Fraud- Nortel trial- Nearly billiton dollars in reserves "incorrectly" booked

It is reported that Nortel conducted a comprehensive review and found out that nearly a billion dollars worth of accounting reserves ``incorrectly'' booked, dating to as far back as 1999. The internal review also found two ``material weaknesses'' tied to the use of the accrued liabilities, the first being a breach in public disclosure rules, the second a violation of Nortel's own accounting practices.

It is evident that certain management of Nortel had manipulated the results by using the accrued liabilities account.

$952 million in accrued liabilities were set up without the appropriate documentation, and weren't filed in accordance with generally accepted accounting practices (GAAP). Citing one account, called the ``out-of-balance'' provision that was stored within the firm's corporate or non-operating books, the accountant said: ``It's not warranted to have an out-of-balance account.''

Tens of millions of dollars in backlogged provisions were entered to cover anticipated costs such as contract liabilities and lawsuits. When those costs weren't realized, Nortel flowed the provisions back into earnings in later periods. Yet, they ``should have been recognized in real-time,'' not deferred.

This so-called ``earnings management'' practice was used by the three top executives in Nortel to tip the flagging tech giant back into profitability in 2003, triggering $73-million in bonuses, of which they collected $12-million combined.

Value of external audit to retail investors

This is an interesting article with regard to the value of external audit to retail investors in Singapore. Please refer to the link:

http://bizdaily.com.sg/newsite/most-singapore-retail-investors-find-value-in-external-audit-survey/

A survey was conducted by the Association of Chartered Certified Accountants (ACCA) and Securities Investors Association (Singapore) (SIAS), who sent out survenys to their own 390 members. As evient from the link above, 80% of the respondents opined that audited financial statement is important sources of information to guide their investment decisions.

In addition, the respondents also commented that the scope of audit should be extended, especially for two main areas:specific assurance on a company’s internal controls and a report on the adequacy and effectiveness of a company’s risk management programme.

In our opinion, the internal controls and risk management programme is especially important to prevent future unfavorable against the entity, and minimise the risks that the entity is been exposed to. Retail investor may feel more comfortable with their own investment if the investee has a strong internal controls in-place and effective risk management assessment programme.

For instance, the investee ( i.e. a entity listed on a stock exchange) may find an opportunity to invest in certain projects. A stringent risk assessment programme may help to evaluate the risks involved in the projects to ensure that all risks are been considered while making investment decisions.

If you have any comments, please feel free to contact us at myauditing@gmail.com

Olympus scandal: hid investment losses in the past 20 years

Japanese company, Olympus Corp has finally admitted that they used inflated acquisition costs ( specifically: advisory fees) to hide investment losses incurred in the past 20 years.

Earlier on, the market was vigorously discussing on the scandalous US$687 million payment for financial advice and expensive acquisition of companies unrelated to its mainstream businesses.

Olympus issued a statement saying that an independent panel investigating the allegations had found that the acquisitions were used to cover up losses on investments dating to the 1990s. During that time in Japan known as the "Lost Decade," many Japanese companies took to making speculative investments in securities to offset sluggish sales following the bursting of Japan's economic bubble.

Olympus Corp's president, Takayama also confessed that the corporation needed higher level of corporate governance to ensure that similar things will not happen in the future.