American Apparel Heads For Bankruptcy

In response to The Trojan Business Journal's post on the near bankruptcy state of American Apparel (AA), I have to point out that there are other reasons other than its American Made goods business model that are contributing to AA's downfall. I agree with TBJ's assessment that AA's "failure to conform to outsourcing its manufacturing operations" can be a major setback. Yet,  AA's aversion to sweat shops was its leading marketing campaign to attract the so-called "hipster cult" crowd. Now, here are some conclusions based on my own observations.

First of all, AA has tarnished its reputation when the founder Dov Charney was sued by a former worker for sexual abuse:

Last month a former worker sued founder Dov Charney, alleging he sexually abused her. American Apparel has said that it expects the lawsuit will be tossed out because the former employee signed an agreement not to sue and to settle disputes in arbitration when she left the company.
The lawsuit is the latest in a string accusing Charney of inappropriate sexual conduct with female employees. In interviews, he has acknowledged having sexual relationships with female workers, but said they were consensual.

Second, Deloitte resigned as AA's external auditor in July 2010. According to WSJ, AA's stock dropped after the announcement. Like most cases where the auditors quit suddenly, the main concern points to "retail store impairment, inventory reserves and the provision for income taxes" on the balance sheet. Based on my knowledge from accounting and business management classes, this typically happens when there is material fraud happening at the client company that Deloitte doesn't want to get involved with and/or major clash between the Deloitte team and the client head team.

Third and lastly, as the economy continues to lag indefinitely, AA refuses to drop its prices. Sure, their clothes are made of higher quality but a plain, basic t-shirt should not cost the amount that AA charges. Especially when you have giant retailers such as H&M and Forever 21 chasing after you. As the Consumerist puts it, 

Something about [American Apparel] being overpriced, bland, and enshrouded in hipster mystique and social activism really pisses our pants off.

Now that AA has completely exploited the royal consumers and destroyed its image, who is willing to pay for their overpriced merchandises? After all, not every company can get away with it like Apple can.

60 Minutes: Why are U.S. companies moving to tax havens

Here's a video of Lesley Stahl reports why U.S. companies are avoiding the statutory corporate tax rate of 35% by moving to countries that have far less lower corporate tax rates. Check it out!

AstraZeneca Pays $1.1 Billion for Tax Settlement

AstraZeneca, a global drug company with its headquarter in London, has reached an agreement with U.S. and U.K. tax regulators to pay $1.1 billion for tax issues that have been going on in the last decade.

AstraZeneca will pay the settlement in 2011 to resolve all transfer pricing issues in the United States. The payment is much less than what was determined in provisions. In fact, this good news raised AstraZeneca's 2011 core earnings to be $6.90 to $7.20 a share. This payment will cause AstraZeneca's effective tax rate this year will be some six percentage points lower than thought at about 21 percent." (FYI, the statutory corporate tax rate is 35%.)

According to this New York Times article, 

Transfer pricing concerns the price at which one unit of a group sells goods or services to another unit of the same group. Such practices are receiving increased attention as tax authorities around the world seek to limit any abuse of intracompany transfers of expenses or profits.

This is another interesting article about big corporates with tax issues. As an accounting major, I find transfer pricing to be a very subjective practice where GAAP recognizes the importance of different transfer pricing methods due to different industry standards. I find it amusing when U.S. government goes after corporates for tax issues because SEC's current accounting rules have too many loopholes that it seems silly if people don't take advantage of them. 

G.E. Claims $3.2 Billion In Tax Benefits Instead of Paying Taxes

General Electric should give their accountants salary raises. And big, fat bonuses.

At year-end 2010, G.E. reported $14.2 billion in annual worldwide profits ($5.1 billion domestic profit), the company paid nothing to Uncle Sam. On top of that, G.E. claimed $3.2 billion in tax benefits. The New York Times had an interesting evaluation of the situation:

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

For those that are interested in the detailed accounting works performed by G.E., depreciation and leasing are two major areas where most tax benefits were achieved.

Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines. But the most lucrative of these measures allows G.E. to operate a vast leasing and lending business abroad with profits that face little foreign taxes and no American taxes as long as the money remains overseas. 

Samsung Manipulates Galaxy Tab Sales

Investors beware!

WSJ reports that Samsung's actual galaxy tab sales are smaller than the numbers on its balance sheet:

In early December, Samsung announced it had sold 1 million, declaring that sales were going “faster than expected.” Then, in early January, Samsung announced sales of 2 million.

But during the company’s quarterly earnings call on Friday, a Samsung executive revealed those figures don’t represent actual sales to consumers. Instead, they are the number of Galaxy Tab devices that Samsung has shipped to wireless companies and retailers around the world since product’s formal introduction in late September.

I believe what Samsung used were a couple of old trick in the accounting book -- channel stuffing and possibly consigned goods. Samsung executive, Lee Young-hee used the terms “sell-in” to reflect Samsung’s sales to distributors and “sell-out” to reflect the distributors’ sales to consumers. Of course, "sell-in" would be high because distributors are the middlemen passing on the products to consumers. Thus, the important number to take notice is "sell-out." In that aspect, Lee Young-hee said "sell-out wasn't as fast as we expected."