Transcript Financial Reporting and Standard Setting

Surviving a Crisis
Professor Jim Grandorf
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Jim Grandorf Bio
• Jim received a BS in Accounting (1963) and an MBA
(1964) from the Kelley School of Business. He is a CPA.
• Jim worked for Exxon Corporation for 34 years
– Systems analyst, financial analyst, financial manager
– Deputy Managing Director / “CFO” – Esso Singapore
– Assistant Controller (Financial) – Exxon USA
– Manager Financial Division /Controller/Treasurer/CFO
– Exxon Research & Engineering
• Jim joined the Kelley School in 1998, where he has
mentored consulting teams in the Graduate Accounting
Program and taught managerial accounting.
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Jim Grandorf Bio
• Jim has received several community and IU awards including
the Thomas Hennessey Halls of Residence Alumni
Association Distinguished Alumni Award (1992), the Kelley
School Service Award (2006), the IU Alumni Association
President's Award (2007), the Mary Alice Gray Memorial
Award for Extraordinary Service to United Way of Monroe
County (2009), and the Downtown Bloomington Economic
Redevelopment Award (2011).
• Jim’s mentored consulting teams have captured first place in
the John Deere / BKD case competition in all eight years of
the competition; his teams captured all three prize places
from 2007 - 2012.
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Jim Grandorf Bio
• At Exxon he conceived and was instrumental in
developing the concept now known as Purchasing
Cards (Procurement Cards, P-Cards). His group was
the first in the world to use this technique for paying
small invoices. It is now used world-wide by every major
company.
• Jim is considered to be an innovator in financial and
managerial accounting concepts, and how to more
effectively and efficiently use accounting and
technology to improve overall business operations.
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Discussion Plan
• Management has to deal with difficult situations
• These may be new accounting issues, ethics or
control breaches, or other situations that need
prompt management attention
• A key question: If confronted with a difficult
situation, how will you react?
– As a manager; As an employee
• Let’s see how you might handle these situations
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Payroll Tax Reporting
• What income should be reported for an
employee assigned internationally?
– Same as US (or Korea) reporting basis?
– In “compliance” with other country’s laws?
• If you change position, how do you do it?
– Retroactive?
Prospective?
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Tax Planning Issues
• Corporate (headquarters) expenses
– Interest expense
– Other charges
• Deemed income
– Corporate
– Personal
• Global income
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Management vs. Auditors
Opinions on Accounting Rules
• Exxon shut-down shale oil project
• At issue – $400M of costs – expense or not
• CEO of US operations deemed it temporary,
despite prevailing views to the contrary
• Price Waterhouse threatened “qualified” opinion
• How do you reconcile differing points of view?
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Bill and Bernie
• Discovered what they believed to be significant
ethics and control violations
• Local management disagreed
• If you were Bill or Bernie, what comes next?
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Enron
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Mark-to-Market accounting
Significant CFO conflict of interest
Arrogant management / corporate culture
DVD방
Tried to hide losses with accounting
Auditors not really independent
No corporate oversight by board
Sherron Watkins concerns ignored
Stock market turned down
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WorldCom Accounting
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Very small general auditor staff
Limited scope of what they could examine
Significant ongoing merger activity
Arrogant corporate culture
“CFO of the Year”
Significant corporate loan to CEO
Stock market turned down
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WorldCom Accounting
• CFO advised poor results were due to
accounting errors, not business problem
• Didn’t want to upset shareholders for this
• Accounting staff acquiesced
• Cynthia Cooper’s staff found falsifications
• What would you do in her position?
• What were her personal consequences?
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WorldCom
• WorldCom could not have failed as a result of
the actions of a limited number of individuals.
Rather, there was a broad breakdown of the
system of internal controls, corporate
governance and individual responsibility, all of
which worked together to create a culture in
which few persons took responsibility until it was
too late.
– Richard Thornburgh, former U.S. attorney general
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When Do Problems Occur
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Arrogant management / corporate culture
Weak Board of Directors
Significant decline is personal finances
Significant change in family situation
– Family death, divorce, medical issues
• Drug and alcohol issues
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What is Ethical?
How Do You
Differentiate
Between Ethical
and Non-Ethical?
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What is Ethical?
• There is a broad, diverse, and inclusive discussion
within the company
• The action taken meets a legitimate business
purpose, consistent with the firm’s long-term strategy
• Investor’s decisions would not be changed if they
knew the real and true numbers
• How would others (Mom!) react if they knew about
the decision?
• Do unto others as you would have others do unto you
• Can you defend it to the WSJ? To Congress?
• Appearance and perception are important
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Ethics and Controls
• Good ethics and good controls must start at the top of the
organization (CEO, Board of Directors)
• Good control systems help to insure ethical decisions
• Create and communicate explicit policies
– Policies must be in writing
– Every employee must have a copy
– Must continually have training programs
• Swift reprimand for non-ethical actions
– Reprimand must be enforced equally to all employees,
including management – no exceptions
• Have a confidential hot-line for concerned employees
• Hire ethical people
• Appearance and perception are important
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Ethics and Controls
• State your position, philosophy, or belief
• Create formal organizational systems
• Communicate expectations through informal
(leadership) systems
• Reinforce the policy through measurements and
rewards
• Implement communications and education strategies
• Use response to critical events to underscore
commitment
• Avoid the perception of hidden agendas
– Ethics Resource Center – Frank Navran
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