Accounts Manipulation - Essay Example

Reasons for providing inaccurate picture of accounts Firms may window-dress the financial ments in order to show a rosy picture of their accounts. In such a case, the whole exercise of analyzing the statements becomes useless. Window-dressing is also done to forecast a better picture to shareholders, bankers and financial institutions. It is a rosier picture that what it actually is. Window-dressing is accomplished in general ways - by not making adequate provisions though prudence would require them for expenses and potential losses, by taking into account income even before its actual accrual, by playing around with inter-corporate adjustments etc. "Security analysts earn their money basically in part, by advising investors of both private and institutional organizations on how to invest their funds. They may judge some companies to have good future prospects which are not fully reflected in the company's share price; therefore, their recommendation will be to buy the company's shares. Alternatively, they may judge other companies to have poor future prospects which are not reflected in their share prices; therefore, their recommendation will be to sell the company's shares. While security analysts carry out their own independent research into companies they can come to different conclusions about a company's future prospects. However, in most cases there tends to be a reasonable degree of consensus in these forecasts (simon, 1998)". "The primary purpose of financial statements is to show the underlying economic performance of a company. The balance sheet provides a snapshot of the assets, liabilities and capital of the business; and the income statement, or profit-and-loss account, shows the difference between total revenues and total expenses. The auditors analyze and assure that these present a fair view, acknowledging the subjective nature of some of the measures behind the accounts (Economist.com, 2002)". Financial statements are prepared for the purpose of presenting a periodical review or report on progress by management and deal with the status of investment in the new business and the results achieved during the period under review. They reflect a combination of recorded facts, accounting conventions and personal judgements, and the judgements and conventions applied affect them materially. The soundness of the judgement necessarily depends on the competence and integrity of those who make them and on their adherence to the Generally Accepted Accounting Principles and Conventions. Since each use of accounts may have a different focus in viewing the financial statement, it is necessary that the accounting statements are not biased in favour of anyone interested group. It is therefore, necessary for an accountant to ensure that the accounts represent a "true and fair" picture of the affairs of business. It may be often difficult to draw a clear line between true and untrue, and fair and unfair accounts; yet if the accountant prepares the financial statements free from any bias in favour of any user group and remains faithful to his self - conscience, chances are that the accounts thus prepared will be true and fair. As accou7ntants are human and prone to errors there would be the probability that the accounts presented are indeed less than true and fair. A reader of accounts must therefore, develop sufficient capability to see through such accounts or read between the lines to offset the biased presentation of accounts. The case of WorldCom The concept of evolution of WorldCom as a company happened in the year 1983 in Mississippi. The person behind this evolution is Bill Fields. He named the company as Long Distance Discount Services (LDDS). After some years the company was renamed as WorldCom. Since then the company grew step by step and transformed itself as a giant in the telecommunication world. The company is famous for its acquisitions of a number of small companies. The company landed in stage where no further large scale acquisitions were allowed by the US government. It was at this point the company began drifting. Political behaviour is something which is self-serving in nature and is not at all accepted by any organization. Political behaviour has a numerous negative consequences which may result in conflicts and disharmony within the organization. Such disharmony and conflicts can be noticed when people in an organization pit against one another or even against the organization. We can observe this kind politics been played by the employees of WorldCom. There was an instance when the Controller of the company David Myers made a false accounting entry of $370 millions as accruals. David Myers first asked the Director of International Fixed costs Mr. Timothy Schneberger to release the above mentioned amount as accruals. But as her refused to do that and also denied to provide the account number to Myers to make the entry, another senior manager in General accounting named Betty Vinson helped Myers in the task. The account number was obtained by Vinson from a lower level analyst in Schneberger's group and after this the entry was made by one of the subordinate of the analyst. This practice of releasing accruals as and when required continued and employees in the General accounting department also started doing the same thing. All this happened without the employees consulting their superiors or the department heads'. One more relevant incident happened when the General accounting department released an amount of $281 million against line costs from the tax department's accruals and the tax department was not aware of this act until the year 2001. The release of undue and false figures of accruals was easily done by making the employees act one against other. The work that was to be actually done by the respective employees was carried out by employees in a different department who were actually loyal to the top management rather than company. When David Schneeman, the acting CFO of UUNET refused to book 9 line accruals as instructed by David Myers for his business unit, staff in the department of general accounting made the entry. Finally, it so happened that an amount of $3.3 billion were released in a span of only one year. The corporate environment of WorldCom was not so healthy. The finance department of the company was located at Jackson, Mississippi. The department had none of the senior lawyers located in Jackson. The lawyers were kept away from the inner circle of the company or it's CEO. They were consulted only when the CEO Ebbers felt some necessity. Never was an advice given by the lawyers was like by Mr. Ebbers. He used to convey them personally, his displeasure about the advice, if any, given by them. The culture of WorldCom was created in such a way that the legal function was less influential and was not welcomed by a healthy corporate environment or culture. There was a severe attitude problem among the employees of WorldCom. The attitude of the employees sent a clear message that none of the employees should question their superiors and need to simply do what was instructed to them. Even the senior managers of different departments were not excluded from this. In fact, they used to face personal criticism and threats. A relevant example for this happened in the year 1999. One of the senior managers in the General accounting department was warned by Buddy Yates, director of General Accounting for showing the actual accounting figures in the accounts of the company. Employees in selected departments like finance, accounts and investor relations departments' were unduly rewarded by the Ebbers and Sullivan. They used to grant compensations beyond the salary and bonus guidelines approved by the company to reward selected employees who were actually loyal to them. This used to happen frequently. When in the year 2001, as there were only very few accruals left which were actually insufficient to achieve the targeted E/R ratio, David Meyers again committed the act of using the accounting principles to his convenience. The employees were asked to treat the cost of excess network capacity as a capital expenditure rather than operating cost as this would lead the company to enter the market in a very less time when demand becomes stronger than its current position. The financial figures of the company were almost all the times were misrepresented by the employees of the general accounting department. This was done for various reasons and as instructed by the top management. Sometimes it was deliberate and sometimes it was by mistake. This practice was not at all hindered as the external auditors focused on identifying risks in order to assess whether the company would be able to handle those risks. The auditors assumed that the accounting information that was recorded was valid. Even the board meetings were carried out according to a pre designed format. It was a regular habit that prior to one week of the board meeting, the board of directors was sent a packet that consisting the agenda, previous quarter's financial information, minutes of the earlier meeting, summaries of investor calls' and the necessary resolutions that were to be taken in the forthcoming meeting. Even the capital expenditures and line costs' information that were presented to the board were manipulated by Sullivan. The financial figures and other accounting information that were given regarding the company to the Board of directors and the Audit Committee were always false. At a later stage it was found out that the Board of the company was always distant and detached from the company's business and working. The political behaviour and mismanagement of both Ebbers and Sullivan are clear from all the above mentioned incidents that took place in the company and ultimately which lead to the failure of the telecommunication giant, WorldCom. The kind of malpractices and politics played by the top management and also the other employees of different departments' of the company who were loyal to the top management rather than organization clearly depicts that the consequences of the organizational failure were internal events and not anything else. The case of Enron "In October 2000, Enron's financial cover was blown and the financial house of cards that Andersen helped to create collapsed in five weeks. The implosion of Enron is the largest bankruptcy in American history. What is so staggering, so appalling, so outrageous is that this once $50 billion company melted to nothingness during the period November 8, 2001, when it restated its earnings retroactive to 1997, to December 2, when it filed bankruptcy (Audet, 2002)". On October 16, 2001, Enron Corporation of Houston, Texas, one of the largest corporations in the world, announced it was reducing its after-tax net income by $544 million and its shareholders' equity by $1.2 billion. On November 8, it announced that, because of accounting errors, it was restating its previously reported net income for the years 1997-2000. These changes reduced its stockholders' equity by $508 million. Thus, within a month, Enron's stockholders' equity was lower by $1.7 billion (18% of previously reported $9.6 billion at September 30, 2001). On December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. With assets of $63.4 billion, it is the largest US corporate bankruptcy (Hartgraves, 2002). "Enron's orgy of greed began in 1992 with the passage of the National Energy Policy Act which allowed power producers to compete for the sale of electricity to utilities. Enron was recklessly empowered by the Commodity Futures Trading Commission (CFTC), which issued an exemption for futures trading in energy derivatives. This was Enron's most lucrative business. Speculators, including Enron, used these financial instruments to drive the cost of wholesale electricity to astronomical levels. As it grew in size, the Enron octopus bought off political candidates with hundreds of thousands of dollars in campaign contribution to guarantee its success. The utter neglect of FASB, the SEC and the CFTC permitted Enron to run amuck and steal both investors and employees life savings (Audet, 2002)". "Enron's strategic plan was to dominate and monopolize the US energy trading market. The company was able to execute its plan beyond a felon's wildest dream with the help of many of its top line executives of the management. The report of a special committee of the Enron Board of Directors, chaired by William C. Powers), condemned Enron Chief Executive Officer Kenneth L. Lay and former CEO Jeffrey K. Skilling, Chief Financial Officer Daniel Fastow, and other Enron managers and consultants for maladministration of Enron stockholder equity (Audet, 2002)." To standardize the accounting information, every organization would have to establish certain accounting policies based on GAAP. Accounting policies encompass the principles, bases, conventions, rules and procedures adopted by managements in preparing and presenting financial statements. There are many different accounting policies in use even in relation to the same subject. Since the task of interpreting financial statements is complicated because of the adoption of diverse policies in many areas of accounting, in formulating the GAAP the three conventions of relevance, objectivity and feasibility are followed. "Generally Accepted Accounting Principles incorporate the consensus at a particular time as to which economic resources and obligations should be recorded as assets and liabilities by financial accounting, changes in assets and liabilities should be recorded, when these changes are to be recorded, how the assets and liabilities and changes in them should be measured, what information should be disclosed and which financial statement should be prepared (ICFAI Centre for Management Research ICMR, 2004)." Six accounting and auditing issues are of primary importance, since they were used extensively by Enron to manipulate its reported figures: (1) The accounting policy of not consolidating SPEs that appears to have permitted Enron to hide losses and debt from investors. (2) The accounting treatment of sales of Enron's merchant investments to unconsolidated (though actually controlled) SPEs as if these were arm's length transactions. (3) Enron's income recognition practice of recording as current income fees for services rendered in future periods and recording revenue from sales of forward contracts, which were, in effect, disguised loans. (4) Fair-value accounting resulting in restatements of merchant investments that were not based on trustworthy numbers. (5) Enron's accounting for its stock that was issued to and held by SPEs. (6) Inadequate disclosure of related party transactions and conflicts of interest, and their costs to stockholders (Hartgraves, 2002). Accounting Bodies all over the world have tried to achieve some uniformity in the accounting policies by prescribing certain accounting standards in order to narrow the range of alternatives available to an organization in respect of collection and presentation of accounting information. Though the various accounting bodies have strived hard and arrived upon a set of standard principles, companies like WorldCom and Enron, these days are leaving no path in misusing these standards for their own convenience. Bibliography 1. Accounting Fraud at WorldCom. PDF (Page numbers. 3 - 6) 2. Organizational politics and employee stand. PDF (Page numbers. 482 & 483). 3. Audet, J. R. (2002). An Octopus of Greed - The enron Financial Web Corruption. Quarterly - Report.com. 4. Economist.com. (2002, May 02). Badly in Need of repair. Financi & Ecoonomics: Economists.com , pp. 1-5. 5. Hartgraves, G. J. (2002). Enron: what happened and what we can learn from it . Atlanta: Goizueta Business School. 6. ICFAI Center for Management Research ICMR. (2004). Financial Accounting & Financial Statement Analysis. Hyderabad: ICFAI Center for Management Research. 7. Kay E.Zekany, L. W. (2004). Behind Closed Doors at WorldCom: 2001. New York: McGraw Hill. 8. Romar, D. M. (2002, March 3). WorldCom. Retrieved June 30, 2008, from Santa Clara University: http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html 9. simon, J. (1998, May 01). Why do companies use creative accounting Association of Chartered Certified Accountants - Articles , pp. 4-7. Read More