Batson International An Analysis

Presented by Group 4
Name Roll Number

Darpan Thakkar
Raghavendran R Sudarsan Balasubramaniam Ishant Bhatia Vignesh Chandrasekaran Tanya Chaudhary Omkar Deshpande

A060
B046 C003 C007 C010 C011 C015
1

INTERNAL CONTROLS
Systems and Processes consisting of specific policies and procedures designed to provide the Management and Auditors with reasonable assurance that the Goals and Objectives it has charted out will be met.

WHY
Promote Operational Efficiency And Effectiveness Provide Reliable Financial Information Safeguard Assets And Records Encourage Adherence To Prescribed Policies Comply With Regulatory Agencies

VALUE
TRANSACTIONS ARE: Valid Property Authorized Recorded Properly Valued Properly Classified Timely Reconciled To Subsidiary Records

Driven By People at all levels of the Organization Involves clear assignment of Responsibility and Accountability Systems should be designed to Identify and Mitigate Risks Separation of Duties and Physical control over Assets and Records Training, Consistency and Proper Flow of Financial Information

EARNINGS MANAGEMENT
Arthur Levitt: practices by which earnings reports reflect the desires of management rather than the underlying financial performance of the company.
Often defined as the planned timing of revenues, expenses, gains and losses to smooth out bumps in earnings. In most cases, earnings management is used to increase income in the current year at the expense of income in future years. Earnings management can also be used to decrease current earnings in order to increase income in the future.

Incentives
A.EXTERNAL FORCES Analyst Forecasts Debt markets and contractual obligations Competition B.INTERNAL FACTORS Potential mergers Management Compensation Planning and budgets Unlawful transactions C.PERSONAL FACTORS Personal bonuses Promotions and job retention

Methods

Camouflage Of Hold And Sale Transactions Uncertainty At Cut Off Date Inflating Standard Orders Expected Lives Of Long Term Assets Obligations For Pension Benefits Deferred Taxes Inter-company Transactions Off Balance Sheet Reporting In Subsidiaries

Deference Of Asset Impairment FIFO V.S LIFO Methods Of Accounting (E.G.Hyper Inflationary Countries) Accelerated Declining Method Of Amortization Working Capital Management Delayed Shipments Timing Of Capital Gains Banks Loan Loss Reserves Business Combos Creative Acquisition Accounting

REGULARLY IRREGULAR
Excessive Inventory of a Technologically obsolete product c/f from the Previous Year written off over the 1st and 2nd quarters of the Current Year Violating GAAP principles of Periodicity and Recognition. The excess inventory should be written off immediately in the financial year it pertains to.

REGULARLY IRREGULAR
Excessive Inventory of a Technologically obsolete product c/f from the Previous Year written off over the 1st and 2nd quarters of the Current Year Violating GAAP principles of Periodicity and Recognition. The excess inventory should be written off immediately in the financial year it pertains to.

Restructuring Reserve made for 2nd Qtr of Current Year reversed in the 1st Qtr itself before commencement of Restructuring.

No indication of any Modification/Changes in Cost budget or otherwise. Window dressing tactic to boost the quarterly profits

REGULARLY IRREGULAR
Excessive Inventory of a Technologically obsolete product c/f from the Previous Year written off over the 1st and 2nd quarters of the Current Year Violating GAAP principles of Periodicity and Recognition. The excess inventory should be written off immediately in the financial year it pertains to

Restructuring Reserve made for 2nd Qtr of Current Year reversed in the 1st Qtr itself before commencement of Restructuring

No indication of any Modification/Changes in Cost budget or otherwise. Window dressing tactic to boost the quarterly profits Not of concern
Documentation always need for Internal Audit and Control for Auditors to test the requirement of a smaller reserve and the accuracy of Managements judgement

Part of Errors and Omissions Reserve reversed without back-up documentation

Regularly Irregular
Small Customer billed late in the Qtr for a Bill and Hold Transaction in excess of usual order level. Extended payment terms+ Discounted price given Timing and Nature of transaction are anomalous. If the Sale is a consignment, then should not be recognized in this quarter

Regularly Irregular
Small Customer billed late in the Qtr for a Bill and Hold Transaction in excess of usual order level. Extended payment terms+ Discounted price given Timing and Nature of transaction are anomalous. If the Sale is a consignment, then should not be recognized in this quarter

Change in Divisions Expense as received policy for initial capitalization and further expensing for small tools and parts

Small tools and parts can be expensed as received. However, any change in Accounting Policies should always be ratified and then notified to the Management

Regularly Irregular
Small Customer billed late in the Qtr for a Bill and Hold Transaction in excess of usual order level. Extended payment terms+ Discounted price given Timing and Nature of transaction are anomalous. If the Sale is a consignment, then should not be recognized in this quarter

Change in Divisions Expense as received policy for initial capitalization and further expensing for small tools and parts

Small tools and parts can be expensed as received. However, any change in Accounting Policies should always be ratified and then notified to the Management

Costs towards a Cancelled Building project still classified as an Asset

It should have been charged towards the Income Statement when the project was cancelled

REGULARLY IRREGULAR
Probable Tax refund of divisions overseas operating companies recognised Another technique to boost earnings. It is Contingent, and should be recorded only after the Receipt of the Tax refund is acquired

REGULARLY IRREGULAR
Probable Tax refund of divisions overseas operating companies recognised Another technique to boost earnings. It is Contingent, and should be recorded only after the Receipt of the Tax refund is acquired

Quarterly Incentive Compensation below calculated amount and divisions budgeted annual results

Since it is formula based, can be seen as an Accounting error- reflecting poor internal controls. Will result in higher division earnings

REGULARLY IRREGULAR
Probable Tax refund of divisions overseas operating companies recognised Another technique to boost earnings. It is Contingent, and should be recorded only after the Receipt of the Tax refund is acquired

Quarterly Incentive Compensation below calculated amount and divisions budgeted annual results

Since it is formula based, can be seen as an Accounting error- reflecting poor internal controls. Will result in higher division earnings
Should have been accounted under Goodwill. Reversal of purchase accounting liability should have been deducted from G/W account. Reversal pumps up divisions earnings

Excess purchase price liability related to an Acquisition in the P.Y reversed in the current year as 1st quarter income- accounted as a business acquisition transaction

REGULARLY IRREGULAR
Probable Tax refund of divisions overseas operating companies recognised Another technique to boost earnings. It is Contingent, and should be recorded only after the Receipt of the Tax refund is acquired

Quarterly Incentive Compensation below calculated amount and divisions budgeted annual results Not of concern Excess purchase price liability related to an Acquisition in the P.Y reversed in the current year as 1st quarter income- accounted as a business acquisition transaction

Since it is formula based, can be seen as an Accounting error- reflecting poor internal controls. Will result in higher division earnings
Should have been accounted under Goodwill. Reversal of purchase accounting liability should have been deducted from G/W account. Reversal pumps up divisions earnings Accounts Payable a very important head. Non- reconcilation shows poor internal controls. Principle of Recognition ignored. Required for prompt and correct liability recognition and proof

Unreconciled differences in Accounts Payable in prior accounts

PROBABLE REASONS (EXCUSES?)

Pressures to Meet Targets

Opportunities Present due to weak Internal Controls

Lack of regulatory pressure from Senior Management

MENDING WHATS BROKEN: POSSIBLE SOLUTIONS

Identify the extent of Accounting irregularities and malpractices throughout the Company Focus on Management judgment in making Accounting decisions. Should be: Responsible Reasonable As per Accepted Accounting Principles
STRENGTHEN INTERNAL CONTROLS

MENDING WHATS BROKEN: POSSIBLE SOLUTIONS

Identify the extent of Accounting irregularities and malpractices throughout the Company Focus on Management judgment in making Accounting decisions. Should be: Responsible Reasonable As per Accepted Accounting Principles STRENGTHEN INTERNAL CONTROLS

SEGMENT REPORTING
IFRS 8 for SEGMENT REPORTING is a result of IASB project to converge segment reporting requirements under IFRS with US GAAP
In some cases, US GAAP includes explicit guidance, while IFRS provides a core disclosure principle without specific guidance. These areas include: Determining Operating Segment, Matrix form of Organizational Structure & Aggregation of Operating Segments

US GAAP
Management approach provides flexibility in defining segments Requires an entity with matrix org structure to define its operating segments based on products or services only Aggregation of operating segments is based on a number of quantitative techniques in implementation guidance and illustrations Segment result definition not provided No requirement for disclosure of capital expenditures or liabilities by segments Intangible assets are excluded from Segments non-current assets disclosures

IFRS
No specific guidance on defining a segment are available Determine set of components constituting the entities operating segments (product, service, geographical) Aggregation of operating segments is based on quantitative basis of long-term gross margins only Segment Result defined Segments are required to disclose capital expenditures and liabilities Intangible assets are included in Segments noncurrent assets disclosures

IRREGULARITIES
Worldcom
Improper reduction of reserves Improper capitalization of expenses Improper revenue recognition Excessive acquisition write-offs

Enron
Incorrect accounting for Special Purpose Entities Selective use of Equity method of accounting Merchant Model used for revenue recognition

Xerox
Acceleration of leasing revenue for fast recognition of revenue Improper increases in residual values of leased equipments Fraudulent manipulation of reserves and other income

Tyco
Improper acquisition accounting Understated acquired assets Overstated acquired liabilities Use of reserves to enhance earnings Incorrect accounting for certain executive bonuses

IMPACT OF IFRS

Reduced cost of capital in implementation

Better decision making due to uniformity in information

Parent company to present consolidated financial statement for subsidiaries

WHAT DOES IFRS AFFECT?

INTERNAL CONTROL CERTIFICATION

Self inspection by the company management Management giving reasonable assurance regarding reliability of financial report and its preparation Mandatory for all Listed Companies under local companies Act

SARBANES-OXLEY ACT 2002

A BACKGROUND
Highly Publicized Frauds like Enron, World Com and Tyco Auditors and financial analyst conflict of interest.

Board Room failures

SARBANES-OXLEY ACT 2002

This act was passed in 2002 and has 11 titles.

WHAT DOES IT ENFORCE?

PCAOB
Auditor Independence Corporate Responsibility Analyst conflict of interest Corporate and Criminal Fraud Accountability