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Ethical issues surrounding accounting scandals
Ethical issues surrounding accounting scandals
Ethical issues surrounding accounting scandals
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An accounting scandal is described as a business scandals that stems from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments. Inappropriate accounting practices more often than not amount to fraud. These fraudulent acts are investigated by government agencies and often change the reputation, structure, and prosperity of a company. Fannie Mae (Federal National Mortgage Association, or FNMA) was established in 1938 during the Great Depression as part of the New Deal. FNMA is a government sponsored enterprise (GSE) - a publicly traded company which operates under a Congressional charter. Fannie Mae was created to stimulate homeownership and expand the …show more content…
The corporation had widespread accounting errors, including shifting of losses. This report opened up the examination of FNMA. The senior managers at Fannie Mae repeatedly engaged in questionable acts. FNMA completed two transactions through investment banking firm Goldman Sachs Group Inc., where $107 million of Fannie Mae’s earnings were improperly pushed into future years. This technique shaped the company's books to appear as if the company had reached earnings targets. The appearance of higher earnings prompted its executives, including Franklin Raines (former CEO), Timothy Howard (former CFO) and others, to receive the maximum payout possible. (Day) The Office of Federal Housing Enterprise Oversight (OFHEO) report found significant problems with the way Fannie Mae’s accounting results were generated and reviewed. Individuals involved in the process were burdened by “heavy workloads, weak technical skills, and a weak review environment.”(Cristie, 17) Under the reported conditions, OFHEO found that accounting operations relied on a few individuals with widespread discretion. In this type of environment, the process for developing new accounting policies is ineffective, and internal controls are weak or non-existent. The company was governed by a weak board of directors, who failed to install basic internal controls and …show more content…
In both cases, Fannie Mae recognized that the company was departing from GAAP, but it failed to consider whether the departures were quantifiable. Senior management defended the company’s accounting practices by saying there was simply a disagreement over FASB (Financial Accounting Standards Board) accounting standards.
After the time of financial crisis, JP Morgan was not the only national bank in US which got involved in trade of toxic loans related to mortgage. Before JP Morgan, it was Goldman Sachs-another large US Bank that faced the allegation of manipulating the trades in its own self interes, ended up in favor of SEC while GoldMan Sachs were asked to pay $500 Million during late 2011 in a deal called Abascus 2007-AC1 where the bank were alleged to mislead its investors on a deal related to Collateral Debt Obligation(CDO). (Eaglesham, 2011) The ab...
The Federal National Mortgage Association (FNMA) is an American based government funded organization. It has been known as Fannie Mae and is one on the government sponsored enterprises (GSE) in the United States of America, founded mainly to perform a scrutiny of the mortgage market. Fannie Mae's Single Family home loan business credit book in 2006 was at $2.34 trillion, at $2.65 trillion in 2007, and at $2.8 trillion as at 2008 when the company was set into Conservatorship. Amid this Period, Fannie Mae utilized three market fragments; Capital Markets, Single Family, and Multi-Family Markets.
The Federal National Mortgage Association (FNMA), and most commonly known as, Fannie Mae, was established in 1938 and plays an important role in the nation’s housing system. The company’s main responsibility is to serve the people who live in America, which involves purchasing loans and giving the mortgage lender cash in return (www.knowledge.wharton). Their mission statement says, “Fannie Mae serves the people who house America. We are a leading source of financing for mortgage lenders, providing access to affordable mortgage financing in all markets at all times. Our Financing makes sustainable homeownership and workforce rental housing a reality for millions of Americans” (fanniemae.com).
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
Are businesses in corporate America making it harder for the American public to trust them with all the recent scandals going on? Corruptions are everywhere and especially in businesses, but are these legal or are they ethical problems corporate America has? Bruce Frohnen, Leo Clarke, and Jeffrey L. Seglin believe it may just be a little bit of both. Frohnen and Clarke represent their belief that the scandals in corporate America are ethical problems. On the other hand, Jeffrey L. Seglin argues that the problems in American businesses are a combination of ethical and legal problems. The ideas of ethical problems in corporate America are illustrated differently in both Frohnen and Clarke’s essay and Seglin’s essay.
What does ethics have to do with accounting? Everything, since there have been some recent financial accounting scandals; a few examples being Xerox, WorldCom, Enron, which have generated much unwanted and unfavorable publicity for CPA's, including those working as controllers or chief financial officers for organizations.
The law requires auditors to report any fraudulent activities discovered during the course of an audit to the SEC. This is when Article I of Section 51 of the AICPA Code of Professional Conduct comes into play. The auditor may uncover illegal acts or fraud while auditing the financial statements of a company. In such instances, the auditor must determine his or her responsibilities in making the right judgment and report their discovery or suspicions of the said fraudulent activities. Tyco International is an example of the auditors’ failure to uphold their responsibilities. Tyco’s former CEO Dennis Kozlowski and ex-CFO Mark Swartz sold stocks without investors’ approval and misrepresented the company’s financial position to investors to increase its stock prices (Crawford, 2005). The auditors (PricewaterhouseCoopers) helped cover the executives’ acts by not revealing their findings to the authorities as it is believed they must have known about the fraud taking place. Another example would be the Olympus scandal. The Japanese company, which manufactures cameras and medical equipment, used venture capital funds to cover up their losses (Aubin & Uranaka, 2011). Allegedly, thei...
...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.
Freddie Mac is a financial services company. Congress chartered the company in 1970 with the statutory mission of providing liquidity, stability and affordability to the U.S. housing market. According to the company’s website, Freddie Mac’s main line of business is buying mortgage loans and mortgage related securities in the secondary market. Since they operate in the secondary market, Freddie Mac does not issue mortgages themselves but they buy mortgages, as whole loans, and mortgage backed securities for investment. The company also issues guaranteed mortgage-related securities that sell in the secondary market.
One of the most debatable topics in the accounting industry today is the extent to which we should make the financial statements understandable to the general population.... ... middle of paper ... ... While there is a great deal of controversy over neutrality, it is again important that FASB maintain a careful balance between cost and effectiveness.
“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.
The main ethical issue with the Enron scandal is that Enron allowed legal loopholes to supersede ethical principles (Bowen & Heath, 2005). Enron used legal principles to justify what they were doing instead of acknowledging that the accounting processes they were using were unethical. Another one of the ethical issues is that Enron faced was that
This unethical behavior started with Countrywide Financials’ top management: the cofounder Angelo Mozilo, the CFO, Sieracki,
In 2002, WorldCom’s bankruptcy was the largest in US history; WorldCom admitted that it had falsely booked $3.85 billion in expenses to make the company appear more profitable. Ebber who was CEO of WorldCom created fictitious some more than questionable accounting practices. Thus began the practice of taking an operating expense and reclassifyin...
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.