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JP Morgan Amends Interim Financial Statements
ACC 537
March 29, 2014
Professor Refi Raza

JP Morgan Amends Interim Financial Statements
The company chosen for review, based on their amendment to a Financial Statement, was JP Morgan Chase (JPM). After considerable review, JPM announced on 13 July 2012 they would amend their first quarter 2012 interim Financial Statements. When JPM first published their interim Financial Statements for the first quarter the method they used for valuation was within the allowable limits. However, they discovered that the integrity in which the traders within Chief Investment Office (CIO) marked the positions of synthetic credit portfolios was questionable. It appears that the valuations may not indicate an accurate reflection of the total losses within their portfolios.
Given that the total losses may not be reflected correctly, JPM decided to amend their interim Financial Statements for the first quarter. While the article did not explicitly state which accounting principle was used to arrive at their decision, this writer, using their accounting knowledge, surmises the Full Disclosure Principle was the reason JPM decided to amend their interim Financial Statements for the first quarter. JPM could have left their first quarter Financial Statements alone since it did not affect their total earnings or revenues for that portion of the year.
Since JPM’s total earnings and revenues for the first quarter were not changed, they could have chosen to wait until the end of the year to see if the valuation would have had an impact. However, the net income previously reported had to be lowered by $459 million. By doing this, one can presume that JPM would not be seen as strong as what the previously financial statements reported. It was determined during the review that additional internal controls for the traders managing/marking synthetic credit portfolios were needed. This appeared to be based on the fact that the CIO was the organization that set the thresholds for the portfolios they would be managing. The article indicated that the traders did not want to reveal what the true amount of the loss, the only assumption to be made here was that it would reflect poorly on person(s) managing the portfolios in which the loss would occur. As a result, JPM changed it valuation method from and internal fair value to an external mid-market benchmark to determine the value of these portfolios. While the article did not indicate that this method of valuation would be used in the future, one would hope that the resulting internal controls would dictate the method be used for prevent the same situation from reoccurring.
With most companies paying their dividends at the end of the year, this amendment to the interim Financial Statements for the first quarter did not have an apparent impact of the stockholders. However, one could argue that by reducing their reported net income for the quarter by $459 million other investors may have shied away from purchasing stocks. If that were the case, then it could have had a negative effect on investment income and reduced JPM’s bottom line.
Upon reviewing 2012, 2011, and 2010 Financial Statements, one can see that each year the Stockholders Equity has continued to increase along with their Retained Earnings. However, when looking at JPM’s Total Liabilities have increased on their Consolidated Balance Sheet from 2011 to 2012. But upon closer inspection the Stockholders Equity has increased on $15 million and the Total Liabilities has increased only $11 million. This the writer’s untrained eye (in accounting) would say that the net effect would be an increase of $4 million to the Stockholders Equity.
Overall, it does not appear that there was any major impact to JPM by them deciding to amend their Financial Statements. If anything, they could be looked at in better light for revealing the circumstances in which the amendment needed to be done. JMP collaborated CGAP and published a document titled Volume Growth and Valuation Contraction on 2 May 2012. This document tried to explain the changes that were occurring in the Microfinance Equity Valuation arena at that time. This writer believes that JMP did this so that if any amendments happen in the future, they could not be attributed their valuation methodology of their portfolios.

References:

JPMorgan Chase to amend interim financial statements for 2012 first quarter. (2012, July). Targeted News Service, (), . Retrieved from http://search.proquest.com.ezproxy.apollolibrary.com/docview/1024762526?accountid=35812

Consolidated Financial Statements: For the three years ended December 31, 2012. (n.d.). Retrieved from http://www.jpmorgan.com/cm/BlobServer/New_Zealand_bankstats12.pdf?blobkey=id&blobwhere=1320615288402&blobheader=application/pdf&blobheadername1=Cache-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs

J.P. Morgan: Volume growth and valuation contraction. (n.d.). Retrieved from http://www.jpmorganchase.com/corporate/socialfinance/document/23017_Microfinance_2012_FINAL_02May.pdf…...

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