Replies to post #63816 on Hybrid Coating Technologies Inc (fka HCTI)

[longymickshort]

The poison pill ... First transfer all the shares to insiders with convertible preferred shares.. Then transfer any and all cash and revenues directly to NTI and the patent holder (The same entity) then either sell out and liquidate all assets giving all the preferred share holders and the patent holder 1st crack at the payout If no buyout or tender offer or merger happens then go to the old backup plan and sell all the shares issued at .00001 R/S or do a reverse merger and change the ticker symbol repeat the process with new unsuspecting shareholders or simply go BK. Win win for NTI. everyone else gets squatdoosh.

[sharpei]

The following is a text book document describing all aspects of 'creative accounting':

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2011 International Conference on Business and Economics Research

IPEDR Vol.16 (2011) © (2011) IACSIT Press, Singapore






Page 1 of 7

Creative Accounting: A Tool to Help Companies in a Crisis or a

Practice to Land Them into Crises

Dr. Syed Zulfiqar Ali Shah1* and Dr. Safdar Butt2

1

Assistant professor (FMS) International Islamic University, Islamabad, Pakistan

2 Professor (FMS) Mohammad Ali Jinnah University. Islamabad. Email:[e-mail]

Abstract. The study has been conducted to have a detailed view on creative accounting. A very important

question has been tried to be answered in this study that why managers do creative accounting and how they

become successful in performing such practice in the presence of stringent rules and procedures. Another

aspect of creative accounting has been tried to be explored that whether this creative accounting practice is

good for the companies or it brings companies in crises situation. Discussion based model has been used on

the basis of past references and experiences. Link of governance with creative accounting practices has also

been tried to be explored in the study. At the end it is concluded that the complex and diverse nature of the

business transactions and the latitude available in the accounting standards and policies make it difficult to

handle the issue of creative accounting. It is not that creative accounting solutions are always wrong. It is the

intent and the magnitude of the disclosure which determines its true nature and justification.

KeyWords: Creative Accounting, Earnings management, Corporate Governance

1. Introduction

Subject of Creative Accounting is normally portrayed maligned and negative act. As soon as these words

“Creative Accounting” are mentioned, the image that emerges in one’s mind is that of manipulation,

dishonesty and deception. I wish to propose today that creative accounting is a tool which is much like a

weapon. If used correctly, it can be of great benefit to the user; but if it is mishandled or goes into the hands

of the wrong person, it can cause much harm. Creative Accounting has helped more companies to get out of

a crisis than land them into a crisis. The weapon is almost always innocent; the fault whenever it emerges

lies with the user. Coming from a developing country where stock exchanges listings often fail to reflect the

true credentials of a company, I have seen many cases where companies have benefited tremendously by

using creative accounting techniques and remained afloat during difficult times.

Before jargon and intricacies of the subject are explored, lets relate an episode from Pakistan’s cement

industry. In mid-nineties, the country suffered an acute shortage of cement. The government announced a

number of incentives for new cement plants and as a result a number of new plants were planned – seven to

be precise. The combined production of these and existing plants was expected to meet the demands of

cement for the country as well as leave a surplus for export to its neighbors like Afghanistan and India who

are always short of this product. It takes three years for a cement plant to start production. By the time the

new plants came into production in late nineties, the country’s economic scenario had changed. The

government had no money for development, the economy was generally in recession, and construction had

virtually come to a halt. With tremendous overcapacity, the cement prices started falling precariously. The

companies got together and slashed production. Plants started operating at an average of around 22%

production capacity to ensure that prices do not fall. The prices drop stopped but still it did not help much.



*

Corresponding Author. Tel.: [phone]; fax: [phone]

E-mail address: [e-mail]

96

2011 International Conference on Business and Economics Research

IPEDR Vol.16 (2011) © (2011) IACSIT Press, Singapore





Page 1 of 7



Page 2 of 7

Now cement is one industry where the largest slice of costs is fixed and time related, rather than operations

related. As much as 72% of annual costs of a new cement plant may comprise of only two items namely

depreciation and interest. Both of these are fixed and computed on the basis of time. As a result, a low

capacity utilization meant higher cost per ton of cement produced in any period, leading to huge losses. One

creative way found around this situation was to convert the depreciation cost from a fixed time related cost to

a variable charge. To achieve this end, the method of computing annual depreciation by dividing the total

plant cost over the number of plant’s useful life was abandoned. Instead, the total cost of plant was divided

over the total cement production to be expected from the plant over its entire life – thereby computing

depreciation cost per ton of cement produced. This drastically curtailed the periodic charge to the Income

Statement and improved the profitability figures. This had no implication for corporation taxes as

depreciation is not a tax allowable expense virtually anywhere in the world. So using a creative accounting

tool, the companies were able to show profits, or minimize losses, during a difficult period when the capacity

utilization was low. This enabled them to keep the investors reasonably comforted and the staff relaxed. The

interesting thing is that when the demand rose and companies started operating at higher capacity, they did

not need to change their accounting policy. Hence, without any deception, ill-will or dishonesty, the directors

of cement plants were able to pull through a crisis.

Now let's have a view on some technical aspects of this phenomenon.

2. Some definitions of Creative Accounting

Creative Accounting refers to the use of accounting knowledge to influence the reported figures, while

remaining within the jurisdiction of accounting rules and laws, so that instead of showing the actual

performance or position of the company, they reflect what the management wants to tell the stakeholders.

“Purposeful intervention in the external financial reporting process with the intent of obtaining some

exclusive gain”.

“Creative accounting is the transformation of financial accounting figures from what they actually are

to what preparer desires by taking advantage of the existing rules and/or ignoring some or all of them”.

(Kamal Naser , 1993:2)

“Every company in the country is fiddling its profits. Every set of published accounts is based on books

which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing

public have all been changed in order to protect the guilty. It is the biggest con trick since the Trojan

horse. . . In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting.”

(Ian Griffiths, 1986:1)

Many terms can be used to describe the practices of changing the facts in accounting, e.g. cooking the

books, aggressive accounting, massaging the numbers, window dressing, earnings management, etc.

Unfortunately, all the above definitions imply a misuse of creative accounting techniques for the purpose

of deception or attaining dishonest ends. While this may be applicable to many of the situations, I believe

that it is not true of all the companies.

3. Motivation for Creative Accounting

Healy and Whalen [1999] summarize the major motivations to manage earnings which include Public

offerings, Regulation, Executive compensation, and financial liabilities. Schipper [1989] provides a

conceptual framework for analyzing earnings management from an informational perspective.

Beneish [2001] added insider trading in this list of motives. Managers aware of misstatement of profits

can benefit by trading the securities. Stolowy and Breton [2000] suggest three broad objectives for earnings

management: minimization of political costs; minimization of the cost of capital and maximization of

managers’ wealth. Deangelo [1988] refers to earnings management in buyout cases.

Teoh, Welch and Wong [1998] find that firms manage earnings prior to seasoned equity offers and IPO’s.

Burgstahler and Eames [1998] conclude that firms manage earnings to meet financial analysts’ forecasts.

97



Page 2 of 7



Page 3 of 7

The managers are motivated for fixing financial statements for either managing position or profits.

Following are important concerns for managers

3.1. To meet internal targets.

The managers want to cook the books for meeting internal targets set by higher management with respect

to sales, profitability and share prices.

3.2. Meet external expectations.

Company has to face many expectations from its stakeholders. The Employees and customers want long

term survival of the company for their interests. Suppliers want assurance about the payment and long term

relationships with the company. Company also wants to meat analyst’s forecasts and dividend payout pattern.

3.3. Provide income smoothing.

Companies want to show steady income stream to impress the investors and to keep the share prices

stable. Advocates of this approach favor it on account of measure against the 'short-termism' of evaluating an

investment on the basis of the immediate yields. It also avoids raising expectations too high to be met by the

management.

3.4. Window dressing for an IPO or a loan.

The window dressing can be done before corporate events like IPO, acquisition or before taking a loan.

(Sweeney (1994) reports the tendency of companies nearing violation of debt covenants is twice or thrice to

make income increasing accounting policy changes than other companies);

3.5. Taxation

The creative accounting may also be a result of desire for some tax benefit especially when taxable

income is measured through accounting numbers.

3.6. Change in management

There is another important tendency of new managers to show losses due to poor management of old

management by some provisions Dahi (1996) found this tendency in US bank managers.

4. Importance

Creativity in accounting can be bad, that doesn't mean that it must be bad. If creative accounting coheres

with ethical and legal standards as well as the generally accepted accounting principles (GAAP), they can

yield immense benefits to the company and its stakeholders.

Creative accounting may help maintain or increase the share price by decreasing debt level to lower risk

and by showing improved profits. The high share price can help the company in raising new capital and in

takeover attempts.

Some authors believe that if management delays the release of financial information to the market, with

an intention of taking some advantage from the delay, that also falls within the meaning of creative

accounting. Once again, if the intentions are not to harm any stakeholders’ interest, this can hardly be

described as dishonest.

According to Beidleman [1973] and Lipe [1990] earning management techniques reduce the variability

of earnings and, therefore, shareholders benefit because the reduced uncertainty and improved predictability

of future earnings help in enhancing price/earning multiples. However, they claim that abnormal accruals

over time tend to reverse and are readily detected by investors. This clearly calls for moderation in using

even healthy techniques for managing earnings.

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Page 4 of 7

Table 1: Rewards of the managing Profits (Earnings Management) & Financial Position

Category The Objectives & Benefits Companies Trying To Achieve

Share-Price Effect

Borrowing Cost Effects

Management Performance

Evaluation Effects

Political Cost Effects

Higher Share Price

Reduce Share Price Volatility

Increase Firm Value

Lower Cost of Equity Capital

Increased Value of Stock Options

Improve Credit Rating

Lower Borrowing Costs

Relaxed or Less Stringent Financial Covenants

Increased Bonuses based on Profits/ Share Price

Decreased Regulations

Avoidance of Higher Taxes

Source: The Financial Number Game by Charles W. Mulford & Eugene E. Comiskey, 2002 (John Wiley & Sons

5. Experience from the world

Unreasonable and dishonestly excessive use of Creative Accounting led to the downfall down of

numerous high-profile companies in the United States during the great depression. This gave rise to the need

for developing GAAP. Recently, the Great Giants like Enron failed as a result of cooking the books to hide

the economic substance.

One example is US film industry which claims huge expenses against successful movies to lower the

remuneration of writers, producers, and actors (Grover 199 la).

Collingwood (1991) reports on how a change in accounting method boosted K-Mart's quarterly profit

figure by some $160 million, by a happy coincidence distracting attention from the company slipping back

from being the largest retailer in the USA to the number two slot.

6. Functioning of creative accounting

Accounting standards do not cover all aspects and many methods are present for one treatment. e.g, there

are more than one method of valuation of inventory or method of depreciation. Secondly, there is discretion

available to management on any particular method.

6.1. Misuse of Accounting Policies

As stated above, the accounting standards and policies cannot cover every aspect of business transactions.

Therefore considerable latitude is available to companies to play within the legal ring. The commonly cited

example of misuse of accounting policies includes exploiting the loopholes in revenue recognition standards.

There is a wide debate on this issue among accounting policy makers, standard setters and practicing

companies as when to recognize and record the revenue in the book of accounts.

So, it is a common practice to book revenue even before recognizing it to increase the profits. Sometimes

companies do no wants to show a profit above a certain level, in that case companies defer revenue to reduce

their profits.

Timing of expense recognition is used in the similar manner to achieve the desired objectives i.e. either

to show increased profits or decreases profits.

6.2. Changes in Accounting Policy

Due to the latitude available in accounting policies, companies can alter their profit figures by changing

the accounting policy and deliberately omit to mention the change of policy in notes or omit to give correct

impact of the change. For example

Changing the closing stock valuation method and do not inform the readers of the financial statements

that what impact either positive or negative it could have on earnings.

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Page 5 of 7

Change the rate of depreciation method or change the method itself to increase or decrease the

depreciation expense.

7. How to deliberately present a false picture

A company wishes to show higher profits, it has number of options to achieve this objective.

• It can overvalue its closing stock thus by decreasing the cost of goods sold; it will show increased

profit and on the other hand increased total assets in the balance sheet.

• By ignoring the provisions for bad debts /legal obligations, the current profits can be overstated.

• It can book false gains through sales purchase back. For example if company owns a piece of land

which were bought, let us say, 30-40 years ago at a cost of Rs. 150,000. Now the company is bound

to show the cost of this piece of land on historical basis as required by accounting standards. If the

current market price of that piece of land is say approx. 30 million, the management can sell this land

to someone on pre-decided terms to purchase it back. By executing this under the table transaction,

the company balance sheet footing will be increased by Rs 30 million. Now that the company would

have legally bought the property at Rs 30 million, it will be justified to show it in the balance sheet at

that amount (being the cost).

• Playing with debits and credits

If we talk purely in accounting language, the entire accounting process is about the correct use of

“debits” and “credits”. In the very first course of accounting, students are taught how the five main items of

assets, liabilities, equity, revenue and expenses are treated in the books of accounts. The below given table

explains for the readers that if an item increases or decreases how this will be treated in the accounting

journal.

Table 2: Debits & Credits Rule

Account Type Increase is Recorded By Decrease is Recorded By

Assets Debit Credit

Expense Debit Credit

Revenue Credit Debit

Liability Credit Debit

Equity Credit Debit

The foundation of the entire accounting edifice stands on these two simple words: debits and credits.

Debits are used to record expenses (or reduction in revenue) and to record assets (or reduction in liabilities or

capital). Similarly, credits are used to record revenues (or reduction in expenses and to record liabilities (or

reduction in assets). A debit will either end up in the Income Statement (i.e. if it is treated as an expense) or

in the Balance Sheet (i.e. if it is treated as an asset). Quite similarly, a credit will end up in Income Statement

if it is treated as revenue or in Balance Sheet if it is treated as a liability. Now, a creative accountant can

mischievously play with these basic rules to procure his desired result. Accountants on demand of

management or owners artistically manipulate these instruments to get the desired results. An expense may

be treated as an asset to improve book profits, or alternatively an asset may be expensed to show lower

profits. Similarly, a revenue may be transferred to a liability (through provisioning) to reduce book profits, or

a liability may be dressed up as a revenue to show higher book profits virtually at the whims of the

accountant.

• Big bath charges

In this technique, instead of showing losses for a couple of years, a big loss is shown for a single year by

charging all expenses in that year. This may be done if there are apparent reasons for poor profitability in

that year and the management feels that by lumping all expenses in one bad year, they can start showing

better profits in following years.

• Creative acquisition accounting

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18-ICBER2011-A20010.pdf









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[valeriana]

I don't doubt that something is brewing with this outrageous A/S increase. One guess would be maybe NTI will soon obtain a ton of common stock, or preferred B, in exchange for some stupid license agreement/fee payment? But in the end, the fact of the matter here is this is still a totally un-investable POS, because whatever plan they are coming up with will likely screw over the common folk again and again as they've proven. That, and a R/S would be likely inevitable in the future. Still, the sideline entertainment factor is fun.

[NM Guy]

Sharpei is this the one?

[sharpei]

NMGuy!!!!! It is indeed. Thank you so much. Do you have the link or the date of the Q. I couldn't find it. Wow! So relieved. Again, thank you!!!!!!!!!

[longymickshort]

Here is what this scam appears to be doing. In essence they issue shares to a private company (NTI) in order to slowly take the company private at some point. A public company with a private exit. Every time they award a license they guarantee themselves 1.5 million USD$ in shares and or cash they and the insiders maybe even Industrial Finishes then sell off the shares to fund their lifestyles and write off the rest as administrative expenses. Along the way they take in more money from inside or other unwary investors which they write off as administrative expenses with no full accounting of where that money went to further line their pockets. When all the shares and licenses get issued NTI ends up owning
all the control and either goes public itself through a merger or reverse merger into a clean shell company. NTI buys the remaining shares in the deal for some ridiculous amount of shares since HCTI is so far in debt and is essentially worthless.. EXCEPT for the net operating losses that they can then use against any future revenue in the new company in whatever form that new company may reappear. They then have a clean slate and start a brand new scam printing fresh shares and get more lemmings to suck the life out of. Rinse and repeat. Very well done I must say do not be fooled by this scam no one has made a nickel on this except those that were lucky enough to see this BS and traded the spikes when the share structure was at reasonable levels and news could move the needle. They have a couple more pumps left here IMO and that's it. before another R/S occurs or they execute the scenario as I have outlined here.