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American Accounting Scandals - Essay Example

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Running Head: American Accounting Scandals American Accounting Scandals American Accounting Scandals Introduction In the aftermath of the financial recession that rocked United States and the entire world, policymakers, stakeholders, experts and other observers are raising their fingers on various events, policies, and happenings that led the country to this disastrous recession…
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American Accounting Scandals

Download file to see previous pages... 55, 2009). Interestingly, this is not the first time in the history of United States that its accounting practices, approaches and system has received criticism and strict scrutiny from its stakeholders. After the bankruptcy of Enron and WorldCom in 2001 and 2003, respectively that was also the biggest accounting scandals of their time, the US accounting practices made the headlines all over the world (Ketz, pp. 234, 2003). This paper is an attempt to explore the accounting standards whether they are too flexible or too rigid. The discussion would include looking over the causes of Enron’s bankruptcy rooted in its accounting problem, debate between rules based accounting and principles based accounting and the problems with the possible convergence of accounting standards all over the world. ...
144, 2006). Non-transparent and unethical accounting was the most important cause attributed to the failure and downfall of Enron. In the year 2004, McLean wrote Enron scandal that, “The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control” (Silverstone & Sheetz, pp. 22, 2007). Furthermore, another writer in an attempt to explain these “habits and values” wrote that, “the primary motivations for Enron's accounting and financial transactions seem to have been to keep reported income and reported cash flow up, asset values inflated, and liabilities off the books. (Duska, Duska, & Ragatz, pp. 74-75, 2011)” Without any doubts, Enron had some of the smartest minds in the company, as its executives and accountants, who were spot on in tweaking and twisting, the accounting laws to their advantages (Rapoport & Dharan, pp. 106, 2004). They used off balance sheet vehicles, complex financial structures and others to hide their debts and inflate their incomes. Furthermore, the mark to market accounting further allowed the company to manipulate its financial figures for deceiving the shareholders, creditors and other stakeholders. More importantly, Enron used the ambiguities and gaps in the mark to market accounting to inflate its income (Rezaee, pp. 175, 176, 2002; Mulford & Comiskey, pp. 44-46, 2005). Mark to Market accounting method requires showing the net present value of the cash flows from any long-term project and adjust the values of market assets according to the current market value. However, the problem with this method is that under certain situations and for certain projects, correct, accurate, and timely predictions about their future ...Download file to see next pagesRead More
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