American Accounting Scandals
o Companies Under Investigation: Adelphia Communications, WorldComo Fact: Adlephia Communications caused losses of over 60 Billion to investors A company books its everyday, ordinary, operating expenses under capital expenses Problem is according to GAAP capital assets expenses can be spread out for the duration of use Example: WorldCom transferred over $3.83 billion in operating expenses to property plant and equipment accounts in their ledger. This it inflates income because expenses that are supposed to be recognized in a certain time period are now spread out. Causes an inaccurate EBITDA (Earnings before interest, taxes, depreciation, and amortization) Analysis which is widely used by stakeholders to measure a company's healtho Companies Under Investigation: Adelphia Communications, Enron, WorldCom, Xeroxo Fact: Enron hide over $1 Billion Dollars in Debt "Companies will move liabilities and debt off the books by moving them into different entities." A loophole in GAAP allows companies to create legal structures called special purpose entities (S
* Network Capacity Swapso Companies Under Investigation: Global Crossing, Qwesto Fact: Global Crossing bankruptcy caused investors a loss of $54 billion and loss of 10,000 jobs Telecommunication companies swap their network capacity with another company Then book this as two separate transactions 1. If a parent company supplies 97% of the initial investment and an outsider supplies the other 3% is does not have to consolidate it with its financial Statements. o Makes it harder for several accounting firms to miss or purposely over look mistakes. If more strict rules had been implemented 6 of the people on Enrons audit committee would have bee ineligible. o "result in a periodic `fresh look' at the institution from an audit perspective to the benefit of investors and regulators,"o Auditors would not participate in certain practices if someone new was coming the next year o Problems could arise due to a waste of time and money considering each auditing firm would have to learn about the company each time. html Once again this puts direct accountability onto the CEOs They can no longer claim they did not about something This will also scare off other management from trying to conceal This also puts some respect of the CEO back into the publico Cons It doesn't necessarily deter the CEOs form doing something wrong if they were going to do it before they probleay It can cause massive cover ups Some people simple do not trust CEOso Increase Shareholder involvemento Truly have a way for the shareholders to discuss their concernso Have board communicate more with Shareholders Mandating that shareholders vote on all equity-based compensation plans, including stock option plans;o o Auditors Have to Dig Deepero Forensic accounting practices should be included in all auditso Proso Will find cases of fraud sooner before they spiral out of controlo The higher cost out ways the billions lost each year due to corporate fraudo Cons o Will have to train most accountants on forensic accountingo Could be a waste of time in the endo Increase Employee Accountanbiltyo Employee Accountabliltyo Auditors Accountabliltyo The Definition oF an Independent Board Member should be redefinedo Former employees should have a longer period to wait before becoming a board also independent board members should not include immediate family to mangament or not be a paid consultant. " o Employees will raise concerns and be more open to come forward with problems* Government Regulation of the Accounting Professiono Self-Regulation has proven ineffective with so many different bodies in charge and no legal powero Would put one main body in charge the governmento Steps have already been made by US government with the Sarbanes-Oxley Act and the development of the SRO* Rotation of Auditorso A rotation would help companies ensure proper accounting procedures within their company. o The Board Should Have complete Authority over the hiring and firing of the auditing firm This will lessen chance of an auditing firm to having a conflict of interest with management This increased sense of responsibility will empower them Gets the Board more involved in the firms Financials because auditors will report all information to them Help Board members who lack a financial background The auditors would get changed around more often as different Board members would prefer different auditorso The downside Board members could firms they have a conflict of interest with Could cause animosity between Management and the Boardo CEO Accountabilityo The mandate by president bush to have all CEOS sign yearNYSE-listed companies to attest to the accuracy, completeness and understandability of information provided to investors; http://www. * Change Accounting Ruleso Find and change the loopholes and inconsistency quickero Accounting Boards having been arguing about showing options and SPEs for years and are finally doing something nowo Should now look at rules for international companies o Be more proactive* Do not let Auditing Firm do Consulting for Companyo Accounting firms have become very dependent on consulting feeso This can create a conflict of interest situationso Especially when Accounting firms are making more off some companies for consulting then auditions http://www. " Increases a companies trading volume, revenues and COGS Purposely misleading to stakeholders. You would break through all of these independence issues very clearly and neatly with rotation. The Following stakeholders should have increased responsibility and accountability:o Board Accountabilityo Limit Number of Boards a Member can belong to Therefore Board Members can feel a true commitment to one company Give complete dedication and expertise Feel bigger sense of responsibility towards a single companyo Fully Educate Board Members as to their Responsibilities and to the Importance of their job Implementing a mandatory class or training session Then a test to ensure they comprehended duties Include such things as warning signs of fraud this will help many board members know what red flags to look for Making Board members sign a contract stating that they understand their impact and responsibilities By them signing a document this would make them feel more accountable Educating Board Members on the day to day operations of company can give them more insight and a greater sense of the organization Gives Board members a responsibility to live up too The down side of this is: Some may find it silly and not take the course seriously It might undermine the intelligence of some board members It would be time consuming and expensive to develop a proper program and a question would be whow would pay for it.
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Acceptance Essays
