Not only does sex sell, it collects info.

Under covers, an IBM executive gave insider “pillow talk” information that benefited hedge funds Galleon Group and New Castle Partners

Robert Moffat, 53 years old, was IBM’s senior vice president for technology and regarded as a possible future chief executive of the company until prosecutors accused him of passing along confidential information on IBM and other companies as part of an alleged insider-trading conspiracy that benefited hedge funds Galleon Group and New Castle Partners.

 Authorities say that Moffat discussed coming IBM and Sun Microsystems earnings announcements with Danielle Chiesi, who worked at New Castle and has been accused of trading on the information. 

Mr. Moffat, a veteran IBM executive who was close to CEO Samuel Palmisano, is the highest-ranking corporate official charged in the insider-trading case that federal investigators built based on wiretaps of Galleon partner Raj Rajaratnam and Ms. Chiesi.  Chiesi was a sex pot who wore revealing clothing as just one of her tools used to relentlessly gather information about the tech stocks she followed.  The SEC has charged that Ms. Chiesi traded on the information she got from Moffat and others.  The scheme reportedly netted $20 million in improper profits.

Moffat pleaded guilty in March to conspiracy and securities fraud at a hearing before U.S. Magistrate Judge Frank Maas in Manhattan. He was the 11th person to plead guilty to criminal charges in the investigation.

Danielle was relentless (in getting info, too.)

Moffat admitted to providing tips to Danielle, a former consultant for New Castle Funds LLC, involving inside information about Advanced Micro Devices Inc., IBM and Lenovo Group Ltd. between August 2008 and October 2008. Mr. Moffat said Ms. Chiesi was a “friend.”  (A friend that he had sex with.)  “I knew the information I provided would be helpful to her in her job,” Moffat has said.

Blond, blue-eyed, and petite, Danielle Chiesi grew up in Binghamton, New York, where she won the regional Southern Tier beauty contest at age 15.  Early on, she found she had the looks and the personality to motivate men to give her what she wanted.

In 1988 Ms. Chiesi got a job as an analyst at a brokerage firm. Ms. Chiesi developed a strong fascination with the powerful men who ran the companies in the industries that she covered.

Some time in 2003, Chiesi and the long-time-married Moffat began sleeping together.  Moffat gave up not only information about his company, IBM, but other firms in the tech industry as well. 

When Danielle whispers, the SEC listens.

Unfortunately for the lovers, the feds were listening in.  Chiesi’s phone was tapped and some conversations concerning the insider information were recorded.

How good the sex was has not yet been reported.  I doubt Robert Moffat would say it was worth it.

Currency conversion can be costly.

If your business does business with international companies you must deal with sometimes-complex currency conversions.

Even small businesses now routinely operate in global markets, and the relationship between the dollar and many major currencies has reached new levels of volatility.

In the past two years, one of the most watched international rates — the euro versus the U.S. dollar — has swung wildly, from as high as $1.60 to the euro to as low as $1.25. As recently as 2002, the euro was worth 85 cents.  The Canadian dollar has strenthened significantly in recent years.

Despite burgeoning deficits and an economy that could grow slowly for the next few years, the United States has, somewhat surprisingly, reclaimed its long-standing role as the world’s safest currency.

With such volatility in key exchange rates, how can small business owners protect their companies from the risks of currency conversions?  Here are some options:

Share the Risk:  Perhaps the most straightforward way to eliminate or reduce currency risk is to structure the business so that revenues are earned and expenses are incurred in the same currency. Then, if a company sees declining revenue due to currency shifts, it can offset some of the impact with correspondingly lower costs.

Contract Design:  Addressing possible currency fluctuations through contract design is another relatively simple and efficient strategy.  Your customer can agree to a minimum amount of committed business for a specific period of a contract.  Your business can then hedge that risk using financial instruments for the life of the agreement.  If the customer wants to terminate the contract early, it agrees to cover the cost of unwinding the hedge.  Most customers are understanding, in part because they realize that they will still make money, even after accounting for potential currency-related adjustments.

Hedging:  Consider currency risk from the very beginning of every contract.  Develop a financial hedging strategy for the life of the program.  Factor in the expense of executing the

Hedge your currency bets.

necessary hedging contracts with your bank or financial institution before quoting a price.  Train your finance and accounting staff to make sure that everyone understands the accounting and reporting requirements for hedging activities.  Small companies are starting to explore the possibility of hedging through derivatives, according to Sanela Hodzic, director of strategy and business development at Calypso, a developer.  The decision to engage in financial hedging depends not only on a company’s own risk profile but also on its competitors’ positions. If everybody has got hedging programs except you, you need to think seriously about putting a program in place, because it’s really going to impact your competitive situation in a volatile currency environment potential future upside should the euro strengthen significantly. Finally, a CFO could lock in the company’s foreign-exchange rate by putting a forward contract on its cash flows at a certain rate; if the rate later goes up, the firm does not gain.

Conclusion:  Regardless of whether a CFO feels he or she can dive into the complex world of financially hedging a company’s foreign-exchange exposure, it is clear that the time is right to review currency liabilities and develop contingency plans, because the uncertainty in the dollar and its relationship with other currencies is not going away any time soon.  Future currency trends are very difficult to predict.

The future is NOW!

What does it mean to you?

The first impression to us is that the law provides general guidelines but few specifics.  The bill leaves multiple regulators with wide discretion across a range of critical issues. The arguments over precisely what the new rules will be are barely getting started.  Some of the most important questions, such as the amount of capital financial firms will have to set aside, are scarcely even addressed. Again and again, the bill calls for studies to be undertaken. The whole law is an unfinished work with many details to be filled in. 

Will voters see this as another victory for Obama?

New:  The Financial Stability Oversight Council and the new early resolution authority. There will be a single entity charged with financial oversight, even if the entity is a panel of representatives from many different agencies.  A new oversight body is still a big change.  The new council will identify systematically significant companies and monitor markets for bubbles.  Companies branded as systemically significant would face stricter capital, leverage and liquidity standards and be obliged to draw up a “living will” to describe how they would be broken up in the event of failure.

Early resolution authority is the bill’s main defense against “Too Big to Fail”. The idea is to have the FDIC apply a pre-emptive liquidation procedure, like the one it currently uses for banks, to any systemically important financial firm that looks headed for collapse. For the foreseeable future, the authorities will not let a big bank fail.  Government can seize and wind up a large institution if it faces impending failure and poses a risk to the broader financial system. Payments to creditors would be paid by the government but recouped later from levies on the industry.

Senator Dodd has the last laugh.

The new Dodd-Frank law lays out a broad mandate for the new Consumer Financial Protection Bureau, and confers broad powers. A new agency will be set up inside the Federal Reserve, but with complete independence from the central bank.  It would tackle “abusive” mis-selling of mortgages, credit cards and other loan products.The law is silent on how the consumer protection agency should balance the directly competing goals of greater safety and wider access to finance.  If the agency significantly shrinks the availability of credit for low-income borrowers, it will not stay popular with the politicians who have championed it for very long. Hopefully, it will not significantly shrink the availability of credit.

The bill makes progress on derivatives.  The goal is to standardize these exotic instruments and have them traded on exchanges where they will be more transparent.  Derivatives that trade in “over-the-counter” bilateral deals would be forced through central clearing houses to curb the risk from one counterparty going bankrupt and on to electronic exchanges.  Banks would be forced to spin off some of their derivatives dealing operations.

Be kind, buy Blockbuster stock.

Even the old re-winding fee was more.

The New York Stock Exchange (NYSE) will de-list a stock if the average closing price of a security is less than $1.00 over a consecutive 30 trading-day period.  Because of their recent low trading prices, Blockbuster shares were de-listed Wednesday, July 7 and now trade over the counter. 

Blockbuster blocked from New York Stock Exchange.

The NYSE’s delisting move came after Blockbuster said late Wednesday that two key proposals, which it said last week had been approved by shareholders, had failed to win majority support, based on a final tally of the votes. The company had proposed combining its Class A and Class B shares into a single class and undertaking a reverse split of its stock. 

A reverse stock split increases the price of the shares by reducing the number of shares.  For example, 100,000 shares trading at 50 cents a share are the equivalent of 1,000 shares trading at $50 a share.  A reverse stock split would alllow Blockbuster to requalify for listing on the New York Stock Exchange.

Blockbuster has been closing stores and cutting costs while it loses market share to Netflix and Redbox, and consumers adapt to watching videos on mobile devices or on demand on their televisions. 

Jeff Stegenga "Jeff the Knife"

Bankruptcy is still an option.  The Dallas-based company has hired a specialist in out-of-court restructurings and bankruptcy accounting to be its chief restructuring officer.  Jeffery J. Stegenga, managing director with Alvarez & Marsal over central U.S. regional offices including Dallas, joined Blockbuster on Friday, July 8.

The hiring of Stegenga was required by Blockbuster’s debt holders, who granted the company a six-week extension on its $42 million interest payment on July 1.  The reprieve extends the deadline until August 13.

Stegenga is nationally regarded as a specialist in financial and accounting consulting. Over the last decade, he has worked on large, complex turnaround and restructuring efforts. Blockbuster has been his client once before, and others included defunct Lewisville-based Fleming Foods and Dow Corning Corp.

Prior to joining Alvarez & Marsal, Stegenga was with FTI Consulting and PricewaterhouseCoopers, a “Big Four” accounting firm.

Your customer may be king but he may not all he is creacked up to be.

How do you determine which customers are more desirable for your business?

Some customers are more profitable than others. Conversely, some are downright unprofitable. Knowing which is which is the all-important question.

Despite enormous variations in profitability, many companies continue unprofitable relationships with customers, often providing them with pricing and service levels identical to those received by the most profitable ones. Why? In most cases, companies simply do not know who the unprofitable customers are. As such, they cannot develop marketing strategies or manage costs accordingly

Companies don’t necessarily need a state-of-the-art database or analytics technology to improve customer profitability. Rather, they can follow a comprehensive approach for measuring and managing customer value called the Customer Value Management Cycle.

The Customer Value Management Cycle has five recurring steps:          

1.  Manage customer segmentation.  This means you need to effectively classify your customers by profitability attributes.  Customer segmentation is the process of dividing customers into groups for decision-making purposes. Segmentation allows the company to provide differential advertising or value propositions to different customer groups. Segments are often determined on the basis of customer similarities, such as personal characteristics, preferences or behaviors. Ideally, segments should correlate to behaviors that drive customer profitability.  Segments are continually redefined as the process repeats and customer understanding is refined.  Customers can be grouped based on marketing-related characteristics such as expected responses to advertisements or expected purchasing behavior. As companies move toward rigorous measurement and analysis of customer profitability, they may refine segments as they discover new segmentation parameters.

Better yet, know your customer's profitability.

2.  Measure customer margins.   Some customers are highly profitable, some are moderately profitable, and some are unprofitable. Many people believe that the 80-20 rule can be applied to customers, which suggests that 20% of the customers are responsible for 80% of the profits. However, results for many companies have been far more extreme.  At a minimum, companies should measure revenue and gross profit by each customer segment.  Allocating sales, marketing and customer service costs brings this analysis to the next level. Selling costs in many organizations vary significantly between customers and segments.  Simple changes in the sales compensation plan that more highly rewards profitable deals than less profitable ones can improve overall profitability.

3.  Measure customer life time value.  The costs of attracting a customer represent an investment in that customer.  The investment in the customer can be expected to produce additional future income over time. The lifetime value of the customer reflects the net present value of all expected cash flows associated with the customer.  A customer’s profitability in one period isn’t necessarily predictive of profitability in other periods, since revenues and costs can vary significantly over time.  Typically, the customer relationship begins when the company invests to attract the customer. As the relationship matures, the customer’s sales volume may grow and become more profitable. This accumulation should accelerate over time for two reasons. First, the cost to serve the customer should decrease as a percentage of revenues because the customer’s knowledge of the company and its products, together with increasing trust, may lead to reductions in promotion, training and relationship maintenance costs.  Second, as the relationship matures, the customer may be more likely to respond to cross-selling or up-selling initiatives.

4. Measure customer impact.  Two critical sources of hidden customer value are customer influence and customer knowledge. Customer influence refers to the influence the customer has, either through intentional action or passive behavior, on other customers, on employees, or on other stakeholders of the firm. Customer knowledge refers to the actionable knowledge that can be gained by the company, either through analyzing customer behavior or through direct customer input. Through their interactions with the product, with the company and with other stakeholders, customers can affect value in numerous ways, ranging from identifying small errors in technical documentation to significantly influencing the brand’s image.  Although influence and knowledge contributions will always be difficult to define and measure, even rudimentary estimates of direction and magnitude can be valuable.

5.      Manage customer profitability.  All of the information derived from the measurement of customer value should be analyzed and an  action plan created.  A segment where technical support costs are disproportionate could drive improved documentation.  Segments with lower expected customer life could reveal a lack of attention from the customer service team.  A segment with high revenues but low profits might indicate the need to retool the sales compensation scheme to shift incentives to increase focus on profits.  There is an infamous saying, “You can lead a manager to data, but you can’t make him think.”  The customer data should be analyzed and the important salient points should be used to take action to enhance the sales to your profitable customers.

Zales has had to pay multi-million dollar penalties to keep its credit card financing with Citibank.

Zales has paid Citibank a more than $5 million shortfall because its credit card sales failed to meet minimums required by an expiring agreement with the bank. 

Zales said it made the payment on Tuesday, June 15, and continues to negotiate with Citibank to replace a 10-year-old agreement. Citibank is asking for another $1.13 million payment by July 16 to cover subsequent shortfalls.  The next payment will keep the agreement in effect until its March 2011 expiration date.

Zales can’t operate without its store-branded credit cards.  Forty percent of Zales’ annual sales at its 1,228 jewelry stores and 679 kiosk locations are on credit.

The jewelry chain also signed a new five-year agreement with Toronto-Dominion bank to provide financing for credit card customers of its 212 Canadian jewelry stores, replacing a separate agreement with Citibank.  It is still trying to find a bank to replace Citibank in the US.

Bridge financing.

Previously, Zales had announced it has secured a $150 million, five-year senior secured loan that has been provided by private equity firm Golden Gate Capital (GGC.) 

Zales will pay a steep price for the loan.  Zales will see a much higher interest expense on the Golden Gate loan starting in the next fiscal quarter. The loan carries a whopping 15 percent annual interest rate.

Golden Gate’s stake will be in common shares that it can purchase at a later date at $2 each.  Golden Gate will receive warrants to purchase up to 25 percent of Zale Corp’s aggregate common stock. The plan must gain shareholder approval.

As part of the loan plan, Golden Gate will get two representatives appointed to Zale’s board of directors. The two new directors are Stefan Kaluzny and Peter Morrow. Kaluzny is currently chairman of the board of directors at Express, and Morrow is a principal at Golden Gate Capital.

Zales also added an additional new credit arrangement with aggregate commitments up to $650 million.  The new credit arrangement will be led by Bank of America, which will serve as administrative agent. In addition, General Electric Capital Corp. and Wells Fargo Retail Finance are serving as co-borrowing base agents in the arrangement.

Zales has struggled mightily to survive over the last two years.

Zales has been struggling over the last two years. Its sales have been sinking, it has run short on cash, and it fired its chief executive and his top two lieutenants in January.  The 1,900-store chain has been steadily losing market share to its competitors.

This is an update of a previous post on May 17th, 2010.

See our other previous posts on Zales issues at: 

Analyzing the Latest Zales Financial Statements       http://www.johnbrianfastcpa.com/1447/analyzing-the-latest-zales-financial-statements/ 

Who Killed Zales?      http://www.johnbrianfastcpa.com/1376/who-killed-zales/

Tarnished Icon      http://www.johnbrianfastcpa.com/884/tarnished-icon/

No Gems Here      http://www.johnbrianfastcpa.com/623/no-gems-here-zales-financial-reporting-is-erroneous/

Is now the time to buy?

BP’s stock price is down more than 40% since the April 20 spill.  Is this a buying opportunity?

There are several potential outcomes for BP that range from the extremes of a bankruptcy-protection filing to a full recovery, a takeover or surviving but in a weakened form.

A BP bankruptcy would wipe out many British pensioners.

Bankruptcy. 

The first and worst is for stockholders, is BP management going to bankruptcy court.  Such a scenario looks unlikely. Under all but the most dire situations, BP should have little trouble servicing its debts. The biggest risk to the company are US government demands.  Experts doubt, however, that the US. government can carry out its harshest threats, such as forcing BP to pay the all of the salaries of workers laid off because of the federal moratorium on deepwater drilling.  Also, BP has a large amount of hard assets such as oil reserves that can be easily sold to raise cash.

Full recovery.  Assuming BP does survve, estimating the cost of the disaster is the key to figuring out what the company is worth. Credit Suisse, for example, posits a loss figure of up to $37 billion, including claims for damages. In comparison, $84 billion of stock value has been wiped from BP’s market capitalization in London since disaster struck on April 20.  If Credit Suisse’s loss figure is accurate, the fall in the stock price has been an over reaction.

To cover the costs of the disaster, BP can rely on its ability to generate cash. Over the past five years, the company produced $145.4 billion in cash flow from operations, and Credit Suisse estimates it will generate another $184.7 billion over the next five years, although such estimates rest on a range of assumptions, including oil prices. BP has $15 billion of cash and available credit to draw on. If its cash falls short, the company could trim investment and dividends or raise long-term debt if need be.

Others see value in BP’s debt. The company’s bonds paying yearly interest of 3 7/8% maturing in 2015 have fallen from a price of almost 105 cents on the dollar prior to the disaster to below 90 cents, and now yield 4.4%.

A firm is an easier takeover target when it is under attack.

Takeover. 

Worrisome to management is a potential takeover by one or several other oil companies, tempted by its weak valuation. BP’s stock is trading at just 5.5 times analysts’ consensus estimate of the company’s 2010 earnings per share, compared with a multiple of 9 times for shares of Royal Dutch Shell, BP’s closest competitor.

However, even at today’s low price, BP still has a market capitalization of $105 billion. Only a handful of big rivals could potentially take it on, such as Shell, Exxon Mobil or Chevron.  Even these huge companies will probably think twice about going after a firm that has such an uncertain future.

Surviving in a weakened form.  Texaco declared bankruptcy in 1987 after losing a multibillion-dollar civil lawsuit brought against it by Pennzoil, now part of Royal Dutch Shell. This wasn’t an environmental disaster. But suring the perod of the litigation there was a period of 18 months where the management of Texaco was totally preoccupied with the legal case.  Experts believe this impaired Texaco’s ability to capitalize on strategic opportunities and left if vulnerable to its competitors.

Addressing such fears, BP announced earlier this month that it was creating a dedicated management team within the company to lead its long-term response.  And, BP has unleashed a fierce marketing campaign, apologizing for the spill, and promising to completely cover the resulting losses.

See our prior post on the BP oil spill at:

              http://www.johnbrianfastcpa.com/1773/accounting-for-the-oil-spill/

The piggy big banks are back at the trough.

The large piggy banks are back to making billions of dollars each financial quarter.  But some smaller neighborhood banks are still in trouble.

Federal and state regulators closed banks in Mississippi, Illinois and Nebraska on Friday, bringing the number of failed banks in the United States this year to 81.

Mississippi-based First National Bank, Arcola Homestead Savings Bank of Illinois and TierOne Bank in Nebraska were the latest to be taken over. Last year’s total of 140 banks was the highest since 1992.

The FDIC has been taking over many small banks this year.

The Federal Deposit Insurance Corporation (FDIC) took over as receiver for First National. Jefferson Bank assumed all deposits and essentially all assets of First National, which reported about $63.5 million in deposits and $60.4 million in assets at the end of March. Illinois regulators closed Arcola and appointed the FDIC as receiver.  Failing to find another institution to take over operations, the FDIC plans to send retail depositors checks for insured funds. The FDIC also took over as receiver for TierOne, whose deposits will be assumed by Great Western Bank, in Sioux Falls, South Dakota.  The FDIC estimates that the cost to its deposit-insurance fund will be about $12.6 million for First National and $3.2 million for Arcola.

The fund protecting consumer deposits has been depleted, ending the first quarter of 2010 at a negative $20.7 billion.

The troubles small banks are likely to get worse because of problems in the commercial real-estate market.  The FDIC raised the number of “problem” banks to 775 last month from 702 at the end of 2009.  That is an increase in the number of shaky banks by more than 10 percent.

Buddy, can you spare a small business a dime?

The failure of small banks make it harder for their prime customers, small-business owners, to get adequate financing to run their businesses.

The Federal Deposit Insurance Corporation and the Federal Reserve and other regulatory agencies are increasing their scrutiny of local lenders to spot troubled assets.  These watchdogs are asking the banks to significantly boost their capital and loan-loss reserves.  This means that these small institutions are getting more selective about making new loans and canceling the risky loans to small companies on their books.  Local bankers will now demand a lot more information about the business and its operations before they sign off on a loan. Entrepreneurs who land a loan need to give frequent updates about the state of affairs—and not just routine financial information, such as sales figures.

Small-business owners who do not or will not work closely with their lenders will find it much tougher to get loans.

GGC. Savior or scavenger?

Golden Gate Capital has portrayed itself as the “white knight” racing to Zales’ financial rescue.  I would be concerned about being trampled by the racing steed if I were a Zales’ vendor or stockholder.

Zales has announced it has secured a $150 million, five-year senior secured loan that has been provided by private equity firm Golden Gate Capital (GGC.) 

Zales will pay a steep price for the loan.  Zales will see a much higher interest expense on the Golden Gate loan starting in the next fiscal quarter. The loan carries a whopping 15 percent annual interest rate.  The deal cost Zales $25 million in origination fees.  More expensive to stakeholders in the long run, the desperate deal allowed GGC to have warrants to buy 25% of the company.

Interest expense has gone up dramatically and is expected to go up even more in the future.  The company’s performance the next three quarters is critical.  The new credit line from Golden Gate Capital (GGC) covenant decreases from $135 million to $120 million on January 31, 2011 and with the first tranche of $120 million expiring on August 11, 2011.  Early 2011 looks very challenging for Zales.

Where have all the customers gone?

One of the big drains on Zales cash is the large number of lease payments they make on space leased in poor performing malls throughout the country.  Experts say that Zales still needs to close several hundred stores to return to profitability.  Current management has shown no inclination to take this necessary step.

Bridge loan to nowhere?

Some observers in the industry say that the expensive “white (black?) knight” deal with GGC was only a bridge to a pre-packaged Chapter 11 bankruptcy plan orchestrated by GGC. 

Upon any loan covenant violation, Golden Gate can force a bankruptcy filing.  In a bankruptcy GGC could restructure leases, “hair-cut” vendors and take Zales private.  Since Zales is likely to violate multiple covenants with the GGC term-loan, GGC is obviously comfortable with taking and holding Zales private.  The biggest losers in bankruptcy will be the Zales vendors, since GGC is secured and senior to the vendors’ claims. The shareholders will also get wiped-out in any bankruptcy.

Bankruptcy will not hurt Golden Gate Capital because they have no real “skin” in the game.  They currently do not own any common shares because they have not exercised any of the warrants they received in the financing deal.

Piggy hedge funds take no prisoners.

This is another example of how large hedge funds destroy the value of shareholders, vendors and employees in the name of simple greed.

See our other previous posts on Zales issues at: 

Zales New Financing Agreement       http://www.johnbrianfastcpa.com/1841/zales-has-secured-new-financing-for-its-credit-sales/

Analyzing the Latest Zales Financial Statements       http://www.johnbrianfastcpa.com/1447/analyzing-the-latest-zales-financial-statements/ 

Who Killed Zales      http://www.johnbrianfastcpa.com/1376/who-killed-zales/

Tarnished Icon      http://www.johnbrianfastcpa.com/884/tarnished-icon/

No Gems Here      http://www.johnbrianfastcpa.com/623/no-gems-here-zales-financial-reporting-is-erroneous/

Some think that accounting is an exact science.  It is more like a black art.  Here are some possible manipulations of the numbers that you should be aware of:

Investors like to see a nice smooth earnings trend line, going up, of course.   One way to accomplish this is to “store” earnings in the balance sheet.

The reserve for bad accounts receivable companies can be manipulated to understate or overstate a company’s bad accounts.  If you overstate the true amount of bad accounts, you reduce assets and income and store future income until the accounting period when you reduce the bad debt reserve to the correct amount.

Valuing inventories is a black art.

Inventory offers many opportunities for manipulating earnings.  Inventory represents the value of goods that were manufactured but not yet sold. When these goods are sold, the value is transferred over to the income statement as cost of goods sold.  Overstating inventory value will lead to an understated of cost of goods sold, and therefore an artificially higher net income.  Understating inventories, reduces income.  If you deliberately understate your inventories, you can always hold back the possiblility of recognizing their true value when you need income.  Smart readers of balance sheets look at changes in inventories.  Look for inventory increasing faster than sales, decreases in inventory turnover, inventory rising faster than total assets and falling cost of sales as a percentage of sales.  Any unusual variations in these figures can be indicative of potential inventory accounting fraud.

Construction projects in progress offer additional opportunities for tricks.  If you overestimate the progress of a project it will increase net income.  If you recognize less progress, you reduce the value of the project on the balance sheet and the effect is to reduce income.

The opposite of storing earnings is manufacturing earnings.  Some companies utilize creative accounting to overstate a company’s assets or understate its liabilities.  The effect of both of these tricks is to overstate income.

When you hide liabilities, you overstate income.  Enron maintained separate entities that were “off balance sheet” that they loaded up with debt that was really owed by Enron.  In our post:

http://www.johnbrianfastcpa.com/1565/ernst-and-young-complicit-in-the-lehman-collapse/

Lehman hid significant liabilities.

we documented that Lehman Brothers used “Repo 105” transactions to keep millions of liabilities off their balance sheet and hide their shaky financial position.

Pension obligations are ripe for manipulation by public companies, since the liabilities occur in the future and company-generated estimations need to be used to account for them.  Companies can make aggressive under-estimations of the true liability in order to improve both short-term earnings as well as to create the illusion of a stronger financial position.

Obligations under the new health care law may be manipulated as well.  Some large companies have made recent additions to their projected liabilities under the new law that some experts question.  Are these companiies really just trying to “store” earnings.

It is like the warning on your auto mirrors:  Earnings may be larger (or smaller) than they appear.  Accounting figures are created by human beings and many assumptions and estimates are made to determine the end results.