The Role of Accounting in Society, 2002 WorldCom Scandal - Essay Example

Author’s name Instructors’ name Course Date Table of Contents The Role of Accounting in Society 1 1 Table of Contents 2 Introduction 3 A Brief Overview of Accounting Fraud 4 Analysis of the 2002 WorldCom Scandal 4 A Brief Analysis of the 2005 American International Group (AIG) Scandal 6 Conclusion 11 Bibliography 12 Introduction There have been issues in accounting for many years and more so the role that accountants play in the society. The core role of accounting profession is to serve the society under various capacities. Therefore there is no doubt that the problems found in the accounting profession are direct reflections of the society. Over the years accounting has been known to play a great role in many areas in the society. There have been debates on whether accountants have been objective or subjective in their work. The current development and with social changes, continue to raise these questions. In this regard, many scholars have developed their own views of this scenario. I believe that at the same time, accounting, objective or subjective; continue to play a critical role in decision making process in organizations or in the entire society. The problems found in the society directly influences how accountants interpret accounting issues. I therefore agree with Morgan on the fact that accountants are always objective in the interpretation instead of being objective. The main concern is the ethical standards of the entire society that accountants need to follow in their work. Therefore, this paper concentrates on the ethical issues in accounting which illustrate how the society is and its influence in the decision making in accountancy. On this note, two examples will be given out to emphasize the unethical actions in some major companies in the world. The first case will be the WorldCom scandal that took place in 2002. The second example is the 2005 accounting scandal in the American international group (AIG). These two examples will be used to show the relationship that exists between accountancy problems and the society. A Brief Overview of Accounting Fraud In any business, the main objective is to make profits. There are different stakeholders whose aim is to ensure their interested are catered for by the business. In some instances it becomes challenging for management to balance all these stakeholders. This is more the case when a business is not doing well in the market. It is in such circumstances that accounting fraud takes place. This an attempt by various players in the business or in a company to manipulate accounting figures to favor them or portray an incorrect company’s image. Accounting fraud comes in different levels and various players are included (Goran Svensson et al 2003, pg. 358). The management of any company is interested in safeguarding the employment of its members and hopefully getting promoted from one level to another. On the other hand, investor’s interest is to see that their investment is giving them some income from the company’s performance. At the same time, creditors want to see their money repaid as par the agreed time period without any failure (Goran Svensson et al 2003, pg. 360). These are some of the examples of why accounting fraud has become such common in the society. The examples below depict how this type of fraud has entered into large and multinational corporations in the world. Analysis of the 2002 WorldCom Scandal A good example of the financial scandal is that of WorldCom international which was later called MCI Inc. this company was founded in 1983 Ashburn, Virginia UAS. It was in 1999, that the company announced its merger with the Sprint Corporation. This merger attracted an agreement of $129 billion (Orin 2008, pg. 145). However the deal did not take place due to the opposition from the US Department of Justice as well as the European Union. The concern was that this could bring a monopoly. Therefore, the board of director met in October 2000 where the merger was cancelled as a result. The price of the CEO, Mr. Bernard Ebbers’ holdings in the common stocks of the company increased and thus he became very wealthy (Pascoe et al 2011, pg. 144). In the year 2000 the decline of the telecommunications industry started to be felt .therefore the aggressive growth of WorldCom’s strategy also started to go down. This was partly because the company’s merger with Sprint had been stopped by the U.S. Justice Department. At the particular time the stock price of WorldCom was decreasing while at the same time, increasing demands were being placed on Ebbers in order to cover his margin calls on the company stock and his other business. Through the leadership of Mr. Ebbers, David Myers (controller), Scott Sullivan (CFO) and Buford "Buddy" Yates as the Director of General Accounting applied fraudulent methods of accounting to caution the continued decreasing of the company’s earnings(Pascoe et al 2011, pg. 166). These methods which started to be applied from mid-1999 through 2002 were meant to ensure the prices of the WorldCom’s stock remained stable. However, Mr. Ebbers would later resign to be replaced by John Sigmore. This team accomplished the fraud in two ways. They ensured that line costs which were merely interconnection expenses with other telecommunication companies write booked as capital expenditure instead off expenses on the company’s balance sheet (Orin 2008, pg. 156). The second way was to ensure that company’s revenue were inflated with bogus entries from unallocated corporate revenue accounts. A small team of internal auditors in the company later started conducting instigation secretly. The team discovered that around $3.8 billion worth of fraud had taken place (Pascoe et al 2011, pg. 157). The company’s board of directors and audit committee were informed and swiftly acted on the matter. As a result Myers resigned from his position while Sullivan was dismissing ed. The U.S. Securities and Exchange Commission (SEC) commenced an investigation on this issue on June 26, 2002 (U.S. Securities and Exchange Commision 2012, pg. 211). Mr. Sigmore who would die in December 2003 due to acute pancreatitis, was very instrumental in turning the company around and revealing the fraudulent actins of Ebbers to the regulators. It was estimated that the WorldCom total assets had been inflated to a tune of about $11 billion by the end of 2003.before the 2008 exposure of Bernard Madoff's of $64 billion Ponzi scheme, this accounting fraud was considered to the largest in the American history. The above unfolding, made the company to file for the bankruptcy protection but it was fined $750 million to be paid to SEC in cash and stock (Orin 2008, pg. 167). As a result, the company changed its name to MCI and also relocated its headquarters from Clinton Mississippi to Dulles in Virginia. WorldCom and the SEC had concluded a deal where WorldCom accepted to pay $2.25 billion as a civil penalty. Many shareholders and creditors criticized the the entire revelations and they had to wait for two years to be paid their money. Later, in July 13 of 2005, Mr. Ebbers was imprisoned for 25 years for fraudulently filing wrong documents with regulators. A Brief Analysis of the 2005 American International Group (AIG) Scandal AIG is a Multinational insurance corporation which was involved in a massive accounting fraud of $3.9 billion, bid-rigging as well as manipulating stock price .The AIG Chairman, Mr. Maurice R. "Hank" Greenberg was pressured to step down in March 2005, after there were damning allegations of inflating accounting figures. The scandal has grown for a while which attracted an investigation into to two reinsurance transactions. It was in Mar. 30 of 2005 that AIG management acknowledged that it had wrongly accounted for the reinsurance transaction in order to bolster its reserves. Other numerous accounting problems were also revealed. There was also some delay in filing its yearly 10-K. it was estimated that these moves inflated the company’s net worth to about $1.7 billion . AIG stock reduced by 2.1% and the Standard & Poor's (MHP) downgraded AIG's debt rating to AA+ from AAA(U.S. Securities and Exchange Commision 2012, pg. 215). After investigations were conducted the company was made to pay the Securities & Exchange Commission as well as Justice Department some huge amounts of money for violating accounting and insurance rules. These included the $10 million paid to the SEC in 2003 and $1.64 billion in 2006. It also attracted the $115 million Louisiana pension fund as well as $725 million for 3 Ohio pension funds (U.S. Securities and Exchange Commision 2012, pg. 213). The Chief Executive Director was fired although he never received any charges. The main reason for the continued manipulation of figures in the accounting profession can be attributed to the objectivity nature of accountancy work. This has been widely been discussed by Morgan Objectivity and Subjectivity in accounting has been the main concerns of many people. For many years, accountants have been objective in addressing issues that affect the society. Accountancy is complex and paradoxical in nature (Morgan 1988, pg. 482)). Therefore assuming that it will offer a real objective picture of a scenario is misplaced. This why WorldCom was declared bankruptcy due to such perception.It is true that the accountants are able to show how objectively they have presented the information based on the accountancy principles. This means their hands are tied since they have to follow the laid out guidelines. According to Morgan, the reality is that accountants are guided by the policies and are only able to present information partially. He believes that the provision of accountancy services and information is done objectively, therefore making it difficult for them to change their approach toward societal issues. It is only after various changes have taken place in the world that the desire to relook the theoretical approach to accountancy has taken pace. To some extent, accountants are responsible for accounting fraud ion the society. It is obvious that in the above examples, accountants are directly or indirectly involved in accounting frauds. Therefore, accountants have come under attack from different stakeholders for failure to capture the real situation on the ground. In such cases, accountants have been unable to defend themselves (Schaltegger et al 2006, 213). According to Morgan, It is advisable for the accountants to accept the loopholes that exist in the profession, in order to change how work is carried out. The acceptance that accountancy has changed for the last few decades can go a long way in ensuring that common agreement is achieved and effective measures are incorporated in the accountancy policies and guidelines. It should be agreed that accountancy is more of subjective than objective. This recognition is helpful for the future strategies and changes in the profession. The interpretative nature of accountancy can also be linked to the malpractices seen in the accounting profession. The ethical issues of both AIG and WorldCom companies are based on the belief that by interpreting financial situations, any business will be able to position itself in the market. The interpretive nature of accountancy in the society is evidenced in many instances as shown in the above illustration. As mentioned above, accountancy is one of the most complex and intermeshed systems in the society. It involves various stakeholders. The role in the current accountancy profession in the society is to define and give accounts of how issues are. This is subject to many other conditions. Therefore, accountants need to realize that they are part of the wider group of stakeholders trying to construct realty in a given scenario (Schaltegger et al 2006, 189). In these circumstances, accountants may not have a strong say (Elliott 2010, pg. 198). They are in most cases answerable to the ‘owners’ of such institutions. If this was to be noted by accountants, then constructive steps could be made on the way forward. It is therefore evident that business people to explain reality in a partial way misuse accountancy. They use this information to make future decisions. In addition, the view that accountancy is expected to improve the organizational culture of a company has also played part in fueling accountancy fraud in in the society. In any organization, there is a way activities are conducted (Sale 2007, 166) .The employees, employers and management are used to a given mode of doing business in their organization. This is also the case in matters to do with accountancy in the same organization. As has already been noted above, they use accountancy to make future decisions, by partially defining the reality of business situations. It is agreeable that accuracy also plays an important role in shaping organizational culture of various businesses (Macintosh et al 2009, pg. 244). The figures are recorded in people’s minds. The employees and owners are made to believe the partial information given and their minds are fixed in one direction. It is also worth noting that accountancy can affect an organization negatively. The information which is presented may show unimaginable and unforeseen variance. If these variances are not noted and fixed as early as possible, the organization might be misdirecting its efforts. This is where accountancy is criticized by not showing the reality. According to Chapman, in such cases, the accountant should not be blamed since he is working under the professional code of conduct of ‘objectively ‘assessing accounts. In addition, in most cases, where the figures show good performance of a business or country’s economy, the result is that those responsible might be tempted to relax and forget that this is not the case. These perceptions can adversely affect an organization or a country. Therefore, it is prudent for all stakeholders to scrutinize the ‘reality’ of accounts in order to avoid misdirecting their efforts. Finally, the metaphorical nature of accountancy is also responsible for the ethical issues in the accounting profession. As shown in both AIG and WorldCom scenarios, accountancy is one of the professions that find themselves in a complex system with many stakeholders. Different players do all what they could, to ensure that numbers and figures favor them (Jorge 2008, pg. 271). In this concern, accountants find themselves in dilemmas of trying to please various stakeholders. The process of representing the worth of a business or examining some aspect of business performance in form of numbers leaves some other factors not accounted for. These factors are those which cannot be quantified. This point comes clear in the Morgan’s argument. The social aspects, which are not quantifiable and which affect the performance of any business are not considered in accounting. This is well indicated in the case study above .Therefore, accounting ends up representing or presenting the performance of an organization in a partial manner. As stated above, the failure or success of an organization also depends on how the process of accounting has been conducted. It is correct that accountancy plays a critical role in giving the bigger picture of an organizational performance. However, it is notable to cover different aspects that make figures be the way they seem. Conclusion In summary, based on the above examples and consequent points of views, it is clear that problems in accounting are direct reflections of how the society presents itself. Accounting profession is viewed as one of the respected careers in the society. However, it equally attracts criticism from different quarters, just like any other profession. Therefore, it means that accounting touches almost every part of the human survival. The argument of whether accounting profession is important in the society should not even arise There is no any business which can operate without accounting. The degree of accountancy in various business environments is what matters. This depends on the size of the business. The success or failure of any business is determined by the efficiency in accounting. The above case studies show how accounting can have negative to the society. As has been mentioned, accountants are in most cases forced to interpret situations depending on how ‘stakeholders ‘want. The impact of such situations could be as bad as what happened in both AIG and the WorldCom companies. The misrepresentation of the facts through accounting leads to misinterpretation of situations. On the same note, social factors are mostly ignored in the accounting process, which leads to partial interpretation of facts. Bibliography Chapman, C. S., Hopwood, A. G., & Shields, M. D. (2007). Handbook of management accounting research. [Volume 2] [Volume 2]. Amsterdam, Elsevier. Chapman, C. S., Hopwood, A. G., & Shields, M. D. (2009). Handbooks of Management Accounting Research 3-Volume Set. Burlington, Elsevier. Elliott, G., Fourali, C., & Issler, S. (2010). Education and social change: connecting local and global perspectives. London, Continuum Goran Svensson, G. W. (2003). The dynamics of business ethics:a function of time and culture- cases and models. Management Decision , 350-361. Jorge, S. (2008). Implementing reforms in public sector accounting: comparative international governmental accounting research (CIGAR). Coimbra, Universidade de Coimbra / Coimbra University Press Macintosh, N. B., & Quattrone, P. (2009). Management accounting and control systems: an organizational and sociological approach. Hoboken, N.J., Wiley Morgan, G. 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