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.
Inhaltsverzeichnis (Table of Contents)
- I. Introduction
- II. Red Flags: Behind the Facade of EM.TV's Astounding Success Story
- Corporate Governance Issues
- Lack of Business Activities
- Aggressive Investor Guidance
- III. Creative Accounting
- Film and Merchandising Rights: Amortization Techniques
- Goodwill Treatment and Inflation of Assets
- Revenue Recognition
- IV. Valuation
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to analyze the accounting practices of EM.TV, specifically focusing on the creative accounting techniques used during 1998-1999 that contributed to its stock price surge. It will examine how these techniques masked the underlying financial realities of the company.
- Creative accounting techniques employed by EM.TV.
- Analysis of the impact of these techniques on EM.TV's financial statements.
- Examination of red flags indicating anomalies in EM.TV's success.
- Evaluation of the role of leadership and corporate governance in the accounting practices.
- Re-valuation of EM.TV based on adjusted financial figures.
Zusammenfassung der Kapitel (Chapter Summaries)
I. Introduction: This introductory chapter sets the stage by highlighting EM.TV's meteoric rise and subsequent crash, emphasizing the company's connection to its founder, Thomas Haffa. It introduces the central focus on analyzing EM.TV's creative accounting practices during 1998-1999, which significantly boosted its stock price. The chapter outlines the structure of the paper, promising to explore red flags hinting at underlying problems, analyze specific accounting techniques (goodwill treatment, amortization, revenue recognition), and conclude with a re-valuation of the company to demonstrate the impact of creative accounting.
II. Red Flags: Behind the Facade of EM.TV's Astounding Success Story: This chapter delves into several warning signs that foreshadowed EM.TV's downfall. It profiles Thomas Haffa, the charismatic but ruthless CEO, highlighting his focus on glamour over sound business practices and his creation of a weak management structure. The chapter also exposes the lack of a solid business model, relying heavily on acquisitions financed by secondary stock issues, and the aggressive investor guidance that fueled the stock hype. The extremely high concentration of ownership in the hands of the Haffa brothers, limiting shareholder influence, is also detailed, contributing to the overall picture of poor corporate governance. The chapter concludes by highlighting the aggressive acquisition strategy, particularly the massive investment in Formula 1 licenses, further emphasizing the lack of sustainable business planning.
III. Creative Accounting: This chapter provides a detailed analysis of EM.TV's creative accounting practices. It examines the company's manipulation of amortization techniques for film and merchandising rights, using overly long amortization periods to inflate profits. The chapter details the manipulation of goodwill accounting, extending amortization periods to artificially inflate assets on the balance sheet. Finally, it exposes the illegal revenue recognition policies, where revenue was booked upon contract signing rather than upon service delivery or payment, significantly inflating reported sales figures. Each technique is illustrated with specific examples and referenced to the company's annual reports and other sources, detailing their individual and collective impact on EM.TV’s financial statements.
IV. Valuation: This chapter presents a re-valuation of EM.TV using adjusted financial figures to correct for the creative accounting practices identified in the previous chapter. Specific adjustments are made to revenue recognition, reflecting a more realistic assessment of service delivery and payments, and to amortization costs, using more accurate calculations of asset depreciation. The chapter clearly outlines the assumptions used for the adjustments and explains the rationale behind them, specifically highlighting the rationale for leaving the goodwill numbers unchanged due to the accounting practices at the time and the existing investor hype. The chapter then presents the adjusted income statement, providing a revised assessment of EM.TV's financial performance and offering a more accurate picture of the company's true valuation.
Schlüsselwörter (Keywords)
Creative accounting, EM.TV, stock market hype, goodwill, amortization, revenue recognition, corporate governance, financial statement analysis, valuation, media rights, merchandising licenses, Thomas Haffa.
EM.TV Case Study: Creative Accounting and Corporate Governance Failures - FAQ
What is the main focus of this paper?
This paper analyzes the accounting practices of EM.TV, focusing on the creative accounting techniques employed between 1998 and 1999 that artificially inflated its stock price. It examines how these techniques masked the company's true financial condition and explores the role of corporate governance in enabling these practices.
What creative accounting techniques are discussed?
The paper details several creative accounting techniques, including manipulation of amortization periods for film and merchandising rights (inflating profits), misrepresenting goodwill accounting (artificially inflating assets), and illegal revenue recognition policies (booking revenue prematurely).
What were some of the "red flags" indicating problems at EM.TV?
Red flags included weak corporate governance under Thomas Haffa's leadership, a lack of a sustainable business model heavily reliant on acquisitions financed by stock issues, aggressive investor guidance creating hype, and an extremely high concentration of ownership in the hands of the Haffa brothers limiting shareholder influence. The company's aggressive acquisition strategy, particularly the Formula 1 investment, is also highlighted as unsustainable.
How did the creative accounting impact EM.TV's financial statements?
The creative accounting techniques significantly inflated EM.TV's reported profits and assets. The paper demonstrates how manipulating amortization, goodwill, and revenue recognition artificially boosted the company's financial performance, creating a misleading picture of its financial health.
What is the purpose of the re-valuation in Chapter IV?
Chapter IV re-values EM.TV using adjusted financial figures that correct for the creative accounting. This provides a more realistic assessment of the company's financial performance and true valuation, contrasting it with the artificially inflated figures presented initially. The assumptions and rationale behind the adjustments are clearly outlined.
What role did Thomas Haffa play in EM.TV's downfall?
Thomas Haffa, the charismatic CEO, is portrayed as prioritizing glamour over sound business practices and creating a weak management structure that facilitated the creative accounting and ultimately contributed to the company's downfall.
What are the key takeaways from this case study?
The case study highlights the dangers of weak corporate governance, the potential for creative accounting to mislead investors, and the importance of thorough financial statement analysis. It serves as a cautionary tale about the consequences of prioritizing short-term gains over long-term sustainability and ethical practices.
What are the keywords associated with this case study?
Creative accounting, EM.TV, stock market hype, goodwill, amortization, revenue recognition, corporate governance, financial statement analysis, valuation, media rights, merchandising licenses, Thomas Haffa.
What is included in the Table of Contents?
The table of contents includes an introduction, a section on red flags, a section on creative accounting techniques, and a final section on valuation. Each section is further divided into sub-sections.
What is the overall conclusion of the paper?
The paper concludes that EM.TV's spectacular rise and fall are a direct result of its unsustainable business practices and aggressive creative accounting, exacerbated by poor corporate governance. The adjusted valuation provides a stark contrast to the artificially inflated figures, demonstrating the severe consequences of unethical financial reporting.
- Arbeit zitieren
- Anonym (Autor:in), 2011, Creative Accounting at EM.TV: Supporting a Stock Hype in 1998/99, München, GRIN Verlag, https://www.grin.com/document/176313
