The FINOVA Group, Inc., was formed as a commercial finance firm in 1992. It was created as a spin-off from the Greyhound Financial Corporation (GFC). GFC underwent a complete restructuring at that time and other spin-offs included the Dial Corporation.

FINOVA, headquartered in Phoenix, Arizona, quickly became a Wall Street darling. Its growth was ferocious. By 1993, its loan portfolio was over \(\$ 1\) billion both through its own loans as well as the acquisition of U.S. Bancorp Financial, Ambassador Factors, and TriCon Capital. In 1994, FINOVA had a successful \(\$ 226\) million stock offering. By 1995, its loan portfolio was \(\$ 4.3\) billion. Standard \& Poor's rated the company's senior debt as A, and Duff \& Phelps upgraded its rating to \(A\) in 1995 when FINOVA issued \(\$ 115\) million in convertible preferred shares and its portfolio reached \(\$ 6\) billion. FINOVA's income went from \(\$ 30.3\) million in 1991 to \(\$ 117\) million by 1996 to \(\$ 13.12\) billion in 1999. Forbes named FINOVA to its Platinum 400 list of the fastest-growing and most profitable companies in January 2000.

FINOVA was consistently named as one of the top companies to work for in the United States (it debuted as number 12 on the list published by Fortune magazine in 1998 and subsequent years). Its benefits included an on-site gym for employee workouts and tuition for the children of FINOVA employees (up to \(\$ 3,000\) per child) who attended any one of the three Arizona state universities under what FINOVA called the "Future Leaders Grant Program." 125 FINOVA also had generous bonus and incentive plans tied to the stock price of the company. Fortune magazine described the 500 stock options each employee is given when hired, the free on-site massages every Friday, concierge services, and unlimited time off with pay for volunteer work as a "breathtaking array of benefits.

The Resort Finance division was a particularly high-risk segment of the company. Resort Finance was the term used to describe what were time-share interests that FINOVA was financing. \({ }^{130}\) Time-share financing is a particularly risky form of financing because lenders are loaning money to borrowers who live in France for property located in the Bahamas that has been built by a company from the Netherlands and is managed by a firm with its headquarters in Britain. The confluence of laws, jurisdiction, and rights makes it nearly impossible to collect should the borrowers default. And the default rate is high because time-sharing interests are a luxury item that are the first payments to be dropped when households experience a drop in income because of illness or the loss of a job.
Resort Finance would prove to be a particularly weak spot in the company and an area in which questions about FINOVA's financial reporting would arise. For example, FINOVA had a time-share property loan for a recreational vehicle (RV) park in Arkansas that had a golf course and restaurant. The idea, when first acted on in 1992, was that folks could pay for a place to park their RV in beautiful Arkansas for a week or two in a time-share RV resort. When the loan was made in 1992 , the property had a book value of \(\$ 800,000\). At the time of the default in 1995 , the property was worth \(\$ 500,000\). FINOVA took back the property but did not write down the loan. It did, however, continue to report the loan as an earning asset even as it capitalized the expenses it incurred to maintain the golf course and restaurant. By 1997, FINOVA was carrying the Arkansas time-share resort on its books as a \$5.5 million earning asset. One manager remarked, "You couldn't sell all of Arkansas and get \(\$ 5.5\) million and we were carrying a bad loan at that amount." \({ }^{131}\) Because of its lending strategies, FINOVA had higher risk in virtually all of its lending divisions. For example, it was highly invested in high-tech companies because they fit the category of too new and too risky for banks...........

Discussion Questions 1. Why do you think the officers and managers waited until the auditors required it to write off the \(\$ 70\) million loan? Given FINOVA's fate and its free-fall in stock price to a final price of \(\$ 0.12\), what issues did the executives miss in analyzing the decision to write down or not write down the loan? Whose interests were served by the decision?
2. Do you think the incentive plans had any effect on the reported earnings? Why or why not?
3. Was FINOVA so generous with its perks for employees that there was a resulting loyalty that was blinding the employees to the real financial condition of the company and the financial reporting issues? Would these perks have had an effect on you if you worked for FINOVA?
4. Was FINOVA forthcoming about the level of risk in its business?