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Enron ethical scandal
Describe the enron scandal introduction
Enron ethical scandal
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Accounting Scandals: Accounting fraud refers to fraud that is committed by a company by maintaining false information about the sales and income in the company books, when overstating the company's assets or profits, when a company is actually undergoing a loss. These fraudulent records are then used to seek investment in the company's bond or security issues. By showing these false entries, the company attempts to apply fraudulent loan applications as a final attempt to save the company by obtaining more money from bankruptcy. Accounting frauds is actually done to hide the company’s actual financial issues. A clear example of accounting fraud is the act of purposely overpricing a company's assets in order to increment its share price. Another example is due to financial problems, saving company from collapsing. One of the biggest accounting frauds in history occurred during the Enron scandal in 2001. Accounting ethics has been difficult to control as accountants and auditors must keep in mind the interest of the public while that they remain employed by the company they are auditing. The accountants should take into account how to best apply accounting standards when company faces issues related financial loss. The role of accountant is crucial to society. They serve as financial reporters to owe their primary constraint to public interest. The information provided is critical in aiding managers, investors and others in making crucial economic decisions. An accountant is responsible for any fraudulent financial reporting. Some examples of fraudulent reporting are: • Manipulation, falsification (forgery), or alteration of accounting records or documents from which the financial statements are prepared. • Misrepresentation i... ... middle of paper ... ... inventory turnover was found to be very low. The low inventory turnover ratio was an indicator of inadequacy, since inventory usually has a rate of return of zero (Inventory Turnover Ratio Interpretation, 2009). It also implied either poor sales or excess inventory. A low turnover rate indicated poor liquidity, convincible overstocking, and obsolescence, but it would have also reflected a planned inventory build-up in the case of material shortages or in anticipation of rapidly rising prices. (Inventory Turnover Ratio Interpretation, 2009) And a rapid and unexplained rise in the number of sales per day in receivables in addition to growing inventories to cover the shortage was noted. The interviewee (Public Accountant) could smell something suspicious which led him for more detailed procedures and proactive investigation at the end of which a fraud was detected.
Regardless of when financial statement fraud first occurred and the development of technology, it will be infinite. People may believe that as technology becomes more advanced, there will be less opportunity to commit fraud and it is easier to catch, but as technology evolves, so do the fraudulent schemes while weaving in the old ones but with a twist. There are always going to be individuals that feel that they will never be the one to get caught and believe that they are invincible to all. There remains a population that lives by means of entitlement, and therefore, minimizing their actions and rationalize them once given an opportunity and the perceived need equaling greed. As fraud evolves, individuals learn by other's mistakes and develop more complex schemes to provide confusion. According to the Wisconsin Law Journal (2012), “financial statement fraud is an ugly fraud with methods that are complex and often not understood by the average consumer or investor, and its results often aren’t tangible to the average person.” Therefore, by making a complex financial statement fraud, the gain is enormous with the amount of investigation overwhelming to determine a portion of the
...FO at the Houston airport. While Mr. Fastow's parents were undergoing a random search, he stopped to chat with Mr. Schwieger. "I never got an opportunity to explain the partnerships to you," he said, according to Mr. Schwieger. Mr. Schwieger replied, "With everything that has come to light, I probably wouldn't like the answer I would have gotten."
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
Kaplan, R. S., & Kiron, D. (2007). Accounting Fraud at WorldCom. Boston: Harvard Business School Publishing.
Earnings Management and Fraud both have similar definitions in which they are done to put the company in a more positive view of financial standing. The difference is that earnings management is legal through the flaws under GAAP that allows companies to be able to do so. Fraud is not legal and at times is bluntly changing numbers instead of changing the method of getting the number like it is done in earnings management. But there is a very fine line between these two as a company managing their earnings could easily do a bit more to commit fraud instead of just managing their earnings
Business fraud basically involves acts that are a breach of ethics and integrity in a business environment. According to Investopedia, business fraud is any activity undertaken, unethical or illegal in most cases that gives an unfair advantage to the undertaker of the action (Investopedia). Action Fraud, a “fraud report center” in the UK reports businesses of all sizes are vulnerable to fraud and as much as 25% of SMEs in the UK fall victim to fraudsters (Action Fraud).
Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the CEO Gregory Podlucky
Some of the most well-known accounting frauds in the U.S., in the past two decades are the Waste Management Scandal (1998), Enron (2001), WorldCom (2002) that brought the Sarbanes-Oxley Act, Tyco (2002), HealthSouth (2003), Freddie Mac (2003), Fannie Mae (2004), AIG (2005), and Lehman Brothers (2008), to name a few (Accounting-degree.org, n.d.). (Dear Our topic is corporate collapses, not accounting frauds, i think we should talk about some of the most well known corporate collapses in US)
Giroux, G. (Winter 2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, 75, 4. p.1205 (34). Retrieved June 16, 2011, from Academic OneFile via Gale:
There are numerous forms of fraud, and it is far more sinister than raiding the petty cash drawer or the physical theft of inventory from the warehouse. The three classifications of fraud are fraudulent financial reporting, asset misappropriation, and corruption (Hedley). (#8). Reporting financial fraud is typically executed by managerial employees who deliberately misrepresent the company’s financial information by doctoring the financial statements. Asset misappropriation usually occurs on an employee level and involves embezzlement. Corruption includes any unethical conduct, such as bribes and extortion, which may result in an illegal act or a law violation (Hedley).
Fraudulent financial reporting is schemes that involve the falsification of an organization’s financial statements to make it appear more or less profitable. It is the deliberate misrepresentation, misstatement or omission of financial statement data for the purpose of misleading the reader and creating a false impression of an organization’s financial strength. This too can take place in any type of business, but generally is committed when there is pressure, either by the shareholders, owners, or board, for the business to do well and meet certain goals. Misrepresentation can be done a number of different ways including manipulating expenses, manipulating revenue recognition, improper disclosures, and recording the incorrect amount
“When a company called Enron… ascends to the number seven spot on the Fortune 500 and then collapses in weeks into a smoking ruin, its stock worth pennies, its CEO, a confidante of presidents, more or less evaporated, there must be lessons in there somewhere.” - Daniel Henninger.
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.
Dowd (2016) runs above and beyond with the clarification to state accounting fraud incorporates the change of accounting records in regards to sales, incomes, costs and different components for a profit motive, for example, boosting organization stock prices, getting ideal financing or maintaining a strategic distance from obligation commitments. Dowd is of the feeling that covetousness, absence of straightforwardness, poor administration data and poor accounting interior controls are a couple of explanations behind accounting fraud. (Dowd,
Accounting manipulation can be defined as when officers of an organization intentionally publish wrong statement their financial information to favourably represent the firm’s financial performance. The accuracy and transparency of Groupon’s financial statements clearly is suspect.