Академический Документы
Профессиональный Документы
Культура Документы
com
October 9, 2009
Duke Energy: Accounts Receivable Trend Indicative
of Earnings Management or Prudent Policies?
http://TheValueatRisk.blogspot.com
October 9, 2009
Earnings management is an ugly term; it carries with it the implication that a company has strategically
timed and/or manipulated its financial statements in order to reach a more desirable earnings outcome.
One of the areas that is susceptible to such tactics is the portion of the balance sheet labeled "Accounts
Receivable"(AR).
Generally speaking, AR represents goods or services that a company has sold to a buyer on credit, i.e it
has not yet received cash for the good/service, but it has booked the sale as revenue. The obvious
question to arise from this scenario, especially during a recession is: what if the customer doesn't pay?
The most precise answer to that question is that an aging analysis is performed, whereby increasing
rates of loss are applied to the receivables based upon the number of days since credit was extended to
the customer. For instance, we could classify all of our receivables as being 0‐30 days outstanding, 30‐
60, and 90+. Experience might tell us that 2% of receivables in the 0‐30 day category will end up
defaulting, whereas a bill that's been out for over 90 days will "go bad" 10% of the time. These
estimated loss rates are multiplied with the dollar value of receivable in each category, generating a loss
estimate known as "Allowance for Doubtful Accounts". Interestingly, this number immediately counts as
an expense in the income statement for the current quarter. If and when the debt is actually classified as
"bad", there is no (net) effect on the balance sheet or income statement. Thus, the potential exists for a
corporation to over estimate bad accounts in one quarter, and slowly bleed the "loss" back into the
income statement over subsequent quarters. Need an extra 10 cents/share to beat analyst estimates?
No problem, just dip into the "bad" accounts cookie jar and take it.
Now, I'm in no way claiming that Duke Energy (DUK) is engaging in this sort of chicanery. In fact, I own
the stock and consider it to be a well‐managed company. That being said, I'm intrigued by the fact that,
since the recession began in December 2007, DUK's allowance for doubtful accounts, as a percentage of
gross receivables, has steadily declined. On 3/31/2007, Duke classified 4.5% of it's outstanding invoices
as "Doubtful". By 3/31/2009, in the depths of the recession, Duke only classified 2.79% of receivables as
doubtful. These small percentage changes add up when you consider that DUK had $1.5Billion worth of
accounts receivable as of the most recent reporting period. I'm surprised at this trend because I would
assume that more households would forgo paying the electric bill during the recession than before.
There is of course another explanation which I, as a DUK shareholder, would prefer to believe. Duke
Energy could simply be tightening its credit standards for new accounts. Presumably, that action would
reduce the number of non‐payers. Since I don't think the electric company can outright deny service to a
household, my best guess is that they are either requiring a deposit of some sort, or are requiring less
credit worthy individuals to set up an automatic account draft. Another possibility is that households are
being forced to put their electric account in the name of a more credit worthy family member. Finally,
Duke might simply be shutting off power to non‐payers quicker than before, essentially eliminating
several months worth of noncollectable accounts.
http://TheValueatRisk.blogspot.com
October 9, 2009
Obviously, Duke Energy has a fairly reliable and predictable stream of revenue. Other corporations may
not, and as such, investors should be cognizant of this accounting trick before they pony up for
potentially over valued common shares.Copyright 2009 ‐ The Value at Risk
For additional analysis of financial markets and politics, or to view information about the author, please visit
http://TheValueatRisk.blogspot.com
The content contained within this newsletter, as well as The Value at Risk website, is provided as general information only and
should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any
security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site
are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The
author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information
or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment
decisions.