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CORPORATE GOVERNANCE ASSINGMENT The Problems and Issues Inflating Capital Expenses oCompanies Under Investigation Adelphia Communications WorldCom oFact Adlephia Communications caused losses of over 60 Billion to investors A company books its everyday ordinary operating expenses under capital expenses Problem is according to GAAP capital assets expenses can be spread out for the duration of use Example WorldCom transferred over 383 billion in operating expenses to property plant and equipment accounts in their ledger This it inflates income because expenses that are supposed to be recognized in a certain time period are now spread out Causes an inaccurate EBITDA Earnings before interest taxes depreciation and amortization Analysis which is widely used by stakeholders to measure a companys health Hiding Debt oCompanies Under Investigation Adelphia Communications Enron WorldCom Xerox oFact Enron hide over 1 Billion Dollars in Debt Companies will move liabilities and debt off the books by moving them into different entities A loophole in GAAP allows companies to create legal structures called special purpose entities SPEs If a parent company supplies 97 of the initial investment and an outsider supplies the other 3 is does not have to consolidate it with its financial Statements SPEs used to conceal certain events that would have a major impact on the Balance Sheet An example is Enron put loan guarantees financing of sales of their own products and loans to executives Companies can also sell assets to the SPE for cash causing a better Return on Capital Round Trip Trades or Wash Trades oCompanies Under Investigation AOL Time Warner Used with Advertisers and Suppliers CMS Energy Duke Energy Dyenergy El Paso Enron oFact AOL has said it my have overstate revenues by 49 Million pre-arranged buy-sell trades of energy with the same counter-party at the same price and volume and over the same term resulting in neither profit nor loss to either transacting party Increases a companies
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