1. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-1 Today’s Topics n Shenanigan #4 n Shenanigan #5 n Shenanigan #6 n Shenanigan #7

2. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-2 Shenanigan #4- Expense Shifting with Assets… Think WorldCom n Technique #1: n Capitalizing normal operating costs-AOL n Technique #2: n Slow amortization/depreciation (somewhat subjective)- Time Warner Telecom n Technique #3: n Failing to write-down impaired assets-Coldwater Creek n Technique #4: n Reducing asset reserves-Vitesse

3. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-3 Shenanigan #4 Red Flags n Changes in capitalization policy pre- IPO n Late accounting change announcements n Changes in reserve policies

4. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-4 Shenanigan #5- Liability Games… Failure to record or understatement n Technique #1: n Failure to record current expenses-Symbol Technologies n Backdating of stock options n Technique #2: n Failure to accrue expenses-Dell Computer n Technique #3: n Use of aggressive accounting assumptions…pensions n Navistar, Raytheon and Lucent n Technique #4: n Questionable cookie jar reserves-Chainsaw Al Dunlap and Sunbeam Corporation

5. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-5 Shenanigan #6 n Shifting revenue to a future period n Why would we want to do this? n What is the benefit? n Fraud vulnerability charting of this fraud

6. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-6 Why Do It? n Reserves for a “rainy day” n Investor benefit post merger

7. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-7 EMS #6 n “The Sun Will Come Out Tomorrow” n Pre-acquisition revenue holdback n Adjusting cookie jar reserves n Adjusting acquisition reserves 7 Executive Education, Inc., © William F. O'Brien, 2011

8. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-8 “Cookie Jar” Reserves n MSFT example n Warning signs n Excessive use of reserves n Post-dating of shipping documents n Smoothing income…flat-line even (Stryker)

9. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-9 Revenue Holdback n Tyco and 3Com n Hold back revenue today n Reverse it into income after the acquisition

10. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-10 EMS #7 n Inflating special charges n Acceleration of discretionary reserves 10 Executive Education, Inc., © William F. O'Brien, 2011

11. FORENSIC ACCOUNTING - BA124 - 2011Slide 14-11 Once Again… It’s All About Transparency