Many people have heard of Ponzi schemes, but most people do not know what a Ponzi scheme actually is. A Ponzi scheme is an investing operation in which the fund pays its investors with their own money or with money invested by other investors. All the money paid back to investors is money that was contributed to begin with. None of the money that is paid to investors comes from actual profits.

Berhard Madoff managed to pull of his Ponzi scheme for two decades. I personally find it extremely difficult to believe that someone could pull off a scheme of that magnitude for that length of a time without anyone picking up on it. Even Madoff himself could not believe that the SEC did not catch him. Madoff’s scheme was not uncovered until Madoff revealed that his entire asset management arm was “just one big lie.” Although it is hard to believe that a scheme like this could work, their were certain factors that helped him last as long as he did.

One reason Madoff was able to pull the wool over so many people’s eyes was that his reputation in the business world was top notch. He helped found NASDAQ stock exchange and served as its chair for a term. Because of these things people trusted that Madoff was knowledgeable about the business world. Also, beyond his stellar reputation, Madoff was extremely smart in the way that he ran his scheme. Madoff was able to get his investors their money promptly whenever they requested it. This helped build the trust of his investors. Although he could have reported outrageous profits like some Ponzi schemes, he chose to show moderate profits that were occurring at a consistent rate. This well execute plan help pad Madoff’s wallet for two decades.

That “one big lie” was used by Madoff to take an estimated $65 billion from his investors. It’s incredible to realize that he was able to make all of that money simply by tricking people. This is just another example of how you can’t be too careful when you are investing your money. 

The Enron scandal was the largest bankruptcy in history when it occurred, but it no longer holds this title. What company is currently in possession of the “prestigious” honor? The answer to that question is Lehman Brothers. In 2008, Lehman Brothers had over $600 billion in assets when it filed for bankruptcy. Lehman Brothers was the fourth largest investment bank when they were forced to file for bankruptcy, and their collapse is though to have precipitated the global financial crisis. Lehman Brothers was an enormous collapse, but what makes it a scandal?

The scandalous part of the Lehman Brothers collapse occurred when they tried to cover up how bad their financial situation actually was. Lehman Brothers sold $50 billion worth of toxic assets to different banks in the Cayman Islands. Lehman Brothers sold these toxic assets with the promise that they would buy them back in a short time. This practice is perfectly legal and is actually done by banks all the time. However, Lehman Brothers used this common practice along with some sneaky and/or illegal accounting to make their companies cash appear to be $50 billion greater than it actually was and it made their toxic assets appear to be $50 billion less than they actually were. How did they accomplish that?

When you sell toxic assets to banks and promise to buy them back, this promise to buy them back makes the transaction a loan, not a sale. However, Lehman Brothers was recognizing this transaction as a sale. Therefore, it appeared as if they had made sales of $50 billion when in fact they had merely borrowed $50 billion from different banks in the Cayman Island. This is commonly known as a “Repo 105.” A “Repo 105” is defined as a short-term loan that is classified as a sale. The “Repo 105” made Lehman Brothers appear to be healthy when in fact they were on the verge of bankruptcy.

When the scandal occurred people were not sure how the situation would be handled. Would people get arrested for there roles in the “Repo 105” scheme? Their questions were finally answered earlier this year when 4 people were arrested for their role in the accounting fraud that occurred at Lehman Brothers. Although some experts felt that the accounting activities that had occurred at Lehman Brothers were merely deceitful, I personally feel that the jury made the correct decision when it decided these activities were fraudulent. The people involved this cover up knew that there company was in trouble, but they choose to lie to the public instead of admitting the truth. Decisions like that are much more that deceitful, they are flat out fraudulent.

The CPA exam is an extremely difficult exam to pass. The national pass rate percentage for each part of the exam tends to fall between 45% and 50%. So why did I decide that in a few years I am going to put myself through this extremely difficult examination? The simple answer is that having a CPA is worth all the hours of studying that will be required to pass all 4 parts. What makes a test worth the CPA worth all of that time and effort?

There are plenty of reasons that make the CPA worth the over 400 hours of studying that is usually done. One of the reasons is job security. The U.S. job market is becoming more and more competitive every year. Potential employees have to work extremely hard to make sure that their resume stands out from the rest. One way for accountants to impress their potential employers is by having a CPA. Employers hiring accountants cannot ask for much more. A CPA shows that you have a very good understanding of many of the complexities that an accountant could have to deal with.

Being a CPA looks excellent on the resume of someone applying for a job, but it is also extremely advantageous for accountants that are trying to move up in their company. Some companies set a ceiling on how high they will let non CPA accountants go. In these companies the importance of a CPA is extremely evident. If you want to get to a certain level, you need to be a CPA. However, not all companies have this ceiling. Nevertheless, it is a very nice safety net to be able to fall back on the fact that you are a CPA. In 2011, the overall unemployment rate was 9%; however, the unemployment rate for accountants was only 3.5%. For those with a CPA, it is even less.  Even when everything else is looking bleak, there is still an extremely high demand for accountants that know what they are doing.

Although job security is a nice benefit, the most popular reason for taking the CPA exam is the ability to make more money. According to Becker Professional Education, the average CPA entry level position earns 10% more money than a non CPA entry level position. This number might be around $7,000 at first, but as the employees move higher up the corporate ladder the salary difference could grow to around $50,000! That kind of difference in salary makes the 400 hours of study well worth it in my opinion.

Passing the CPA exam is tough work. The 400 hours that they suggest that you study might seem to be daunting. However, if you sit down and do the math you will find that those 400 hours are well worth it. According to the Becker Professional Education the difference in salaries between non-CPA accountants and CPA accountants can end up translating into over 1 million dollars over your career! That means that during those 400 hours of studying you are earning roughly $2,500 an hour if you are able to pass the test on your first try. In my opinion that kind of money and job security are more than worth the time and effort of studying for the CPA exam.

In my previous blog I discussed how Enron managed to pull off its enormous scandal. Let’s look more closely at some of the more significant effects of this scandal.

First, this scandal caused one of the “Big Five” accounting firms to be dissolved. This scandal should have been discovered much earlier on. However, the accounting firm responsible for auditing Enron, Arthur Andersen, did not fulfill their duties as auditors. To make matters even worse, the firm was convicted of obstruction of justice, because some of their partners had order several relevant documents to be shredded. Although this conviction was over turned 3 years later, the damage had already been done, and Arthur Andersen’s reputation was ruined.

One of the most beneficial side effects of the Enron Scandal was the passing of the Sarbanes-Oxley Act. Named after its sponsors, Paul Sarbanes and Michael Oxley, the Sarbanes-Oxley Act set new or enhanced standards for the boards and management of publically owned companies. These new standards also apply to public accounting firms. The bill passed through the Senate and the House only receiving 3 opposing votes in the process.

The Sarbanes-Oxley Act included 11 titles. These titles covered a wide range of ideas and punishments that would help clean up business in America. The first title in the Act established the Public Company Accounting Oversight Board. The whole goal of this board was to oversee public accounting firms that were providing auditing services. This is one of the most important titles in the Act, because it created an independent group of people that could look at the situation from a less biased perspective to ensure that the new standards were being followed.

Other titles in the Sarbanes-Oxley Act helped to make sure that the people responsible for auditing a company do not have a conflict of interest. One issue that occurred during many of the financial scandals was that the people auditing the companies might benefit in some way based on auditing decisions they made. Conflicts of interest can cause problems by giving people a reason to act unethically. The unethical decision is usually in the best interest of themselves and/or their company. Although people want to believe that they will make the ethical decision, past history has shown that there are plenty of people that ignore the ethical choice and make the one that will benefit themselves and/or their company.

The Enron Scandal and the other scandals that occurred around that same time were low points in American business. However, the business world used these events to fix loophole that existed in the current system. Although you can never have a perfect system, the changes that were made after the scandals will help keep the dirty business practices at a minimum. What else can you ask for? The business world is learning and improving to make sure that we are better today than we were yesterday.

Do you think it is possible to make one billion dollars magically appear? Most people think this is impossible to do, but in October of 2001 people found out that this actually happened. An energy company based in Houston, Texas, Enron, managed to make one billion dollars appear on their income statement. They were reporting a net income of 393 million dollars; however, when the net income was calculated following Generally Accepted Accounting Principles (GAAP) it was found to be a 644 million dollar loss! How was Enron able to make all of this extra cash show up on its income statement?

Enron pulled this off by taking advantage of accounting loopholes and using poor accounting. Also, they abused special purpose entities to help their net income look extremely inflated. Special purpose entities are companies that are formed to help out the main organization. Enron would make special deals with these companies that were extremely profitable for Enron. The special purpose entity would take a huge hit, and by taking this huge hit it would absorb part of Enron’s enormous net loss. However, Enron hid this practice from everyone so that when people looked at the company from the outside it appeared that they were doing extremely well. People were crazy about the great growth that Enron was having. This caused the stock price to skyrocket to around $90 a share.

Eventually, however, investors began to get suspicious of Enron’s activities. These suspicions were the beginning of the end for Enron. Enron’s stock plummeted to 25 cents a share, and eventually the company was forced to file for bankruptcy. Enron had 63.4 billion dollars in assets when they filed for bankruptcy. This made them the largest company to file for bankruptcy, until WorldCom filed for bankruptcy the following year.

The Enron scandal had a huge effect on the American public. Enron’s stockholders lost nearly 11 billion dollars when its stock collapsed. This collapse greatly affected the confidence of the American public. Most people had no idea how easy it was to mess with the numbers on the income statement. Even after the Sarbanes-Oxley was passed, people were still suspicious about how truthful the accounting practices of companies could be.

The accounting profession’s reputation has recovered from the scandals that happened around the time of the Enron Scandal. However, these scandals have had a lasting impact on how accounting is done. Accounting has learned from its dark past and continues to become more and more virtuous as time goes on.

I have found that most people have a basic understanding of what accounting is. However, most people do not realize that there are two very distinctive types of accounting, managerial and financial. Both types of accounting are vital but they are extremely different in a number of ways. Managerial accounting helps managers and those inside a company make decisions about the present based upon predictions regarding the future. Financial accounting, however, is almost completely the opposite. It deals with past information and is used by external groups, such as stockholders.

Managerial accounting is a tool that businesses use internally and has a crucial impact on how a company operates as a whole.  Due to the complex nature of the business world, it is helpful to those in charge to have a financial forecast available when making decisions. That is what managerial accounting provides. Since it is only supposed to be used by people inside that company, there are no rules regarding what you can and cannot do. Therefore, companies are not required to comply with General Accepted Accounting Principals (GAAP). In some cases they may purposefully break GAAP. Companies are not required to have managerial accountants or managerial accounting reports! Although there is not an outside agency that governs managerial accounting, it would be unwise for a company to function without managerial accountants.

Financial accounting is an important tool for people on the outside of a company who want to understand what a company is currently going through financially. Unlike managerial accounting, it is extremely vital to follow the GAAP that are set by the Financial Accounting Standards Board (FASB). Failure to follow their rules can lead to serious legal issues for a company. Since the information provided in the financial statements is used by a large number of people outside of a company, it is both immoral and unethical to falsify or skew the numbers in order to present a company in a favorable financial light. There have been certain circumstances in which people have been caught doing this and the results have been catastrophic, legally and financially, for the companies involved.

Managerial and financial accounting look similar on paper, but there is an easy way to distinguish between the two. Financial accounting is reporting on the past, so there is less guesswork involved. Most of the numbers that the financial accountants deal with can be calculated accurately, because the transactions have already occurred. Managerial accounting numbers are more often estimates, because they are trying to predict the future. They are trying to forecast numbers based on many variables. There are, however, reliable techniques managerial accountants can utilize to insure the most accurate numbers possible. But, random events can occur that are impossible to account for which may throw off even the most trustworthy methods.

Companies should use both types of accounting to accomplish their important tasks. Although the work may seem to be similar, the ending result can be vastly different.

One of Mattel’s rivals in the toy making industry is Hasbro. Hasbro is also a massive toy company with assets worth slightly more than 4.1 billion dollars. The current ratio is one way that people measure the health of a company. Hasbro’s current ratio was 3.09 to 1 at the end of 2010 and then it decreased to 2.39 to 1 at the end of 2011. This ratio compares current assets to current liabilities. So over the past year Hasbro’s current liabilities have become larger in comparison to its current assets. Although this may seem like a problem, the increase in current liabilities has pulled the current ratio down and now it is closer to the ideal 2 to 1 ratio. As expected, the increase in current liabilities has brought the current ratio closer to the ideal number, but it has also lowered the quick ratio. At the end of 2010 the quick ratio was 2.35, but after the large increase in current liabilities the quick ratio is down to 1.78. This ratio shows the ability of a company to pay off its short-term debts, and even after the large increase in current liabilities Hasbro still has plenty of quick assets to pay off there short-term debt. Even though there was a large decrease in the quick ratio, the quick ratio is still strong. They have enough quick assets around to pay off all their short-term debt and still have a substantial amount leftover.

The debt to equity ratio is another ratio that is important to calculate when you are analyzing a company’s balance sheet. Hasbro’s debt to equity ratio was 1.53 to 1 at the end of 2010, however it increased to 1.91 to 1 at the end of 2011. This was partially caused by the large increase in short-term liabilities that help get the current ratio closer to ideal. However, this large of an increase is not a good sign for the company. Over 2011 Hasbro actually lost around 200 million dollars worth of equity. This was caused by an enormous increase treasury stock. So the large increase in the debt to equity ratio does not look as bad when you realize that the major factor that caused this increase is an increase in treasury stocks accumulated by the company. The company could simply reissue these shares of stock if they ever needed cash. The reissuing of the treasury stock would them decrease the companies liabilities and return the debt to equity ratio to its usually mark. Hasbro’s debt to equity ratio was higher than Mattel’s even before the large increase in treasure stock. Although this is not a good sign, it is not a guarantee that Hasbro has a debt to equity ratio that is too high.

Another ratio that helps show the financial status of a company is the Price per Earnings (P/E) ratio. In order to calculate the P/E ratio, you need to calculate earnings per share (EPS). The EPS for Hasbro increased from $2.86 in 2010 to $2.88 in 2011. This shows that each share of stock earns slightly more money at the end of 2011 than it did at the end of 2010. EPS is another value that is difficult to determine how good or how bad it is because what is good for one industry might be bad for another. We know that Hasbro’s stock makes 68 cents more per share than Mattel’s stock does, but this is not nearly enough information to make any kind of important decision. The P/E ratio is another piece of information that might help you determine how good Hasbro’s EPS is. The P/E ratio for Hasbro at the end of 2010 was 16.97 to 1 and it decreased to 11.26 to 1 by the end of 2011. This is an instance in which a decrease can be a good thing. At the end of 2010 for every $16.97 invested in Hasbro you made $1, but at the end of 2011 for every $11.26 invested in Hasbro you made $1. This means that you earned more on your investment at the end of 2011 than you did at the end of 2010.

Overall, Hasbro is a fairly stable company, but there are a few things on their financial statement that worry me. One of these things is the large decrease in the stock price over the last year. However, the stock price seems to be rebounding ever since the dip it took at throughout the 2011 year. Another interesting thing to look at is the increase in short-term borrowing by almost 170 million dollars. This is something that I would look into before I invested in Hasbro. It is probably not a big deal, but I would want to look at it before I give the company my money. The most worrying thing about their financial statement is the 15 million dollar decrease in assets category called Property, plant, and equipment, net. This makes me think that they are decreasing their company size and that is not the kind of company that I would want to invest in. It makes me think that they are losing their market share and are being forced to reduce their toy manufacturing. Hasbro is a good name, but I would do a little more digging before I invested in their company.

Mattel Inc. is a very large and successful toy company. At the end of 2011 there assets were measured at almost 5.7 billion dollars. At the end of 2011 there current ratio was measured at 3.31 to 1, which is a 38% increase from 2.39 to 1 in 2010. This shows that in 2011 Mattel managed to lower their short-term liabilities while increasing current assets. The current ratio shows that the company is extremely liquid and it got increasingly liquid over the previous year. The general rule for the short-term health of a company is 2 to 1, so based on this rule it would be beneficial for Mattel increase their liabilities and use the borrowed money to help grow the company.

Another ratio that measures the health of a company is the quick ratio. This ratio shows Mattel’s about to pay off its short-term debts. Mattel’s quick ratio increased from 1.80 to 1 in 2010 to 2.52 to 1 in 2011. Since the ratio is greater than 1 it shows that Mattel has more assets that can be quickly turned into cash than it has debt, so Mattel should have no problem paying off its debts. As you have stated in class, “Cash is king” and Mattel has tons of cash and assets that can be easily converted to cash. This should give them an advantage over other companies in their industry. Also the substantial increase in the quick ratio is an extremely positive sign for the financial strength of the company.

Another important ratio that investor look at is the debt to equity ratio. Mattel’s ratio increased for 1.06 to 1 in 2010 to 1.17 to 1 in 2011. This is a ratio in which an increase is a bad thing. This shows that Mattel has more liabilities than it has equity. However, it is difficult to determine if these numbers are good or bad because this is a ratio that should be compared to the other companies in its industry. Mattel’s debt to equity ratios are better than Hasbro’s ratios. Although this is a good sign, it still does not tell us how Mattel looks compared to the whole industry.

The Price per Earnings (P/E) ratio is another important ratio to find when you are looking at a company. However, in order to calculate this ratio you need to calculate earnings per share (EPS). Mattel had an EPS of $2.20 at the end of 2011, which was an increase from its EPS of $1.88 at the end of 2010. At the end of 2010 each share of Mattel’s stock was earning $1.88, and by the end of 2011 each share of Mattel’s stock was earing $2.20. This is a good sign because it shows that Mattel’s stock earnings increased during 2011. However, it is difficult to determine if $2.20 is god or bad for this company because we do not know the industry average. After we calculated this value we are able to calculate the P/E ratio. The P/E ratio is simply the price of the stock divided by its EPS. Mattel’s P/E ratio decreased from 13.51 to 1 at the end of 2010 to 12.61 to 1 at the end of 2011. This shows that at the end of 2011 made more earnings for every dollar you invested in Mattel that you did at the end of 2010. So the decrease in the P/E ratio is actually a good thing for all of the people that invested in Mattel.

Overall, Mattel seems to be a very stable company and it appears to be the kind of company that you would consider investing in. There are many other factors that contribute to its appearance as a safe investment. Mattel seems to be paying off their short-term debts and still increasing their assets at the same time. They managed to decrease their current liabilities by over 300 million dollars during 2011, and at the same time they increased their current assets by over 200 million dollars. This is a nice accomplishment because you typically pay off your current liabilities with your current assets. Also during the 2011 year, investing in Mattel became more profitable. This is probably on of the most important things to potential investor, how much money they will earn by investing in this company. In 2010 you earned 7.5¢ for every dollar you invested in Mattel (The inverse of the P/E ratio). In 2011 this number increased to 8¢ for every dollar that you invested. If you combine this with the increase in the price of the stock, you can see that Mattel is trending in a positive direction in quite a few of the major statistical categories.

When you are trying to decide what career field you want to enter, what are the most important factors that effect your decision? Obviously you should want to choose a career that is interesting to you. However, usually you cannot narrow your selection down to one career field based on that criterion alone. So what are other things you can look at when you are trying to decide your future?

One important aspect to consider is how much flexibility you will have if you decide to follow down that a certain path. During Professor Quirin’s Accounting 210 class, he brought in 4 Accountants from the Wichita area to tell us about what they do as Accountants. Based upon their description of their daily routines, Accounting seems to be a profession in which you have to work for extended periods of time but you do have some freedom over when you work these hours. Also, in certain instances you even got to control where they worked at.

Another thing that people look at is how much money can are they going to make. Although some people do not want to admit it, they would take a job they do not enjoy as much if it pays them more money. According to the Bureau of Labor Statistics, in 2010 the median accounting and auditing salary was around $62,000. This puts accounting well above the median salary of all occupations, which lays around $34,000. Also, the top 10 percent make more the $106,880, which shows that accounting is a field of study in which you can make a significant move up the ladder.

The most important job quality to look at for people that are still in college and going to be looking for a job in the near future is the expected growth in your field. The Bureau of Labor Statistics is predicting that between 2010 and 2020 the net change in accounting jobs is going to be around 190,700. This equates to a 16 percent growth in the accounting industry over the next 10 years. If the prediction holds true, there should be a steady demand for accountants well in the future.

Accounting is not meant for everyone. However, if you are considering a career in accounting there are some definite benefits. It is an excellent field that is allows you some flexibility for those people who do not like to be stuck to strict schedule. It also pays well and allows you the opportunity to work your way into a much higher and better paying position. At most significantly it is a field that is expected to continue to get large year after year into the future. It may seem to be just of boring counting, but in reality it can be an interesting and appeal field of choice that can lead to a bright future.

When I arrived at Wichita State, in the fall of 2011, I enrolled in the Barton Business School, because I had been told what a highly regarded program it was.  However, I had no idea which major in business I wanted to declare.  Through an Introduction to Business class, I was informed about all of the possible business majors I could choose from.  The only thing I knew for certain was that I did not want to pursue a major in Entrepreneurship.  For the time being, I decided to declare a Business Administration major; because I knew it would be relatively easy to switch from that to another business major.  It would, however, take me over a year to figure out what that major would be.

My degree path became clearer in the fall of 2012 when I took Professor Quirin’s accounting class.  This class was by far my favorite business class at Wichita State.  I found the concepts of the class interesting, which made the class easier and more enjoyable.  Having always liked math and working with numbers, it made sense that my major would involve math and numbers.  Therefore, in the fall of 2012, I switched my major from Business Administration to Accounting.

After graduation, I plan to sit for the CPA exam.  Although I am unsure of exactly what career in accounting I would like to pursue, I do know that with my CPA and my accounting degree from Wichita State Barton Business School, I should have many options available to me.