FSR Forum 16-03 Fraud and Ethics

16th Volume June 2013 Issue #3

Fraud and Ethics Interview André Ruiz de Roxas

Column M. de Kiewit

Column G. Groeneveld

p20

p18

p22

International lawyer at PwC

“De trein gemist: Fyra”

Ondernemers helpen groeien met jouw cijfermatig inzicht?

Looking for an internship or a job?

Check our website

Financieel talent Sta jij aan het begin van een carrière als accountant of fiscalist? Dan is het goed om jezelf af te vragen waar jouw financieel inzicht het best tot zijn recht komt. Bij Baker Tilly Berk controleer je niet alleen het verleden, maar adviseer je ook over de toekomst van een bedrijf. Baker Tilly Berk combineert een landelijke aanwezigheid en een internationaal netwerk met kleinschalige kantoren dichtbij onze klanten. Die jij al snel persoonlijk kunt adviseren. Je werkt bijvoorbeeld mee aan de uitbreiding van een transportonderneming, de fusie van twee bedrijven of een audit in de publieke sector.

Om ondernemers te helpen groeien zoeken we medewerkers die zelf ook ondernemend zijn en zich continu willen ontwikkelen. Denk jij dat de rol van adviseur bij jou past? Dan hebben we voor jou ook een goed advies: werkenbijbakertillyberk.nl.

www.werkenbijbakertillyberk.nl

www.FSR.nl/carriere ACCOUNTANTS EN BELASTINGADVISEURS

fsrforum • volume 16 • issue #3

Venture Capital

Preface

Dear readers, In front of you lies the third edition of the 16th volume of the FSR Forum. The last phase of the academic year started and we already announced our successors of the XVII FSR Board.

Perhaps you are the one who will write this foreword next year!

The theme of this edition is Fraud and Ethics. The past years you have probably noticed several cases of corporate fraud in the newspapers. Ethical issues have got more attention in corporate issues affecting the company. Stakeholders are interested in how companies address this issue.

Corporate Social Responsibility (CSR), sustainability programs and general codes of conduct are criteria for shareholders whether or not to invest in the company. The corporate role of a company in society is part of the public image of the company and needs attention. Hopefully, after reading this edition you will get a practical inside of what is meant with Fraud and Ethics in accounting.

As in previous editions this edition includes three scientific articles. These articles will give you a better understanding about Fraud and Ethics in general and what the boundaries are. The first article is written by K. W. Kheng Soon. In this paper K. W. Kheng Soon briefly analyzes the recent literature and theories on earnings management and show the techniques used by managers to manipulate earnings.

The second article is written by Rania Ahmed Azmi. This research will explore the growing issue of business ethics particularly as a competitive advantage. The paper also analyzes business ethics as a threat to business competitiveness, when ethical failure diminishes the reputation of a company and its products, locally and globally.

The last article is written by R.W. McGee. In this paper he writes about the ethical literature on hostile takeovers and applies ethical theory to some of the defensive tactics that have been used to thwart unwanted takeovers.

As usual, the News-update in the FSR Forum is related to the topic of the FSR Forum. In this News-update you can read about fraud within a company.

In the remainder of this FSR Forum you will find an overview of our activities that have taken place. You will find a short description of the Dinners, Finance Day, Valuation, International Research Project and Clean Tech Challenge.

Finally I would like to make you aware of the fact that we are not only looking for our successors, but also for new committee members for the next academic year. As a committee member of the FSR you will gain a set of skills and gain insight into the job market, making it easier to choose your own career path and have a lot of fun during the activities which we organise for our active members.

If you are interested, or if you want to know more about a committee at the FSR, please do not hesitate to contact us, either by sending an e-mail to hr@fsr.nu or by coming by our office at H14-06.

I hope you will enjoy reading this FSR Forum and I wish to see you next year in one of our committees.

Sincerely, Martine Nieuwenhuijzen Kruseman Editor in chief FSR Forum FSR board 2013-2014

For the practical side of Fraud and Ethics we had an interview with André Ruiz de Roxas. He is an international lawyer working with the PwC Office of the Global General Counsel, with a focus on providing legal support to firms in Continental Europe.

Furthermore, you will find a column written by a professor in this FSR Forum. The column is written by drs. de Kiewit, Head of Ethics & Compliance Management of KPMG Forensic Switzerland and part time lecturer Business Ethics. Drs de Kiewit talks about the fact that women are underrepresented in crime in general and specifically in fraud.

In this edition we also have a column of mister Groeneveld. In his column mister Groeneveld discusses the current issues around de Fyra train.

The FSR Former board member column is written by Eefke van der Meer, who is still very committed to the FSR, since she takes place in the Advisory Board. The FSR Member column is written by Robin Touw, who is doing the FAN committee this year and got a thesis internship through the FSR Big4 Cycle.

2 • Preface

Preface • 3

fsrforum • volume 16 • issue #3

Fraud and Ethics

Table of contents

Business Ethics as Competitive Advantage for Companies in the Globalization Era

Interview André Ruiz de Roxa

Companies are dedicated to being sustainable organizations through building long-term shareholder value while being a responsible corporate citizen. It is globally believed that the only way to achieve that is to incorporate economic, social and environmental codes of conduct into business strategy. This research will explore the growing issue of business ethics as a source of 6 competitive advantage.

Column professor

K. W. Kheng Soon

This paper sheds light on the use of accounting discretion to address financial statements. It seems to be eroding public confidence in the financial reporting process. Some managers are abusing GAAP’s afforded discretion to manage earnings thus reducing the quality of the financial reporting process. Market participants, legislators, regulators, and academics are concerned in order for them to have the need to control financial reporting abuse.

9

Some Overlooked Ethical Issues Acquisitions and Mergers This paper reviews the ethical literature on hostile takeovers and applies ethical theory to some of the defensive tactics that have been uses to thwart unwanted takeovers. The focus will be on the fiduciary duties of top management and ethical issues involved with poison pills, greenmail, golden parachutes and other defensive tactics.

14

16th volume, number 3, circulation 1900 copies

4 • Table of contents

Editorial department Lisanne Frijling Myrna Baadjou Editorial advisory Dr. M.B.J. Schauten Dr. W.F.C. Verschoor Drs. R. Van der Wal RA

Baker Tilly Berk www.werkenbijbakertillyberk.nl

M. de Kiewit Column Joost Groeneveld PhD

29

PwC www.werkenbijpwc.nl

“De trein gemist: Fyra”

Word of the Chairman

28

News Update

26

FSR former board member

31

FSR member

32

Activity reports

33

Company Presentations

R.W. McGee

With the cooperation of R. Ahmed Azmi K. Wee Kneng Soon R. W. McGee M. de Kiewit Drs. J.G. Groeneveld RA RV E. van der Meer R. Touw

23

FSR News

Earning Management: Is it Good or Bad?

Editor in chief Martine Nieuwenhuijzen Kruseman

Advertisers

International lawyer at PwC

R.A. Azmi

Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913

21

Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu

EY www.ey.nl/carriere

Subscription EUR Students through membership FSR; costs E 5,00.

Others through subscription. To obtain information, contact the editorial department; costs E 27,50 (including VAT and postage).

Bank ABN-AMRO 50.15.61.331

25

Address Changes Send an e-mail to secretary@fsr.nl or fill out the form on www.fsr.nl.

Graphic Design and printing Haveka the graphics partner www.haveka.nl Photos and illustrations www.istockphoto.com

Advertising acquisition Floris Mathol No portion of the information in this ­magazine may be reproduced in any form or by any means without the prior written consent of the editorial board. Although the information is with great care collected, the correct functioning is in no manner guaranteed.

Table of contents • 5

fsrforum • volume 16 • issue #3

Business Ethics as Competitive Advantage for Companies In the Globalization Era R.A. Azmi

II. Globalization, Business Ethics and Competitive Advantage

For a long time people believed that

Industries and companies globalize because shifts in technology, customer needs, government policy, or country infrastructure create major differences in competitive position among companies from different nations or make the advantages of a global strategy more significant. Firms are on the front line of international competition. They must increasingly compete globally (Porter, 1998).

the only purpose of industry is to make a profit – They are wrong.

Business ethics is a function of the business ethos within itself, the mentality of business may be a game mentality, but not all of business ethics are defined by this game like business ethos or by the business community. The nature of business is defined by existing trends in the society where business operates. Society tends to encourage or discourage particular aspects of business on the basis of its own ideals and wellbeing.

Sustainable competitive advantage has proved elusive for companies in the 1990s. While making enormous investments in technology, research and state–of–the art marketing, many of today’s managers seem to ignore the single most important factor in achieving and maintaining competitive advantage: People (Pfeffer, 1994).

I. Introduction Ethics is primarily a communal, collective enterprise, not a solitary one. It is the study of our web of relationships with others. When Robinson Crusoe found himself marooned and alone on a tiny pacific atoll, all things were possible. But when Friday appeared and they discovered pirates burying treasure on the beach, Crusoe was then involved in the universe of others, an ethical universe (Gini, 1996).

Companies do not operate in a vacuum but rather are plunged in a universe of relationships with multiple stakeholders. With the globalization the scenario in which companies operate has become even more complex, given the emergence of global groups of stakeholders. Furthermore, globalization has also increased the levels of competition among firms, which look for new a creative ways to create a competitive edge (Friedman, 2000).

In this context, Business Ethics becomes a prerequisite for conducting any type of business, particularly in the global marketplace. Traditionally, there have been two views on the role of ethics in business. The first perspective is that the corporate executives’ sole responsibility is to maximize the shareholder’s value. The second view is that “ethics pays,” which implies that acting in a socially responsible way towards shareholder will automatically enhance shareholder wealth (Verhezen, 2005).

There is also an argument that ethics are natural market consequence of business – customers, clients, employees all want their companies to be ethical, so it is the company’s best interests to be so.

Norton Juster, as cited by Hartman (2005), stated that, “From here that looks like a bucket of water, but from an ant’s point of view, it’s a vast ocean; from an elephant’s point of view, it’s just a cool drink; and to a fish, of course, it’s home.”

6 • Business Ethics as Competitive Advantage for Companies In the Globalization Era

Juster’s statement is to imply, if we are to conduct an analogy, the different views of stakeholders around the company about its importance for them, but after all the company itself is the most interested one in its prosperity. Business ethics to one company could be one of the valuable intangible assets for competing in today’s business world. In essence, business ethics could be viewed similarly by a company and its stakeholders if business ethics are to be competitive advantage.

Business ethics to one company could be one of

In this regard, it is important to design an ethics program that is perceived by employees to be first and foremost about shared organizational values and about guiding employees to act on their ethical aspirations. Ethics program that guides the process of value creation within a company in a unique way is actually a critical source of competitive advantage.

When a company is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors, then we can say the company has a competitive advantage. And when potential or actual competitors are unable to duplicate the benefits of this strategy, then we can say that the company has a competitive advantage that derives from business ethics.

the valuable intangible assets for competing in

Globalization has brought about greater involvement with ethical considerations and most importantly achieving competitive advantage through business ethics.

today’s business world

The next section of the paper will discuss how companies in today’s world are trying to have their own business ethics not only as a critical requirement for competing and being trusted by the mass stakeholders, but also for achieving sustainable competitive advantage.

The present paper presents a brief review of the existing literature on the potential/actual role of business ethics as a firm’s competitive advantage.

First of all, the need for a company to behave “ethically” is described in terms of a company’s need to interact productively with its stakeholders. Then, the second section of the paper discusses the concept of business ethics as a firm’s competitive advantage within the context of globalization.

Part three analyzes the need to shift from the “ethics of scandal” to the “ethics of strategy” in today’s world. Part four highlights the need to examine business ethics as an advantage both in long- and short-term competitive situations. Our concluding remarks suggest a few ideas for future research.

III. “Ethics of Scandal” Versus “Ethics of Strategy” In recent years, the spotlight on corporate world has revealed corporations’ misuse of their shareholders’ and stakeholders’ trust. In the wake of numerous recent corporate scandals (ex.

Enron, WorldCom, etc.), politicians and law makers have suggested more stringent reporting and control to restore the reputation of the corporate world.

However, strict reporting, detailed codes of conduct and regulations and rules are certainly necessary but not sufficient.

A firm with a good reputation is one with an image that fits

Its purpose is to serve the general welfare the ethical values of an individual agent, and which when it is relevant, fosters good relationships (Geoghegan & Azmi, 2005).

Corporate reputation reflects the organization’s strategy, culture, and values. A good corporate reputation signifies trust in a firm; it creates an emotional and intellectual bond with a number of stakeholders and acts as the source of authority and credibility for all the company’s dealings “ethics of strategy” (Verhezen, 2005).

It is increasingly important for companies to deal with ethics as a corporate strategy that, if uniquely implemented, could achieve competitive advantage for the company rather than waiting to react to possible ethical issues of importance to the targeted stakeholders. It is the necessity of being ethically proactive company rather than being ethically reactive company.

IV. Business Ethics as Competitive Advantage Business ethics should become part of corporate codes, and if implemented in the line of business as a corporate philosophy it should help achieving a competitive advantage for the firm. While short-term competitive advantage is obtained by appealing to customers in targeted external markets (in the context of globalization), long-term sustainable competitive advantage is the result of exploiting an enduring core of relevant capability differentials cultivated by responsible management of tangible and intangible internal skills and assets (Petrick & Quinn, 2001).

Business ethics of a firm has been defined as one of the invaluable intangible assets for competing. In general, intangible assets are assuming increasingly competitive significance in rapidly changing domestic and global markets. As the speed of comparable tangible assets acquisition accelerates and the pace of imitation quickens, firms that want to sustain distinctive global competitive advantages need to protect, exploit and enhance their unique intangible assets, particularly integrity (building firms of integrity is the hidden logic of business ethics).

Sustainable global competitive advantage occurs when a company implements a value-creating strategy which other companies are unable to imitate. For example, a company with superior business leadership skills in enhancing integrity capacity increases its reputation capital with multiple stakeholders and positions itself for competitive advantage relative to companies without comparable leadership performance. Companies could perceives stakeholder interdepend-

»

Business Ethics as Competitive Advantage for Companies In the Globalization Era • 7

fsrforum • volume 16 • issue #3

Globalization has brought about greater

involvement with ethical considerations

Earning Management: Is it Good or Bad?

and most importantly achieving competitive advantage through business ethics

ence, demonstrate ethical awareness, and respond effectively to moral issue management put themselves in a position of a competitive advantage in comparison to other companies without those internal resources, by providing a more comprehensive list of ethics capacities (Petrick & Quinn, 2001).

International organizational leaders can and should be held accountable for enhancing the intangible strategic asset of integrity capacity in order to advance global organizational excellence.

The marketplace with globalization is becoming increasingly aware of, and increasingly discriminating against, corporations that fail to meet the criteria of ethical business operations and ethical management principles (Svensson & Wood, 2004).

Furthermore, sustaining advantage requires change. It demands that a corporation exploit, rather than ignore industry trends (one of the major trends is the demand of business ethics). It also demands that a company invest to close off the avenues along which competitors could attack (Porter, 1998).

Business ethics as competitive advantage involves effective building of relationships with a company’s stakeholders based on its integrity that maintains such relationships.

Business relationships, like personal ones, are built on trust and mutual respect (Boatright, 2005; White, 2006).

Successful business must treat the parties affected by the corporation’s actions as constituents to be consulted rather than spectators to be ignored. Doing so was just smart business. This was a novel step in that it was among the first attempts to characterize the impact of ethical behaviour on a company’s financial performance. As Henry Ford, Sr. once said: “For a long time people believed that the only purpose of industry is to make a profit – They are wrong. Its purpose is to serve the general welfare.” (Harting, Harmeling & Venkataraman, 2006).

V. Concluding Remarks and Future Research A recent cartoon appeared on the Executives journal portrays a CEO coming back from a seminar, announcing: “People, this year’s buzz word is “Honesty”! And his VP says “Brilliant, chief—but risky!” (Cazalot, 2005)

8 • Business Ethics as Competitive Advantage for Companies In the Globalization Era

This cartoon implies the importance of shifting from the “ethics of scandal” to the “ethics of strategy” where the CEO and his/her VP could perceive business ethics and corporate honesty as invaluable assets that, if effectively managed, could strengthen a company’s competitive advantage. Ethics is simply the proper way to conduct business and, despite what the cartoon says, a responsible business is risk-free.

An integrity approach to business can yield strengthened competitiveness: it facilitates the delivery of quality products in an honest, reliable way. This approach can enhance work life by making the workplace more fun and challenging. It can improve relationships with stakeholders and can instil a more positive mindset that fosters creativity and innovations. The purpose of ethics is to enhance our lives and our relationships both inside and outside of the organization.

As the competitive environment with globalization could be characterized by the game metaphor rather than the war metaphor (the traditional metaphor usually used for characterizing competition), it is increasingly important to include ethics in the corporation’s strategy and potentially implement it in a way that achieves a competitive advantage for the company and adds value to the stakeholders.

The metaphor of a game sees competition in business as an exciting game, in which each competitor strives to achieve excellence, satisfy customers, and succeed as a result. The motive in this type of game is not to drive out the competition, but to work hard, play by the rules of the game, and do one’s best in order to succeed (Shleifer, 2004; Trevino & Weaver, 1997).

Last but not the least, there is another face of business ethics that could be managed also to gain a competitive advantage, which is corporate ethics. On the one hand, business ethics has an external emphasis. Business ethics considers the gap between the corporation’s ethical behaviour and the market place’s perception of the corporation’s ethics in its business operations. Corporate ethics, on the other hand, has an internal emphasis and this could be well managed toward a unique competitive advantage as anything related to people (corporate ethics through people) is very difficult to imitate and this raises the chances of achieving a sustainable competitive advantage. Future researches are needed in this particular issue of corporate ethics as sustained competitive advantage.

K.W. Kheng Soon

1.0 Introduction This research paper is to examine whether earning management is it good or bad. Though there is so many debate about whether it should be accepted to be good rather than bad, however, this research will explain the both side of earnings management. Earnings management reduces the quality of financial reporting, it can interfere with the resource allocation in the economy and can bring adverse consequences to the financial market. The last few years many cases of severe accounting manipulation occurred leading to the collapse of several major corporations such as Enron, Parmalat, Refco and Worldcom whereby their earnings management need no additional comments because of the damages they brought to the economy. This research paper analyzes both, causes and motives of earnings management as well as possible remedies. Therefore, it is not surprising that market participants, legislators, regulators, and academics are concerned with the need to control financial reporting abuses. Responsible authorities seem to be concerned with the pervasiveness of earnings management. Since 1998, after Levitt's speech addressing the need to control earnings management, the Securities and Exchange Commission (SEC) has been on the lookout for selective disclosure. Business Week recently published that the number of restatements more than tripled in the last 3 years briefly review the recent literature on earnings management and show the incentives as well as the techniques used by managers to manipulate earnings.

1.1 Objective Objective of this paper is to do a research on the definition or meaning of “Earning Management” and how the effect to the

good side and the bad side of it and what are the remedies or solution in the future. Prior to the research, I will quote some of the previous and recent literature review or theories to explain the said definition, outline the reason for the impact to appreciate the good and the bad of earnings management. I will conclude my paper by summarizing this research paper with strategic aspect of right ethics of accounting policy and recommended solutions thru initial stage of education, training and awareness to accounting students and external users on earnings management within GAAP guidelines and tools to auditors to spot some of techniques used for earning management.

2.0 Literature and Theories Literature review in earnings management proposes different theories for why firms manage earnings. Prior to recent scandals in accounting, creating volume of new literature on the quality of earnings and the earnings management phenomenon. At least one aspect of earnings management— income smoothing—has been known and debated since before Ronen and . Sadan’s 1981 Smoothing Income Numbers: Objectives, Means, and Implications, as attested to by their excellent summary of a vast number of empirical studies on the subject up to that time. One of the theory, Healy and Wahlen (1999) observed that many aspects of this definition deserve additional comments. Earnings management occurs when managers use their judgment in financial reporting and in structuring transactions to alter the financial reports to either mislead some stakeholders about the underlying economic performance of the company or even to influence contractual outcomes that depend on reported accounting numbers referred by (HEALY; WAHLEN, 1999).

»

Earning Management: Is it good or Bad? • 9

fsrforum • volume 16 • issue #3

Studies of specific earnings management tools and the effect of earnings management on resource allocation was suggested. At that time, they urged the accounting profession to consider areas where standards could be altered to decrease the ability to manipulate earnings—places where it would make the most difference in assuring efficient resource allocation. Healy’s evidence that bonus plans motivate earnings management helps students to take contracting theory seriously. It opens up a whole new set of considerations in accounting policy choice beyond the disclosure of useful information to investors. Watts and Zimmerman (1978) had reffered to the argument that managers alter reported accounting numbers to maximize their bonus, avoid tripping debt-covenants written on accounting numbers or to reduce their firm’s political visibility. Graham, Harvey and Rajgopal (2005) had done a survey with Chief Financial Officers who indicate they manage earnings to maintain or increase the stock price of their firms. A vast literature reffered by (Fields, Lys and Vincent 2001) for references) has validated the Watts and Zimmerman (1978) propositions. However, there is managerial incentives to manage earnings to address stock price concerns are relatively under-explored.

among corporate managers, auditors, and analysts (Levitt, 1998, p. 14). He put the accounting profession on notice that those who are operating in the gray area between legitimacy and outright fraud are poisoning the financial reporting process (Levitt, 1998, p. 19).

had been used by some companies to influence the figures by bending the rules rather than breaking them, anticipate or increasing the income reduce or delay the recognition of the expenses and shifting way from debt or losses.

3.0 Earnings Management?

3.1 Flow of Earnings Management

Accrual accounting will lead to smooth earnings and generate a number that is more useful for investor to predict future earrings compare to cash accounting. In order to describe on earnings management I need to define the point at which managers’ accrual decisions result in too much smoothing and so become earnings management (Dechow and Skinner 2000).Analyze conservative accounting, neutral accounting, aggressive accounting, and fraudulent accounting, I can make distinction between fraud and earnings management (Dechow and Skinner 2000). Dechow and Skinner [2000] contrasted the perceptions of academics, practitioners, and regulators, finding that academics are less disturbed by earnings management (understating the problem due to the belief in efficient markets and difficulty in modeling earnings management) than are regulators and practitioners (who overstate the problem because of the inherent flexibility of GAAP, the existence of full disclosure, and the growing number of creative accounting innovations).In late 1998. the former Chairman of the Securities and Exchange Commission (SEC) Mr. Arthur Levitt referred earning management to as a process that has become a “game of nods and winks”

In accordance to Healy and Wahlen (1999), "Earnings Management" occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of a company or influence the contractual outcomes that heavily depend on reported accounting numbers. Earnings management is the choice by a manager of accounting policies, or real actions that affect earnings, so as to achieve some specific reported earnings objective. Earnings management involves the artificial increase (or decrease) of revenues, profits, or earnings per share figures through aggressive accounting tactics on all earnings. Aggressive earnings management is a form of fraud which differs from reporting error.

He put the accounting profession on notice that those who are operating

in the gray area between legitimacy and outright fraud are poisoning the financial reporting process 10 • Earning Management: Is it good or Bad?

The definition of earning management was given by Schipper (1989, 1992) who defined it as "… purposeful intervention in the external financial reporting external process with intent to obtain some private gain."

Aggressive earnings management is a form of fraud which differs from reporting error

Most of this happen is when management of the companies need to present and show the earnings at a certain level or certain loopholes in financial reporting standards. Practically, the management will alter the numbers to achieve desired aims or to satisfy projections by financial analysts or in other words attempts by management to influence or manipulate reported earnings by using specific accounting methods (or changing methods), recognizing one-time nonrecurring items, deferring or accelerating expense or revenue transactions, or using other methods designed to influence short-term earnings.These are fraudulent reporting due to not fulfilling the accounting practice principles with the techniques of revenue recognition, accounting policy change, timing adoption of new standards, write-off, asset sales, provisions, accruals(discretionary) and direct charges to retained earnings. Market expectation sentiment, individual bonus, to maintain position in the specific industry.

All this probable actions is due to downturn in business.

Accounting practice principles need to adhere such as integrity of individual. Types of Earning Management is a) Unsuitable revenue recognition b) Inappropriate accruals and estimates of liabilities c) Excessive provisions and generous reserve accounting d) Intentional minor breaches of financial reporting requirements that tied to material breach. All of this

Good Earning Management

Pattern of Earning Management

Motivations

Accounting

of Earning

Implication

Management

Bad Earning Management

Based on the figure (a) as shown above, we can see how the flow of the earning management. We will need to spot the pattern of the earning management. Identify what is key driver of motivation either an earning management is good or bad. This will enable us to analyze the good and bad side nature of the earning management, resulting to the implication of the accounting principles and financial reporting. The whole chronological of the flow will be explained as below.

A) Pattern of Earning Management 1) Big Bath accounting is the process where publicly traded corporations write-off or write-down certain assets from their balance sheets in a single year. The write-off will help removes or reduces the asset from the financial books and results in lower net income for that year.

2) Income Minimization 3) Income Maximization 4) Income Smoothing

B) Motivations of Earnings Management 1) Contractual motivations • Bonus plan hypothesis: to manage cash bonus - Evidence and Findings from Healy (1985) • Debt covenant hypothesis: to manage debt covenants - Research thru evidence from Dichev & Skinner (2002) 2) Political cost hypothesis • To lower political “heat” • Cross-examining report from Jones (1991) 3) Some of the driver of earnings management to meet earning expectations:• Significant negative effects on share price and manager reputation if expectations not met • Other motivations • Initial public offerings

C) Good Side of Earning Management There is definitely a good side of earning management if it is properly practice for the benefits of the companies prior to achieving the key performance objective of the companies.

Good earnings management means “reasonable and proper practices”. “Accounting Subjectivity and Earnings Management: A Preparer Perspective” referred by Parfet (2000 p.

487) contends: calls attention to “the context in which decisions are made, where subtle effects from human perceptions and peer pressures, the complexity of combined factors, and a high-stakes business environment all impact good people who are trying to do their jobs with integrity. Good side of earnings management describe in the arguments shown in (1) and (2).It briefly describe, from contracting perspective earnings management was anticipated by the principal when the bonus contract was being negotiated, so that it is allowed for in setting the bonus rate. Firstly, lowering contracting costs in the face of rigid and incomplete contracts. Secondly, earnings management can reveal inside information to investors. One of the example usually referred to is General Electric Co. (GE) as simple announcement by GE of its persistent future earnings is ‘blocked.”

The two arguments mentioned below on good side of earnings management as below was referred thru online by Robert C. Lipe (2001) .

1) Incentives given on contracts a) Bonus is given on net income referring to contract • Volatility of the new accounting standards may lead to lower net income • May adversely affect manager effort b) Debt covenant contracts • New accounting standards may increase probability of debt covenant violation • Contract violation is costly, earnings management may be low-cost way to work around 2) Investor-based arguments Credibly communicate inside information to investors a) Blocked communication may inhibit direct disclosure of earnings expectations b) Discretionary accrual management as a way to credibly reveal management’s inside information about earnings expectations, some of examples :• Manager foolish to report more earnings than can be maintained • Manager reported earnings to an amount management expects will persist

D) Bad Side of Earning Management Bad earning management means intervention to hide real operating performance. Some of the techniques used that will influence bad earnings management is as follow below based on my investigation from some of the research done in the past.

1) Contracting Perspective From a contracting perspective, we can think that managers manage earnings to opportunistically maximize their utilities. Healy (1985) examines that managers act on their self-

»

Earning Management: Is it good or Bad? • 11

fsrforum • volume 16 • issue #3

Aggressive earnings management is

a form of fraud which differs from reporting error interest when their bonus schemes are tied to the reported net incomes. However, managers not only manage earnings for self-interests but also manage earnings for an efficient contracting. Healy (1985) found that managers utilize such information superiority to maximize their wealth on their bonus scheme which suggests that managers might possibly manage earnings to protect their bonuses. This is the contract between the firm and the managers. Research examining SEC enforcement actions has found that accrual information is a key determinant of the earnings manipulation (Dechow, Sloan and Sweeney, 1996). Therefore, it is reasonable to assume that earnings restatement firms can be characterized as firms who knowingly and intentionally engaged in earnings manipulation.

2) Financial Reporting Perspective Based on Hanna (1999) article in CA magazine review, important point to get across from this article is that management is tempted to provide excessive unusual, non-recurring and extraordinary charges, to put future earnings in the bank.

Furthermore, these future earnings are buried in operations.

This makes it difficult for investors to diagnose the reasons for subsequent earnings increases.

Investors and analysts look to core earnings, ignoring extraordinary and non-recurring items Implies manager not penalized for non-core charges, such as write-downs, provisions for restructuring. But current non-core charges increase core earnings in future years, through lower amortization and absorption of future costs. As a result, managers tempted to “overdose” on non-core charges, thereby putting earnings “in the bank” also called cookie jar accounting.

Referring to securities market reaction, Hanna found evidence that market uses frequency of such charges as proxy for their misuse--lower ERC when greater frequency ( example: Nortel Networks’ reversals of its excess accruals)

E) Implication to Accounting 1) Earnings management can be good if used responsibly I investigate that even some of the evidence from” Arya, Glover, and Sunder (2003) asks the question, “Are Unmanaged Earnings Always Better for Shareholders?”: Practice of “Income manipulation is not an unmitigated evil: within limit it promotes efficient decision” [p 111]. It is also management’s ability to distinguish transient changes in income from permanent income better than external users. Investing public doesn’t really want to know what a firm made this year; they are really only interested in its promise for the future Focus had been made to ensure increase in the income by the management to ensure the performance of the companies.

2) Full disclosure helps to control bad earnings management • Revenue recognition policies

12 • Earning Management: Is it good or Bad?

• • •

Unusual, non-recurring and extraordinary events Enables investors to better evaluate earnings persistence Effect of previous write-offs on current core earnings

4.0 Future Research Prior to future research, a lot more need to be done to curb all malpractice in the accounting principles, though SEC’s effort on cracking down on earnings management abuse. Proactively approach need to be taken by the profession of public accounting. Training schemes need to be given to auditor’s with annual update on how they are perpetrated. What steps need to be taken knowing that there is manipulation of earnings within GAAP and income smoothing such as inappropriate revenue recognition, accounting policy change, timing adoption of new standards, write-off, asset sales, provisions, accruals(discretionary) and direct charges to retained earnings and all the other accounting and fraudulent reporting.

Professional code of ethics in terms of credibility, integrity and confidentiality had been questionable without doubts, furthermore, companies or corporations with such practice will lose credibility in the capital markets though facing with new laws to curb such conduct and management practices such as the Sarbanes-Oxley Act. Accounting profession have to return to its ethical values traditional, however, the questions is how does this relate to the earnings management debate? How do we restore “public confidence in [our]…service” [p. 48]? Awareness and further educating accounting student on what Parfet referred to as earning management (vs manipulation) with the abusive of earning management practices, better help them to share the right ethics practice with their financial managers and other superiors. In addition, more effort of introducing tools necessary to identify earnings management techniques to better equip Chartered Public Accountant (CPA).

Education will reduce the expectations gap between auditors and financial statement users. Most firms that fraudulently misstated earnings through earnings management had employed Big Five public accounting firms as their auditors referred by Robinson-Backmon and Finney (Research on Accounting Ethics 1999, 5: 77-93). Education thru business and professional publications could help their readers by publishing articles on how to detect and deter earnings management schemes.

There is even suggestion in the future that that since auditors are in the best position to assess a firm’s earnings quality because of their familiarity with GAAP, the client’s controls, and its business practices. Researchers have proposed that auditors should prepare a “quality of earnings report” on the income statement. Finally, in accordance to the benefits of the investing public (external user) or even students clearer understanding of earning management is (and/more importantly, is not) necessary to ensure an accuracy of understanding towards the future of accounting information.

agement not only due to violation of GAAP but also aggressively choose GAAP method that are considered as earnings management. This broad definition may discourage earnings management and benefit financial statement users by increasing the quality of the information provided. Earnings management can be examined from different aspects thru many ways. There is a relationship between professional ethics and earnings management. A strong sense of ethics would discourage earnings management. As manager he has a potential to assess accounting treatment in favor of his interests according to agency theory. Managers have some degree of flexibility and discretion in reporting their financial statement to reflect underlying economic of their corporations. The flexibility gives managers opportunity to manipulate earnings. Managers may choose accounting treatment guided under GAAP to reduce the risk of violating of GAAP even it is not the most appropriate method to reflect the company’s economic situation. From the whole flow of earning management, we need to examine the pattern and motivation of earning management what really drives the good and bad side of earning management. Management compensation is on of the most important incentive for earnings management. Managers may use timing of transactions, discretional accruals, and bad debt expenses to manage earnings to increase stock price and receive gain from stock options. Earnings management should be discouraged even if investors could see through accounting numbers.

There is a relationship between professional ethics and earnings management. A strong

sense of ethics would discourage earnings management However, the I truly believe thru this research findings that earnings management should be discouraged because the financial statement is supposed to provide real performance of the company to users.

5.0 Conclusions The concept of the earnings management is difficult to define and very subjective to decide whether it is an appropriate accounting treatment or it is an earnings management.

Prior to review and analysis of researches I conclude with definition that agree with SEC. I believe that earnings man-

Earning Management: Is it good or Bad? • 13

fsrforum • volume 16 • issue #3

Some Overlooked Ethical Issues in Acquisitions and Mergers

Just because an activity may be considered immoral by some people does not mean that it should be declared illega that it should be declared illegal. Driving an automobile in Jerusalem on a Saturday afternoon can subject one to being the recipient of projectiles [Orthodox Jews throw rocks at cars on Saturday because of their perception that driving on Saturday is against God’s law]. Victimless crimes such as prostitution, injecting drugs into your body, dwarf tossing or suicide do not violate anyone’s rights and should not be illegal. One might turn this punishment argument on its head by rightfully advocating the punishment of those who attempt to prevent such consensual activities since they must necessarily violate the contract or property rights of others to accomplish their goal.

R.W. McGee

While it may be true that some predators are greedy, immoral or uncaring, that is not the topic of discussion for this paper. This paper will look at some overlooked -- actually ignored -- economic and ethical questions.

The focus will be on the individuals who attempt to prevent such activities rather than on the predators.

Bentham’s view was that one must consider the happiness or unhappiness of everyone who is affected by an action in order to determine whether the action is right or wrong. John Stuart Mill, another early utilitarian, took a similar position:

“The creed which accepts as the foundation of morals ‘utility’ or the ‘greatest happiness principle’ holds that actions are right in proportion as they tend to promote happiness; wrong they tend to produce the reverse of happiness.” [30] Henry Sidgwick, another nineteenth century British utilitarian, gives a more precise definition:

“By utilitarianism is here meant the ethical theory, that the conduct which, any given circumstances, is right, is that which will produce the greatest amount of happiness on the whole; that is, taking into account all whose happiness is affected by the conduct.” [42]

THE UTILITARIAN ETHICAL APPROACH Utilitarian ethics is the ethical system subscribed to by the vast majority of economists as well as many lawyers, politicians (assuming they have any ethical principles) and policy makers, so it is necessary to analyze ethical issues relating to acquisitions and mergers from the utilitarian perspective if for no other reason than to provide the mainstream perspective. Of course, the utilitarian approach is not the only perspective from which ethical issues may be viewed. It may not even be the best approach. But it is the mainstream approach. Thus, we will begin with the utilitarian perspective.

According to utilitarian ethics, an action is considered to be ethical if the result is the greatest good for the greatest number.

Jeremy Bentham [5], an early exponent of utilitarianism, said:

There is much evidence to suggest that most acquisitions and mergers result in a net benefit to the economy [14][16] [17][20][21][22]. There are more winners than losers. Economists would say that it is a positive-sum game. Yet those who initiate such activity, the “predators,” are commonly viewed as greedy, immoral and uncaring.

Greed may be a vice and viewed as an immoral character trait in some religious and philosophical circles. However, those who are greedy and who play within the rules by not resorting to theft, fraud, deception or murder to achieve their goals actually perform a service for others.

This idea is not new by any means. Adam Smith pointed it out in The Wealth of Nations in 1776. Those who have

14 • Some Overlooked Ethical Issues in Acquisitions and Mergers

no intention of benefiting others often benefit them more than they know. They try to capture market share by either slashing prices or offering better quality products or services than the competition. Those who are obsessed with driving their competitors out of business by resorting to low prices and high quality products and services do much more good for consumers and the general population than those who try to prevent or regulate such predatory practices. While it might not be considered nice to be an uncaring individual, it should not be a trait that is subject to punishment in a court of law.

Morality is a highly personal thing. Just because an activity may be considered immoral by some people does not mean

“…it is the greatest happiness of the greatest number that is the measure of right and wrong.” [5]

According to utilitarian ethics, an action is

considered to be ethical if the result is the greatest good for the greatest number

Shaw would state the utilitarian position as follows:

“An action is right if and only if it brings about at least as much net happiness as any other action the agent could have performed; otherwise it is wrong. … Utilitarianism tells us to sum up the various good, bad, or indifferent consequences for everybody of each possible action we could perform and then to choose the action that brings about the greatest net happiness.” [40, pp. 10-11] Another, slightly different utilitarian approach would be to view an action as good if there are more winners than losers.

The problem with this second approach is that there may be a great multitude of people who benefit or lose a little while some concentrated minority gain or lose a lot, which makes it difficult to determine whether an action is ethical when the losers exceed the winners or vice versa. Rothbard [37] points out the fact that it is impossible to accurately measure gains and losses. Actually, there are at least two fatal flaws in the utilitarian approach to ethics: the inability to measure gains and losses and the total disregard of rights [26][27].

Economists get around this problem by taking the position that an activity or policy is good if the result is a positive-sum game, if the good outweighs the bad. A variation of this economist’s approach to the utilitarian ethic is that an activity is good if it increases economic efficiency and best if it maximizes economic efficiency. One might question the veracity of this approach, since something that is efficient is not necessarily moral. Hitler was rather efficient at killing gypsies, Jews and Poles. The Turks were even more efficient at killing Armenians back in 1915 even though they had less efficient

»

Some Overlooked Ethical Issues in Acquisitions and Mergers • 15

fsrforum • volume 16 • issue #3

weapons to work with than Hitler. However, the mainstream economic view is that there is no conflict between what is efficient and what is moral, at least not for the most part [36].

Dostoevsky [11] summarized the utilitarian positionquite well in The Brothers Karamazov when he asked whether it would be acceptable to torture to death a small child if, as a result, the rest of the human race would live in eternal happiness. If a child in nineteenth century Russia had a life expectancy of 50 years and if the child being tortured to death was one year old at the time of the torture, the perpetrators would be cutting short one life by 49 years, and along with it all the suffering that would otherwise take place during those 49 years. Of course, they would be torturing the child for awhile, thus increasing unhappiness for awhile, but this temporary unhappiness must be weighed against all the future unhappiness that is being prevented by killing the child 49 years early. One must then weigh the unhappiness prevented against the happiness the child would experience if it were allowed to live its full natural life. But that is not the end of the comparison because the child’s net happiness or unhappiness must then be compared to the vast increase in the total happiness that would accrue to the rest of the human race for all eternity.

Thus, applying utilitarian ethics one could easily conclude that the proper thing to do would be to torture to death the small child, since total happiness would increase greatly.

Dostoevsky’s question highlights one of the major deficiencies in any utilitarian approach to ethics. However, since the vast majority of economists subscribe to utilitarian ethics (perhaps because they have not read Dostoevsky), we need to examine acquisitions and mergers from the utilitarian perspective, at least as a starting point.

From a utilitarian ethical point of view,

we would conclude that acquisition and merger activity is ethical if the result is increased efficiency or if the winners exceed the losers in the positive-sum game sense of the term From a utilitarian ethical point of view, we would conclude that acquisition and merger activity is ethical if the result is increased efficiency or if the winners exceed the losers in the positive-sum game sense of the term. If such activity meets the utilitarian ethics test, one may logically conclude that acts perpetrated by individuals to prevent such ethical activity must necessarily constitute unethical conduct, since their efforts to thwart an acquisition or merger must necessarily result in reduced efficiency. Bentham, Mill and Sidgwick would state it somewhat differently. They would say that engaging in acquisition or merger activity is good and right if it increases overall happiness and bad if it decreases overall happiness.

16 • Some Overlooked Ethical Issues in Acquisitions and Mergers

Before we can reach such a conclusion we must first look at the evidence to see whether allowing an acquisition or merger to become finalized results in increased economic efficiency. If it does, then the action is ethical from the utilitarian perspective and actions to thwart such activity are unethical.

Such analyses have been made in the past [28] and we will not review them in detail here, although it is worthwhile to make a few points.

A number of groups benefit as a result of merger activity. The old shareholders benefit because they receive a premium for their stock. New shareholders benefit because they are buying stock in a company that is in the process of becoming more efficient and competitive. Those shareholders who do not tender their stock also benefit because the market value of their shares rises as a result of the tender offer. The general public benefits because the more efficient company that results from the merger is able to reduce its prices and/or provide higher quality products and services. Employees benefit because a healthy company will be less likely to go out of business. There is some evidence to suggest that hostile takeovers have a beneficial effect on wages and employment. [10].

It is generally agreed among economists that all shareholders lose in a poison pill situation [15]. Yet their use is expanding.

There is ample evidence to suggest that takeover legislation tends to harm, rather than protect shareholders. Several studies confirm this thesis [4][23][48]. Government protection of incumbent management in New Jersey caused the stock prices of 87 affected companies to fall by 11.5 percent [35]. Stock prices for 74 companies incorporated in Ohio dropped by 3.2 percent, or $1.5 billion, after the legislature passed restrictive legislation, according to a Securities and Exchange Commission study [34]. New York’s statute cost stockholders $1.2 billion, or 1 percent of stock value, according to a Federal Trade Commission estimate [39].

Since takeovers increase efficiency and since attempts to thwart takeovers, whether successful or not, reduce efficiency, individuals who attempt to takeover a company are acting ethically and anyone who attempts to thwart a takeover is acting unethically, according to the utilitarian ethic as described above.

Poison Pills It seems like the only group that does not benefit from an acquisition or merger is the company’s present management, which stands to lose their jobs as a result of the merger. Up to 50 percent of top management loses their jobs within three years of a takeover, according to one report [20]. Management is the only group that stands to gain if the merger is thwarted. This causes problems because management has a fiduciary duty to its shareholders to do things that benefit shareholders. If they put their own interests above those of their employer (the shareholders) they are breaching their fiduciary duty and acting unethically. Yet management almost uniformly resorts to such activity whenever there is a hostile takeover in the works.

Management uses a variety of defensive tactics to thwart a takeover. They sometimes run to Washington or the state legislature screaming that the predator has violated some antitrust law [1][6][7][41], some antitakeover law, which tends to place obstacles in the path of tender offers that hinder their success and efficiency [3][19][22][43], or the Williams Act [43]. They may make the company less desirable as a takeover target by adopting a poison pill, selling the company’s most attractive assets, going into debt, giving a third party lock up rights (“a promise to a bidder for the corporation that if the bid is rejected, the corporation will compensate the bidder for his lost opportunity.” [36, p. 456]) that allow it to repurchase in the event of a hostile takeover, paying a large dividend to deplete cash or awarding golden parachute contracts to management. They may resort to greenmail, which is a form of bribery using corporate assets to persuade the predator to go away.

Several studies have tried to measure the amount of the loss to shareholders that results when a corporation’s management tries to block a takeover. A Securities and Exchange Commission study found that the announcement of a poison pill plan by a takeover target causes the stock price to drop by an average of 2.4%, whereas announcement of such a plan by a company that is not a target has no effect on stock price [33].

A poison pill is a:

“strategic move by a takeover-target company to make its stock less attractive to an acquirer. For instance, a firm may issue a new series of preferred stock that gives shareholders the right to redeem it at a premium price after a takeover. Two variations: a flip-in poison pill allows all existing shareholders of target company shares except the acquirer to buy additional shares at a bargain price; a flip-over poison pill allows holders of common stock to buy (or holders of preferred stock to convert into) the acquirer’s shares at a bargain price in the event of an unwelcome merger. Such measures raise the cost of an acquisition, and cause dilution, hopefully deterring a takeover bid. A third type of poison pill, known as a people pill, is a threat that in the event of a successful takeover, the entire management team will resign at once, leaving the company without experienced leadership [12, pp. 452-453]

Poison pills are financial schemes made by management to make the company a less attractive takeover target.

Poison pills may take several forms, many of which involve debt restructuring, preferred stock, discriminatory targeted repurchases, or poison pill rights. An important question to ask is who benefits and who loses by the introduction of a poison pill?

The obvious losers are the potential raiders. A raider may decide not to attempt a takeover because of the poison pill. If an attempt is made, it may be unsuccessful and costly. Even if it is successful, the cost of success is higher where there is a poison pill.

The less obvious losers are the target company shareholders.

Since the evidence suggests that target company shareholders tend to benefit by a takeover, thwarting a takeover by use of a poison pill (or by any other means) prevents them from

earning a premium on their stock. Ironically, it is management, which is supposed to protect shareholder interests, that makes the poison pill.

Another group that stands to lose by poison pills is consumers. Since the raider is prevented from making more efficient use of the assets than present management, the company is unable to upgrade quality and reduce cost, with the result that consumers will have to pay higher prices to purchase goods or services that are of lower quality.

An even less obvious class of losers consists of the thousands of other industries that would get extra business if the target company was taken over and made to run more efficiently.

If the target company’s sales were $10 billion before the acquisition and the raider was able to cut costs to the point where the company could reduce prices by 10 percent, an extra $1 billion of customer funds would become available to purchase other goods and services even if the number of units sold did not increase. However, if prices were reduced by 10 percent, it is likely that the number of units sold would increase, so sales would be something more than $900 million. Customer A might decide to use the $10,000 it saves to buy an additional machine for its factory. Customer B might use its $15,000 savings to buy another car for the corporate fleet. Customer C might use its $100,000 savings to invest in employee education or training.

Customers A, B and C all benefit because they are able to buy something they could not have afforded in the absence of the takeover. The company that sold the machine to Customer A, the car to Customer B and the education and training to Customer C also benefit because of the takeover, as do the Customer C employees who receive the education and training. There is no way to predict what the target company’s customers would do with their cost savings, but the fact that they would do something cannot be denied. Even if all they do is let the savings sit in their bank accounts, the fact that the money is there (perhaps earning interest) means that it is available for the bank to use to make loans to businesses or individuals.

Since the quantity of money available for loans has increased, there is downward pressure on interest rates, which benefits anyone who might borrow money. The general economic law that “as supply increases, price decreases” applies to the supply of money as well as to the supply of any other commodity.

If all these groups stand to lose by the introduction of a poison pill, why are such pills introduced? Someone must gain by their introduction. Otherwise, the poison pills would never be introduced. An easy way to find who benefits is to look at who introduces them in the first place, since it is usually the advocate that tends to benefit. The advocate of poison pills is management. It does not take long to see how management stands to benefit by the introduction of a poison pill.

Poison pills decrease the chances of a successful takeover. If a takeover is successful, a high percentage of managers stand to lose their jobs. Up to 50 percent of top management loses their jobs within three years of a takeover, according to one study. [20] Therefore, management takes action to prevent job losses among their own group by introducing a poison pill. Thus, it appears that management is working against the interest of its shareholders by introducing a poison pill.

Some Overlooked Ethical Issues in Acquisitions and Mergers

» • 17

fsrforum • volume 16 • issue #3

Yet some courts have upheld the right of management to introduce poison pills. [32] In one case, the Delaware Supreme Court upheld the right of management to restrict the right of its shareholders to sell their stock [32], an interesting result in light of the fact that management is supposed to be the agent of the stockholders.

As a result of this case, corporations are adopting poison pills in record numbers. At least two studies found that the mere announcement of such an adoption causes the company’s stock price to fall [25][38], perhaps because of the decreased likelihood of a successful takeover, which would cause the stock price to rise.

However, not all courts have ruled that management may interfere with shareholder voting rights. New York [31][44] and New Jersey [2] have crushed some poison pills, and an Illinois court, while dissolving one poison pill, allowed the same company to adopt a different poison pill a few weeks later [13]. But the Delaware court has upheld management’s right to use poison pills to thwart predators [45][46]. The proposal has been made that poison pills could be defeated through the enactment of state shareholder protection statutes [9]. However, enacting such statutes will be difficult in the absence of powerful interest groups that can lobby the legislature.

Greenmail Greenmail is:

“Payment of a premium to a raider trying to take over a company through a proxy contest or other means. Also known as bon voyage bonus, it is designed to thwart the takeover. By accepting the payment, the raider agrees not to buy any more shares or pursue the takeover any further for a specified number of years.” [12, p. 246]

Greenmail is seen in the popular press as something that is evil, a bribe that is paid to a raider to prevent a takeover attempt from proceeding. The raider is seen as being unjustly enriched at the expense of the target company and shareholders. Greenmail is a payment top management decides to make to protect shareholders from a corporate raider. It is seen as an evil, but the lesser of two evils.

Greenmail payments do, indeed, stop takeover attempts dead in their tracks. But an economic analysis of greenmail payments raises questions as to their propriety. Since the evidence suggests that target company shareholders (as well as consumers and the economy in general) tend to benefit by takeovers, should management prevent a takeover by making greenmail payments? Rather than protecting shareholders, it appears that making greenmail payments harms shareholders, since it prevents them from obtaining the benefits that go with a takeover -- primarily an increase in the price of their stock. Consumers are also harmed, since blocking a takeover prevents the new owners from using the acquired assets more efficiently, which would otherwise lead to offering higher quality products or services at lower prices. Preventing takeovers tends to protect management, many of whom would lose their jobs

18 • Some Overlooked Ethical Issues in Acquisitions and Mergers

if the takeover attempt were successful. Thus, it appears that management, unwittingly or not, makes greenmail payments to protect themselves against job loss, to the detriment of shareholders and consumers. They are thus breaching their fiduciary duty to the shareholders, since they are using their position to benefit themselves at the expense of the shareholders.

Paying greenmail is actually a form of antitakeover, a targeted repurchase. It could be construed as being unfair to a large group of shareholders, since it involves an offer to repurchase the shares of one or a small group of shareholders at a premium, an offer that is not extended to all shareholders. Ironically, it is the greenmailer who is offering the other shareholders the opportunity to sell their shares at a premium, an offer the company’s management is trying to prevent from being made or accepted.

Studies indicate that the stock’s price increases between the initial purchase by the greenmailer and the later repurchase [18][29]. Thus, shareholders benefit rather than suffer harm because the price of their stock is bid up. If management buys off the raider, the shareholders lose the premium [8]. However, the stock price might not go back to its pre-takeover attempt position, because the market may anticipate that there will be other future attempts that may prove successful. But if the company’s financial position is weakened as a result of having to pay a large sum to thwart a takeover, the stock’s price may slide, since the company is perceived as being in a weakened financial condition, and thus a less desirable investment.

Golden Parachutes The subject of “golden parachutes” has become a controversial one. As takeovers become more sophisticated and “junk” bond financing makes it possible to take over even the largest companies, top management is no longer protected by working for a very large firm. That, plus the fact that about half [20] the target company’s top management are no longer with the company three years after the takeover, creates a tremendous amount of anxiety and gives them a strong incentive to seek ways to protect themselves in the event of a takeover.

Briefly, a golden parachute is a severance contract to compensate high-level corporate officials for losing their jobs if their company is taken over. Most commentators have seen such contracts as shareholder rip-offs because the high-level employee benefits and the shareholders don’t get anything for their money. But this analysis is simplistic. There is really much more involved than initially meets the eye. There are circumstances under which shareholders can benefit by having the corporation enter into golden parachute contracts with top management employees.

One beneficial effect of golden parachute contracts is that they can help reduce the conflict of interest that would otherwise exist between top management and shareholders. Management may resist a takeover attempt that would be in the shareholders’ interest because they stand to lose their jobs if the takeover is successful. Thus, they are work-

ing against the shareholders’ interests. Having a properly constructed golden parachute will eliminate or at least reduce this potential conflict of interest because management would be less likely to attempt to thwart a takeover attempt if their incomes were protected by golden parachutes. The evidence suggests that merely having golden parachute contracts raises the company’s stock price by about 3 percent when the existence of the golden parachute contracts is announced [24]. This price rise might be due to a perception of the investing public that a takeover attempt is more likely than before, but it may also be because the market sees that the potential conflict of interest between management and the corporation has been reduced, thus making the stock a better investment. In all likelihood, both of these factors have somewhat of an effect on the increase in the company’s stock price.

Since the evidence suggests that takeovers are good for the stockholders of the target company, as well as for the general consuming public, it seems logical that company and government policy should be to encourage topmanagement to negotiate takeovers that seem to be in the shareholders’ best interests. Yet some present policies, such as the Deficit Reduction Act of 1984, penalize companies and managers who enter into golden parachute contracts and state and federal officials are advocating placing further restrictions on golden parachute contracts. Since a properly structured golden parachute contract reduces top management’s conflict of interest, legislation that restricts or prohibits such contracts actually works against the shareholders’ interests, and the interests of the economy in general, since takeovers tend to be in the consumers’ interest, too. The logical solution would be to repeal legislation that restricts companies from entering into golden parachute contracts with their top management.

However, not all golden parachute contracts resolve the conflict of interest problem. Depending on how the contract is structured, it may serve to make management more entrenched than before, which tends to work against the shareholders’ interest. A well-designed contract will reduce this potential conflict of interest whereas a badly-designed contract will do just the opposite. One way to make such contracts work for the benefit of the shareholders is to extend them to the members of top management who would be negotiating the takeover and implementing the later restructuring. However, extending golden parachute contracts to lower level managers who would not be involved in takeover negotiations would be more difficult to justify on shareholder interest grounds.

Extending too many golden parachutes raises the cost of the acquisition, thus making it less attractive to potential raiders, while not gaining any corresponding benefits for the corporation.

Another beneficial effect of golden parachute contracts is that they make it easier to attract top management. Golden parachute contracts are a form of compensation, a salary substitute, an insurance policy against job loss, and potentially a supplemental retirement plan. Absence of a golden parachute provision makes a job offer less attractive to a potential top-level manager, and since golden parachutes

are a form of compensation, companies that do not have them would probably have to offer higher salaries to entice potential top managers to join the company.

But not all golden parachute contracts are in the best interests of shareholders. While a properly constructed contract reduces the manager’s conflict of interest, an improperly structured contract will do just the opposite. If the golden parachute is too “golden,” top management might be too willing to sell the company, so they may tend to take the first offer that comes along rather than negotiate a higher price for their shareholders. Managers and board members who hold a great deal of stock in the company will have less incentive to take the first offer than those who own little or no stock, so the company might provide incentives that encourage top management and board members to own stock in the company. Yet present insider trading laws provide a disincentive, and some top managers and board members are selling their stock so that they will not be accused of insider trading. Offering stock options and restricted stock appreciation rights that are exercisable only if control changes is one possible solution.

THE RIGHTS APPROACH There are at least two basic problems with the utilitarian approach. For one thing, it is impossible to accurately measure gains and losses, although it is often possible to see that a certain action will increase or reduce efficiency.

Another defect with the utilitarian ethic is that it totallyignores property and contract rights. For a utilitarian, an action is ethical if the amount of happiness increases, or if the result is a positive sum game. For a utilitarian, it does not matter if someone’s rights are violated as long as the overall result is increased happiness or a positive sum game.

The rights approach is completely different. It avoids the two pitfalls of the utilitarian ethical approach. The rights approach to ethics would hold that any action that violates anyone’s rights is unethical, even if the majority benefit by the action and even if the result is a positive sum game. However, the rights approach does not hold that any actions between or among consenting adults are moral, since some such actions might be immoral. All that can be said is that any activity that violates someone’s rights is automatically unethical, even if some majority benefits by the rights violation.

In the case of an acquisition or merger, the rights of the individuals launching the takeover attempt and the rights of shareholders are violated if they are prevented or hindered from entering into a contract to buy or sell shares. When one takes a rights approach to ethics, there is no need to first measure increases or decreases in efficiency or total happiness against total unhappiness before determining whether an action is ethical. Those who attempt to prevent a takeover attempt are the ones who are acting unethically, not the ones who initiated the takeover attempt. They are using force or the threat of force (government) to prevent one group of individuals from buying shares and another group of individuals from selling their shares. Thus they are violating both property and contract rights by preventing such transactions from taking place.

»

Some Overlooked Ethical Issues in Acquisitions and Mergers • 19

fsrforum • volume 16 • issue #3

CONCLUDING COMMENTS Very little has been said about the ethics of individuals who attempt to prevent mergers and acquisitions. This paper is intended to fill that gap. From the perspective of utilitarian ethics, an action is good if it increases happiness or if there are more winners than losers or if it is a positive sum game or if it increases efficiency. The evidence is clear that acquisitions and mergers do all of these things, at least in cases where the acquisition or merger is successful. Therefore, from a utilitarian ethic perspective, engaging in acquisition and merger activity constitutes ethical conduct, at least in those cases where the acquisition or merger is successful. Conversely, those who attempt to thwart an acquisition or merger are acting unethically because their actions reduce happiness and efficiency.

The result is the same if one takes a rights approach to ethics. Any action that violates someone’s rights is automatically unethical. Preventing consenting adults from entering into merger agreements violates contract and property rights. Therefore, anyone who attempts to prevent an acquisition or merger is acting unethically, from a utilitarian perspective, in cases where the acquisition or merger would result in a positive-sum game, and in all cases from the rights perspective, since rights must necessarily be violated if consensual activity is prevented by force or the threat of force.

In cases where the acquisition or merger fails, that is, where the result is a negative-sum game, utilitarian ethics would hold that using force to prevent such acquisitions and mergers would be justifiable. The problem is that it is impossible to know whether a planned acquisition or merger will result in a positivesum or negative-sum game until after the fact, whereas the decision whether to allow it must take place before the fact. Thus, applying utilitarian ethics to acquisitions and mergers would, in some cases, result in stopping an acquisition or merger that would have resulted in a positive-sum game, while in other cases, applying utilitarian ethics would result in allowing an acquisition or merger to go through when the final result is a negative-sum game. It is impossible to know in advance whether a particular acquisition or merger will be successful. One can only guess, although the presumption is that it will be successful, since participants would not enter into such an activity if they suspected that they would be making themselves worse off as a result.

Applying rights theory avoids all these uncertainties. Applying rights theory merely allows consenting adults to trade what they have (cash) for what they want (shares), provided no one’s rights are violated. Thus, the rights approach to ethics is superior to the utilitarian approach, since making the decision whether to allow or disallow a particular acquisition or merger can be made a priori, before the event, merely by determining whether anyone’s rights would be violated if the activity were allowed to proceed.

fsrforum • volume 16 • issue #3

Interview with André Ruiz de Roxas International lawyer at PwC

Martine Nieuwenhuijzen Kruseman, Lisanne Frijling and Myrna Baadjou

Can you tell me more about your academic history I completed a Bachelor of Arts in International Relations and a Bachelor of Laws at the Australian National University. I then decided to continue my studies at the graduate level with, first, the completion of a Masters’ degree in the Politics of the World Economy in the Department of International Relations at the London School of Economics, and then the completion of a Masters of Law degree, focusing on Private International Law, at Cambridge University.

Can you briefly describe your role at PwC? I am an international lawyer working with the PwC Office of the Global General Counsel, with a focus on providing legal support to firms in Continental Europe. One of the main areas in which I provide support is in respect of counselling PwC Audit Partners and teams in discharging their responsibilities relating to fraud in the audit of their client’s financial statements.

Why did you choose to work for PwC? PwC is a multi-national professional services network, with member firms throughout the world. It therefore offers a fascinating combination of cross-border legal work, on the one hand, as well as the opportunity, on the other, to work closely with leading professionals in individual countries providing market-leading Assurance, Tax and Advisory services.

What, in a nutshell, are the responsibilities of an auditor in respect of fraud in the audit of a client’s financial statements?

The primary responsibility for the prevention and detection of fraud rests with those charged with governance of the entity and management. An auditor is responsible for providing an opinion on a client’s financial statements – specifically that the financial statements provide a true and fair view. In discharging this responsibility, one of the areas on which the auditor must obtain reasonable comfort is in respect of ensuring that the financial statements are free from material misstatement due to fraud.

In a nutshell, the auditor’s objectives in respect of fraud are: firstly, to identify and assess the risks of material misstatement of the financial statements due to fraud; secondly, to obtain sufficient appropriate audit evidence regarding the

20 • Some Overlooked Ethical Issues in Acquisitions and Mergers

assessed risks of material misstatement due to fraud, thorough designing and implementing appropriate responses; thirdly, to respond appropriately to fraud or suspected fraud identified during the audit.

Why, in your view, is fraud so important to identify?

The easy answer would be to explain that the identification of fraud forms part of an auditor’s professional responsibilities, as I’ve explained above. However, for me, the complete answer must recognise that fraud eats away at companies and society as a whole. The words of the Greek playwright, Sophocles, ring very true to me – “Things gained through unjust fraud are never secure”.

Do you think more measures could be taken to prevent fraud? For example, changing rules and regulations?

One needs to be careful, in my view, in thinking that implementing endless rules and regulations will prevent all fraud from occurring. Preventing fraud begins with capturing the minds of individuals – not just in a company but in society at large. This is not easy. Bribery and corruption is a daily reality for many throughout the world. The global business community needs to support efforts to change perceptions and mindsets within the markets that they operate. At the end of the day, refusing to provide a bribe, even where this means lost business, needs to be accepted as a necessary starting point.

Is there a particular sector that violates ethics the most?

It is difficult to single out one sector. In my experience, those sectors which operate across borders and across cultures are traditionally the most affected.

What are the ethics violations that employees in companies often unwittingly commit?

For international companies, with the passing of recent legislation globally - such as, for example, the Bribery Act in the UK - corporate hospitality has become an area which there is often uncertainty. The UK Act sets down no rules, monetary limits or exemptions in relation to gifts/hospitality. The best intentioned efforts of employees to promote good business relations does accordingly need to be considered in the con-

» Interview • 21

fsrforum • volume 16 • issue #3

fsrforum • volume 16 • issue #3

The Best Anti-Fraud Control?

drs. Martijn de Kiewit, Head of Ethics & Compliance Management KPMG Forensic Switzerland and part time lecturer Business Ethics.

text of carefully developed corporate policies and standards.

The legitimate concern of the authorities is however that bribes can sometimes also be disguised as acceptable business expenses.

What is the biggest challenge that companies face in keeping up with and preventing fraud?

Balancing effective oversight and compliance with maintaining entrepreneurial spirit, minimal red tape and sensible compliance costs.

How can employees of PwC report concerns, issues or potential violations of laws, regulations or the code of conduct or compliance policies?

In the Netherlands, the PwC Code of Conduct and accompanying complaints and notification procedures are available to all employees. These procedures are both for complaints in the personal arena, as well as for any concerns or suspicions of professional misconduct. Dealing with dilemmas is also a mandatory element of our learning and development program, with a specific emphasis on nurturing a professionally skeptical attitude.

Furthermore, there are confidential counsellors active within PwC The Netherlands. They can submit complaints to the Complaints Committee. This Committee investigates the complaint and advises the Board of Management on the handling and resolution of complaints. The Board of PwC ensures the adequate operation of whistleblowing and complaints procedures. Each year, the Transparency Report sets out their operating effectiveness.

How do you think that handling fraud cases will change over time?

The key development that I expect over time is for bribery and corruption legislation to become more global in its nature – both in terms of developing international minimum standards which need to be adhered to in a business transaction; but also levels of national enforcement which create a level playing field globally.

For instance, to date, by the OECD’s own assessment, the first and only international anti-corruption instrument focused on the ‘supply side’ of the bribery transaction is the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The Convention - which establishes legally binding standards to criminalise bribery of foreign public officials in international

22 • Interview

business transactions and provides for a host of related measures that seek to make this effective – is however not backed by the same level of consistent oversight and enforcement rigour as, for example, many national pieces of legislation, such as the US Foreign Corrupt Practices Act or UK Bribery Act.

In her column “Diversity as Opportunity”, in the second FSR Forum, Fieke van der Lecq gives a nice overview of several advantages of diversity. In our work as Forensic investigators we happen to see not much diversity when it comes to the (suspected) fraudsters… In our team we had some debate about this lack of gender diversity when it comes to fraudsters and we decided to look at some data to verify our own views.

Most Fraudsters are Male Our most recent KPMG Fraud Barometer in Switzerland shows that almost all fraudsters are male:

Perpetuator Gender Male Female Group (both genders, e.g. couples)

Number of cases 48 4 6

Only in 4 out of 58 cases, the fraudster was a woman. From our own Forensic practice we recognize these figures. Usually this finding is not considered very surprising. Many people will say that this is because of the simple fact that most frauds are committed by managers. And since most managers are male due to the ‘Glass Ceiling’-effect, it only is logical that most fraudsters are male. The ‘Glass ceiling’ is a term used to describe the barrier that keeps women from rising to the top of the hierarchy in organizations.

Total Accused 2012 Switzerland

Total

Men

Woman

%

Tötungsdelikte (Art. 111 - 114) (homocide)

263

238

25

9,51

Hehlerei (Art. 160) (handling stolen goods)

1857

1675

182

9,80

Einfache Körperverletzung (Art. 123) (assault) Versicherungsbetrug (Art. 146) (insurance fraud) Ladendiebstahl, inkl.geringfügig (Art. 139) (shoplifting) Falsche Anschuldigung (Art. 303)(False accusation)

7587 199 11293 587

6481 135 7570 360

1106 64 3722 226

14,58 32,16 32,96 38,50

Source: Swiss statistical Bureau

It seems that women tend to act less criminal and when they are engaged in criminal activities they are more often involved in less serious crime. This is also visible in the data of the Swiss prisons. Only 5.2% of detainees are female!2 And it is certainly not because of Switzerland, in fact Switzerland has quite a good gender equality. Also in other countries the same effect is seen that women are underrepresented in crime in general and specifically in fraud.

In this column I will not elaborate on underlying reasons explaining this effect but I do want to give a good advice to corporations. Based on the data I would advise that gender diversity is maybe the easiest and most effective anti-fraud measure you can take!

But is this the only explanation? According to the Swiss statistical Bureau, 35% of managers these days are female.1 That is still not exactly 50%, but it would mean that around 35% of the fraud cases should involve women, which is far of from the actual figure.

Other statistics show the same effect: women are underrepresented in crime If we look at the data of other crime statistics in Switzerland we also see that women are under represented. The imbalance seems to be very strong with violent crimes and less with crimes like shoplifting and false accusation.

Notes 1 http://www.bfs.admin.ch/bfs/portal/en/index/themen/20/22/press.html?pressID=8586 2 http://www.bfs.admin.ch/bfs/portal/en/index/themen/19/03/05/key/ueberblick/wichtigsten_zahlen.html

The Best Anti-Fraud Control • 23

A better working world stArts with you.

Maak het verschil door mee te bouwen aan ‘a better working world’

We want to build a better working world — for you and with you.

Because we employ some of the world’s best talent, your career will be enriched by the EY experience — no matter when you join us or how long you stay.

Why not start now?

Visit ey.nl/carriere.

Het is onze overtuiging dat wanneer het bedrijfsleven beter werkt, de gehele wereld beter werkt.

Onze bedrijfsmissie ‘Building a better working world’ heeft alles te maken met het groeiend belang van duurzaamheid; hoe gaan we om met de wereld, de mensen en de natuur? Meer concreet willen we met ons statement een belangrijke bijdrage leveren aan het verbeteren van de werkende wereld voor ondernemers en bedrijven. Maar ook voor onze werknemers.

Daarom doen we er alles aan om talenten te werven en te ontwikkelen. Met gerichte coaching door ervaren collega’s. Training op maat. En door talent bij elkaar te brengen in de best presterende teams. Wij willen dat voor iedereen geldt dat, onafhankelijk van de tijd die je bij ons werkt, je ervaring bij EY van grote waarde blijft voor de rest van je leven. Duurzame ontwikkeling dus. En natuurlijk kunnen wij alleen onze uitzonderlijke dienstverlening aan cliënten waarmaken met de inzet van de beste mensen.

Veel van onze opdrachtgevers zijn grote internationale ondernemingen. Om hen optimaal van dienst te zijn, hebben wij een internationale structuur en werken wij op basis van multiculturele en multidisciplinaire teams. Zo is de hele wereld ons werkterrein. En heb jij volop mogelijkheden je loopbaan mondiaal vorm te geven.

Internationale teams

EY in Nederland is onderdeel van het cluster EMEIA: Europa, Midden-Oosten, India en Afrika. Binnen je team heb je toegang tot de support en expertise van collega’s over de hele wereld in meer dan 140 landen. Andersom gaan die steeds meer op jou rekenen naarmate je kennis en ervaring toenemen. Of je nu op een regionaal kantoor werkt, in een groot commercieel centrum of in een opkomende markt.

Dit betekent overigens niet dat je altijd moet reizen of in het buitenland moet werken. Maar wel dat je de kans hebt alles uit jezelf te halen door samen te werken met enkele van de belangrijkste ondernemingen ter wereld.

Toonaangevend in financiële dienstverlening

© 2013 EYGM Limited. All Rights Reserved.

Met 167.000 medewerkers wereldwijd is EY toonaangevend in assurance, tax, transactions, advisory en financial services. Specialiteiten die steeds belangrijker worden. Zo is betrouwbare financiële informatie van onschatbare betekenis voor ondernemers, managers en toezichthouders. Meer en meer ondernemingen willen weten hoe hun zakelijke strategie in een complexe wereld zich verhoudt tot de hoeveelheid belasting die ze betalen. Adviseurs van EY bereiden het bedrijfsleven voor op de wereld van morgen met even grote als noodzakelijke verandertrajecten. Weer anderen helpen onze opdrachtgevers bij complexe strategische beslissingen over hun kapitaal. En in financial services bieden we al deze expertise geïntegreerd aan internationale businessleaders aan.

Past dit bij jou?

Ben jij wellicht één van de architecten van ‘a better working world’? Wil jij een verschil maken en vind je dat jij bij ons past? Vertel het ons tijdens een van onze recruitmentevenementen of in een sollicitatiegesprek. Kijk ook eens op www.ey.nl/carriere.

fsrforum • volume 16 • issue #3

The enemy within

Fraud within the companies is a risk that never can be eliminated, just managed

Most recent news update about the subject

BUSINESS has always been plagued by fraud: witness the South Sea Company in the 1710s (which enveloped the British economy in a giant bubble) or Charles Ponzi’s Securities Exchange Company in 1920 (which gave the world the Ponzi scheme) or the Enron and WorldCom scandals in the early 2000s. Ambitious fraudsters are attracted to businesses for the same reason that Willie Sutton, a contemporary of Ponzi, reportedly said he robbed banks: “Because that’s where the money is.”

Some frauds are committed by people at the top such as Bernard Madoff or Allen Stanford. Others are committed by hired-hands lower down the organisation. But all frauds involve abusing people’s trust and diverting corporate resources for personal ends. Fraud by wayward employees, be they high or low, can never be eliminated. Directors and executives can, however, treat it like any other unavoidable risk, and manage it professionally.

The risk is particularly acute at the moment. Companies are straining the bonds of loyalty. They are making ever more use of contractors and temporary workers. They are putting more pressure on employees to hit targets; they are also holding down the wages of the majority of workers while increasing the boss’s pay. This is all happening at a time when economic activity is shifting to the emerging world (where corporate fraud is rife) and to the internet (where fraudsters are having a field day). Kroll, a security consultant, found that 70% of the companies that it studied were affected by fraud in 2013, up from 61% in the previous year.

At the same time the punishment is harsher than ever. Companies nowadays run the risk of being held liable for their employees’ misbehaviour unless they can show they had done their best to prevent it. Directors who play even the smallest role in frauds can now go to prison. America’s Foreign Corrupt Practices Act and its European imitators have made a serious crime of something once seen as normal business practice: bribing foreigners. Companies infected by fraud can incur all sorts of other costs. Their licences to trade may be withdrawn, they may be barred from bidding for government work and they may be subjected to online campaigns urging customers to boycott them.

26 • Schumpeter

Praising the bearers of bad news

What can companies do to uncover internal scams? A new book, “Corporate Fraud: the Human Factor”, by Maryam Hussain, an investigator at EY, an accounting firm, provides a timely guide. One answer is to look for the telltale signs.

Some of the biggest corporate tricksters were people whose flamboyant personalities often raised suspicions: think of Robert Maxwell, or Augustus Melmotte in Anthony Trollope’s “The Way We Live Now”, perhaps the best novel about corporate fraud. Boards have a duty to pluck up the courage to challenge such larger-than-life bosses.

The most powerful weapon against fraud is not an algorithm or a checklist but a whistleblower. The Association of Certified Fraud Examiners calculates that three times as many frauds are discovered by tip-offs than by any other method. It also notes that firms with fraud hotlines, which staff can call anonymously, suffer smaller losses from fraud, and cut by seven months the “exposure gap” between the start of an illicit scheme and its discovery. Governments are increasingly providing whistleblowers with legal protection and financial incentives: America’s Securities and Exchange Commission has created a $450m fund to reward them.

Companies that dither, blather or launch half-hearted inquiries when presented with evidence of employee misconduct often end up regretting it. JPMorgan Chase lost billions in its “London Whale” rogue-trader scandal, initially dismissed by the bank’s boss, Jamie Dimon, as a “tempest in a teapot”.

Besides doing more to encourage whistleblowers, businesses must take decisive action to close the exposure gap. A botched investigation can tip off a fraudster and make it easy for him to cover his tracks. A suspicion of deliberate footdragging can render an entire company vulnerable. The damage done by corporate fraud can last long after the culprits have been identified.

However, most corporate fraudsters do not have swishing reptilian tails as a giveaway sign. In many instances they are not borderline psychopaths, just ordinary people gone wrong. Frequently, they start with small crimes and then engage in ever bigger misdemeanours to conceal their wrongdoing. Nick Leeson, who destroyed Barings Bank by losing £862m in bad bets on derivatives, said, “It all started when I tried to cover for a junior colleague who had lost £20,000.” Ramalinga Raju, the chairman of Satyam, who admitted to inflating the computer-services company’s revenues by $1 billion, said, “It was like riding a tiger, not knowing how to get off without being eaten.”

A second answer is to put procedures in place to detect frauds.

The Sarbanes-Oxley law passed in America after the Enron and WorldCom frauds requires the boards of public companies to commission independent audits of their internal financial controls. But rigorous procedures can easily lure companies into a false sense of security. The employees most affected by those rules may be precisely the ones most capable of finding ways around them, as was the case with Mr Leeson and Jérôme Kerviel, a renegade trader at Société Générale.

Many companies seek reassurance that all is well by installing cyber-security tools to monitor employees’ e-mails and internal accounting systems for suspicious activity. But fraudsters are often quicker at harnessing technology to disguise what they are up to (for instance, using instant messaging on their smartphones as a back-channel to communicate with accomplices) than companies are at using it to spot them. Those running scams may also be skilled at tricking colleagues into giving them passwords—a technique Edward Snowden may have exploited to devastating effect.

Source http://www.economist.com/news/business/21597980-fraud-within-companies-risk-can-never-beeliminated-just-managed-enemy-within?zid=317&ah=8a47fc455a44945580198768fad0fa41

» Schumpeter • 27

fsrforum • volume 16 • issue #1

fsrforum • volume 16 • issue #3

Word of the chairman

De trein gemist: Fyra

Gijs Romer

K(r)anttekening | Drs. Joost Groeneveld RA RV1

Dear reader, Temperatures are rising; the sun is shining more often: these are signs that the last phase of the academic year has started. This means the time for another series of business courses and deadlines for traineeships, but most importantly for the last activities of the FSR. We have a few weeks left to finish our projects before the memorable period of recruitment starts. Who will take the place of the current board next year, and who will be the first to be part of the FSR committee member group?

We will end this year with a bang, both our international projects will take place in the same week as the Asset Management Tour. The European Finance Tour will be heading for the financial center Frankfurt and the International Research Project group will explore India by visiting New Delhi and Mumbay. Fifteen FSR members along with two professors from the departments Finance and Accounting and the committee will visit Child Helpline International in India, together with multiple company visits. Also the European Finance Tour has an intensive but utmost interesting program for Frankfurt as well. Unfortunately I will not be able to join these projects abroad to expand the FSR network internationally, because I will be occupied with the final preparations for closing the FSR year.

Recently we had a fantastic weekend during a visit to Budapest with our committee members and our board predecessors. Moments like these emphasize the enthusiasm of the group with who we have organized all the FSR activities this year. Next to the FSR committee members that I have worked with, I have met a lot of FSR members this year. With many of these students I have talked about their plans and their choices, and I hope to keep in touch with them.

I have learnt a lot of this and I will return the favor by helping others where I can. In this way the FSR can play a great role in creating and maintain a great network of Accounting & Finance graduates.

For all students that consider studying for a master’s degree in Finance or Accounting I strongly recommend becoming acquainted with the FSR as early as possible. In this way you will meet other students with common interests and the same drive. Eventually you will see that you could really benefit from the people you meet following the same track. The FSR is therefore the best association to become member of in case this sounds appealing to you.

De Hoge Snelheidslijn (HSL) die tussen Amsterdam, Rotterdam, Antwerpen en Brussel werd aangelegd heeft “uiteindelijk meer dan zeven miljard euro” gekost (= een 7 met negen nullen). Meer dan zeven miljard is in guldens afgerond 16 miljard. Daar denk ik aan omdat de start van dit project nog in het guldens-tijdperk zal hebben gelegen. Voor de trein die er over

FSR News

Column Eefke van der Meer

Column Robin Touw

The Valuation

31 32 36

Naturally I finish with the looking forward to meeting you, and in this case I mostly look forward to meeting you during the interviews for either board- or committee positions. Nevertheless, I am always prepared to share my experience or talk about future plans with you. Otherwise I will talk to you again in the last ‘word of the chairman’ in a few weeks.

I wish you best of luck with your activities.

Gijs Romer Chairman FSR board 2013-2014

28 • FSR news

Active Members Weekend Budapest

zou rijden, werd door een merknamenbureau de naam Fyra bedacht: Zweeds voor vier, omdat het vier steden waren. Als je had willen besparen, was de naam ARAB ook goed geweest, of gewoon HST.

40

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators).

Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

Oorspronkelijk bedroeg het budget € 3,4 mrd (prijspeil 1995).

In het jaar 2000 was het nog begroot op 4 miljard euro toen bleek dat het 150 miljoen duurder zou worden. Maar het werd dus meer dan zeven miljard euro. Ik ben natuurlijk benieuwd hoeveel dat meer is. Ik denk dat het veel meer is: begin juli 2006 was al duidelijk dat het meer dan € 7 mrd zou gaan kosten: “Er lagen nog meer financiële tegenvallers op de loer”.

In november 2011 was er sprake van € 1 mrd, nodig om de “financiële problemen van de hogesnelheidslijn” op te lossen.

In juni 2012 bedraagt het financiële gat € 1,7 mrd. Ik denk dat met een gerust hart mag worden geconcludeerd dat die “meer dan zeven miljard euro” een eufemisme is. Het is bijvoorbeeld ook meer dan bijvoorbeeld vijf miljard euro. Maar de vraag is of het ook meer is dan 8, 9 of 10 miljard euro. Niets verbaast me wat dit betreft.

Maar de HSL ligt er nu dan toch. En dan moet er treinen over rijden. Die zijn gekocht. Door de High Speed Alliance (HSA = NS + minderheidsbelang KLM). De HSA moest natuurlijk eerst de concessie verwerven. De NS wilde geen buitenlandse concurrentie op deze lijn. “NS móest de concessie hebben. Het bod dat de Nederlandse Spoorwegen indienden was zó hoog dat de ambtenaren op het ministerie zich in de ogen wreven.

NS bood 178 miljoen – bijna twee keer zo veel als de buitenlandse concurrenten. Na overleg met het ministerie werd dat bedrag ‘naar beneden gepraat’ tot 148 miljoen euro per jaar” (NRC.nl, 3 juni 2013). En “NS-topman Hans Huisinga biedt tegen de adviezen van zijn eigen rekenmeesters in een concessievergoeding van bijna 150 miljoen euro per jaar voor het gebruik van de lijn. Experts schatten de waarde van de concessie op hooguit 100 miljoen euro” (Volkskrant, 4 juni 2013).

Het werd dus € 148 miljoen/jaar met een looptijd van 15 jaar.

In 2010 met ingang van 2015 werd dit bedrag verminderd tot € 101 miljoen/jaar: weer € 390 miljoen minder voor de over-

Hoe kan een efficiënt bedrijf zoveel geld op de eigen begroting bezuinigen zonder de kwaliteit van haar dienstverlening te schaden? heid. Met als troost: “Dat is veel minder dan de 2,4 miljard euro die het ministerie erbij was ingeschoten als de lijn failliet was gegaan” (Trouw, 18 november 2011). Ik ga er graag van uit dat niet al bij de aanbesteding is afgesproken om de jaarpremie na een paar jaar met ruim 30% af te stempelen (afgerond gelijk aan het surplus van 50% waarmee andere gegadigden werden afgetroefd).

De hoge bieding van € 148 mln maakt een rendabele exploitatie van de lijn niet eenvoudiger. “Om de exploitatiekosten voor de HSA te verlagen, werd door de Nederlandse overheid, in samenspraak met de HSA en de NMBS (JG: Belgische Spoorwegen), gekozen voor een goedkopere en daarmee langzamere trein dan gepland. Het bedrijf AnsaldoBreda won die slag” (zie NRC Handelsblad 18 juni 2011).

NS heeft voor heel veel dubbeltjes op de eerste rang willen zitten. Duidelijk is dat NS als meerderheidsaandeelhouder in HSA letterlijk tegen beter weten in haar hand heeft overspeeld.

Daar heeft ze de gelegenheid voor gekregen van de Nederlandse overheid. Voor de betrokken ministers geldt de uitdrukking “pennywise and poundfoolish”. Na die investering van meer dan € 7 mrd + de rest kon een behoorlijke trein er niet meer vanaf. De Fyra kostte eerst € 18,9 mln en even later € 20,7 mln per trein. “De NMBS liet accountantsbureau Ernst & Young de aanbestedingsprocedure onderzoeken. De prijsstijging wordt een onregelmatigheid genoemd, die erop kan wijzen dat Fyra-fabrikant AnsaldoBreda wist dat het de favoriet was van de selectiecommissie. Het staat echter nog niet vast dat sprake is van corruptie” (NU.nl, 6 juni 2013). “De treinen

De trein gemist: Fyra • 29

fsrforum • volume 16 • issue #3

fsrforum • volume 16 • issue #

FSR Former board member Het is als een cake met verschillende ingrediënten. Eerst het meel, de boter en de suiker bij elkaar. Maar de suiker is zo duur dat er geen gistmeer in mag Eefke van der Meer

van Alstom waren per stel 10 tot 15 miljoen euro duurder”.

Het ging om 19 treinstellen. Het prijsverschil was dus bij elkaar ten hoogste € 285 mln. Dat is nog altijd meer dan € 100 mln minder dan het verlies van de overheid (€ 390 mln) als gevolg van de afgestempelde concessie van HSA. Het zou ongeveer 3,5% van de totale investering zijn geweest. Met als premie een betere trein en minder risico. Maar er werd alleen nog gekeken naar de dubbeltjes die eerst niet op konden en later op oneigenlijke wijze moesten worden terug gehaald door op de resterende investering te bezuinigen. Het is als een cake met verschillende ingrediënten. Eerst het meel, de boter en de suiker bij elkaar. Maar de suiker is zo duur dat er geen gist meer in mag. Ik denk dat we zelfs geen koekenbakkers hoeven te zijn om te kunnen bedenken dat dit niet goed afloopt.

Het ging inderdaad mis. "Op 9 december 2012 zijn HSA en NMBS gestart met de Fyra-verbinding Amsterdam–Brussel met V250-materieel. Op 17 januari 2013 heeft HSA besloten dit V250-materieel uit dienst te halen" (brief NS inzake Fyra, 3 juni 2013). Die trein heeft dus wel 6 weken gereden.

Op 18 maart 2014 meldt NRC Handelsblad: “Fyra gaat terug, NS accepteert grote verliezen”. En daaronder: “De Fyra kost NS zeker 67 miljoen euro”. Het gaat om negen treinen voor € 213 miljoen. Toch nog weer meer dan die € 20,7 mln per trein uit de offerte. Een verschilletje van € 26,7 mln waar ik niets over lees. Fabrikant Ansaldobreda koopt deze tweedehandsjes terug voor € 125 mln. Als ze allemaal worden “opgelapt” en verkocht, krijgt NS nog eens € 21 mln. Misschien een trucje van NS om ze heel goedkoop te laten repareren. NS zou ze zelf weer kunnen kopen tenslotte. Niets verbaast me nog.

“Eigenlijk is er per saldo een meevaller van 37 miljoen, zei Dijsselbloem, omdat vorig jaar al 125 miljoen euro werd afgeboekt op de treinstellen”, en hij voegt er aan toe: “Maar dat is allemaal boekhoudkunde” (Het Parool, 18 maart 2014).

En gelijk heeft ie. Hij maakt er een grapje van. Nu weer serieus: “De aanvullende schade is groter, in totaal 340 miljoen euro. De hele zaak vindt Dijsselbloem geen goede deal, maar gegeven de omstandigheden dus wel verdedigbaar”. Dat is behoorlijk genuanceerd, maar niet erg consistent. Of bedoelt hij dat een goede deal niet mogelijk was? In dat geval zou elke deal goed zijn. Of moesten we liever een treinstel in

30 • De trein gemist: Fyra

het spoorwegmuseum zetten? Als monument voor de manier waarop de voorgeschreven Europese aanbesteding is ontweken.

Dit was wel een heel bijzondere vorm van publiek-private samenwerking. Zo zal die niet zijn bedoeld: hoge inschrijving om de buitenlandse concurrentie buiten de deur te houden.

Nederlands provincialisme, terwijl we zo pro EU zijn. Het omgekeerde van het concurrentie-effect zoals dat met aanbesteding wordt beoogd: efficiency die in kwaliteit en prijs tot uitdrukking wordt gebracht: may the best man win. En de daders liggen op het kerkhof? Pek en veren? Nee, die zien we terug in eervolle functies.

En nu stelt NS ons gerust; ze gaat na het “Fyra-debacle” de komende 10 jaar € 340 mln extra bezuinigen. En dat doen ze heel knap: “De Spoorwegen weten op die manier de kosten van het Fyra-fiasco op de eigen begroting te dekken. De Tweede Kamer had daar op aangedrongen; Kamerleden wilden niet dat de reiziger via duurdere kaartjes of minder treinen de dupe zou worden van de mislukking met de Fyratreinen” (ANP). Ik sta opnieuw voor een raadsel. Hoe kan een efficiënt bedrijf zoveel geld op de eigen begroting bezuinigen zonder de kwaliteit van haar dienstverlening te schaden?

Omgekeerd: waar zou al dat geld zonder bezuiniging naar toe zijn gegaan? Het logische antwoord: NS is geen efficiënt bedrijf. Zet dat monumentale treinstel maar liever bij de ingang het NS-hoofdkantoor. Ter leringhe ende vermaeck.

Passport Name Eefke van der Meer Age 24 years Residence Rotterdam, The Netherlands Employed at RebelGroup Current position Junior Consultant Which FSR Board XIIIth Board 2010-2011 Board function Secretary Study Finance & Investments Year of graduation 2012 Which car do you drive Peugeot 208 What do you drink on a Friday night A beer Life motto If things don’t go right, turn left.

Notes 1 Wingman Business Valuators B.V.

Today, it has already been over four years ago that I started thinking what I wanted to do after finishing my Bachelor IBA. One thing was really clear to me after returning from my Bachelor Exchange in the US: I would not immediately start with my master. My time as a student was flying, and I liked it too much to be graduated after four years. Furthermore, I didn’t want to finish my studies with only theoretical knowledge in my pocket.

When I was considering the possibilities, it became clear to me that a fulltime board year was the thing I wanted to do the most. Being able to run an organization with a close team of board members who are all fully committed to a common goal: bringing the organization to a higher level.

For me, the FSR was by far the most attractive study association. I was interested in finance and the FSR is an organization where professionalism and fun are equally important.

This combination was exactly what I was looking for during a board year. You can understand that I was very happy after hearing I would be the Secretary of the XIIIth Board.

The year started in June with getting to know my fellow board members at the board announcement drink. I didn’t know the other five board members, and I was not very acquainted with the FSR before applying for a board year.

Therefore, the summer was a great experience for me with getting to know all the ins and outs of the FSR, my ‘colleagues’, former board members, committee members, lecturers and of course the secretaries at the 14th floor the of H-building. I was impressed by how professional the FSR really was and how the biggest companies took us seriously.

As a board, we used the summer to make strategic plans for the academic year and prepare all the events that we would organize. This is an exciting period and gives the board the time to take charge of their year.

During the year itself, I really liked my role as Secretary, because I was involved in nearly everything. I formed the daily board together with the Chairman and Treasurer, which meant I could talk about strategic and practical issues with them. Next to that, I was creating the promotion materials for all our events which made me involved in all our events in an early stage. Furthermore, I had a variety of tasks on my to-do list, such as coordinating the commercial mailings for all financial study associations in the Netherlands and organizing

some smaller events, such as the Company Dinners and Active Members Weekend. Despite the allocation of tasks and responsibilities between the board members, I have always felt the board year as a mutual responsibility for our board as a team. We worked together intensively, since we spent five days a week at our office in the H-building and had daily discussions about our events, activities and strategic issues. The intensity of working together as a team in unique during a fulltime board year and I think it was great.

There was a lesson I learned, already at the beginning of the board year. We were enjoying a dinner with one of our partner companies and the manager of this company was giving a speech to us. He wished us a lot of luck and fun during our board year, and we toasted all together to celebrate this. But he also gave us the advice to have some fights during our board year. This advice was initially strange to me, because at the beginning of a year, you actually hope that you will not get into a fight with your team members. However, I understood that if you ‘fight’ each other on the content, rather than on personal issues, it will lead to better decisions and eventually better management of the study association. If team members always agree with each other, they will never be able to sharpen their opinion and improve themselves. I still remember this advice sometimes and it reminds me to not be afraid to have vigorous discussions if it is necessary.

I am looking back on a great period as the XIIIth Board.

Deciding to apply for a board year at the FSR was the best decision I could take in my third year. Besides the lesson above, I learned a great amount of lessons during my board year. I got to know many companies in the financial sector, learned how to take responsibility and, last but not least, had a lot of fun. Now that I am working for more than a year, I am still involved with the FSR. It is nice to keep in touch with my friends of the FSR and I am a member of the Supervisory Board. It is nice to be able to advice the current board and being kept up to date on what is going on.

FSR news • 31

fsrforum • volume 16 • issue #3

fsrforum • volume 16 • issue #3

FSR Member

Banking Dinner and Multinational Dinner

Robin Touw

My name is Robin Touw,22 years old and I am currently enrolled in the Master Accounting & Finance. During my pre-master I came in contact with the FSR for the first time.

The first event I participated in was the Bachelor Accountancy Day. This event has heightened my interest in the field of accountancy and especially in the Big 4. Because I wanted to experience the different cultures between these companies, I applied for the FSR Big 4 cycle. As a participating student you’ll visit the four major accounting firms and get the opportunity to get to know the organizations, employees and their work. During the inhouse-days you’ll get a good idea of the differences between these four accounting firms. I eventually made the choice to apply for a master thesis internship at EY (former Ernst & Young). Especially, the face-to-face interviews with various EY employees made me very enthusiastic and led to my final choice. After a selection process I started in February 2014 as a master thesis intern. As a student I find it hard to make a choice for a particular firm. I think that an internship will give me a clear view on the working environment of the company.

Both events and social interactions with several FSR committees have aroused my interest to apply for a committee. I eventually applied for the FAN-committee. As member of this committee I was responsible for the organization of two events: Traders Trophy (in co-operation with Optiver) and the Multinational battle (in co-operation with Shell, Unilever and KPN). It is interesting for students to participate in several in-house days and experience the different business cultures. In addition, I think it’s important for students to find out what options the different companies have to offer, such as traineeships. Participation in events or applying for a committee gives students the opportunity to expand their network. For me in particular, it was interesting and informative to organize such an event. I also experienced it as a way to get in contact with leading multinational companies.

tional knowledge and experience in both finance and accounting. From my point of view, it is a challenge to use my knowledge in this research to improve the lives of children in India. Besides that, it is a wonderful cultural experience.

The events organized by and for students will give you the opportunity to get the most out of your study. For me especially, the FSR has given me the chance to get in contact with several different firms: Accounting, trading, consulting, and investment banks. Getting in contact with all these companies has contributed a lot to my knowledge. Besides that, as an active member within the FSR, my network expanded considerably. After participating and organizing various events with the FSR, I can only recommend you to do the same. So if you’re a motivated student who likes doing something during your study, I can suggest you to apply for several events of the FSR. Besides that, if you want to get in touch with companies at an organizational level, I suggest you sign up for one of the many different committees within the FSR. I am sure you won’t regret it.

If you have any questions or remarks, please contact me.

Passport Name Robin Touw Age 22 Residence Rotterdam Study MSc in Accounting, Auditing & Control: Accounting & Finance FSR committee FAN-Committee

In March the FSR has organized the Banking Dinner and the Multinational Dinner. Both dinners took place in restaurant ‘De Harmonie’ where a selected group of students got the opportunity to meet various renowned companies. During a three course dinner the students met potential employers in an informal atmosphere.

On the 4th of March the FSR Banking Dinner took place where students met ABN AMRO, Kempen & CO and NIBC. Three weeks later on the 25th of March the FSR Multinational Dinner took place where students met Unilever, KPN, ExxonMobil and Essent. After everyone was welcomed with a drink, the evening started with a short introduction by representatives of the participating companies. The introduction was followed by the dinner itself, which consisted of three delicious courses. After each course the students switched tables to join another company. This way the students could meet the representatives of the companies and ask their burning questions about the experiences of the employees. If there were any questions unanswered, the students had the chance to have a chat with the representatives at the closing drink after the dinner. Both the FSR Banking Dinner and the FSR Multinational Dinner have given the students the opportunity to extensively become acquainted with the corporate culture, activities and differences of the participating companies in an informal setting. From the perspective of the FSR we considered the dinners to be very successful and therefore we would like to thank all contestants and the involved companies.

In December 2013 I applied for the FSR International Research Project. During this project a group of 20 students who study either Finance or Accountancy does research for Child Helpline India. As a part of this research, students will participate in several workshops and visit different multinationals. The research will be done both in the Netherlands and in India during a two-week stay in Mumbai and Delhi. I see participation in this project as a chance to obtain addi-

32 • FSR news

FSR news • 33

fsrforum • volume 16 • issue #3

fsrforum • volume 16 • issue #

Finance Day

International Research Project 2014

Together with the EFR we organized the Finance Day on the 11th of March. During this day Bachelor's students with an interest in finance had the opportunity to see what their academic- and career opportunities are in finance are. Different aspects of finance were discussed by specialists in the field.

The day started off with a speech by Christian Stoll. He told us about his experience as commodity trader at Barclays.

Hereafter Pascal Visée gave a speech, who served as Group Treasurer of Unilever NV. Afterwards students had the time to ask the guest speakers all questions they had. Next to speeches about the working experience, students were also informed about the Master programme of Financial Economics by professor Han Smit.

With this writing the International Research Project (IRP) committee and the participants are closing an exiting period.

The flight tickets are booked, hotels are ready, our research topic is clear and the international plan is getting to show its form. It is a fun and exciting period for all of us. After the application period we were positively surprised by the amount of applications. Certainly we are glad to say that the current mix of Finance and Accounting students are very skilled and motivated to push our charity partner into the right direction. For all the participants to get to know each other our partner EY organized a kick-off meeting at their Rotterdam office. After a warm welcome the IRP group was tested on their flirting skills (on a business perspective off course). Getting to flirt with each other was of course the perfect ice breaker and we were happy to see that the group was getting along right from the start.

Off course, in order to perform quality research we needed partners to help us with our cause. We are very glad to announce that large international firms such as PwC, EY, Unilever, Varova Investments and Friesland Campina will assist us, both financially and intellectually. We started of with an informal day at the Unilever Rotterdam office where a finance trainee told about his experiences in India. Truth be told, it was not all pretty, but we were able to take some very interesting notes. Followed by a presentation from Erik van Vliet (Senior Business Controller) who gave us a very interesting presentation about global sustainable living. Coming month our other partners will organize other inhousedays tailored to our research. These in-housedays give our research a more practical feeling and it is a great opportunity to get in touch with a future employer.

This year the IRP partners with Childline India. This charity organization is the first one of its form in India and is thriving to help children in distress. For the Dutch readers, the organization can be compared with the Dutch organization “De Kindertelefoon”. Childline India is backed up by the international organization Child Helpline International (CHI) for organizational problems, but for the financials it must stand on its own. And as is the case with every charity, Childline India struggles with finding the appropriate funding for their cause.

The IRP Project 2014 aims at seeking and finding answers to the current funding problems of Childline India. To make sure that our research will be of the most possible value to Childline India, we will have close contact with the organization during the entire project. Thereby our team of twenty motivated researchers will be supported by the Erasmus University Rotterdam in the form of two professors. Ted Welten of the accountancy department and Joris Kill of the financial department will guide the students in their research of academic quality.

To ease the stress, the IRP committee has put up a challenging and fun program during our time in India. Off course, main touristic attraction, such as the Taj Mahal, the spicy Indian food, Bollywood and others cannot be excluded while visiting India. Truth be told, we all are anticipating a culture shock of great extend. But hey, it makes our trip even more valuable.

After the speeches it was time for all students to have lunch before the two workshops started. An M&A workshop was given by Rembrandt Fusies & Overnames to twenty selected students. During this workshop the students got an insight view into the practical area of M&A. Another workshop was given by RD recruitment. They gave a training on how to present yourself in the financial sector to have a perfect start of your career. The training was very informative and gave the students a good view on the whole application process.

At 16:15 all participating students went back to CB-4 for an inspiring speech of Erik Swelheim, CFO of KLM. He shared some of his experience as the CFO of KLM. Hereafter it was time to go to the Smitse to end the inspiring day with a drink. Erik Swelheim joined us and students could still ask any question they had. After the drink, the day had come to an end and we can look back on a successful day.

Child Helpline International, Curry and Bollywood...

And so, on the 11th of May a group of highly motivated students of accounting and finance will arrive in Mumbai and will travel all the way up to New Delhi to perform research, contribute to a charity organization and will have fun doing it.

On behalf of the IRP committee, Yours sincerely, Ibrahim Karatas Marketing Officer

After a number of brainstorm sessions with the professors we decided that the aim of the research would be the funding of Childline India. As of 2015 Indian private corporations are required to spend at least 2 procent of their net income on corporate social responsibility. These kinds of developments are very beneficial for charity organizations in India. Therefore we will try to analyse how these corporations look at charity, how their CSR programs are set up and how Childline India can benefit from this.

34 • FSR news

FSR news • 35

fsrforum • volume 16 • issue #3

The Valuation

On Thursday morning 9 am all students arrived at Stroom Rotterdam to get in touch with BDO and EY. In the morning the corporate finance team of BDO was representing their company. After a short introduction the group was divided into four teams with a color for every team. The first two teams were representing the buy-side and the other two teams the sell-side during the case and team four won the case. After the lunch with BDO, EY arrived for the session during the afternoon. First there was a presentation about EY and the advisory department.

In the evening we had a dinner together with both companies, the students and the committee. During the dinner we could ask our last questions, could get to know the companies even better and afterwards we had some drinks in the bar. After all we had a great experience in the field of valuation and even receive a certificate of Corporate Valuation from Training the Street.

The second edition of The Valuation took place on the 7th and the 8th of April together with BDO and EY. The entire event was about two days with the following slogan: “One day theory, one day practice”.

The first day we had our theoretical part together with Training the Street. Around 9am the instructor, Zane Hurst, introduced us to the topics he was planning to discuss with us. The general subject was Corporate Valuation and the topics were about Leveraged Buyouts, Discounted Cash Flow analysis’s, Acquisition Comparables and Public Comparable analysis’s.

During the day we continuously draw on the deal that Kraft took over Cadbury. After we had discussed the Acquisition comparable, we had some coffee during the break while everyone could ask their questions about the comparables. During the second part, Zane told us something more about the Comparable Analysis. Around 1pm we had lunch and in the afternoon Zane had explanation and exercises about Discounted Cash Flow and finally the Leveraged Buy Out. We ended the day in ‘het Erasmus Paviljoen’ with a social drink with Zane Hurst and the people of BDO and EY. After a long day of valuation, the students went home to get ready for the next day, the day of practice!

36 • FSR news

» FSR news • 37

fsrforum • volume 16 • issue #3

Clean Tech Challenge

On the 4th of April 2014 the Dutch Cleantech Challenge hosted its closing event, the 2014 Dutch Cleantech Challenge Finals. Out of the 12 teams selected to compete throughout the course, 5 out of twelve were left after the semi-finals. These 5 finalists went head to head in an exciting Cleantech presentation event. A jury of experts from leading organizations that have contributed to the program had a front row seat and judged each of the contestants and their ideas on criteria such as impact, innovativeness and feasibility.

Four prices were given away to the selected top 3 of teams and one to the team voted to be the most interesting by the audience. Prices included a free consultation by technical experts at RoyalHaskoningDHV for each of the three selected teams and a €3.000 price for the winning team. The audience voted to give away a 500€ price to the best presentation of the evening. On top of this, the winning team was selected to represent the Netherlands in the International Cleantech Challenge Finals in London!

38 • FSR news

The winning team was a team of students who designed a new testing application for the solar industry. Their application allows PV-manufacturers a better way to test cells before mounting them to a panel. The technology was dubbed the Fourier Optical Measurement System or FOMS for short.

The jury was particularly impressed by the practicality of the idea and its ability to make a real impact in existing markets.

The Dutch Cleantech Challenge 2014 was made possible by the combined efforts of organizing parties such as the Yes!Delft students, ECE Students, FSR and the Energy Club. Furthermore it couldn’t have been the success it was without the involvement of the partners; RoyalHaskoningDHV, Climate-KIC, Kempen&Co, ECN and the TU Delft.

We would like to thank all the organizing parties, the partners, the jury and all of the contestants throughout the Cleantech Challenge for the amazing competition and the brilliant ideas it generated!

Second and third place went to Strawberry (2nd place) and RiziQi (3rd place). These teams developed an ink-free printer (Strawberry) and a charging & storing device for rural Africa using bicycles (RiziQi).

The latter of these teams also won the audience price and took home an additional €500 on top of their free consultancy price.

For now we wish the FOMS team the best of luck in competing in the International Finals of the Cleantech Challenge in London on the 24th and 25th of April 2014!

»

For more information on the competition and the London Finals follow us through our website: www.cleantechchallenge.nl, on Facebook: fb.me/dutchcleantechchallenge or on Twitter: twitter. com/Dutch_CTC

FSR news • 39

fsrforum • volume 16 • issue #3

Active members weekend Budapest

www.werkenbijpwc.nl

Soms weet je precies wat je wilt

Soms sta je open voor suggesties Je hebt tijdens je studie alle mogelijke kennis opgedaan.

En nu wil je aan de slag. Op een plek waar je al je ambities kwijt kunt. Waar de lat hoog ligt en waar je samenwerkt met professionals. Je start je carrière vliegend en gaat recht op je doel af. Dat is: het beste in jezelf naar boven halen.

Kom verder op werkenbijpwc.nl

Being an active member of the FSR is more than organizing events, it is also about social events with all active members. With the FSR I went on active member weekend to Budapest in Hungary. The active members weekend is a weekend with all students who are in a committee at the FSR. My name is Max van Keulen, together with Gert-Jan Breukink and Sebestiaan van Hovell I am part of the Finance committee.

On Friday the 28th of March we met at Rotterdam central station to travel to Eindhoven airport by train. After a comfortable flight we arrived around dinnertime in our hotel in Budapest. One of the most attractive facts of Budapest is the cost of living.

For student prices you can have a good dinner and drinks. You can imagine what the first things were that we did. The first evening we went to the world famous bar called ‘Szimpla’ where we had some drinks will all active members. When the birds were chirping, we crawled into our beds. After having a power nap of 120 minutes the finance and FAN committee decided to visit the oldest and most beautiful bathhouse of Budapest. The temperature of the water was around 38 degrees Celsius and with three hour’s sun at our faces, we felt reborn. This could not really be said about the other people that stayed at the hotel.

To be sure that everybody could handle the coming night we went on a Boat trip on the Donau River to freshen up in the sun.

The next activity was a two hours cycling tour on a beer bike. During the bike tour we could look around the old city of Budapest and we had to opportunity to get in shape for the coming night. My athletic body got a bit hungry after so much cycling. Happy as I was, the board had made a reservation in a nice restaurant in Budapest to thank the active members for their contributions this academic year. We closed the night in a club in Budapest. We had drinks and partied all night. It was a great evening. The next morning only the Finance Committee showed that they can handle an investment banker’s life, with again a power nap of less than three hours we visited this time the biggest bathhouse of Budapest. Sunday evening we were back in Rotterdam and had a closing dinner together.

In the name of all the active members, I want to thank the FSR Board for the great weekend and the opportunities you have given us this year.

Max van Keulen Finance Committee 2013-2014

Neem voor meer informatie contact op met een recruiter: 088 792 87 77 werkenbijpwc@nl.pwc.com www.werkenbijpwc.nl/contact Volg werkenbijpwc op Facebook en Twitter

© 2012 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.

40 • FSR news

Become Active

We are now recruiting for committee positions

www.FSR.nl