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A Letter From Prison Accounting Essay

Computer Associates International, Inc. (CA) is a software company which sells software products for business. In the case, according to the Generally Accepted Accounting Principles, revenues for the software licensing should be recognized once a contract was signed, the software was delivered, and payment was reasonably assured. In Computer Associates, when the revenue recognition principles were met, it recognized the whole value of the licensing revenues quarterly. However, from the fourth quarter of the fiscal year 1988 to the second quarter of the fiscal year 2001, Computer Associates has backdated some contracts and allows it accountants to record these contracts in the present financial statements. In accordance with the Generally Accepted Accounting Principles, these contracts should be recognized in the next quarter. The future revenues which have recorded in the present financial statements lead to the higher profits and return on investments currently. What Computer Associates does is in the violation of the Generally Accepted Accounting Principles. What Computer Associates haves done is a kind of ethical elitism and ethical parochialism. Ethical elitism means that it is significant to maximize the interest of the top stratum or the elite no matter what to scarify and the ethical parochialism refers to that it is important to protect the interests of the individual’s ‘in-group’. The executives of Computer Associates take their effort to recognize the revenues against the Generally Accepted Accounting Principles in order to protect the reputation of the company and meet the analyst’s estimation and make the investors confident to the company. However, the investors and shareholders cannot make a good decision by using the improper financial statements.
In the case, as the former senior manager of the Computer Associates, Richards try to defense against the crime which makes him in jail. Richards considers that Computer Associates lacks of the information to justify whether the accounting operation in Computer Associates is legal or not. As to him, it is not a big deal for doing this and it is just a timing issue in the revenue recognition. Nevertheless, the revenue recognition in Computer Associates is against the Generally Accepted Accounting Principles. Computer Associates recorded the future revenue in the current financial statements to make the company seems to be profitable. The main function of the financial statements is to show how the company operates and offer the information about the company to the managers and investors. The financial statements are the tools in helping the managers and investors to make the decision. Computer Associates cloud the investors and shareholders about its accurate sales revenues within the current quarter. By using the inaccurate financial statements, strategies and investment are made incorrectly.
From the Exhibit 4 in the case, the percentages that properly recorded revenue was inflated by improperly accelerated revenue in every quarter from 2000 to 20001 were all above 10%. Moreover, there are large differences between the announced EPS and EPS without improperly recognized revenue in every quarter from 2000 to 2001. The announced EPS were much higher than the EPS without improperly recognized revenue. Comparing to the analyst EPS estimated, Computer Associates cannot reach the analyst EPS estimated without improperly recognized revenue which is mentioned before. In order to make the financial statements more profitable, Computer Associates use the improper recognized revenue method to make the company seem more profitable. It is unethical for Computer Associates to use ‘allowed accounting flexibility’ for its revenue recognition.
What is accounting flexibility? Accounting flexibility refers to the process that the accountants use their knowledge of accounting rules and standards to manipulate the figures in the financial statement in order to meet some specific purposes. It is about the transformation of the figures in the financial reports from actual figures to the figure which were needed by the preparers, by taking the advantages of the accounting rules and standards. (Naser, 1993). It can help the management to manage the reported figures to be higher or lower. Examples of accounting standards which can use accounting flexibility are as follow:
The revaluation of the assets. While in estimation of the assets’ current value through the depreciation, the estimations are usually made inside the business. It is subjective for the company to estimate the value of the assets. The management has the opportunity to estimate the value on the side of caution or optimism. When doing the estimation in the value of the assets, it refers to the change of the assets, depreciation expenses and the impairment losses. Therefore, the measurement of the assets and income change.
The fair value recognition of the plan asset. According to IASB, fair value is defined as the market-based value. It means that the fair value of the plan asset is on the basis of the market transaction. it can be manipulated. When changing the fair value of the plan asset, changes will be recorded in the financial statements.
Q2. Richards mentions how difficult it is to operate in the “grey areas of accounting” and indicated that he might have benefitted from more guidance from senior management. Critically indicate who in a listed firm is responsible for the content of the final accounting reports. Corporate governance is the processes, structures and information which use for coordinating the relations in the management of the corporation. It guarantees the efficiency and the accountability for the mechanism in the corporation to protect the interests of the shareholders. Good corporate governance can help the company to create good corporation culture. The corporation culture creates through the process of the management practices and values which directly come from corporate governance.
As in the company, the responsibilities of the major office holders are as follow:
Implementing the strategy of the company to make the company operation in the healthy way.
Advising the board about the structures of the company and making sure the quality and the quantity of the staff in the company.
Providing the accurate information about the company to the board and making the proper prediction for the company.
Preparing the accurate financial statements within the Generally Gccepted Accounting Principles
In the company, the management should take the responsibility for the accounting reports which is in accordance with the IFRS adopted in Australia. The management should make sure the financial statements are fairly present the financial position and performances of the company. In addition, management must guarantee the financial statements with the accounting standards and prevent them to being fraud. In IFRS 8, management must consider that ‘the most recent pronouncements of other standard setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices’. Even though accountants prepare the financial statements in company, the management determines in what ways the financial position illustrate and whether make changes in the financial statements. In conclusion, the management is responsible for the content of the final accounting reports.
In Computer Associates case, as a senior manager, Richards did not take his responsibilities to correct the manipulation of the revenues in the financial statements and applied to the sales-driven culture in Computer Associates. He paid more attention to the sales and the revenues in the company. Therefore, with the support of the management included Richards, the improper revenue recognition method was implemented in the company.
As for me, possible alternatives can be taken as follow:
Changing the accounting policies. The company can use the legal way to manipulate the revenues. For instance, Computer Associates can change the depreciation calculation and change the allocation of the research and development expenses within the Generally Accepted Accounting Principles to reduce the expenses so that the profits can be higher.
Changing the time of the transactions. It is helpful for delaying the expenses and the anticipation of the income, which will avoid fighting against the law and the accounting standard.
Changing the terms of manipulation. Within Generally Accepted Accounting Principles, some other terms relative to the profits of the company can be manipulated in legal ways. For example, the calculation of the doubtful debts and allowance for uncollectible accounts.
Changing the closing date policy of the sales target. As it is mentioned in the case, the customers use delaying tactics to negotiate with Computer Associates to get the better deal. Large proportions of the contract are booked in the final week of the quarter. That makes Computer Associates hard to recognize these contract in the current period and it makes Computer Associates to backdate the contracts. Changing the closing date policy of the sales target is helpful. Computer Associates can short the period for the sales target. For example, it can be closed monthly so that the contracts can be recognized in time.
Q3. Consider management’s incentives and choices in their actions. What are Computer Associate’s motivations to manage earnings and the financial ratios as represented in the accounting statements? Internal motivations
As Richards mentions in the letter, the company culture in the Computer Associates is a ‘sales-driven culture’. It means that the more you sell, the more commissions you can get. The culture leads the company to be aggressive in operation. The goal of the company is to make profit as it can so that it can maximize the shareholders’ benefits. In addition, the compensations of the executives are on the basis of the sales. The executives would have high compensations when sales associates have reached the goals. According to a study of Massachusetts Institute of Technology in 1983 by Healy, there is a high possibility for choosing and changing accounting procedures in a sales-driven culture with bonus schemes. It is easily to manipulate the accounting figures to maximize the bonus awards. The study also that it is high incidence of voluntary changes in accounting operations in years following the adoption or modification of the bonus reward plan. In Computer Associates, it is so attractive to get the high quantity of compensations by manipulated the revenues. What is more, in Computer Associates, performance in business is a vital criterion. Non-performance is not acceptable in the business. Performance in non-revenue areas should be paid less attentions. In order to perform well, it is reasonable for Computer Associates to manipulate the improper revenue.
External motivations
The main reason for Computer Associates to manipulate the revenues is to meet the expectations of the market. According to the study of Kasznik and McNichols, the consequences of not meeting the expectations lead to lower future earnings, lower share price, lower market premium and penalization of the markets. Therefore, for Computer Associates, the motivations in order to meet the expectations can be concluded as follows:
Future earnings. It is about the stakeholders. The Computer Associates needs to enhance its reputation in their stakeholders, such as distributors and customers. High earnings in the financial reports make the stakeholders more confident for the company. Therefore, the stakeholders would like to do business with the company.
Share prices. According to the study of Amat, Blake and Dowds, the accounting flexibility can help to boost the share prices of the company and make the company appeared to less risks for the investors. From the Exhibit 4, it is obvious to see that the EPS without improperly revenue recognition is much lower than the expectation. That means the market will decrease the share price for Computer Associates because of the low revenues. In order to change the situation, Computer Associates should manipulate the revenues to meet the expectations to maintain or increase the share price so that the confidence of the investors can be enhanced.
The analysts. As it is mentioned in the case, investors gain information about investments from the analysts instead of the company. The main method which Analysts gather the information about the company is to analyze the financial reports. If the company fails to meet the expectation of the market, the analysts will doubt about the company’s future earnings and the credibility. Computer Associates do not want to make the analysts feel doubtful about the company’s development so that it tries to manipulate the revenues to meet the expectation of the markets.
Q4. All issues related to revenue eventually affect the calculation and recognition of income. Making specific reference to the Comprehensive Income Project initiated by the International Accounting Standards Board (IASB), carefully outline the concept of income that has been proposed by this project and the major issues highlighted. According to IASB, income refers to the increases in the benefits in the accounting period in the form of increases of the assets or the decreases of the liabilities which lead to the increase in equity. Comprehensive income is the changes in equity in a period of transactions and other events and circumstances from sources which are not owned by someone. All the changes in equity should be included in comprehensive income while the investment by owners and distributions to owners should be excluded. Comprehensive income is the sum of historic transaction income and unrealized fair value of the other items. For the historic transaction income, it refers to the entity’s income during an accounting period which relative to the company’s operation. In IFRS 13, fair value is the value which can be received when selling the assets or paying to transfer a liability in fairly transaction between knowledgeable and willingness parties. Fair value measurement defines as a market-based measurement and it is not an entity-specific measurement.
Hard income refers to budgeted income that should be recognized during the operations and soft income is the actual income which recognized after the operation.
In 2004, a Joint International Working Group on Performance Reporting was established (IASB 2004a). It is helpful in Comprehensive Income Project to establish the standards of the comprehensive income presentation in financial reports. (IASB 2005b) Comprehensive income requires the entity to present all the items relative to income and expense during the period. One single or two statements are accepted. When the Accounting Handbook 2009 was released, the definition of comprehensive income was published. However, income statement was still useful. Therefore, there is a confusion that as the income statement is useful, it seems the comprehensive income approach is quite inconsistent. The comprehensive income requires all the changes in the revenues and expenses and the disclosure items haven been changed.
Q5. Critically review and provide an overview summary of a minimum of at least two (2) academic research papers that asses the price relevance of comprehensive income. Show how this research may have influenced subsequent releases and changes in focus by the IASB. In the study of Biddle and Choi, they focused on the debate about the fundamental definition in accounting, the comprehensive income and the consideration of IASB relative to the question. In order to justify those issues, information content, predictive ability and executive compensation contraction were used to examine. The study drew a conclusion that different definition of income makes different decisions and applications and disclosing separately comprehensive income components is useful for making decision. This study is the first study to examine this kind of issue.
Another study which had done by Cahan, Courtenay, Gronewoller and Upton, suggested that, to some extent comprehensive income more value relevant than net income. Nevertheless, when doing the asset revaluation increments and foreign currency translation, the effect of comprehensive income was weak and there was no benefit in reporting the separate components of comprehensive income. In conclusion, as for the authors, in the comprehensive income approach, some information was useless, which lead to the comprehensive income did not really benefit the investors.
As in a study of comprehensive income, Hanlon had the similar opinion with Cahan, Courtenay, Gronewoller and Upton. In Hanlon’s study, he mentioned the value relevance of mandated comprehensive income disclosures and discussed whether to choose reported in comprehensive income basis or reported in net income basis. He found that there is no evidence to support the value relevance which would be affected by the comprehensive income. Thus, he suggested that components of comprehensive income were not really value relevant after the controlling for the net income.
From my point of view, after reading three essays above, IASB need to focus more on the uses of comprehensive income which IASB makes the entity to report. There are many differences between the different situations so that it leads to different adoptions. Revenue recognition is quite complex. IASB should do more researches to find out whether to use the comprehensive income approach or not when facing different situations.

The Internal Control Weaknesses At Enron Accounting Essay

The events were finally resulting the filing for bankruptcy in December 2001, started way much before fraud at Enron could be even suspected. Andersen played a major role in the collapse of Enron. Andersen failed two times regarding audit issues just a few years short time before the collapse of Enron, at Waste Management in 1996 and at Sunbeam in 1997. The two audit failures mentioned above should have been huge warning signs for Andersen to protect itself against another client failure but what they had to face regarding Enron was worse than they ever had. Some internal memos at Andersen made it clear that several conflicts existed between the auditors and the audit committee of Enron. These memos contained several e-mails as well which expressed concerns about accounting practices used by Enron. David B. Duncan as the leading partner on the audit tipped over these concerns. According to McNamee(2001) there is proof that Duncan’s team wrote memos fraudulently stating that the professional standards group approved of the accounting practices of Enron that hid debts and pumped up earnings. Andersen’s independence is also highly questionable due to the relationship between audit and non-audit fees. According to McLean(2001) the person who first spotted in 2001 that there wasn’t even any chance for Enron to make profit was Jim Chanos, the head of Kynikos Associates. He said that that parent company had technically become nothing more than a hedging entity for all of its subsidiaries and affiliates. In 2001 the operating margin of Enron went down significantly to 2% from the previous year’s figure of 5% which is more than interesting because this kind of a decrease in one year is unheard of in the utilities industry. Chanos also pointed out that Enron was still aggressively selling stocks, despite there was hardly any capital to back up the shares they were selling.
To be professional and effective, auditors must be independent of management and evaluate the financial representations of management for all users of financial statements. Less than 30% of the fees that Andersen received from Enron came from auditing, with the balance of fees coming from consulting. Andersen acted as Enron’s external auditor and as its internal auditor. Andersen’s work as a consultant raises several questions. It appears that Andersen’s audit team, when faced with accounting issues, chose to ignore them, acquiesced in silence to unsound accounting, or embraced accounting schemes as an advocate for its client.
Internal Control Weaknesses at Enron
Auditors assess the internal controls of a client to determine the extent to which they can rely on a client’s accounting system. Enron had too many internal control weaknesses to be given here. Two serious weaknesses were that the CFO was exempted from a conflicts of interest policy, and internal controls over SPEs were a sham, existing in form but not in substance. Many financial officials lacked the background for their jobs, and assets, notably foreign assets, were not physically secured. The tracking of daily cash was lax, debt maturities were not scheduled, off balance sheet debt was ignored although the obligation remained, and company-wide risk was disregarded. Internal controls were inadequate; contingent liabilities were not disclosed; and, Andersen ignored all of these weaknesses.
Evaluation of Accounting — Materiality
Auditors focus on material misrepresentations. A misrepresentation is material if knowledge of the misrepresentation would change the decisions of the user of financial statements. When Enron began to restate its financial statements and investors began to grasp its misrepresentations, the response of the market is indisputable as to materiality. Many errors were known, but were dismissed by Andersen as immaterial. Other errors may not have been known, but should have been known if reasonable inquiry would have revealed them.
Business Model, Experiences, and Organizational Culture
At Enron and at Andersen, the business model and the organizational culture were changing. Enron was moving to a new business model dominated by intangible assets, the rights to buy and sell commodities. This change in assets was driven by a new organizational culture which then aggressively cultivated its own growth. As auditors moved to become part of a consulting industry, their business model and organizational culture were changing too. It is likely that both the changes at Enron and at Andersen were increasing risks for investors. Enron’s movement away from the dominance of fixed assets to the dominance of intangible assets was likely to increase volatility, and this prospect was compounded by the use of mark-to-market accounting. Also, Andersen’s movement away from the professionalization of auditing to the commercialization of consulting was likely to weaken auditors as monitors of management. Into the mix of changing business models and cultures, add people who were not equipped for the changes. The young trading executives at Enron chased the deal for earnings, while failing to grasp the risks attached to the intangibles that were driving growth in earnings. Likewise, young auditors at Andersen embraced consulting, while failing to understand the risk of audit failure.
Many accounting firms and independent CPAs reacted to these events and implemented changes in procedure voluntarily. The biggest change that accounting firms made was a move made by the four remaining members of the big five, KPMG, Ernst and Young, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers. These four companies decided to break all ties with Andersen in an attempt to avoid being dragged down with the selling controversy surrounding the Enron scandal. This distancing was also due to the major changes mandated to Andersen as a way to get back on their feet after the scandal broke, and the other firms were afraid that these changes would be forced on them as well.
The government reacted aggressively when they became aware of the Enron scandal, and a flurry of legislation and proposals emanated from Congress and the SEC about how best to deal with this situation. President Bush even announced one post-Enron plan. This plan was to make disclosures in financial statements more informative and in the management’s letter of representation. This plan would also include higher levels of financial responsibility for CEOs and accountants. Bush’s goal was to be tough, but not to put an undue burden upon the honest accountants in the industry.
By far the biggest change brought about is the Sarbanes-Oxley Act. The Sarbanes-Oxley Act requires companies to revaluate their internal audit procedures and make sure that everything is running up to or exceeding the expectations of the auditors. It also requires higher level employees, like the CEO and CFO to have an understanding of the workings of the companies that they head and to affirm the fact that they don’t know of any fraud being committed by the company. Sarbanes-Oxley also brought with it new requirements for disclosures. These requirements included reporting of transactions called reportable transactions. These transactions are broken down into several categories, which impact every aspect of a business. One of these categories is listed transactions-which are by far the worst. They are transactions that are actually written out in a list, each one pertaining to one specific situation. Another is transactions with a book-to-tax difference of more than ten million dollars. There are several others, however these two will have the greatest effect. Accompanying these requirements are strict penalties if these transactions are not reported and discovered later. This act will mean significant additional work for accountants over the next several years.
For many years the SEC Chairman, then Arthur Levitt Jr., had been calling for the separation of auditing and consulting services within one company. However big firms like Andersen would apply their proverbial weight to attempt to show that consulting did not interfere with an auditor’s independence. Since the major concern of Andersen’s role in the controversy centres on their independence, and because of the large monetary consulting fees being paid to them by Enron, the push has been started anew by Paul Volcker the former Federal Reserve Chairman. Realistically, few think that the big firms will be able to dissuade the SEC from actually implementing such a rule. Many companies who use auditors believe that this is not the answer, because of the fact that it will cause them to hire one firm to do auditing work, and another to do non-audit work like taxes and other filings. In an attempt to not get damaged by any imminent government action, many business-including Disney and Apple Computer Inc. have already begun splitting their audit and non-audit work between different firms.
Effects on other Commercial Organisations WorldCom After the bewildering complexity of Enron’s SPEs and prepays, Worldcom’s fraud is simplicity itself. During the 1990s, WorldCom became a global telecommunication giant by acquiring companies such as MCI and building a large telecommunications network.
In addition, WorldCom entered into long-term, fixed-rate line leases to connect its network with the networks of incumbent local exchange carriers.
Faced with the telecom downturn and intense pressures on earnings, WorldCom undertook a series of measures to inflate earnings37. The largest and simplest of these related to line costs. WorldCom simply recharacterized its sizeable line costs as “Prepaid Capacity” and transferred them from the Company’s income statements to its balance sheets. The result was that over $3.8 billion of line costs that should have been shown as expense were capitalized as assets. WorldCom’s income was overstated by the same amount.
There were no SPEs and no complex accounting tricks. There was simply a journal entry passed under the directions of the Chief Financial Officer, Scott Sullivan, that reclassified expenses as assets without any supporting documentation whatsoever. When this was finally discovered by the internal audit department, Sullivan offered an equally brazen explanation38 which is worth quoting at length:
At the time of the cost deferral, management had determined that future economic benefit would be derived from these contractual commitments as the revenues from these service offerings reached projected levels. At that time, management fully believed that the projected revenue increases would more than offset the future lease commitments and deferred costs under the agreements. Therefore, the cost deferrals for the unutilized portion of the contract was considered to be an appropriate inventory of this capacity and would ultimately be fully amortized prior to the termination of the contractual commitment.
(FASB CON No. 6, par. 26).”
Adelphia In a series of disclosures40 between March 2002 and June 2002, Adelphia Communications Corporation announced that it had concealed $2.6 billion of its indebtedness. At the time, Adelphia was the sixth largest cable television operator in the United States. The Rigas family that owned a controlling stake in Adelphia also owned several other companies (“Rigas entities”) that were also in the cable telivision business.
The Rigas entities were managed by Adelphia. Moreover, Adelphia subsidiaries and the Rigas entities borrowed money under a co-borrowing agreement with that made all parties jointly and severally liable for the borrowing regardless of who had drawn down the money. This meant that the debt had to be shown as a debt of the Adelphia subsidiaries (and therefore as part of Adelphia’s consolidated debt) and not as a contingent liability. The following footnote in Adelphia’s December 31, 2000 balance sheet would have led everybody to believe that this liability was included in the consolidated debt:
In fact, however, this amount was not included in Adelphia’s consolidated debt. The footnote was thus calculated to conceal this debt completely. At least, if the note had disclosed a contingent liability, readers would have known that that this debt was in addition to the debt on the balance sheet. Of course, even that would have been inaccurate from an accounting point of view as the co-borrowing needed to be disclosed as debt and not as a contingent liability. The SEC stated: “The omission of these liabilities was a deliberate scheme to under-report Adelphia’s overall debt, portray Adelphia as de-leveraging, and conceal Adelphia’s inability to comply with debt ratios in loan covenants.”
In March 2002, while presenting the results for the last quarter of 2001, Adelphia for the first time disclosed the existence of $2.3 billion of hidden debt treating it as a contingent liability:
Subsequent disclosure made it very clear that the amount of $2.3 billion was not just a contingent liability but was very much a part of Adelphia’s debt. It turned out that there was not in fact any clear demarcation between the drawdowns by Adelphia and the Rigas Entities. The apportionment of the co-borrowing between them was an arbitrary reclassification carried out every quarter while preparing the financial statements. The SEC stated: “Adelphia management allocated and reallocated co-borrowing liabilities among Adelphia’s consolidated subsidiaries and unconsolidated Rigas Entities at will and through a single, quarterly cash management reconciliation of the inter-company receivables and payables outstanding at quarter end between or among Adelphia’s subsidiaries and Rigas Entities” In fact, Adelphia operated a Cash Management System (CMS) into which Adelphia, its subsidiaries and the Rigas Entities deposited their cash receipts (generated from operations or obtained from borrowings) and from which they withdrew cash for expenses, capital expenditure and debt repayment. This resulted in the commingling of funds between Adelphia and the Rigas Entities.
Adelphia’s fraud was not restricted to concealment of debt. “Between mid-1999 and the last quarter of 2001, Adelphia misrepresented its performance in three areas that are important in the metrics financial analysts use to evaluate cable companies: (a) the number of its basic cable subscribers, (b) the percentage of its cable plant ‘rebuild,’ or upgrade, and (c) its earnings, including its net income and quarterly EBITDA”. Most of this was accomplished by outright falsification or by fictitious transactions with the Rigas Entities through the CMS.
Xerox Xerox restated its income for the years from 1997 to 2002 partly to reflect incorrect accounting practices relating to the timing and allocation of revenue from bundled leases. Xerox sells most of its products and services under bundled contracts that contain multiple components – equipment, service, and financing components – for which the customer pays a single monthly-negotiated price as well as a variable service component for page volumes in excess of stated minimums. The SEC claimed that Xerox’s revenue-allocation methodology for these contracts did not comply with the accounting standards and forced Xerox to change its methodology. Under the original methodology, Xerox estimated the fair value of the financing component (using a discounted cash flow method based on the company’s cost of equity and debt) and of the service component (by using an estimate of service gross margins) and attributed the balance to equipment. In the new methodology, the fair value of the service component and the fair value of the equipment (using cash sale prices) are deducted from the total lease payment to arrive at the financing component as a balancing figure and the implicit financing rate is determined. Interestingly, the company’s previous auditor, KPMG regards the original accounting as correct and regards the new accounting adopted by the company and its new auditors, PricewaterhouseCoopers under pressure from the SEC as incorrect. KPMG stated that:
“KPMG remains firm in its conviction that the financial statements reported on by us in May 2001, including Xerox’s financial statements for 2000 and the restated financial statements for 1997-1999, were fairly presented in accordance with generally accepted accounting principles.
KPMG, Xerox and PricewaterhouseCoopers had it right the first time, when the company and three separate teams from PwC all agreed with us that Xerox’s lease accounting methodology was GAAP compliant. By contrast, today’s news reports lead us to believe that the restated financial statements defy economic reality. They apparently give Xerox the benefit of recognizing revenues in 2002 and in future years that it had already recognized in prior years.
AOL Time Warner AOL Time Warner Inc. admitted50 in October 2002 that it had improperly inflated revenue by $190 million and profitability (EBITDA) by $97 million by improperly accounting for some online ad sales and other deals between July 2000 and June 2002. While AOL Time Warner did not identify the transactions involved, it is likely that these were the ones that the Washington Post had highlighted in two articles52 in July 2002. The Post had alleged that America Online (AOL) resorted to questionable accounting practices in an attempt to shore up advertising revenue at a time when it was in the process of acquiring Time Warner in a stock swap deal. From late 2000 onwards, stock markets were extremely worried about the sustainability of advertising revenue for internet companies. A weakness in advertising revenues could conceivably have led to a sharp fall in the AOL stock price that could have endangered the merger with Time Warner. The Washington Post alleged: “AOL converted legal disputes into ad deals. It negotiated a shift in revenue from one division to another, bolstering its online business. It sold ads on behalf of online auction giant eBay Inc., booking the sale of eBay’s ads as AOL’s own revenue. AOL bartered ads for computer equipment in a deal with Sun Microsystems Inc. AOL counted stock rights as ad and commerce revenue in a deal with a Las Vegas firm called PurchasePro.com Inc”. AOL’s accounting is under investigation by the SEC and by the Justice Department. While the restatements are small relative to AOL’s total revenues and profits, it could have had a disproportionate impact on the share price at a critical point of time when it was clinching the merger deal with Time Warner.
Referencing Enron and Andersen-What Went Wrong and Why Similar Audit Failures Could Happen Again by Matthew J. Barrett
Governance, Supervision and Market Discipline: Lessons from Enron by Jayanth R. Varma, Journal of the Indian School of Political Economy published (October-December 2002), Volume 14 Number 4, 559-632).
Arthur Andersen and Enron: Positive Influence on the Accounting Industry by Todd Stinson
http://faculty.mckendree.edu/scholars/2004/stinson.htm
McNamee, Mike and Harvy Pitt. If You Violate the Law You Will Pay for it. Business Week December 24, 2001: 33.
McLean, Bethany. Why Enron Went Bust. Fortune December 24, 2001: 59

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