Creative Accounting at EM.TV: Supporting a Stock Hype in 1998/99
Seminar paper from the year 2011 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,00, IE Business School, Madrid, course: Creative Accounting, language: English, abstract: EM.TV & Merchandising AG and its engagement in the German 'Neuer Markt' (New Market) has been one of the most interesting and instructive chapters in stock market history. A corporation which rose within three years from a family business to becoming a global leader in media business, EM.TV is inseparably connected to its founder and long-time CEO Thomas Haffa. Establishing a small business in 1989 devoted to buying the rights for, and merchandising TV series such as 'Alf' or 'Sesame Street', Haffa took the opportunity of an upcoming stock market hype in Germany and placed a successful IPO in October 1997 (annual report 1997). Soon, the puzzled investor community saw its stock price skyrocketing, reaching a plus of 31521% within two and a half years (Bloomberg Data). Similarly brutally the stock crashed after a series of corrections, announcements, internal inconsistencies and more. This paper focuses on the accounting practices of EM.TV, which allowed and supported its appraisal in the markets. Specifically, I will analyze the creative accounting techniques underlying the 1998-99 business figures, which inter alia, gave rise to a further boost in its stock price development. The paper is structured in the following way: First, I will outline a number of crucial factors that hinted at anomalies surrounding the EM.TV 'miracle'. Those red flags encompass factors such as the business strategy (actually the lack of it), leadership issues, and the special stock market environment at that time. Then the analysis of the business results in 1998 and 1999 will expose the creative accounting tricks employed by EM.TV, with emphasis on goodwill treatment, accounting for amortization, and revenue recognition policies. Thus, it will be shown how the fact of the corporation basing its business on immaterial goods such as media rights and merchandising licenses, is translated into the accounting process. This impact will then serve for an ex-post correction of key figures in the financial statements to lead over to the final section, in which a re-valuation of the company, based on multiples, shall demonstrate the extent and effects of creative accounting to valuing EM.TV.
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