ASSESSING EARNINGS QUALITY: NUWARE, INC. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

OVERVIEW:

The following case shows the evaluation of the Nuware’s accounting policies. The company is currently implying GAAP but is consistent with the application of those principles. The company has adopted an aggressively policy towards the management of its earnings. The main objective of the company’s management is to show the overall position of the company better in earning aspects against its competitors. Harry Malon has a big concern over its financial position because the company has showed greater earnings potential in the event of industry decline. The evaluation of the company’s actual earnings position has been analyzed through the various adjustments in the company’s own financial statements by adopting the competitors financial and accounting policies.

ASSESSMENT OF NUWARE’s PERFORMANCE:

Reason for Concern Over Netware’s reported performance:

In this case, Harry Malon is particularly has a concern over the Netware’s reported performance, whether to rely on these results as shown by the reporting of the company or not. The detailed analysis has been done has been already done in the given case of the relationships that exist between Nuware and RP Stuart. He believes that the management of the Stuart has provided a fair set of results that can be used for the comparison. The business model of both the firms is identical, but Nuware has successfully maintained its growth in the earnings, recording 18% in both 2013 and 2012 as shown in the Exhibit 1 while the Stuart in this stance has failed to satisfy their growth potentials of the company as their earnings and sales growth both have been in a declining phase. Due to this reason, Harry Malon has a greater concern as because it’s closest rival is declining badly while the Nuware is no way near to a declining condition despite of the industrial downfall.

Financial Statement Reliability

It is a fact and generally accepted by the many of the authority’s concerns, that companies creating their financial statements as per the generally accepted accounted principle (GAAP) are considered to reliable with their transparency of financial statement’s matters. This has also been proved theoretically. But the adoption of GAAP in the making of financial statement doesn’t determine the actual picture of the company. The management of the company plays a significant and pivotal role in the management of earnings. Despite of these strict rules and regulations set by the standards like GAAP and IFRS, there is still much room for making these discrepancies in reporting, which make the company’s position understated.

As denoted in the case, the Nuware is not adopting only one single principle to manage its earnings, it is implying multiple set of rules in order to show the earning’s results of the company better. This changing technique includes estimation of bad debt expense, future cost of warranty programs or the fair value of financial instruments, to name a few.

In addition to the above discussion, it is also proved from many scandals of the finance and accounting like Enron Case. Sometimes management doesn’t make erroneous accounting representations because of uncertainty, bias or estimates, but because they intend to deceive and they intentionally misrepresent their firm’s financial position.

PERFORMANCE OF THE NUWARE AS PER ITS COMPETITOR’s POLICIES

The results are shown in the Exhibit no. 3. The available for sale investments that is included in the Nuware’s current assets should be backed out. They are discussed in the footnotes and they are the only single financial instrument, which has a different fair value from its recorded value.

The available for sale investments has been therefore wrongly classified as a current asset. These investments must be classified as a long-term asset recorded at fair value. According to the standards, these investments are being held for an indefinite period and therefore classifying it as a long-term source is more appropriate than short term. Any gain or loss regarding this asset must be reported in the other comprehensive income section of the shareholder’s equity.ASSESSING EARNINGS QUALITY NUWARE, INC. Case Solution

The account receivable of the company is decreasing and as a result also reduced its allowance for bad debts as the company is estimating quick recovery of its receivables, while R.P Stuart’ receivable policy is more stable than the Nuware’s receivable. It has kept its doubtful debts allowance estimation at a steady pace. So, the allowance for bad debts has also been readjusted in the Nuware’s earnings for restatement results. This restatement shows that now the company is more in line with the actual risk it bears on credit sales..........................

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