The Earnings Game: Everyone Plays, Nobody Wins

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SHC 4153 Accounting Theory and Practice

Case Study
The Earnings Game: Everyone Plays, Nobody Wins.

Group member:
Chong Li Yun| AH090043|
Ho Shuang Tien| AH090095|
Chua Huey Shieng| AH090053|
Lau Foong Seong| AH090126|
Aminah binti Nasaruddin| BH100002|

Lecturer:
Dr. Aniza binti Othman

INTRODUCTION

It is all about the shares price. The shares market is so active and everybody wants to win in this game. In reality, nobody would want to become a loser. They try to think the best way to gain the advantage and win in this game. Unfortunately, the players in the game used questionable tactics in order to win the game. All players are connected with each other and the winner will only goes to the player who able to control the game. Finally, who will be the loser? It could be the players itself or the outsiders e.g. the citizen who does not play the game. The dynamic share market could make the economy become gloomy and undesirable consequences will be occurs. Most of the companies involved in the earnings game where the companies have desire or have took actions to meet the analysts’ earnings per share predictions. The common players of this game include the companies themselves, analysts, investors, and accounting firms. There are many issues had been arise in the earnings game.

ISSUES AND ANALYSIS

1.0 MANAGEMENT
In order to meet the analysts’ expectation on the earnings per share, companies will use some tactics to distort their current earnings even those tactics may against the law or regulations. The tactics included:

a) Channel Stuffing
Channel Stuffing is a tactic where the companies borrow from future sales to increase current results by selling goods to customers who aren’t ready to buy yet. In order to attract buyers, the companies are willing to take the cost of storing the goods. Sunbeam, consumer appliance maker is a company who use channel stuffing to boost its earnings in winter by selling millions of dollars’ worth of backyard grills to customers. The customers not really need the goods at that season and they are allowed to defer payment until the spring.

b) Premature Revenue Recognition
Premature revenue recognition means the companies recording a highly contingent transaction as a firm sale. For example, MicroStrategy, a web software developer recorded the expected revenue from software upgrades other than actual sales. This is different from accrual revenue that allowed in accounting standard which the sales have been confirmed but the revenue has not been received yet. The software upgrades by customers are just an expectation of MicroStrategy.

c) Unusual Structure
For example, Boston Chicken has an unusual structure by which their hundreds of stores were owned by large regional franchisees called “financed area developers” or FAD. Boston Chicken lent money to FAD to start the business or open stores. After that, FAD recovered the funds in the form of fees, royalties and interest. Therefore, Boston Chicken earns more profits as the stores opened more. However, the funds that they got back from FAD were not their real revenue.

1.1 Advantages
The advantages of doing these tactics are due to several factors. Firstly, they wanted to show a good result to the public especially those investors who are potential to invest in their companies. Therefore, they will either collaborate with accounting firms to show a good audit report, increase their sales by using future sales to replace current sales, communicate with analyst and so on. Regardless of ethical or unethical, what they want is to increase their earning per share (EPS) in order to attract investors. As a result, it can be concluded that channel stuffing, premature revenue recognition and unusual structure have the similar effects to achieve their ultimate goal. 1.2 Disadvantages

For the disadvantages, each approach has different side effects if the method does not work. For channel stuffing, the...
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