Earning Management Practices Implemented by Kogan Ltd: A Report

This report provides an analysis of the earning management techniques employed by Kogan Ltd. It examines the company's income statement, highlighting revenue recognition methods and the use of techniques such as Big Bath and Change GAAP to present a favorable financial overview. The report details how Kogan Ltd manipulates financial figures to show smooth earnings, focusing on depreciation, earnings per share, and operating expenses. It explores the motivations behind these practices, including maintaining accounting ratios and influencing investor perceptions. Additionally, a SWOT analysis is conducted to identify the company's strengths, weaknesses, opportunities, and threats, offering a comprehensive understanding of Kogan Ltd's financial strategies and market position. The report concludes with a summary of the key findings and implications of the earning management practices observed.

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Executive Summary
The main purpose of this report is to understand the earning management technique
implemented by Kogan Ltd. The study is supported by analysing the income statement of the
company. It has been found that the company uses various techniques like big bath
techniques, “big bet on the future” technique and Change GAAP technique for earning
management.

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Table of Contents
Introduction................................................................................................................................3
Discussions.................................................................................................................................3
Earning Management.............................................................................................................3
Income Statement...................................................................................................................3
Revenue..................................................................................................................................4
Net Profit................................................................................................................................6
Possible Motivations for earning management......................................................................7
SWOT Analysis.....................................................................................................................7
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
Earning management techniques is implemented by many organisations to show
smooth earnings in the company's financial statement. The first part of this study has
discussed on the earning management technique used by the management of Kogan Ltd in the
income statement. The last part has given an overview of the SWOT analysis of Kogan Ltd.
The intense of this study is to understand the earning management technique implemented by
Kogan Ltd.
Discussions
Earning Management
Earning management is a method of using different financial techniques for creating a
positive overview of the financial statement of a company. This is done by manipulating the
financial figures recorded in the financial statement and presenting the profits as an overview
of smooth earnings in the business. Earning management is done by applying the accounting
rules and policies and generates higher earnings.
Overview of the Company
Kogan is a leading customer brand of Australia that provides retail services to the
customers. It is a retail and services type of industry that is headquartered in Melbourne,
Australia. The company has aimed to build a business portfolio that creates greater value,
services and offerings to the customers. It is a public sector company that is traded in the
Australian Stock Exchange.
Income Statement
 The depreciation and amortisation expense in FY 2017 was $3,823,701 and decreased
to $5,339,333 in FY 2018. The company has normally written off the cost of this non-

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operating expense. Amortisation expenses of the company are goodwill, copyrights,
patents and trademarks. The depreciation expenses included tangible assets like
buildings, machinery and equipment (Asx.com.au, 2019). The company has selected
the written off method for showing the depreciation expenses in the business.
 The earnings per share were done through stock repurchase. The basic earnings per
share have been increased from 0.04 in the FY. 2017 to 0.15 in the FY. 2018. The
management has made adjustments to reflect the dividend paid and has repurchased
the stocks form their shareholders.
 The operating expenses were increased from $ 6,506,479 in the FY. 2017 to
19,980,549 in the FY. 2018. These expenses included all the selling a distribution
expenses, warehouse expenses, administrative expenses and other expenses of the
business. There is a huge increase in these expenses in the FY. 2018. The company
has shifted the operating expenses to the next year. The other unusual expenses are
reported in the income statement. The carrying amount of plant and equipment are
measured annually. The expected net cash flows from the recoverable amount of this
asset is discounted to their present values in order to determine the recoverable
amount. This amount was represented as discontinued operations or other unusual
expenses in the financial statement.
Revenue
 The revenue of the company was $289,517,780 in the FY. 2017 and increases to
$412,312,395 in the FY. 2018. There is a significant increase in the revenues. The
management. Kogan.com Ltd has acquired Kogan Operations Holdings Pty Ltd. The
company had a common control on the transactions of the acquired company and
hence, no fair adjustments were made by the management (Kogancorporate.com,
2019). Therefore, the difference between the value of issued capital and the book

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value of the net assets is recorded in the merger reserve of the company. The
management has used “Big Bet for the future” technique by writing off the research
and development cost in the earnings of the acquired company. The research and
development tax benefit were found to be $65,016 in the FY. 2018, whereas, this
benefit was absent in the FY. 2017 annual report.
 The revenues from sales of good are written in deferred income. The return of goods
is estimated reliably. Return from the sales is recognised by estimating the expected
value of the revenue by comparing the historical data of sales and doing a specific
review of the sales for the current period and the post-period of the company’s
financial statement. The sales from goods in the FY. 2017 was $276,496,962 and
increased to $389,884,367 in the FY. 2018. There is a large increase in the sales
returns. The management has only estimated the expected value of the sales of goods
in the FY. 2018.
 The revenue generated from the rendering of services was recognised by the
management. The management has provided travel & mobile services to the
customers and has fulfilled the service obligations from the revenue. The revenue
amount was measured reliably by the management by calculating the net revenue and
discounts on trades. This revenue recognition was different depending upon the
agreement and contractual obligations of the services with the customers. Then the
revenues from these services were calculated only from the payments by customers
without fulfilling the service obligations to the customers (Swlearning.com, 2019).
The rendering of services was $ 9,971,911 in the financial year 2017 and increased to
$18,986,988 in the FY. 2018. Hence, the management has used Change GAAP
technique of revenue recognition in the revenues from rendering of services. They

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have improved the revenue of this item for reflecting a good economic position in the
company’s income statement.
Net Profit
 The revenue from the sales by reliability estimating the sales from the goods. By
simply measuring the revenues of sales by net returns, trade discounts and volume
rebates of the historical data. The sales from goods were recorded in the deferred
income of the company’s income statement. This indicates that the income generated
from the goods are not delivered to the company (Azibi, Azibi and Tondeur 2017).
The company has estimated the warranty claims outstanding from the historical
warranty data and estimated the provisions for warranties. The provisions of sales
returns were estimated by finding the expected value of returns of sales based on the
historical data.
 The company has shown operations restructuring expenses of Kogan Group in the
financial statement. The expenses were based on estimation in order to avoid the
possible earnings from the operations (Hassen 2014). The management has used Big
Bath Techniques to avoid the negative impact of earnings on the current stock price of
the company. The management has reported these expenses as, operational
restructuring due to acquiring the Kogan Operations Holdings Pty Ltd. The
management has charged a huge loss of the current earnings due to competition of the
online retail market of Australia. This has changed the customer preferences with
respect to the product. The operational charges are viewed as negative in the
company's financial statement. The total expenses in the FY. 2017 was $97,42,938
and increased to 2,74,59,462 in the FY. 2018.
 The net income of the company was increased from the FY. 2017 to 2018. It was
$27,97,74,842 in year 2017 and increased to 38,48,52,933 in the year 2018.

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Therefore, the net profit of the company was also increased in the FY. 2018. Big bath
technique was used by the company management to write off the reserves like merger
reserves and other reserves so that the charges in the future can be compensated
against the reserve in order to acquire greater earnings in the current period and
increase the profitability in the future (Sari and Sari 2018).
Possible Motivations for earning management
 In order to maintain the accounting ratios and adjust the debt obligation, Kogan
retail business has used earning management technique in the business.
 The basic earnings per share were 0.04 in the FY. 2017, which is very less for the
company's stock. Therefore, in order to mislead the investors and increase the
earnings, these techniques were used as motivation for the business (Haider, Ali
and Sadiq 2012).
SWOT Analysis
SWOT Analysis is a technique that will help to identify the strengths, weakness,
opportunities and threats that is related to business. It is relayed on identifying the internal
and external factors that have an impact on reaching the organisational objective. The
following strengths and weaknesses of Kogan are:
Internal analysis
 Strengths- Kogan has a strong market-leading brand and strong distribution network
and can reach to the majority of the potential markets. The company has expanded its
service offerings by leveraging their brands to industries leaders. Kogan has achieved
increased revenue growth of 40.5% every year. The company has highly skilled
employees in the organisation (Chan 2011). The employees are motivated through
training and development programmes and providing sufficient resources to enhance

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their job skills. They have a strong business model that is bold and innovative to
differentiate their products from others successfully. It has a wide range of suppliers
to produce private label products. Every supplier will meet the volume, cost and
quality requirements of the product. Automation of business activities has enabled the
company to produce on a large scale based on the demand of the market (Schirmer et
al. 2017). The company has a strong customer base by enhancing a strong customer
relationship and the creation of brand valuation among the customers.
 Weakness- Kogan is spending a large amount of money in Research and
Development, but is not able to compete with the leaders in terms of innovation. They
have to spend a large amount of money in building product innovation. Therefore, the
company spends a high attrition rate on the workforce (Nwakoby, Ezejiofor and Ajike
2017). The company needs to put more money into technologies in order to explore a
larger investment. The company has a high increase in inventories in the FY. 2018.
This may affect the future growth of the business. The brand positioning and product
differentiation are not defined by the company. This can be risky in case of
competition. Other competitors may take advantage of this factor.
External Analysis
 Opportunities- The Company has invested a huge sum of money on an online
platform. They have the opportunity to grow and meet customer needs. It has
generated stable cash flow. This may be a good opportunity for them to invest in new
technologies. It is focusing on adopting new technology in the business. This will help
the company to explore new markets with new technology (Appelbaum, Kogan and
Vasarhelyi 2018). It has launched a new business known as Kogan Money loans and
Kogan Mobile New Zealand. This provides strategic opportunities for the company to
grow its business.

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 Threats- Change in consumer behaviour can be a threat to the business. New
technologies developed by the competitor be a major threat to the business. Shortage
of skilled labour can be a threat to the business. If the company do not supply regular
innovative products, then it can be a major threat to the business because it may
impact the sales return of the business (Chen, Dou and Kogan 2019).
Conclusion
Therefore, it can be deferred from the study that, earning management has helped
Kogan business has implemented earning management techniques like big bath technique,
Change GAAP technique, written off method for depreciation method for earning
management in the organisation. These techniques have helped the company to show feasible
earnings in the FY. 2018. The SWOT analysis of Kogan shows that the company do not have
any competitive advantage in the market.

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References
Appelbaum, D.A., Kogan, A. and Vasarhelyi, M.A., 2018. Analytical procedures in external
auditing: A comprehensive literature survey and framework for external audit analytics.
Journal of Accounting Literature, 40, pp.83-101.
Asx.com.au (2019). [online] Asx.com.au. Available at:
https://www.asx.com.au/asxpdf/20180925/pdf/43ylycq9hv59cr.pdf [Accessed 11 Dec. 2019].
Azibi, J., Azibi, H. and Tondeur, H., 2017. Institutional activism, auditor’s choice and
earning management after the Enron collapse: Evidence from France. International Business
Research, 10(2), pp.154-168.
Chan, X., 2011. A SWOT study of the development strategy of Haier Group as one of the
most successful Chinese enterprises. International Journal of Business and Social Science,
2(11).
Chen, H., Dou, WW and Kogan, L., 2019. Measuring “Dark Matter” in Asset Pricing
Models (No. w26418). National Bureau of Economic Research.
Haider, J., Ali, A. and Sadiq, T., 2012. Earning management and dividend policy: Empirical
evidence from Pakistani listed companies. European Journal of Business and Management,
4(1), pp.83-90.
Hassen, R.B., 2014. Executive compensation and earning management. International Journal
of Accounting and Financial Reporting, 4(1), p.84.
Kogancorporate.com (2019). [online] Kogancorporate.com. Available at:
https://www.kogancorporate.com/resources/pdf/library/9.%20KGN_Annual_Report_2017.pd
f [Accessed 11 Dec. 2019].

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Nwakoby, N.P., Ezejiofor, R.A. and Ajike, A.K., 2017. Effect of SWOT Analysis on
Performance of Manufacturing Firms in Nigeria.
Sari, R.P. and Sari, R.P., 2018. Study of Earning Management and Audit Quality in
Indonesia. Journal of Economics, Business, and Government Challenges, 1(2), pp.143-152.
Schirmer, A.L., Brownholtz, E.A., Kogan, S.L. and Muller, M., International Business
Machines Corp, 2017. Integrated view of multi-sourced information objects. US Patent
9,607,287.
Swlearning.com (2019). [online] Swlearning.com. Available at:
http://www.swlearning.com/pdfs/chapter/0324223250_2.PDF [Accessed 11 Dec. 2019].