Question 1

Evaluate the ethics at Enron and by those in top management with respect to its operations and accounting and financial reporting techniques.

Accepted Answer

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Question 2

The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case?
A) Enron
B) Gemstar TV Guide
C) Xerox
D) WorldCom

Accepted Answer

WorldCom's accounting issue involved improperly capitalizing expenses, similar to the issue with cable installation costs in the Cubbies Cable case.

Question 3

Which of the following was not an accounting issue in the Sunbeam case?
A) Cookie jar reserves
B) Channel stuffing
C) Bill and hold sales
D) Swap transactions

Accepted Answer

Swap transactions were not an accounting issue in the Sunbeam case. Cookie jar reserves, channel stuffing, and bill and hold sales were all accounting practices used by Sunbeam that were investigated and ultimately found to be fraudulent.

Question 4

The Diamond Foods case addresses each of the following issues except for:
A) Crop payable recorded in the wrong year
B) Increasing revenues but stagnating cash flows
C) Depreciation of almond trees
D) Clawbacks of stock and cash

Accepted Answer

The Diamond Foods case did not address the depreciation of almond trees; it focused on financial misstatements related to crop payables, revenue recognition, and executive compensation clawbacks.

Question 5

The former CEO of Vivendi Universal, Jean-Marie Messier, used as his defense in the case that:
A) His actions were protected by attorney-client privilege
B) While some of his actions may have turned out to be wrong, there never was an intent to defraud
C) While some of his actions may have turned out to be wrong, he did the best that he could to save the company for certain bankruptcy
D) He adhere to the business judgment rule and met his fiduciary obligations
Essay Questions

Accepted Answer

The defense used by the former CEO of Vivendi Universal, Jean-Marie Messier, was that while some of his actions may have turned out to be wrong, there never was an intent to defraud. This defense shows that Messier was not deliberately attempting to deceive anyone, but rather made mistakes in judgment. This defense is plausible as long as it can be shown that Messier acted in good faith and did not intend to cause harm.

Question 6

Explain when earnings management may be an ethical practice.

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Question 7

Select either the Xerox or Lucent frauds described in the chapter and explain the accounting techniques used to commit fraud.

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Question 8

Explain each of the seven financial shenanigans described by Schilit. Be sure to give an example of each one.

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Question 9

The swap transactions used in the Solutions Network case to manage earnings can best be described as:
A) Going to a swap meet and capitalizing purchases instead of expensing them immediately against swap revenue
B) Recording revenue on software systems transactions in an earlier period than when obligated to buy the same in a later period
C) Using a cookie jar reserve to delay the recording of revenue into a later period
D) Recording as operating revenue on onetime gains from the sale of underperforming assets

Accepted Answer

The swap transactions used to manage earnings involved recording revenue on software systems transactions in an earlier period than when obligated to buy the same in a later period. This allowed Solutions Network to manipulate their earnings to meet or exceed analyst expectations.

Question 10

The accounting shenanigan used in the Dell Computer case can best be described as:
A) Recording revenue from exclusivity payments too soon or of questionable quality
B) Shifting current revenue from exclusivity payments to a later period
C) Shifting future expenses to the current period as a special charge
D) Shifting current expenses to a later period

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Question 11

Discuss all the factors an auditor should consider in making a materiality judgment.

Accepted Answer

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Question 12

In the Sweat Construction case, the company tried to manipulate earnings through the use of which accounting technique
A) Cookie jar reserves
B) Lease capitalization
C) Percentage of completion method
D) The Big Bath accounting

Accepted Answer

The Sweat Construction case involved manipulating earnings through the percentage of completion method, which allows companies to recognize revenue and expenses in proportion to the work completed, potentially leading to earnings manipulation if estimates are adjusted improperly.

Question 13

Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis?
A) Egoism
B) Act utilitarianism
C) Rule utilitarianism
D) Virtue

Accepted Answer

The professor is asking for an analysis based on the net benefits versus harms of earnings management, which aligns with the principles of act utilitarianism. This approach evaluates the consequences of a particular action to determine whether it leads to the greatest overall happiness for the greatest number of people. In this case, the analysis would involve comparing the benefits of earnings management (such as increased profits, improved stock prices, etc.) against any potential harms (such as misleading investors or violating accounting standards) to determine whether the net effect is positive or negative.

Question 14

Many of the cases discussed in the chapter address the issue of swap transactions. What is a swap transaction? What criteria should be used to determine how and when to record revenue on swap transactions? Describe the facts of any one case in the book with respect to proper recording for revenue in swap transactions.

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Question 15

You work for a company that always pushes the envelope with respect to reporting revenues and expenses. You often disagree with the company because its approach to reporting these amounts cannot be justified from a GAAP perspective. You are upset and are considering whether this is a company that has a culture you want to be part of. Which of the following best characterizes the ethical issues of concern?
A) Rights Theory
B) Moral blindness
C) Ethical Dissonance
D) Materiality

Accepted Answer

Ethical dissonance refers to the conflict between personal ethical beliefs and the actions of an organization. In this scenario, the individual disagrees with the company's approach to reporting revenues and expenses and is experiencing this ethical dissonance. The other options do not address this conflict of personal beliefs and actions of the organization.

Question 16

The North Face case deals with materiality and how auditors employ that metric in an audit. The following are all true except:
A) North Face accounted for barter transactions with full normal margin recognized.
B) Crawford devised the 1997 barter transaction so that it was just beneath material threshold.
C) Crawford followed the GAAP methods that Deloitte suggested.
D) Deloitte proposed an adjusting entry for the 1997 barter transaction, but "passed" it as immaterial.

Accepted Answer

Crawford did not follow the GAAP methods suggested by Deloitte, which is why the barter transactions were problematic.

Question 17

Use the fraud triangle to evaluate the actions by those in top management at Enron as the accounting fraud unfolded.

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Question 18

Debbie and Steve are discussing a lecture given by their ethics professor after class one day. The professor said that misstatements of earnings are always unethical. Debbie agrees with this situation but Steve does not. What statement might Steve make to best support his point of view?
A) It depends on whether the misstatements were made deliberately
B) It depends on whether a user relied on the financial statements
C) It depends on whether the statements lead to a modified or unmodified opinion
D) All are valid statements for Steve to support his point of view

Accepted Answer

Steve's point of view is that misstatements of earnings are not always unethical, which implies that there might be some situations in which they can be ethical. Therefore, statement A is the best option to support his position because it introduces the notion of intent, suggesting that whether misstatements are deliberate or not can affect their ethical nature. Statements B and C are not relevant to Steve's argument because they do not address the issue of ethicality but rather the potential consequences of misstatements. Option D is incorrect because it claims that all options are valid for Steve, which is not the case since his position is that misstatements could be ethical under certain conditions.

Question 19

The Solway case looks at the accounting issue of:
A) Recording of accruals to manage earnings
B) Recording of asset impairments to manage earnings
C) Premature revenue recognition
D) Setting up SPEs

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Question 20

The main accounting issues in the Nortel Networks case were:
A) Premature revenue recognition and hidden cash reserves
B) Capitalization of operating expenses and hidden cash reserves
C) Premature revenue recognition and off-balance-sheet entities
D) Capitalization of operating expenses and off-balance-sheet entities

Accepted Answer

The Nortel Networks case primarily involved issues of premature revenue recognition and hidden cash reserves. These practices were part of the accounting fraud that led to the company's financial statements not accurately reflecting its financial status, misleading investors and regulators.

Quiz 7: Earnings Management and the Quality of Financial Reporting

Evaluate the ethics at Enron and by those in top management with respect to its operations and accounting and financial reporting techniques.

The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case?

Which of the following was not an accounting issue in the Sunbeam case?

The Diamond Foods case addresses each of the following issues except for:

The former CEO of Vivendi Universal, Jean-Marie Messier, used as his defense in the case that:

Explain when earnings management may be an ethical practice.

Select either the Xerox or Lucent frauds described in the chapter and explain the accounting techniques used to commit fraud.

Explain each of the seven financial shenanigans described by Schilit. Be sure to give an example of each one.

The swap transactions used in the Solutions Network case to manage earnings can best be described as:

The accounting shenanigan used in the Dell Computer case can best be described as:

Discuss all the factors an auditor should consider in making a materiality judgment.

In the Sweat Construction case, the company tried to manipulate earnings through the use of which accounting technique

Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis?

The North Face case deals with materiality and how auditors employ that metric in an audit. The following are all true except:

Use the fraud triangle to evaluate the actions by those in top management at Enron as the accounting fraud unfolded.

Debbie and Steve are discussing a lecture given by their ethics professor after class one day. The professor said that misstatements of earnings are always unethical. Debbie agrees with this situation but Steve does not. What statement might Steve make to best support his point of view?

The Solway case looks at the accounting issue of:

The main accounting issues in the Nortel Networks case were: