Wayne State University BA 6000 – Fall 2011 Case 1 ClearOne Communications, Inc. is a provider of end-to-end video and audio conferencing services, including the manufacture and sale of video and audio conferencing products. From its inception as a manufacturer of this equipment through 2001, ClearOne sold it products through a nationwide network of manufacturer's representatives. Sometime in early 2001, ClearOne decided to alter its business model and instead of using manufacturer's representatives, began selling its products through a nationwide network of distributors complemented by a direct sales force. Through early 2001, ClearOne experienced robust growth and increased product sales every quarter. From the selected financial data extracted from ClearOne's Form 10-Ks that follow, this growth appeared to continue through fiscal 2002. However, a complaint filed by the SEC against ClearOne alleges the truth may be different.

ClearOne Communications
Selected Financial Data, Years ended June 30, 2002 Product sales Service sales Cost of goods sold - products Cost of goods sold - services Operating expenses Pre-tax operating income Income from continuing operations Net accounts receivable at June 30 $37,215,161 17,327,525 15,057,167 7,942,952 20,809,281 10,733,286 7,410,752 $20,316,730 2001 $28,189,612 11,688,793 10,633,956 5,869,106 14,904,460 8,470,883 5,525,185 $ 7,212,970 2000 $22,226,504 5,891,909 8,033,867 2,974,456 10,568,861 6,451,229 4,301,742 $ 4,153,677

Required: 1. Retrieve the SEC's complaint against ClearOne Communications (link provided on Blackboard with the case). Describe management's alleged scheme for inflating revenue. 2. The SEC alleges that by the end of fiscal 2002, ClearOne had stuffed inventory costing approximately $11.5 million into the distribution channel. On the basis of that assertion, what was the approximate amount of its alleged revenue overstatement by the end of 2002? 3. Does the financial statement data presented support your estimate from question 2? Why or why not? 4. The SEC claimed that despite the company's claims that it had seen over 30% sales growth in fiscal 2002, ClearOne had, in fact, experienced no sales growth. Does the financial statement data presented, in light of your answer to question 2, support that claim? Why or why not? 5. Comment on any other interesting or relevant items you can gather from the financial statement data related to the SEC's allegation. Your answer should not take more than three pages of double spaced text, not including any supporting calculations you provide (and it is advised that you do provide them). The case is due November 1.