The United States prides itself in being first in a wide range of socioeconomic, scientific, and cultural “top ten” lists. One ranking that does nothing to bolster national pride among United States citizens, however, is the nation’s claim to watching more television programming than any other country across the globe. In 2007, the Economist, an international business periodical, reported that the average U.S. household spends 8 hours and 11 minutes each day viewing television programming, far surpassing the runner-up, the typical Turkish household, which spends exactly fi ve hours watching the boob tube. Rounding out the top fi ve in this inauspicious list were the sedentary citizens of Italy, Belgium, and Japan, respectively.

Over the past two decades, surfi ng the World Wide Web has become an important pastime for many former couch potatoes. The increasing popularity of the Internet during the 1990s convinced several e-commerce companies, principal among them AOL and Yahoo!, to establish massive websites intended to serve as “portals” to the Internet. These Internet portals were designed to “capture” Internet users when they went online and then direct them to the specifi c entertainment, business, sports, or other sites that they wanted to visit. AOL, Yahoo!, and their competitors expected to produce huge revenue streams by selling advertising on their portal websites to the large number of companies that wanted to market their products and services to Internet users who typically have deeper pockets than the average consumer.

Several insightful business executives recognized that the portal concept could be even more lucrative if applied to the “old school” but still dominant electronic information and entertainment medium, namely, the television. Despite the far-reaching impact that the Internet has had on U.S. culture over the past two decades, television viewing remains much more prevalent in the United States than surfi ng the World Wide Web. The Nielsen Company reported recently that the typical Internet user in the United States spends only twenty minutes online each day, a small fraction of the time that individual spends glued to his or her television screen.

The most successful television “portal” to date has been the ubiquitous scrolling programming guide that millions of bleary-eyed television addicts scan each day to fi nd an upcoming episode of NYPD Blue, Seinfeld, or The Beverly Hillbillies. During the 1990s, several companies struggled to gain control over that very low-tech but also very important television portal. That struggle eventually culminated in a large-scale fi nancial fraud that imposed billions of dollars of losses on investors worldwide.

Che-Chuen Yuen was born in 1948 in Shanghai during the bloody civil war that rocked China following the conclusion of World War II. After the Chinese civil war ended in 1949, Mao Zedung, the leader of the Communist forces that gained control of the country, established an authoritarian central government and renamed the nation the People’s Republic of China. The new Communist government forced business owners, professionals, and other Chinese citizens who were perceived to be counterrevolutionaries to leave the country. Che-Chuen’s father, a businessman, was among those banished. The elder Yuen moved his family, including his infant son, to Hong Kong, which had been a British colony since the mid-1800s. Fifteen years later, Che-Chuen immigrated to the United States where he assumed the name Henry.

After finishing his undergraduate degree in mathematics at the University of Wisconsin, the quiet and studious Yuen decided to pursue a doctorate in applied mathematics at the prestigious California Institute of Technology (CalTech) in Pasadena, California. Upon completing his doctorate, Yuen remained in southern California, working for fourteen years as a research scientist for TRW, a large conglomerate. Because he had always been fascinated by the U.S. legal system, Yuen spent several years attending law school on a part-time basis while employed by TRW. He eventually earned a law degree from Loyola Law School near downtown Los Angeles.

While working toward his doctorate at CalTech, Henry Yuen became close friends with Daniel Kwoh, a doctoral student in the university’s physics department. Like Yuen, Kwoh accepted a research position with TRW after completing his doctorate. In addition to having the same employer, the two friends had a mutual interest in sports, an interest that would eventually prove to be extremely lucrative for both of them.

As a young man, Yuen had aspired to becoming a world class soccer player. When he failed to achieve that goal, he became a martial arts expert, specializing in Wing Chun, a form of martial arts that involves aggressive, close range combat. After coming to the United States, Yuen became a hardcore baseball fan—his favorite team was the Boston Red Sox. Yuen’s full-time job at TRW and his evening law school classes typically prevented him from watching Red Sox games that were televised on the West Coast. So, he would program his VCR to record those games. Unfortunately, Yuen often came home to find that his VCR had failed to record a game, leaving him frustrated and angry. In his mind, if a research scientist with a doctorate from CalTech could not successfully use a VCR’s recording technology, then there was something wrong with that technology.

In 1988, Yuen and Kwoh teamed together to develop a simplified method for programming VCRs that they referred to as VCR Plus. This technology became the flagship product of a small company they co-founded, Gemstar Development Corporation. Although Gemstar produced only modest revenues during its first few years of operation, the company’s impressive technology and seemingly bright future persuaded Business Week to name Yuen and Kwoh as the nation’s “best entrepreneurs” in 1990. Five years later, Yuen and Kwoh took their company public, listing its stock on the NASDAQ stock exchange. That exchange would eventually include Gemstar in the NASDAQ 100, the stock index used to track the performance of companies listed on the world’s largest electronic securities exchange. In 1997, a reported “falling out” between the two men resulted in Kwohleaving the company to become an independent venture capitalist.

During the fi rst fi ve years that Gemstar was a public company, its revenues steadily increased, rising from \($42\) million in 1995 to \($167\) million in 1999. After incurring operating losses from 1995 through 1997, the company posted its fi rst profi t of \($39\) million in 1998. The following year, the company’s net income increased to \($74\) million........

Questions 

1. What fundamental principles dictate when a company should recognize or record revenue in its accounting records? Revenue recognition issues can be particularly complex for companies that sell software and/or license technology.
Identify specifi c rules or concepts in the professional standards that accountants and auditors can rely on to make proper revenue recognition decisions for such companies.

2. The SEC charged KPMG with “repeated audit failures” in this case. Identify general conditions, specific circumstances, and other factors that are common causes of, or, at a minimum, commonly associated with, “audit failures.” What quality control mechanisms can audit firms implement to minimize the likelihood of audit failures?

3. The SEC criticized KPMG for relying on “quantitative” measures in arriving at materiality judgments while ignoring important “qualitative” issues relevant to those judgments. Under what circumstances should auditors rely more heavily on quantitative measures rather than qualitative issues in making materiality judgments? Under what circumstances should auditors rely more heavily on qualitative issues rather than quantitative measures in making materiality judgments? Explain.

4. Do you agree with Henry Yuen’s assertion that a businessperson who is complying with all applicable laws and regulations is, by defi nition, behaving “ethically”? Defend your answer.