1985: Coporate controller at C&S updated the charts of accoutns did major cost reductions was promoted to vice president intitiated a study on the strategic planning tried to convicen management to change to a chash focused planning system instead of operating income 1989 CFO at EFI
Updated the budget sys. (Satellite business was unprofitable) Found out that earnings were artificially increased (e.g. by depreciating equipment longer than realistic and deferring expenses) In 1990, Don subjected accounting adjustment of decreasing of 2 mio doller, CEO denied In 1991 profit forecast has to be adjusted due to false profit projection
1. Was Don Russell a good controller for Cook and Spector, Inc.? Why or why not?
tried to raise concern about the problem with the CEO
Modernized the accounting system
cost reductions were realized
Allowed the possibility for accounting fraud by modernizing the accounting system Did’nt inform top-management at the beginning
Was not able to convince top-management
Analytical skills: Not sure, not fulfilled
Business judgment: not sure
Recommendations: makes recommendations, furfilled
Conclusion: He gave recommendation on changing the accounting system, but could not change the top managements decision on not changing the system. -> subjected opion: More bad than good…
2. Does Don have the power to force ETI top management to make a correcting accounting entry? If not, what should he do? If so, should he force the entry to be made, and how large should it be?
Answer both of the questions
Making the correcting accounting entry
make an accounting entry to write off inappropriate assets
Make the firm to look bad, but being a good controller, probable loose his job Ignore it, it will prolong the problem, not being a good controller, Could talk to the external auditors, the company will look bad, loose his job
Auditors should have found out
The Auditors were scared about the CEO, loose their client, maybe loose their job. Broad of directors
Maybe did’nt knew or did not want to know
3. Are earnings management practices such as took place at C&S and ETI smart? Are they ethical?
earnings management practices Smart/ethical
Depending on the
Unethical: Don’t want to change the accounting entry, because want the company to look good, to get the deal with the satellite firm. Hiding to boost profit Hiding money from the public, not illegal,
Don forced the entry, said the CEO that, he did not want to go to jail. Otherwise he would go to the auditors, so they the fraud GOOD controller!!!
Don Russell: Experiences of a Controller/CFO
Don Russell, CFO discovered that the company’s financial accounting was excessively aggressive All repairs and maintenance were capitalized
Most interest was capitalized because it was deemed to be the cost of financing the construction in progress Most equipment was being depreciated on a 12-year life (should have been 5 years and some even a max. of 24 months) As many expenditures as possible (for example travel) was classified as goodwill and thereby amortized over 40 years
Auditors didn’t object because they didn’t understand the technology If corrections were to be made the company ETI would report large losses that would trigger violations of debt financing covenants and place the company’s survival in jeopardy ETI’s chairman and president were strongly against making the correcting entry NTC had offered to buy a new offering of ETI stock at a substantial premium and ETI had to report the profits they were expecting or they would back away Don concluded that auditors provide no safety net at all against financial people in a company (Joe would scream at them – explosive personality – they feel a natural pressure to go along)
Don felt that the firms accounting reports were misleading to decision-makers both outside and inside the company Personal thought – 6 kids and high alimony payments + stock options which could be exercised in 2 months Earnings management at previous employer C&S – distorted numbers The company was reporting profits but in reality it was heading in a downward spiral No linkage between bonuses and a strategic plan, just to an accounting number that was not tied to a plan – got their bonuses for nothing (even bad decisions)