Hello, I need this is C++. Thank you! (1B)
Write a Fraction class whose objects will represent Fractions.
Note: this is the first part of a multi-part assignment. For this week you should not simplify (reduce) fractions, you should not use "const," and all of your code should be in a single file. In this single file, the class declaration will come first, followed by the definitions of the class member functions, followed by the client program.
You must provide the following member functions:
Your class should have exactly two data members, one to represent the numerator of the Fraction being represented, and one to represent the denominator of the Fraction being represented.
Here's a hint for how you will set up your arithmetic operation functions: You need two Fractions. One is the parameter, one is the calling object. The function multiplies the calling object times the parameter and returns the result. In some ways it is similar to the comesBefore() function from the lesson. That function also needs two Fractions, and one is the calling object and one is the parameter.
When adding or subtracting Fractions, remember that you must first find the common denominator. The easy way to do this is to multiply the denominators together and use that product as the common denominator.
I am providing a client program for you below. You should copy and paste this and use it as your client program. The output that should be produced when the provided client program is run with your class is also given below, so that you can check your results.
I strongly suggest that you design your class incrementally. For example, you should first implement only the set function and the output function, and then test what you have so far. Once this code has been thoroughly debugged, you should add additional member functions, testing each one thoroughly as it is added. You might do this by creating your own client program to test the code at each stage; however, it would probably be better to use the provided client program and comment out code that relates to member functions that you have not yet implemented.
As you can see from the sample output given below, you are not required to reduce Fractions or change improper Fractions into mixed numbers for printing. Just print it as an improper Fraction. You are also not required to deal with negative numbers, either in the numerator or the denominator.
Here is the client program.
#include <iostream>
using namespace std;
int main()
{
Fraction f1;
Fraction f2;
Fraction result;
f1.set(9, 8);
f2.set(2, 3);
cout<<"\nArithmetic operations with fraction objects stored in the results class object\n";
cout<<"------------------------------------------------------------------------------\n\n";
cout << "The product of ";
f1.print();
cout << " and ";
f2.print();
cout << " is ";
result = f1.multipliedBy(f2);
result.print();
cout << endl;
cout << "The quotient of ";
f1.print();
cout << " and ";
f2.print();
cout << " is ";
result = f1.dividedBy(f2);
result.print();
cout << endl;
cout << "The sum of ";
f1.print();
cout << " and ";
f2.print();
cout << " is ";
result = f1.addedTo(f2);
result.print();
cout << endl;
cout << "The difference of ";
f1.print();
cout << " and ";
f2.print();
cout << " is ";
result = f1.subtract(f2);
result.print();
cout << endl;
if (f1.isEqualTo(f2)){
cout << "The two Fractions are equal." << endl;
} else {
cout << "The two Fractions are not equal." << endl;
}
cout<<"\n---------------------------------------------------------\n";
cout<<"\nFraction class implementation test now successfully concluded\n";
// system ("PAUSE");
return 0;
}
This client should produce the output shown here:
C++ CLASS SINGLE-FILE PROJECT Client.cpp - testing a Fraction class implementation
----------------------------------------------------
Arithmetic operations with Fraction objects stored in the result class object
------------------------------------------------------------------------------
The product of 9/8 and 2/3 is 18/24
The quotient of 9/8 and 2/3 is 27/16
The sum of 9/8 and 2/3 is 43/24
The difference of 9/8 and 2/3 is 11/24
The two Fractions are not equal.
---------------------------------------------------------
Fraction class implementation test now successfully concluded
Process returned 0 (0x0) execution time : 10.546 s Press any key to continue.
In: Computer Science
C++...This program is broken down into phases for your convenience only. Please turn in only the final phase. Before turning in your program, please make sure that it does something reasonable if the user enters a negative number the first time.
Phase I: Write a program for a theater that will keep track of how many people in each of 5 age categories attended a particular movie. Use the 5 age categories listed below in the sample screen output. The user will enter a number of ages, entering a negative number when there are no more ages to enter. Your program will then report on how many people in each age group attended. Sample screen output:
Enter age of attendee (-1 to quit): 34
Enter age of attendee (-1 to quit): 16
Enter age of attendee (-1 to quit): 68
Enter age of attendee (-1 to quit): 53
Enter age of attendee (-1 to quit): 39
Enter age of attendee (-1 to quit): 23
Enter age of attendee (-1 to quit): 21
Enter age of attendee (-1 to quit): -1
age 0 to 18: 1
age 19 to 30: 2
age 31 to 40: 2
age 41 to 60: 1
over 60: 1 |
Phase II: Modify your program so that, in addition
to the report that the program currently produces, it also gives
the average age of the people in attendance, the age of the oldest
person in attendance, and the age of the youngest person in
attendance. Sample screen output:
Enter age of attendee (-1 to quit): 34
Enter age of attendee (-1 to quit): 16
Enter age of attendee (-1 to quit): 68
Enter age of attendee (-1 to quit): 53
Enter age of attendee (-1 to quit): 39
Enter age of attendee (-1 to quit): 23
Enter age of attendee (-1 to quit): 21
Enter age of attendee (-1 to quit): -1
age 0 to 18: 1
age 19 to 30: 2
age 31 to 40: 2
age 41 to 60: 1
over 60: 1
The average age was 36.
The youngest person in attendance was 16.
The oldest person in attendance was 68. |
Phase III: Modify your program so that it also asks each attendee for a theater concession stand purchase. The attendee must make a selection based on the following choices …
1 - Soft Drink (such as Coca Cola, ICCEE, Mineral Water etc...)
2 - Popcorn
3 - Nachos
4 - Soft drink & Popcorn
5 - Soft drink & Nachos
6 - Organic and Gluten-free snacks
7 – None
The program output should now also provide a theater concession stand sales summary with a count of each category purchased.
Note: Include a validation routine to ensure that a correct choice is input for each attendee.
Check the sample screen output below for the final formatted display of theater statistics.
========================== THEATER STATS PROGRAM ========================== Movie theater snacks available for purchase ========================================== 1 - Soft Drink (such as Coca Cola, ICCEE, Mineral Water etc...) 2 - Popcorn 3 - Nachos 4 - Soft drink & Popcorn 5 - Soft drink & Nachos 6 - Organic and Gluten-free snacks 7 - None ========================================== Enter age of attendee (-1 to quit): 34 Movie theater snack purchased. (Select items 1 - 7):4 -------------------------- Enter age of attendee (-1 to quit): 16 Movie theater snack purchased. (Select items 1 - 7):5 -------------------------- Enter age of attendee (-1 to quit): 68 Movie theater snack purchased. (Select items 1 - 7):12 Invalid selection, please choose from 1 - 7 Movie theater snack purchased. (Select items 1 - 7):6 -------------------------- Enter age of attendee (-1 to quit): 53 Movie theater snack purchased. (Select items 1 - 7):6 -------------------------- Enter age of attendee (-1 to quit): 39 Movie theater snack purchased. (Select items 1 - 7):1 -------------------------- Enter age of attendee (-1 to quit): 23 Movie theater snack purchased. (Select items 1 - 7):2 -------------------------- Enter age of attendee (-1 to quit): 21 Movie theater snack purchased. (Select items 1 - 7):3 -------------------------- Enter age of attendee (-1 to quit): 21 Movie theater snack purchased. (Select items 1 - 7):4 -------------------------- Enter age of attendee (-1 to quit): -1 ================================== THEATER STATS PROGRAM RESULTS ================================== age 0 to 18: 1 age 19 to 30: 3 age 31 to 40: 2 age 41 to 60: 1 over 60: 1 The average age was 34 The youngest person in attendance was 16 The oldest person in attendance was 68 Theater Concession Stand sales ================================== Soft Drink (such as Coca Cola, ICCEE, Mineral Water etc.): 1 Popcorn: 1 Nachos: 1 Soft drink & Popcorn: 2 Soft drink & Nachos: 1 Organic and Gluten-free snacks: 2 Process returned 0 (0x0) execution time : 169.589 s Press any key to continue. |
In: Computer Science
In the ZZZZ Best case, explain the kinds of evidence that the auditors gathered and how the auditors failed. just write one or two paragraph to support
ZZZZ Best Case
On May 19, 1987, a short article in the Wall Street Journal reported that ZZZZ Best Company, Inc., of Reseda, California, had signed a contract for a $13.8 million insurance restoration project. This project was just the most recent of a series of large restoration jobs obtained by ZZZZ Best (pronounced “zee best”). Located in the San Fernando Valley of Southern California, ZZZZ Best had begun operations in the fall of 1982 as a small door-to-door carpet cleaning operation. Under the direction of Barry Minkow, the extroverted 16-year-old who founded the company and initially operated it out of his parents’ garage, ZZZZ Best experienced explosive growth in both revenues and profits during the first several years of its existence. In the three-year period from 1984 to 1987, the company’s net income surged from less than $200,000 to more than $5 million on revenues of $50 million.
When ZZZZ Best went public in 1986, Minkow and several of his close associates became multimillionaires overnight. By the late spring of 1987, the market value of Minkow’s stock in the company exceeded $100 million, while the total market value of ZZZZ Best surpassed $200 million. The youngest chief executive officer in the nation enjoyed the “good life”, which included an elegant home in an exclusive suburb of Los Angeles and a fire-engine red Ferrari. Minkow’s charm and entrepreneurial genius made him a sought-after commodity on the television talk show circuit and caused the print and visual media to tout him as an example of what America’s youth could attain if they would only apply themselves. During an appearance on The Oprah Winfrey Show in April 1987, Minkow exhorted his peers with evangelistic zeal to “Think big, be big” and encouraged them to adopt his personal motto, “The sky is the limit.”
Less than two years after appearing on Oprah, Barry Minkow began serving a 25-year sentence. Tried and convicted on 57 counts of securities fraud, Minkow had been exposed as a fast-talking con artist who swindled his closest friends and Wall Street out of millions of dollars. Federal prosecutors estimate that, at a minimum, Minkow cost investors and creditors $100 million. The company that Minkow founded was, in fact, an elaborate Ponzi scheme. The reported profits of the firm were nonexistent and the large restoration contracts, imaginary. As one journalist reported, rather than building a corporation, Minkow created a hologram of a corporation. In July 1987, just three months after the company’s stock reached a market value of $220 million, an auction of its assets netted only $62,000.
Unlike most financial frauds, the ZZZZ Best scam was perpetrated under the watchful eye of the Securities and Exchange Commission (SEC). The SEC, a large and reputable West Coast law firm that served as the company’s general counsel, a prominent Wall Street brokerage firm, and an international public accounting firm all failed to uncover Minkow’s daring scheme. Ultimately, the persistence of an indignant homemaker who had been bilked out of a few hundred dollars by ZZZZ Best resulted in Minkow being exposed as a fraud.
How a teenage flimflam artist could make a mockery of the complex regulatory structure that oversees the U.S. securities markets was the central question posed by a congressional subcommittee that investigated the ZZZZ Best debacle. That subcommittee was headed by Representative John D. Dingell, chairman of the U.S. House Committee on Energy and Commerce. Throughout the investigation, Representative Dingell and his colleagues focused on the role the company’s independent auditors played in the ZZZZ Best scandal.
The ZZZZ Best prospectus told the public that revenues and earnings from insurance restoration contracts were skyrocketing but did not reveal that the contracts were completely fictitious. Where were the independent auditors and the other that are paid to alert the public to fraud and deceit?
Like many other daring financial frauds, the ZZZZ Best scandal caused Congress to reexamine the maze of rules that regulated financial reporting and served as the foundation of the U.S. system of corporate oversight. However, Daniel Akst, a reported for The Wall Street Journal who documented the rise and fall of Barry Minkow, suggested that another ZZZZ Best was inevitable. “Changing the accounting rules and securities laws will help, but every now and then a Barry Minkow will come along, and ZZZZ Best will happen again. Such frauds are in the natural order of things, I suspect, as old and enduring as human needs.”
The Early History of ZZZZ Best Company
Barry Minkow was introduced to the carpet cleaning industry at the age of 12 by his mother, who helped make ends meet by working as a telephone solicitor for a small carpet cleaning firm. Although the great majority of companies in the carpet cleaning industry are legitimate, the nature of the business attracts a disproportionate number of shady characters. There are essentially no barriers to entry: no licensing requirements, no apprenticeships to be served, and only a minimal amount of start-up capital is needed. A 16-year-old youth with a driver’s license can easily become what industry insiders refer to as a “rug sucker,” which is exactly what Minkow did when he founded ZZZZ Best Company.
Minkow quickly learned that carpet cleaning was a difficult way to earn a livelihood. Customer complaints, ruthless competition, bad checks, and nagging vendors demanding payment complicated the young entrepreneur’s life. Within months of striking out on his own, Minkow faced the ultimate nemesis of the small business person: a shortage of working capital. Because of his age and the fact that ZZZZ Best was only marginally profitable, local banks refused to loan him money. Ever resourceful, the brassy teenager came up with his own innovative ways to finance his business: check kiting, credit card forgeries, and staging of thefts to fleece his insurance company. Minkow’s age and personal charm allowed him to escape unscathed from his early brushes with the law that resulted from his creative financing methods. The ease with which the “system” could be beaten encouraged him to exploit it on a broader scale.
Throughout his tenure with ZZZZ Best, Minkow recognized the benefits of having an extensive social network of friends and acquaintances. Many of these relationships he developed and cultivated at a Los Angeles health club. After becoming a friend of Tom Padgett, an insurance claims adjuster, Minkow devised a scheme to exploit that friendship. Minkow promised to pay Padgett $100 per week if he would simply confirm over the telephone to banks and any other interested third parties that ZZZZ Best was the recipient of occasional insurance restoration contracts. Ostensibly, Minkow had obtained these contracts to clean and do minor remodeling on properties damaged by fire, storm, or other catastrophes. Minkow convinced the gullible Padgett that the sole purpose of the confirmations was to allow ZZZZ Best to circumvent much of the bureaucratic red tape in the insurance industry.
From this modest beginning, the ZZZZ Best fraud blossomed. Initially, Minkow used the phony insurance restoration contracts to generate the paper profits and revenues he needed to convince bankers to loan him money. Minkow’s phony financial statements served their purpose, and he expanded his operations by opening several carpet cleaning outlets across San Fernando Valley. Minkow soon realized that there was no need to tie his future to the cutthroat carpet cleaning industry when he could literally dictate the size and profitability of his insurance restoration “business.” Within a short period of time, insurance restoration, rather than carpet cleaning became the major source of revenue appearing on ZZZZ Best’s income statements.
Minkow’s “the sky is the limit” philosophy drove him to be even more innovative. The charming young entrepreneur began using his bogus financial statements to entice wealthy individuals in his ever-expanding social network to invest in ZZZZ Best. Eventually, Minkow recognized that the ultimate scam would be to take his company public, a move that would allow him to tap the bank accounts of unsuspecting investors nationwide.
Going Public with ZZZZ Best
Minkow’s decision to take ZZZZ Best public meant that he could no longer completely control his firm’s financial disclosures. Registering with the SEC required auditors, investment bankers, and outside attorneys to peruse ZZZZ Best’s periodic financial statements.
ZZZZ Best was firm subjected to a full-scope independent audit for the 12 months ended April 30, 1986. George Greenspan, the sole practitioner who performed that audit, confirmed the existence of ZZZZ Best’s major insurance restoration contracts by contacting Tom Padgett. Padgett served as the principal officer of Interstate Appraisal Services, which reportedly contracted the jobs out to ZZZZ Best. By this time, Padgett was an active and willing participant in Minkow’s fraudulent schemes. Minkow established Interstate Appraisal Services and Assured Property Management for the sole purpose of generating fake insurance restoration contracts for ZZZZ Best.
In testimony before the congressional subcommittee that investigated the ZZZZ Best scandal, Greenspan insisted that he had properly audited Minkow’s company. Greenspan testified that while planning the 1986 audit he had performed various analytic procedures to identify unusual relationships with ZZZZ Best’s financial data. These procedures allegedly included comparing ZZZZ Best’s key financial ratios with industry norms. Regarding the insurance contracts, Greenspan testified that he had obtained and reviewed copies of all key documents pertaining to those jobs. However, Greenspan admitted that he had not inspected any of the insurance restoration sites.
Congressman Lent: Mr. Greenspan, I am interested in the SEC Form S-1 that ZZZZ Best Company filed with the SEC….You say in that report that you made your examination in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and other auditing procedures as we consider necessary in the circumstances….You don’t say in that statement that you made any on-site inspections.
Mr. Greenspan: It’s not required. Sometimes you do; sometimes you don’t. I was satisfied that these jobs existed and I was satisfied from at least six different sources, including payment for the job. What could you want better than that?
Congressman Lent: Your position is that you are an honest and reputable accountant.
Mr. Greenspan: Yes, sir.
Congressman Lent: You were as much a victim as some of the investors in this company?
Mr. Greenspan: I was a victim all right….I am as much aghast as anyone. And every night I sit down and say, why didn’t I detect this damned fraud.
Retention of Ernst & Whinney by ZZZZ Best
Shortly after Greenspan completed his audit of ZZZZ Best’s financial statements for fiscal 1986, which ended April 30, 1986, Minkow dismissed him and retained Ernst & Whinney to perform the following year’s audit. Apparently, ZZZZ Best’s investment banker insisted that Minkow obtained a Big Eight accounting firm to enhance the credibility of the company’s financial statements. At approximately the same time, and for the same reason, Minkow retained a high-profile Los Angeles law firm to represent ZZZZ Best as its legal counsel.
The congressional subcommittee asked Greenspan what information he provided to Ernst & Whinney regarding his former client. In particular, the subcommittee wanted to know whether Greenspan discussed the insurance restoration contacts with the new auditors.
Congressman Wyden: Mr. Greenspan, in September 1986 Ernst & Whinney came on as the new independent accountant for ZZZZ Best. What did you communicate to Ernst & Whinney with respect to the restoration contracts?
Mr. Greenspan: Nothing. I did—there was nothing because they never got in touch with me. It’s protocol for the new accountant to get in touch with the old accountant. They never got in touch with me, and its still a mystery to me.
Representatives of Ernst & Whinney later testified that they did, in fact, communicate with Greenspan prior to accepting ZZZZ Best as an audit client. However, Ernst & Whinney did not comment on the nature or content of that communication. (Greenspan was not recalled to rebut Ernst & Whinney’s testimony on this issue.)
The engagement letter was signed by Ernst & Whinney and Barry Minkow in September 1986. The engagement letter outlined four services that the audit firm intended to provide ZZZZ Best: a review of the company’s financial statements for the three-month period ending July 31, 1986; assistance in the preparation of a registration statement to be filed with the SEC; a comfort letter to be submitted to ZZZZ Best’s underwriters; and a full-scope audit for the fiscal year ending April 30, 1987. Ernst & Whinney completed the review, provided the comfort letter to ZZZZ Best’s underwriters, and apparently assisted the company in preparing the registration statement for the SEC; however, Ernst & Whinney never completed the 1987 audit. The audit firm resigned on June 2, 1987, amid growing concerns that ZZZZ Best’s financial statements were grossly misstated.
The congressional subcommittee investigating the ZZZZ Best fraud questioned Ernst & Whinney representatives at length regarding the bogus insurance restoration contracts—contracts that accounted for 90 percent of ZZZZ Best’s reported profits. Congressional testimony disclosed that Ernst & Whinney repeatedly insisted on visiting several of the largest of these contract sites, and that Minkow and his associated attempted to discourage such visits. Eventually, Minkow realized that the auditors would not relent and agreed to allow them to visit certain of the restoration sites, knowing full well that none of the sites actually existed.
To convince Ernst & Whinney that the insurance restoration contracts were authentic, Minkow plotted and carried out a series of sting operations that collectively cost millions of dollars. In the late fall of 1986, Larry Gray, the engagement audit partner for ZZZZ Best, told client personnel that he wanted to inspect a restoration site in Sacramento on which ZZZZ Best had reported obtaining a multimillion-dollar contract. Minkow sent two of his subordinates to Sacramento to find a large building under construction or renovation that would provide a plausible site for a restoration contract. Gray had visited Sacramento a few weeks earlier to search for the site that Minkow had refused to divulge. As chance would have it, the building chosen by the ZZZZ Best conspirators was the same one Gray had identified as the most likely site of the insurance restoration project.
Minkow’s two confederates posed as leasing agents of a property management firm and convinced the supervisor of the construction site to provide keys to the building one weekend on the pretext that a large, prospective tenant wished to tour the facility. Prior to the arrival of Larry Gray and an attorney representing ZZZZ Best’s law firm, Minkow’s subordinates visited the site and placed placards on the walls at conspicuous locations indicating that ZZZZ Best was the contractor for the building renovation. No details were overlooked by the two co-conspirators. They even paid the building’s security officer to greet the visitors and demonstrate that he was aware in advance of their tour of the site and its purpose. Although the building had not been damaged and instead was simply in the process of being completed, the sting operation went off as planned.
Congressional investigators quizzed Gray regarding the measures he took to confirm that ZZZZ Best had a restoration contract on the Sacramento building. They were particularly concerned that he never discovered the building had not suffered several million dollars in damages a few months earlier, as claimed by ZZZZ Best personnel.
Congressman Lent: Did you check the building permit or construction permit?
Mr. Gray: No, sir. That wouldn’t be necessary to accomplish what I was setting out to accomplish.
Congressman Lent: And you did not check with the building’s owners to see if an insurance claim had been filed?
Mr. Gray: Same answer. It wasn’t necessary. I had seen the paperwork internally of our client, the support for a great amount of detail. So, I had no need to ask—to pursue that.
Congressman Lent: You understand that what you saw was not anything that was real in any sense of the word?....You are saying you were duped, are you not?
Mr. Gray: Absolutely.
Before allowing Ernst & Whinney auditors to visit a bogus restoration project, Minkow insisted that the firm sign a standard confidentiality agreement. Members of the congressional subcommittee were troubled by the following stipulation of the confidentiality agreement: “We will not make any follow-up telephone calls to any contractors, insurance companies, the building owner, or other individuals involved in the restoration contract.” This restriction effectively precluded the auditors from corroborating the insurance restoration contracts with independent third parties.
Resignation of Ernst & Whinney
Ernst & Whinney resigned as ZZZZ Best’s auditor on June 2, 1987, following a series of disturbing events that caused the firm to question Barry Minkow’s integrity. First, Ernst & Whinney was alarmed by a Los Angeles Times article in mid-May 1987 that revealed that Minkow had been involved in a string of credit card forgeries as a teenager. Second on May 28, 1987, ZZZZ Best issued a press release, without consulting or notifying Ernst & Whinney, that reported record profits and revenues. Minkow intended this press release to restore investors’ confidence in the company—confidence that had been shaken by the damaging Los Angeles Times story. Third, and most important, on May 29, Ernst & Whinney auditors discovered evidence supporting allegations made several weeks earlier by a third-party informant that ZZZZ Best’s insurance restoration business was fictitious.
The informant had contacted Ernst & Whinney in April 1987 and asked for $25,000 in exchange for information proving that one of the firm’s clients was engaging in a massive fraud. Ernst & Whinney refused to pay the sum, and the individual recanted shortly thereafter, but not until the firm determined that the allegation involved ZZZZ Best. (Congressional testimony disclosed that the individual recanted because of a bribe paid to him by Minkow.) Despite the retraction, Ernst & Whinney questioned Minkow and ZZZZ Best’s board of directors regarding the matter. Minkow insisted that he did not know the individual who had made the allegation. On May 29, 1987, however, Ernst & Whinney auditors discovered several cancelled checks that Minkow had personally written to the informant several months earlier.
Because ZZZZ best was a public company, the resignation of its independent auditor had to be reported to the SEC in an 8-K filing. This requirement alerts investors and creditors of circumstances that may have let to the change in auditors. At the time, SEC registrants were allowed 15 days to file an 8-K auditor change announcement. After waiting the maximum permissible time, ZZZZ Best reported the change in auditors but, despite Ernst & Whinney’s insistence, made no mention in the 8-K of the fraud allegation that had been subsequently recanted.
The SEC requires a former audit firm to prepare a letter to be filed as an exhibit to its former client’s 8-K auditor change pronouncement. That exhibit letter must comment on the 8-K’s accuracy and completeness. In 1987, formed audit firms had 30 days to file an exhibit letter, which was the length of time Ernst & Whinney waited before submitting its exhibit letter to the SEC. In that letter, Ernst & Whinney revealed that ZZZZ Best’s insurance contract might be fraudulent.
The congressional subcommittee was alarmed that 45 days had passed before the charges of fraudulent misrepresentations in ZZZZ Best’s financial statements were disclosed by the public. By the time the SEC released Ernst & Whinney’s exhibit letter to the public, ZZZZ Best had filed for protection from its creditors under Chapter 11 of the federal bankruptcy code. During the period that elapsed between Ernst & Whinney’s resignation and the public release of the 8-K exhibit letter, ZZZZ Best obtained significant financing from several parties, including $1 million from one of Minkow’s close friends. These parties never recovered the funds invested in, or loaned to, ZZZZ Best. As a direct result of the ZZZZ Best debacle, the SEC shortened the length of time that registrants and their former auditors may wait before filing auditor change documents.
The congressional subcommittee also quizzed Ernst & Whinney representatives regarding the information they disclosed to Price Waterhouse, the audit firm that Minkow retained to replace Ernst & Whinney. Congressman Wyden wanted to know whether Ernst & Whinney had candidly discussed its concerns regarding Minkow’s integrity with Price Waterhouse.
Congressman Wyden: I am going to insert into the record at this point a memo entitled “Discussion with successor auditor,” written by Mr. Gray and dated June 9, 1987. Regarding a June 4 meeting, Mr. Gray, with Dan Lyle of Price Waterhouse concerning the integrity of ZZZZ Best’s management, you stated that you had no reportable disagreements and no reservations about management integrity pending the results of a board of directors investigation. Then you went on to say that you resigned because, and I quote here: “We came to a conclusion that we didn’t want to become associated with the financial statements.” Is that correct?
Mr. Gray: That is correct.
Mr. Wyden: …Mr. Gray, you told the committee staff on May 29, 1987, that when you uncovered evidence to support allegations of fraud that you decided to pack up your workpapers and leave the ZZZZ Best audit site. How did your leaving without telling anybody except the ZZZZ Best management and board of directors the reasons for leaving help the public and investors?
A final twist to the ZZZZ Best scandal was an anonymous letter Ernst & Whinney received one week after the firm resigned as ZZZZ Best’s auditor. At that time, no one other than Ernst & Whinney and ZZZZ Best’s officers was aware of the firm’s resignation. The letter contained several allegations suggesting that ZZZZ Best’s financial statements were fraudulent. According to the congressional testimony, Ernst & Whinney forwarded this letter to the SEC on June 17, 1987.
Collapse of ZZZZ Best
The Los Angeles Times article published in mid-May 1987 that disparaged Barry Minkow ultimately doomed the young entrepreneur and his company. Several years earlier, a homemaker had fallen victim to Minkow’s credit card forgeries. Minkow had added a fraudulent charge to a credit card slip the woman had used to make a payment on her account. Despite her persistence, Minkow avoided repaying the small amount. The woman never forgot the insult and tracked down, and kept a record of, individuals who had been similarly harmed by Minkow. At the urging of this woman, a reporter for the Los Angeles Times investigated her allegations. The woman’s diary became the basis for the Los Angeles Times article that, for the first time, cast doubt on the integrity of the “boy wonder” that was the talk of Wall Street.
The newspaper article triggered a chain of events that caused ZZZZ Best to collapse and disappear less than three months later. First, a small brokerage firm specializing in newly registered companies with suspicious earnings histories began short-selling ZZZZ Best stock, forcing the stock’s price into a tailspin. Second, Ernst & Whinney, ZZZZ Best’s law firm, and ZZZZ Best’s investment banker began giving more credence to the allegations and rumors of financial wrongdoing by Minkow and his associates. Third, and most important, the article panicked Minkow and compelled him to make several daring moves that cost him even more credibility. The most critical mistake was his issuance of the May 28, 1987, press release that boldly reported record profits and revenues for his firm.
EPILOGUE
Among the parties most vilified for their role in the ZZZZ Best scandal was Ernst & Whinney. The transcripts of the congressional testimony focusing on the ZZZZ Best fraud included a list of 10 “red flags” that the audit firm had allegedly overlooked while examining ZZZZ Best’s financial statements. Ernst & Whinney officials flatly rejected assertions that their firm was even partially to blame for the ZZZZ Best fiasco. In his congressional testimony, Leroy Gardner, the West Coast director of accounting and auditing for Ernst & Whinney, maintained that when all of the facts were revealed, his firm would be totally vindicated:
The ZZZZ Best situation proves at least one thing: a well-orchestrated fraud will often succeed even against careful, honest, hard-working people…The facts that have begun to emerge establish that Minkow, along with confederates both inside and outside ZZZZ Best went to extraordinary lengths to deceive Ernst & Whinney. For example, Thomas Padgett, an alleged conspirator, revealed in a recent televised interview that Minkow spent $4 million to deceive Ernst & Whinney during a visit to one of ZZZZ Best’s job sites….Ernst & Whinney never misled investors about the reliability of ZZZZ Best’s financial statements. Ernst & Whinney never even issued an audit opinion for ZZZZ Best….We are not part of the problem in this case. We were part of the solution.
In one of the largest civil suits stemming from the ZZZZ Best fraud, a court ruled that Ernst & Whinney was not liable to a large California bank that had extended ZZZZ Best a multimillion-dollar loan in 1986. The bank alleged that in granting the loan, it had relied upon the review report issued by Ernst & Whinney on ZZZZ Best’s financial statements for the three-month period ending July 31, 1986. However, an appellate judge ruled that the bank was not justified in relying on the review report since Ernst & Whinney had expressly stated in the report that it was not issuing an opinion on the ZZZZ Best financial statements. “Ernst, because it issued only a review report, specifically declined to express an opinion on ZZZZ Best’s financial statements. The report expressly disclaimed any right to rely on its content.”
In the late 1980s, ZZZZ Best’s former stock-holders filed a class-action lawsuit against Ernst & Whinney, ZZZZ Best’s former law firm, and ZZZZ Best’s former investment banker. An Internet publication reported in March 1996 that this lawsuit had been settled privately. The defendants reportedly paid the former ZZZZ Best stockholders $35 million. However the contribution of each defendant to the settlement pool was not disclosed.
Barry Minkow was released from prison in late 1994. Minkow secured the reduction in his 25-year prison sentence for “good behavior and efforts to improve himself.” These efforts included earning by correspondence bachelor’s and master’s degrees in religion from Liberty University. Shortly after being paroled, Minkow married a young woman introduced to him by a fellow inmate. That inmate was a former subordinate of Charles Keating, the principal architect of the massive Lincoln Savings and Loan fraud.
In early 1995, Minkow began serving as the associate pastor of an evangelical church in a community near his hometown of Reseda. Two years later, Minkow was appointed the senior pastor of a large nondenominational church in San Diego. Besides his pastoral duties, Minkow serves as the spokesperson for an Internet company, the Fraud Discovery Institute, which markets various fraud prevention and detection services.
Minkow regularly presents lectures and seminars across the United States that focus on his “experience” with corporate fraud. He has spoken to groups of CPAs, educational institutions, and, most notably, the FBI Academy at Quantico, Virginia. Minkow, who typically delivers his lectures while dressed in an orange prison jumpsuit, often chastises he accountants and auditors in his audience. During one presentation, Minkow noted that, “CPAs are creatures of habit. You’re interested in making tick marks and footnotes, not in thinking outside the box.” Minkow also chides auditors for being overly willing to accept weak forms of audit evidence, such as client representations. He warns auditors “Don’t give up objectivity for convenience.”
Journalists frequently interview Minkow and ask for his views on corporate fraud and related issues. In January 2005, Minkow gave the following response when he was asked by CFO Magazine whether the Sarbanes-Oxley Act of 2002 would likely serve to mitigate or deter corporate fraud: “Let me tell you why this legislation is brilliant. Sarbox hit a common denominator of corporate fraud: bypassing systems of internal control. I would not have been able to perpetrate the ZZZZ Best fraud if I had not been able to bypass the internal controls.”
Ten Red Flags that ZZZZ Best’s Auditors Allegedly Overlooked.
1. The amounts called for by the insurance restoration contracts were unrealistically large.
2. The number of multimillion dollar insurance restoration contracts reportedly obtained by ZZZZ Best exceeded the number available nationwide during the relevant time period.
3. The purported contracts failed to identify the insured parties, the insurance companies, or the locations of the jobs.
4. The contracts consisted of a single page which failed to contain details and specifications of the work to be done, such as the square yardage of carpet to be replaced, which were usual and customary in the restoration business.
5. Virtually all of the insurance restoration contracts were with the same party.
6. A large proportion of the ZZZZ Best insurance restoration contracts occurred immediately and opportunistically, prior to a planned offering of stock.
7. The purported contracts provided for payments to ZZZZ Best or Minkow alone rather than to the insured or jointly with ZZZZ Best and the insured, contrary to the practice of the industry.
8. The purported contracts provided for payments by the insurance adjustor contrary to normal practice in the industry under which payments are customarily made by the insurance company directly to its insured or jointly to its insured and the restorer.
9. ZZZZ Best’s purported gross profit margins for its restoration business were greatly in excess of the normal profit margin for the restoration industry.
10. The internal controls at ZZZZ Best were grossly inadequate.
In: Accounting
1. The perfectly competitive firm's demand curve is horizontal at the market price.
True
False
2. In perfect competition, the market price is established at the intersection of the market demand and market supply curves in the industry and the individual firms are "price takers" of that market price.
True
False
3. The perfectly competitive firm will continue to produce in the "short-run" if the price in the market is below their average total cost but above their average variable cost.
True
False
4. The theory of the perfect competitive firm provides a complete and accurate description of most real world firms existing today.
True
False
5. If a firm is earning ECONOMIC PROFIT, they must be producing at an output level where the price is above their average total cost.
True
False
6. We can be sure that the perfectly competitive firm, producing an output level where "price = marginal cost" is earning a normal profit, even in the short-run.
True
False
7. Public franchises, patents, and copyright laws are examples of legal barriers to entry in monopoly models and are the source of monopoly power.
True
False
8. In general, monopoly may exist because one firm has the exclusive ownership of a scarce resource such as bauxite, an essential element in the production of aluminum.
True
False
9. The monopolist is a "price maker" and must lower price to sell an additional unit of its product.
True
False
10. In monopoly theory, a price maker is a person who actively seeks out the best price for a product that he or she wisher to buy.
True
False
11. As a price maker, a rational monopolist can charge whatever price it wants to charge and sell the same amount by virtue of it's monopoly power and position.
True
False
12. A monopolist is always assured of positive economic profits given its control over price.
True
False
13. For the monopolist, the marginal revenue curve lies above their demand curve in graphic illustration of their cost and revenue structure.
True
False
14. The monopolist faces a "horizontal" demand curve.
True
False
15. The monopolist can sell all it can produce at the market established price.
True
False
16. The marginal revenue curve of the monopolist lies below its demand curve.
True
False
17. The monopolist, by definition, is a "price taker."
True
False
18. In theory of monopoly, the monopoly firm is the industry.
True
False
19. To maximize profits, a single-price monopolist will produce where Marginal costs = Marginal revenue: establishing a price that is greater than their marginal cost.
True
False
20. As a consequence of the perfectly competitive firm producing the quantity of output at which: price equals marginal revenue and marginal cost, it will achieve "allocative efficiency" in the deployment of societies scarce resources.
True
False
21. In the "long-run," the perfect competitive achieves technical efficiency and the firm will produce at: P = ATC = LRATC, assuring the consumer that the good or service is provided at the lowest possible price--given a constant state of technology.
True
False
22. Monopoly is never preferable to perfect competitive industry structures.
True
False
23. A cost that is incurred when an actual monetary payment is made by the firm is an "explicit (accounting) cost"--such as the payment of an electric bill or mortgage.
True
False
24. A firm is said to earn "normal profit" when it generates enough revenue to exactly cover its explicit and implicit cost(s) of production.
True
False
25. The MP or MPP (marginal product or marginal physical product) curve rises as the marginal cost curve falls in the area (range) of production subject to "increasing marginal returns."
True
False
26. In the short run, FC ("fixed cost") do not change as the output quantity increases.
True
False
27. In the short run, AFC ("average fixed cost") do not change as the output quantity increases.
True
False
28. As the output quantity continues to increase--moving to the right on the "X" (quantity of production) axis, the average variable cost curve gets closer to the average total cost curve in vertical analysis--reflecting change in the magnitude of the firm's "average fixed cost"--which necessarily, by definition, must continually decrease.
True
False
29. The AVC (average variable cost) equals VC (total variable cost) divided by the level of output (quantity) or "Q." Alternately: AVC = VC / Q.
True
False
30. The "onset of diminishing returns to productivity" causes the marginal product curve to peek and the marginal cost curve to bottom out.
True
False
31. The marginal cost curve, the average total cost curve, and the average variable cost curve are typically "U-shaped" ultimately due to the law of diminishing returns.
True
False
32. The LRATC (long run average total cost) curve is an historic envelop of the developing companies historic ATC curves--generally illustrating initial scale economies followed by constant return to scale and eventually diseconomies of scale (resulting from managerial inefficiency from BIGNESS or bureaucracy.)
True
False
33. Evolving "technology" does not and cannot affect the position of the LRATC curve.
True
False
34. In the long run
there can be no variable costs
all costs are fixed costs
none of these answers are correct
all costs are variable costs
35. If the AVC (average variable cost curve) is falling,
The MC curve must be above it at the level of output under consideration.
The MC curve must be below it at the level of output under consideration.
The MC curve is necessarily rising at the level of output under consideration
The MC curve is necessarily falling at the level of output under consideration.
36. The average-margin rule states that if the marginal magnitude (value) is
greater than the average magnitude, the average magnitude falls.
Rising, the average magnitude is necessarily above it.
Falling, the average magnitude is necessarily below it.
less than the average magnitude (value), the average magnitude falls.
37. The law of diminishing marginal returns to productivity holds for a situation in which
some inputs are variable and at least one input is fixed.
all inputs are variable.
all inputs are fixed.
none of these answers is correct.
38. Long run equilibrium for a perfectly competitive firm occurs when
P > MC > NROI > ATC
MC = MR = P > ATC
P = MC = MR = ATC = LRATC
M = MR = AFC = ATC
39. Which of the following is NOT considered a barrier to entry?
Diseconomies of scale
Government Licenses
Scale Economies
Control over essential resources
Patents
40. The "regulated monopolist" (natural monopoly) will be regulated to where
P = MR
P = AVC
P = MC
P = ATC
In: Economics
1. The perfectly competitive firm's demand curve is horizontal at the market price.
True
False
2. In perfect competition, the market price is established at the intersection of the market demand and market supply curves in the industry and the individual firms are "price takers" of that market price.
True
False
3. The perfectly competitive firm will continue to produce in the "short-run" if the price in the market is below their average total cost but above their average variable cost.
True
False
4. The theory of the perfect competitive firm provides a complete and accurate description of most real world firms existing today.
True
False
5. If a firm is earning ECONOMIC PROFIT, they must be producing at an output level where the price is above their average total cost.
True
False
6. We can be sure that the perfectly competitive firm, producing an output level where "price = marginal cost" is earning a normal profit, even in the short-run.
True
False
7. Public franchises, patents, and copyright laws are examples of legal barriers to entry in monopoly models and are the source of monopoly power.
True
False
8. In general, monopoly may exist because one firm has the exclusive ownership of a scarce resource such as bauxite, an essential element in the production of aluminum.
True
False
9. The monopolist is a "price maker" and must lower price to sell an additional unit of its product.
True
False
10. In monopoly theory, a price maker is a person who actively seeks out the best price for a product that he or she wisher to buy.
True
False
11. As a price maker, a rational monopolist can charge whatever price it wants to charge and sell the same amount by virtue of it's monopoly power and position.
True
False
12. A monopolist is always assured of positive economic profits given its control over price.
True
False
13. For the monopolist, the marginal revenue curve lies above their demand curve in graphic illustration of their cost and revenue structure.
True
False
14. The monopolist faces a "horizontal" demand curve.
True
False
15. The monopolist can sell all it can produce at the market established price.
True
False
16. The marginal revenue curve of the monopolist lies below its demand curve.
True
False
17. The monopolist, by definition, is a "price taker."
True
False
18. In theory of monopoly, the monopoly firm is the industry.
True
False
19. To maximize profits, a single-price monopolist will produce where Marginal costs = Marginal revenue: establishing a price that is greater than their marginal cost.
True
False
20. As a consequence of the perfectly competitive firm producing the quantity of output at which: price equals marginal revenue and marginal cost, it will achieve "allocative efficiency" in the deployment of societies scarce resources.
True
False
21. In the "long-run," the perfect competitive achieves technical efficiency and the firm will produce at: P = ATC = LRATC, assuring the consumer that the good or service is provided at the lowest possible price--given a constant state of technology.
True
False
22. Monopoly is never preferable to perfect competitive industry structures.
True
False
23. A cost that is incurred when an actual monetary payment is made by the firm is an "explicit (accounting) cost"--such as the payment of an electric bill or mortgage.
True
False
24. A firm is said to earn "normal profit" when it generates enough revenue to exactly cover its explicit and implicit cost(s) of production.
True
False
25. The MP or MPP (marginal product or marginal physical product) curve rises as the marginal cost curve falls in the area (range) of production subject to "increasing marginal returns."
True
False
26. In the short run, FC ("fixed cost") do not change as the output quantity increases.
True
False
27. In the short run, AFC ("average fixed cost") do not change as the output quantity increases.
True
False
28. As the output quantity continues to increase--moving to the right on the "X" (quantity of production) axis, the average variable cost curve gets closer to the average total cost curve in vertical analysis--reflecting change in the magnitude of the firm's "average fixed cost"--which necessarily, by definition, must continually decrease.
True
False
29. The AVC (average variable cost) equals VC (total variable cost) divided by the level of output (quantity) or "Q." Alternately: AVC = VC / Q.
True
False
30. The "onset of diminishing returns to productivity" causes the marginal product curve to peek and the marginal cost curve to bottom out.
True
False
31. The marginal cost curve, the average total cost curve, and the average variable cost curve are typically "U-shaped" ultimately due to the law of diminishing returns.
True
False
32. The LRATC (long run average total cost) curve is an historic envelop of the developing companies historic ATC curves--generally illustrating initial scale economies followed by constant return to scale and eventually diseconomies of scale (resulting from managerial inefficiency from BIGNESS or bureaucracy.)
True
False
33. Evolving "technology" does not and cannot affect the position of the LRATC curve.
True
False
34. In the long run
there can be no variable costs
all costs are fixed costs
none of these answers are correct
all costs are variable costs
35. If the AVC (average variable cost curve) is falling,
The MC curve must be above it at the level of output under consideration.
The MC curve must be below it at the level of output under consideration.
The MC curve is necessarily rising at the level of output under consideration
The MC curve is necessarily falling at the level of output under consideration.
36. The average-margin rule states that if the marginal magnitude (value) is
greater than the average magnitude, the average magnitude falls.
Rising, the average magnitude is necessarily above it.
Falling, the average magnitude is necessarily below it.
less than the average magnitude (value), the average magnitude falls.
37. The law of diminishing marginal returns to productivity holds for a situation in which
some inputs are variable and at least one input is fixed.
all inputs are variable.
all inputs are fixed.
none of these answers is correct.
38. Long run equilibrium for a perfectly competitive firm occurs when
P > MC > NROI > ATC
MC = MR = P > ATC
P = MC = MR = ATC = LRATC
M = MR = AFC = ATC
39. Which of the following is NOT considered a barrier to entry?
Diseconomies of scale
Government Licenses
Scale Economies
Control over essential resources
Patents
40. The "regulated monopolist" (natural monopoly) will be regulated to where
P = MR
P = AVC
P = MC
P = ATC
In: Economics
Summary
Lewis wants you to write another script that shows a table of events at the Lyman Hall Theater over the next two weeks from the current date. He has already created three arrays for use with the script:
Lewis has already written the page content and provided style sheets for use with the page. Your job will be to write a script that selects the events that occur in the two-week window from the current date and display them in the web page.
A preview of the home page is shown above.
The style sheets and graphic files have already been created for you. Your job is to write the HTML markup.
Instructions
This Review Assignment contains interactive instructions that you can complete to ensure you've completed the instruction correctly.
After reading each instruction thoroughly, perform the requested change in the code editor to the right. You can use the Build Website button to refresh your website preview at any point and view a full-page version of your website by clicking the arrow in the top right corner of your website preview.
After you've completed an instruction, click the corresponding check box in your list of instructions. This will trigger simulated tests of your website to ensure that you successfully completed the instruction.
Click Next Step to get started!
Setup
Enter your name and the date in the comment section of lht_events.html and lht_table.js.
Link JS Files
Open the lht_events.html file and directly above the closing </head> tag, insert script elements that link the page to the lht_list.js and lht_table.js files in that order. Defer the loading and running of both script files until after the page has loaded.
You will not be tested on this instruction, but you should still complete this step.
Event List
Scroll down the document and directly after the closing
</article> tag insert a div element with the ID
eventList. It is within this element that you will
write the HTML code for the table of upcoming theater events.
(Hint : Be sure to review this file and all the support files,
noting especially the names of variables that you will be using in
the code you create.)
Variables
Go to the lht_table.js file and below the comment section, declare a variable named thisDay containing the date August 30, 2018. You will use this date to test your script.
Create a variable named tableHTML that will contain the HTML code of the events table. Add the text of the following HTML code to the initial value of the variable:
<table id='eventTable'> <caption>Upcoming Events</caption> <tr><th>Date</th><th>Event</th><th>Price</th></tr>
Lewis only wants the page to list events occurring within 14 days after the current date. Declare a variable named endDate that contains a Date object that is 14 days after the date stored in the thisDay variable.
(Hint : Use the new Date() object constructor and insert a time value that is equal to thisDay.getTime() + 14 x 24 x 60 x 60 x 1000.)
For Loop
Create a for loop that loops through the length of the eventDates array. Use i as the counter variable.
Within the for loop insert the following commands in a command block:
<tr> <td> eventDay @ eventTime </td> <td> description </td> <td> price </td> </tr>
HTML Table Code
After the for loop, add the text of the HTML code </table> to the value of the tableHTML variable.
Insert the value of the tableHTML variable into the inner HTML of the page element with the ID eventList.
<!DOCTYPE html>
<html>
<head>
<!--
New Perspectives on HTML5 and CSS3, 7th Edition
Tutorial 10
Review Assignment
Lyman Hall Theater Upcoming Events
Author:
Date:
Filename: lht_events.html
-->
<meta charset="utf-8" />
<meta name="viewport" content="width=device-width, initial-scale=1" />
<title>Upcoming Events at the Lyman Hall Theater</title>
<link href="lht_reset.css" rel="stylesheet" />
<link href="lht_styles.css" rel="stylesheet" />
<link href="lht_events.css" rel="stylesheet" />
</head>
<body>
<header>
<img src="lht_logo2.png" alt="The Lyman Hall Theater" id="logoimg" />
<nav> <a id="navicon" href="#"><img src="lht_navicon2.png" alt="" /></a>
<ul>
<li><a href="#">home</a></li>
<li><a href="#">events</a></li>
<li><a href="#">box office</a></li>
<li><a href="#">facilities</a></li>
<li><a href="#">directions</a></li>
<li><a href="#">contact</a></li>
</ul>
</nav>
</header>
<section>
<article>
<h1>At the Theater</h1>
<p>Great shows are coming to the Lyman Hall Theater in the upcoming weeks.
The Broadway Touring Company of <a href="#">Cabaret</a> arrives for four
performances, featuring Tony-award winning actress Kayla
James. Tickets are limited, so be sure to <a href="#">order
online</a> and by calling the LHT boxoffice.
</p>
<p>Enjoy a stunning multimedia event with Edward Lee's <a href="#">Visions
of Light and Dreams</a> featuring sound, video, and interactive
demonstrations of the latest innovations in film and theater.
</p>
<p>If music is more your passion, LHT welcomes the popular group
<a href="#">San Diego Blues</a>. Want an evening of laughs?
Get your tickets now for <a href="#">Gerry Jones</a> and his
one-person show, <a href="#">Exit Stage Left</a>.
</p>
<p>For an inexpensive night out, be sure to check out LHT's
<a href="#">Classic Cinema</a> and for a delicious Sunday
brunch, join us for <a href="#">Classics Brunch</a>.
</p>
</article>
</section>
<footer>
<nav>
<ul>
<li><a href="#">Staff</a></li>
<li><a href="#">Employment Info</a></li>
<li><a href="#">Directions & Parking</a></li>
</ul>
<ul>
<li><a href="#">Box Office</a></li>
<li><a href="#">Group Rates</a></li>
<li><a href="#">Events</a></li>
</ul>
</nav>
<section>
The Lyman Hall Theater<br />
414 Leeward Drive<br />
Brookhaven, GA 30319<br />
Office: (404) 555 - 4140
</section>
</footer>
</body>
</html>
In: Computer Science
Read this and answer questions at the bottom.
How Much of Your $355 Ticket Is Profit for Airlines_ - WSJ.pdf
How Much of Your $355 Ticket Is Profit for Airlines?
Airlines are healthierthan everinancially—and that’s why they add more fees and more seats
Next time you board a flight, just imagine you’re putting a $20 bill in the airline’s tip jar. Profit per passenger at the seven largest U.S. airlines averaged $19.65 over the past four years— record-setting profitable years for airlines. In 2017, it stood at $17.75, based on airline earnings reports. In truth, airlines now cover their costs with tickets and get their profits from baggage fees, seat fees, reservation-change fees and just about all the other nickel-and-diming that aggravates customers. You might also call those extra 12 to 15 passengers now crammed onto each flight “Andrew Jackson” for the profit they bring. It takes a lot to earn a little moving people. U.S. airlines experienced plenty of years of steep losses, when creditors were subsidizing tickets for travelers. But now, profit margins—about 9% in 2017—are healthy. Keeping $20 from every passenger is about twice the profit airlines in the rest of the world get, according to data from the International Air Transport Association. “It’s certainly high by airline historic standards. But it’s not high if you look across other companies in the U.S. economy. It’s average,” says Brian Pearce, IATA’s chief economist. U.S. airlines were on pace to take in more than $4 billion in baggage fees and $3 billion in reservation-change and cancellation penalties in 2017, according to Transportation Department data. (The full year hasn’t been tallied yet.) Most of that drops straight to the bottom line. The two categories add up to about more than half of the net profits airlines posted last year. Airline earnings are further boosted by other fees for things like seats assignments, extra legroom, early boarding and pets, plus sales of frequent flier miles to banks for credit-card rewards. Given the $20-per-passenger haul ($40 round-trip), it’s easy to see why airlines are so intent on cramming in more seats, even when they know travelers hate the lack of space and complain bitterly about shrunken bathrooms, slim seat padding and skinny rows. Last year, the average round-trip fare on the seven largest U.S. carriers— American , Delta , United, Southwest , Alaska , JetBlue and Spirit —was $355, based on their financial reports, up from $351 in 2016. Getting an extra two rows of seats on a plane can mean the difference between profit and loss. Of course, some passengers are far more profitable than others. First-class and businessclass travelers are more valuable when they pay for their tickets; less when they get a free upgrade. But even then, road warriors are often upgraded from high-dollar, last-minute coach tickets. Frequent travelers account for a large percentage of airline revenue—and profit. Low-fare passengers shoehorned into the back of the plane may not even be covering what it costs to transport them. But they scored a low fare because the airline was concerned it might not fill all the seats on a particular flight, and some fare is better than no fare. IATA’s Mr. Pearce says airline profits last year were squeezed by higher fuel and labor costs, and that trend is continuing in 2018. Jet fuel prices were up 26% last year compared with 2016, and prices are expected to be about 10% higher this year. Airline fuel efficiency has improved significantly world-wide as newer planes go into service, and older gasguzzlers are retired. But higher fuel prices have driven airline costs higher. At the same time, expanding competition from low-fare carriers has kept fare increases small. Big airlines are building up in competitive markets like Seattle, Boston and Los Angeles. Even some cities that saw dramatic air-service cuts are getting more flights now; Delta recently announced an expansion in Cincinnati, for example. With more empty seats to sell, airlines are finding it even harder to raise ticket prices. “Fares are too low for oil prices this high,” American Airlines Chief Executive Doug Parker said on an earnings call with analysts last month. “Over time you’ll see it adjust.” American spent $1.3 billion more on fuel in 2017 than the previous year, a 22% increase. The carrier also spent nearly $1 billion more on labor, a 9% increase. The airline grew only about 1% last year, so rising costs meant earnings were down $757 million. Thus Mr. Parker is pushing for higher fares. Among the big U.S. airlines, Southwest had the largest net profit margin last year, at 16.5%. Southwest continues to defy conventional airline wisdom. It doesn’t charge baggage fees; instead, it believes it attracts more passengers to each flight because many want to avoid the baggage fees charged by competitors. Alaska, JetBlue and Spirit all had higher profit margins than American, Delta and United. American had the lowest profit margin among the top carriers, at 4.5% in 2017. Airlines’ average profit margin of 9% is about average for a U.S. business. Last year McDonald’s posted a net profit margin of 23%; FedEx , 5%. But that average is a leap for an industry that had cumulative losses from 1979 to 2014 of $35 billion and suffered six major bankruptcies in the 2000s.
Questions.
|
1. How profitable are airlines today in comparison to historical performance? In comparison to other industries? |
|
2. What does the author mean when he states that airlines get their profits from fees rather than ticket sales? Is this based on the fact that there is no cost of goods sold as there is for ticket sales? Explain your answer. |
|
3. What earnings metric is used to compare profits across airlines of different sizes? |
|
4. Consider the note to the graphic entitled "Flight Change." How much difference exists in determining this metric across airlines? Do you think the differences hurt this comparison? Explain. |
In: Operations Management
The story of ZZZZ Best is one of greed and audaciousness. It is the story of a 15-year-old boy from Reseda, California, who was driven to be successful, regardless of the costs. His name is Barry Minkow. Although this case dates back over 30 years, it does serve as an example of what can happen when auditors do not look too hard to find fraud.
Minkow had high hopes to make it big—to be a millionaire very early in life. He started a carpet cleaning business in the garage of his home. Minkow realized early on that he was not going to become a millionaire cleaning other people’s carpets, but that he could in the insurance restoration business. In other words, ZZZZ Best would contract to do carpet and drapery cleaning jobs after a fire or flood. Because the damage from the fire or flood probably would be covered by insurance, the customer would be eager to have the work done, and perhaps not be all that concerned with how much it would cost. The only problem with Minkow’s insurance restoration idea was that it was all a fiction. Allegedly, over 80 percent of his revenue was from this work. In the process of creating the fraud, Minkow was able to dupe the auditors, Ernst & Whinney (now EY), into thinking the insurance restoration business was real. The auditors never caught on until it was too late.
How Barry Became a Fraudster
Minkow wrote a book, Clean Sweep: A Story of Compromise, Corruption, Collapse, and Comeback, that provides some insights into the mind of a 15-year-old kid who was called a “wonder boy” on Wall Street until the bubble burst. He was trying to find a way to drum up customers for his fledgling carpet cleaning business. One day, while he was alone in his garage-office, Minkow called Channel 4 in Los Angeles. He disguised his voice so he wouldn’t sound like a teenager and told a producer that he had just had his carpets cleaned by the 16-year-old owner of ZZZZ Best. He sold the producer on the idea that it would be good for society to hear the success story about a high school junior running his own business. The producer bought it lock, stock, and carpet cleaner. Minkow gave the producer the phone number of ZZZZ Best and waited. It took less than five minutes for the call to come in. Minkow answered the phone and when the producer asked to speak with Mr. Barry Minkow, Minkow said, “Who may I say is calling?” Within days, a film crew was in his garage shooting ZZZZ Best at work. The story aired that night, and it was followed by more calls from radio stations and other television shows wanting to do interviews. The calls flooded in with customers demanding that Barry Minkow personally clean their carpets.
As his income increased in the spring of 1983, Minkow found it increasingly difficult to run the company without a checking account. He managed to find a banker that was so moved by his story that the banker agreed to allow an underage customer to open a checking account. Minkow used the money to buy cleaning supplies and other necessities. Even though his business was growing, Minkow ran into trouble paying back loans and interest when due.
Minkow developed a plan of action. He was tired of worrying about not having enough money. He went to his garage—where all his great ideas first began—and looked at his bank account statement, which showed that he had more money than he thought he had based on his own records. Minkow soon realized it was because some checks he had written had not been cashed by customers, so they didn’t yet show up on the bank statement. Voilá! Minkow started to kite checks between two or more banks. He would write a check on one ZZZZ Best account on the last day of the reporting period and deposit it into another. The check wouldn't clear Bank # 1 for at least one day so he could count the cash in both accounts (back then, checks weren’t always processed in real time the way they are today).
It wasn’t long thereafter that Minkow realized he could kite checks big time. Not only that, he could make the transfer of funds at the end of a month or a year and show a higher balance than really existed in Bank #1 and carry it onto the balance sheet. Because Minkow did not count the check written on his account in Bank #1 as an outstanding check, he was able to double-count.
Time to Expand the Fraud
Over time, Minkow moved on to bigger and bigger frauds, like having his trusted cohorts confirm to banks and other interested parties that ZZZZ Best was doing insurance restoration jobs. Minkow used the phony jobs and phony revenue to convince bankers to make loans to ZZZZ Best. He had cash remittance forms made up from nonexistent customers with whatever sales amount he wanted to appear on the document. He even had a co-conspirator write on the bogus remittance form, “Job well done.” Minkow could then show a lot more revenue than he was really making.
Minkow’s phony financial statements enabled him to borrow more and more money and expand the number of carpet cleaning outlets. However, Minkow’s personal tastes had become increasingly more expensive, including purchasing a Ferrari with the borrowed funds and putting a down payment on a 5,000-square-foot home. So, the question was: How do you solve a perpetual cash flow problem? You go public! That’s right, Minkow made a public offering of stock in ZZZZ Best. Of course, he owned a majority of the stock to maintain control of the company.
Minkow had made it to the big leagues. He was on Wall Street. He had investment bankers, CPAs, and attorneys all working for him—the now 19-year-old kid from Reseda, California, who had turned a mom-and-pop operation into a publicly owned corporation.
Barry Goes Public
Pressured to get a big-time CPA firm to do his audit by the underwriting firm selling his stock, Minkow hired Ernst & Whinney to perform the April 30, 1987, fiscal year-end audit. Minkow continued to be one step ahead of the auditors—that is, until the Ernst & Whinney auditors insisted on going to see an insurance restoration site. They wanted to confirm that all the business—all the revenue—that Minkow had said was coming in to ZZZZ Best was real.
The engagement partner drove to an area in Sacramento, California, where Minkow did a lot of work—supposedly. He looked for a building that seemed to be a restoration job. Why he did that isn’t clear, but he identified a building that seemed to be the kind that would be a restoration job in progress.
Earlier in the week, Minkow had sent one of his cohorts to find a large building in Sacramento that appeared to be a restoration site. As luck would have it, Minkow’s associate picked out the same site as had the partner later on. Minkow’s cohorts found the leasing agent for the building. They convinced the agent to give them the keys so that they could show the building to some potential tenants over the weekend. Minkow’s helpers went up to the site before the arrival of the partner and placed placards on the walls that indicated ZZZZ Best was the contractor for the building restoration. In fact, the building was not fully constructed at the time, but it looked as if some restoration work was going on at the site.
Minkow was able to pull it off in part due to luck and in part because the Ernst & Whinney auditors did not want to lose the ZZZZ Best account. It had become a large revenue producer for the firm, and Minkow seemed destined for greater and greater achievements. Minkow was smart and used the leverage of the auditors not wanting to lose the ZZZZ Best account as a way to complain whenever they became too curious about the insurance restoration jobs. He would even threaten to take his business from Ernst & Whinney and give it to other auditors. To get on their good side, he would wine and dine the auditors and even invite them to his house.
Minkow also took a precaution with the site visit. He had the auditors sign a confidentiality agreement that they would not make any follow-up calls to any contractors, insurance companies, the building owner, or other individuals involved in the restoration work. This prevented the auditors from corroborating the insurance restoration contracts with independent third parties.
The Fraud Starts to Unravel
It was a Los Angeles housewife who started the problems for ZZZZ Best that would eventually lead to the company’s demise. Because Minkow was a well-known figure and flamboyant character, the Los Angeles Times did a story about the carpet cleaning business. The Los Angeles housewife read the story about Minkow and recalled that ZZZZ Best had overcharged her for services in the early years by increasing the amount of the credit card charge for its carpet cleaning services.
Minkow had gambled that most people don’t check their monthly statements, so he could get away with the petty fraud. However, the housewife did notice the overcharge and complained to Minkow, and eventually he returned the overpayment. She couldn’t understand why Minkow would have had to resort to such low levels back then if he was as successful as the Times article made him out to be. So she called the reporter to find out more, and that ultimately led to the investigation of ZZZZ Best and future stories that weren’t so flattering.
Because Minkow continued to spend lavishly on himself and his possessions, he always seemed to need more and more money. It got so bad over time that he was close to defaulting on loans and had to make up stories to keep the creditors at bay, and he couldn’t pay his suppliers. The complaints kept coming in, and eventually the house of cards that was ZZZZ Best came crashing down.
During the time that the fraud was unraveling, Ernst & Whinney decided to resign from the ZZZZ Best audit. It had started to doubt the veracity of Minkow and his business at ZZZZ Best. Of course, by then it mattered little because the firm had been a party to the cover-up for some time.
Legal Liability Issues
The ZZZZ Best fraud was one of the largest of its time. ZZZZ Best reportedly settled a shareholder class action lawsuit for $35 million. Ernst & Whinney was sued by a bank that had made a multimillion-dollar loan based on the financial statements for the three-month period ending July 31, 1986. The bank claimed that it had relied on the review report issued by Ernst & Whinney in granting the loan to ZZZZ Best. However, the firm had indicated in its review report that it was not issuing an opinion on the ZZZZ Best financial statements. The judge ruled that the bank was not justified in relying on the review report because Ernst & Whinney had expressly disclaimed issuing any opinion on the statements. The firm lucked out in that the judge understood that a review engagement only provides limited assurance rather than the reasonable assurance of the audit.
Barry Minkow was charged with engaging in a $100 million fraud scheme. He was sentenced to a term of 25 years.
The external auditors at Ernst and Whinney succumbed to which part of the fraud triangle?
A) Opportunity
B) Incentive pressure
C) Rationalization
D) Opportunity and rationalization
In: Accounting
[The following information applies to the questions displayed below.]
Canada-based Nortel Networks was one of the largest telecommunications equipment companies in the world prior to its filing for bankruptcy protection on January 14, 2009, in the United States, Canada, and Europe. The company had been subjected to several financial reporting investigations by U.S. and Canadian securities agencies in 2004. The accounting irregularities centered on premature revenue recognition and hidden cash reserves used to manipulate financial statements. The goal was to present the company in a positive light so that investors would buy (hold) Nortel stock, thereby inflating the stock price. Although Nortel was an international company, the listing of its securities on U.S. stock exchanges subjected it to all SEC regulations, along with the requirement to register its financial statements with the SEC and prepare them in accordance with U.S. GAAP.
The company had gambled by investing heavily in Code Division Multiple Access (CDMA) wireless cellular technology during the 1990s in an attempt to gain access to the growing European and Asian markets. However, many wireless carriers in the aforementioned markets opted for rival Global System Mobile (GSM) wireless technology instead. Coupled with a worldwide economic slowdown in the technology sector, Nortel’s losses mounted to $27.3 billion by 2001, resulting in the termination of two-thirds of its workforce.
The Nortel fraud primarily involved four members of Nortel’s senior management as follows: CEO Frank Dunn, CFO Douglas Beatty, controller Michael Gollogly, and assistant controller Maryanne Pahapill. At the time of the audit, Dunn was a certified management accountant, while Beatty, Gollogly, and Pahapill were chartered accountants in Canada.
Accounting Irregularities
On March 12, 2007, the SEC alleged the following in a complaint against Nortel:1
In late 2000, Beatty and Pahapill implemented changes to Nortel’s revenue recognition policies that violated U.S. GAAP, specifically to pull forward revenue to meet publicly announced revenue targets. These actions improperly boosted Nortel’s fourth quarter and fiscal 2000 revenue by over $1 billion, while at the same time allowing the company to meet, but not exceed, market expectations. However, because their efforts pulled in more revenue than needed to meet those targets, Dunn, Beatty, and Pahapill selectively reversed certain revenue entries during the 2000 year-end closing process.
In November 2002, Dunn, Beatty, and Gollogly learned that Nortel was carrying over $300 million in excess reserves. The three did not release these excess reserves into income as required under U.S. GAAP. Instead, they concealed their existence and maintained them for later use. Further, Beatty, Dunn, and Gollogly directed the establishment of yet another $151 million in unnecessary reserves during the 2002 year-end closing process to avoid posting a profit and paying bonuses earlier than Dunn had predicted publicly. These reserve manipulations erased Nortel’s pro forma profit for the fourth quarter of 2002 and caused it to report a loss instead.2
In the first and second quarters of 2003, Dunn, Beatty, and Gollogly directed the release of at least $490 million of excess reserves specifically to boost earnings, fabricate profits, and pay bonuses. These efforts turned Nortel’s first-quarter 2003 loss into a reported profit under U.S. GAAP, which allowed Dunn to claim that he had brought Nortel to profitability a quarter ahead of schedule. In the second quarter of 2003, their efforts largely erased Nortel’s quarterly loss and generated a pro forma profit. In both quarters, Nortel posted sufficient earnings to pay tens of millions of dollars in so-called return to profitability bonuses, largely to a select group of senior managers.
During the second half of 2003, Dunn and Beatty repeatedly misled investors as to why Nortel was conducting a purportedly “comprehensive review” of its assets and liabilities, which resulted in Nortel’s restatement of approximately $948 million in liabilities in November 2003. Dunn and Beatty falsely represented to the public that the restatement was caused solely by internal control mistakes. In reality, Nortel’s first restatement was necessitated by the intentional improper handling of reserves, which occurred throughout Nortel for several years, and the first restatement effort was sharply limited to avoid uncovering Dunn, Beatty, and Gollogly’s earnings management activities.
The complaint charged Dunn, Beatty, Gollogly, and Pahapill with violating and/or aiding and abetting violations of the antifraud, reporting, and books and records requirements. In addition, they were charged with violating the Securities Exchange Act Section 13(b)(2)(B) that requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit the preparation of financial statements in conformity with U.S. GAAP and to maintain accountability for the issuer’s assets.
Dunn and Beatty were separately charged with violations of the officer certification provisions instituted by SOX under Section 302. The commission sought a permanent injunction, civil monetary penalties, officer and director bars, and disgorgement with prejudgment interest against all four defendants.
Specifics of Earnings Management Techniques
From the third quarter of 2000 through the first quarter of 2001, when Nortel reported its financial results for year-end 2000, Dunn, Beatty, and Pahapill altered Nortel’s revenue recognition policies to accelerate revenues as needed to meet Nortel’s quarterly and annual revenue guidance, and to hide the worsening condition of Nortel’s business. Techniques used to accomplish this goal include:
Reinstituting bill-and-hold transactions. The company tried to find a solution for the hundreds of millions of dollars in inventory that was sitting in Nortel’s warehouses and offsite storage locations. Revenues could not be recognized for this inventory because U.S. GAAP revenue recognition rules generally require goods to be delivered to the buyer before revenue can be recognized. This inventory grew, in part, because orders were slowing and, in June 2000, Nortel had banned bill-and-hold transactions from its sales and accounting practices. The company reinstituted bill-and-hold sales when it became clear that it fell short of earnings guidance. In all, Nortel accelerated into 2000 more than $1 billion in revenues through its improper use of bill-and-hold transactions.
Restructuring business-asset write-downs. Beginning in February 2001, Nortel suffered serious losses when it finally lowered its earnings guidance to account for the fact that its business was suffering from the same widespread economic downturn that affected the entire telecommunications industry. As Nortel’s business plummeted throughout the remainder of 2001, the company reacted by implementing a restructuring that, among other things, reduced its workforce by two-thirds and resulted in a significant write-down of assets.
Creating reserves. In relation to writing down the assets, Nortel established reserves that were used to manage earnings. Assisted by defendants Beatty and Gollogly, Dunn manipulated the company’s reserves to manage Nortel’s publicly reported earnings, create the false appearance that his leadership and business acumen was responsible for Nortel’s profitability, and pay bonuses to these three defendants and other Nortel executives.
Releasing reserves into income. From at least July 2002 through June 2003, Dunn, Beatty, and Gollogly released excess reserves to meet Dunn’s unrealistic and overly aggressive earnings targets. When Nortel internally (and unexpectedly) determined that it would return to profitability in the fourth quarter of 2002, the reserves were used to reduce earnings for the quarter, avoid reporting a profit earlier than Dunn had publicly predicted, and create a stockpile of reserves that could be (and were) released in the future as necessary to meet Dunn’s prediction of profitability by the second quarter of 2003. When 2003 turned out to be rockier than expected, Dunn, Beatty, and Gollogly orchestrated the release of excess reserves to cause Nortel to report a profit in the first quarter of 2003, a quarter earlier than the public expected, and to pay defendants and others substantial bonuses that were awarded for achieving profitability on a pro forma basis. Because their actions drew the attention of Nortel’s outside auditors, they made only a portion of the planned reserve releases. This allowed Nortel to report nearly break-even results (though not actual profit) and to show internally that the company had again reached profitability on a pro forma basis necessary to pay bonuses.
Siemens Reserve
During the fraud trial, former Nortel accountant Susan Shaw testified about one of the most controversial accounting provisions on the company’s books, relating to a 2001 lawsuit filed against Nortel by Siemens AG. It was long-standing practice across Nortel to establish reserves on a “worst case” basis, which meant at an amount equal to the maximum possible exposure.
Nortel had created an accounting reserve on its books at the time the Siemens lawsuit was filed to provide for a settlement in the case, but it was alleged that a portion of the provision was arbitrarily left on Nortel’s books long after the lawsuit was resolved in the fourth quarter of 2001. It became part of a group of extra head office, non-operating reserves that allegedly was reversed arbitrarily—and with no appropriate business trigger—to push the company into a profit in 2003 and earn “return to profitability” bonuses for executives.
The $4-million remaining Siemens provision was initially booked to be reversed into income in the first quarter of 2003, but then withdrawn, allegedly because it was not needed to push the company into a profitable position in the quarter. It was then booked to be used in the second quarter, and became the only head office non-operating reserve used in the quarter.
The contention was that the Siemens reserve was used in that quarter because Nortel needed almost exactly $4 million more income to reach the payout trigger for the company’s restricted share unit plan at that time. However, lawyer David Porter argued the Siemens amount was triggered in the second quarter because that is when the company believed it was no longer needed and should appropriately be reversed.
In cross-examination, Porter showed Shaw a working document recovered from the files of Nortel’s external auditors at Deloitte & Touche, showing the auditor reviewed Nortel’s justifications for keeping the Siemens reserve on the books until that time and for reversing it in the second quarter of 2003. Deloitte’s notes showed the auditor reviewed Nortel’s detailed rationale for the reserve and concluded its release in the second quarter was “reasonable.”3
The company said it was holding on to the reserve because the settlement with Siemens had been “rancorous” and Nortel wanted to be sure there would be no further claims made after the lawsuit was settled and $32 million was paid to Siemens in two installments in late 2001 and late 2002.
In its working notes, Deloitte recorded that Nortel felt it was “prudent” to keep the $4 million on the books until mid-2002. Shaw testified she felt the reserve was being reversed on schedule with the plan to keep it in place for the first two quarters of the year. Porter asked Shaw whether the auditors were satisfied at the time there was an appropriate triggering event to use the reserve in the second quarter of 2002, and she replied there was one.
However, the amount became part of a broad restatement of reserves announced at Nortel at the end of 2003. The company noted in the restatement that the Siemens reserve should have been reversed in the fourth quarter of 2001 when the lawsuit was settled.
Role of Auditors and Audit Committee
In late October 2000, as a first step toward reintroducing bill-and-hold transactions into Nortel’s sales and accounting practices, Nortel’s then controller and assistant controller asked Deloitte to explain, among other things, (1) “[u]nder what circumstances can revenue be recognized on product (merchandise) that has not been shipped to the end customer?” and (2) whether merchandise accounting can be used to recognized revenues “when installation is imminent” or “when installation is considered to be a minor portion of the contract”?4
On November 2, 2000, Deloitte presented Nortel with a set of charts that, among other things, explained the US GAAP criteria for revenues to be recognized prior to delivery (including additional factors to consider for a bill-and-hold transaction) and also provided an example of a customer request for a bill-and-hold sale “that would support the assertion that Nortel should recognize revenue” prior to delivery.
Nortel’s earnings management scheme began to unravel at the end
of the second quarter of 2003. On the morning of July 24, 2003, the
same day on which Nortel issued its second Quarter 2003 earnings
release, Deloitte informed Nortel’s audit committee that it had
found a “reportable condition” with respect to weaknesses in
Nortel’s accounting for the establishment and disposition of
reserves. Deloitte went on to explain that, in response to its
concerns, Nortel’s management had undertaken a project to gather
support and determine proper resolution of certain provision
balances. Management, in fact, had undertaken this project because
the auditor required adequate audit evidence for the upcoming
year-end 2003 audit. Nortel concealed its auditor’s concerns from
the public, instead disclosing the comprehensive review.
Shortly after Nortel’s announced restatement, the audit committee commenced an independent investigation and hired outside counsel to help it “gain a full understanding of the events that caused significant excess liabilities to be maintained on the balance sheet that needed to be restated,” as well as to recommend any necessary remedial measures. The investigation uncovered evidence that Dunn, Beatty, and Gollogly and certain other financial managers were responsible for Nortel’s improper use of reserves in the second half of 2002 and first half of 2003.
In March 2004, Nortel suspended Beatty and Gollogly and announced that it would “likely” need to revise and restate previously filed financial results further. Dunn, Beatty, and Gollogly were terminated for cause in April 2004.
On January 11, 2005, Nortel issued a second restatement that restated approximately $3.4 billion in misstated revenues and at least another $746 million in liabilities. All of the financial statement effects of the defendants’ two accounting fraud schemes were corrected as of this date, but there remained lingering effects from the defendants’ internal control and other nonfraud violations.
Nortel also disclosed the findings to date of the audit committee’s independent review, which concluded, among other things, that Dunn, Beatty, and Gollogly were responsible for Nortel’s improper use of reserves in the second half of 2002 and first half of 2003. The second restatement, however, did not reveal that Nortel’s top executives had also engaged in revenue recognition fraud in 2000.
In May 2006, in its Form 10-K for the period ending December 31, 2005, Nortel admitted for the first time that its restated revenues in part had resulted from management fraud, stating that “in an effort to meet internal and external targets, the senior corporate finance management team . . . changed the accounting policies of the company several times during 2000,” and that those changes were “driven by the need to close revenue and earnings gaps.”
Throughout their scheme, the defendants lied to Nortel’s independent auditor by making materially false and misleading statements and omissions in connection with the quarterly reviews and annual audits of the financial statements that were materially misstated. Among other things, each of the defendants submitted management representation letters to the auditors that concealed the fraud and made false statements, which included that the affected quarterly and annual financial statements were presented in conformity with U.S. GAAP and that they had no knowledge of any fraud that could have a material effect on the financial statements. Dunn, Beatty, and Gollogly also submitted a false management representation letter in connection with Nortel’s first restatement, and Pahapill likewise made false management representations in connection with Nortel’s second restatement.
The defendants’ scheme resulted in Nortel issuing materially false and misleading quarterly and annual financial statements and related disclosures for at least the financial reporting periods ending December 31, 2000, through December 31, 2003, and in all subsequent filings made with the SEC that incorporated those financial statements and related disclosures by reference.
On October 15, 2007, Nortel, without admitting or denying the SEC’s charges, agreed to settle the commission’s action by consenting to be enjoined permanently from violating the antifraud, reporting, books and records, and internal control provisions of the federal securities laws and by paying a $35 million civil penalty, which the commission placed in a Fair Fund5 for distribution to affected shareholders.6 Nortel also agreed to report periodically to the commission’s staff on its progress in implementing remedial measures and resolving an outstanding material weakness over its revenue recognition procedures.
On January 14, 2009, Nortel filed for protection from creditors in the United States, Canada, and the United Kingdom in order to restructure its debt and financial obligations. In June, the company announced that it no longer planned to continue operations and that it would sell off all of its business units. Nortel’s CDMA wireless business and long-term evolutionary access technology (LTE) were sold to Ericsson, and Avaya purchased its Enterprise business unit.
The final indignity for Nortel came on June 25, 2009, when
Nortel’s stock price dropped to 18.5¢ a share, down from a high of
$124.50 in 2000. Nortel’s battered and bruised stock was finally
delisted from the S&P/TSX composite index, a stock index for
the Canadian equity market, ending a colossal collapse on an
exchange on which the Canadian telecommunications giant’s stock
valuation once accounted for a third of its value.
Postscript
The three former top executives of Nortel Networks Corp. were found not guilty of fraud on January 14, 2013. In the court ruling, Justice Frank Marrocco of the Ontario Superior Court found that the accounting manipulations that caused the company to restate its earnings for 2002 and 2003 did not cross the line into criminal behavior.
Accounting experts said the case is sure to be closely watched by others in the business community for the message it sends about where the line lies between fraud and the acceptable use of discretion in accounting.
The decision underlines that management still has a duty to prepare financial statements that “present fairly the financial position and results of the company” according to a forensic accountant, Charles Smedmor, who followed the case. “Nothing in the judge’s decision diminished that duty.”
During the trial, lawyers for the accused said that the men believed that the accounting decisions they made were appropriate at the time, and that the accounting treatment was approved by Nortel’s auditors from Deloitte & Touche. Judge Marrocco accepted these arguments, noting many times in his ruling that bookkeeping decisions were reviewed and approved by auditors and were disclosed adequately to investors in press releases or notes added to the financial statements.
Nonetheless, the judge also said that he believed that the accused were attempting to “manage” Nortel’s financial results in both the fourth quarter of 2002 and in 2003, but he added he was not satisfied that the changes resulted in material misrepresentations. He said that except for $80 million of reserves released in the first quarter of 2003, the rest of the use of reserves was within “the normal course of business.” Judge Marrocco said the $80 million release, while clearly “unsupportable” and later reversed during a restatement of Nortel’s books, was disclosed properly in Nortel’s financial statements at the time and was not a material amount. He concluded that Beatty and Dunn “were prepared to go to considerable lengths” to use reserves to improve the bottom line in the second quarter of 2003, but he said the decision was reversed before the financial statements were completed because Gollogly challenged it.
In a surprising twist, Judge Marrocco also suggested the two devastating restatements of Nortel’s books in 2003 and 2005 were probably unnecessary in hindsight, although he said he understood why they were done in the context of the time. He said the original statements were arguably correct within a threshold of what was material for a company of that size.
Darren Henderson, an accounting professor at the Richard Ivey School of Business at the University of Western Ontario, said that a guilty verdict would have raised the bar for management to justify their accounting judgments. But the acquittal makes it clear that “management manipulation of financial statements is very difficult to prove beyond a reasonable doubt in a court of law,” he said.
It is clear that setting up reserves or provisions is still subject to management discretion, Henderson said. “The message . . . is that it is okay to use accounting judgments to achieve desired outcomes, [such as] a certain earnings target.”
___________________
1U.S. District Court for the Southern District of New York, U.S. Securities and Exchange Commission v. Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly, and Maryanne E. Pahapill, Civil Action No. 07-CV-2058, www.sec.gov/litigation/complaints/ 2007/comp20036.pdf .
2Pro forma means literally as a matter of form. Companies sometimes report income to the public and financial analysts that may not be calculated in accordance with GAAP. For example, a company might report pro forma earnings that exclude depreciation expense, amortization expense, and nonrecurring expenses such as restructuring costs. In general, pro forma earnings are reported in an effort to put a more positive spin on a company’s operations. Unfortunately, there are no accounting rules on just how pro forma should be calculated, so comparability is difficult at best, and investors may be misled as a result.
3Janet McFarland, “Nortel Accounting Reserve Reversal Deemed ‘Reasonable,’” The Globe and Mail, September 6, 2012, Available at:http://www.theglobeandmail.com/globe-investor/nortel-accounting-reserve-reversal-deemed-reasonable-by-auditors-court-told/article4171550/.
4U.S. SEC v. Nortel Networks Corporation and Nortel Networks Limited, Civil Action No. 07-CV-8851, October 15, 2007, Available at:https://www.sec.gov/litigation/complaints/2007/comp20333.pdf
5A Fair Fund is a fund established by the SEC to distribute “disgorgements” (returns of wrongful profits) and penalties (fines) to defrauded investors. Fair Funds hold money recovered from a specific SEC case. The commission chooses how to distribute the money to defrauded investors, and when completed, the fund terminates.
6Theresa Tedesco and Jamie Sturgeon, “Nortel: Cautionary Tale of a Former Canadian Titan,”Financial Post, June 27, 2009.
QUESTIONS
1. Discuss Nortel’s accounting for the following transactions and why they were not in conformity with GAAP:
-Revenue recognition
-Reserve accounting
-Accounting for contingent liabilities
2. The following two statements are made in the case:
Accounting experts said the case is sure to be closely watched by others in the business community for the message it sends about where the line lies between fraud and the acceptable use of discretion in accounting.
Darren Henderson opined that “The message . . . is that it is okay to use accounting judgments to achieve desired outcomes, [such as] a certain earnings target.”
Evaluate these statements from the perspectives of representational faithfulness and fair presentation of the financial results reported by Nortel.
In: Accounting
In line with South Bank’s current thrust to expand retail through its branches, Alex Roces, manager of the Marikina Branch, reviewed its list of depositors. Since Roces planned to offer South Bank’s loan services to its depositors, he inquired among the branch’s employees on potential loan clients. He was informed that Fe Javier, the owner of Darling Dolls Company (DCC), had plans to borrow money for use in her business.
Early in January 1995, Roces set up a meeting with Javier. During their meeting, Javier informed Roces that DDC was in need of P1 million for additional working capital during the year.
DDC had no formal accounting records. Javier confidentially informed Roces that its financial statements were only prepared when she had to report her income for tax puposes. In view of this, Roces wanted a new set of DDC’s financial statements prepared for his evaluation.
Company’s Background
Darling Dolls Company was a small manufacturer of stuffed dolls operating from 200-sq.m. leased building in Parang, Marikina. Fe Javier established the business in early 1992 with an initial capital of P2 million from her savings (P1 million) and from personal borrowings from relatives and friends (P1 million). Of the initial investment, about P500,000 was used for improvement of building. Sandee, one of her daughters and a Stuyvesant School of Fine Arts graduate, helped in the management of business and designed the dolls.
Javier started the business with only major customer, Martie Designs. After a year, she was able to ink contracts with four additional customers. DDC dolls were unique and appealing not only to children and teenagers but also to working ladies and young mothers.
DDC had 25 employees, two of whom handled administrative work. Its production process was simple, and its equipment were mainly high-speed sewing machines. In December 1994, Javier invested in 10 new high-speed sewing machines at a total cost of P270,000.
Dolls made by DDC soon became popular. During the fourth quarter of 1994, Javier was able to establish contact with three additional store chains based in Visayas and Mindanao. She believed that a lasting business relationship could be established with these prospective clients. She estimated that production would increase by 80 percent from the current annual level of 27,000 dolls. But as a result of the recent acquisition of 10 sewing machines, Javier did not have sufficient funds to cover the increase in working capital. Moreover, she anticipated that the prices of raw materials and factory supplies would also increase due to the expected implementation of new tax measures.
Up until this time, DDC had no bank loans of any other credit accommodation, except for suppliers’ credit.
Roces assigned a member of his staff to interview Javier, and visit her factory. Based on the results of the interview, Roces’ staff prepared a brief description of the company and summarized the financial data. (see Exhibit 1).
Exhibit 1
Darling Dolls Company
Interview Questions and Answers
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Questions |
Answers |
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1. How much was the 1994 sales? |
P 4.32 million; 21, 600 dolls at P200/doll |
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2. Who were the major customers? How much in sales were registered per customer? |
5 major customers, namely: Customer % Sales Martie Designs 50 Sophie’s Gifts and Tags 10 Whims 15 Cuddles and Toys 15 Aspen Boutique 10 Total 100% |
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3. Was the company a depositor of other banks besides South Bank? |
No, maintains deposit with South Bank only. |
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4. What was its cash balance as of December 31, 1994? |
P 75,000 |
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5. How much was the amount collectible from customer? |
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6. How much in raw materials and factory supplies were on hand as of December 31, 1994 |
P 320,000 raw materials P 58,000 factory supplies |
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7. Were there any unfinished dolls as of December 31, 1994? How many were they and what is their average stage of completion? |
Yes, 3,600 dolls are still in process of which 2000 are 90 percent complete and 1,600 are 50 percent complete. |
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8. How many completed dolls remained unsold as of December 31, 1994 |
1,800 dolls |
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9. How much is the average production cost per doll? |
Production cost per doll: P140 |
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10. How much is the current balance of payable to suppliers? |
About P500,000 |
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11. What are Javier’s personal assets? Which of these assets are used by Darling Dolls Company? |
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12. When did Javier buy the assets used in the business? |
Early 1992, it is estimated that fixed assets would be operational for 10 years from their acquisition dates. |
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13. How long is the lease agreement? |
10 years |
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14. What major operating expenses were incurred for the year? |
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15. What other liablilities does Darling Dolls Company have besiudes the amount of payable to suppliers? |
Overtime pay of 10 workers for P26,000. All other operating expenses incurred have been paid as of December 31, 1994. |
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Guide Questions:
C. If you were Roces, would you favorably consider the P1 million loan requested by Darling Dolls Company? What assets can be used as collateral?
In: Accounting