ethics chpt 7
Which of the following did Skilling and Lay suggest caused Enron's decline in their 2006 civil trial?
A crisis of confidence in the market
Results of the CFO study of earnings management indicates that:
A large majority of earnings misrepresentations are due to pressure to hit earnings benchmarks A large majority of earnings misrepresentations are due to a desire to influence stock price
Results of the CFO study of earnings management indicate which of the following red flags of possible earnings misrepresentations by responding CFOs?
Absence of consistent reporting methods Presence of various long-term estimates
What method of ethical reasoning might be used to rationalize earnings management?
Act-utilitarianism
Which of the following amounts might be restated because of errors in reserve or provisions?
Bad debt expense Provision for loan losses Inventory
How did the use of a "Gas Bank" enable Enron to manage its operations?
Booked revenue immediately on long-term contracts Bridged the gap between producer supply and consumer demand
Which of the following are examples of shifting current expenses to a later period?
Capitalizing costs that should be expensed Failing to write down impaired assets
What did MagnaChip Semiconductor engage in when they recognized revenue on a "sell in" basis?
Channel Stuffing
Select all the improper recognition policies utilized by MagnaChip Semiconductor:
Channel Stuffing arrangements Recording revenue for unshipped products Delaying recording obsolete inventory
Which of the following devices can be used to smooth net income?
Channel stuffing Delaying the recognition of expense Cookie-jar reserves
Which of the following are financial shenanigan techniques that can be used to hide or distort financial performance or financial condition?
Deflating current reported income Inflating current reported income
Which of the following is a technique used to understate reported earnings by shifting them to a later period?
Delay recording revenue in high earnings years
Cookie-jar reserves can be used to manipulate earnings by
Deliberately overstating the allowance for uncollectibles to create an amount that can be moved back into revenues at a later time Delaying the recording of revenue when revenues are relatively high in a given year
What was the basis for McKee's criticisms of the way others define earnings management?
Earnings management can be acceptable if designed to achieve stable and predictable financial results Other definitions take an unnecessarily negative view of earnings management It represents a conscious choice by management to smooth earnings over time
What motivated the actions by management of Enron?
Enhance stock option values Increase profits
Jeff Skilling suggested that the initial problem at Enron what based on what?
Enron needed long-term supply contracts, but producers were only willing to commit to 30 day deals due to the volatility in the industry.
What are the effects of income smoothing on earnings?
Erosion in the quality of earnings
Under ASC Topic 850-10-50-6 Related Party Disclosures, if the reporting entity and another entity are under management control that would result in significantly different operating results if they were autonomous, which statement is correct?
Even if there are no transactions between the entities, the relationship should be disclosed
Why were Fastow's actions with regard to Chewco misleading?
Failed to mention that one of his protégés managed Chewco Failed to mention there was virtually no outside ownership of Chewco
Which of the following actions and conclusions of KPMG about Gemstar were unreasonable?
Failed to properly consider materiality issues Reliance on representations by management Gemstar's financial statements were fairly presented in conformity with GAAP
Each of the following techniques were used by Lucent to manipulate recorded earnings:
Failing to write down impaired assets Boosting income with one-time gains Releasing reserves into income Recording revenue too soon
Each of the following was an accounting violation at Enron:
Failure to consolidate the results of Chewco with Enron Failure to disclose adequately the related party activities with SPEs Overstating earnings from mark-to-market accounting
In the Enron fraud, Ken Lay was found guilty of:
Fraud Bank fraud Conspiracy
In the Enron fraud, Jeff Skilling was found guilty of:
Fraud Conspiracy Insider trading
Which of the following is outlined by Regulation G?
GAAP presentation of information must have equal or greater prominence than non-GAAP financial measures. Disclosure of the reasons why non-GAAP measures provide useful information to investors is required. Reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures is required.
Why was the quality of Enron's financial reports poor?
Gains from sales of assets to SPEs masked true earnings Failed to adequately disclose related-party transactions Used SPEs to hide debt Inadequate explanations for the use of reserves
Which of the following factors served as an incentive for how the culture at Enron worked?
Growth at all costs
Each of the following techniques was used by Enron to manage earnings:
Inflated estimates of mark-to-market Overrode internal controls Used reserves to inflate income when reported amounts were too low
How did Watkins characterize the environment at Enron?
It was a risky place to work
How did the structured partnerships help Enron to enhance its financial results?
Kept debt off the books Recorded gains on sales of operating assets
Which of the following could a vendor providing cloud computing services use to overstate their revenues?
Lump all services together and record them all as cloud services Sell a cloud subscription to a pilot population but book it as if it were for the whole company Provide a cloud product for free allocating revenues to other modules
Which of the following points were raised by Dechow and Skinner in characterizing earnings management?
Managerial intent influences how earnings are managed Aggressive accounting may be acceptable Difficult to operationalize earnings management
What was the finding identified by Bruns and Merchant about how managers view the ethics of earnings management?
Managers disagreed on whether earnings management was acceptable
Which of the following techniques can be used to establish a cookie-jar reserve?
Manipulating bad debt expense Deferring revenue
The underlying technique used to carry out accounting shenanigans is:
Misapplication of accounting principles
A vendor having an agreement with a customer to provide and install a product along with providing one year of maintenance services is an example of what?
Multiple Deliverables
To comply with Regulation S-K Item 10(e), the registrant is prohibited from including which of the following in SEC filings
Non-GAAP measures presented on the face of the financial statements prepared in accordance with GAAP Non-GAAP financial measures that exclude charges requiring cash settlement other than EBIT and EBITDA
Which of the following are red flags of earnings management?
One-time sources of income Growth in revenue that does not line up with inventory Frequent acquisition of businesses
When decisions are altered to affect cash flows and net income for a period of time, the company has engaged in
Operating earnings management
Results of the CFO study of earnings management indicate which of the following red flags of possible earnings misrepresentations by responding CFOs?
Persistent deviations between earnings and underlying cash flows Large and unexplained accruals and changes in accruals Firm culture that allows earnings management
Which of the following are criteria for revenue recognition?
Persuasive evidence of an arrangement exists Collection is reasonably assured Delivery has occurred or services have been provided
Which of the following disclosures would cause a non-GAAP measure to be more prominent than a GAAP measure?
Presenting a non-GAAP measure that precedes the most directly comparable GAAP measure Omitting a comparable GAAP measure from headlines of earnings releases
Which of the following non-GAAP metrics violate Regulation G?
Presenting a performance measure that excludes normal cash operating expenses. Presenting non-GAAP measures that exclude non-recurring charges but include non-recurring gains
What operating issue was raised by Watkins in her warning letter to Ken Lay?
Problems with Enron's partnerships
Which of the following best describes the topside lease accounting techniques used by Xerox to accelerate reported lease revenue?
Pulled forward a portion of finance income and recognized it immediately as equipment revenue
Which of the following is the example given by Bruns and Merchant of using operating decisions to manipulate earnings?
Purposefully delaying making needed repairs to a subsequent period
Which of the following are used to alter the amount of revenue that is recognized?
Recognize revenue before the earnings process is complete Recognize revenue before the customer has unconditionally accepted shipment
To comply with Item 10(e), the registrant must include which of the following in SEC filings
Reconciliation should presented with each adjustment clearly labeled Non-GAAP measures should be presented in proximity to GAAP measures
Which of the following revenue recognition issues affect customer acceptance?
Recording revenue before unconditional acceptance Recording revenue even though the customer is not obligated to pay
Which of the following is an example of recording revenue too soon?
Recording revenue even though the customer is not obligated to pay
Which of the following is not an example of bogus revenue?
Recording revenue when product is shipped to a customer
Which of the following techniques were completed by Gemstar to overstate earnings?
Recording revenues for nonexistent agreements Creating cookie-jar reserves Engaging in round-trip transactions
Which of the following are red flags of earnings management?
Reduction in reserves Change in members of upper management Short-term borrowing at year end Change in auditors
Which of the following indicates shareholders should no longer rely on past financial statements?
Reissuance restatements
Which of the following provisions of SOX resulted from the Enron fraud?
Requires disclosure of off-balance-sheet financing activities Prohibits internal audit services for audit clients Requires disclosure of related-party transactions
Which legislation was the first to regulate non-GAAP measures?
Sarbanes-Oxley
How was Enron able to establish control over the partnership entities and keep its operations off their books?
Showed that at least 3% of the equity was owned by outside interests
In his statement on earnings management, Levitt links the practice to:
Smoothing net income Meeting or exceeding financial analysts' expectations Culture of gamesmanship
The device used by Enron to engineer the results of the partnerships was called
Special-purpose entities
Why was the Powers Committee report critical of activities at Enron?
Tax liability of Kopper from the sale of Chewco assets was paid by Enron Kopper made a profit on the sale of Chewco assets to Enron
The theme of Levitt's statement on earnings management can best be described as
The Numbers Game
Which of the following is true about non-GAAP financial measures?
The external auditor is not responsible for non-GAAP financial measures as they are not in the financial statements.
How did Oracle use their "cloud credits" to record bogus revenue?
They recorded traditional software licenses as cloud subscription
Which of the following did Skilling state as his reason for leaving Enron?
To spend time with his family
Earnings management can occur by:
Using aggressive accounting techniques Establishing or altering estimates Altering operating decisions
How did the board's actions violate Enron's code of ethics with regard to Fastow?
Waived the conflict of interest requirement
Lucent created cookie-jar reserves by
Writing off part of the acquisition cost of buying other entities as in-process R&D
Under GAAP, revenue from a multiple-element arrangement must be allocated based on
a consistent price paid by customers fair value vendor-specific objective evidence
Victor Alston, CEO of Ixia, misled investors by:
accelerating revenue recognition from multiple-element arrangements
When analyzing earnings management, who should be most responsible for the integrity of the corporate system?
bOard
Collection must _____ for revenue recognition to occur.
be reasonably assured
Recording sales that lack economic substance is an example of recording revenue.
bogus
Enron's debt load was so high that it forced the company into financing projects with borrowings that were kept off the
bs
When management chooses to add back losses but not deduct gains, the SEC suggests they are adjustments.
cherry picking
Improper accounting for other (OCI) transactions is an accounting error and can trigger financial statement restatement.
comprehensive income
David Fuselier, the CEO of Integrated Freight Corporation, misled investors by:
concealing related party transactions
What is a legitimate reason to establish an SPE?
control risk
The overriding cause of the fraud at Enron in addition to inadequate internal controls was a failure in its systems.
corporate governance
From a cultural perspective, it could be said that Enron's actions reflected a(n) of .
culture greed
When a vendor provides multiple products to its customer at different points in time, it is referred to as multiple .
deliverables
When companies artificially inflate or deflate their revenues or profits, has occurred.
earningss management
Non-GAAP measures should better reflect than GAAP amounts alone.
economic reality
The culture at Enron:
encouraged a "yes" mentality regardless of the cost. rewarded loyalists and punished dissenters. made employees reluctant to question their bosses.
Given the need to comply with SEC disclosure rules, companies should develop controls over non-GAAP measures that
ensure non-GAAP measures are reconciled to GAAP address whether non-GAAP measures are transparent
True or false: The Powers Committee concluded that Enron's general counsel authorized payments to Chewco.
f
If fraudulent activity is suspected or has been detected, a(n) accountant may be brought in to assess the magnitude of the fraudulent activity.
forensic
Jeff Skilling discussed ways to pool investments in gas-supply contracts and then sell long-term deals to utilities through the use of a
gas blank
Put the following steps of revenue recognition in order according to the new standard:
ide i det all rec
UTi Worldwide Inc. misled investors by:
improperly disclosing changes in financial condition
The purposes of forward-looking statements are to
increase transparency provide earning guidance about the future guide investors
When non-GAAP financial measures are disclosed, they must be presented in a manner that
is not misleading reconciles the information according to U.S. GAAP does not contain an untrue statement of material fact
The underlying reason earnings may be manipulated is because estimates and are inherent on the accounting process.
judgement
The original motivation by FASB for creating SPEs was to establish a mechanism to encourage companies to invest in needed assets while
keeping related debt off the books
Regulation S-K requires issuer's of quarterly filings to discuss material changes in
liquidity and financial resources
Under General Motors internal accounting controls, during the period from 2012 to 2014, employees failed to:
properly account for potential product recalls
Jeff Skilling's new employee evaluation policy was called and by employees.
rank yank
Fastow's actions violated Enron's code of ethics because he became involved with a - entity.
related party
To increase earnings when reported amounts were too low, Enron used
reserves
The principle that states that revenues should be recognized when the firm has delivered a product, and the cash receipt is reasonably assured, is the principle.
revenue recognition
So-called restatements have been fairly steady while restatements have been declining.
revision reissuance
increase transparency provide earning guidance about the future guide investors
sets in motion organizational behaviors that damage the firm. can be detrimental to the long-term value of the firm. can help the firm meet earnings targets and reap market rewards. puts the integrity of management in question.
Non-GAAP measures :
should better reflect economic reality
The new revenue recognition standard:
specifies a five step process to recognize revenue requires extensive disclosures requires separate allocation of revenue recognition when multiple obligations within one contract exist.
True or false: A disclosure in the financial statements may be used to rationalize an unethical action with respect to earnings management. True false question.
t
True or false: Changes in accounting policies can lead to shifting current expenses to a later or earlier period.
t
True or false: Under accounting rules at the time, control over the partnership entities by Enron was established by exercising management rights over the entity's operations.
t
Xerox's fraudulent accounting policies are referred to as lease accounting devices.
topside
The purpose of forward-looking statements is to improve
transparency
During the period from 2012 to 2014, General Motors misled investors by:
understating liabilities