Case of Apple

TITLE: The Case Of Apple, Inc.
, And Fintech: Managerial Psychology,

Corporate Governance And Business Processes.
AUTHOR: Michael Nwogugu. Address: Enugu, Enugu State, Nigeria. mcn2225@gmail.com; mcn2225@aol.com.
Skype: mcn1112. Phone: 234-909-606-8162; or 234-814-906-2100.
Abstract.
During 2009-2015, Apple defied all expectations and its reported announced operating performance exceeded all
records (and were questioned by some researchers). During 1990-2016 there was substantial debate about the
nature and extent of earnings management by Apple and some S&P-500 companies. This article contributes to the
literature in the following ways: i) surveys Apple’s extensive history of litigation and endemic corporate
governance problems and explains how Apple may have perpetrated earnings management and asset quality
management - all of which have not been addressed by its management team or external auditors, and which have
wide-ranging Social Welfare, economic and political ramifications; ii) explains how actual/implied and
perceived/un-perceived Strategic Alliance structures used in Apple’s business processes failed and facilitated
earnings management and asset quality management by Apple; iii) explains the symbiotic relationship between
Apple and fintech in general and associated Antitrust problems; iv) explains why Apple is a financial stability risk;
v) introduces new theories of Corporate Governance, Financial Stability and Intrapreneurship/Entrepreneurship; vi)
explains some asset pricing anomalies.
Keywords: Corporate Governance; Operations Strategy; Managerial Psychology; Fintech; Policy; Financial
Stability; Intrapreneurship/Entrepreneurship And Innovation; Antitrust; Asset Pricing Anomalies.
1. Introduction.
This article has a somewhat broad context and is motivated by the following factors. First, Apple is one of the
largest companies in the world (by stock market value) and has generated significant controversy about its poor
corporate governance, labor practices and tax evasion1 – this is worrisome given that for a long period of time,
Albert Gore (the former Vice President of the US) and at least four Fortune-500 CEO served on Apple’s BOD; and
which also raises the issue of political interference. Apple’s strategic alliances are major Business Processes and a
core element of its business model but have substantial Social welfare Implications and can create Deadweight
Losses; all of which have not been fully addressed in the literature. Second, the Global Financial Crisis has exposed
significant weaknesses in Corporate Governance standards and managerial psychology in organizations, and
strategic decision-making by Boards of Directors. The exponential growth of cross-border trade during 1995-2015
has led to the growth of the numbers and sizes of multinational companies that are often subject to conflicting
corporate governance and labor standards. Both individual and institutional investors around the world are
increasingly emphasizing the quality and implementation of corporate governance standards and Board Dynamics
within companies as a major investment criteria. During 1995-2015 and across the world, there were increases in
shareholder activism and joint ventures (and associated litigation), much of which was directed at or was handled
by or was ultimately influenced by BODs of large multinationals such as Apple. Third, Apple’s strategic alliance
models (including its open-source development model) are somewhat unique and contradict many theories in
Robinson (2008); Haeussler & Higgins (2014); Seale, Arend & Phelan (2006); Elfenbein & Lerner (2012); Gawer
& Henderson (2007); Kloyer (2011); Lerner & Malmendier (2011); Yin & Shanley (2008), Qiu (2010); Owen &
Yawson (2013); Sawler (2005) and Ray (2013) – and that has implications for asset pricing. Fourth, the conduct
and inertia of Apples’ senior executives and BOD constitute psychological and Enterprise-Risk phenomena – and
this article develops some managerial psychology and Corporate Governance theories. The patterns of Apple’s
strategic decision making contradict many theories and results in Pathak, Joshi & Ludhiyani (2010); García-Pérez,
Yanes-Estévez & Oreja-Rodríguez(2014); and Grechuk & Zabarankin (2014). Fifth, the existing literature has not
addressed the issue of whether the internal corporate governance principles/standards and strategic alliances of
1
See: La Roche, J. (Sun, May 29, 2016). “Apple went from the hottest hedge fund stock to the coldest in just 3
months: Hedge funds unloaded about $7 billion worth of Apple stock in the first quarter”.
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large technology multinationals that engage in significant outsourcing of production and R&D (such as Apple)
constitute Public Goods given the broad geographical scope of their operations. Sixth, Apple is a significant
financial stability risk and can transmit systemic risk. Apple has a vast platform in which fintech products are
directly (eg. ApplePay) and indirectly (fintech apps created by affiliated developers) provided and which are
disrupting financial services and retailing and have effects on economic growth and financial stability. The Apple
ecosystem (Apple’s retailing channels; strategic alliances; app ecosystem; suppliers; etc.) is vast, global and
growing and presents policy problems. Seventh, traditional empirical and theoretical research in Financial Stability
often omits analysis of Corporate Governance and Corporate Strategy and firm-level . Conversely, traditional
academic research in Corporate Strategy and Corporate Governance often omits analysis of Financial Stability and
or Systemic Risk. Thus, by addressing these issues and introducing new theories, this article fills critical gaps in the
literature and contributes to the Managerial Psychology, Corporate Governance and Business Process literatures.
2. Existing Literature.
Researchers such as Bergvall-Kåreborna & Howcroft (2013); Haslam, Tsitsianisa, Andersson & Yin
(2013); Lazonick, Mazzucato & Tulum (2013); Montgomerie & Roscoe (2013), and Lehman & Haslam (2013)
didnt analyze the true extent of the problems at Apple and instead are confusing Apple’s purported strategy with its
earnings management and asset quality management; and none analyzed the consequences of Apple’s obvious or
implied Strategic Alliances and Joint Ventures., asset pricing issues and financial stability issues. The implication
of their studies is that earnings management by Apple is a core business process and core element of Apple’s
corporate strategy. Nwogugu (2003), Nwogugu (2004a), Cichello & Kieschnick (2005), Melendy (2011); Claudiu
(2013); and Nwogugu (2004b) analyzed corporate governance and strategy issues. Pathak, Joshi & Ludhiyani
(2010); García-Pérez, Yanes-Estévez & Oreja-Rodríguez(2014); Grechuk & Zabarankin (2014) analyzed strategic
decision-making.
Nwogugu (2007), Nwogugu (2009b) and Nwogugu (2009a) analyzed corporate transactions. Karpoff, Lee
& Martin (2008a) and Karpoff, Lee & Martin (2008b) analyzed the consequences of earnings management to firms
and managers, but in this instance some of their conclusions don’t apply. Nwogugu (2006), Önüt, Efendigil & Kara
(2010) and Karamychev & van Reeven (2009) analyzed retailers’ site-selection problems and developed site-
selection models. Nwogugu (2008c) developed new franchising models for retailers.
Robinson (2008); Haeussler & Higgins (2014); Seale, Arend & Phelan (2006); Elfenbein & Lerner (2012);
Gawer & Henderson (2007); Kloyer (2011); Lerner & Malmendier (2011); and Ray (2013) analyzed operational
within-firm and inter-firm elements of Strategic Alliances. Owen (2015) analyzed the valuation and capital markets
aspects of strategic alliances. Owen & Yawson (2013) analyzed the impact of information asymmetry on strategic
alliances during 2000–2008, constructed a new measure of information asymmetry; and found that Information
asymmetry is inversely associated with cross-border strategic alliances; and that Alliances with publicly listed
overseas partners are driven by economic development. Christoffersen, Plenborg & Robson (2014) analyzed the
validity, similarities and the importance of differences of strategic alliance performance measures used in 167 (one
hundred and sixty seven) empirical studies. Yin & Shanley (2008), Qiu (2010) and Sawler (2005) compared
strategic alliances and mergers. Nwogugu (2009a) analyzed the choice between a Strategic Alliance on one hand,
and a merger or acquisition.
McCarter, Rockmann & Northcraft (2010) analyzed public goods whose eventual value is uncertain when
contribution decisions are made; and the effects of outcome-variance on why individuals contribute and amounts
they contribute to a public good (their research is applicable to analysis of Strategic Alliances and Statutes as public
goods). Dey (2010) and Bargeron Lehn & Zutter (2010) studied the effects of Sarbanes-Oxley on corporate risk
taking – some researchers have noted that compliance with SOX has often resulted in lower corporate investment.
This article intentionally omitted a complete Porter-type competitive analysis which is considered basic and
perhaps misleading given the comments in Nwogugu (2005a) and Nwogugu (2005b). The Porter Model rigidly
classifies companies as “competitors”, customers and “suppliers”, but in the real world, many competitors are
strategic alliances partners, some suppliers are actual or potential customers (as in some of Apple’s suppliers),
while some customers are also suppliers (as in the IoS ecosystem). Increasingly, partnerships, strategic alliances,
joint ventures (and their financing and competition effects) and the way that companies are financed distort and
contravene the Porter Model.
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3. Apple’s Strategic Alliances, Antitrust And Channel-Conflicts.
During 2005-2015, Apple’s operations were heavily affected by the nature, timing and scope of its various
forms of partnerships, strategic alliances and or joint ventures2 some of which are as follows. Some of Apple’s
various partnerships and Strategic Alliances (documented and un-documented) seem to be collusive and may have
violated US and or foreign antitrust statutes. Nwogugu (2009b) introduced new models of Antitrust analysis.
3.1. Apple’s Alliances With Retailers.

Between 2003-2015, Apple sold its products through authorized resellers, large retailers, Apple’s own
physical stores (from 2001) and Apple’s online stores (from1997). Apple controls product prices at most
distribution points that it controlled. There were divergencies between product pricing in Apple-controlled outlets
and non-Apple outlets. As of December 2014, Apple had 447 retail stores (including 182 in fourteen countries),
and the online Apple Store and iTunes Store (the world's largest music retailer). As of March 2015, Apple had 453
retail stores in sixteen countries and an online store that was available in 39 (thirty nine) countries. A significant
portion of Apple’s sales revenues were generated from Apple’s distributors and Apple’s online platform (online
store and iTunes) as opposed to Apple’s owned physical stores (which evolved into support stations for Apple’s
online operations). The resulting relationships between Apple and its channel partners were mostly strategic
alliances and joint ventures (and not traditional distribution agreements) in which Apple had rare asymmetric power
and control; and in which Apple shifted some risk and costs to its distributors (payment terms; delivery; etc.) and
customers (upgrading; customer services; etc.). Most of Apple’s software was bundled with its computers and
devices. Those Strategic Alliances imposed substantial fixed/variable cost burdens, uncertainty, product-risk and
channel-conflicts on large retailers in ways that reduced overall Social Welfare and could have resulted in Supply-
Chain inefficiencies and Deadweight Losses (in the pricing, supply and demand both for Apple’s products/services
and the Distributors’ services to Apple). Hines (1999) and Lind & Granqvist (2010) discussed Deadweight Losses.
Apple’s un-sustainable gains from these Strategic Alliances were or could have been outweighed by costs/losses,
uncertainty and labor problems incurred by retailers and portals. Apple was in a bargaining position to demand and
obtain phantom-sales and Channel-stuffing arrangements from these companies. Quoting the Montgomerie &
Roscoe (2013) article, Lehman & Haslam (2013) stated in part: “........In terms of product distribution Apple runs its
own stores and also distributes through large independent stores but with strict display and price controls to limit
price erosion........ ‘Apple’s relationship with big-box stores is unlike most suppliers as they retain strict control
over display and prices. For instance, large national retailers are required to have an ‘Apple Valley’ in their
stores, an area exclusively dedicated to Apple products’........The author concludes that: ‘acting as both a major
supplier to the big box retailers and as a primary competitor through its branded stores, Apple is able to dominate
the retail landscape and effectively own the consumer’. But the threat to this model is product competition and
sustaining consumer loyalty when competitors are actively segmenting and fragmenting the market selling similar
products, updating more frequently, discounting and offering multi-product contracts such as a smart-phone
coupled to a tablet .......”.
Tsay (2014) discussed some aspects of antitrust in channel conflicts. Apple’s alliances with retailers were
anti-competitive because they were forms of: i) “Tying” wherein Apple obtained preferential treatment in return for
selling its products in stores; ii) “Foreclosure” – because Apple compelled retailers to spend money and allocate
2
See: Apple and IBM Forge Global Partnership to Transform Enterprise Mobility. July 15, 2014. Available at:
https://www.apple.com/pr/library/2014/07/15Apple-and-IBM-Forge-Global-Partnership-to-Transform-Enterprise-
Mobility.html.
See: “Examples of Successful Strategic Alliances”. The Houston Chronicle. Available at:
http://smallbusiness.chron.com/examples-successful-strategic-alliances-13859.html.
See: Is Apple a Great Partner? Friday, June 20, 2014. Available at: http://www.strategic-
alliances.org/blogpost/1143942/190505/Is-Apple-a-Great-Partner. This article states in part: “............But there
have been criticisms of Apple's collaborative execution abilities. As the Times article noted, Apple and AT&T had a
rocky relationship, and the argument can be made that Apple didn't vet the existing carriers well if you consider that
the iPhone lost plenty of potential customers around 2009 because AT&T's network couldn't handle the Internet
traffic generated by the large cluster of customers in the San Francisco Bay Area and New York City metropolitan
area. In addition, Apple has been criticized for dealing with their developers in a draconian (read: less-than-
collaborative) way............”
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resources that such retailers would have otherwise allocated to other companies – that had the effect of raising
market-entry costs for Apple’s competitors; ii) “Market Integration”; iv) “Price Discrimination” – such retailers
were offering vastly different terms to Apple, compared to Apple’s competitors; v) “Collusion” - between Apple
and such retailers.
The alleged earnings management and asset quality management perpetrated by Apple during 2010-2015 and
described herein and below (ie. phantom sales and channel-stuffing) could be more probable if there was alliance-
type cooperation between Apple on one hand and its corporate customers and suppliers.
3.2. Apple’s Strategic Alliances With Resellers.

Apple’s relationships with its resellers (distinct from retailers) were Strategic Alliances that often resulted in
substantial Channel-Conflicts that could have reduced Social Welfare3. Apple’s authorized resellers often alleged
that Apple granted preferential terms to its owned-stores in the shipment of its products; and that Apple engaged in
unfair trade practices and channel strategies aimed at eliminating them. On March 31, 2004, Apple resellers started
a website (www.TellOnApple.org) which contained articles about their conflicts with Apple, and Apple's unethical
practices. During February 2005, and after an individual (Armes) filed his third amended complaint against Apple,
a five-member group of consumers and dealers filed a class-action lawsuit which claimed that Apple sold
refurbished products.
Tsay (2014) discussed some aspects of antitrust in channel conflicts. Apple’s alliances with its resellers were
anti-competitive because they were forms of: i) “Tying” wherein Apple obtained preferential treatment in return for
the opportunity to sell Apple’s products; ii) “Market Integration”; iii) “Price Discrimination” – Apple granted
preferential product terms to its owned-stores in the shipment of products and in product pricing.
The alleged earnings management and asset quality management perpetrated by Apple during 2010-2015 and
described herein and below (ie. phantom sales and channel-stuffing) could be more probable if there was alliance-
type cooperation between Apple on one hand and its corporate customers and suppliers.
Howlett (2014)4 questioned portions of a November 2013 Forrester Consulting report that stated in part:
“..............Despite the fact that 46% of the retailers we surveyed cited that they already have a dedicated omni-
channel team that includes members of all functions, fundamental silo barriers and conflicting priorities remain
with 34% of respondents reporting that conflict between channel organizations is still a major barrier to success.
When dealing with the attribution of cross-channel sales (e.g., buy online, pick up in-store), only 16% of retailers
reported that attribution of the sale revenue is irrelevant, focusing on the entire customer experience rather than
channel revenues (see Figure 12). Interestingly, 16% of retailers still attribute revenue between channels, while
31% and 21%, respectively, attribute revenue from such sales exclusively to the online or store channels. The
reality is that only a few retailers have yet completely dismantled their online, offline, and mobile channel silos,
implementing a single retail P&L with an associated organizational structure for all sales regardless of
channel......”
Table-1:Excerpt From Forrester Consulting’s November 2013 Report On Channel-Conflicts.
3
See: Channel Conflict at Apple – Case Study (2005). Available at:
http://www.icmrindia.org/casestudies/catalogue/marketing/MKTG108.htm.
4
See: Howlett, D. (March 2014). Four organizational conflict scenarios in omni-channel retail. Available at:
http://diginomica.com/2014/03/19/organizational-conflict-scenarios-omni-channel-retail/#.VaDiYPlVikq.
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3.3. Apple And Its External Auditors.
The relationship between Apple and its external auditor during 2010-2015 was in the form of a “status-
preserving” Strategic Alliance - which had failed. The relationship was not that of a professional services contract
because: 1) the external auditor omitted important professional standards and disclosures (and may have been
subjected to bargaining about disclosures by Apple); 2) Apple had and continues to have enough market-power
(among its suppliers and corporate customers) to damage the reputation and reduce the business volumes of its
external auditor; 3) then existing auditor compensation models and auditor liability-allocation mechanisms fostered
such “alliance-type” relationships between auditor-firms and auditee-companies. That is, Apple’s external auditors
failed to warn Apple and the general public about Apple’s insufficient disclosures, earnings management and
operational problems. Apple’s external auditor benefited from the fees and prestige of such work; while Apple
benefited from the appearance of financial stability.
3.4. Apple Strategic Alliances With, And Financing Of Its Suppliers.

Apple’s assets in its FY-2014 Balance Sheet included more than $450 Million of outstanding trade-financing
loans and arrangements between Apple and its Suppliers (which are forms of Strategic Alliances). Those
transactions are suspicious. Apple outsourced the manufacturing of some components and also acted as a direct
supplier to some of its own OEM-suppliers while financing them via Strategic Alliances in which Apple had
substantial asymmetric-power and control and shifted costs, labor-risk and uncertainty to its suppliers in ways that
reduced overall Social Welfare and could have resulted in Deadweight Losses.
3.5. Apple And Its Staff.

During 2010-2015, the relationships between Apple on one hand and its low-paid in-store sales staff (more
than 30,000 people) were forms of strategic alliances because, their salaries were un-reasonably very low and some
operating risk was shifted to such staff. In the US, each of such staff (about 30,000 people) earned about
$25,000/year during 2012-2014; whereas Apple’s CEO Tim Cook earned more than $380 Million in 2013. As of
January 2015, Apple employed more than 70,000 permanent full-time employees and more than 3,000 temporary
full-time employees worldwide. This type of Strategic Alliance could have resulted in Deadweight Losses in the
supply and demand for staff for Apple’s operations; and it reduced Social Welfare because it: 1) imposed low-
compensation and inefficient incentive systems on Apple employees; and 2) resulted in significant widening of the
pay-gap between Apple’s executives and its non-executive staff; 3) could have lowered unobservable employee job
satisfaction, un-observable employee savings rates and employee aspirations.
Apple’s Board of Directors (BOD) appears to be a special type of “internal Strategic Alliance” – a significant
percentage of Apple’s BOD members are CEOs of other large companies. Nwogugu (2015) discusses BODs as
types of strategic alliances and joint ventures.
As of 2013-2016, many of Apple’s senior executives had worked at Apple and in the same positions
continuously during the prior seven years. This type of Management Entrenchment is also a form of “internal
Strategic Alliance” that has critical ramifications for a company’s operations and corporate governance.
Apple’s contributory Employee Retirement Plan involves Apple’s payment of matching contributions to the
retirement plan (up to six percent of the employee’s annual salary per year). Each participating employee could
contribute a maximum of twelve percent of his/her annual gross income to the Plan. That Retirement Plan is also a
5
form of quasi Strategic Alliance, which in the specific case of Apple, did not reduce the wide pay-gap at Apple; and
apparently didnt provide Apple’s Employees with sufficient incentives to improve its corporate governance or
Welfare-Reducing Strategy or to report misconduct.
3.6. Apple, iCloud Services And iOS Device-Backup Service.

Apple’s online services through iCloud (cloud storage and syncing) and iOS device-backup, were delivered
and facilitated by partnerships and strategic alliances.
3.7. Apple’ IoS (App Crowdsourcing) Platform.

Apple’s crowd-sourcing of, and open-source software development model was made possible by strategic
Alliances between Apple on one hand, and many software developers and companies within Apple’s self-made
ecosystem. Culpan (2014) analyzed innovation partnerships and strategic alliances. In this crowd-sourcing
software development model, independent software developers build apps based on the Apple platform and sell the
apps within the Apple ecosystem. Quoting the Bergvall-Kåreborna & Howcroft (2013) article, Lehman & Haslam
(2013) stated in part:
“...............The authors note that this modification to the business model is not without risk: ‘The
Company relies on third-party intellectual property and digital content which may not be available to the
Company on commercially reasonable terms at all’. The “apps” that are developed are then used on an
Apple device that are downloaded from its ITunes store and Apple in return, takes a 30% (thirty percent)
top slice of the total revenue received before paying apps developers............ ‘I find it very unfair that
30% (thirty percent) of my application bill goes to a company that had nothing to do with it. Apple gets
the money from the actual hardware [iPhone] and even the software [SDK] they created. When you
develop apps this makes the phone better, so Apple shouldn’t then be making money out of developers as
well.’............The Apps developer is also placed at some distance from the consumer in terms of
capability to adjust quickly to feedback and is also dependent upon the apps approval process and time
scale set by Apple. According to the authors: developers shoulder the burden of costs while Apple
circumvents the investment and resources required for in-house product development and
marketing................”.
In this foregoing form of Strategic Alliance, Apple doesn’t pay these developers any salary; and the alliances
reduced overall Social Welfare because it made Apple’s customers depend on Apps that may not be available in the
future; it eliminated or reduced customer feedback to the Apps developers; and it imposed substantial uncertainty
and costs on the Apps developers.
This form of Strategic Alliance could have resulted in Deadweight Losses in the pricing, supply and demand
for the services of the Apps developers; and in the pricing, supply and demand for the Apps with regard to both
Apple and its end-user customers. Lind & Granqvist (2010) and Hines (1999) analyzed Deadweight Losses.
Furthermore, Apple’s treatment of some of these crowd-sourced Apps developers is a form of earnings
management because it enabled Apple to omit expenses that hould otherwise have been recorded as employee
compensation expenses and employee taxes (which should have been deducted in its Income Statement and
Taxable-Income). To the extent that any such developer functions almost exclusively within the Apple ecosystem
and develop products that are sold primarily within the Apple ecosystem, such developer should be classified as an
Apple employee and some cost/value assigned to his/her contributions to Apple. Many years ago, the US Supreme
Court ruled that Microsoft’s programmer-consultants who developed many of Microsoft’s software were
employees of Microsoft. In 2015, a US court ruled that Uber’s drivers were employees and not independent
consultants. Longtop Financial (a Chinese software company)5 had similar problems and claimed that its
“independent consultants” were not employees.
5
See: Citron reports on Longtop Financial (NYSE:LFT). Available at:
http://www.paulgillis.org/citronresearchcom__citron.pdf.
See: Hempton, J. (Bronte Capital) (May 20, 2011). Longtop Financial: Lessons In The Morphology Of Sin, Loss Of
Virginity, And Your 17 Year Old Daughter. Available at: http://www.businessinsider.com/john-hempton-longtop-
financial-2011-5. Also see http://www.brontecapital.com/files/sma/Client_Letter_201105.pdf.
See: SEC Charges China-Based Longtop Financial Technologies for Deficient Filings -
For Immediate Release - 2011-241. Washington, D.C., Nov. 10, 2011.
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Table-1: Comparison Of Amazon AMT And Apple IoS (2013).
Amazon AMT Apple IoS

Key role Vendor, platform Vendor, platform
owner, and broker owner, and broker
Vendor Mediation 10% of HIT 30% of all sales and
Fee in-app advertising
revenue
Contractual Responsibility lies Responsibility lies
Relationship with requester with Apple (via
app review
process)
Scale 200,000 requesters In 2013, 775,000
(2009). apps were
Requesters post made available and
between 20,000- there were more
40,000 than forty billion
new HiTs each day downloads
Revenue Fixed fee per HIT Determine own
(third-party fee, but revenue
providers) generation is
subject to the
number of
downloads
Types of tasks Micro, macro, and Generally holistic
simple projects, development, with
complex projects either lone
(most rare) developer or
project based in
small teams
Value creation and Expands role as a Digital content
capture platform provider, fuels the sales of
enhances market highly profitable
share, value hardware products.
skimming of 10% Close coupling of
from each HIT. services and
products enhances
consumer lock-in,
driving growth.
Value skimming of
30%.
Source: Bergvall-Kåreborn & Howcroft (December 2013). The 6th

ISPIM Innovation Symposium – Innovation in the Asian
Century, in Melbourne, Australia on 8-11 December 2013.
3.8. Apple, Antitrust And Fintech.

Apple has had and continues to have a significant and growing and somewhat symbiotic relationship with, and
impact on global fintech and financial services in several ways, some of which are as follows.
First, ApplePay6 (Apple’s proprietary payment system) is an important and disruptive payment system and
is used globally. Applepay can replace a credit or debit card chip and PIN or magnetic stripe transaction at a
contactless-capable point-of-sale terminal. ApplePay’s apparent success has been in contrast to previous
unsuccessful efforts of PayPal, Wal-Mart, Target, Google Wallet, and Softcard and other retailers to build mobile
payments services. However, ApplePay causes substantial antitrust problems such as the following: i) most of
Apple’s products (and the IoS apps services) can be purchased online using only ApplePay; and ApplePay is
See: Gillis, P. (______). Longtop Financial Technologies Case Study - Accounting fraud in China. Peking
University's Guanghua School of Management. Available at:
http://www.paulgillis.org/longtop_financial_technolog.pdf.
See: Gillis, P. (________). Auditing cash in China. Available at:
http://www.chinaaccountingblog.com/weblog/auditing-cash-in-china.html. Peking University's Guanghua School
of Management.
See: Norris, F. (May 26, 2011). The Audacity of Chinese Frauds. Available at:
http://www.nytimes.com/2011/05/27/business/27norris.html?pagewanted=all&_r=0.
6
See: https://en.wikipedia.org/wiki/Apple_Pay; and https://www.apple.com/apple-pay/.
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available only on Apple devices (“Tying”); ii) as a result, new entrants into market segments in which Apple
competes face much higher entry costs (Foreclosure); iii) ApplePay increases Market-Integration in many
industries and sectors – partly because ApplePay is pervasive, can displace Debit/credit cards for may payment
functions and is accessible only within the IoS ecosytem; iv) ApplePay can increase collusion among app-
developers; v) the IoS ecosystem is not open to apps developers that don’t have contracts with Apple (contracts that
assign 30% of their revenues to Apple); and other third-party payment systems cannot be used within the IoS
ecosystem (exclusionary conduct).
Second, as mentioned above, Apple’s IoS app crowdsourcing platform enables developers to offer various
fintech apps to consumers but without incurring the typical substantial marketing/sales and administrative costs
associated with product launches and expansion. Thus, Apple’s IoS platform accelerates disruption by fintech.
Apple’s IOS platform now offers more than two million apps. Since inception and up to 2015, apps in Apple’s iOS
were downloaded over 100 billion times, generating more than $30 billion of revenue for developers, and
substantial revenues and profits for Apple in app and handset sales. Thus, the Apple IoS crowdsourcing platform is
a new form of second-generation fintech henceforth referred to as “Private/Restricted Leveraged Fintech” which is
characterized by the following: 1) the fintech app is developed by a separate party (“developer’) and is available
only or primarily through a third party platform (‘provider’); 2) consumers don’t have direct access to the fintech
developer – and in most instances customer service is provided by the platform-provider; 3) consumers can offer
very limited feedback to the developer; 4) in most instances, revenues paid by the app are initially paid to the
platform providers who then makes payments to the developer; 5) the platforms are two-sided platforms; 6) the
platform “finances” apps developers directly or indirectly (by reducing or eliminating their marketing/sales,
distribution, and or administration expenses) – thus the term Private/Restricted Leveraged Fintech applies to both
fintech and non-fintech apps developers.
Third, there seems to be a symbiotic relationship between Apple’s iOS system and associated non-fintech
and fintech apps on one hand, and Apple’s sales revenues – the greater the number of Apps downloaded from IoS,
the greater is Apple’s sales revenues, and the greater Apple’s revenues and sales volume, the greater the demand
for, and downloads of the IoS apps and that creates antitrust issues. The Apple iOS system and associated fintech
apps also raises the antitrust problems of Tying; collusion; market-integration; discriminatory cost-shifting and
Foreclosure because: i) many of those apps can run only on Apple’s systems/devices, and customers often must
buy Apple’s handsets in order to buy or use the apps (Tying); ii) as a result, new competing entrants that want to
penetrate market segments in which Apple competes face much higher entry costs because of IoS and associated
apps (illegal Foreclosure); iii) users cannot purchase products outside the Appstore7; iv) Apple shifts software
development costs/testing to programmers but does not shift similar product costs to its other suppliers in other
product segments (discriminatory cost-shifting); v) the IoS system increases Market-Integration in many industries
and sectors; vi) the IoS ecosystem can increase collusion among app-developers. .
Fourth, given Apple’s vast global reach, access to consumers and iOS, during the last five years, many
industry participants in the financial services and technology sectors have speculated that Apple will soon make
major moves in banking or may create a banking/finance subsidiary or may enter into large scale joint ventures and
or alliances with financial services companies in order to generate revenues from financial services. Its conjectured
here that this speculation by itself (the “Apple Banking Speculation”) has substantial information content, has
implications for financial stability, and could have: 1) increased the pace and direction of development and
financing of fintech companies around the world; 2) changed the type of fintech companies that elect to participate
in the IoS platform and the duration of their participation; 3) changed the product pricing and software development
patterns of developers in the IoS system; 4) increased Amazon’s AMT and Google’s fintech efforts and their plans
for expansion into the financial services industry; 5) increased the stock prices of Apple, Google and Amazon
during 2012-2017. Apple’s IoS apps in general may have had a significant positive effect on the stock prices of
Apple, Google and Amazon which have similar apps or platforms. The Apple Banking Speculation is justifiable for
various reasons including but limited to the following: i) Apple’s global reach (which enables it to easily launch its
7
See: Nellis, S. & Levine, D. (Jan. 12, 2017). “U.S. appeals court revives antitrust lawsuit against Apple”. Reuters.
http://www.reuters.com/article/us-apple-court-idUSKBN14W2VH.
See: Pepper, et. al. v. Apple, Inc. (Case number 4:11-cv-06714; U.S. District Court for the Northern District of
California, USA).
See: United States of America v. Apple Inc., et al. (12-Civ. 2862-DLC; US District Court For The Southern District
of New York); and https://en.wikipedia.org/wiki/United_States_v._Apple_Inc..
8
own branded debit/credit cards like AMEX), ii) Apple’s reported large cash holdings (which have to be invested);
iii) Apple’s viable retail and corporate banking channels (Apple’s physical stores, affiliated retailers’ stores, Apple’
online store; and IoS, all of which are amenable to agent banking and investment services), iv) Apple’s existing
technology infrastructure (datacenters, tech professionals, etc. which can be allocated to online and offline financial
services); and v) the ability of ApplePay to replace regular debit/credit cards in a wide variety of transaction types;
vi) Apple’s IoS enables it to gather large amounts of customer data; vii) corporations increasing need the types of
apps that are offered in IoS.
Fifth, the Apple Banking Speculation may have contributed to the increasing collaboration between banks
and fintech companies – more banks are either building their own fintech accelerators or are financing and
sponsoring fintech companies in various ways. According to PriceWaterhouse’s8 March 2016 report titled
“Redrawing the lines: FinTech’s growing influence on Financial Services”, at least twenty percent of banks’
business will be at risk by 2020; over 80% of financial institutions believe business is at risk to innovators (fintech);
56% have put disruption at the heart of their strategy; 45% of participants are partnering with FinTech companies,
an increase from 32% in 2015; and 82% of respondents expect to increase FinTech partnerships during 2017-2020.
Funding of fintech startups in 2015 exceeded US$12.2 billion.
Sixth, Apple’s IoS apps has changed and raised consumer’s expectations of service quality from financial
services companies around the world. According to PriceWaterhouse’s March 2016 report titled “Redrawing the
lines: FinTech’s growing influence on Financial Services” consumers expect the same service and innovation from
banks as they do from Apple, Google and Amazon. These apps and fintech may have increased consumers’ affinity
for online financial services and consumers’ propensity to participate in financial markets partly because of the
context (the Apple ecosystem and cross-marketing with retailing products such as entertainment and consumer
goods)9.
Seventh, the vast popularity of the Apps in IoS (including the fintech Apps) seem to have had positive
information effects and may have significantly dampened regulators’ reactions to, and the perceived severity of
Apple’s various misconduct and corporate governance problems (eg. tax evasion; earnings management, etc.) some
of which are summarized herein and below.
Eighth, Apple’s IoS apps and affiliated FinTech companies foster the collection of vast amounts of
customer data and builds trusted relationships with clientele – all of which can radically change regulation, product
development and product marketing/distribution in financial services industry (and in other industries such as
healthcare, retailing and travel/lodging). This increase in trust and data availability is likely to accelerate fintech
development.
Ninth, Apple’s IoS apps and affiliated FinTech companies have raised the thorny issue of the viability,
upgrading and or replacement of legacy banking systems (which in many instances, need to be amended before
banks can offer apps provided by fintech companies); and have made more banks more willing to change such
legacy systems (various surveys conducted during 2015 and 2016 indicated that more than 80% of the surveyed
banks intended to replace their legacy banking software during 2016-2022).
Tenth, the threat or prospect of Apple either mining Bitcoin, and or accepting Bitcoin in IoS and or making
ApplePay compatible with blockchain (and similar moves by Google and other companies), may have contributed
to the rapid increase in the prices of Bitcoin during 2015-2017. Some large financial services companies are
adopting Bitcoin – as of 2017, Fidelity Investments had a department that mined Bitcoin. However, for many
reasons, its unlikely that Bitcoin and other crypto-currencies will become dominant or practical mediums of
exchange.
Eleventh, Apple’s iTunes and iPod ecosystems are closed systems and are types of illegal Foreclosure
because the content cannot be played on many non-Apple devices. Apple has not licensed its FairPlay DRM, or its
formerly proprietary lossless format codec Apple Lossless (ALAC), to any other company. As of April 2009, all
8
See: Pricewaterhouse (March 2016). Redrawing the lines: FinTech’s growing influence on Financial Services -
What does FinTech mean for financial services organisations: innovation, disruption, opportunity - or all of them?
http://www.pwc.com/gx/en/industries/financial-services/fintech-survey/report.html; and
http://www.pwc.com/gx/en/industries/financial-services/assets/pwc-fintech-exec-summary-2017.pdf.
9
See: “How GAFA Redefined the Meaning of Innovation and Our Lives”.
April 8, 2016. https://letstalkpayments.com/how-gafa-redefined-the-meaning-of-innovation-and-our-lives/.
See: https://www.welt.de/finanzen/article150809163/Die-gefaehrliche-Dominanz-der-grossen-Vier.html (“The
Dangerous Dominance Of GAFA”).
9
music on the iTunes Store is DRM-free but this does not apply to other content. The Apple Lossless (ALAC) codec
was reverse-engineered and an independent encoder and decoder was released. In 2011, Apple made the original
ALAC source code available under the Apache license.
Twelfth, Apple has often been accused of planned obsolescence10 wherein Apple intentionally produces
devices that quickly seem to become prematurely obsolete which then compels owners to buy 'new and improved'
versions of the product. A class action lawsuit alleging planned obsolescence in the iOS 9 update was filed in New
York state (USA) in December 2015. Others have complained about an imposed rule in iOS-9 that prevented
applications in older phones from accessing external websites. In July 2016, an online petition created by consumer
group SumOfUs11 accused Apple of providing software upgrades (for its devices) designed to slow down older
models. Another SumOfUs petition that had more than 300,000 petitioners as of September 2016 also accuses
Apple of planned obsolescence by removing the standard headphone jack in the iPhone-712.
4. Corporate Governance, Public Policy And Politics.

Its noteworthy that for many years at least six fortune-500 CEOs and the former Vice President of the US,
Albert Gore, were members of Apple’s Board of Directors. This may explain why Apple may have avoided
prosecution and negative public perceptions in many countries.
4.1. Apple’s Lawsuits.

Apple’s litigation strategy was often deficient and had direct and adverse impact on its stock prices.
4.1.1. The 1984 “Vaporware” Lawsuit Against Apple And Some Of Its Officers.
Between 1980 and 2014, Apple regularly engaged in “Vaporware” which involves early announcements of
future introduction of new products which subsequently either does not occur or is significantly delayed (see the
lawsuits against Apple some of which are summarized above). The net effect of such announcements is to distort
and inflate the expected operating performance of, and to inflate the stock prices of the announcing-company.
“Vaporware” constitutes violations of US securities laws and is a form of earnings management, Incentive-Effects
Management and Asset-Quality Management. Prentice & Langmore (1994). During 1984, some Apple shareholders
filed a securities fraud lawsuit against Apple and its Vice Chairman Mr. A.C. Markkula. The Apple Shareholders
claimed that Apple and some of its officers made false representations in a press release about a new disk drive
being developed by Apple which was known as “Twiggy”. Apple introduced Twiggy for only a few months in
1983 and the product withdrawal caused its share prices to drop by 25% (twenty five percent) within a short time. A
California US District Court found that A.C. Markkula (Apple’s co-founder and vice chairman) and John Vennard
(head of Apple's peripherals division) were liable for securities fraud; and the jury found that Apple was responsible
for $2.90 of the $8 per share decline in Apple’s stock price which occurred on the day after Apple announced that it
would discontinue Twiggy.
4.1.2. The 2000 “Vaporware” Lawsuit Against Apple And Some Of Its Officers.
In this lawsuit filed in the US District Court for the Northern District Of California, the plaintiffs alleged that
Apple’s CEO Steve Jobs made material misrepresentations about sales projections for a new product, and that
Apple’s inability to meet the projections because of production problems resulted in losses due to declines in Apple
10
See: "Is Apple guilty of using 'planned obsolescence' to force iPhone users into upgrading?". Global News.
http://globalnews.ca/news/2926170/is-apple-guilty-of-using-planned-obsolescence-to-force-iphone-users-into-
upgrading/.
See: "Planned Obsolescence Has Led To Ridiculous Product Cycles, And It's Time To Say Enough Is Enough".
Digital Trends. http://www.digitaltrends.com/computing/apple-iphone-7-planned-obsolescence/.
11
See: "SomOfUs Petition: Apple: Don't push iOS "upgrades" which sabotage older iPhones and iPads".
SumOfUs. https://actions.sumofus.org/a/planned-obsolescence-is-why-apple-isn-t-a-green-company/.
12
See: "iPhone 7 petition: Apple 'screwing customers and planet' with headphone jack". Deutsche Welle.
http://www.dw.com/en/iphone-7-petition-apple-screwing-customers-and-planet-with-headphone-jack/a-18980996.
See: "Apple is ditching the standard headphone jack to screw consumers and the planet". SumOfUs.
https://actions.sumofus.org/a/iphone-headphone-jack.
10
stock prices. The US District court dismissed the case and was affirmed by the US Court Of Appeals for the Ninth
Circuit. In re Apple, Inc., Securities Litigation13. However, both Court decisions were wrong because: i) the
plaintiffs presented evidence that established that other Apple agents/employees were aware of the problems; ii) the
fact that the plaintiffs didnt present sufficient evidence that Steve Jobs knew of the production problems when he
made the misrepresentations was irrelevant because taken as a group, Apple’s other staff knew or should have
known about the production problems when Mr. Jobs made the alleged misrepresentations. See Maslo (2010) and
Biondi (2009), both of which argued for the use of a semi-strong form of corporate Scienter in securities law
enforcement cases. Prentice & Langmore (1994) described Vaporware.
4.1.3. The 2001 Class Action Lawsuits Against Apple, Inc..

During 2001, at least three law firms filed class-action securities fraud lawsuits against Apple – these firms
included Cauley Geller Bowman & Coates, LLP. The lawsuits claimed that Apple misrepresented its financial
position and falsified its financial statements before an increase in the value of its share prices which subsequently
collapsed shortly thereafter. Apple’s share price declined from $61-3/64 on 9/20/00 to $25-3/8 on 9/29/00, and
subsequently declined further to $13-5/8, all of which reduced Apple’s market cap by more than $10 billion during
a few days. The law firm named Cauley Geller Bowman & Coates, LLP stated as follows:
“...........The Law Firm of Cauley Geller Bowman & Coates, LLP announced today that a class action has
been filed in the United States District Court for the Western District of Washington on behalf of
purchasers of Apple, Inc. ("Apple" or the "Company") publicly traded securities during the period between
July 19, 2000- September 28, 2000, inclusive (the "Class Period"). A copy of the complaint filed in this
action is available from the Court, or can be viewed on the firm’s website at
http://www.classlawyer.com/pr/appl.pdf ...........”
4.1.4. Apple Securities Litigation.

During August 2006, a class action lawsuit was filed against Apple, Inc. (“Apple”) (in the United States
District Court for the Northern District of California, USA). The Class action complaint claimed that: i) Apple and
some of its officers and directors violated Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934
and Rules 10-b(5) and 14a-9 promulgated thereunder; ii) Apple and its officers made false and misleading
statements and omissions concerning Apple's improper and undisclosed practice of backdating stock options
granted to some officers (which had the effect of creating instant paper gains for such grantee officers); iii) refusing
to recognize such instant profits as compensation income in Apple’s Income Statement for the appropriate period.
Apple, Inc. Securities Litigation (#: 06-CV-05208; US NDCal.). Martin Vogel, et al. v. Apple, Inc., et al (#06-CV-
05208; US ND.Cal.). Thus, the following Apple filings were materially false and misleading: i) financial statements
in its Form 10-K filing for the fiscal year 2005 and interim financial statements for 2005 and 2006; ii) the Proxy
Statement for Apple’s annual shareholder meeting that was held in 2006.
In 2008, a separate lawsuit was filed against Apple Inc. in the Northern District of California (08-CV-
03123) claiming only Section 10(b) and 20 allegations. This case was consolidated with the 2006 case docket. In
June 2006, Apple acknowledged that an internal investigation had revealed irregularities in its stock option grants
between 1997 and 2001. According to the complaint, Apple's share price dropped 14% (fourteen percent) in the two
weeks after Apple's admission, erasing more than $7 billion in share value. According to InformationWeek, in
December 2006, Apple said that as a result of its internal investigation, it would restate its financial results to
include "an additional non-cash stock-based compensation expense of $84 million after tax [$105 million pretax],
including $4 million and $7 million in fiscal years 2006 and 2005, respectively." At that time, Apple claimed that
there were no irregular stock option grants after Dec. 31, 2002. The 105-page complaint in the second lawsuit
claimed that: i) Mr. Jobs and the other defendants (Apple executives) knew what was going on; and ii) that stock
options were backdated and the backdating was not disclosed to shareholders; iii) Apple falsified its accounting
records; iv) Mr. Jobs, made an "instant paper profit" of $20,325,000 when, on Dec. 18, 2001, he received 7.5
million Apple shares in a stock option grant that was back-dated to October 19, 2001, and the $20,325,000 expense
was not disclosed in Apple’s financial statements; v) there was a backdated ten-million share option grant in
January 2000 that resulted in "instant paper profit" of $83,762,000 for Mr. Jobs, which was not disclosed to
shareholders or in Apple’s financial statements. On July 22, 2008, the Court stayed the case pending the appeal in
13
See: In Re Apple, Inc., Securities Litigation, 243 F.Supp. 2d 1012 (N.D. Cal.; 2002)(affirmed) In re Apple, Inc.,
127 Fed.Appx. 296, 303 (CA9; 2005).
11
the court case titled Vogel v. Jobs et al., also filed in the United States District Court for the Northern District of
California. On or around September 28, 2010, the lead plaintiffs filed a motion for preliminary approval of a
Settlement. The proposed settlement was for $14 million (fourteen million US Dollars) by Apple, which was later
amended to $16.5 million; and Apple also agreed to implement certain corporate governance measures. The
Settlement Agreement was preliminarily approved on November 22, 2010; and on May 16, 2011, the final
Settlement Agreement was approved by the US District Court. The motion for attorneys' fees and expenses was
also granted in the amounts of $1,966,250 and $395,515.90 respectively. The lawsuit was subsequently dismissed
with prejudice after the Settlement. US SEC (2007).
Nwogugu (2008) developed new types of Employee Stock-Options (and implicitly, equity-based
incentives) that completely resolve the “back-dating” and “re-pricing” problems, which were rampant in the US
during 1999-2008 and resulted in imposition of monetary fines and jail sentences on many senior corporate
executives in the US during that time period. Narayanan, Schipani & Seyhun (2007) and Carow, Heron, Lie & Neal
(2009) discussed back-dating of employee stock options. Karpoff, Lee & Martin (2008a) and Karpoff, Lee &
Martin (2008b) analyzed the effects of earnings management on companies and their managers. The Glass-Lewis &
Co. (http://www.glasslewis.com) report analyzed 257 (two hundred and fifty seven) US companies that had
announced internal reviews, SEC inquiries, or US Justice Department (DOJ) subpoenas related to their historical
stock-option grants as of March 20, 2007.
4.1.5. The New York City Employees' Retirement System (NYCERS) Lawsuit Against Apple.
During 2010, Apple settled a lawsuit filed by the New York City Employees' Retirement System (NYCERS) in
which NYCERS claimed that Apple back-dated stock options that it awarded to its officers. As part of the
settlement, Apple was ordered to pay $14 million to shareholders, and $2.5 million to fund corporate-governance
programs at Columbia University (USA) and Stanford University (USA), and an additional $4 million in legal fees.
4.1.6. The 2007 US SEC Charges Against Apple’s General Counsel And Its Chief Financial Officer.
Apple was investigated by the US Securities & Exchange Commission (“US SEC”), and in 2007, the US SEC
charged Apple’s former CFO Mr. Fred Anderson and its former General Counsel Ms. Nancy Heinen for violations
of securities laws – specifically for fraudulently backdating Apple’s two large stock options grants to Apple’s
senior executives, which resulted in Apple understating its reported expenses by about $40 million. These two
persons settled the SEC claims and were fined and ordered to repay millions of dollars in illegal gains14. Around
August 2008, Nancy Heinen accepted the sanctions, agreed to pay a $2.2 million fine and a $200,000 civil penalty,
agreed to be barred from serving as an officer or director of any public company for five years, and to barred from
appearing or practicing as an attorney at the US SEC for three years. Around April 2008, Fred Anderson settled a
similar case with the US SEC without admitting any wrongdoing by agreeing to a fine of $150,000 and the
repayment of about $3.5 million in illegal options gains. See: US SEC (2007).
4.1.7. Apple Computer, Inc. v. Does, And Takings Theories.

In Apple Computers v. Does (a court case in California, USA) Apple confronted critical Takings issues pertaining
to journalists’ privileges and the right to disclose Apple’s trade secrets. Although the court in Apple Computers v.
Does ruled in favor of Apple, Praul (2006) critiques the courts decisions. Nwogugu (2012) introduced new Takings
Theories that could have supported the arguments in Praul (2006).
4.2. Earnings Management And Asset-Quality Management In Apple, Inc.’s Operating Results For 2014-2015.
Apple’s results for Q1-2015 (the quarter that ended in December 2014) were as follows:
1) Apple sold 74.5 million iPhones, which represented a Q-to-Q increase of +57% over Q1-2014. iPhone
revenue was $51.2 billion, and represented a Q-to-Q increase of +57%. This amounts to enough iPhones for
1% of the world population.
2) Apple’s revenues grew 30% to $74.6 billion, and the iPhone accounted for 69% of total sales. In Q4-2014,
Apple’s revenues grew by 30%, and iPhone revenue, which grew by 57%, exceeded $51 billion in one
quarter - almost equal to Google’s revenues in its entire fiscal 2014 year. As of Spring 2015, Apple’s
revenue guidance indicated a next quarter growth rate that exceeds 20%. This implied that for FY2015,
14
See: Marsal, K. (Aug. 14, 2008). Ex-Apple general counsel settles backdating suit for $2.2 million.
http://appleinsider.com/articles/08/08/14/ex_apple_general_counsel_settles_backdating_suit_for_2_2_million.html.
12
Apple will have to add an additional $37-$40 billion in sales revenues, which will be more than half of
Google’s recent annual sales revenues, and about half of Microsoft’s annual revenues.
3) Apple’s Net Income was $18 billion (which was Google’s revenues during the same quarter); and that may
be the highest quarterly profit ever achieved by any company:
Table-__: A Comparison Of The Highest Quarterly Corporate Profits Around The World.
Source: http://qz.com/340899/apple-earnings-iphone-business-theories/.
4) After generating $33 billion in cash from quarterly operations, as of the end of Q1-2015, Apple had $178
billion in cash and cash equivalents.
Apple (2015)15 contains the transcript of Apple’s Q1-2015 earnings conference call. Gruber (Feb. 2015)16 and
Wilcox (2014)17 criticized Apple’s disclosed sales revenues and other accounting disclosures. Lynch (2012)18,
Sampere (Feb 4 2015); Lazonick, Mazzucato & Tulum (2013); Haslam, Tsitsianisa, Andersson & Yin (2013);
Lehman & Haslam (2013); and Cohan (2015)19 commented on Apple’s significant revenue-growth and some noted
that its not sustainable. The Economist (2016)20 correctly noted that:
i) Apple’s revenues were not sustainable and were likely to decline. Indeed Table-2A below shows the
extremely erractic nature of the volumes of Apple’s product sales and supports the author’s theories of real
earnings management by Apple.
ii) Apple generated quarterly profit of $18.4 billion in Q42015 (quarter that ended in December 31, 2015),
beating the record it set a year earlier by a few hundred million dollars.
iii) Economic problems in emerging markets will reduce Apple’s profits - especial in China were Apple
purportedly generates a quarter of its sales.
15
See: Apple (2015). Apple's (AAPL) CEO Tim Cook On Q1-2015 Results - Earnings Call Transcript. Available at:
http://seekingalpha.com/article/2856006-apples-aapl-ceo-tim-cook-on-q1-2015-results-earnings-call-
transcript?part=single. Jan. 27, 2015.
16
Gruber, J. (Feb 4, 2015). Dazzling Results. Available at: http://daringfireball.net/2015/02/dazzling_results.
17
See: Wilcox J. (2014). Apple's Core Is Rotting. Available at: http://betanews.com/2015/02/05/apples-core-is-
rotting/?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed+-+bn+-
+Betanews+Full+Content+Feed+-+BN.
18
See: Lynch R. (2012). Strategic Management Case plus Case Answer – Apple’s Profitable but Risky Strategy.
http://www.global-strategy.net/apples-profitable-but-risky-strategy/.
19
See: Cohan, P. (1/28/2015). Six Reasons Apple Is Still More Doomed Than You Think. Available at:
http://www.forbes.com/sites/petercohan/2015/01/28/6-reasons-apple-is-still-more-doomed-than-you-think/.
20
The Economist (Jan. 27th, 2016). Apple’s winning streak is soon to end.
http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart-20.
13
iv) Apple generates about 66% of its revenues from the iPhone; and during 2005-2015, Apple sold 900m
iPhones, compared to: 350m iPods, 300m iPads and 140m Macs. Between 2015 and 2016, 12-15 million units
of Apple’s smartwatch was sold since it was launched in April 2015, and that generated about $4 billion in
revenue. As of January 2016, Apple had about one billion active devices that were being used by its customers.
However, those articles completely omitted the critical issues which are that: i) Apple’s revenues are un-
sustainable because Apple has been engaging in earnings management, Incentive-Effects Management and Asset-
Quality Management; and ii) Apple’s earnings management, Incentive-Effects Management and Asset-Quality
Management are intricately intertwined with its strategy and the relationship among them is symbiotic. Such
misconduct is indicated by the following factors:
1) As of December 2015, Apple had purportedly gained PC market share during thirty-one of thirty-two
quarters in the last eight years. Despite Apple’s small market share (around 7% worldwide), Apple generated
about half of all PC industry profits partly due to its significant ASP ($1,250 vs. $417 industry-wide in 2014,
trending down to $379 in FY2015). Apple’s low market share in the mobile sector (13% to 15%) accounted for
90% (ninety percent) of mobile profits in Q1-2015.
2) During 2010-2015, none of Apple’s competitors in any market segment has recorded the same percentage
increases in cash, cash-equivalents and sales revenues (in most fiscal quarters and years) from new products as
Apple has done. During 2013-2016, Apple was not able to innovate as before; and instead has been copying
specific features from competitors for its premium products.
3) Apple had extraordinarily large amounts of cash and cash equivalents during 2010-2016. None of its
competitors and very few software companies have generated such large cash balances. This fact coupled with
Apple’s historical reluctance (until 2013-2015) to execute share repurchases and or pay greater dividends
indicates possible earnings management.
4) Market Share, Commoditization, and Modularity are three major contradicting facts in the computer sector –
Apple’s revenue growth defies this contradiction. Modularity refers to the transition from proprietary
architecture to open modular architecture. In the PC clone market, modularity cause intense and harmful intra-
industry competition by improvement of layers, smarter graphic cards, better/faster/cheaper processing, storage,
and peripheral modules. However, the Mac has not been affected by Modularity, and as of Spring 2016, the
iPhone remained immune to Modularity.
5) During 2010-2015, the quarterly and annual changes in Apple’s Net Income and its Operating Income was
not proportional to, and have been significantly lower than the quarterly and annual changes in both Apple’s
Sales Revenues and Net Revenues. Apple’s rapid revenue growth has not yielded similar and proportionally
rapid growth in its operating profits. In Apple’s Operating Margin declined from 31% (thirty one percent)
during Q4-2011 (ending in September 2011) to 29% (twenty nine percent) during Q4-2014; and its Gross
Margin declined from 41% (forty-one percent) in Q4-2011 to 39% (thirty nine percent) during Q4-2014.
Apple’s reported unit prices have been consistently higher than those of its competitors. IDC estimates that
smartphone unit growth will decline from 26.3% in 2014 to 12.2% in 2015; while average annual growth rate in
unit-volume will be about 9.8% between 2014 and 2018; and IDC forecasts a 4.2% annual revenue growth
during the same period. The Consumer Electronics Association forecasted that smartphone ASPs (average
selling prices) were estimated to decline by 38% (thirty eight percent) from $440 in 2010 to an expected $275
in 2015. iPad sales declined by 18% from Q4-2013 to Q4-2014 (to 21.4 million). Consumer Electronics
Association forecasts that tablet revenues in the industry will decline by 8% in 2015 (after a 1% industry
decline in 2014). Its difficult to see how Apple was achieving such rapid revenue growth in an environment of
declining unit prices and unit-volumes during 2012-2014, even where its unit prices have been greater than
competitors’ prices.
6) During 2012-2016, Apple’s Accounts Receivables were substantial, and the quarterly changes in its A/R
haven’t matched increases in its sales revenues.
7) During 2012-2016, the quarterly changes in Apple’s Accounts Payables, purchases and Inventory didn’t
match, and were much lower than the quarterly changes in its Sales Revenues. During 2012-2016, the absolute
amounts of Apple’s Accounts Payables and Inventory were comparatively low. Accounts Payables increased
by $9.003 Billion, and Inventories increased by $172 Million; while “Other current and non-current liabilities”
increased by $4.667 Billion, and Sales Revenues increased by more than $10 Billion in Q1-2015, up from Q4-
2014.
14
8) During 2012-2016, the quarterly changes in Apple’s Selling, General & Administrative (SGA) expenses
didnt match, and were much lower than the quarterly changes in its sales revenues.
9) During 2012-2016, Apple used many discretionary Balance Sheet accruals that were not explained in detail
in its US SEC filings.
10) The World Bank data (http://data.worldbank.org/) on income levels and related economic indicators for
various countries does not support Apple’s reported sales revenues in these countries during 2010-2016. That
is, indigenes of these countries were not likely to be able to afford the volumes of Apple products that were
purportedly sold in their countries (even with price discounts). In a Wall Street Journal interview, Apple’s CEO
Tim Cook once stated that: “…fewer than 15% of older iPhone owners upgraded to the iPhone-6 and 6-
Plus….....the majority of switchers to iPhone came from smartphones running Google Inc.’s Android operating
system.” The implication was that most purchasers of iPhones were entirely new customers. In Q1-2015,
Apple purportedly had a 70% (seventy percent) revenue growth in the Greater China region where cheap
competing “clones” dominate the market. The biggest changes in Apple’s Q1-2015 regional Net Revenues
were in the Americas (23% - for South America and North America), the Greater China region (70%) and the
“Rest of Asia” region (33%) (see page-26 of Q1-2015 10Q). Net Sales Revenues by products (page-26 of 10Q)
showed changes in sales of revenues generated from sales of iPhones (+57%); iPad (-22%); Mac (9%); Services
(9%) and “Other Products” (-5%). The fact that the iPhone accounts for more than 70% of Apple’s global
sales revenues also confirms possible earnings management because most customers in countries where Apple
sells products cannot afford the iPhone. While many securities Analysts and industry watchers had expected
Apple to sell 48.8 million iPhones during Q3-2015 (ending in June 2015), Apple sold 47.5 million iPhones
during Q3-2015. Apple’s explanation was that it tried to avoid having excess inventory in the channel so it
shipped 600,000 fewer iPhones than usual.
Table-1: Sales Of Apple’s iPhone As A Percentage Of Apple’s Total Revenues (As Of Q3-2015).
Source: Apple.
Table-2A: Sources of Apple’s Revenues.
15
Table-2B: Sources Of Apple’s Revenues (As of Q3-2015).
(Source: Skye Gould/Business Insider)
11) As mentioned herein and above, between 1980 and 2014, Apple regularly engaged in “Vaporware”
announcements which constitutes violations of US securities laws and is a form of earnings management,
Incentive-Effects Management and Asset-Quality Management. Prentice & Langmore (1994) described
instances of Vaporware. See Apple’s website for its Press Releases and analysts’ conference calls. As
mentioned above, Apple was back-dating its stock options/warrants.
12) During 2010-2015, the performance criteria used to determine the annual bonuses for Apple’s senior
executive officers were Net Sales Revenues and Operating Income. This provides significant incentives for
Apple’s executives to engage in earnings management and incentive-effects management.
13) As mentioned above, Apple’s crowd-sourcing and open-sourcing for apps constitutes earnings management
because it enables Apple to avoid reporting employee-related expenses.
16
14) While Apple claims a history of innovation and R&D, during 2005-2015, its Capital Expenditure and R&D
expense have been relative stable and low.
15) Apple has been selling products to its manufacturing suppliers – and this may have been done at prices
above which Apple purchased those supplies, in order to boost Apple’s sales revenues. A similar trend occurred
at Toshiba which sold product parts to its manufacturing vendors in order to boost its sales revenues, and such
misconduct was made public during Summer 2015 when an investigatory committee created by Toshiba (to
investigate earnings management at Toshiba) announced its findings. Apple’s “Vendor Non-Trade
Receivables” increased significantly (by $3.58 Billion) in Q1-2015, up from Q4-2014. An excerpt from
Apple’s Q1-2015 10Q about its Vendor Non-Trade Receivables states in part “......Additionally, the Company
has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to
these vendors who manufacture sub-assemblies or assemble final products for the Company. Vendor non-trade
receivables from three of the Company’s vendors accounted for 57%, 14% and 12% of total vendor non-trade
receivables as of December 27, 2014 and three of the Company’s vendors accounted for 51%, 16% and 14% of
total vendor non-trade receivables as of September 27, 2014.........”.
16) Table-2A shows the extremely erratic nature of Apple’s product sales and supports the author’s theories of
real earnings management by Apple.
4.2.1. How Apple, Inc., Could Have Effected Earnings Management And Asset-Quality Management.
The implication of the foregoing is that Apple is or maybe recording excessive and illegal sales revenues and
illegally managing its earnings in the following ways:
First, by Channel-stuffing as illustrated by the following examples:
1) Apple can “sell” 130%-170% of the regular periodic demanded volume of Goods1 to a
customer/distributor at a 10%-30% price discount. Apple then records Accounts Receivable “A/R-1”.
Distributor obtains a loan from Apple (Loan1) and uses the proceeds to pay part (30%-60%) of A/R-
1, and rolls over the remaining portion of A/R-1 for 3-12 months or more. Apple will then record a
loan receivable for Loan1 in its balance sheet. Distributor will use the price discount to repay the
loan interest (and maybe part of the loan principal) for Loan1 and to realize a profit. If the interest
rate for Loan1 is low enough, and if Apple ships 6-10 times per year to Distributor, Apple can record
130%-170% of the regular sales as Net Sales Revenues, and Distributor will pay cash for only 40%-
70% of Good1 that it purchased during that fiscal year. Apple’s recorded Accounts Receivables
turnover rates will appear high, and its liquidity-ratios will improve. Note that Apple does not
disclose any concentration, distribution or aging of its accounts receivables in its annual reports or
10K or 10Q. This method can also be combined with the use of offshore “controlled” or affiliated or
subsidiary companies in low-tax or no-tax jurisdictions to effect earnings management.
2) Apple can “sell” 130%-170% of the regular periodic demanded volume of Goods1 to a distributor
at a 10%-30% price discount. Apple then records Accounts Receivable “A/R-1”. Distributor pays
only part (30%-60%) of A/R-1 and rolls over the remaining portion of A/R-1 for 3-12 months or
more (possibly without incurring or paying interest charges). Distributor will use the price discount to
realize a profit. If Apple ships Goods1 about 6-10 times per year to Distributor, Distributor can pay
cash for only 40%-60% of the value of Goods1 that it purchases in that reporting period. Apple’s
recorded A/R, “(New-A/R)/revenues” ratio and “A/R-to-revenues” ratio will be consistently high,
and Apple will report inflated Net Sales Revenues. “New A/R” refers to A/R that is generated during
a reporting period. This method can also be combined with the use of offshore “controlled” or
affiliated or subsidiary companies in low-tax or no-tax jurisdictions to effect earnings management.
3) In its 2010-2016 Annual Reports, 10Qs and 10Ks, Apple did not disclose the amount of goods that
it shipped on consignment. Thus, Apple could have recorded consignments as Sales Revenues.
4) For its internet sales, Apple generates online sales through various promotions, loyalty programs
etc., and can accept online payments for goods, but is given substantial discretion by accounting rules
(IFRS and US GAAP) about when to record or defer such revenues as Net Sales Revenues. Thus,
Apple can record revenues before its goods that are purchased online are received by customers.
Apple also sells Gift Certificates which can be redeemed for Apple’s products. Accounting rules
17
require Apple to estimate rates of possible redemption, and also grants substantial managerial
discretion over such estimates. Thus, Apple can inflate its Net Revenues that are generated from sales
of its Gift Certificates.
5) Table-2A shows the extremely erractic nature of Apple’s product sales and supports the author’s
theories of real earnings management by Apple.
During 2005-2016, Apple was often been criticized for post-launch price reductions – eg. during 2007, the price of
the iPhone was cut by $200 just two months after its release21, and Apple responded by offering $100 store credit to
early iPhone customers who had bought their iPhones from Apple or AT&T. Channel Stuffing often involves
recording revenues when goods are shipped rather than when goods are received or paid for by its customers –
Apple records sales revenues when it ships good that were purchased offline (not through internet). An excerpt
from Apple’s Q1-2015 10Q (page-34) about its revenue-recognition policies states as follows: “............Net sales
consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and
service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is
considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have
been transferred. For most of the Company’s product sales, these criteria are met at the time the product is
shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other
sales, the Company defers revenue until the customer receives the product because the Company retains a portion
of the risk of loss on these sales during transit. For payment terms in excess of the Company’s standard payment
terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales
price is fixed or determinable, such as a successful history of collection, without concession, on comparable
arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with
hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes
Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in
accordance with industry specific software accounting guidance for the following types of sales transactions: (1)
standalone sales of software products, (2) sales of software upgrades and (3) sales of software bundled with
hardware not essential to the functionality of the hardware. For multi-element arrangements that include
hardware products containing software essential to the hardware product’s functionality, undelivered software
elements that relate to the hardware product’s essential software and/or undelivered non-software services, the
Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the
Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (1)
vendor-specific objective evidence of fair value (“VSOE”), (2) third-party evidence of selling price (“TPE”) and
(3) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable
separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best
estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis........”
Apple’s Q1-2015 10Q (page-__) also states as follows “.......Recent Accounting Pronouncements............In May
2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from
Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for
revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an
entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for the
Company beginning in its first quarter of 2018. Early adoption is not permitted. The new revenue standard may be
applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of
the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its
consolidated financial statements..........”.
Second, and more specifically, during 2009-2016, Apple’s accounting and allocation of revenues gave its
management substantial discretion to manipulate reported sale revenues. An excerpt from Apple’s Q1-
2015 10Q about revenue recognition rules (page-36) states as follows: “..........For multi-element
21
See: MacDonald, C. (2007). Were iPhone Early-Adopters "Abused?". The Business Ethics Blog.
http://businessethicsblog.com/2007/09/07/were-iphone-early-adopters-abused/.
See: "Apple screwed you: So now what ?". TUAW: Apple news. Available at:
http://www.tuaw.com/2007/09/05/apple-screwed-you-so-now-what/.
18
arrangements that include hardware products containing software essential to the hardware product’s
functionality, undelivered software elements that relate to the hardware product’s essential software
and/or undelivered non-software services, the Company allocates revenue to all deliverables based on
their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling
price to be used for allocating revenue to deliverables: (1) “vendor-specific objective evidence” of fair
value (“VSOE”), (2) “third-party evidence” of selling price (“TPE”) and (3) best “estimate of selling
price” (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the
price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of
what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For sales
of qualifying versions of iOS devices, Mac and Apple TV, the Company has indicated it may from time to
time provide future unspecified software upgrades and features free of charge to customers. The
Company also provides various non-software services to owners of qualifying versions of iOS devices and
Mac. Because the Company has neither VSOE nor TPE for the unspecified software upgrade rights or the
non-software services, revenue is allocated to these rights and services based on the Company’s ESPs.
Revenue allocated to the unspecified software upgrade rights and non-software services based on the
Company’s ESPs is deferred and recognized on a straight-line basis over the estimated period the
software upgrades and non-software services are expected to be provided for each of these devices, which
ranges from two to four years. The Company’s process for determining ESPs involves management’s
judgment and considers multiple factors that may vary over time depending upon the unique facts and
circumstances related to each deliverable. Should future facts and circumstances change, the Company’s
ESPs and the future rate of related amortization for software upgrades and non-software services related
to future sales of these devices could change. Factors subject to change include the unspecified software
upgrade rights offered, the estimated value of unspecified software upgrade rights, the estimated or
actual costs incurred to provide non-software services and the estimated period software upgrades and
non-software services are expected to be provided...........” Note that such deferred revenues (that arise
from Revenue allocated to the unspecified software upgrade rights and non-software services based on the
Company’s ESPs) can result in Deferred Tax Assets and Deferred Tax Liabilities in future periods. The
absolute amounts of, and quarterly increases in Apple’s Deferred Tax Assets and Deferred Tax Liabilities
during 2014-2015 were significant. IFRS and US GAAP accounting standards grant Apple substantial
managerial discretion about the decision to create Deferred Tax Assets and Deferred Tax Liabilities, and
the timing of “reversals” of such Balance Sheet accruals which can be used to manipulate financial
statements in future periods. In January 2010, Apple retroactively adopted a new US/FASB accounting principle
and restated its previous income statement for FY2009. The restatement increased Apple’s FY2009 net income by
44% to $8.2 billion, and increased its revenues by 17% to $42.9 billion. This new accounting principle (which
Apple lobbied FASB for) grants Apple substantial and detrimental managerial discretion in revenue recognition and
allows Apple to recognize revenues from sales of bundled products much faster than before (the products include
iPhones - which include hardware, software, services and upgrade rights). The FASB rule change had two main
parts – the first pertains to “multiple-deliverable arrangements”, while the second covers software sales. When
Apple sells a bundled product such as an iPhone, the hardware and software are delivered at the time of sale, but
other deliverables include the rights to future software upgrades and other features are provided in the future. The
old accounting rules required Apple to recognize large portions of its revenue gradually over each product’s
economic life; while the new rules allow Apple to record more revenues upfront for each sale.
Third, during 2005-2016, Apple could have effected earnings management by recording sales revenues
for phantom (non-existent) sales without shipping any physical goods to its customers. Some of Apple’s
distributors/customers may have colluded in earnings management by acknowledging purchase and
receipt of such phantom goods. Longtop Financial (a Chinese software/IT company that was cross-listed
19
in the US) had also reported phantom sales revenues22. Apple could have generated such phantom sales
revenues in the following ways:
1) Apple “ships” phantom Goods1 to Distributor at a recorded price discount of 10%-30% (of sales
price), and issues an invoice, but Apple does not deliver any physical goods to Distributor. Apple
also records sales revenues and A/R-1 for the phantom goods. Distributor then records the receipt of
phantom Goods1 but doesn’t make any payments. Apple then ships Goods2 to Distributor at a price
discount of 10%-35%, and records sales revenues and A/R-2. Distributor pays cash for Goods2, and
uses part of the price-discounts and profits for Goods2 to payoff part of A/R-1,and then rolls-over the
remaining portion of A/R-1 for 3-12 months (possibly without interest charges). If this process is
repeated 8-12 times per year, and if Apple’s price discount is 10%-30%, and if Apple’s COGs are
low enough, and if A/R-1 and A/R-2 are in the right proportions, then Apple can record all sales of
Goods2 and phantom Goods1 as sales revenues; and Distributor can pay cash for only 40%-60% of
the value of Goods1 and Goods2 in the period for which Apple records such sales revenues. Apple’s
recorded A/R, (New-A/R)/revenues ratio and A/R-to-revenues ratio will be consistently high, and
Apple will report inflated sales revenues. “New-A/R” is A/R that is generated during the subject
reporting period. Such Distributor will typically earn much lower Gross Margins and Operating
Margins than Apple; and may even incur operating losses.
2) In a second method, Apple will go through all the above-mentioned steps except that Apple will
sell A/R-1 to a factoring company; and Distributor can use part of the price-discounts and profits
from Goods2 to repay part or all of A/R1 to the factoring company; and rollover any remaining
portions of A/R-1 for 3-12 months.
3) Apple can record sales of phantom goods and associated increases in cash, and have its bank issue
false bank-account statements to Apple’s auditors – the account statements will show fake cash
balances. Apple’s distributors will then record the phantom purchases and record much lower
margins and operating losses and reduce their tax burdens. The banks of Longtop Financial (a
Chinese software company that was listed in a US stock market) issued false bank account statements
to Deloitte which served as Longtop’s external auditor.
4) Table-2A shows the extremely erractic nature of Apple’s product sales and supports the author’s
theories of real earnings management by Apple.
During 2010-2016, in its 10Q and 10K reports, Apple didn’t disclose any concentration, distribution or aging of its
Accounts Receivables. The reality is that the amounts/timing of physical shipments of goods by most US
companies are not independently verified (by persons other than the subject company, the shipping/transportation
company and the receiving-customer) and external auditors don’t verify all shipping/warehouse records. Thus,
these three parties can collude to record shipments of phantom goods.
Fourth, could have effected earnings management and asset-quality management by mis-reporting product-
returns, warranty costs and costs of customer incentives; or by forcing its distributors to accept revenue losses from
product-returns and warranty expenses (eg. by threatening not to supply Apple products to such Distributors, or not
to provide price discounts to them). An excerpt from Apple’s Q1-2015 10Q (pages 36-37) about product returns
and the costs of customer incentives states as follows: “...........The Company also records reductions to revenue for
expected future product returns based on the Company’s historical experience. Future market conditions and
product transitions may require the Company to increase customer incentive programs that could result in
reductions to future revenue. Additionally, certain customer incentive programs require management to estimate
the number of customers who will actually redeem the incentive. Management’s estimates are based on historical
22
Virginity, And Your 17 Year Old Daughter. http://www.businessinsider.com/john-hempton-longtop-financial-2011-
5. Also see http://www.brontecapital.com/files/sma/Client_Letter_201105.pdf.
20
experience and the specific terms and conditions of particular incentive programs. If a greater than estimated
proportion of customers redeems such incentives, the Company would be required to record additional reductions
to revenue, which would have an adverse impact on the Company’s results of operations........” An excerpt from
Apple’s Q1-2015 10Q about Warranty Costs (page-37) states as follows “.........Warranty Costs......The Company
provides for the estimated cost of warranties at the time the related revenue is recognized based on historical and
projected warranty claim rates, historical and projected cost-per-claim and knowledge of specific product failures
that are outside of the Company’s typical experience. Each quarter, the Company re-evaluates these estimates to
assess the adequacy of its recorded warranty liabilities considering the size of the installed base of products subject
to warranty protection and adjusts the amounts as necessary. If actual product failure rates or repair costs differ
from estimates, revisions to the estimated warranty liabilities would be required and could materially affect the
Company’s results of operations. ........”
Fifth, Apple could have effected earnings management and asset-quality management by using improper
“sales” to its offshore foreign subsidiaries and or foreign affiliated companies and or “friendly” companies to
record improper Net Sales Revenues. In its Q1-2015 Form-10Qand its FY-2014 Form-10K, Apple did not make
any disclosures about its un-consolidated entities and affiliates/subsidiaries. Table-2A shows the extremely erratic
nature of Apple’s product sales and supports the author’s theories of real earnings management by Apple. An
excerpt from Apple’s Q1-2015 Form-10Q about its segment-reporting and geographical regions states in part
“..............The Company manages its business primarily on a geographic basis. As the Company continues to
expand its business, management believes collaboration across its online, retail and indirect channels is integral to
better serving its customers and optimizing its financial results. In the first quarter of 2015, management began
reporting business performance and making decisions primarily on a geographic basis, including the results of its
retail stores in each respective geographic segment. Accordingly, to align with the way the business is currently
managed, the Company’s reportable operating segments now consist of the Americas, Europe, Greater China,
Japan and Rest of Asia Pacific. Retail is no longer reported as a separate reportable operating segment. The
Americas segment includes both North and South America. The Europe segment includes European countries, as
well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan.
The Rest of Asia Pacific segment includes Australia and Asian countries, other than those countries included in the
Company’s other operating segments. Each operating segment provides similar hardware and software products
and similar services. The accounting policies of the various segments are the same as those described in Note-1,
“Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8
of the 2014 Form 10-K. The Company evaluates the performance of its operating segments based on net sales and
operating income. Net sales for geographic segments are generally based on the location of customers and sales
through the Company’s retail stores located in those geographic locations. Operating income for each segment
includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.
In the first quarter of 2015, the Company also began allocating certain costs to its operating segments that were
previously included in other corporate expenses, including certain share-based compensation costs. Advertising
expenses are generally included in the geographic segment in which the expenditures are incurred. Operating
income for each segment excludes other income and expense and certain expenses managed outside the operating
segments. Costs excluded from segment operating income include various corporate expenses such as R&D,
corporate marketing expenses, certain share-based compensation expense, income taxes, various nonrecurring
charges and other separately managed general and administrative costs. The Company does not include
intercompany transfers between segments for management reporting purposes.........” This reporting
choice/decision makes it much easier for Apple to hide its sales to, and transactions with offshore related entities
and offshore “friendly” companies.
Sixth, Apple’s “Vendor Non-Trade Receivables” increased significantly ($3.58 Billion) in Q1-2015, up
from Q4-2014. An excerpt from Apple’s Q1-2015 10Q about its Vendor Non-Trade Receivables states in part
“......Additionally, the Company has non-trade receivables from certain of its manufacturing vendors resulting from
the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the
Company. Vendor non-trade receivables from three of the Company’s vendors accounted for 57%, 14% and 12%
of total vendor non-trade receivables as of December 27, 2014 and three of the Company’s vendors accounted for
51%, 16% and 14% of total vendor non-trade receivables as of September 27, 2014.........”. Page-61 of Apple’s FY-
2014 10K states in part “........Vendor Non-Trade Receivables.........The Company has non-trade receivables from
certain of its manufacturing vendors resulting from the sale of components to these manufacturing vendors who
manufacture sub-assemblies or assemble final products for the Company. The Company purchases these
21
components directly from suppliers. Three of the Company’s vendors accounted for 51%, 16% and 14% of total
vendor non-trade receivables as of September 27, 2014 and three of the Company’s vendors accounted for 47%,
21% and 15% of total vendor non-trade receivables as of September 28, 2013. The Company does not reflect the
sale of these components in net sales and does not recognize any profits on these sales until the related products
are sold by the Company, at which time any profit is recognized as a reduction of cost of sale.........”.
Seventh, an excerpt from Apple’s Q1-2015 10Q about is Accounts Receivables states in part
“.........Accounts Receivables......The Company has considerable trade receivables outstanding with its third-party
cellular network carriers, wholesalers, retailers, value-added resellers, small and mid-sized businesses and
education, enterprise and government customers that are not covered by collateral, third-party financing
arrangements or credit insurance. As of December 27, 2014, the Company had one customer that represented 10%
or more of total trade receivables, which accounted for 13%. As of September 27, 2014, the Company had two
customers that represented 10% or more of total trade receivables, one of which accounted for 16% and the other
13%. The Company’s cellular network carriers accounted for 63% and 72% of trade receivables as of December
27, 2014 and September 27, 2014, respectively..........”. Thus, during 2010-2016, Apple was selling
products/components to its Vendors/Suppliers, and recording the resulting sales revenues without detailed
disclosures of such sales. Apple’s Q1-2015 10Q (page-42) disclosure (under Risk Factors) about its resellers and
distributors was as follows “.........The Company depends on the performance of distributors, carriers and other
resellers. The Company distributes its products through cellular network carriers, wholesalers, national and
regional retailers, and value-added resellers, many of whom distribute products from competing manufacturers.
The Company also sells its products and third-party products in most of its major markets directly to education,
enterprise and government customers, and consumers and small and mid-sized businesses through its online and
retail stores. Carriers providing cellular network service for iPhone typically subsidize users’ purchases of the
device. There is no assurance that such subsidies will be continued at all or in the same amounts upon renewal of
the Company’s agreements with these carriers or in agreements the Company enters into with new carriers. Many
resellers have narrow operating margins and have been adversely affected in the past by weak economic
conditions. Some resellers have perceived the expansion of the Company’s direct sales as conflicting with their
business interests as distributors and resellers of the Company’s products. Such a perception could discourage
resellers from investing resources in the distribution and sale of the Company’s products or lead them to limit or
cease distribution of those products. The Company has invested and will continue to invest in programs to enhance
reseller sales, including staffing selected resellers’ stores with Company employees and contractors, and improving
product placement displays. These programs could require a substantial investment while providing no assurance
of return or incremental revenue. The financial condition of these resellers could weaken, these resellers could stop
distributing the Company’s products, or uncertainty regarding demand for the Company’s products could cause
resellers to reduce their ordering and marketing of the Company’s products............”.
Eighth, Apple’s “Other Current Assets” increased significantly in Q1-2015, up from Q4-2014. This
specific line item was opaque during FY-2012 to FY-2014; and was not explained in detail to notes in financial
statements. This line item could have been used to manage earnings and asset-quality.
Ninth, the changes in Apple’s Deferred Tax Liabilities and Deferred Tax Assets were relatively erratic and
substantial during 2012-2014. Apple’s Deferred Tax Liabilities increased to $23.3 Billion in Q1-2015 from $20.259
Billion in Q4-2014.
Tenth, an excerpt from Apple’s Q1-2015 10Q about its off balance sheet commitments states in part “.....
Other Commitments......The Company utilizes several outsourcing partners to manufacture sub-assemblies for the
Company’s products and to perform final assembly and testing of finished products. These outsourcing partners
acquire components and build product based on demand information supplied by the Company, which typically
covers periods up to 150 days. The Company also obtains individual components for its products from a wide
variety of individual suppliers. Consistent with industry practice, the Company acquires components through a
combination of purchase orders, supplier contracts and open orders based on projected demand information.
Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the
respective supplier. As of December 27, 2014, the Company had outstanding off-balance sheet third-party
manufacturing commitments and component purchase commitments of $21.6 billion.......” This constitutes false
disclosure, and such commitments should have been included in the Current Liabilities section of Apple’s Balance
Sheets.
Eleventh, an excerpt from Apple’s Q1-2015 10Q about its off balance sheet commitments states in part
“......The Company leases various equipment and facilities, including retail space, under non-cancelable operating
22
lease arrangements. The Company does not currently utilize any other off-balance sheet financing arrangements.
The major facility leases are typically for terms not exceeding ten years and generally contain multi-year renewal
options. As of December 27, 2014, the Company had a total of 447 retail stores. Leases for retail space are for
terms ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal
options. As of December 27, 2014, the Company’s total future minimum lease payments under non-cancelable
operating leases were $4.8 billion, of which $3.5 billion related to leases for retail space.........”. The reality is that
for accounting purposes, renewal-terms under renewal options in real estate leases are included in the total “term”
of the lease – in which case, most of Apple’s retail space leases most probably had total terms of more than ten
years and most likely up to 25-35 years (which was probably equal to, or exceeded the useful life of such
buildings). Most retail leases are also “net” leases wherein Apple pays for its share of utilities, and or property
maintenance, and or property taxes and or property insurance. Such leases should have been classified as capital
leases and included in the Current Liabilities and Long-term Liabilities sections of Apple’s Balance Sheets. Thus,
Apple’s lease disclosure was false and misleading. The new FASB and IASB lease accounting standards were
widely circulated and debated during 2012-2016 and were formally issued in 2016 - FASB (USA) issued “ASC
842: Leases” on February 25, 2016, and the IASB issued “IFRS 16 – Leases” on January 13, 2016. Both accounting
standards require that all operating leases should be capitalized in the balance sheet.
Twelfth, Apple generates substantial Deferred Revenues from prepaid online sales; and sales of Gift-cards,
warranties, “AppleCare service and support contracts” and product-upgrade rights. First, Apple’s failure to disclose
“segment revenues” for the various types of products and services that it sells, and for software that is bundled with
hardware is misleading and distorts the quality of its revenues. Secondly, Apple creates various types of
discretionary Balance Sheet accruals for items related to such Deferred Revenues, and such accruals can enable
Apple to manipulate the timing and amounts of its reported revenues. Third, accounting rules grants Apple the
discretion to under-report its Deferred Revenues, and boost its period-end reported Sales Revenues and make any
adjustments during the months in each reporting period. Page-51 of Apple’s FY-2014 10K states in part
“...........The Company records deferred revenue when it receives payments in advance of the delivery of products or
the performance of services. This includes amounts that have been deferred for unspecified and specified software
upgrade rights and non-software services that are attached to hardware and software products. The Company sells
gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on the iTunes Store for the
purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which
is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is
deferred and recognized over the service coverage periods. AppleCare service and support contracts typically
include extended phone support, repair services, web-based support resources and diagnostic tools offered under
the Company’s standard limited warranty.....The Company records reductions to revenue for estimated
commitments related to price protection and other customer incentive programs. For transactions involving price
protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Company’s other
customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which
the Company has sold the product or the date at which the program is offered. The Company also records
reductions to revenue for expected future product returns based on the Company’s historical experience. Revenue
is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected
taxes recorded as current liabilities until remitted to the relevant government authority........”
Thirteenth, during 2010-2016, Apple included in its Net Sales Revenues, amounts billed to customers for
shipping and handling, and it included its shipping and handling costs in its cost-of-sales. The net effect is inflation
of Apple’s reported Net Sales Revenues. Apple didn’t disclose in its Q1-2015 10Q or FY-2014 10K, whether or not
it does its own shipping or outsources shipping/handling to third-party logistics companies.
Fourteenth, as mentioned herein and above, between 1980 and 2015, Apple regularly engaged in
“Vaporware” announcements which constitutes violations of US federal securities laws. Vaporware is a form of
earnings management, Incentive-Effects Management and Asset-Quality Management because it fraudulently
changes expectations of the subject company’s earnings and operating performance. Prentice & Langmore (1994).
See Apple’s website for its Press Releases and analysts’ conference calls. More importantly, Vaporware could also
boost Apple’s sales revenues, because Apple’s distributors read its financial statements and press releases, and
could have be impressed by announcements of Apple’s product innovations, and thus, would have been be much
more likely to devote resources (cash; staff; warehouses; etc.) and “shelf-space” to Apple’s products instead of
those of competing companies.
23
Fifteenth, as mentioned above, the accounting for Apple’s crowd-sourcing and open-sourcing for apps, is a
form of earnings management because such “independent workers” should have been classified as Apple
employees and the associated employee compensation and employee taxes should have been deducted from
Apple’s income statements.
4.2.2. Apple’s Violations Of US And International Tax Regulations/Statutes.

Apple has not been paying income taxes on much of its non-US revenues (which constitutes more than 65% of its
worldwide revenues) and has been admonished by the US Senate for tax evasion. See: Sheppard (2013)23; Financial
Times (London, UK) (April 29, 2015)24; Duhigg & Kocieniewski (April 28, 2012)25; Levin & McCain (May 2013);
Reuters (2013)26; Fernholz (2015)27; and Fairless (Sept. 30, 2014)28, all of which noted Apple’s tax evasion. In a
May 20, 2013 report, the US Senate’s Homeland Security Permanent Sub-Committee on Investigations explained
Apple’s tax planning strategies and the report concluded that Apple’s tax arrangements were un-related to its
businesses, and thus were illegal. According to the US Senate report:
i) Almost all of Apple's foreign operations are processed through an Irish company with no employees.
ii) Although Apple claimed that most of its cash/cash-equivalents/marketable-securities are held by its
foreign subsidiaries, most of the $102 billion Apple was keeping "overseas" through its foreign subsidiaries
(as of 2013) was actually in US banks.
iii) Apple pays 2%—or less—in corporate income tax in Ireland (Ireland's standard rate of corporation tax
is 12.5%). Apple's US profits also end up in Ireland. Apple Operations International, which provided 30%
of Apple's worldwide net profits from 2009 to 2011, doesn't pay taxes anywhere.
iv) Apple has not been adept or accurate in estimating its own taxes.
About 33% (thirty three percent) of Apple’s European revenues are generated from its Ireland subsidiary in
order to pay little or no taxes to any government by using an unusual global tax structure (Ireland has a population
of less than five million people and cannot possibly generate that much sales revenues). This Irish holding company
includes Apple's retail stores throughout Europe, and didn’t pay any corporate income tax during 2009-2014
because Apple exploited a difference between Irish and U.S. tax residency rules. Such misconduct constitutes fraud
and tax evasion.
4.2.3. Apple’s Accounting Restatements.

During August 2006, Apple publicly announced that it may restate its financial statements, and that the
general public should not rely on the audited financial statements that it issued during the immediately preceding
four years (since September 2002) because of irregularities in the way it granted share options to executives. In
December 2006, Apple file a form-10Q and made a restatement in which it recognized total additional non-cash
stock-based compensation expense of $84 million after tax, including $4 million and $7 million in fiscal years 2006
and 2005, respectively; attributable to certain stock option grants made between 1997 and 2002.
For FY2009, Apple originally reported $5.7 billion of net income and $36.5 billion of annual revenues. In
January 2010 Apple retroactively adopted new accounting principles and restated its previous income statement for
23
See: Sheppard, L. (May 2013). How Does Apple Avoid Taxes? Forbes. Available at:
http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/.
24
See: Financial Times (London, UK) (April 29, 2015). Apple Warns Of Material Financial Damage From Irish
Tax Probe.
25
See: Duhigg, C. & Kocieniewski D. (April 28, 2012). “How Apple Sidesteps Billions in Taxes”. The NY Times.
Available at: http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-
nations.html.
26
See: Reuters (2013). "Senate Probe Finds Apple Used Unusual Tax Structure to Avoid Taxes". Reuters (USA).
Available at: http://www.cnbc.com/id/100751799.
27
See: Fernholz, T. (2015). The seven craziest findings in the US investigation of Apple’s tax avoidance practices.
Quartz. Available at: http://qz.com/86740/the-seven-craziest-findings-in-the-us-investigation-of-apples-tax-
avoidance-practices/.
28
See: Fairless, T. (Sept. 30, 2014). “EU Believes Apple, Fiat Tax Deals Broke Rules - Letters to Irish and
Luxembourg Governments Outline Rationale for Investigation”. Wall Street Journal. Available at:
http://www.wsj.com/articles/apples-irish-tax-deal-breached-rules-says-eu-1412064337.
24
FY2009. The restatement increased Apple’s FY2009 net income by 44% to $8.2 billion, and increased its revenues
by 17% to $42.9 billion. This new accounting principle (which Apple lobbied FASB for) allows Apple to recognize
revenues from sales of bundled products (such as iPhones - which include hardware, software, services and upgrade
rights) much faster than before.
4.2.4. “Non-Compliance Cartels” (Un-Documented Strategic Alliances).

Given the foregoing, Apple, its banks, its distributors, channel-partners and its transportation-vendors
constitute or can be deemed to constitute a form of “non-compliance Cartel”. Nwogugu (2014b) analyzed similar
Non-compliance Cartels in the Nigerian financial services industry.
4.3. Apple’s Phantom Cash/Cash-Equivalents/Marketable-Securities Balances.

During 2005-2017, Apple’s significant cash/cash-equivalents/marketable-securities balances and its
reluctance to pay significant dividends and cash distributions to its shareholders or to repurchase substantial
amounts of its shares were a contentious and heavily debated issue. This issue is even more suspicious given that: i)
during 2013-2017, Apple borrowed substantial and increasing amounts of debt even though it had significant
cash/marketable-securities balances – this is in contract to other internet/tech companies such as Facebook; ii) as
mentioned herein, Apple’s pension plan was under-funded as of 2015; iii) during 2010-2016, Apple had significant
accounts payables and accrued expenses which have generally been increasing, and Apple did not disclose any
aging of its accounts payables; iv) in each fiscal quarter during 2012-2017, the sum of Apple’s Retained Earnings,
long term debt and cumulative depreciation expense has always been far less than the reported value for its
portfolio of investment securities; v) Apple’s increased share repurchases during 2013-2017 were matched with
(and funded by) increased “non-current liabilities” and significant borrowings of long term debt.
As can be seen in the two tables below: i) Apple’s cash/cash-equivalents/marketable securities began to
grow significantly after 2009, when Apple began to apply a new US FASB accounting principle (which Apple
lobbied FASB for) that allows Apple to recognize revenues faster for sales of bundled-products such as the iPhone;
ii) Apple’s cash/cash-equivalents/marketable-securities more than doubled between 2010 and 2016); iii) Apple’s
quarterly net income has been somewhat seasonal, increased drastically in 2012 but was steady during 2012-2014.
Table-___: Apple’s Quarterly Profits.
Table-___: Apple’s Cash/Cash-Equivalents/Marketable-Securities.
25
As mentioned above, Apple could have colluded with its banks and securities brokers to provide
false/inaccurate account statements to its external auditors about its cash balances and marketable securities (Apple
could have grossly overstated its cash and securities portfolio during many years). This would be similar to what
happened during 2011 at Longtop Financial29, an NYSE-listed Chinese software company that colluded with its
banks to present false bank account statements to Deloitte (its former auditor that eventually resigned) and to
Goldman Sachs (which managed Longtop’s IPO). Such misconduct may account for Apple’s historical reluctance
(until 2013) to pay cash dividends and distributions to its shareholders or to repurchase its shares of stock even
though Apple had more than $40 Billion (forty billion US Dollars) of cash/cash-equivalents/marketable-securities
in each of those years. See Hodgkins (Oct. 2014)30. Why would Apple agree to execute only a $14 Billion stock
repurchase program in 2014 when it reported more than $110 billion in Cash/Cash-Equivalents/Marketable-
Securities during all quarters of FY2014; and had raised $17 Billion in cash from a bond offering during calendar
2013; and investors such as Carl Icahn had been pressuring Apple to spend as much as $150 Billion on stock
repurchases? One obvious reason was that Apple just didn’t have the cash. During 2012-2017, Apple held
significant cash, cash-equivalents and marketable securities balances, and more than seventy percent of such assets
were purportedly held by Apple’s foreign (non US) subsidiaries. As of the end of Apple’s first fiscal quarter of
29
Virginity, And Your 17 Year Old Daughter. http://www.businessinsider.com/john-hempton-longtop-financial-2011-
5. Also see http://www.brontecapital.com/files/sma/Client_Letter_201105.pdf.
See: Gillis, P. (_____). Longtop Financial Technologies Case Study - Accounting fraud in China. Peking
University's Guanghua School of Management. http://www.paulgillis.org/longtop_financial_technolog.pdf.
See: Gillis, P. (_____). Auditing cash in China. http://www.chinaaccountingblog.com/weblog/auditing-cash-in-
china.html. Peking University's Guanghua School of Management.
See: Norris, F. (May 26, 2011). The Audacity of Chinese Frauds.
http://www.nytimes.com/2011/05/27/business/27norris.html?pagewanted=all&_r=0.
30
See: Hodgkins, K. (Oct 9, 2014). Carl Icahn Asks For Accelerated Stock Repurchase Program In Letter To
Apple's Tim Cook. Available at: http://www.macrumors.com/2014/10/09/carl-icahn-tim-cook/. This article stated in
part “........In a letter addressed to Tim Cook today, activist investor Carl Icahn praises Apple for its innovation,
while again asking the company to accelerate its stock repurchase program. Icahn previously pressured Apple to
increase its stock buyback program to as much as $150 billion, but dropped that bid following Apple's decision to
repurchase $14 billion shares in February of this year..........”
26
FY2017, 94% of Apple’s cash/cash-equivalents/marketable-securities (total was about US$246 billion)31 were
supposedly held by Apple’s foreign subsidiaries (to put it in context, as of that time, the sum of Apple's cash/cash-
equivalents and marketable securities was bigger than the market values of Procter & Gamble (PG), Bank of
America (BAC), Chevron (CVX) and Walmart (WMT)). Apple’s excuse has been that it does not want to shift such
cash and marketable securities back to the US because such assets would become subject to US taxes, and thus
Apple resorted to borrowing money. Note that some countries (such as China) don’t permit the US SEC to obtain
the working papers of external auditing/accounting firms; and a substantial and increasing percentage of Apple’s
annual revenues were purportedly generated in such countries like China. However, as noted above, the US
Senate’s 2013 report which confirmed the tax evasion by Apple noted that although Apple claimed that most of its
cash/cash-equivalents/marketable-securities are held by its foreign subsidiaries, most of the $102 billion that Apple
was keeping "overseas" (as of 2012-2013) through its foreign subsidiaries was actually in US banks. The table
below shows that some of Apple’s cash/cash-equivalents/marketable-securities that Apple was keeping "overseas"
(as of 2016) was actually in US banks – because Apple’s total cash/cash-equivalents/marketable-securities balance
as of FYE2016 was more than $200 billion while the reported un-repatriated profits was $109.8 billion.
Table-___: Top-20 US Companies That Have The Greatest Un-Repatriated Profits As Of 2016.
31
See: La Monica, P. (Feb. 1, 2017) “Apple has $246 Billion in cash, nearly all overseas”.
http://money.cnn.com/2017/02/01/investing/apple-cash-overseas/.
See: Gangar, S. & Robinson, M. (April 29, 2014). Apple Sells $12 Billion of Bonds to Keep Cash Overseas.
https://www.bloomberg.com/news/articles/2014-04-29/apple-returns-to-bond-market-to-scale-biggest-borrowers-
ranks.
27
Source: http://pulse.ng/bi/finance/finance-theres-2-4-trillion-dollars-stashed-overseas-here-are-the-companies-hoarding-the-most-cash-outside-america-
id6628257.html.
Given that mature companies like Apple are usually valued with respect to their dividends, and given the
asset-quality management and earnings management theories introduced herein, it’s conjectured here that most of
Apple’s reported cash/cash-equivalents/marketable-securities balances doesn’t exist and constitutes fraudulent
disclosure.
4.4. Excessive Quarterly Churning In Apple’s “Long-Term” Marketable Securities Portfolio.

During FY-2012, FY-2013, FY-2014 and FY2015, Apple had significant annual portfolio-turnover in its large
portfolio of “Long-Term Marketable Securities” (more than 60% turnover in each year; and $99-$217 Billion of
assets in each year) – which continued until FY2017. Apple’s bought/sold ratios of its investments portfolio were
1.15 (217/189; and annual trading volume was about $406 billion) in FY-2014; and 1.43 (148.4/104; and annual
trading volume was about $252.4 billion) in FY-2013; and 1.52 (151.2/99.7; and annual trading volume was about
$250.9 billion) in FY-2012. The trading volumes and bought/sold ratios (for Apple’s Long Term Marketable
Securities) were significant and changed in each fiscal quarter during 2012-2017. During FY2014, the adjusted
costs of amounts that Apple invested in various types of securities were as follows: Corporate securities was
$85.431 Billion; U.S. Treasury securities was $23.140 Billion; and MBS/ABS were $12.907 Billion. Apple’s
“Proceeds from maturities of marketable securities” were $18.810 Billion in FY-2014; and $20.317 Billion in FY-
2013; and $13.035 Billion in FY-2012. The classification as “Long Term marketable Securities” implies that such
assets are to be “held-to-maturity”. Given that during 2005-2016, Apple was never a financial services company,
such high portfolio-turnover and large portfolio-size is alarming and has the following implications: i) first, it
means that such securities should have been classified as “trading securities” rather than “Long-term marketable
securities”; and ii) why was Apple deliberately trying to reduce its perceived liquidity ? (the securities were
recorded as long term assets); iii) there may be a correlation between Apple’s significant trading in such “long
term” securities, and the significant annual and quarterly increases in Apple’s sales revenues – was Apple
purchasing and or biding-up and or supporting the bonds/debt and or shares of common stock of its corporate
customers, or vendors or distributors in exchange for “Channel-stuffing” and or “phantom-sales” or “Shelf-space”
or actual purchases of Apple’s products ?; iv) was Apple including sales of, or profits from “Long-Term Marketable
Securities” in its Gross Sales Revenues in its Income Statement ?; v) Apple’s actual liquidity may have been much
lower than it reported and despite Apple’s reported high liquidity - Apple raised substantial amounts money during
2013-2015 through issuances of its securities (instead of selling some of its $120+ Billion of “liquid” investments) -
in April 2013, Goldman Sachs Group and Deutsche Bank executed Apple's $17 billion (seventeen Billion US
Dollars) bond offering, which was the largest bond sale on record then and was Apple’s first bond offering since
28
1996; vi) in each fiscal quarter during 2012-2017, the sum of Apple’s Cumulative Retained Earnings, long term
debt and cumulative depreciation expense has always been far less than its portfolio of investment securities.
4.5. Apple’s Product Warranty Problems.

Between 2009 and 2016, Apple was fined by at least one country for issuing misleading Warranty claims and
product guarantees. See comments in Patel (December 21, 2011)32; cntv.cn (2013a)33; and cntv.cn (2013b)34. Such
misconduct also constitutes actionable earnings management and Asset-Quality Management because warranty
costs were omitted from Apple’s financial statements. As mentioned above, its probable that Apple forces some of
its distributors in some countries to absorb product warranty claims costs.
4.6. Apple’s Labor Problems.

During 2010-2016, Apple was aware that its vendors used poorly-managed sweat-shops (with poor and un-sanitary
working conditions) in Asia (ie. China) to manufacture Apple’s products, and this issue has been widely reported in
the press in many countries35. Between 2008 and 2014, some workers at these sweat-shops in China committed
suicide because of poor working conditions. Despite the publicity surrounding Apple’s labor practices, Apple has
32
See: Patel, N. (December 21, 2011). "Apple fined $1.2m in Italy for misleading warranty claims". The Verge.
Available at: http://www.theverge.com/2011/12/27/2663489/apple-fined-1-2m-in-italy-for-misleading-warranty-
claims.
33
See: cntv.cn (2013a). "Apple China warranty policy is different from foreign countries". Available at:
http://jingji.cntv.cn/2013/03/15/ARTI1363350607589867.shtml.
34
See: cntv.cn (2013b). "Tim Cook Apologies To Chinese Consumers For Warranty Policy". cntv.cn (2013).
Available at: http://jingji.cntv.cn/2013/04/02/VIDE1364861283571975.shtml.
35
See: Malone, A & Jones, R. (December 6, 2010). "Revealed: Inside the Chinese suicide sweatshop where
workers toil in 34-hour shifts to make your iPod". Daily Mail (London). Available at:
http://www.dailymail.co.uk/news/article-1285980/Revealed-Inside-Chinese-suicide-sweatshop-workers-toil-34-
hour-shifts-make-iPod.html.
See: "Chinese Factory asks for 'no suicide' vow". MSNBC. May 26, 2010. Available at:
http://www.msnbc.msn.com/id/37354853/ns/business-world_business/?ns=business-world_business.
See: Carlson, N. (April 7, 2010). "What It's Like To Work In China's Gadget Sweatshops Where Your iPhones And
iPads Are Made". Business Insider. Available at: http://www.businessinsider.com/what-its-like-to-work-if-chinas-
gadget-sweatshops-where-your-iphones-and-ipads-are-made-2010-
4?utm_source=Daily+Buzz&utm_campaign=81432d578c-nl_emv_db_04082010_a&utm_medium=email.
See: The Foxconn Suicides, May 28, 2010, wsj.com, WSJ opinion. Available at:
http://online.wsj.com/article/SB10001424052748704269204575270031332376238.html?mod=googlenews_wsj.
See: Suicides Spark Inquiries Apple, H-P to Examine Asian Supplier After String of Deaths at Factory, Jason Dean,
Ting-i Tsai, May 27, 2010. Available at:
http://online.wsj.com/article/SB10001424052748704026204575267603576594936.html.
See: Carlson, N. (July 27, 2009). "Life Inside A Chinese Gadget Factory". Business Insider. Available at:
http://www.businessinsider.com/life-inside-a-chinese-gadget-factory-2009-7.
See: “Apple suppliers maintain tight security to avoid leaks: Foxconn said to have 'special status' in China”.
MacNN, February 17, 2010. Available at:
http://www.macnn.com/articles/10/02/17/foxconn.said.to.have.special.status.in.china/.
See: Apple's Recent Strike in Suzhou is Sign of Continued Bad Labor and CSR Practices in China. All Roads Lead
to China, January 21, 2010. Available at: http://www.allroadsleadtochina.com/2010/01/21/will-apple-be-the-next-
nike-or-will-they-take-labor-compliance-seriously/.
See: “Apple - Supplier Responsibility" (PDF). Apple. Available at:
http://images.apple.com/supplierresponsibility/pdf/L418102A_SR_2010Report_FF.pdf.
See: Blodget, H. (April 7, 2010). "Apple-Supplier Factory Worker Tries To Kill Herself – That's 4 In 4 Weeks".
Business Insider. Available at: http://www.businessinsider.com/henry-blodget-another-apple-supplier-factory-
worker-tries-to-kill-herself-thats-4-in-4-weeks-2010-4.
29
deftly used its political influence to preclude sanctions and lawsuits. Chan, Ngai & Selden (2013) discussed
Apple’s labor issues.
4.7. Apple’s Board Of Directors.

As of 2014-2016, most of Apple’s BOD members were external directors who had been on its BOD for more than
seven years. Thus, there maybe an issue of detrimental BOD “Entrenchment” at Apple which can be partly
attributed to non-implementation of a majority-voting rule for Apple’s BOD members that contest elections for
seats in its BOD. Page-12 of Apple’s 2015 Proxy Statement
(http://investor.apple.com/secfiling.cfm?filingid=1193125-14-8074&cik=320193) noted that “......The Board met a
total of seven times during 2014. The Board has determined that all Board members, other than Mr. Cook, are
independent under applicable rules of the Nasdaq Stock Market (“Nasdaq”) and the SEC.......”. As of December
2014, Apple had eight Board Members. Unfortunately and contrary to Apple’s US SEC filings, none of Apple’s
BOD members were truly “independent” during 2012-2015 under international standards of “Independence”. That
is, ideally, no independent BOD member should own any shares/interests in Apple, in addition to other
“Independence” requirements. Both SEC and NASDAQ set limits on compensation paid to, and shares/options
owned by “independent” BOD members. But Apple’s 2014 10K and Q1-2015 10Q does not provide sufficient data
to verify independence of BOD members.
Page-16 of Apple’s 2015 Proxy Statement showed the Apple shares and stock options that were owned by
Apple’s BOD members – but that data does not show the maximum permitted shares/options that can be owned by
such BOD members. Page-15 of Apple’s 2015 Proxy Statement stated in part:
“............The Board determines the form and amount of director compensation after its review of
recommendations made by the Compensation Committee. A substantial portion of each director’s annual
retainer is in the form of equity. Under the Company’s 1997 Director Stock Plan (the “ Director Plan ”),
members of the Board who are not also Company employees (“ Non-Employee Directors ”) are granted
restricted stock units (“ RSUs ”) on the date of the annual meeting of shareholders (each, an “ Annual RSU
Award ”). The number of RSUs subject to each Annual RSU Award is determined by dividing $250,000 by
the per-share closing price of the Company’s common stock on the date of grant (rounded to the nearest
whole share). All Annual RSU Awards to directors will vest on February 1 of the year following the year in
which the award is granted, subject to continued service on the Board. A Non-Employee Director who is
newly appointed to the Board other than in connection with an annual meeting of shareholders will generally
also receive a grant of RSUs upon appointment (an “ Initial RSU Award ”), except that a Non-Employee
Director who joins the Board after February 1 of a particular year and prior to the annual meeting for that
year will not receive an Initial RSU Award. The number of RSUs subject to each Initial RSU Award is
determined in the same manner as described above for Annual RSU Awards, but the grant-date value of the
award is prorated based on the portion of the year that has passed since the last annual meeting. Initial RSU
Awards will vest on the vesting date established for the Annual RSU Awards made at the last annual meeting
prior to the date on which the Non-Employee Director joined the Board.........Non-Employee Directors
receive a $50,000 annual retainer. The Chairman of the Board, Dr. Levinson, receives an additional annual
retainer of $200,000; the Chair of the Audit Committee, Dr. Sugar, receives an additional retainer of
$25,000; the Chair of the Compensation Committee, Ms. Jung, receives an additional annual retainer of
$20,000; and the Chair of the Nominating Committee, Mr. Campbell, receives an additional annual retainer
of $15,000. All retainers are paid in quarterly installments. Other than the additional annual retainers paid
to the Chair of each committee and the Chairman of the Board, directors do not receive any additional
compensation for serving as Chair or member of any committee..... In February 2013, the Company adopted
stock ownership guidelines applicable to the Company’s CEO, executive officers and Non-Employee
Directors. Under the guidelines, Non-Employee Directors are expected to own shares of Company common
stock that have a value equal to five times their annual cash retainer for serving as a director. Shares may be
owned directly by the individual, or owned jointly with or separately by the individual’s spouse, or held in
trust for the benefit of the individual, the individual’s spouse or children. Each individual is expected to
satisfy the stock ownership guideline applicable to them by November 12, 2017, or within five years after first
becoming subject to the guidelines. Each of the Company’s directors has satisfied the stock ownership
guidelines. In addition, under the Company’s Board of Directors Equipment Program, each Non-Employee
Director is eligible to receive, upon request and free of charge, one of each new product introduced by the
Company, and is eligible to purchase additional equipment at a discount......”.
30
Apple’s BOD lacks racial and gender diversity36, and many people have commented about this issue.
The members of Apple’s Audit Committee (Ronald Sugar (Chair); William Campbell, Robert Iger and Arthur
Levinson) are un-qualified for such role because none are accountants/CPAs and none seem to have equivalent
direct experience in financial management and internal audits. Furthermore, none of the members of Apple’s Audit
committee were “Independent” under both NASDAQ and SEC rules as of Q1-2015, because they owned Apple’s
shares and or stock options as of Q1-2015.
4.8. Management Entrenchment At Apple.

As of January 2015, many of Apple’s senior managers had worked at Apple continuously during the prior seven
years. This raises the problem of detrimental Managerial Entrenchment. There is a substantial academic literature
on the many corporate governance problems caused by Managerial Entrenchment.
4.9. Apple’s Executive Compensation Program.

Apple’s 2015 Proxy Statement states that Apple’s executive compensation program does not include the
following: i) employment agreements; ii) severance arrangements; iii) cash payments in connection with a change
in control of the Company; iv) tax gross-ups; v) supplemental executive retirement benefits; or vi) Supplemental
health or insurance benefits. This is clear error. US Courts have constantly ruled that written Employment
Agreements are at-will agreements – the mere fact that there is a written employment agreement does not create a
non at-will employment. In fact an employment agreement often protects the employer-company by clearly
specifying terms such as venue for dispute resolution; actual compensation; employee’s responsibilities and
obligations; intellectual property; restrictions and other issues that may cause disputes and litigation. Similarly,
severance agreements and arrangements can help in preventing disputes and litigation. Supplemental executive
retirement benefits and or Supplemental health or insurance benefits can provide significant incentives for senior
management.
The pay gap between Apple’s executives and lower level employees is perhaps one of the widest in the
world. See Apple’s employees’ salary ranges at:
http://www.payscale.com/research/US/Employer=Apple_Computer,_Inc/Salary; and
http://www.glassdoor.com/Salary/Apple-Salaries-E1138.htm. However, a 2012 Forbes37 article stated that about
30,000 (thirty thousand) of the 43,000 (forty three thousand) Apple employees in the US work in Apple Stores, and
most of them earn about $25,000 (twenty five thousand US Dollars) per year. Apple’s CEO Tim Cook’s total
compensation for FY-2013 exceeded US$370 Million (three hundred and seventy million US Dollars) !!
As noted by Hodgson (2013)38 and Financial Times (2013)39, Apple’s shareholders were very unhappy in
2013 about its executive compensation and at least 33% (thirty three percent) of Apple’s voting shareholders didn’t
approve the say-on-pay proposals. The reasons were as follows:
i) Apple’s 2011 shareholder say-on-pay proxy proposed a 14 percent pay rise for the executive team because
compensation consultant F.W. Cook & Co. determined that Apple executive salaries were below the peer
median despite the fact that the 2012 proxy claimed they were approximately at the median.
ii) At the 2013 shareholder meeting, the say-on-pay proposal included a 50% percent increase in base salary
for Apple’s CEO Tim Cook on his appointment as CEO; and an award to him of one million restricted stock
units that were worth $376,180,000 at the time of grant and were worth $445,210,000 as of February 2013
36
See: Apple Inc. Nominating and Corporate Governance Committee Charter (as of November 19, 2013), p.2.
Available at: http://files.shareholder.com/downloads/AAPL/0x0x443007/0d3f54b1-d2d3-44e8-a805-
500473659a85/nominating_charter.pdf.
See: Hughes N. (Jan. 6, 2014). “Critics take issue with lack of diversity on Apple Board of Directors”.
Appleinsider (Jan. 6, 2014). Available at: http://appleinsider.com/articles/14/01/06/critics-take-issue-with-lack-of-
diversity-on-apple-board-of-directors.
37
See: Apple's Employees Have A Hell Of A Ride. Forbes, May 25, 2012.
http://www.forbes.com/sites/stevedenning/2012/06/25/apples-employees-have-a-hell-of-a-ride/.
38
See: Hodgson P (Feb. 2, 2013). Why are Apple Shareholders Dissatisfied with Executive Pay? Forbes.
http://www.forbes.com/sites/paulhodgson/2013/02/28/why-are-apple-shareholders-dissatisfied-with-executive-pay/.
39
See: Financial Times (Bradshaw T. & McCrum D.) (Feb. 27, 2013). Apple shareholders in protest vote on pay.
http://www.ft.com/intl/cms/s/0/c9f09eb2-810c-11e2-9fae-00144feabdc0.html#axzz3ZATP3H6K.
31
despite the decline in Apple’s stock price in 2013. That grant had no other requirements for Mr. Cook other
than holding his job for the next 5-10 years.
iii) The fact that Apples’ top five executives all got a cash bonus during 2012 because the company exceeded
its net sales and operating income targets during 2012, when Apple’s stock price fell from its high of around
$700 to $550 and continued to decline during 2013.
iv) As of 2011-2013, the performance criteria used to determine the annual bonuses for Apple’s senior
executive officers were Net Sales Revenues and Operating Income (under US GAAP). These metrics are not
connected to the creation of shareholder value; or shareholders’ investment returns; or true company
performance; or long-term vesting requirements; or ethical manufacturing and labor practices; or sizeable
stock retention requirements for mid-level and senior executives.
v) Apple’s stock awards vest over long periods (5-10 years); but they are granted to executives as long as
they remain employed by Apple, and regardless of their individual performance or Apple’s operating
performance.
Also, some shareholders may perceive Apple’s cash payout to shareholders as relatively low – the announced ASR
amounts constitute less than half of Apple’s holdings of cash and cash-equivalents.
4.10. Apple’s Disclosures About Its Employee Retirement Plan Has Been Inadequate.
Apple may have an under-funded employee retirement plan40; and does not seem to have been making recent
adequate disclosures about the plan. Towers Watson (2014); Zanglein (1991); U.S. Government Accountability
Office (Mar. 2013); and Yermo & Severinson (July 2010) discussed pension deficit problems. Wilshire (2014)
noted that despite a strong increases in the global stock markets during 2013, the aggregate funding deficit of
defined benefit pension assets for S&P 500 Index companies was about US$153.9 billion as of 2014. Apple’s Q1-
2015 10Q and 2015 Proxy Statement and FY-2014 10K did not contain any material disclosures about its pension
obligations and pension assets – specifically, Apple’s Form-10Ks and Form-10Qs (filed at the US SEC) didn’t
disclose the “minimum annual contributions” to the retirement plan that was required from Apple for FY 2011-
2014. Similarly, Apple’s financial statements in the10Q and 10K didn’t contain any line items or notes about its
pension obligations. This constitutes inadequate disclosure and perhaps earnings management. Apple’s 401k Plan
is a defined contribution plan with a profit-sharing component and 401k feature. Under this plan, Apple matches
US employees’ contributions to the plan up to a maximum of six percent of their annual compensation and subject
to an US IRS employee contribution-cap of $17,500 per employee per year. As of 2014, Apple’s 401k Plan had
more than 70,600 active participants and at least US$3.1 Billion in plan assets (an average of about $43,900 per
employee). However, given Apple’s reported annual revenues ($40-$183 Billion per year) and Net Income ($10-
$40 Billion per year) and Selling/General/Administrative expenses during the last ten years and the required profit-
sharing contributions to its employee retirement plan, the plan-assets of $3.1 Billion seem to be extremely low –
thus, the issue of under-funding by Apple. See:
http://www.bloomberg.com/research/stocks/financials/pensions.asp?ticker=AAPL. See:
http://www.brightscope.com/401k-rating/414190/Apple-Inc/419642/Apple-401K-Plan/. In 2012, Apple switched
to an ETF-only retirement plan for its employees.
Page-72 of Apple’s FY-2014 10K states in part “..........401(k) Plan......The Company’s 401(k) Plan is a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan,
participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit
($17,500 for calendar year 2014). The Company matches 50% to 100% of each employee’s contributions,
40
See: Floyd Norris, “Private Pension Plans, Even at Big Companies, May Be Underfunded”. New York Times
(July 20, 2012). Available at: http://www.nytimes.com/2012/07/21/business/pension-plans-increasingly-
underfunded-at-largest-companies.html?_r=0.
See: Krantz, M. (April 9, 2014). “Report: 85% (Eighty five percent) Of Pensions Could Fail In Thirty Years”.
USA Today. Available at: http://americasmarkets.usatoday.com/2014/04/09/report-85-of-pensions-could-fail-in-30-
years/. (citing a recent report by hedge-fund Bridgewater Associates; and assuming investment returns of four
percent per annum).
See: U.S. Department of Labor (June 2013). Private Pension Plan Bulletin Historical Tables and Graphs.
Available at: http://www.dol.gov/ebsa/pdf/historicaltables.pdf.
32
depending on length of service, up to a maximum 6% of the employee’s eligible earnings. The Company’s matching
contributions to the 401(k) Plan were $163 million, $135 million and $114 million in 2014, 2013 and 2012,
respectively..............”
The four tables below show hypothetical employee-only contributions to the Apple Employee Retirement
Plan.
Table-___: Hypothetical Apple Employee Contributions During 1-5 years ($17,500 per employee per
year) (1;2;3).
% of
Employees Total Annual Contributions (years 1-5)
That
Contribute (Without Compounding Of Returns/Interest)
$17,500/year Year-1 Year-2 Year-3 Year-4 Year-5
5% 61,775,000 123,550,000 185,325,000 247,100,000 308,875,000
10% 123,550,000 247,100,000 370,650,000 494,200,000 617,750,000
15% 185,325,000 370,650,000 555,975,000 741,300,000 926,625,000
25% 308,875,000 617,750,000 926,625,000 1,235,500,000 1,544,375,000
40% 494,200,000 988,400,000 1,482,600,000 1,976,800,000 2,471,000,000
35% 432,425,000 864,850,000 1,297,275,000 1,729,700,000 2,162,125,000
50% 617,750,000 1,235,500,000 1,853,250,000 2,471,000,000 3,088,750,000
65% 803,075,000 1,606,150,000 2,409,225,000 3,212,300,000 4,015,375,000
75% 926,625,000 1,853,250,000 2,779,875,000 3,706,500,000 4,633,125,000
Table-___: Hypothetical Apple Employee Contributions During 1-5 years ($10,000 per employee per
year) (1;2;4).
% of Staff That Total Annual Contributions (years 1-5)

5% 35,300,000 70,600,000 105,900,000 141,200,000 176,500,000
10% 70,600,000 141,200,000 211,800,000 282,400,000 353,000,000
15% 105,900,000 211,800,000 317,700,000 423,600,000 529,500,000
25% 176,500,000 353,000,000 529,500,000 706,000,000 882,500,000
40% 282,400,000 564,800,000 847,200,000 1,129,600,000 1,412,000,000
35% 247,100,000 494,200,000 741,300,000 988,400,000 1,235,500,000
50% 353,000,000 706,000,000 1,059,000,000 1,412,000,000 1,765,000,000
65% 458,900,000 917,800,000 1,376,700,000 1,835,600,000 2,294,500,000
75% 529,500,000 1,059,000,000 1,588,500,000 2,118,000,000 2,647,500,000
Table-___: Hypothetical Apple Employee Contributions During 1-5 years ($3,000 per employee
per year) (1;2;5).

5% 10,590,000 21,180,000 31,770,000 42,360,000 52,950,000
10% 21,180,000 42,360,000 63,540,000 84,720,000 105,900,000
15% 31,770,000 63,540,000 95,310,000 127,080,000 158,850,000
25% 52,950,000 105,900,000 158,850,000 211,800,000 264,750,000
40% 84,720,000 169,440,000 254,160,000 338,880,000 423,600,000
35% 74,130,000 148,260,000 222,390,000 296,520,000 370,650,000
50% 105,900,000 211,800,000 317,700,000 423,600,000 529,500,000
65% 137,670,000 275,340,000 413,010,000 550,680,000 688,350,000
75% 158,850,000 317,700,000 476,550,000 635,400,000 794,250,000
Table-___: Hypothetical Apple Employee Contributions During 1-5 years ($1,500 per employee
per year) (1;2;6).

5% 5,295,000 10,590,000 15,885,000 21,180,000 26,475,000
10% 10,590,000 21,180,000 31,770,000 42,360,000 52,950,000
15% 15,885,000 31,770,000 47,655,000 63,540,000 79,425,000
33
25% 26,475,000 52,950,000 79,425,000 105,900,000 132,375,000
40% 42,360,000 84,720,000 127,080,000 169,440,000 211,800,000
35% 37,065,000 74,130,000 111,195,000 148,260,000 185,325,000
50% 52,950,000 105,900,000 158,850,000 211,800,000 264,750,000
65% 68,835,000 137,670,000 206,505,000 275,340,000 344,175,000
75% 79,425,000 158,850,000 238,275,000 317,700,000 397,125,000
Notes:
1) Data doesnt include Apple's matching contributions to the plan; and does not include compounding of interest. Assumes that: i) Apple’s employee
retirement plan has at least 70,600 (seventy thousand and six hundred) plan participants41; and ii) the average employee tenure at Apple is 4-5 years; iii) each
participating employee does not make any withdrawals from the plan during the five-year period; or that each such withdrawal is replaced by new cash
contributed by another employee or a new employee; iv) Apple makes matches an average of 75% of each employee’s contributions to the plan; v) the average
employee annual base salary at Apple is at least $60,000. See Apple’s employees’ salary ranges at:
http://www.payscale.com/research/US/Employer=Apple_Computer,_Inc/Salary; and http://www.glassdoor.com/Salary/Apple-Salaries-E1138.htm.
2) A 2012 Forbes42 article stated that about 30,000 (thirty thousand) of the 43,000 (forty three thousand) Apple employees in the US work in Apple Stores, and
most of them earn about $25,000 (twenty five thousand US Dollars) per year. Six percent of $25,000 is $1,500. The maximum permitted contribution per
individual employee per year is the lower of either $17,500 or 12% of the employee’s gross salary. The employer matches a maximum of 6% of each
employees gross salary per year.
3) If the average employee tenure at Apple is five years, and 10% (ten percent) of Apple’s employee-participants contributed $17,500 (seventeen thousand and
five hundred US Dollars, and 25% (twenty five percent) of Apple’s plan-participants contributed at least $10,000 (ten thousand US Dollars) and 65% (sixty
five percent) of Apple’s plan-participants contributed at least $1,500 (one thousand and five hundred US Dollars) in the plan each year for four consecutive
years; the total plan assets without compounding of returns/interest (and without Apple’s matching cash contributions) will exceed $1.844 Billion. If its
assumed that Apple matches 75% of employee contributions, the hypothetical plan assets will exceed Apple’s reported $3.10 Billion plan assets (in Apple’s
FY 2014 10K).
4) If the average employee tenure at Apple is five years, and 15% (fifteen percent) of Apple’s employee-participants contributed at least $17,500 (seventeen
thousand and five hundred US Dollars), 15% (fifteen percent) of Apple’s employee-participants contributed at least $10,000 (seventeen thousand and five
hundred US Dollars, and 35% (thirty five percent) of Apple’s employee-participants contributed at least $3,000 (three thousand US Dollars) and 35% (thirty
five percent) of Apple’s employee-participants contributed at least $1,500 (one thousand and five hundred US Dollars) in the plan each year for five
consecutive years; the total plan assets without compounding of returns/interest (and without Apple’s matching cash contributions) will exceed $2.010 Billion.
If its assumed that Apple matches 75% of employee contributions, the hypothetical plan assets will exceed Apple’s reported $3.10 Billion plan assets (in
Apple’s FY 2014 10K).
5) If the average employee tenure at Apple is five years, and 25% (twenty five percent) of Apple’s employee-participants contributed at least $17,500
(seventeen thousand and five hundred US Dollars, and 10% (ten percent) of Apple’s employee-participants contributed at least $10,000 (ten thousand US
Dollars) and 65% (sixty five percent) of Apple’s employee-participants contributed at least $1,500 (one thousand and five hundred US Dollars) in the plan
each year for five consecutive years; the total plan assets without compounding of returns/interest (and without Apple’s matching cash contributions) will be at
least $2.241 Billion. If its assumed that Apple matches 75% of employee contributions, the hypothetical plan assets will exceed Apple’s reported $3.10 Billion
plan assets (in Apple’s FY 2014 10K).
6) If the average employee tenure at Apple is five years, and 5% (five percent) of Apple’s employee-participants contributed at least $17,500 (seventeen
thousand and five hundred US Dollars, and 25% (twenty five percent) of Apple’s employee-participants contributed at least $10,000 (ten thousand US Dollars)
and 50% (fifty percent) of Apple’s employee-participants contributed at least $3,000 (three thousand US Dollars) and 20% (twenty percent) of Apple’s
employee-participants contributed at least $1,500 (one thousand and five hundred US Dollars) to the plan each year for five consecutive years; the total plan
assets without compounding of returns/interest (and without Apple’s matching cash contributions) will be at least $1.824 Billion. If its assumed that Apple
matches 75% of employee contributions, the hypothetical plan assets will exceed Apple’s reported $3.10 Billion plan assets (in Apple’s FY 2014 10K).
Thus, if its assumed that Apple matches at least of 75% (seventy five percent) of employee contributions to the
plan, and each participating employee does not make any withdrawals from the plan during the five-year period (or
each such withdrawal is replaced by new cash contributed by another employee or a new employee), its highly
likely that Apple has been under-funding its employee retirement plan; and or that the reported retirement plan data
in Apple’s recent 10Ks and 10Qs were wrong.
4.11. Apple Didn’t Provide Adequate Disclosure About Its Accelerated Share Repurchase Program (ASR) And
ASRs Are Or May Be Illegal.
Many large multinational companies and S&P-500 companies43 (eg. Humana; Monsanto; Boise Cascade;
Qualcomm; Pfizer; etc.) have implemented ASRs. As noted in Nwogugu (2015e), ASRs are inefficient and may be
illegal; and the current accounting methods for ARSs are wrong. Fried (2011); Carlson & Vogel (2006); and
Francis (June 2011)44 discussed share buybacks.
41
See: www.Brightscope.com ratings of Apple’s employee retirement plan at: http://www.brightscope.com/401k-
rating/414190/Apple-Inc/419642/Apple-401K-Plan/.
42
See: Apple's Employees Have A Hell Of A Ride. Forbes, May 25, 2012.
http://www.forbes.com/sites/stevedenning/2012/06/25/apples-employees-have-a-hell-of-a-ride/.
43
See: Factset (March 15, 2015). Buyback Quarterly.
http://www.factset.com/websitefiles/PDFs/buyback/buyback_3.16.15.
44
See: Francis, T. (June 2011). A Tale Of Two Paychecks At Mckesson & CA. June 13, 2011. Available at
http://www.footnoted.com/my-big-fat-deal/a-tale-of-two-paychecks-at-mckesson-ca/.
34
Apple didn’t make many of the required disclosures for ASRs in its Q1-2015 10Q and FY-2014 10K, which
according to Skadden (2013) are as follows:
1) Section 703 of Regulation S-K requires that, for all issuer share repurchases, the company must disclose the
following data in its next periodic report for each month of the preceding fiscal quarter:
• the total number of shares purchased;
• the average price paid per share;
• the number of shares purchased as part of a publicly announced program; and
• the maximum number of shares (or approximate dollar value) that may yet be repurchased under the
program.
2) Additionally, for publicly announced programs, the SEC requires disclosure (in footnotes to the table) of
the following information:
• the date of the announcement;
• the share or dollar amount approved by the board of directors;
• the expiration date (if any) of the program;
• each program that has expired during the last fiscal quarter; and
• each program that the issuer has determined to terminate prior to expiration or under which the issuer
does not intend to make further purchases.
Page 69 of Apple’s FY-2014 10K states in part “..........In 2012, the Company’s Board of Directors authorized a
program to repurchase up to $10 billion of the Company’s common stock beginning in 2013. The Company’s
Board of Directors increased the share repurchase authorization to $60 billion in April 2013 and to $90 billion in
April 2014. As of September 27, 2014, $67.9 billion of the $90 billion had been utilized. The Company’s share
repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may
be repurchased in privately negotiated and/or open market transactions, including under plans complying with
Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company has
entered into four accelerated share repurchase arrangements (“ASRs”) with financial institutions beginning in
August 2012. In exchange for up-front payments, the financial institutions deliver shares of the Company’s common
stock during the purchase periods of each ASR. The total number of shares ultimately delivered, and therefore the
average repurchase price paid per share, will be determined at the end of the applicable purchase period of each
ASR based on the volume weighted-average price of the Company’s common stock during that period. The shares
received are retired in the periods they are delivered, and the up-front payments are accounted for as a reduction
to shareholders’ equity in the Company’s Consolidated Balance Sheet in the periods the payments are made. The
Company reflects the ASRs as a repurchase of common stock in the period delivered for purposes of calculating
earnings per share and as forward contracts indexed to its own common stock. The ASRs met all of the applicable
criteria for equity classification, and therefore, were not accounted for as derivative instruments...........”
4.12. Apple Didn’t Provide Sufficient Disclosures About Its Dividend Equivalent Rights (“DERs”); And DERs Are
Or Maybe Illegal.
Although many multinational companies have issued DERs, as noted in Nwogugu (2015e), DERs are
inefficient and may be illegal under many US state corporation laws. DERs have been a contentious issue that has
generated controversies for BODS. For example, in 2009, shareholders of General Electric Company (GE)45 sent a
proposal to GE’s BOD in which they requested that GE cease payment of dividends or Dividend-Equivalents on
Stocks that the executives had not yet earned (DERs payments). That shareholder proposal stated in part:
“........“The 2006-2008 proxy statements disclose that senior executives of the Company have received
millions of dollars of dividends or dividend-equivalent payments on grants of equity compensation that
they do not own. These are payments on shares that the executives may never earn if the Company fails to
meet certain performance targets.....…In addition, our analysis of the2006-2008 Proxy Statements indicates
that the five senior officers have collectively been paid in excess of $12.5 million in dividends or dividend
equivalent payments for the eleven quarters after January 1, 2006. We believe it is a blatant contradiction of
45
See: GE (2009). Shareholder Proposal #4. Available at http://files.cwa-
union.org/Investor/Dividend_Policy_for_Executives_-_GE_2009.pdf.
See: GE 2007 Proxy Statement, Shareowner Proposal. Available at http://www.ge.com/ar2006/proxy/sprop5.htm.
35
the principle of pay-for-performance to give senior executives millions of dollars in ‘dividends’ for stock
that they do not own, and may fail to earn in the future. If the purpose of a grant of performance shares is to
make compensation contingent on the achievement of specified performance objectives, as the
Compensation Committee stated in the 2006 proxy statement, we submit that no ‘dividends’ should be paid
on those shares until an executive has actually earned full ownership rights..........”
Unfortunately, GE’s BOD recommended the rejection of this Shareholder Proposal.
While Apple’s shareholders approved the 2014 Apple Employee Stock Plan which includes “general”
terms of DERs, the shareholders didn’t approve the “specific” terms of DERs. Note that it’s the specific terms of
DERs that gives DERs value and harms Apple. Since Apple’s DERs can affect the firm’s capital structure, share-
price, solvency and bankruptcy risk, and the specific details and terms of DERs weren’t approved by a majority of
the company’s shareholders, Apple’s DERs are illegal. The specific terms include vesting conditions, vesting
period, relationship with other types of compensation; etc. Such misconduct and or negligence or omissions
constitute or may constitute breaches-of-trust (by BOD members); breaches-of-fiduciary duties (by BOD members
and senior executives) and usurpation of corporate opportunity all of which are actionable under most US state
corporation statutes. Also, all the above mentioned misconduct and or negligence or omissions may constitute fraud
or Negligent-Fraud if there is evidence of intent by the subject company and or its BOD or its officers.
Apple did not make sufficient disclosures in its FY 2012-2014 10Qs, Proxy Statements and 10Ks about its
DERs. ASC-718 (FAS 123R) requires specific disclosures about stock based incentives and compensation. See:
Ernst & Young (2014). Apple didnt disclose in its FY2011-FY2014 10Qs, 10Ks and Proxy statements/filings, the
amounts of restricted stock; whether such stock has been earned; the legal and ownership implications of “vesting”;
whether the DERs payments were subject to Section-162 (IRS Code) treatment; the amounts of cash paid to DERs-
holders; the names of holders of DERs; the timing of issuance of DERs during the reporting period; etc.. Page-71
of Apple’s FY-2014 10K states in part “..........2014 Employee Stock Plan........In the second quarter of 2014,
shareholders approved the 2014 Employee Stock Plan (the “2014 Plan”) and terminated the Company’s authority
to grant new awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-
based equity grants to employees, including executive officers, and permits the granting of RSUs (Restricted Stock
Units), stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus
awards. RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and
are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. Each share issued with
respect to RSUs granted under the 2014 Plan reduces the number of shares available for grant under the plan by
two shares. RSUs cancelled and shares withheld to satisfy tax withholding obligations increase the number of
shares available for grant under the 2014 Plan utilizing a factor of two times the number of RSUs cancelled or
shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend equivalent rights (“DERs”),
which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject
to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated
and paid when the underlying shares vest. Upon approval of the 2014 Plan, the Company reserved 385 million
shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares subject
to outstanding awards under the 2003 Plan that expire, are cancelled or otherwise terminate, or are withheld to
satisfy tax withholding obligations with respect to RSUs, will also be available for awards under the 2014 Plan. As
of September 27, 2014, approximately 492.6 million shares were reserved for future issuance under the 2014
Plan.........”.
7. Evidence; And Theories Of Corporate Governance, Managerial Psychology And Enterprise Risk (Company-
Specific Factors That Can Have Macroeconomic Effects).
Yin & Shanley (2008) developed some testable strategy theories. Apple’s Corporate Governance and Strategy
problems and the corporate governance problems of S&P-500 companies are, or can be reasonably construed as
evidence of the following.
36
7.1. Complex “higher-order behaviors”.
This refers to complex “higher-order behaviors” by BODs and executives, which degrade existing Corporate
Governance statutes and measures. Bernard (1926b) distinguished between “Primary” and “Derivative” Attitudes
and Ideals. Bernard (1936) analyzed conflicts between “Primary Group Attitudes” and “Derivative Group Ideals”.
“Hullian Theory” in psychology also distinguishes between “direct” and “derivative” human (individual and group)
behaviors. Deck & Schlesinger (2014); Noussair, Trautmann & Kuilen (2013) and other articles have analyzed a
few higher-order risk preferences.
7.2. Corporate Governance Statutes And Corporations’ Strategies/Mechanisms/Alliances As Non-Public Goods

(that may be created, diminished or amplified by Political Influence And Lobbying).
The “use-value” and potency of Corporate Governance statutes as mechanisms seem to, or can decline as more
persons/companies use such statutes and mechanisms; and or when there is increasing complexity of the Strategy-
spaces of many of the users of such statute/mechanism. Thus, Corporate Governance statutes (such as SOX) and
mechanisms are or can be Non-Public Goods. Similarly, the legality and potency of the announced or un-
announced strategies or “mechanisms” or Strategic Alliances of large/medium companies (or groups of similar
small companies) can decline as more persons/companies are subjected/exposed to such strategies, alliances and or
mechanisms; and or when there is increasing complexity of the Strategy-spaces of many of such companys’
customers and or suppliers. Thus, the strategies, mechanisms, Strategic Alliances and internal Corporate
Governance principles of large multinational companies (or groups of similar small/medium companies) are or can
be Non-Public Goods.
7.3. Enforcement Leakages.

This occurs when statutes don’t require that regulators take preemptive or investigative action to forestall
misconduct and or reduction of Social welfare; and or when existing statutes don’t reduce or increase enforcement
costs.
7.4. Sub-Optimal Litigation Strategies.

Sub-Optimal Litigation Strategies can adversely affect or can affect the company’s stock-prices, employees,
customers and suppliers. Hence, corporate Litigation Strategies are an important aspect of overall Corporate
Strategy. Corporate Litigation Strategies are or can be influenced by: 1) human biases; 2) knowledge deficits; 3)
internal communication deficits; 4) internal controls; 5) internal or external collusion (intentional or un-intentional);
6) criminal misconduct; 7) external pressures (such as meeting analysts’ EPS estimates or shareholders’ demand for
greater dividends); 8) difficulties in either assessing the markets’ technology needs and or in incorporating strategy
into innovation processes and development of technology; 9) economic and psychological costs of innovation,
strategy development and implementation; 10) impact of innovation and strategy development on managers’
compensation and career progress; 11) managers’ perception of apprehension; 12) availability of insurance; 13)
managers’ perceived impact of guilty pleas or settlements or court awards on their career prospects; 14) the
company’s financial condition and access to capital; 15) perceived impact of litigation on customers and suppliers.
In rare exceptions (such as the case of Apple), a company’s proven ability to (legally or illegally) withstand various
forms of lawsuits and government investigations may add to such company’s Social Capital and “perceived
Stability” from the point of view of participants in its Value-Chain and Supply-Chain.
7.5. Strategy Permeation Deficits Theory.

The formulation and or execution of strategy from the BOD to the senior executives to middle managers is distorted
or interrupted by any of the following: 1) human biases; 2) knowledge deficits; 3) internal communication deficits;
4) internal controls; 5) internal or external collusion (intentional or un-intentional); 6) criminal misconduct; 7)
external pressures (such as meeting analysts’ EPS estimates or shareholders’ demand for greater dividends); 8)
difficulties in either assessing the markets’ technology needs and or in incorporating strategy into innovation
processes and development of technology; 9) economic and psychological costs of innovation, strategy
development and implementation; 10) impact of innovation and strategy development on managers’ compensation
and career progress.
7.6. Deadweight Losses.
37
This refers to Deadweight Losses in: i) the pricing, demand and supply of prosecutorial/enforcement litigation
(which may be caused or amplified by Political Influence and Lobbying); ii) Deadweight Losses in the trading of
securities of the company (and perhaps the securities of other companies in the same industry sector). Hines (1999)
and Lind & Granqvist (2010) discussed Deadweight Losses.
7.7. Managerial Entrenchment.

There are adverse effects of Managerial Entrenchment; BOD Entrenchment; and Quasi-managerial Entrenchment
(managers’ philosophies and methods are entrenched by BOD reliance, long term transactions; Policies &
Procedures; organizational culture; fear of change; etc.).
7.8. Social Welfare.

Among managers of some exchange-traded companies, sometimes there is generally low concern for Social
Welfare and for regulations that don’t require frequent reporting/filing; and the effect of quarterly financial
reporting remains a dominant factor in both the operations, strategies and financial reporting of some exchange
traded companies.
7.9. Value Chain Paralysis Theory.

This occurs when the firm’s innovation processes and strategies are not sufficiently translated into value-increasing
tasks, actions and compliance (that do not reduce Social Welfare).
7.10. Super-Additive Value Chain Dominance Theory.

Wherein a firm’s dominance of its value chain increases and increases at a faster rate than the firm’s expansion rate
and or the complexity and economic costs of regulations. In the case of Sub-Additive Value Chain Dominance
Theory, a firm’s bargaining power and influence in its value chain declines at a faster rate than the rate at which the
company expands and or the rate at which regulations become more complex and economically burdensome.
7.11. Value Chain Alliance Volatility Theory.

Wherein one or more Strategic Alliances fail or produces volatile outcomes (in terms of costs; prices; time;
employee effort/motivation; efficiency; etc.) because of asymmetric power in the Alliance; inadequate and or
ineffective incentives; and or partner dependence; and or other factors.
7.12. Value-Chain Execution Gaps Theory.

Wherein critical elements of the value-chain that could be filled/completed by strategic alliances or joint ventures
are instead left open or are inadequately addressed. The results can include lost revenues; uncertainty,
unsustainable business models; value-extraction (ie. a company cannibalizes other companies in its value chain and
reduces overall Social Welfare – eg. Apple; Google; etc.); high costs; etc..
7.13. Welfare-Reducing Value-Extraction Theory.

Wherein one party to a Strategic Alliance or JV extracts value from the other party/parties by imposing costs;
creating or fostering harmful asymmetric power/control in the relationship; increasing the other partys’ switching
costs; shifting fixed and or variable costs to the other parties; or increasing the perceived demand for its
products/services; etc..
7.14. The Policy-Dampening Alliance Theory.

It can be reasonably inferred that Strategic Alliances can dampen monetary policies under some conditions
including but not limited to the following: 1) there is asymmetric power among alliance partners which increases
uncertainty that is or can be directly proportional to the volume of activity in the alliance; 2) the alliance-partners’
costs don’t vary substantially with volume or interest expense - most or a substantial percentage of alliance-costs
are fixed costs; 3) costs and the allocation of costs are fixed in time or place; 4) alliance termination costs are
asymmetric, substantial and are mostly fixed costs; 5) the costs of scaling the alliance or amending the alliance
agreement are significant and are mostly fixed costs; 6) one or more alliance-partners is a major player in an
industry that affects many people and or companies; 7) the strategic alliance creates irreversible changes in one or
more of the alliance-partners’ operations; 8) one or more of the alliance-partners owe relatively low amounts of
38
debt; 9) one alliance-partner that has low debt implicitly finances the other alliance-partner; 10) the strategic
alliance reduces customers’ need for loans/debt to finance their operations.
7.15. The Dynamic Coordination-Gaps Theory.

This refers to: 1) Intra/Inter jurisdictional Coordination-Gaps in enforcement of laws/statutes, which often
increases enforcement and monitoring costs; and 2) Coordination-Gaps among BODs, executive management
teams, shareholders and regulators of the company; and or among Strategic-Alliance/JV partners .
7.16. The Sub-optimally Exercised Time-Varying Asymmetric Power Theory.

This refers to Sub-optimally Exercised Time-Varying Asymmetric Power Theory among shareholders, BODs and
executive management teams; and or among strategic-alliance/JV partners. Such Asymmetric Power is not
necessarily bad (and can increase Social Welfare), but when its exercised in sub-optimal ways or for meaningless
purposes, it can reduce Social Welfare.
7.17. The Sub-optimal Investment Theory.

Sub-optimal investment (cash; human capital; technology; etc.) in both corporate governance structures, Strategic
Planning and competitive intelligence which eventually causes non-random repeating patterns of poor strategic
decisions; and weakens incentive systems and compliance by employees. Such sub-optimal investment is typically
not properly identified or effectively resolved by management and the BOD; and or there are communication gaps
and inadequate execution directives between the BOD and management. Note that there is a difference between
“sub-optimal investment” and “inadequate investment”.
8. Macroeconomic Issues.
8.1. Implications For Financial Stability And Goodwill/Accounting Regulations.

Given the foregoing, Apple poses a substantial financial stability risk due to its operations, financing and
accounting disclosures; and because of the following reasons. See: Nwogugu (2015b; 2014c). Any sudden drop or
collapse of Apple’s stock prices can or will have a significant and negative effect on not only the stock prices of
internet/technology companies around the world, but also the stock prices of S&P-500 companies, logistics
companies, retailers, electronics parts suppliers and manufacturing companies and their credit ratings. Any
announced or perceived financial distress of Apple will likely have a negative effect on its many suppliers, and also
the credit ratings of many internet/technology companies around the world, but also the stock prices of S&P-500
companies, logistics companies, electronics parts suppliers and manufacturing companies regardless of whether or
not they supply products/parts to Apple. Apple’s heavy churning of its large securities portfolio increases and or
can cause volatility and financial instability in markets. This is partly because traders and institutional investors
often note the trading patterns of large institutions such as Apple. Apple’ strategic alliances imposes financial
stability risks on retailers because the arrangements impose costs on the retailer partners (such costs often force
retailers to close stores). Apple’s devices and internet services are a major part of the infrastructure for banking and
financial services – and thus any collapse of Apple will affect the global financial services industry. It appears that
Apple has been financing or propping up some of its suppliers.
Apple’s annual revenues, profits and assets are among the largest in the world. More than one billion Apple
products/devices are being used around the world, and Apple’s products affect more than one billion people around
the world. Apple’s IoS ecosystem involves many companies and more than two million downloaded apps. Thus,
any negative news that affects Apple’s stock price or its perceived credit quality can cause rapid contagion and
financial instability.
A significant percentage (more than 40%) of Apple’s stock market value (more than US$700 Billion as of
2017) is in the form of Goodwill. First, that is an example of the inefficiency of current Goodwill/Intangibles
accounting regulations – Goodwill is opaque and the accounting disclosure does not capture the true risk of Apple’s
assets. Apple’s “Goodwill” as reflected by its stock market value, actually contains human capital; contracts;
software; marketing rights; distribution rights; etc.. See the comments about goodwill/intangibles accounting and
Financial Stability in Nwogugu (2015a;d) and Nwogugu (2007). Secondly, it also poses a significant financial
stability risk because: i) the accounting disclosure of goodwill does not capture the true risk of Apple’s assets; ii)
the lack of accounting classification of Intangibles (such as human capital; marketing rights; Apple’s contracts;
39
etc.) actually increases the probability that Apple’s stock-price will decline substantially and that there will be
significant differences of opinion among market-participants about Apple’s Goodwill in general, and the possibility
of existence of such identifiable intangible assets – all of which increases financial instability, systemic risk, market
volatility, and volatility-spillovers; iii) the under-valuation of identifiable intangibles increases the probability that
Apple’s stock-price will decline substantially and that there will be significant differences of opinion among
market-participants about Apple’s intangible assets in general; iv) since most banks don’t lend money with
goodwill as collateral, the accounting model and existence of significant goodwill (as disclosed in financial
statements or as measured by stock market value) weakens the perceived viability of an issuer’s bonds.
Karpoff, Lee & Martin (2008a;b); Kim, Li & Zhang (2011a;b) and Kim & Zhang (2013; 2014) analyzed
financial stability issues that arise from financial reporting opacity, earnings management (which affects
inccentives), tax avoidance and or asset quality management (which affects incentives).
Apple is an important participant in global credit chains wherein it provides and also obtains trade credit
(where such borrowing is partly based on its reputation and perceived solvency). Such credit chains have become a
major source of capital for many companies and financial institutions, but they increase the probability of domino-
effects in both the real and financial sectors. See comments in Boissay (2006). Apple also has substantial debt; and
any perceived insolvency and or business contraction of Apple can trigger an industry-wide credit crunch and or
hyperinflation for some products/services in some countries. Contrary to the literature and as shown during the
global financial crisis in 2008-2010, multinationals are not entirely immune from financial crises. Apple’s earnings
management and reluctance to comply with accounting regulations is in line with the “Bad News Hoarding and
Stock-price Crashes” theory in the literature – see Jin & Myers (2006) which has spawned a new line of empirical
research focused on identifying corporate activities and/or firm characteristics that cause or facilitate bad news
hoarding and thus, predicts stock price crashes. Using a large sample of U.S. headquartered firms during 1987-
2011, May & Boehme (May 2016) found that multinational firms have greater stock price crash-risk than domestic
firms; and that the difference in crash risk between multinational and domestic firms is most acute among firms
with weaker corporate governance mechanisms (ie. weaker shareholder rights, less independent boards, and less
stable institutional ownership).
Given the rapid and exponential increases in the types and volumes of strategic alliances and joint ventures
(JVs) around the world during the last twenty years, like swaps/derivatives, alliances/JVs create financial networks
that increase interconnectedness and the risk of domino-effects in both the real and financial sectors – and that is
often omitted in both financial stability analysis and asset pricing models.
Given the foregoing, the US FSOC may have hesitated to declare Apple as a “non-financial SIFI” or to
take-over Apple (pursuant to Dodd Frank Act provisions) because of the potentially adverse information effects and
financial instability risks.
8.2. Implications For Monetary Policy Transmission And Economic Growth.

Given Apple’s position in the technology, retailing, business services and entertainment industries, any perceived or
actual financial distress of Apple, or disruption in Apple’s IoS ecosystem can result in increases in interbank rates
and lending rates, and may also increase interest rates for trade credit (credit chains). Such trends will probably
have spillover effects in the real estate market, the retailing sector, distribution sector, entertainment sector and the
consumer loan market. Apple’s capital structure and financing policies indicates that its less likely to transmit
government monetary policies (or behave in ways desired by policy regulators) than the average multinational or
middle market company.
While Apple does not do much direct lending, it buys and sells a huge amount of bonds and bills and other
securities in each fiscal year (typically more than US$250 billion per year) – that is sufficient to qualify Apple as
one of the “new banks” or as a “shadow banking entity”; and its also an indication of the core and nature of its
relationship and responses to monetary policies. Also Apple’s securities trading is keenly watched by market
participants. Thus Apple directly and indirectly affects monetary policy transmission. These issues raise the
question of inadequate regulation of the “new banks”, “shadow banks” and fintech companies that so intertwined in
banking and financial services, that they should be subject to financial regulation.
Apple is also a critical monetary policy and fiscal policy transmission channel because its IoS platform and
ApplePay influence the effects of monetary policies and fiscal policies. IoS and its associated apps carry
information (apps, links and advertisements) about mortgage loans and business loans and some apps in that
ecosystem provide mortgage loans, insurance and business loans. Sales tax is a major issue for products and
40
services purchased in the IoS ecosystem or with ApplePay. Some of the apps in IoS provide information (and
sometimes include calculators) about, and or facilitate transactions that pertain to real estate taxes, Rent-control
terms, utility charges, sales taxes and municipal fees/taxes, and information about lenders’ non-interest terms (such
as loan-to-value-rates, collateral, etc.). In some instances, the apps developer provide feedback to lenders and
mortgage brokers. Thus IoS is a confluence point where monetary policy, fiscal policy, macro- and microprudential
regulations meet. The interesting results are that: i) the IoS and ApplePay play important roles in how and whether
standard and non-standard fiscal and monetary policies are accepted by consumers, companies and the financial
sector – and the IoS and ApplePay can increase or reduce the implementation, un-winding and communication
challenges associated with non-standard monetary policy measures (such as zero or negative interest rate
environment); ii) the actual and potential side effects associated with non-standard monetary policy measures
(especially for financial stability) are substantially influenced by both the IoS ecosystem and ApplePay.
Given Apple’s position in the tech industry, any perceived or actual financial distress of Apple, or business
or technological disruption in Apple’s IoS ecosystem can result in: i) increased interest rates for trade credit (credit
chains) and ii) reduction in volumes of commerce; iii) delayed money transfers and delayed payments; iv) reduced
growth of app development startups (including fintech companies). Such trends will probably have significant
spillover effects in various sectors such as real estate; business services; travel/lodging; retailing, distribution;
entertainment and the consumer loan market.
8.3. Recursive Time-Varying Regulatory Failures, Regulatory-Capture And Regulatory-Fragmentation That Can
Have Significant Negative Macroeconomic, Psychological And Political Effects.
Apple’s problems are evidence of the following failures and failed regulations:
1) The Sarbanes-Oxley Act of 2002 (USA) – these regulations should include more stringent accounting
requirements, minimum corporate governance standards and penalties for non-compliance with
accounting and or internal control rules.
2) The Dodd-Frank Act of 2010 (USA) and the US FSOC’s “Non-bank SIFI Criteria”– an efficient
regulation would have required the early identification of a broader group of troubled and or non-
compliant companies (companies that don’t comply with accounting and corporate governance
standards but whose operations affect more than two million people/customers).
3) Goodwill/Intangibles accounting regulations (both US GAAP and IFRS/IASB) – these should require
mandatory write-downs of impaired intangibles; mandatory and post-acquisition classification of
goodwill and other intangibles as identifiable intangibles; that goodwill should not exceed a specific
percentage of a company’s intangible assets; and government evaluation of companies whose
intangible assets exceed a specific amount or a specific percentage of their total assets.
4) The US SEC’s and EU’s securities and disclosure regulations – which should require more stringent
monitoring of compliance with accounting regulations.
5) The regulation of credit rating agencies (CRAs) – effective CRA regulations should require mandatory
ratings of all exchange-traded companies and some private companies (whose sales revenues exceed a
specific amount) by at least four licensed credit rating agencies; and should provide adequate
independence of CRAs in order to ensure objectivity and impartiality in credit rating.
6) Auditor Liability-Allocation mechanisms/rules – which should be codified and allocate more liability to
external auditors, the Boards of directors and executives of auditee-companies.
7) US Bankruptcy laws - which don’t require preemptive intervention for most types of private and
exchange-traded companies and medium and large companies whose operations affect many people
and other companies.
8) US And EU Tax laws – these statutes permit US companies to hoard large amounts of cash abroad in
order to avoid US taxes.
9) Regulatory Capture – wherein: i) corporate lobbying is successful to the detriment of Social Welfare;
ii) companies and their legal and or accounting advisors figure out ways to circumvent, denigrate,
dampen or take advantage of regulations/statutes and or to influence regulators (in most cases to the
detriment of social welfare).
10) Regulatory Fragmentation – wherein: i) laws/regulations that are intended to achieve the same or
similar objectives are codified in different statutes that in some cases, may or often conflict; and or ii)
enforcement and or rule-making efforts in both the public and private sectors are diffused among
41
various parties (some of which may not have the adequate resources or knowledge), and government
regulatory agencies have overlapping functions and or jurisdictions.
Papaikonomou (2010); Nwogugu (2010/2013a); Nwogugu (2015a), Nwogugu (2015b), Nwogugu (2015c),
Nwogugu (2015d), Nwogugu (2014) and Nwogugu (2008) discussed various statutes and regulations. Young (Feb.
21, 2013) noted that the annual cost of regulations imposed by various US federal government agencies could be
classified into various groups46. Note that a portion of the above-mentioned regulatory costs can be attributed to
Regulatory Takings. Nwogugu (2012) introduced new types of Takings. The factors that often discourage or
preclude firms from filing lawsuits to challenge such Takings include but are not limited to the following: i) fear of
retaliation by regulators, and imposition of additional costly regulations; ii) lack of an organized industry-wide
effort to curb Regulatory Takings; iii) perceived costs of litigation including the opportunity costs – on customers;
stock prices; suppliers, employees; etc.; iv) the perceived influence of the Executive Branch of the US government
on the federal judiciary (eg. some federal judges were selected from, or had been affiliated with, or had practiced
law before government agencies in the Executive Branch of the US federal government; v) government’s statutory
immunity (government agencies and or their staff); vi) statutory limitations on damages/recoveries from lawsuits;
vii) procedural requirements of litigation (ie. the tort claims act; Section-1983; etc.).
46
Group-F5 (Greater Than $100 billion per year):

 Environmental Protection Agency (EPA): $353 billion
 Health & Human services (HHS): $184.8 billion
 FCC and Telecom Regulation: $142 billion
 Department of Labor: $116.3 billion
 Financial Regulation (several agencies): $102.5 billion
Group-F4 ($10 billion - $100 billion per year):
 Department of Transportation: $61.8 billion
 Department Of Homeland Security (DHS): $55.32 billion

 Energy Department: $9.809 billion
 US Department of Agriculture (USDA): $9.05 billion
 Department of the Interior: $5.2 billion

 Department of Education: $3.302 billion
 Housing & Urban Development (HUD): $1.827 billion
 Department of Commerce: $1.801 billion
 Department of the Treasury: $1.32 billion
 Department of Justice: $1.25 billion
Group-F1 (Less Than $1 billion per year):

 U.S. Access Board (ATBCB): $851 million
 Nuclear Regulatory Commission: $414 million
 FERC: $336 million
 CPSC: $193 million
 Equal Employment Opportunity Commission (EEOC): $121 million
Source: Wayne Crews, “Tip of the Costberg”; working paper.
42
8.4. Apple’s Other Alleged Violations Of Antitrust Regulations47.
Between 2000 and 2014, Apple was investigated by government regulatory agencies of several countries
for violations of Antitrust statutes. United States of America v. Apple Inc., et al., 12 Civ. 2862 (DLC)48, was filed in
2012 and was a US antitrust case in which the Court held that Apple conspired to raise the price of e-books in
violation of the Sherman Act. In Timothy Smith, et al. vs. Apple, Inc. et al., No. C 07-05662 RMW, a class action
lawsuit, Apple was accused of violating antitrust statutes. The lawsuit was re-filed as In Re Apple iPhone Antitrust
Litigation, case 11-cv-06714-YGR (NDCA), but was later dismissed by the Court.
On August 30, 2016, the EU's competition commissioner concluded that Apple had received "illegal state
aid" from Ireland. The Commission ordered Apple to pay €13 billion ($14.5 billion), plus interest, in unpaid taxes.
The Irish government and Apple separately announced that they would appeal the ruling. The Irish government
claimed that the EU Competition Commission's action was an intrusion into Irish sovereignty (because EU treaties
exclude national taxation policy).
As of May 2015, the U.S. Department of Justice and the US Federal Trade Commission were investigating
Apple for colluding with major record labels to get them to refrain from offering free ad-supported streaming of
their music online, in order to push users towards a re-launch of the subscription-based Beats Music service. Apple
had allegedly compelled record labels to remove their music from the freemium tier of Spotify; and had also
offered to pay Universal Music Group the equivalent of YouTube's licensing fees with the label in exchange for
pulling its content from Spotify.
Some Antitrust issues that have not been addressed are as follows. First, Apple’s strategic alliances with
retailers (described above) are anticompetitive and are forms of illegal Tying (availability of Apple’s products is
tied to Apple’s unique and costly requirements for retailers’ in-store sales and logistics), illegal foreclosure
(Apple’s requirements reduce the resources that such retailers can allocate to marketing Apple’s competitors’
products), discriminatory cost-shifting (the strategic alliances shifts substantial costs to retailers), price-
discrimination (the terms of such alliances vary widely across retailers) and price maintenance (the retailers are
compelled to charge higher final-prices for Apple’s products in order to recoup their costs) given Apple’s market
dominance. Second, to the extent that Apple’s manufacturing agreement with its foreign supplier prevents such
vendor from supplying products to Apple’s competitors, such agreements are anti-competitive and constitute illegal
Foreclosure. Third, Apple sells products/components to some of its vendors and finances such purchases – to the
extent that any such arrangement grants Apple any advantages such as lower prices or exclusivity, its anti-
competitive.
8.5. Neoclassical And Behavioral Asset Pricing Anomalies, And Some Asset Pricing Implications Of Corporate
Policies – Apple’s Operations/Policies Contradicted Theories And Empirical Results In The Literature.
Apple’s strategic alliance models (including its open-source development model) were somewhat unique
and contradict many theories and empirical results in Robinson (2008); Haeussler & Higgins (2014); Seale, Arend
& Phelan (2006); Elfenbein & Lerner (2012); Gawer & Henderson (2007); Kloyer (2011); Lerner & Malmendier
(2011); Yin & Shanley (2008), Qiu (2010); Owen & Yawson (2013); Sawler (2005) and Ray (2013).
The patterns of Apple’s strategic decision making contradict many theories and results in Pathak, Joshi &
Ludhiyani (2010); García-Pérez, Yanes-Estévez & Oreja-Rodríguez(2014); and Grechuk & Zabarankin (2014).
The patterns of Apple’s cash management (and associated accounting disclosures) during 2012-2016 were
highly un-usual.
The foregoing and Apple’s corporate policies have obvious implications for asset pricing in terms of:
i) Apple’s risk premia;
ii) the valuation of the equity of Apple, retailers, technology companies and companies in Apple’s IoS ecosystem;
iii) the development of factor models – the era of 0/1 dummy variables is over; etc.;
iv) the inclusion of corporate governance; auditor-risk, managerial decision-making; managers’ policies about
goodwill/intangibles accounting; corporate compliance risk, specialized business structures (such as strategic
alliances and joint ventures); business-process quality and default-risk in asset pricing models.
See comments in about goodwill/intangibles in Nwogugu (2015a;d) and Nwogugu (2007).
47
See: https://en.wikipedia.org/wiki/Apple_Inc._litigation#Apple_and_AT.26T_Mobility_antitrust_class_action,
which lists some of Apple’s litigation.
48
See: http://www.justice.gov/atr/cases/f299200/299275.pdf.
43
See the comments about goodwill/intangibles accounting in Nwogugu (2015a;d) and Nwogugu (2007),
which also introduces some asset pricing anomalies. Chandra & Thenmozhi (2017), Baker, Wurgler & Yuan
(2012), and Cronqvist & Siegel (2014) analyzed behavioral asset pricing and investor sentiment. May & Boehme
(May 2016) and Jin & Myers (2006) suggest the use of alternative measures of crash risk and controlling for known
determinants of crash risk identified in prior studies – and in addition, these factors, multinational operations and
the crash-risk factors mentioned in Kim, Li & Zhang (2011b) and Kim & Zhang (2013; 2014) should be included in
asset pricing models.
Clearly, investor sentiments affected Apple’s corporate policies - Apple’s innovation patterns, “planned
obsolence” and earnings management can be partly attributed to Apple’s estimates of investors’ reactions to its
operating performance, and to the large numbers of its institutional investors. More importantly, during 2011-2016,
Apple’s stock prices were anomalies because they didn’t reflect the risks inherent in Apple’s operations,
compliance with regulations, accounting disclosures and future prospects.
Part of the problem are the following conjectured behavioral anomalies: i) investors tend to include a
premium in the stock prices of large multinationals and technology companies regardless of their operating
performance, compliance risk and accounting disclosure simply because of their size, annual revenues,
product/services breadth and international operations; and ii) investors are more likely to have positive expectations
and assign positive future prospects to technology companies and to large exchange traded companies, than to
smaller exchange traded companies (distinct from the size premium) and non-technology companies; iii) investors’
excessive reliance on corporate financial statements (especially financial statements prepared by the big-four
accounting firms) and on compliance by exchange-traded companies, and such reliance sometimes increases as the
size and perceived influence of the company increases; iv) there is a reputation effect wherein in some markets,
some types of institutional investors and or advisors serve as “credibility investors” and their continues association
with a company can provide valuation support for its securities; v) the social capital generated by companies
because of their multinational operations and being in the technology industry may increase their appeal to
investors, and may reduce regulators’ willingness to prosecute them for offenses; vi) that Apple, Google and
Amazon have not seriously pursued fintech (eg. AI-based financial services; lending; financial/economic news;
etc.) and online financial services remains a major puzzle (the “Diversification Puzzle”) - and investors are less
likely to deduct a discount from stock prices of multinational enterprises and technology companies for the
Diversification Puzzle, than for non-MNEs and non-technology companies; vii) investors are more likely to under-
value goodwill/intangibles in smaller companies and for under-performing companies than for larger companies,
technology companies and over-performing companies.
9. Conclusion.
Clearly, Apple seems to have numerous and serious Corporate Governance, Strategy and managerial decision
issues, that present complex regulatory and policy challenges. The implications of finding in this article are that: i)
multinational companies should revamp their Corporate Governance principles/standards and implementation
methods; ii) new and more effective international corporate governance standards are required and should be
incorporated into national accounting and securities statutes; iii) IFRS accounting standards have to be improved
and made mandatory in all countries; iv) governments should implement internationally-coordinated and tougher
anti tax-evasion statutes and enforcement methods; v) the cost and socio-economic and psychological impacts of
regulations are major factors that determines the extent, duration and evolution of compliance.
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TITLE: The Case Of Apple, Inc.

, And Fintech: Managerial Psychology,

3.1. Apple’s Alliances With Retailers.

3.2. Apple’s Strategic Alliances With Resellers.

Table-1:Excerpt From Forrester Consulting’s November 2013 Report On Channel-Conflicts.

3.4. Apple Strategic Alliances With, And Financing Of Its Suppliers.

3.5. Apple And Its Staff.

3.6. Apple, iCloud Services And iOS Device-Backup Service.

3.7. Apple’ IoS (App Crowdsourcing) Platform.

Amazon AMT Apple IoS

Source: Bergvall-Kåreborn & Howcroft (December 2013). The 6th

3.8. Apple, Antitrust And Fintech.

4. Corporate Governance, Public Policy And Politics.

4.1. Apple’s Lawsuits.

4.1.3. The 2001 Class Action Lawsuits Against Apple, Inc..

4.1.4. Apple Securities Litigation.

4.1.7. Apple Computer, Inc. v. Does, And Takings Theories.

Table-2A: Sources of Apple’s Revenues.

(Source: Skye Gould/Business Insider)

4.2.2. Apple’s Violations Of US And International Tax Regulations/Statutes.

4.2.3. Apple’s Accounting Restatements.

4.2.4. “Non-Compliance Cartels” (Un-Documented Strategic Alliances).

4.3. Apple’s Phantom Cash/Cash-Equivalents/Marketable-Securities Balances.

Table-___: Apple’s Quarterly Profits.

Table-___: Apple’s Cash/Cash-Equivalents/Marketable-Securities.

4.4. Excessive Quarterly Churning In Apple’s “Long-Term” Marketable Securities Portfolio.

4.5. Apple’s Product Warranty Problems.

4.6. Apple’s Labor Problems.

4.7. Apple’s Board Of Directors.

4.8. Management Entrenchment At Apple.

4.9. Apple’s Executive Compensation Program.

% of Staff That Total Annual Contributions (years 1-5)

% of Staff That Total Annual Contributions (years 1-5)

% of Staff That Total Annual Contributions (years 1-5)

Unfortunately, GE’s BOD recommended the rejection of this Shareholder Proposal.

7.2. Corporate Governance Statutes And Corporations’ Strategies/Mechanisms/Alliances As Non-Public Goods

7.3. Enforcement Leakages.

7.4. Sub-Optimal Litigation Strategies.

7.5. Strategy Permeation Deficits Theory.

7.6. Deadweight Losses.

7.7. Managerial Entrenchment.

7.8. Social Welfare.

7.9. Value Chain Paralysis Theory.

7.10. Super-Additive Value Chain Dominance Theory.

7.11. Value Chain Alliance Volatility Theory.

7.12. Value-Chain Execution Gaps Theory.

7.13. Welfare-Reducing Value-Extraction Theory.

7.14. The Policy-Dampening Alliance Theory.

7.15. The Dynamic Coordination-Gaps Theory.

7.16. The Sub-optimally Exercised Time-Varying Asymmetric Power Theory.

7.17. The Sub-optimal Investment Theory.

8.1. Implications For Financial Stability And Goodwill/Accounting Regulations.

8.2. Implications For Monetary Policy Transmission And Economic Growth.

Group-F5 (Greater Than $100 billion per year):

Group-F3 ($5 billion - $10 billion per year):

Group-F2 ($1 billion - $5 billion per year):

Group-F1 (Less Than $1 billion per year):