CHAPTER 7:

Jim is the owner and president of ZZZ Company. He and his close friend, Dan, graduated with MBAs. They always dreamed about being successful and making lots of money. They have worked in the same company for years, working their way up to senior management and eventually senior executive roles. ZZZ Company has been a success the entire time that Jim and Dan have worked for the company. Stock prices have increased every year, and revenues have grown by a compounded rate of 20 percent per year. Jim is becoming a little suspicious of the companys results because the earnings per share are always equal to Wall Streets projections. In the past couple of years, Jim has noticed that his friends personal life has become troubled. Dan has gotten a divorce and is continually struggling financially, even though Jim knows that Dan is making plenty of money to cover his bills. One night, Jim stopped by the office to respond to some e-mails he could not get to during the day. He noticed that Dan was working late as well. Dan was the CEO, and Jim just assumed that he was working late because it was close to the end of the quarter. However, after reviewing the quarters results, Jim is suspicious again because the results are exactly equal to Wall Streets forecasts. Jim decides he needs to begin an investigation into financial reporting practices.

Question: What issues must Jim consider in deciding how to investigate the financial results of the company?