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Financial Statement Analysis

Presented by: Gopal Krishan
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i Manipulation of financial 

numbers Also called:

i Within the scope of law and 3reative or
accounting standards
i Against the spirit Innovative
Accounting
i Not providing true and fair
value of the company Earnings
Management or
i Generally done to inflate the
profits Aggressive
i Hidden in the notes to
Accounting
accounts
i IS NOT ILLEGAL!!!
 Fav 
i £evenue recognition a
i Off-balance sheet financing
Even if current
i Impairment of assets
year profits are
i Deferred revenue expenditure presented as high,
i Inappropriate accruals and the next year
estimation of liabilities would have to
i Amortization absorb the deferred
expenses and
hence there will be
a dip.
 ¦aj
i Enron a
al
i Tyco International It encourages the
i Adelphia attitude for
i Peregrine Systems committing more
i World3om serious
i Satyam misrepresentations.
i Obsessed with increasing 


the stock values which Primary cause of
Enron¶s ³risky
could not be achieved behavior´ was the
without financial practices ³growing arrogance
of executives who
i Organization culture became confident
that no-one was
i 3orruption looking over their
shoulders, watching
i 3overing up previous frauds and understanding
i Accounting methods what they were
doing.´ Traders were
the most aggressive
employees in Enron.
 [





i Louis Borget, a trader of a
al
Enron stole $3 million from
the company and nothing
was done to him
i Louis Borget and N.
Mastroeni Diverted $142
million to offshore accounts
i Jeff Skilling¶s Mark to
market accounting
 ¦a
¦a a
a


i Arthur Anderson sanctioned Mark to market

this accounting accounting allowed
Enron to book
i They were receiving $1
potential future profits
million every week for on the very day the
signing the financial deal was signed. No
statements matter how much cash
was actually flown in
the company, to the
outside world the
profits could be
anything company
wanted.
 Ô a 
i People were paid a large

a 

part through stocks They started
i Stock prices were rising but
coming up with
business was loosing money
these fancy
i Started the broadband
business and made deals
derivatives of
with the block busters. buying and
Booked $50 million for a selling risk
deal that didn¶t make a positions.
penny.
i Weather trading


i Structured finance by Andy
Fastow
i His job was to keep stock
prices up though company
was in $30 billion debt
i The boards signed deals
with Fastow¶s LJM
F
a

Fastow created
hundreds of "special-
purpose entities"
designed to transfer
Enron's debt to an
outside company and
get it off the books--
without giving up
control of the assets
that stood behind the
debt.
i Fastow used Enron¶s £a

la

stock as collateral X individual bankers
invested in LJM.
i Banks predicted to Some banks even
purchase Enron¶s assets invested an amount of
when the assets were 25 million each
1. JP Morgan
actually engaged in 2. 3redit Suisse
loans 3. Meryl Lynch
4. 3itibank
i LJM was sold to Meryl
5. Deutsche bank
Lynch bankers
i Profits were result of deals 

with the special purpose
entities
i Jeff Skilling stepped down
as 3EO
i Enron stock began to fall
ë  
i The method most commonly used was to hold the
open books past the end of the accounting period to
accumulate more sales, this meant that companies
were holding the open books until they reached their
target sales, which they might have promised to
shareholders.
i £ecording revenue when services are still due and
shipping merchandise to private warehouses for
storage before the sale is final, and counting the
shipments as sales, were two other types of cut-off
fraud.
i Modern accounting rules £a 

i Independent auditors
The scandal
i Securities and financial
market regulation
was rooted in
i The prohibitions against recent changes
insider trading in US legal,
financial and
accounting
professions.
i Amendments £ 
i New acts
M Sarbanes-Oxley act in US
M 3orporate Law Economic
£eform Program Act 2004
in Australia
i Principal Vs. £ules based
standards
wuestions?