Question

• How is finance both an art and a science?
• Revenue or sales is often estimated based on when it is recorded, which can alter the income statement drastically. Provide an example of when a company has misrepresented their revenue. Discuss the details of the case. After considering the case above, discuss the legal and ethical ramifications of the case.

Answer 1

Finance is an art as well as science. Financial activities when performed have to be done in a systematic way as to evaluate the result of each activity at every stage, at the same time financial environment is very complex and in todays world when you want to successfully execute a strategy you have to be diligent in following each steps carefully and at the same time you have to be open to adapting to new environment in the process. Today's financial environment is far more complex than it was two or three decades ago. Financial activity has to be performed in systematic way at the same time being open to adapting to change in environment. Revenue or sales is recorded on an accrual basis, meaning in the period in which it is recorded in the period in which it has occurred. Although there are often different interpretation of recording of sales or revenue especially in e-commerce world which companies often use to over estimate their sales or revenue. Xerox, an American global corporation that manufacture and sells photocopying and print products was founded in 1906. Xerox was one of the major companies which consistently misrepresented its revenue over at least five years. Xerox overestimated its revenue over five years by at least $2 billion. The scandal was brought in light by the regulator securities and exchange commission. The SEC accused Xerox of misleading and betraying investors via a series of accounting tricks designed to manipulate its earning and senior executives benefitted from it. Its auditor KPMG was fired from auditing. Xerox eventually agreed to pay fine to settle the charges and many senior executives were charged with civil cases against them. There are many legal as well as ethical ramifications of misrepresenting your revenue. The legal ramifications can be in the form of fine which Xerox had to pay, and many senior executives who were involved in auditing might be barred from the audit function. Apart from the fine, senior executives might be jailed for accounting fraud. The ethical ramifications are more serious because investor losses confidence in the company, the company will face serious issues while raising fresh capital or hiring human resources. Financial statement is supposed to present the true picture of the company and stock price of Xerox was also negatively affected after the scandal.