Reference no: EM133722534

Assignment: Finance Enforcement Action for Audit Quality Issues- Finance, Corporations and Society

I. Fahmi Quadir on Ebix Disclosures

Read this Public Service Announcement (PSA) by Safkhet Capital, a company founded by our guest speaker Fahmi Quadir that focuses on short selling, and answer the following questions. (In the reading, IPO stands for initial public offering, where a firm's stock starts being traded in the public market for the first time, and SEBI stands for the Securities and Exchange Board of India, which is the Indian equivalent of the US SEC.)

1. Which auditor did the PCAOB take enforcement action against? What other auditors are mentioned in the PSA? What are their assessments of financial statements prepared by Ebix or its related entity?

2. Why does Safkhet claim that the dismissal of the class action lawsuit against Ebix has no bearing on whether securities fraud has been committed? Does it provide any example to back up this claim? (This part focuses on the 'Shareholder Litigation - Scienter what?' section.)

3. (Mandatory for 5-unit students, optional/bonus for others.) Summarize in no more than 150 words: What is the purpose of this PSA? What is the event that Safkhet is trying to prevent and why it believes the event should it be prevented?

II. Eaves Inc.

Eaves Inc. currently has $160 million worth of assets. The company also owes $200 million in one year. Suppose that Eaves has an opportunity to invest $20 million now in a project that would pay $60 million with probability Y2 and nothing with probability Y2 in one year. For simplicity assume that the discount rate is zero (so that the present value of future cash flow is its expected value) and assume that the value of the assets will remain below $160 million if the company does not take this project.

1. Will shareholders benefit if Eaves invests in this project assuming (a) that they use existing cash or other assets to pay for the investment or (b) that they raise new equity to fund the new project?

2. Would the answer to part (1) change if the company has no debt?

3. What does this problem illustrate?

III. Utilities Safety

As discussed in Session 7, California created a fund to cover fire damages by enacting Assembly Bill (AB)-1054 in 2019. On August 22, 2023, Will Abrams, our visitor in Session 8, submitted a letter to the Office of Energy Infrastructure Safety concerning PG&E's safety certification.

1. Read letter, and summarize in no more than 150 words Mr. Abrams concerns and his criticism of PG&E's claims related to its response on their 2023 Wildfire Mitigation Plan. (The PG&E document.)

2. Discuss briefly (in no more than 100 words) the challenges the Office of Energy Safety faces in deciding whether and under what conditions they should give PG&E the Safety Certificate that would allow access to the fund created by AB-1054. Your answer should cover both the process by which the Office gathers information and the tradeoffs in the decision itself.

IV. A Ballot Proposition in Maine

On November 7, 2023, voters in Maine will decide the fate of a ballot proposition that would create a new non-profit utility meant to replace the investor-owned utilities in the state. Read about the proposition and some of the issues. (You may want to listen to the Volt podcast on this topic) Based on the history of Sacramento Municipal Utility District (SMUD) on Wikipedia, discuss briefly (up to 70 words) the challenges that the new utility (Pine Tree Power Company or PTP) in Maine would face if the proposition passes.

V. Evergrande Distress

Evergrande has beens one of China's largest real estate developers and has interacted with and borrowed investors across the globe. Read the following articles on the crisis surrounding Evergrande. (Note: Wealth Management Products are debt contracts used in China. An explainer is available).

1. "What to Know About China Evergrande, the Troubled Property Giant," Alexandra Stevenson and Cao Li, New York Times, December 5, 2021.

2. A recent update: "How Evergrande's Chief Tried to Turn Things Around-and Failed," Rebecca Feng and Cao Li, Wall Street Journal, October 15, 2023.

Then answer the questions pertaining to the "dark side of borrowing" (BNC, Chapter 3). Your overall answer for all the parts should be no more than 250 words.

1. Why has Evergrande become distressed and who are its creditors?

2. Why have creditors agreed to make loans to Evergrande?

3. What recourse do different creditors (including buyers of homes under construction) have when Evergrande defaults on its promises?

4. Why is the bankruptcy process particularly complex in the case of Evergrande? How would a bankruptcy of Evergrande be similar to and different from the PG&E bankruptcy discussed in class? Consider the location of the corporation and its stakeholders as well as the legal issues and role of government.

VI. Icahn Entreprises

Look at the stock price movement of Icahn Entreprises over the past year. Then answer the following questions in no more than 200 words total.

1. Comment briefly on the chart: By how much did the price change in one year? Around what dates did the price fluctuate significantly?

2. By doing your own research, find information on Icahn around the first large drop in price of 2023 and summarize your findings by answering the following questions: What is Icahn Entreprises' line of business? What were they accused of?

3. There is a second significant drop around August, what was the new piece of information that markets reacted to?