Wednesday, November 13, 2019
Is it Possible to Forecast Financial Schenanigans Essay -- essays rese
Introduction I found Peregrine’s story on the Internet while doing a Google search. As I was reading â€Å"Financial Shenanigans†from Horward Schilit to prepare for the level 2 of the CFA examination, I decided to have a closer look at the financial statements of Peregrine Systems Inc. that were published before the shenanigans became publicly known (in May 2002) in order to detect those shenanigans solely based on those financial statements – more specifically on the forms 10K filed by Peregrine between 1998 an 2001. Here is a summary of the story, quoted from the court that had to rule on those irregularities: 1.Peregrine Systems, Inc. (â€Å"Peregrine†) was a computer software company headquartered in San Diego, California. Peregrine was incorporated in California in 1981 and reincorporated in Delaware in 1994. From its initial public offering (â€Å"IPO†) in April 1997 until it was delisted on August 30, 2002, Peregrine was a publicly held corporation whose shares were registered securities traded under the symbol â€Å"PRGN†on the National Association of Securities Dealers Automated Quotation system (â€Å"NASDAQ†), a national securities exchange that used the means and instrumentalities of interstate commerce and the mails. 2. Peregrine developed and sold business software and related services. Software license fees accounted for the bulk of Peregrine’s publicly reported revenues. Peregrine sold its software directly through its own sales organization and indirectly through resellers such as value added resellers and systems integrators. 3. From its IPO in April 1997 through the quarter ended June 2001, Peregrine reported 17 consecutive quarters of revenue growth, always meeting or beating securities analysts’ expectations. Peregrine's stock price soared from its April 1997 IPO price of approximately $2.25 per share (split adjusted) to approximately $80 per share in March 2000. By March 2002, Peregrine had issued over 192 million shares. 4. In May 2002, Peregrine disclosed that its prior public reports had been materially false and that it had employed a variety of devices, schemes and fraudulent accounting practices over an extended period of time in order to portray itself as far more healthy and successful that it actually was. After Peregrine disclosed its true financial results and condition, its stock price dropped precipitously and now trades at below $1 per share... ...the shrinking size of the 10K that went from 1330 pages in 1999 to 154 pages in 2001. That implies that the company disclosed significantly less information on the way it constructed its financial statements. This study also found some weaker warnings, but failed to find the heart of the gimmicks. I don’t think that those warnings could lead to any conclusion by themselves, as there may be some noise even in a healthy company. What actually happened? Peregrine:  §Ã‚     Inflated revenue by recording sales to resellers that weren’t finals  §Ã‚     Sold false invoices to banks  §Ã‚     Improperly accounted for cash collection  §Ã‚     Improperly wrote off receivables  §Ã‚     Improperly accounted for stock options  §Ã‚     Failed to maintained adequate books and records It seems that even if they inflated revenue, they had a strong business activity (even if it wasn’t as large as what their statements indicated) – the other gimmicks didn’t involve revenue. Their stock price, which hit a low of $2.25 during the crisis, is now trading in the $20 range Is it Possible to Forecast Financial Schenanigans Essay -- essays rese Introduction I found Peregrine’s story on the Internet while doing a Google search. As I was reading â€Å"Financial Shenanigans†from Horward Schilit to prepare for the level 2 of the CFA examination, I decided to have a closer look at the financial statements of Peregrine Systems Inc. that were published before the shenanigans became publicly known (in May 2002) in order to detect those shenanigans solely based on those financial statements – more specifically on the forms 10K filed by Peregrine between 1998 an 2001. Here is a summary of the story, quoted from the court that had to rule on those irregularities: 1.Peregrine Systems, Inc. (â€Å"Peregrine†) was a computer software company headquartered in San Diego, California. Peregrine was incorporated in California in 1981 and reincorporated in Delaware in 1994. From its initial public offering (â€Å"IPO†) in April 1997 until it was delisted on August 30, 2002, Peregrine was a publicly held corporation whose shares were registered securities traded under the symbol â€Å"PRGN†on the National Association of Securities Dealers Automated Quotation system (â€Å"NASDAQ†), a national securities exchange that used the means and instrumentalities of interstate commerce and the mails. 2. Peregrine developed and sold business software and related services. Software license fees accounted for the bulk of Peregrine’s publicly reported revenues. Peregrine sold its software directly through its own sales organization and indirectly through resellers such as value added resellers and systems integrators. 3. From its IPO in April 1997 through the quarter ended June 2001, Peregrine reported 17 consecutive quarters of revenue growth, always meeting or beating securities analysts’ expectations. Peregrine's stock price soared from its April 1997 IPO price of approximately $2.25 per share (split adjusted) to approximately $80 per share in March 2000. By March 2002, Peregrine had issued over 192 million shares. 4. In May 2002, Peregrine disclosed that its prior public reports had been materially false and that it had employed a variety of devices, schemes and fraudulent accounting practices over an extended period of time in order to portray itself as far more healthy and successful that it actually was. After Peregrine disclosed its true financial results and condition, its stock price dropped precipitously and now trades at below $1 per share... ...the shrinking size of the 10K that went from 1330 pages in 1999 to 154 pages in 2001. That implies that the company disclosed significantly less information on the way it constructed its financial statements. This study also found some weaker warnings, but failed to find the heart of the gimmicks. I don’t think that those warnings could lead to any conclusion by themselves, as there may be some noise even in a healthy company. What actually happened? Peregrine:  §Ã‚     Inflated revenue by recording sales to resellers that weren’t finals  §Ã‚     Sold false invoices to banks  §Ã‚     Improperly accounted for cash collection  §Ã‚     Improperly wrote off receivables  §Ã‚     Improperly accounted for stock options  §Ã‚     Failed to maintained adequate books and records It seems that even if they inflated revenue, they had a strong business activity (even if it wasn’t as large as what their statements indicated) – the other gimmicks didn’t involve revenue. Their stock price, which hit a low of $2.25 during the crisis, is now trading in the $20 range
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