SWM - Mark Moore

Potential Red FlagsDue to the flexibility given to firms through GAAP, managers are able to distort theinformation that will be provided in their annual financial statements, which can raise potentialred flags. Red flags identify questionable accounting methods and suggest that the analystshould examine certain items more closely or gather more information on them (Palepu &Healy). For the most part, Schweitzer-Mauduit operations are either above average or relativelyclose to the industry average. There are, however, two questionable red flags.One potential red flag was caught in their cash flows statement. This was noticed afterperforming expense manipulation diagnostics. In comparison to competing firms, Schweitzer-Mauduit’s Cash Flow from Operation/Operating Income is below average. This requires furtheranalyzing on why this would occur; either cash flow from operations has lowered or operatingincome has increased. From the Cash Flow Statement it is shown that net cash provided by(used in) has significantly dropped in 2008. Upon further research, a reason this may haveoccurred could be due to the acquisition of a minority share in LTRI. Although thesetransactions began in 2006, they were not completed until January of 2008. This ratio shouldbecome closer to industry average in 2009, as the Schweitzer believes that this acquisitionshould improve earnings and a more competitive production base.Another red flag that was found is that projected increases in salaries are lower thanthat of the industry. Schweitzer-Mauduit expects the companies’ salaries to increase by 3.5%,as evidenced from the past five years and 2009’s projection. However, when examining theirgeneral and administrative expenses from 2006 to 2008 alone, there has been 593%. Inconclusion, their low projected increase in salaries is unrealistic, and that they should possiblyre-evaluate actual spending in relation to projected spending.Undo Accounting DistortionsSpecific standards have been put in place for the sole reason to protect investors frommanipulation. The Federal Accounting and Standards Board have implemented explicitprinciples and conditions in order to give analysts and investors a more comprehensible outlook92