Nuware Incorporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction:

The case is about analysis of the reporting quality of Nuware Corporation. It is the mid-size retailer that is based in the Midwest. The company has reported substantial profits in the years 2013 and 2012, whereas the industry has earned only limited profits or losses. The analysis is about to find any window-dressing made by the management or any other real reason behind such profitability increase.

Jack Hereford being an independent analyst of Wyburn Malone’s firm of financial analysts asked the CEO of the company, Harry Malone to give analysis about the financial earnings of Nuware as an independent analyst.

Analysis:

The analysis is about the earning quality of a company and in this case, Nuware is under consideration for the assessment of its reporting quality and the restatement of the financials on the basis of true accounting policies adaptation and estimations aligned with the industry. The analysis is given below in detail:

What type of issue come into the mind when you hear analyst’s question a firm’s earning quality?

The first issue that comes into the mind is that the earnings are not manipulated by the management of the firm. The analyst is always under consideration that there is something wrong and its skeptical mind work on those areas that can prove to be the place for manipulations in the earnings. The nature of a corporate structure is that the owners and the directors can be different who run the business operations. The management and the directors can manipulate the earnings and cash flows to get personal gains; therefore the analyst does not believe that the management is right.

According to an analyst, the earning quality is about the reporting of the real and fair earnings. The revenues are recorded according to the reporting standards and according to the nature of the revenue recognition. There is no recording of fictitious revenues to show higher earnings with a view to earn personal benefits from the company.

The expenses are recorded correctly in the financial statements and no manipulation is being made to decrease the expenses or playing a game of accruals to get personal benefits in the current years and then same accruals and prepaid game is being played on yearly basis. In the past history, the management used to take such actions and after the insolvency of Enron and WorldCom, there have been strict rules to follow the right reporting rules.

Nuware Incorporation Case Solution

The estimations and assumptions of the company align with those industry assumptions and the place where the assumptions and estimates differ from that industry create a sense of doubt for the financial analyst. The management is qualified; therefore it can create fraud and it efficient enough to hide the fraud from auditors and analysts. The skeptical review by an auditor and an analyst is required to get the desired results.

Why Harry Malone concern about relying on Nuware’s reporting performance? If Nuware follow GAAP, shouldn’t the company’s reported financial statements be reliable?

Harry Malone is the CEO of Wyburn Malone firm, he is more concerned that the report by his firm must be accurate and the firm is about to issue a report relating to the earnings quality of Nuware. The earning quality can be accessed through financial statements; therefore he is concerned about the reporting performance of Nuware. The firm has a reputation of the good analyst’s report and now it is under consideration to provide a report on the analysis of the earning quality of Nuware in its upcoming newsletter. The clients of the firm highly believe on the analysis provided by the firm and base their decisions on the analysis done by the team of Myburn. The firm has an access of the financial statements of the company and its competitors that issue financial statements publically. The financials are being prepared by the respective company’s management and the respective auditors review those statements, the work is done by others and the analysis is based on the work of third parties. The fair reporting performance minimizes the chances of any wrong recommendation by the firm; this is why the CEO is more concerned about the reliance on the financial performance of Nuware’s reporting performance to provide right recommendation to its clients...................

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