Accounting deals with internal and external users. External users are the investors, customers, suppliers, employees, authorities, and creditors that use the information about the firm to make decisions regarding their future relationship with that firm. The information that they look at to make these decisions are the financial statements. Each of these external users may use the financial statements differently. An investor may look to see if it is worth investing in that specific company; while a supplier may look to see if they should do business with that specific company. The internal users of that firm prepare and report the financial statements that the external users use to make their decisions. The single most important thing that firms show on their financial statement is earnings. Earnings are the amount of profit that a firm or company makes during a period. The value of a company and its earnings go hand in hand. Higher earnings means increased value for the company and lower earnings mean a decreased value for the company. Also, if companies have continuous growth in earnings then that would result in higher stock prices. Investors will look at the earnings of a company to decide which particular stock that they would want to invest in. Since earnings are the most important thing that companies show on their financial statements, many companies undertake earnings management. Earnings management refers to the strategy that companies use to manipulate their earnings so that they can change their reported earnings on the financial statements (Investopedia). It is very hard for companies to continuously report consistent periodic earnings because of economic cycles and seasonal changes. Since it is hard t...
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...as declining, WorldCom showed false growth and profitability so that they could increase the price of their stock. They were able to do this in two different ways. First of all, they underreported line costs. Line costs are the interconnection expenses with other telecommunication companies. Secondly, WorldCom was able to increase their revenue by creating fake accounting entries. These accounting entries were corporate unallocated revenue accounts. After the internal audit department at WorldCom found some of the fraud that was being committed, the Securities and Exchange Commission launched an investigation soon after. It was soon estimated that WorldCom’s assets were inflated by 11 billion. (WorldCom scandal) The CEO Bernard Ebbers ended up getting convicted of fraud and was sentenced to 25 years in prison, while WorldCom ended up filing for bankruptcy.
WorldCom and The Mississippi Scheme are both large financial scandals that have occurred. WorldCom was a telecommunication company that overstated their cash flow by reporting $7.6 billion in operating expenses as capital expenses. WorldCom is the largest accounting scandal in US history as of March 2002. The Mississippi Scheme was a business scheme that destroyed the economy of France during the 1700’s. The scheme involved the loss of paper money’s purchasing power as a result of asset inflation. Both WorldCom and The Mississippi Scheme were frauds involving manipulation to create higher stock prices and dubious practices within the organizations to keep the public unaware.
WorldCom’s lack of corporate governance and questionable financial follies led to “Overstated cash flow by booking $3.8 billion in operating expenses as capital expenses; gave founder Bernard Ebbers $400 million in off-the-books loans” (Brag, 2002, para. 21). This unethical behavior led to even more financial losses after further investigations, and resulted in billions of dollars in losses...
Enron then began using an accounting scandal known as mark-to-market accounting which allowed Enron to predict potential profits rig...
...d then they reported a $ 1 million charge in total. Then there was the project to build a natural gas 900 kilometer pipeline in Mozambique to Gauteng, South Africa which cost $700 million. Enron's contract is now considered overpriced. Nevertheless, Enron must pay for the gas even if it does not take possession of it and Enron has no customers for the gas. I feel that Enron had luck on it’s side for a while and were able to conquer all these different markets for a while. But they wanted too much power and money, much too fast for some of the markets they entered they had to dish out billions of dollars in up front capital investments on hard assets. . These capital investments were not expected to generate significant earnings or cash flow in the short term. This put pressure on Enron’s balance sheet.
Lucas Pacioli was the first to describe a system of debts and credits in accord with journals and ledgers in 1494. These basics came together to be the concoction for what is known as accounting. Since the formal establishment of accounting in 1494, the field has expanded as the demands of the ever-changing economy became greater. The industrial revolution created the first jump in the field forcing the creation of sectors within. Since this first creation of sectors, accounting as a field has been creating more specific sects to accommodate a large variety of areas. The most common and large sects created this far include public and private accounting. Although both sects carry the same basis for their work, the variation between the two lies in their demographic, demands, and decoration.
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
Enron had assets in many different companies and if the company didn't reach the projected amount of money then the ranking officials of Enron would transfer the loss to an off-the-books corporation where no one would find it. Enron
...ent expense the year it incurred. Due to the reporting error, in 2001 $3.055 billion was misclassified and 4791 million in the first quarter of 2002 (Law Maryland). In order to avoid getting caught, WorldCom was trying to be slick by leaving some line costs as current expense so that the error in classifying would not be easily detectible. This error in classifying expenses cause WorldCom to increase net income and assets. This fraud was found by the companies internal audit, Cynthia cooper, on May 2002. This detection was not good news to Arthur Anderson as they were the outside auditors of WorldCom. Anderson had already been affected by Enron scandal and neglecting to do to their job correctly. But with WorldCom they claimed that the chief financial officer Scott Sullivan did not tell them about the line costs being capitalized and they were unaware of this fact.
According to the article authored by Mark Rupert, what are the seven best practices in the roles and responsibilities of an internal audit function?
The Enron scandal in the early 2000’s was a major scandal that was hard to miss (Ferrell, Hirt, & Ferrell, 2009). Enron has once ranked a Fortune 500 company with a network of $111 billion dollars (Ferrell, et. al., 2009). Enron dealt mainly with energy, but they also had interest in communications and paper (Ferrell, et. al., 2009). Enron was confident in their earnings and financial reporting, but after a year of gaining interest, Enron caved in and filed bankrupt (Ferrell, et. al, 2009).
The total assets of the company were estimated to inflated by about $11 billion by the end of 2003. They overstated the cash flow and profit margins significantly to disguise its decreasing earnings to maintain the price of WorldCom’s stock by fraudulent accounting methods (web), which should be found by their auditor – Arthur Anderson (one of the former Big Five accounting firms and then bankrupted in 2001). According to the Economist (), WorldCom scandal resulted in many negative impacts on its auditors and American economy even the world. Andersen was not only sued and lost its reputation but also dented the confidence in American accounting. Additionally, WorldCom’s share price had fallen from a peak of over $60 to below $2 a share by several months. Before New York stock opened, Japan 's Nikkei, Germany 's Dax and France 's CAC 40 each fell by over
The fraud came in to limelight when they could not explain improper records of $3.8 billion in their capital expenditure. Further investigation exposed that the company used to adjust the value of assets in their accounts which gave false impression to investors that company is improving quarter by quarter. They admitted to violate and adjust an earnings of $11 billion. Total fraud was reported to be $79.5 billion. WorldCom has filed for Chapter 11 bankruptcy in 2002.
Prior to 2000, Enron was an American energy, commodities and service international company. Enron claimed that revenue is more than 102 millions (Healy & Palepu 2003, p.6). Fortune named Enron “American most innovative company” for six consecutive years (Ehrenberg 2011, paragraph 3). That is the reason why Enron became an admired company before 2000. Unfortunately, most of the net income for the years 1997-2000 is overstated because of unethical accounting errors (Benston & Hartgraves 2002, p. 105). In the next paragraph, three main accounting issues will identify for what led to the fall of Enron.
Accounting is the pillar of every company to measure its growth, loss, revenue , capital, its really specify the real terms in foam of figures and sometimes in tables, in accounting there are certain rules are obtained to make more accuracy while playing with figures.
Enron has risen to the top by engaging in energy projects worldwide and speculating in oil and gas futures on the world’s commodities markets. They also provided financial support to some presidential candidates and members of the U.S. Congress. However, Enron had a secret. The corporation had created partnerships located in off-shore tax havens. Enron’s stock price fell from $90 to 50 cents a share.