Review the scenario on p 230 regarding how Kim should handling the pension liability of the parent company in the possible sale of the car rental division. What is your view on this dilemma?
I think Kim should disclose the pension liability of the parent company to potential buyers. Maybe the parent company can negotiate the pension liability in the sale of the corporation
As discussed on p. 232-233, what is finance?
Finance has three different stories …
as a method, as an organizational policy or strategy and as an industry.
Finance as a method: includes the valuation of decisions using such tools as discounted cash flow, asset or revenue multiples, book value, market value, among others
Organizational policy: incorporates how organizations get money runs their operations- the funding decision of organizations
An industry: provides financial services to consumers and organizations and includes investment banks, commercial lending, and venture capital firms
As noted on p. 233, what is the view of finance with ethics and without ethics?
The typical view of finance with ethics and without:
Without: Finance is just numbers, other groups can do the ethics, follow what the financial model tells me to do, we have a goal and that’s my focus, build models on what people tell me… I don’t make value judgments
With: work to make sure financial models are complete and that I communicate alternatives, using it a tool for multiple outcomes, who do I include in my work (all stakeholders), making sure produce the long-term value while serving short term requirements, understanding the financing policies of the organization and who is affected by them, do stakeholders be taken into consideration in deciding how to finance the organization
As discussed on pp. 234-235, how does valuation imply value judgments. What are the steps in the valuation process?
The process of simplification in valuation encapsulates and hides many small and large value judgments.
1. The steps in the valuation process Is to decide what you are valuing. .. only those alternatives that are identified for comparison an eventually become the decision executed.
2. Identify assumptions required for the financial model. These assumptions drive the valuation process and are , in fact , value laden decisions
3. Valuation is an iterative process. Initial findings are presented, feedback is incorporated and the process begins again
4. Taking the assumptions and options and creating a model requires an understanding of the constructed value… for each valuation model, profits, free cash flow, long-term market value, we need to identify the stakeholders.
5. Defining the stakeholders, whom do we involve in the process? Who needs to be involved from the creation of the assumptions? Who needs to be involved during the construction of the model? Who needs to be in the presentation of the initial findings
6. Once the financial model has been created, the presentation of initial findings constitutes the decision making process
- assumptions, valuations, and alternatives. Pg 238
Discuss the question on p. 239 that managers need to ask in order to use financial modeling effectively.
1. What alternatives are not being considered? Are there alternative that meet the needs of multiple stakeholders or multiple standards of conduct?
2. Have I examined the assumptions to ensure they are in keeping with the values of the organization? Can I stand by these assumptions? Am I making these assumptions as transparent as possible to key Stakeholders?
3. Does the model take into considerations alternative priorities and goals?
4. Who is impacted by this model? Have I included these stakeholders in the process?
5. Am I positioning this model as one possible answer? Am I giving the audience enough information to make an informed decision in keeping with their values an the values of the organizaiton?
Explain figures 7.3 and 7.4 on pp. 240-241. What do the figures have to do with finance?
Simplified view of the corporation: Managers should make choices that fulfill their fiduciary duty to shareholders… view is to maximize profits for shareholders.
Robust view of the corporation: Bringing together key stakeholders and relationships to achieve a common goal
On p. 245, the text describes accounting with and without ethics. Describe the two approaches. What is your view on them?
Without ethics : Is an view of internally thinking and not caring about what or how the corporations looks to external stakeholders.. hoarding information… completing information to meet deadlines
With ethics: Is taking into consideration the standards of accounting, the organization, and groups that are involved… involves stakeholders and gives them a view of the internal processes of the organization or department…
As discussed on pp. 248-249, what was the original purpose of financial statements?
Financial statements provide critical information to external stakeholders in order for them to adequately assess the operations, finances, and values of an organization
As discussed on p. 250, what is the difference between financial and managerial accounting?
Financial accounting: communicates operations, financing, and values to those outside the organization
Managerial accounting: gets to the heart of decisions making within organizations in helping to determine who gets what money and attention and assessing how projects are done
As discussed on p. 251, what is a balanced scorecard?
Adds a customer perspective, internal perspective, and an innovation and learning perspective.
The balance scorecard begins with the goals of the organization. Companies set their goals and then translate them into specific measurements. The balanced scorecard reports multiple measures simultaneously, multiple and divergent goals
As discussed on p. 252, describe the issue of conflicts or perceived conflicts of interest in public accounting.
There was concern that an accounting firm, in order to win additional lucrative consulting contracts would appease the client rather then enforce the rules and regulations
Ben and Jerry Case
Describe the key facts of this case:
> Public outcry (fear of multinational companies skin the company alive and use tis gentle lambskin brand to fool customers into buying their brand)
> Spray-painted main street vs. wall street
> Waterbury ice cream plant was Vermont’s biggest tourist destination
> Vermont farmers who sold 300 million tons of milk to the company yearly was worried that their dairy products would not be used exclusively
Ben and Jerry Case
What does it mean for B&J to be a “values-led” business?
1. Meant a commitment to employees, the Vermont community and social causes in general. Employees received affordable daycare health club memberships, profit sharing, and free college tuition.
2. Committed to the local family dairy, buying tis milk and cram form St. Albans cooperative creamery… paid them last years prices although the industry was down
3. Donated the most 7.5 % pretax profits
4. Link prosperity mission
Product mission: to make, distribute, and sell the finest quality product.
Social mission: to operate the company in a way the a actively recognizes the central to that business plays in society, by initiating innovative ways to improve the quality of life for the local, national, and international communities
Economic mission: to operate the company on a sound fiscal basis of profitable growth
Ben and Jerry Case
Describe B&J’s stock history and the typical stockholder profile.
1. To build a manufacturing facility in Waterbury Vermont, the company made direct public offering to Vermont residents, raised $750k… a year later went public and sold 500k shares at $13
2. In 1997, there were roughly 11K shareholders which a large percentage were Vermont residents
Class A and Class B stock
1. Cohen and Greenfield owned only 15% of the stock, but controlled 43% of the votes.
2. Converted class A shares into Class B and advised the residents and employees of Vermont to keep the Class B in order to keep control of the company
Typical stockholder profile
1. The typical stockholder of ben and jerry’s were untraditional as the company. Some bought stock in the company to support it and because they believed in the ideals for which the company stood
Ben and Jerry Case:
Describe the buyout offer and the bidding for B&J. Who were the suitors?
Ben and Jerry bid offers were from several companies… Unilever, Dreyers, MBLC… Unilever offer was the best in my opinion… Maximized distribution while keeping with the tradition of the company: However, the tax hit to stockholders were the issue
Dreyers offer was suboptimal… They wanted to
Ben and Jerry Case
What was Unilever’s commitment to B&J?
As described in the Reuters article, what did the Sarbanes-Oxley act do?
> It has strengthened auditing, made the accounting industry a better steward of financial standards, and fended off Enron-sized book-cooking disasters.
>Sarbanes-Oxley also increased criminal penalties for various kinds of financial fraud. Maximum prison terms for mail fraud, for example, jumped to 20 years from five years.
>These changes had a sharp deterrent effect and have helped create a mindset that "accounting shenanigans aren't going to be tolerated anymore,
According to the article, is the Act working? Why or why not?
Sarbanes Oxley Act
According to the article, some agreed that it has worked and others have criticized it. I agree it has worked for the most part. The article mentioned how corporate conduct like the Enron has not existed. Corporate Executive are taking more responsibility for the accuracy of their internal books. In addition, restatements are down significantly
Describe the facts of the Peregrine Financial case – why didn’t Sarbanes-Oxley protections prevent this fraud?
The facts about the case:
- 1. Futures brokerage firm
- 2. They hired a small accounting firm that was validating their financial books
- 3. Veraja-Snelling, a tiny firm run out of a home in suburban Chicago, was not subject to audit inspections before 2010, when Wall Street reforms known as Dodd-Frank extended the PCAOB's
- authority to the auditors of broker-dealers -- too late for Peregrine.
It didn't prevent the fraud because when it first started Sarbanes Act didn't extend oversight to auditors of brokerage deals
One criticism of the Act is that it did not resolve an inherent tension within the accounting industry. What is this tension? How could it be resolved?
>It did not resolve an inherent tension within the industry's "client pays" business model -- that is, an auditor's basic conflict between serving the paying client and serving the greater good
>Nor has it brought increased competition to an industry that still is an oligopoly
- >Auditors have become more independent of
- clients, but not entirely so. The law limited the types of consulting
- that accounting firms can do for their audit clients, but left them free
- to do lucrative tax work. It made lead audit partners rotate off
- accounts after five years, but let audit firms serve the same clients
How could it be resolved?
It could be resolved by breaking up the oligopoly in the accounting industry and not allowing the firms to continue to do lucrative tax work for the same client that they choose to audit
What are some challenges with accounting industry consolidation and the “big four” accounting firms?
Some of the challenges with accounting industry consolidation is that it has narrowed the competition amongst audit firms
What have been some of the legislative challenges to Sarbanes-Oxley?
- > Another challenge to Sarbanes-Oxley is still
- to come. Concerned about the performance of auditors in the credit
- crisis, the PCAOB is considering an array of tough reforms and
- encountering fierce opposition from business lobbyists.
- >Congressional opponents of Sarbanes-Oxley have
- additionally tried sometimes to limit its scope by holding back the
- budgets and staffing of regulatory agencies like the SEC.
Based on the video, what is Countrywide accused of?
Countrywide was accused of mortgage fraud.
1. Falsifying documents so that individuals that didn't qualify for a mortgage loans eligible to qualify
Do you think that there is potential merit to her claims?
Yes i believe it was merit to the claim. They ignore her complaints of wrong doing and they fired her. She won a lawsuit based the fraud that regulators were able to find.
What issues are raised by the video in terms of how Countrywide responded and how the U.S. government responded?
The issue with how Countrywide responded was that fact they tried to circumvent the process and told high earning loan officers to report directly to other office. The tried to pay her off.
The U.S. Government responded by just giving the CEO at the time a fine and no jail time
What are the different parts of an investment bank as described in the case? Describe the role of Todd Thompson
The different parts of a investment bank
1. Sales and trading ( This group served as a vital like between the sellers, corporations, and government entities, and buyers (investors)
2. Investment Banking (The investment banker acted as an advisor, on either the buy side or sell side, to one company in transitions involving the sale of another firm, division, or certain assets)
3. Equity research (Equity analysts wrote research reports that they distributed to portfolio managers and pension funds to assist them in making better investment decisions)
Todd Thompson was a research analysts that build research model for his industry. His primary responsibility, as a security analyst was to provide in-depth investment advice to the firm's clientele through complex written reports.
What is the challenge/conflict that Thompson faces?
1. other analyst were accused of watered down research reports out of fear of losing investment banking business
2. analyst in spite of bad news often maintained positive stock ratings to avoid getting blacklisted by companies they covered
Thompson maintained that conducting research with integrity and building relationships with clients were the best way to show your value
Someone inside his company leaking information to companies