Eti and Management Control Systems

Background information

·ETI had several cable franchises in New England and the New York metropolitan area

·Considerable bank financing were raised for construction of antennas and distribution networks

·High initial investments in assets and high leverage

·At ETI Don assumed a treasurer’s position contrasted to his controller role previously

Issues

·The controller was weak: The controller was not supportive to Don’s plans in changing the accounts and had a vague concept of expenses

·No planning and budgeting: Because of the lack of regular billing to charges it was hard to produce reliable budget and operating reports and department managers were not knowledgeable of making the forecasts

·Financial focus on earnings per share rather than cash flow: top management was negligent to cash flow problems while focusing on showing a preferable picture of ETI to raise funds from investors

·Satellite communications business was not making profit but this was not reflected in financial statements: improper capitalization of repairs and maintenance expenses, interest expenses, improper deprecation methods and classification of intangible assets

·Incompetent auditors: they could not form strong audit opinions because they did not know the satellite communications technology

·ETI was forecasting a 4 million loss while still tried to manipulate good financial results to raise funds: there was ethical issues with serious earnings management

Recommendations

·Stop the earnings management and change the tone at the top: There was going concern of ETI while the earnings management hindered management to detect those problems early. It seemed that ETI was already in risks of bankruptcy and once the earnings management was found by regulators, the company’s reputation would be significantly damaged. Even if the ETI made through this loss without being found out, the root cause of the problem-tone at top(the control environment)-should be changed for long term development...