CASE STUDY 2

POSEIDON CONCEPTS CORPORATION: BOOM TO BUST

SYNOPSIS

On February 25, 2013, Paulina Ortega, the chief investment officer at University of Regina Investing (URI) was reviewing the draft copy of the annual report for 2012 that was to be submitted to the client, the University of Regina. One investment that stood out to Ortega was Poseidon Concepts Corporation (Poseidon), which the fund had bought at CA$14.02¹ per share in April 2012, had reached a high of $16.02 in September 2012, and had eventually lost all stock value. Ortega decided to review the Poseidon transaction to identify any warning signs or red flags indicating that Poseidon's management was involved in earnings manipulation. If there were signs, and if they had been identified earlier, could URI have avoided the losses incurred on this transaction?

KEY LEARNING OBJECTIVES

The case covers topics related to earnings management and identification of fraud. After completion of the case, students will be able to:

understand how to analyze and value accounts receivable;

discuss the issues related to revenue recognition policies; and

evaluate issues of corporate governance and internal controls.

ASSIGNMENT QUESTIONS

Have each group read the case study carefully and then discuss the following questions.

1.Differentiate between earnings management and fraud.

2.What types of accounting manipulation did Poseidon practise?

3.Calculate the average collection period. What does it indicate? What red flags can be identified from Poseidon's financial statements?

4.Compare the bad debt allowance practice of Poseidon and Open Range.

5.What conclusions can you draw from the management team's decision to sell Poseidon shares?