Monday, April 6, 2009

Summary Blog

http://www.google.com/hostednews/ap/article/ALeqM5j-udzGtmQ4ocJMxezvpnBuGcFCswD975CNBG1

Summary: The Broadway theatre company is known worldwide for their hit shows (Such as "Ragtime" and "Show Boat"). Unfortunately, two co-founders of one company (Livent) had harmed its reputation. The two accountants, Garth Drabinsky and Myron Gottlieb, have been doing the accounting and production of financial statements for this company for years. The thing was, they were committing fraud every time they produced financial statements. They had been overstating their business finances by millions of dollars, all this done within a period of several years. The two were charged with two counts of fraud and one count of forgery and could be sentenced to 14 years in prison. Authorities say that the fraud helped build over $100 million in shareholder value. This was lost though, when the fraud was revealed by a New Managment Team.

Connections: This article is connected to the Accounting 1 Fifth Edition textbook that we have, in the way that it relates with the Generally Accepted Accounting Principles, Concepts, and Conventions. There are a total of eleven GAAP's in the back of our textbook, and I believe this article to be defiant of mainly three of them. The first principle it disregards is the Objectivity Principle. This states that the accounting will be recorded on the basis of objective evidence, and will not be based on personal feelings, but on facts. The second GAAP that it doesn’t fulfill is the Materiality Principle. This states that accountants must use the GAAP's unless it is expensive or too difficult (For Livent it was neither). Finally, the Principle of Conservatism is not being used as it states that: The accounting for a business should be fair and reasonable (Which the accounting of this company obviously isn’t).

Reflection: I am baffled by the fact that a company that seemed to have a good reputation and had good shareholder value was committing fraud for several years. They had a good potential company going for them before they started the fraud, but they threw it all away as soon as they started adding additional millions of dollars on their financial statements. I personally am not a big fan of the kind of shows that this company creates, but i can imagine the thousands (maybe even millions) of fans that this company had, that are now crushed by the fact that one of their favourite entertainment companies has been screwing everyone over for years.

2 comments:

Sam Hui said...

I am also surprised that a company like that would commit fraud. I have no idea why they did it, except for greed, but I think that once they started the fraud, they couldn't stop because it would look suspicious if the amounts they overstated suddenly dropped. Another reason is that they probably didn't want to stop their new more luxurious life styles and go back to how they were before they commited fraud. I too am not a fan of these kinds of shows, but I do hope that people who are big fans and are investors don't lose fate in this industry and continue to support it. I think GAAP is an important part of accounting, and people who ignore or break them deserve what they get when they are found out.

Ronald said...

I totally agree with Sam’s point, I believe that greed plays a big role in this case. I understand that for most of the businessman earning a profit is the most important thing. However, lying about the financial status of one's company is totally unacceptable. First, he has broken the GAAPs which are principals for accountants. Secondly, it is unfair to all the investors who have invested in this company. With this particular company’s behavior, investors may also lose confident in the whole industry and not invest in it, which cause the other company lose money as well.