In: Accounting
Jim is the owner and president of ZZZ Company. He and his close friend, Dan, graduated with MBAs. They always dreamed about being successful and making lots of money. They have worked in the same company for years, working their way up to senior management and eventually senior executive roles. ZZZ Company has been a success the entire time that Jim and Dan have worked for the company. Stock prices have increased every year, and revenues have grown by a compounded rate of 20 percent per year. Jim is becoming a little suspicious of the company’s results because the earnings per share are always equal to Wall Street’s projections. In the past couple of years, Jim has noticed that his friend’s personal life has become troubled. Dan has gotten a divorce and is continually struggling financially, even though Jim knows that Dan is making plenty of money to cover his bills. One night, Jim stopped by the office to respond to some e-mails he could not get to during the day. He noticed that Dan was working late as well. Dan was the CEO, and Jim just assumed that he was working late because it was close to the end of the quarter. However, after reviewing the quarter’s results, Jim is suspicious again because the results are exactly equal to Wall Street’s forecasts. Jim decides he needs to begin an investigation into financial reporting practices.
Question: What issues must Jim consider in deciding how to investigate the financial results of the company?
The concern with this investigation is that Jim needs to make sure it is not seen as a private attack at his partner Dan. Reminisce that he accepts it has to some degree to do with Dan but could very straightforwardly not be Dan’s liability. Criticizing him could stress the long term business association between the two. So I would endorse that Jim broaden his hunt to not emphasis openly on his partner. The main emphasis should be on how the company is attaining EPS equivalent to Wall Street’s projections. That is optimistic in idea but almost impossible to do year after year. Maybe a bit higher, a bit lower, or equal to the predictions but not equal to year after year. This needs to be the financial emphasis of Jim’s examination. It will most likely give light to a red flag in the accounting processes. On top of the company’s processes, Jim is going to need to find out how Dan is going through such bad financial problems even though he is making enough to cover the bills. Is there something else that the extra money is being invested in that nobody knows about?