A. What type of opinion did the auditors issue on Google’s financial statements for 2007? What is the date of the audit opinion? Explain why the opinion date is different than the date of the financial statements. Ernst & Young provides an unqualified opinion following their review of Google’s financial statements. They state that Google has performed effective internal control over their financial reporting, but they do go onto state that they changed their accounting methods in previous years as a note. The date of the audit, February 14th, is later than the issuance of the statements, January 31st, because the auditors must wait for the statements to be finalized before performing their review. It’s standard protocol for auditors to come out with their opinion 30-60 days following the closing of the books. It’s more common for fraud to occur towards the end of a fiscal year when goals/expectations need to be met so the auditors need to wait until the books are closed to begin their review. B. Managers often report ‘pro-forma’ or ‘non-GAAP’ earnings as supplemental information when reporting their GAAP earnings. i. What info can a pro-forma earnings number provide that the GAAP earnings number does not? Give examples of possible differences that might exist between the two earnings numbers. The pro-forma number can provide a better baseline representation of the net income when unique, one-time, or unusual expenses are not figured into the calculation of the net income. Charge-offs, restructuring charges, changes in GAAP policies, etc will draw down the net income earnings number portraying a less optimistic performance than a pro-forma number. Pro forma earnings can provide a more normalized representation to investors, which forecasts future performance without the unusual current expense. Items sometimes excluded in pro-forma earnings figures include write-downs, goodwill amortization, depreciation, restructuring and merger costs, interest, taxes, stock based employee pay and other expenses. The company excludes these items with the intent to present its figures more clearly to investors. However, whether or not this is accomplished is debatable. This has spawned such nicknames for pro-forma earnings as EEBS (earnings excluding bad stuff). ii. Discuss potential advantages and disadvantages to using pro forma earnings to assess a firm’s performance. One advantage is to get an untainted perspective on the health of the organization without effect from necessary one-time charges to put the company in a better operating position. Another advantage of the pro-forma statement gives a better picture of what the near term future of the company looks like by providing data that’s not affected by aforementioned charges. A disadvantage is that it doesn’t include expenses that have been incurred in the operations of the corporation which could be misleading. It also doesn’t provide a full picture of what the organization is doing in terms of how it’s operating and what costs are being incurred. Therefore, pro-forma earnings should not be used as the primary source for understanding a company’s performance since it can be mis-leading especially in the case of Google. This is why the SEC requires GAAP numbers to be presented alongside pro-forma numbers so that the investor can determine if the pro-forma numbers are truly exceptions or recurring items as in the case of Google. iii. Explain the SEC’s position on pro-forma earnings. Why might the SEC have instituted this sort of requirement? The SEC believes that in some situations, the pro-forma earnings statement can have value-add when reviewing an organization’s financial and operating performance. In order to provide a clear picture though, the SEC requires comparable GAAP numbers to be presented alongside the non-GAAP numbers to show both sides of the spectrum and mitigate any confusion. The SEC created this rule for “public companies that disclose...
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