edit Master subtitle style ACCT-361  Accounting Information Systems Finish Fraud and Internal Controls Class #20
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Discussion n Homework questions? n Projects and time management n Now, we will finish our lecture on fraud, errors, and internal controls. n How was WorldCom fraud discovered?
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Business Week, 10/4/04
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Business Week, 10/4/04
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Business Week, 10/4/04
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Other Examples n Financial Statement Fraud q World Com q Health-South q Fannie Mae q Channel stuffing: Forcing distributors to make sales n Bristol-Myers; Krispy Kreme; Compaq; many others q Round-trip deals: swap of assets or services back and forth without any real gains
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Good quote summarizing problems at Fannie  Mae n “A searing, 211-page report of a Special Examination of Fannie Mae released on Sept. 22 by the Office of Federal Housing Enterprise Oversight paints an ugly picture of a company tottering under the weight of the sort of baleful misdeeds that marked the corporate scandals of the past three years: dishonest accounting, lax internal controls, insufficient capital, and me-first managers who only care that earnings are high enough to get fat bonuses and stock options.” http://www.businessweek.com/@@9UhMCWUQ6rDg7RMA/premium/content/04_41/b3903037_mz011.htm
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Fannie Mae Enron?  The Wall Street Journal, A16, 10/4/04, Editorial n For years, mortgage giant Fannie Mae has produced smoothly growing earnings. And for years, observers have wondered how Fannie could manage its inherently risky portfolio without a whiff of volatility. Now, thanks to Fannie's regulator, we know the answer. The company was cooking the books. Big time. n . . . By improperly delaying the recognition of income, it created a cookie jar of reserves. And by improperly classifying certain derivatives, it was able to spread out losses over many years instead of recognizing them immediately. In the cookie-jar ploy, Fannie set aside an artificially large cash reserve. And -- presto -- in any quarter its managers could reach into that jar to compensate for poor results or add to it to dampen good ones. This ploy, according to Ofheo, gave Fannie "inordinate flexibility" in reporting the amount of income or expenses over reporting periods. n This flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million. n Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie's executives -- whose bonus plan is linked to earnings-per-share -- to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309.
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This note was uploaded on 02/05/2011 for the course SOM 492 taught by Professor Minecar during the Spring '11 term at George Mason.

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Class 10 - ACCT361 AccountingInformationSystems Click to...

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