Earnings Management

1. Earnings Management Ronald A. Kiima, CPA President Kiima Incorporated Former SEC Assistant Chief Accountant GLG Institute

2. Council Member Biography • Ronald A. Kiima is President of a private consulting firm specializing in SEC registration statements and periodic reports, SEC accounting and disclosure issues, SEC investigations and enforcement proceedings, corporate governance and risk management (including compliance with the Sarbanes-Oxley Act of 2002), investor relations and communications, due diligence and investigatory procedures, litigation support and testimony. Prior to founding Kiima Incorporated in 1997, Mr. Kiima served in a number of increasingly responsible positions with the SEC’s Division of Corporation Finance in Washington D.C., his last six years there as an Assistant Chief Accountant. During his eight-year tenure with the SEC, Mr. Kiima had oversight responsibility for a number of industry sectors including, among others, high technologies, retailing, miscellaneous services, manufacturing, banking and insurance, metals and mining, healthcare and real estate. Mr. Kiima’s professional experience also includes serving as Senior Manager of Financial Compliance, Reporting and Special Projects for a public corporation, and as an audit staff member for a leading international public accounting firm. Mr. Kiima is a Certified Public Accountant and is a member of the Association of SEC Alumni, American Institute of Certified Public Accountants, and American Bar Association. Mr. Kiima is also a prominent national speaker on SEC and Sarbanes-Oxley related matters.

3. Defining Earnings Management • Common Revenue Manipulations • Common Expense Manipulations • Common Acquisition/Divestiture Manipulations • Common Miscellaneous Manipulations Table of Contents

4. Earnings Management • Acceptable “Earnings Management”: • “Optimizing financial performance through pro-active operational decision making coupled with the effective selection and application of acceptable alternative available within the parameters of generally accepted accounting principles (GAAP)” • Unacceptable “Earnings Management”: • “Altering or ignoring reality so as to externally report, currently and/or in the future, financial performance consistent with or better than targets previously established by corporate management and/or stock analysts”

5. Earnings Management • Unacceptable Earnings Management violates: • U.S. GAAP • U.S. Federal Securities Laws, including Sarbanes-Oxley • Punishable via: • Civil Sanctions by U.S. Securities & Exchange Commission (“SEC”) • Cease & Desist Orders • Monetary Disgorgements and Penalties • Director/Officer Suspensions and Disbarments • Criminal Prosecutions by the U.S. Department of Justice (“DOJ”) • Monetary Fines • Prison Sentences

6. Earnings Management • Common Revenue Manipulations: • Premature Recognition • Channel Stuffing • Gross vs. Net Recognition • Non-Substantive “Round-Trip” Arrangements • Skewed Fair Value Allocations within Multiple Element Arrangements • “Side” Letters or Agreements • “Bill & Hold” Arrangements • Backdated Contracts • Fictitious Transactions • Manipulated Contra-Revenue Allowances

7. Earnings Management • Common Expense Manipulations: • “Rainy Day” Reserves • Capitalized/Deferred Period Costs • Excessively Lengthy Tangible/Intangible Asset Lives • Unsupportable Alterations to Asset Lives • Inappropriate Depreciation/Amortization Methods • Unrecognized Asset Impairments • Unrecognized “Probable” Loss Contingencies • Inappropriate Restructuring Charges • Inappropriate Nettings/Offsets • “Managed” Allowances

8. Earnings Management • Common Acquisition/Divestiture Accounting Manipulations: • Skewed Fair Value Allocations • Ignored/Understated Short-Lived Amortizing Intangibles • Excessively Lengthy Depreciation/Amortization Periods • Establishment of General Contingency Reserves • Unsupportable/Ignored In-Process R&D • Inappropriate Adjustments to Acquiree Allowances • Speculative Pro Forma Synergies • Ignored/Understated Directly Attributable Expenses • Ignored/Understated Overhead Expense Allocations

9. Earnings Management • Common Miscellaneous Accounting Manipulations: • Related Party Arrangements/Transactions • Off-Balance Sheet Arrangements/Transactions • Non-Recognition of Deferred Tax Assets • Derivatives – Economic vs. Accounting Hedge • Excessive “Conservatism” • Legal Form Over Economic Substance

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11. Gerson Lehrman Group Contacts Matthew Creedon SVP Accounting & Financial Analysis (AFA) Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 212-984-3682 mcreedon@glgroup.com Christine Ruane Senior Product Manager Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 212-984-8505 cruane@glgroup.com

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