accounting and financial statements may 9th. 2011

Accounting and Financial Statements

May 9th. 2011

2© 2012 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International“), a Swiss entity. All rights reserved. Printed in the Czech Republic.

Contents

Background

History

1. How did we get here?

People, Process and Technology

People

Process

1. ISO9001 – details process maps, Desk top procedures

2. Risk Management

3. Transition

Technology

4. Vision, Control room concept

5. Automation

6. Demo

Questions

Introduction


Your Thoughts about Accounting and Finance

When you hear the terms

Accounting and / or

Finance, what do you think?

What do you know about Accounting /

Finance?

What purpose do you think they serve?

Who decides about these

items?


The Backbone….

No matter what you might thing, or what you might have heard, accounting and finance are the backbone of business!

Accounting tells us what a company has done with its money and how it is doing in terms of profit.

Finance is how companies decide what to do with the money they have and / or how they go about getting more money (from banks, etc.).

Without accounting and finance, the economy cannot work!


ENRON—Why is this so truly important?

ENRON

Enron Corporation was an American energy, commodities, and services company based in Houston, Texas.

Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000.[1]

Fortune named Enron "America's Most Innovative Company" for six consecutive years.

http://en.wikipedia.org/wiki/Houston

http://en.wikipedia.org/wiki/Wood_pulp

http://en.wikipedia.org/wiki/Fortune_(magazine)


ENRON–OOPS!!!

At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal".

Enron has since become a popular symbol of willful corporate fraud and corruption.

The scandal also brought into question the accounting practices and activities of many corporations throughout the United States and was a factor in the creation of the Sarbanes–Oxley Act of 2002.

The scandal also affected the wider business world by causing the dissolution of the Arthur Andersen accounting firm.[2]

Source of slides: Wikipedia.

http://en.wikipedia.org/wiki/Accounting_scandals

http://en.wikipedia.org/wiki/Enron_scandal

http://en.wikipedia.org/wiki/Corporate_crime

http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act

http://en.wikipedia.org/wiki/Arthur_Andersen


Additional Comments

Given that the corporate pensions of those 20,000 employees were invested in ENRON stocks and assets, those individuals lost their life-savings.

Several of the officers in ENRON have served or are serving jail time.

Sarbanes-Oxley is estimated to take 1% of revenue annually for all companies subject to its rules.

The work of auditors has become much more difficult as a result.

THIS SITUATION IS ALSO HELPFUL IN SHOWING HOW ALL OF THE DIFERRENT PARTS OF THE PUZZLE TIE TOGETHER


In Summary....

In the end, it is all about the need for information!!!

So who uses that information?


Users of Financial Information

Looking back at the ENRON situation, who might be a user of financial information?

Management.

Investors (who are “investors?”)

The government

Banks

All of this ties together in the end into an inter-related web of relations between the various actors. Without the financial information that accounting provides, all of this would fail. As such, accounting really is the backbone of the economy!

ManagementHow does management of an entity use financial information?


Management Uses of Information—Introduction

Information coming from the accounting can be used for a number of different things

– Determining profit, knowing how much you own/owe/should receive, determining taxes to be paid, etc. This is the general operations of the company.

– Determining how you are doing compared to last year / compared to the budget / what the trends in performance are.

– Helping decide about future investments, growing the business.

Unfortunately, even some good sized Czech companies are NOT using the information available to them in any way! This is a shame, and it only harms these companies!!!


Case Examples

You are the management of one of the companies below. What type of information would YOU want to have about your company?

• Tesco

• Škoda Auto

• Telefonica O2

• Budějovický Budvar

Four groups, each group to discuss what information they would want to have. And how would you use this information?


What Types of Information are Most Often Used?

Ratios

• Effectiveness Ratios

• Profitability Ratios• Debt Ratios• Working Capital

Ratios (how many days, etc.)

• Earnings per share

Budget

• Budgets are used for planning and setting out expectations.

• We can then track performance compared to expectations.

• We can also track compared to the previous year.

Segments

• We can also track per• Store• Product• Production line• Country• Region• Center• Office

Costs

• Cost per item produced

• Actual cost compared to expected cost

• Cost per segment or other unique area.

In all of these situations, it is also interesting to look at the trends in the ratios, budgets, segments, costs, etc. This also gives management an idea of where things are moving as well


Investment Decisions of Management

How does management decide what to invest in?

Financial analysis

Valuations

Cash Flow analyses IRR (internal rate of return) NPV (net present value)

Ego (no, this is not a joke). Sometimes investment decisions are made that are not driven by purely business considerations, but take ego or mistaken market considerations into account. A classic case is Daimler Chrysler which was meant to be a “marriage of equals” but did not benefit either company in the end. Quite the opposite—one went into bankruptcy and the other’s stock price fell significantly.

In the end, how do such investment decisions of management impact the company?

This leads us to investors....


Users of Financial Information—Management

But first, how did ENRON’s management behave?

To start, they used their accounting just as anyone else would—to track the performance of the business.

However, once things started to go wrong (losses, deals gone bad, investment to write off), they played tricks and hid such losses in special companies that were not included in the group’s accounting.

And once something like this starts, it is nearly impossible to unwind and more and more falsifications are required to keep up the illusion that all is well.

InvestorsHow do investors use financial information?


What do investors want?

First of all, investors are anyone who own a company, whether they be the government, large investors like insurance companies, or individual shareholders / bondholders like you and me.

Our previous example shows that management does NOT necessarily act in the interest of the investors, so how do investors get information?

Questions How do they get the information they need? How do they know it is correct / who controls it? Why do they want this information?

And this is not only for companies that are already own, but also for companies that they would like to buy into, either to buy the whole company or to buy its stocks. The accounting helps tell them how much money they should pay for these assets. The case of AVG...


AVG

Who knows this company? Have you heard anything about it recently?

In January it listed on the stock exchange, not in Prague as other companies like AAA Auto or ECM have done in the Czech Republic, but it listed directly in New York!

Would this have happened if AVG had poor accounting information or if their financial statements were not sound?


What do investors want?

But it is not just about stocks and stock prices!!!

There are thousands of businesses that acquire each other, sell off parts of their businesses, etc., and are not listed on stock exchanges as they are simply not big enough!

These companies need strong, sound accounting to be able to stand up to the processes involved in selling a company.

And what happens if their accounting is not good?

THEY GET LESS FOR THEIR COMPANY, OR CANNOT EVEN SELL IT!!!


Users of Financial Information—Investors

But first, how did ENRON’s investors behave?

Here, the controls went wrong thanks primarily to management’s intentional efforts to fool everyone.

– Investors were intentionally being lied to, so they were unaware of the problems in the company.

– ENRON management was also lying to its auditors and hiding the facts from them as well, so they could not report on this correctly either.

Investors thought they had the right information, but realized only very late that they did not. Once this happened, the ENRON share price collapsed to nearly zero.

Banks and GovernmentInformational needs of these two.


Banks and Governments

These tie everything together:

•Banks are a source of money for companies to use for investment, growth, etc.

•The government sets the rules of the playing field, enforces it, and also collects taxes.

What do these two use this information for?



The Government

• Uses accounting for the purpose of taxation. • Uses accounting for collecting statistical data• Uses accounting to control the accounting of

companies, primarily ones that are listed on a stock exchange. (Unfortunately, this does not always work!)

• The government also decides how accounting should be done and sets “accounting standards.”


Users of Financial Information—Government

With respect to the Government, even the USA’s watchdog, the SEC (Securities and Exchange Commission) was fooled by the false reporting of ENRON?

Both Congress and the SEC realized that there were significant failures in the system and acted accordingly.

– The Sarbanes-Oxley Act was passed. This law defines how accounting should be controlled, makes executives personally liable for the information in the financial statements, defines what auditors can and cannot do in addition to the audit.

This law is meant to be the government’s way to safeguard investors, but it comes with a high price—estimates at 1% of revenue annually are required for listed companies to comply with this law.



SEC

• It is also important to note that laws past in the United States are “extra-territorial” in nature, meaning that ALL companies that are part of a group whose parent is listed on a stock exchange in the Unites States are subject to those same rules!

• So, for example, Microsoft Czech must abide by the rules of the SEC and must be “SOX compliant” (follow the rules of the Sarbanes-Oxley Act).

• As such, the rules of the SEC have a global impact.



Banks

• Use accounting to determine if they will lend money to a company

• Use accounting of a company they have already lent money to control whether the company is following the conditions outlined within the loan contract.



Banks

• Without proper accounting, a company will have difficulties obtaining bank financing for its various projects!

• And poor accounting can also create a situation where a bank refuses to loan more money to a company, even if the reality is that it is successful.

Closing Remarks


Summary

•Management uses it to run their company and to decide about its future. •Investors use it to decide whether they want to put their money into that company. •Banks use it to decide who to loan money to, thus providing liquidity to the market. •The government uses it for taxes and to control the overall system (regulation) to protect investors.

Finance and Accounting are

important because they

provide us with information that is the backbone

of the economy.


Summary

The system is full of traps, pitfalls, and other threats—it is not perfect!

• The case of ENRON was used here to show how bad things can become when someone intentionally tries to make their accounting false.

• However, ENRON is the exception, not the rule, and there are thousands and thousands of positive examples of companies who have gone from small outfits to huge international companies without having to resort to fraud.


Summary

QUESTIONS?

© 2012 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International“), a Swiss entity. All rights reserved. Printed in the Czech Republic.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

Michael Cianci

Director, Accounting Services and PayrollKPMG Česká republika, s.r.o.+420 602 313 [email protected]

mailto:[email protected]




accounting and financial statements may 9th. 2011

Documents

kpmg esk republika

accounting finance

czech republic

terms accounting

services company

innovative company

swiss entity

introduction slide