Financial Disclosures & Creative Accounting

Duration of Course: Three-day Programme

The importance of Financial Disclosure & Creative Accounting

• Analyse how companies exploit weak and ineffective accounting standards

• Determine if a company is hiding losses through off balance sheet instruments

• Scrutinise SPV's and how companies like Enron have exploited them

• Examine how companies exploit currency mismatches and explore techniques for detecting this creative accounting tactic

• Analyse hidden derivative exposures on company balance sheets

• Identify companies that have capitalised expenses

Overview 

Wall Street's over-attention to quarterly earnings and annual earnings per share figures puts considerable pressure on Chief Executives to exploit their relationship with auditors. To their cost, analysts have found that auditors have not stopped many of the creative accounting practices that enrich the bonuses of chief executives and finance directors. Today, the very detailed disclosure requirements of company accounts means that it is possible to spot many of the creative accounting practices adopted by accountants. This means that the EPS figures can be recalculated leading to a more realistic valuation of share prices. There is growing pressure on analysts to be able to read a set of accounts and distinguish between pure speculation, hype and hard facts.  Only then can they claim to fully understand what is going on.

Course Objectives

Most analysts and accountants readily admit that accounting standards are almost incapable of dealing with complex deals. Banks very often structure products for companies that deliberately exploit these weaknesses and finance directors can use these structured products to enhance their bonuses without adding value to the  company. Analysts and shareholders of Enron, Elan and Worldcom have learnt to their cost, that lack of awareness of these accounting pitfalls can yield unpleasant surprises. As a consequence of the recent multi-billion dollar accounting scandals, many shareholders no longer trust accountants and auditors, placing greater faith in analysts to see through creative accounting practices. To restore business and public confidence, accountants must come to grips with the complex nature of creative accounting and devise strategies for addressing them. This course is designed to identify the weaknesses in the current accounting standards and will enable delegates to see how easy it is to manipulate figures. Using live case studies delegates will develop forensic skills to determine where and why the figures don't add up. All sets of accounts present warning signals. Delegates will learn how to identify such signals and recalculate the correct EPS.

Who Should Attend

•   Accountants

•   Financial analysts

•   Portfolio managers

•   Securities analysts

•   Credit / investment banking analysts

•   Investment analysts

•   Pension fund managers

•   Senior managers

•   Auditors

Profile of Trainer

Cormac Butler is currently an active equity and options trader and a former consultant with Lombard Risk Systems London and has also worked with Peat Marwick and Coopers & Lybrand. He has considerable international experience as a training consultant in Derivative Accounting, Corporate Finance and Derivative Mathematics, working with major banks including Salomon Brothers, Robert Fleming and Banque Paribas. He has recently conducted in-house courses for Salomons, Morgan Stanley Dean Whitter (London), PriceWaterhouseCoopers (Holland), Investec (South Africa) and ABB Switzerland. In addition, he has worked for IIR and Euromoney in Singapore, Hong Kong, Thailand, America and Saudi Arabia. Cormac graduated from the University of Limerick, Ireland with a degree in Finance He has recently published Mastering Value at Risk (Financial Times Pitman) which is currently on the best sellers list (for Risk Management books) with Amazon.com, Gloriamundi.org and Financial World Bookshop (London).

Course Outline

Introduction 

• Creative Accounting Activities
• Capitalized Expenses On Balance Sheet
• Hidden Liabilities Off-Balance Sheet
• Special Purpose Vehicles

Overview

•  Xerox - Premature Revenue Recognition
• Worldcom - Capitalising Expenses
• Elan - Off Balance Sheet Structures

Consolidation Basics 

• Definition and Terms
• Overview Business Combinations
• Acquisition Accounting

Issues with Special Purpose Vehicles

• Qualifying Special Purpose Vehicles
• Transfer of Accounting Provisions
• being accounted for as sales
• Role of the Basle Committee in Securitizations
• Issues Affecting Lease Securitisations
• New Disclosures Required in Audited Statements

Earnings Management 

• How is Earnings Management Defined
• Earnings Management Techniques
• Effectiveness of Management

Recognising Premature or Fictitious Revenue 

• What is Premature or Fictitious Revenue
• When should revenue be recognised
• Detecting Premature and Fictitious Revenue

 Misreported Assets and Liabilities 

• Link with Reported Earnings
• Boosting Shareholders Equity
• Overvalued Assets

Creative Income Statements; Classification and Disclosure

•  Current Income Statement Requirements and Practice
• Reporting Comprehensive Income
• Creating Income Statement Classifications
• Creative with Other Aspects of the Income Statement  

Case Study Worldcom

Accounting for Leases 

• Concepts rules and examples
• Classification of Lessee and Lessor
• Distinction Direct Financing and Leveraged Leases
• Accounting for Leases Lessee
• Accounting for Leases Lessor
• Leases Involving Land and Buildings

Disclosure requirements under IAS 17 

• Lessee Disclosures
• Lessor Disclosures

 US Gap - Leasing Issues 

• Termination of Lease
• Renewal or Extension of Lease
• Accounting for Leases  in a Business Combination
• Sale or Assignment to Third Parties.

Off balance sheet nature of derivatives

• Traditional Treatment
• Current Treatment
• Risk Factors
• Valuing Issues

Unrecognised Liabilities

• Underwriting Losses
• Reducing Cost of Capital
• Caps Floors and Collars (Their pitfalls)
• Creative Accounting Opportunities with Exotic Options

Hedge Accounting and its Contribution to Creative Accounting

• Hiding Speculative Activity
• Problems with Hedge Accounting
• Use of Structured Products

 Cherry Picking

• Profit Making Derivative Contracts
• Hiding Loss Making Derivative Contracts
• Structuring Capital to reduce Losses
• Reducing Cost of Finance

 Why firms Securitise

• Asset Liability Management
• Leverage
• Capital Adequacy Issues
• Client Relationship Management

 CDO CLO Structures

• Types of Securitisation Structures
• Use and abuse of credit derivatives
• Bonds and Credit Ratings
• Credit Enhancers and Guarantees

 FASB Rules on Special Purpose Vehicles

• FASB 140 Risk Transfer
• Weaknesses with the standard
• What does 'Significant Equity Stake' mean?
• Off balance sheet v on balance sheet structures

 Sponsoring Corporations

• Creditworthiness of sponsoring corporation
• Proposed changes in FASB guidelines
• Partly owned v Fully owned SPV
• Substance v Form of Transaction

 Role of Securitisation

• Basics of Securitisation
• Role of Securitisation in diversifying portfolio
• History of the ABS market
• Issuers objectives

 Benefits of Securitisation

• .Issuers' benefits from Securitisation
• Importance of Diversification
• Regulatory issues
• Investors Objectives
• Diversifying the single-obligor risk
• Liquidity and the Structured Products
• Tranching the issue
• Accessing Capital Markets

Structuring the Securitisation Deal

• Common Structures
• Enhancing the Credit Profile
• Disclosure issues
• Issuers
• Intermediaries
• Rating agencies/Trustees
• Credit Protection

 Accounting Standards

• How Effective is FASB 140 and IAS 39 in avoiding creative accounting
• Comparison Sales v Financing
• Income Recognition
• Measuring and Disclosing Risk Activities
• Securitization of credit risk    

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