AC3103 Take Home Assignment 2
Olam International: Challenges to Financial Reporting and Disclosure
[Document Subtitle]
[Author]
Major Concerns Raised by Muddy Waters Over Olam’s Financial Reporting
Firstly, Olam seemed to have reclassified its derivatives so as to present high financial returns. Olam was guilty of altering the derivative balance by changing from the adoption of Level 2 inputs to using Level 3 inputs to calculate the fair values of its derivatives during the financial year ended 30 June 2011.
Olam also often disguised its declining performance and increased its return on investments by recognizing non-cash accounting gains derived from negative goodwill and biological assets. This was a significant source of profit for Olam from 2010 to 2012. Since managers themselves decided upon assessed profits and this is what determines the amount of negative goodwill that arises on acquisition, managers could easily manipulate profits using this avenue. Furthermore, recognition of biological assets depended on Olam’s internal pricing model that could be manipulated by top management.
Finally, the company did not sufficiently disclose reasons behind large amounts of expenditure on fixed assets. Muddy Waters was concerned if Olam could earn enough returns on those expenditures and questioned where the money was channeled.
Major Concerns Raised by Muddy Waters Over Olam’s Operation
Olam had a large amount of maturing liabilities that Muddy Waters was concerned about because the company could possibly be unable to pay them off due to its relatively lower cash balance and insufficient earnings and external finances. Furthermore, a significant portion of its cash balance consisted of withdrawals from its brokerage accounts and bank account overdraft. This puts them in a less solvent position.
Also, the profits Olam was making from its subsidiaries in Nigeria and Gabon were not sustainable in the long run due to corruption and political issues in the two countries. Furthermore, a
[Document Subtitle]
[Author]
Major Concerns Raised by Muddy Waters Over Olam’s Financial Reporting
Firstly, Olam seemed to have reclassified its derivatives so as to present high financial returns. Olam was guilty of altering the derivative balance by changing from the adoption of Level 2 inputs to using Level 3 inputs to calculate the fair values of its derivatives during the financial year ended 30 June 2011.
Olam also often disguised its declining performance and increased its return on investments by recognizing non-cash accounting gains derived from negative goodwill and biological assets. This was a significant source of profit for Olam from 2010 to 2012. Since managers themselves decided upon assessed profits and this is what determines the amount of negative goodwill that arises on acquisition, managers could easily manipulate profits using this avenue. Furthermore, recognition of biological assets depended on Olam’s internal pricing model that could be manipulated by top management.
Finally, the company did not sufficiently disclose reasons behind large amounts of expenditure on fixed assets. Muddy Waters was concerned if Olam could earn enough returns on those expenditures and questioned where the money was channeled.
Major Concerns Raised by Muddy Waters Over Olam’s Operation
Olam had a large amount of maturing liabilities that Muddy Waters was concerned about because the company could possibly be unable to pay them off due to its relatively lower cash balance and insufficient earnings and external finances. Furthermore, a significant portion of its cash balance consisted of withdrawals from its brokerage accounts and bank account overdraft. This puts them in a less solvent position.
Also, the profits Olam was making from its subsidiaries in Nigeria and Gabon were not sustainable in the long run due to corruption and political issues in the two countries. Furthermore, a
References: Wong, S. (2010, September 1). How institutional investors should step up as owners. Retrieved March 8, 2015, from http://www.mckinsey.com/insights/risk_management/how_institutional_investors_should_step_up_as_owners Muddy Waters. "Muddy Waters Reaction to Olam Frantic Response." Muddy Waters Research. 20 Nov. 2012. Web. 9 Mar. 2015. <http://www.muddywatersresearch.com/research/olam/mw-reaction-olam-frantic-response/>.