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Corporate Collapse Case Study Part 2 - Essay Example

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Corporate Collapse Case Study Part 2

In USA this procedure is a part of fraud accounting but in the UK it is used to provide flexibility in the existing accounting and regulatory system of the company. The sole purpose of accounting is to provide a true and fair view to the users of the financial information (Larson, 2008). Creative accounting does not necessarily mean the violation of GAAP rules or breaching of any terms and condition of the company. The accountants generally use this concept to insert flexibility in the accounting system and deliver a true and fair view to the users of the financial report and information (Jones, 2011). Mark to Market accounting on the other hand is used for updating the value of an asset or a liability to reflect the real market value of the asset/ liability (Wolnizer, 2003). This was mainly used for transaction related to future exchange and recently it is been used by banks and other financial institutions. This method got official recognition in the year 2009 by FASB (Financial Accounting Standard Board). This method was used to prevent inappropriate use of financial value. Companies usually use this method for assets and liabilities but it is also used for future exchanges to meet the profit margin requirements. If the margin accounts are not monitored regularly then the current market value could drop drastically below the required levels. The process of internal audit adds significant value by preventing fraud accounting within the company and improving financial control. Audit failure leads to misappropriation of funds and non detection of fraudulent activities within the company. Companies which rely on external source for internal auditing process are likely to detect less error than those who conduct the process themselves (Idowu and Caliyurt, 2012). Examples of failure in the accounting procedure One of the most controversial accounting scandals was the “Enron scandal” in which Enron Corporation, a Houston based energy, service and commodities corporation filed for bankruptcy in October 2001. The shareholders of the company lost $74 billion and thousand of employee lost their retirement accounts and jobs. The CEO of the company Jeff Skilling and former CEO Ken had not portrayed the huge debt amount in their balance sheet. In October 2000, the share price of the company skyrocketed to $90 per share and later in the November, 2000 the stock price dipped to $1(Bierman, 2008). The stock price of the company went down because Sherron Watkins, an employer of the company had raised suspicion about the high stock prices through the whistle blowing method. The CEO of the company and his accomplice was eventually caught and were termed for 24 years in prison (Accounting Degree, 2013). This had tarnished the image of Enron Corporation completely and the management of the company who had sought plans for IPO (Initial Public Offering) for the internet department could not continue with the plans of IPO. Another similar incident which had sparked controversies in USA was popularly known as the “World com Scandal”. In the year 2000, the CEO of MCI Communications Mr. Bernie Ebbers became one of the wealthiest men in the nation even amidst the financial crisis faced by the telecom ...Show more

Summary

Corporate Collapse of Lehman Brothers Table of Contents Table of Contents 2 Fraud, Creative, Mark to Market accounting and poor auditing 3 Examples of failure in the accounting procedure 4 Role of Accounting in Corporate collapses 5 The collapse of Lehman Brothers 6 References 9 Fraud, Creative, Mark to Market accounting and poor auditing The procedure of using fictitious accounting transactions which are generally prevented by the GAAP (Generally accepted accounting principles) is known as fraud accounting…
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