First Solar: CFRA’s Accounting Quality Concerns

Questions:
1. The market was valuing First Solar richly, with high multiples. What do you think is
behind such an optimistic valuation?

The optimistic valuation is due to the fact that First Solar operates in the solar energy market in a
monopolistic fashion, It has long lasting customer relationships, a global network of consumers
(especially Europe), great revenue and profit margins, and overall outstanding cost cutting
techniques (replacement of crystalline silicon with cadmium telluride).

2. What were the key business risks faced by First Solar in early 2009?

The main risk faced was the financial crisis of 2009 that eroded all investor confidence in First
Solar's management to sustain profit in light of the growing financial requirement. The other risk
factor faced by First Solar in 2009 was overproduction leading to the supply market being
saturated this drastically diminished the pricing of products; which in turn reduced revenue
significantly. As one of the managers in First Solar during the 2009 crisis period, I would have
advocated for the reduction of production in order to cut-down on supply to a level that it is at
equilibrium with market demand.

3. What is your assessment of the quality of revenues reported by First Solar in 1Q 2009?

Revenue was $418.2 million, inventory $131.47, and receivables $184.79 million from this
information it is interest that the company was able to observe revenue of 418.2 million and still
have accounts receivable of 184,79 from a beginning inventory of 131.47. The behavior of First
Solar's revenue is unprecedented compared to that of other firms in the market. The company
seems to have been the only one unaffected by the financial crisis of 2009. Lastly, one would be
right in saying that First Solar's revenue and revenue recognition technique were indeed faulty;
since there are no qualitative or quantitative factor to support the 54% increase in revenue during
a difficult first quarter of 2009 (product price can only go so far as to increase the revenue by
10% in such a competitive market).
a. Examine trends in receivables and inventory for First Solar. How did these behave over
time and in comparison to First Solar’s key competitors? (Hint: The case presents First
Solar’s financial statement information on a quarterly basis, so average collection period and
days inventory outstanding measures each need to be divided by four). What do these trends
indicate about the performance of the company?

b. Are there any qualitative signs of how First Solar’s revenue recognition was changing
over time?

4. What other business and accounting risk should CFRA have considered in evaluating
First Solar’s accounting quality?

Here are other things that the CFRA should have considered when investigating FSLR's
accounting

i. Overstatement of asset net book value in order to trick the investors into thinking the company
was financially well.

ii. Misappropriation of funds; as such, the maintenance of unreliable record could act as a
starting ground from where investigation could be conducted.

iii. Decline in market demand of company product; which is a clear indicator that a company
should be experiencing so difficulties.

iv. Cash flow problems; if the CFRA was to carefully evaluate FSLR's cash flow statement they
would have found some irregularities in the cash flow streams.

v. Technological obsolescence and over trading are two major business risks that CFRA should
have considered when investigating FSLR's accounting records.

vi. It is also possible they could have investigated any litigations or claims made against FSLR
during that first quarter of 2009.