Professional Documents
Culture Documents
Revenue Recognition Challenges For Disruptive Innovation
Revenue Recognition Challenges For Disruptive Innovation
Revenue Recognition Challenges For Disruptive Innovation
FSDA Case Group1 (PGP03005, 044 and 054) About the Company Zynga
History
Zyngas first few months as a publicly listed company had much less zing than many investors had hoped for. Zyngas initial public offering took place on December 16, 2011. The IPO was priced at $10/share, but finished its first day of trading down 5%. The price slowly climbed over the next few months, peaking at just over $14 in March of 2012, but had dropped back below the IPO price by late April of 2012. At least one analyst attributed this stock price slump to weak sentiment heading into Zyngas lock up releases, recommending that investors take the opportunity to overweight the stock. Yet many risks remained, not least of which was Zyngas struggle to monetize its large and growing user base. Groupon is a Delaware corporation, incorporated on January 15, 2008 under the name ThePoint.com, Inc. Groupon was started in October 2008 and officially changed its name to Groupon, Inc. by filing an amended certificate of incorporation on June 16, 2009. Its principal executive offices are located at 600 West Chicago Avenue, Suite 400, Chicago, Illinois 60654. It completed its initial public offering in November 2011 and its Class A common stock is listed on the Nasdaq Global Select Market under the symbol GRPN.
For Zynga, which also owns CityVille, Zynga Poker, Mafia Wars and Words With Friends, revenue stream is from the sales of virtual goods like fertilizers and tractors. Like other social gaming companies, Zynga allows users to speed up the process by converting real dollars from their credit card and PayPal accounts into the FarmVille currency used to buy virtual goods. The revenue recognition now becomes more complex as the definition of consumables and durables become important and the selection of amortization schedule can affect the bottom line to great extent. By using a non-GAAP term Bookings, analysis of Zynga become more complicated.
1. A key element of Zyngas business strategy is its affiliation with Facebook. Identify the key benefits and risks associated with Zyngas affiliation with Facebook. 2. Describe the accounting policies that Zynga uses in the recognition of revenue generated from the sale of virtual goods within its games. What are the issues associated with it? 3. What are the two Non GAAP financial metrics used by Zynga? 4. Prepare reconciliation between Non GAAP metrics and GAAP metrics: Bookings & Revenue, Adjusted EBITDA & Net Income. 5. What are the key limitations of Adjusted EBITDA & Bookings?
Business Overview
Zynga Inc. is the worlds leading provider of social game services. It develops, market and operates online social games as live services played over the Internet and on social networking sites and mobile platforms. Its games are accessible on Facebook and other social networks, mobile platforms and Zynga.com. Generally, all of its games are free to play, and generate revenue through the in- game sale of virtual goods, mobile game download fees and advertising. Zynga is supported in two manners: via direct credit card payments and partner businesses. Several Zynga games require an "Energy" characteristic to play. Engaging in "Missions", a core feature of many games, consumes a certain amount of energy. After expending energy, it slowly replenishes to the character's maximum limit. This can take minutes or several hours (energy replenishes whether or not players are logged into the game). After energy is replenished, players can engage in additional missions. Waiting for energy to replenish is a significant limiting factor in the games. Their support mechanisms take advantage of this. Zynga games are linked to offers from a number of partners. Players can accept credit card offers, take surveys or buy services from Zynga's partners in order to obtain game credits, which would allow them to replenish their character's energy or receive premium currency that could be exchanged for other various virtual goods. Players may also purchase game credits directly from Zynga via credit cards or PayPal. From within the game, players can purchase the points for a fee: US$5.00 for 21 game credits, for example. In March 2010 Zynga started selling prepaid cards for virtual currency at more than 12,800 stores across the US. The primary revenue source is the sale of virtual currency that players use to buy ingame virtual goods. Virtual currency can also be earned for free through game play or by accepting promotional offers from our advertising partners. We also generate revenue when players purchase mobile game downloads. Zynga also sells advertising sponsorships within some games such as movie tie-ins and other brands. In March, 2012, Zynga announced it launched a separate social gaming platform, which will include publishing other developers to the new Zynga.com platform. Early third-party developers include Row Sham Bow, Inc and Mobscience. In June, 2012 Zynga started running Facebook advertisements and sponsored stories on its website. The revenue is to be split between Facebook and Zynga, as they continue their partnership.
Understanding the Risks Related to Business and Industry Accounting Practices and Analysis of e-Commerce Businesses 3
Groupon
History
Groupon breaks into new markets by identifying successful local businesses, first by sending in an advance a number of employees to research the local market; when it finds a business with outstanding reviews, salespeople approach it and explain the model, and use social marketing sites such as Facebook to further promote the idea. Prior to the company's fifth anniversary, the Groupon website was completely redesigned and new features were added in November 2013. According to the SVP of product management, the original website was "designed for a deal of the day and the new site is designed for a marketplace." Following the website relaunch, the company rewarded a random selection of one million customers on November 20, 2013 with up to US$5,000 worth of "Groupon bucks."
Industry Overview
Internet Coupons Industry:
With the advent of internet, smart marketers focused on the idea of selling online coupons. Today, according to study by NPD online research, nearly one third of internet customers use coupons distributed via the web. None in the world has ever questioned this business model, but how big will this nascent industry become in future as new methods of coupon distribution will involve. Even now, as the use of Internet coupons grows, marketers are developing new methods of cyber discount distribution. A variety of web sites now sell discount vouchers for services as diverse as restaurants, skydiving, and museum visits. To consumers, discount vouchers promise substantial savings, often 50% or more. There are obvious reasons for flourishing of this industry.
Benefits to Consumers
Ease of Use: Consumers click on the coupons they want and print them at home. The coupons can be redeemed at any retailer that accepts coupons. Convenience: Consumers can search for print-at-home coupons when they want--any day of the week, any time of the day. Relevance: Consumers choose the coupons they want. Marketers can offer coupons and information targeted to individual preferences. Presentation: Consumers see interactive, enjoyable and unique content. Information-Rich: Consumers receive more targeted information. Enhanced Incentives: Consumer interaction can result in additional rewards
Benefits to Marketers
The Internet is an easy, cost-effective way to reach a mass audience that offers marketers the potential to target individual consumers. This new medium provides marketers with:
FSDA Case Group1 (PGP03005, 044 and 054) GroupOn Accounting Methods
Non GAAP Financial Measure: The corporation finance division of SEC reviews all forms of S-1 filings that are mandatory for a company before it is allowed to register and sell its share publicly. The SEC questioned GroupOn on numerous matters contained in its prominent use of financial measure called Adjusted Consolidated Segment Operating Income (Adjusted CSOI). The financial statements reported losses for all periods 2008-10. However, GroupOn also presented adjusted CSOI, which starts with loss from operations, then adds back online marketing expenses, stock-based compensation expenses as given in Exhibit. In 2003, the SEC issued conditions for use of Non-GAAP Financial Measure known as Regulations G. It required public companies that disclose or release such Non-GAAP financial measures to reconcile the Non-GAAP financial measure to the most directly comparable GAAP financial measure. It also prohibits adjusting a non-GAAP performance measure to eliminate or smooth items identified as a non-recurring, infrequent or unusual when 1) The nature of charge or gain is such that it is reasonably likely to occur in two years. 2) There was similar charge or gain prior two years. The SEC Staff viewed the add-back of online marketing expenses in the Adjusted CSOI manipulation as misleading, since those costs could be reasonably expected to recur. GroupOn stated that it expected to discontinue those costs at some (unspecified) future time and also claimed that presentation of adjusted CSOI acceptable since management used it internally to measure the performance. Revenue Recognition: GroupOn included its audited financial statements as of and for the years ended 31st Dec, 2008, 09 and 10 in its Form S-1. In the consolidated statement of operations, it reported $713.4 million, $30.5 million and $0.1 million in 2008, 09 and 10 respectively. In its revenue recognition policy, it reported gross amount billed to purchaser. However, Accounting Standards Codification (ASC) Section 605-45 provides guidance for whether to report revenue as gross or net basis. It provides indication that entity should use gross revenue reporting it when. 1) Is the primary obligor on arrangement 2) Has general inventory risk 3) Has latitude in establishing price 4) Changes the product or performs the service 5) Has discretion in supplier selection 6) Is involved in the determination of product or service 7) Has physical loss inventory risk and has credit risk. The arrangements that GroupOn had with consumer coupon purchaser and merchants were not consistent with these indicators of gross revenue reporting. GroupOn was the primary obligor on its transactions; it carried no inventory, could not establish the product and did not perform any part of service, had no discretion in supplier selection and was not involved in setting up of service
10
So GroupOn disclosed parenthetically, amounts labeled gross billings; essentially, what it had previously labeled as revenue plus allowance for refunds (which itself had been incorrectly netted against revenue rather than being classified as an expense). Internal Control Weaknesses: In all, GroupOn amended its S-1 eight times before finally completing its registration and IPO on Friday, November 4, 2011, selling 40.25 million shared at $20/share. The stock sale, for 6.3% of GroupOns outstanding shares raised $8-5million. As an SEC registrant, GroupOn was now required to file reports (8K and 10Q) with SEC. On February 8, 2012, it issued a press release, filed an exhibit to form 8K, announcing the results for its last 2011 quarter where it reported operating income as $15 million on revenue of $506.5 million. On March 20, 2012, it revised its report to an operating loss $15 million and revenue of $492.2 million. In March 20th announcement, GroupOn also disclosed that it had material weakness in the design and operating effectiveness of its internal control over financial reporting as defined in SEC regulations S-X. The material internal control weakness disclosed by GroupOn included: 1) Implementation and formalization of written policies and procedure for the review of account analysis, reconciliation and journal entries. 2) Assigning account reconciliation and journal entries during the reporting period close to specific individuals. 3) Formal documentation of procedures performed during the close process 4) Implementation of enhanced oversight procedures to ensure that account reconciliation review process is performed prior to finalization of the financial statements at each reporting period. 5) Validation of accounting for non-routine judgments and estimations (including the allowance for customer refunds ) It blamed material weakness on rapid growth, organizational changes and significantly accelerated timing of its annual audit and frequent restatements. On April 24, 2012, it announced the addition of two new members to its board of directors, both of whom have served on an expanded audit committee and hired KPMG LLP to help it develop proper internal control procedures. Finally in Sept, 2012, it announced the hiring of former KPMG partner to newly created post known as Chief Accounting Officer. After this fiasco, the stock price has plummeted from $20 to $9 as it stands today. But some analysts still believe the company is doing well and it was one-off event.
11
12
Table of Contents
Exhibits Financial Condition and Results of Operations and our audited consolidated financial statements and related notes, which are included
The following selected consolidated financial data should be read in conjunction with Managements Discussion and Analysis of
elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2011, 2010 and 2009 as well as the consolidated balance sheet data as of December 31, 2011 and 2010 are derived from the audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the period from Exhibit 1 inception (April 19, 2007) to December 31, 2007 and for the 12 months ended December 31, 2008, as well as the consolidated balance sheet data as of December 31, 2009, 2008Statement: and 2007, are derived from audited consolidated financial statements that are not included in this Annual Report Consolidated Income on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in the future.
Period from Inception (April 19, 2007) 2011 Year Ended December 31, to December 31, 2010 2009 2008 2007 (in thousands, except per share, users and ABPU data) $597,459 176,052 149,519 114,165 32,251 471,987 125,472 1,222 365 127,059 (36,464 ) $ 90,595 4,590 58,110 $ 27,895 $ $ 0.12 0.11 $ 121,467 56,707 51,029 42,266 24,243 174,245 (52,778) 177 (209) (52,810) (12) $ (52,822) $ (52,822) $ (0.31) $ (0.31) $ 19,410 10,017 12,160 10,982 8,834 41,993 (22,583 ) 319 187 (22,077 ) (38 ) $ (22,115 ) $ (22,115 ) $ $ (0.18) (0.18) $ 693 189 869 231 277 1,566 (873) 22 8 (843) (3) (846) (846) (0.06) (0.06)
$ $ $
288,599 288,599
223,881 329,256
171,751 171,751
119,990 119,990
14,255 14,255
$ 35,948 $ 4,549 NA NA NA NA
$ $
1,351 (185) NA NA NA NA
NA means data is not available. (1) See the section titled Non-GAAP Financial Measures below for how we define and calculate bookings, a reconciliation between bookings and revenue, the most directly comparable GAAP financial measure and a discussion about the limitations of bookings and adjusted EBITDA.
29
13
2011
2010
FSDA Case Group1 (PGP03005, 044 and 054) $ 22 Cost of revenue $ 17,660 $ 2,128 $ 443 Research and development 374,920 10,242 1,817 226 Sales and marketing 81,326 7,899 518 381 Exhibit 2 General and administrative 126,306 5,425 1,212 60 Consolidated Balance Sheet: Total stock-based compensation $600,212 $25,694 $3,990 $689
Year Ended December 31, 2011 2010 2009 (in thousands) 2008
17 3 20
Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities Property and equipment, net Working capital Total assets Deferred revenue Total stockholders equity (deficit) Non-GAAP Financial Measures Bookings
To provide investors with additional information about our financial results, we disclose within this Annual Report on Form 10-K, bookings, a non-GAAP financial measure. We have provided below a reconciliation between bookings and revenue, the most directly comparable GAAP financial measure.
Exhibit 3additional discussion of the estimated average life of virtual goods, see period. For Consolidated Statement of Cash Flow:
TableBookings of Contents is a non-GAAP financial measure and is equal to revenue recognized in the period plus the change in deferred revenue during the Liquidity and Capital Resources
30
2011 Year Ended December 31, 2010 (in thousands) 2009
Consolidated Statements of Cash Flows Data: Acquisition of property and equipment Depreciation and amortization Cash flows provided by operating activities Cash flows used in investing activities Cash flows provided by financing activities
As of December 31, 2011, we had cash, cash equivalents and marketable securities of approximately $1.9 billion, which consisted of cash, money market funds, U.S. government debt securities and corporate debt securities. Prior to 2010, we funded our operations and capital expenditures through cash flows from operations and sales of preferred stock. During 2012, we expect to make capital expenditures of up to $160 million as we invest in network infrastructure to support our expected growth and to continue to improve the player experience. We believe that our existing cash, cash equivalents and marketable securities, together with cash generated from operations, will be sufficient to fund our operations and capital expenditures for at least the next 12 months.
Accounting Practices and Analysis of e-Commerce Businesses 14
Operating Activities Operating activities provided $389.2 million of cash in the year ended December 31, 2011. The cash flow from operating activities primarily
Exhibit 4
(2) See the section titled Non-GAAP Financial Measures below for how we define and calculate adjusted EBITDA, a reconciliation between adjusted EBITDA and net income (loss), the most directly comparable GAAP financial measure and a discussion about the limitations of bookings and adjusted EBITDA. (3) DAUs is the number of individuals who played one of our games during a particular day, as recorded by our internal analytics systems. Average DAUs is the average of the DAUs for each day during the period reported. See the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsKey MetricsKey Operating Metrics DAUs for more information on how we define and calculate DAUs. This reflects 2009 data commencing on July 1, 2009. (4) MAUs is the number of individuals who played a particular game during a 30-day-period, as recorded by our internal analytics systems. Average MAUs is the average of the MAUs at each month-end during the period reported. See the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsKey MetricsKey Operating MetricsMAUs for more information on how we define and calculate MAUs. This reflects 2009 data commencing on July 1, 2009. (5) MUUs is the number of unique individuals who played any of our games on a particular platform during a 30-day period, as recorded by our internal analytics systems. Average MUUs is the average of the MUUs at each month-end during the period reported. See the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations Key Metrics Key Operating MetricsMUUs for more information on how we define and calculate MUUs. This reflects 2009 data commencing on July 1, 2009. (6) ABPU is defined as (i) our total bookings in a given period, divided by (ii) the number of days in that period, divided by (iii) the average DAUs during the period. See the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsKey MetricsKey Operating Metrics ABPU for more information on how we define and calculate ABPU. This reflects 2009 data commencing on July 1, 2009.
Stock-based compensation included in the statements of operations data above was as follows: Stock Based Compensation:
Year Ended December 31, 2011 2010 2009 (in thousands) 2008 Period from Inception (April 29, 2007) to December 31, 2007
Cost of revenue Research and development Sales and marketing General and administrative Total stock-based compensation
17 3 20
2008
Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities 2008 : 7000 Property and equipment, net Working capital 2009 :0 Total assets 2010 : 39346 Deferred revenue 2011 : 2145 Total stockholders equity (deficit)
15
Case Excerpt: If Facebook changes its standard terms and conditions for developers in a way that is detrimental to Zynga and the business will suffer. To date, it has derived substantially all of its revenue and acquired substantially all of its players through Facebook.. This addendum with Facebook expires in May 2015. Analysis : Benefits : 1. It derives its major chunk of revenue through Facebook. 2. It has benefited from Facebooks strong brand recognition and large user base. 3. It is easy to manage relationship with one big player and customize its product with respect to the major players platform. Disadvantages : 1. If Facebook loses its market position or otherwise falls out of favor with Internet users, we would need to identify alternative channels for marketing, promoting and distributing our games, which would consume substantial resources and may not be effective. 2. In addition, Facebook has broad discretion to change its terms of service and other policies with respect to us and other developers, and those changes may be unfavorable to us. 3. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, change how the personal information of its users is made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform. It has happened in past which led to a decline in the number of users.
2. Describe the accounting policies that Zynga uses in the recognition of revenue generated from the sale of virtual goods within its games. What are the issues associated with it ?
16
3. What are the two Non GAAP financial metrics used by Zynga?
Case Excerpt: Key Financial Metrics Analysis: Bookings: Bookings is a non-GAAP financial measure that is equal to revenue recognized during the period in addition to the change in deferred revenue during the period. Bookings, as opposed to revenue, is the fundamental top-line metric we use to manage our business, as we believe it is a better indicator of the sales activity in a given period. Over the long term, the factors impacting our bookings and revenue are the same. However, in the short term, there are factors that may cause revenue to exceed or be less than bookings in any period. Adjusted EBITDA: Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted for (provision for) / benefit from income taxes; other income (expense), net; interest income; gain (loss) from legal settlements; depreciation and amortization; stockbased compensation and change in deferred revenue. We believe that adjusted EBITDA
17
4. Prepare reconciliation between Non GAAP metrics and GAAP metrics: Bookings & the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations Revenue Recognition. Revenue, Adjusted EBITDA & Net Income.
We use bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as Case Excerpt: Exhibit 2& supplemental in nature and is not1, meant as3 asubstitute for revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure.
Analysis:
The following table is a reconciliation of revenue to bookings for each of the periods presented:
Year Ended December 31, 2011 2010 2009 (in thousands) 2008 Period from Inception (April 19, 2007) to December 31, 2007
$ $
In July 2010, we began migrating to Facebook Credits as the primary payment method for our games played through Facebook, and by April 2011, we had completed this migration. Facebook remits to us an amount equal to 70% of the face value of Facebook Credits purchased by our players for use in our games. We record bookings and recognize revenue net of amounts retained by Facebook. Prior to the adoption of Table of Contents Facebook Credits, we recorded a majority of our online game revenue at the gross price charged to the customer. The following table presents a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated: Adjusted EBITDA To provide investors with additional information about our financial results, we disclose within this Annual Report on Form 10-K adjusted (April 19, the 2007) to EBITDA, a non-GAAP financial measure. We have provided below a reconciliation between adjusted EBITDA and net income (loss), most Year Ended December 31, December 31, directly comparable GAAP financial measure. 2011 2010 2009 2008 2007 We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure we use to evaluate our operating Reconciliation of Net Income (Loss) to Adjusted performance, EBITDA: generate future operating plans, and make strategic decisions for the allocation of capital. Accordingly, we believe that adjusted EBITDA provides in understanding evaluating$our operating results in the Net income (loss) useful information to investors and others $(404,316 ) $ and 90,595 (52,822 ) $(22,115 ) same $ manner as our (846) management and board of directors. non-GAAP financial measure is useful our business, this (Provision for) / benefit from incomeWhile taxes we believe that this (1,826 ) 36,464 12 in evaluating 38 3 information should be considered as supplemental in nature and2,206 is not meant as a (365 substitute for the209 related financial information prepared in (8) Other income (expense), net ) (187 ) accordance with GAAP. Interest income (1,680) (1,222) (177) (319) (22) Gain (loss) from legal settlements (2,145) (39,346) 7,000 Depreciation and amortization 95,414 31 39,481 10,372 2,905 10 Stock-based compensation 600,212 25,694 3,990 689 20 Change in deferred revenue 15,409 241,437 206,603 16,538 658 Adjusted EBITDA $ 303,274 $392,738 $168,187 $ 4,549 $ (185)
Limitations of Bookings and Adjusted EBITDA
(in thousands) Period from Inception
5. What are the key limitations of Adjusted Some limitations of bookings and adjusted EBITDA are: EBITDA & Bookings?
Case Excerpt: Key Financial Metrics bookings and adjusted EBITDA do not reflect that we defer and recognize online game revenue and certain advertising transactions Analysis: adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; Some limitations of bookings and adjusted EBITDA are:
adjusted EBITDA does not include other income and expense, which includes foreign exchange gains and losses; adjusted EBITDA excludes depreciation and amortization and although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; revenue over the estimated average life of virtual goods or as virtual goods are consumed; adjusted EBITDA does not include the impact of stock-based compensation expense;
Accounting Practices and Analysis of e-Commerce Businesses adjusted EBITDA does not include gains and losses associated with legal settlements; and
18
other companies, including companies in our industry, may calculate bookings and adjusted EBITDA differently or not at all, which reduces their usefulness as a comparative measure.
Because of these limitations, you should consider bookings and adjusted EBITDA alongside other financial performance measures,
6. What is material weakness? If the firm has restatements or material weakness, doe it necessarily have other?
Case Excerpt: Internal Control Weaknesses Analysis: Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 defines a material weakness as follows: A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the companys annual or interim financial statements will not be prevented or detected on a timely basis. Auditing Standard No. 5 updated the definition to change the threshold to a reasonable possibility from a more than remote likelihood which the PCAOB believed clarified the threshold prescribed in the previous definition. Tax executives must pay particular attention to two elements of this definition: Reasonable possibility of material mismanagement Applicability to interim financial statements as well as annual financial statements The answer to second part depends on the underlying facts and circumstances. The existence of a material weakness is not restricted to situations in which a restatement occurs but rather depends only on the reasonable possibility of a material misstatement, as covered above in the
19
7. What are other possible reasons for restatements apart from revenue recognition assumptions? What questions should be asked by management and audit committee to assess the risk of restatements?
Case Excerpt: It blamed material weakness on rapid growth, organizational changes and significantly accelerated timing of its annual audit and frequent restatements. Analysis: First Part: Inappropriate recognition of gain on derivatives transactions: Safety-Kleen management violated GAAP by inappropriately using cash generated by derivatives transactions to increase interest income and to reduce interest and other operating expenses. Inappropriate capitalization and deferral of operating expenses, including capitalizing payroll expenses related to marketing and start-up activities, software development and implementation costs, and repair and maintenance expenses for company trucks. Inappropriate reserve and accrual accounting: Company management increased earnings by reducing certain reserve account balances without sufficient justification. It also reversed certain payroll expense accruals that had been made to account for bonuses that were paid. Increased auditor and audit committee conservatism: The SOX created a number of new demands on auditors and audit committees. Increased regulation, scrutiny, and legal exposure for auditors and audit committees increase their motivation to be conservative
20
21