Europe’s Enron PAGE 70 Adjectives and adverbs PAGE 72 Career skills: Referring to visuals PAGE 73 vawvslongman-ett.com wanw.economist.com Dilemma: Counting the costs PAGE 74 The bottom line Keynotes Huge losses experienced by investors and employees due to mismanagement and irregularities in financial reporting have led to a demand for stricter corporate governance. Independent auditors such as the SEC (Securities and Exchange Commission) in the US have been checking balance sheets, which show ‘the overall performance of companies and income statements (AmE) or profit and loss accounts (8:E) which show the difference between total income and outgoings fora given period.Preview The Profit and Loss Account (P&L) Study the incomplete P&L below. Complete the document with the following headings. Use a dictionary to help you. Research and development costs Cost of materials Gross profit Interest receivable Turnover Dividend Consolidated Profit and Loss {or the year ended Dec 31 in SM Forecast Actual Money in ——____ 1__ (sales revenue} : 700 704 Other earnings Gains on fixed assets and operations 250 248 <4 on investments: 175 162 Money out ________|_ Costs of making goods 2 ‘and all manufacturing expenses (100) a Money in minus reer 2a ° cost of making Salaries and personne! costs (200) — goods ___|_ i: scaasaraanaa Se ee Other money out _ Other costs and expenses Indirect costs or overheads 25) 2 was nies Loss on fixed assets (25) (25) Loss on foreign operations (109) (8) Marketing and distrioution costs (100) ves Gross profit minus other money out | Trading/Operating Profit 525 cS Money left when Profit for shareholders (°_________.) 95 18 aoa shareholders have been paid |. Retained profit WS0S cs faba Listening [JJ Now listen to a presentation of the actual results and complete the missing figures for gaps a-h. 68m Unit 8e Speaking Listening 2 © Speaking Bi Listen again and answer the following questions. 1 Why was gross profit higher than expected? Where did the company decide to have parts made? Which budgets went over the forecast limits? What is expected to happen to the marketing budget in future? How much will shareholders receive per share? What prediction does the speaker make about retained profi? If you were a potential shareholder would you feel confident in investing in this company? Why? /Why not? Creative accounting [i Companies sometimes make the figures in financial documents more attractive than they really are. They can do this by: inventing revenues from companies that don’t exist b_ not including debts of subsidiaries and acquisitions © hiding debts on the books of subsidiaries d_ overstating current profits by including possible future earnings Listen to two investors talk about what happened to them when they invested in two media companies. Which of the above methods were used to drive up share prices in each case? Ey Listen again and complete the graphs. T avrech SEs, 22 2 aioe rectly Mebane iets ie 79 oot ‘om ome Bony Sou ce Ee 2980-2008 0 0 - 100 “ 0 0 09 2000 2001 2008 2008 Can you think of any other famous financial scandals? Unit 8m 69Reading Corporate governance 0 Read the text about corporate governance. What accounting irregularities are mentioned? Who was responsible? on Glossary overwhelming too large to deal with absolves removes responsibility Corporate governance Europe’s Enron ‘The Ahold financial scandal should shock Europe into accounting and corporate governance reform, just as the Enron scandal did in the USA. t_may seem an exaggeration to describe the scandal overwhelming Royal Ahold as “Europe's Enron” — but in’ many ways it is true enough. Certainly, the world’s third biggest food retailer, after WalMart and Carrefour, presents none of the financial risks of Enron, which was both deeply in debt and the worlds largest electricity giant. That apart, the similarities between the former Texan powerhouse and the Dutch retailer are striking, from the very had corporate governance, agressive eamings management and accounting “irregularities” to auditors whose role must be called into question. Now, at least, Europeans should stop believing that corporate wrongdoing is US problem that cannot occur in the old continent. Instead, they should. fix their own corporate "governance and accounting problems. On 24 February 2003 Ahold announced the resignation of its chief executive and finance director after find- ing that it had overstated its profits by more than 463m ($500m). Its_market value plunged by 63 per cent that day, 0 33bn. In late 2001, it exceeded Soin. Ahold is now under’ investigation by vari- cous authorities, including the Securities and Exchange Commission (SEC) in the USA Rather like Kenneth Lay at Enron, and Dennis Kozlowski at Tyco, another Scan- dathit US firm, Aholds ‘now-departing boss, Cees van der Hoeven, won a huge reputation from turning a dull company into’ a growth machine. Investors applauded long after they should have started asking hard questions. When eventually they did ask them, his anger and pride became quickly apparent and he refused to answer. The 463m overstatement is due pri- marily to Ahold’s US Foodservice unit, which supplies food to schools, hos tals and restaurants, although there are also issues over its Disco subsidiary in Argentina and several other units. This has led some observers to say that this is Jess a European problem than yet anoth- er US accounting failure. Such a claim bsolves Ahold’s bosses of responsibilty for their acquisitions and dishonesty and ignores the persistent, firmavide tendency to test the limits of acceptable accounting. ‘Most firms that buy in bulk ~ includ ing such admired retailers as Wal-Mart and Teseo - get discounts from suppli ers if they meet sales targets. The issue is how those rebates are accounted for. The accepted practice is wait until the tar gets are met. Failing firms, such as. now- bankrupt Kmart, food distributor Fleming, and now Ahold appear to have booked these rebate payments before they were earned ‘What of Ahold’s auditor? Although the problems were uncovered, it should have done so much earlier, says Lynn Turner, a former chief accountant at the SEC 70 @ Unit 8Speaking Vocabulary BD Read the text again and answer the following questions. What are the similarities between Enron and Ahold? What should European companies do? Why did the shareholders admire Cees van der Hoeven? Which of Ahold’s acquisitions is mentioned in the text? What did Europeans believe about corporate wrong-doing in the past? 6 How did Foodservice overstate its sales? Do you think CEOs who falsify accounts are criminals and should go to jail or is it an acceptable risk to falsify accounts if it helps to safeguard the company’s future and jobs Choose the best word to fill each gap in the sentences below. 1 Sales are a good way for _ to get rid of surplus stock. a retailers b sellers © dealers d_ wholesalers 2. The company was in fact seriously_____ even though they claimed to be making a profit. a ata loss b in debt © imtheblack d_ broken 3 Some companies ______ their earnings to drive up share prices. a overdo b overflow © overstate di oversee 4 The Financial Services Authority was set up in the UK to deal with such as fraud and insider trading, a issues b ideas © reasons d_ purposes 5 When the CEO should have been cost cutting, he was spending huge sums on ___ that turned out to be unprofitable. a. increases b investors growth d_ acquisitions 6 When you buy in bulk you can obtain _ or rebates. a. discounts b sales © decreases di interest 7 Shareholders lost money when the company declared itself a. redundant b sold out © broken down d bankrupt 8 When they heard about our financial difficulties our asked to be paid in advance. a service b deliveries ¢ suppliers orders 9 They didn't lie - they simply tried to _ the truth. a. conceal b prevent © reduce d warnLanguage check Adjectives and adverbs Look at the following uses of adjectives. — before nouns There was a dramatic fall in profits last year. afier stative verbs such as be, become, seem, appear, look, etc The similarities between Ahold and Enron are striking. Look at the following uses of adverbs. after verbs Shares fell sharply on the news. — before an adjective or adverb .. his anger and pride became quickly apparent Practice [ll Use the following expressions to describe the performance of the Enron share price 1991-2001. fluctuated mildly a sharp increase reached a peak rose steadily dropped slightly a dramatic and sudden fall ‘The amazing disintegrating firm Te tian share pce (US5) 1981-2001 ol 1921619941986 «99T— 8B a889 2000 zoe B) Journalists use dramatic verbs that describe the direction, speed and degree of change. What information do these verbs give? direction speed large/small degree plunge v very fast very large dip v fast mall soar plummet slide skyrocket jump nosedive decline 72m Unit 8D verecom Noe noe 1992 1995 1986 Career skills Listening 3 © T cutture at work Referring to visuals | Visual aids such as graphs, bar charts, pie charts and flow charts are an important and effective way of structuring and communicating presentations that include a lot of statistics. The following phrases are useful for drawing the listeners’ | attention to particular details. led to the ... you see here. .» 5 obvious on this part of the graph here. This stide shows the... 0 Look at the graph showing the performance of the WorldCom share price 1992-2002 and match the changes with the time periods. Then listen and check your answers. 1 reached a record high a 1992-95 2 nosedived to an all-time low b 1995-98 3 continued to skyrocket © 1998-99 4 started a spectacular ascension d_ 1999 5 there was a downturn © 1999-02 Bl Work in pairs. Student A turn to page 139. Student B look at the bar chart showing the American sales of the Italian food giant Parmalat, which went bankrupt in 2003 with debts of €14bn. Describe the chart to your partner. Then listen to your partner and complete the European sales 1996-2003. TD rarmaat operating resuts Neth and Cental Anerien Turnover (elon), 1996-2003, Mao 1500 1250 1000 190 soo o 3961997 ~=«998~=~=«N997~=~=«OODS=*«CmSS eta Formal and informal presentations Some cultures expect presentations to be formal and technical. Others find this dull and ineffective and prefer a more entertaining style of presentation. What are they like in your country? How might these attitudes affect the dress, style and use of visual aids in presentations in different countries? Unit 873Dilemma a ecision Dilemma: Counting the costs Brief MultiBrands is a globally successfull consumer products company, Listen to William Grange, which has built up a reputation based on ‘Honesty, Quality and from International Innovation’. Since it started operating ten years ago, it has launched at Consultants, saying where he least two new, high-quality products in different markets every year. would have made the However, managers are currently reviewing company policy because necessary budget adjustments of a recent dramatic fall in profits and share price performance. and cuts, Shareholders believe that this is due to over-diversification, rising costs and failing consumer confidence as a result of complaints that product quality is declining, Shareholder recommendations are: — freeze current policy of developing new products concentrate on consolidating current successful brands improve quality or reduce prices freeze recruitment but avoid layofis ~ reduce current budget by 15 per cent | task 1 In groups, study the information on page 140 and discuss where budget | cuts and reallocations could be | made in order to achieve a 15 per cent reduction in total operating Useful phrases ‘As you can see, You'll notice that... . clearly shows ns led to the ... vou see here before making a final decision. Task 2 Draw new visual aids to illustrate the changes and cuts you have made to the various departmental budgets. Task 3 Present your budget proposal using the new visual aids. Write it up Summarise your proposal in a short report. Include geaphs and charts to help illustrate and support your ideas. (See Style guide, page 26.) 74m Unit 8