Accounting Case Study
1. Retrieve the SEC's complaint against ClearOne Communications (link provided on Blackboard with the case). Describe management's alleged scheme for inflating revenue.
Management’s alleged scheme for inflating revenue is that in 2001, when the company was not able to meet their sales and revenue goals, they would record sales on the books as soon as products left the warehouse. So if ClearOne shipped a lot of products during the last week of the quarter (or swept the floor as they call it), they would be able to meet their revenue projections. So basically, they manipulated their revenue by placing significantly large orders during the last few days of the quarter. The CEO then had an agreement with other companies or third party garages to send them the shipments at no cost, until the shipments were sold and at no risk to that third party. After the shipments left the warehouse, ClearOne would list the revenue as a receivable on the transaction. ClearOne continued to do this at the end of every quarter, which conflicts with the GAAP principles.
2. The SEC alleges that by the end of fiscal 2002, ClearOne had stuffed inventory costing approximately $11.5 million into the distribution channel. On the basis of that assertion, what was the approximate amount of its alleged revenue overstatement by the end of 2002?
The approximate amount of revenue overstatement by the end of 2002 would be:
3. Does the financial statement data presented support your estimate from question 2? Why or why not?
The data from question 2 does not support my estimate of approximately $28 million because in 2002, the accounts receivable balance should be at least 28 million according to my calculations and the account receivable shown for 2002 is only approximately $20 million. That leaves over $8 million dollars unaccounted for. Product sales increased by $15 million over the last 2 years which is about half of the missing $28 million.
4. The SEC claimed that
Management’s alleged scheme for inflating revenue is that in 2001, when the company was not able to meet their sales and revenue goals, they would record sales on the books as soon as products left the warehouse. So if ClearOne shipped a lot of products during the last week of the quarter (or swept the floor as they call it), they would be able to meet their revenue projections. So basically, they manipulated their revenue by placing significantly large orders during the last few days of the quarter. The CEO then had an agreement with other companies or third party garages to send them the shipments at no cost, until the shipments were sold and at no risk to that third party. After the shipments left the warehouse, ClearOne would list the revenue as a receivable on the transaction. ClearOne continued to do this at the end of every quarter, which conflicts with the GAAP principles.
2. The SEC alleges that by the end of fiscal 2002, ClearOne had stuffed inventory costing approximately $11.5 million into the distribution channel. On the basis of that assertion, what was the approximate amount of its alleged revenue overstatement by the end of 2002?
The approximate amount of revenue overstatement by the end of 2002 would be:
3. Does the financial statement data presented support your estimate from question 2? Why or why not?
The data from question 2 does not support my estimate of approximately $28 million because in 2002, the accounts receivable balance should be at least 28 million according to my calculations and the account receivable shown for 2002 is only approximately $20 million. That leaves over $8 million dollars unaccounted for. Product sales increased by $15 million over the last 2 years which is about half of the missing $28 million.
4. The SEC claimed that