StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Effect of Accounting Impropriety and Enron Scandal - Assignment Example

Cite this document
Summary
As the paper "Effect of Accounting Impropriety and Enron Scandal" tells, Jeffrey Skilling, the former CEO of the company, had managed to create an illusionary financial status for the company through accounting loopholes, unsupported financial reporting practices, and special purpose entities…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.6% of users find it useful
Effect of Accounting Impropriety and Enron Scandal
Read Text Preview

Extract of sample "Effect of Accounting Impropriety and Enron Scandal"

? Finance and Accounting: Discussions Discussion Enron Scandal Enron Corporation was the largest natural gas dealer in North America. Enron’s stock prices rose by 311% over the 1990-98 period and on the strength of this great growth rate, the Fortune’s Most Admired Company survey chose Enron as the most innovative large company. However, the Enron’s indecipherable business nature and vague accounting practices caused stock price falls, SEC investigation, and credit rating downgrade. Later on reports came out that Jeffrey Skilling, the former CEO of the company, had managed to create an illusionary financial status for the company through accounting loopholes, unsupported financial reporting practices, and special purpose entities. The Enron fraud was revealed to the public in October 2001 and this ended up in the bankruptcy of the organization. While analyzing the Enron accounting impropriety, it appears that the company executives exploited accounting limitations with intend to create a false view of the cash flows and to prepare a misleading balance sheet. This inflated the profits. Fair accounting practices and proper annual reporting might have prevented the Enron scandal. Effect of Accounting Impropriety Although improper or illegal accounting practices may assist a firm to gain short term financial benefits, such practices can have dreadful consequences on the company in the long term. Undoubtedly, accounting malpractices will reduce stakeholder confidence in management and hence investors would be reluctant to invest in the company. This situation may adversely affect the firm’s overall financial performance. Management professionals opine that active stakeholder engagement in business is inevitable to improve financial performance. Hence, in order to minimize the resulting impact of accounting impropriety on the business, making timely changes to the top management team and to publish proper annual reports is essential. Discussion 2 Bookkeeping and Accounting The statement ‘bookkeeping and accounting are the same’ flaws. Bookkeeping can be simply defined as the process of recording a business entity’s day to day transactions in chronological order whereas accounting refers to the art of recording, classifying, summarizing, analyzing, interpreting, and reporting. Hence, it can be stated that bookkeeping constitutes the basic part or starting point of the accounting process. As Banerjee (2010) states, the scope of bookkeeping is restricted to systematic and repetitive recording of business transactions in ledger accounts through journal. In contrast, the accounting process involves the preparation of Trial Balance, Profit & Loss A/c, Income Statement, and Balance Sheet using accepted accounting principles. While bookkeeping is only a clerical job, accounting is an analytical job (p.4). Accounting Equation Accounting equation also referred to as balance sheet equation, reflects the relationship between assets, liabilities, and owner’s equity of a business. This equation is linked to the concept that total debits equal total credits. The accounting equation can be expressed as Assets = Liabilities + Capital. As accounting equation is fundamental to the double entry bookkeeping system, it can greatly support the work of professional accountants. More precisely, this equation is the basic idea behind the preparation of balance sheet. A good understanding of this equation can assist stakeholders, particularly investors to form potential business decisions. While making business decisions, it is important to give specific focus to liabilities rather than assets. Discussion 3 SOX and Accounting Professionals The Sarbanes-Oxley Act (SOX) has been recently introduced in the United States to promote fair reporting of asset valuation. The SOX framework necessitates proper financial accounting disclosure and therefore organizations are required to produce complete information of assets, depreciation, values, and status in any accounting period (Omnix Asset Management, n.d). As the SOX has precise standards for accounting practices, it is easy for accounting professional to effectively comply with legal accounting standards to successfully defend future lawsuits claiming damages. Furthermore, it gives a systematic framework for accounting practitioners, and hence they can easily complete their work within the stipulated time period. “SOX has created an opportunity to provide tax services to corporations that need to divvy up work among various firms” (Accounting web, June 6, 2005). SOX and Investors Section 401 of the SOX framework has set provisions for certain procedures that can make certain accurate disclosures in periodic reports. These accounting procedures prevent companies from inflating or deflating profits and thereby check fictitious financial reporting practices. According to the Section 802 of the Sarbanes-Oxley Act (as cited in Legal Information Institute), the violation of SOX standards is considered to be a criminal offence and therefore the defendant shall be fined or/and imprisoned. It puts a moral check on accounts and auditors and persuades them to act in strict compliance with the SOX framework. Evidently, this situation is helpful to ensure a true and fair view of the state of affairs of the company. This in turn would reinforce creditors’ and investors’ confidence in the firm. Discussion 4 Treatment of Environmental Costs For the Chief Financial Officer (CFO), it is better to state costs related with pollution, environmental-disposal, or demolition problems in the in the ‘expenses’ column of the income statement. The CFO may also add this item on the asset side of the balance sheet because environmental spending adds value to the goodwill of the organization. Today many companies prepare separate sustainability reports also along with their financial statements to demonstrate their environmental responsibility. The top management is likely to discourage this proposal as it is not a common practice in financial reporting. However, the management’s resistance to change can be overcome by citing the fact that this practice would contribute to the firm’s goodwill. Advantages and Disadvantages One of the notable disadvantages of recording environmental costs in the financial statements is that it increases accounting complexity. Hence, this practice may cause to delay the preparation of financial statements by the end of the accounting period. Despite these minor drawbacks, this financial reporting practice is very effective to improve the public image as well as brand loyalty of the organization. Today people are increasingly concerned about environmental sustainability. Hence companies allot a portion of their revenues for environmental protection with intent to gain high market reputation. At this juncture, the practice of recording environmental costs in financial statements would assist firms to communicate their environmental responsibility directly to stakeholders. Undoubtedly, this practice can improve the firm’s public image, which in turn would attract potential investors and thereby promote business growth. References Accounting web. (June 6, 2005). Smaller Accounting Firms Reap Benefits from SOX. Retrieved from http://www.accountingweb.com/topic/cfo/smaller-accounting-firms-reap-benefits-sox Banerjee, B. K. (2010). Financial Accounting : Concepts, Analyses, Methods And Uses. PHI Learning Pvt. Ltd. Legal Information Institute. 18 USC § 1519 - Destruction, alteration, or falsification of records in Federal investigations and bankruptcy. Cornell University. Retrieved from http://www.law.cornell.edu/uscode/text/18/1519 Omnix Asset Management. Retrieved from http://www.avw.co.nz/catalogue/images/andrew/docs/BR-100682-EN.pdf Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Discussions Assignment Example | Topics and Well Written Essays - 1000 words”, n.d.)
Discussions Assignment Example | Topics and Well Written Essays - 1000 words. Retrieved from https://studentshare.org/finance-accounting/1482703-discussions
(Discussions Assignment Example | Topics and Well Written Essays - 1000 Words)
Discussions Assignment Example | Topics and Well Written Essays - 1000 Words. https://studentshare.org/finance-accounting/1482703-discussions.
“Discussions Assignment Example | Topics and Well Written Essays - 1000 Words”, n.d. https://studentshare.org/finance-accounting/1482703-discussions.
  • Cited: 0 times

CHECK THESE SAMPLES OF Effect of Accounting Impropriety and Enron Scandal

Research proposal: Imbedding Ethics as a Risk Management Strategy

The case of Enron, Worldcom, Arthur Andersen, Parmalat and “the KPMG tax shelter fraud case in particular proves that the tax profession has not gone untainted in the age of accounting and corporate scandals (Sikka and Hampton 2005 qtd in Doyle et al 2009:177).... In addition, the recent scandal involving Barclay'...
15 Pages (3750 words) Thesis Proposal

Accounting Fraud: Enron Accounting Scandal

The research focuses on the study of the Enron accounting scandal.... Accounting Fraud: Enron Accounting scandal Accounting scandals can be easily prevented.... The research focuses on the study of the Enron accounting scandal.... Clikeman (7) reiterated the investigation found that the scandal –tainted officers presented a deceitful illusion of a company that was generating huge profits through the use of several factors....
12 Pages (3000 words) Term Paper

Policy Proposal to Institute Ethics in Business

They are sure that by now, one already realized the devastating effect of unethical business practices on the US economy and the world.... Unethical business practice is not only bad for business in terms of the economic losses attendant to it but it also has a ripple effect of eroding confidence in the business community business that businesses themselves would hesitate to expand due to its perceived uncertainty of the general economic environment of the US....
8 Pages (2000 words) Essay

Accounting Scandal

he enron scandal is credited for.... This is know as the “agent” and “merchant” models of accounting.... The scandal is cited in most corporate governance texts and it explains a lot about the need for strong controls and honesty in financial reporting. ... lthough no evidence was found that proved that there was direct bribery from the staff and management of Enron to public officials, many of them were found guilty for their involvement in what became a scandal....
5 Pages (1250 words) Research Paper

The Auditors Independence and the Mandatory Auditor Rotation

On the other hand, the model predicted a direct and positive effect of partner rotation on both auditor independence and quality of the audit.... Auditor's independence is a critical issue that is broadly discussed in the business world, especially after the world-known scandal of Enron.... Auditor's independence implies performing duties 'free of subjective biases and professional impropriety".... ecently, the American accounting Association has published the results of the survey carried out by Daugherty et al (2013)....
8 Pages (2000 words) Essay

Arthur Anderson: Questionable Accounting Practices

As one of the most popular and largest accounting organizations in the US, Arthur Andersen had become synonymous with integrity, trust and high ethical standards.... here are accounting requirements and practices that organizations are expected to legally comply with, and these requirements are divided into five categories.... ccording to Carnegie (2011) and Thomas and Mark (2011), the legal and ethical issues surrounding Arthur Andersen's auditing and accounting practice were characterized with accounting practices....
4 Pages (1000 words) Term Paper

Policy Proposal to Institute Ethics in Business

Unethical business practice is not only bad for business in terms of the economic losses attendant to it but it also has a ripple effect of eroding confidence in the business community business that businesses themselves would hesitate to expand due to its perceived uncertainty of the general economic environment of the US.... That is more devastating than what enron and the company did to the US economy for it is already a crisis of confidence of which we will not know when it will be over....
8 Pages (2000 words) Essay

Governance and Fraud

The scandal involving Enron and its officials has been described as the largest corporate failure in history precipitated by poor corporate governance approaches by the management of the company.... The scandal involving Enron and its officials has been described as the largest corporate failure in history precipitated by poor corporate governance approaches by the management of the company.... The scandal involving Enron and its officials has been described as the largest corporate failure in history precipitated by poor corporate governance approaches by the management of the company....
14 Pages (3500 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us