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... t-off fraud. 'Under SAB 1010 issued 1999, the SEC established four main criteria for proper revenue recognition: evidence than an arrangement between a buyer and a seller exists, delivery of a product or rendering of a service, a set or determinable price, and an insurance that payment can be collected. ' (Revenue recognition) WorldCom, the nation's second-largest long-distance phone company was also found guilty of accounting fraud. The basis of this fraud was very similar to that of Enron in that it used window-dressing to inflate profit. However WorldCom's major sham was that they disguised $ 3. 8 billion in expenses over 15 months. This was carried out in the strategy operated by their Chief Financial Officer, in which operating costs like basic network maintenance and line-costs were booked as capital investments. Unlike Enron's scam the theory behind WorldCom's scandal is much simpler - treating operating costs as capital expenditure meant that the costs could be depreciated in pieces over time.
Hence this meant that expenses incurred in the year would not have such a great impact on its cash flow, but instead push expenses were been pushed into the future. The problem therefore arose because all this was doing was delaying payments in the financial statements, but after all the costs were going to be incurred. Hence the company would have to hope that more revenue was going to be received over the next years and so WorldCom's CFO defended his actions by stating that 'because WorldCom wasn't receiving revenue, he could defer the costs of leasing the lines until they produced revenue. ' His mistake was that he was doing this in the anticipation that the agreements would start producing revenue later, but he ended up discovering that 15 % of these connection agreements were not producing revenue. Surprisingly WorldCom's auditors were also Arthur Andersen LLP, who say that they were never consulted or notified about the line-cost capitalization. However an accounting professor at Columbia Business School in New York went against them in saying that 'auditors are supposed to look at material expenditures and make sure they are reported properly, this is accounting 101. ' (WorldCom Accounting debacle) Nevertheless WorldCom was forced to replace Andersen, who were been described as 'the scandal-plagued Arthur Andersen', with KPMG. Ironically KPMG are currently been sued in respect to the Xerox scandal mentioned below.
Though its involvement in the WorldCom scandal is doubted because of its late involvement with this case. Photocopy giant Xerox were found guilty of fraud by The Securities and Exchange Commission (SEC) for misstating four years worth of profits, resulting in an overstatement of $ 3 billion. Xerox booked the value of leased products at the time that the lease was entered, accounting also for the cost of financing and servicing the equipment during the lease period, based on local market conditions. In other words Xerox were altering its accounting to treat more finance and servicing revenue as part of the value of the equipment, allowing Xerox to recognize a greater portion of revenue from leases immediately in its financial statements. However whether Xerox's auditors, KPMG LLP, were part of the scandal or not is not as clear as in the Enron case, 'The SEC sued KPMG LP saying the accounting company let Xerox Corp. manipulate its accounting practices' (web). 'There was no watchdog at Xerox.
KPMG's bark sounded no warning to invests; its bite was toothless the SEC said Consequently KPMG defended their accusation by stating Apart from all the complex and illegal accounting chicanery mentioned, an accountant can find it relatively easy to window-dress a financial statement, perhaps because of some of its weaknesses. The first one being that the accounting standards allow financial statements can be prepared using different conventions with respect to major balances. This means that two companies with identical transactions can declare different results. However this is unavoidable because it is due to calculations such as the depreciation of fixed assets, which can be done using the straight line or the reducing balance method. Another potential source for confusion is in the Accounting Standards, this is because 'different accounting standards govern financial statements in the major market economies' (Lies, Damn lies) The USA uses GAAP while the international community other than the UK applies International Accounting Standards. Therefore the problem being that it would be very unusual for accounts prepared under different rules to generate the same result.
The fact that auditors only use a sample of transactions and balances in auditing can affect the fair presentation of the financial statements, as it very possible for significant matters to escape their attention. The public is therefore been led to believe wrongly that accounts signed off by auditors are accurate. At this stage it can be said that the role of the accounting professional is enormous in these scandals, as The Financial Times of London said 'accounting goes to the heart of Enron's failure' (Financial times of London, lies... ) Though confusion still exists on the role of auditors and directors in carrying out these scandals. The reason for this being that the whole truth is unknown, because of actions such as the shredding of documents. Therefore it could be said that it depends on the judgement of the individual. Though at this point I feel that it would be correct to conclude that everybody was responsible some way or another.
An advisor of PricewaterhouseCoopers is therefore correct in saying that 'it is not the responsibility of auditors or accountants to detect fraud, it is the responsibility of management. So given the problems of Enron and WorldCom, it is important that everyone appreciates that everyone has a role to play. It is a chain that begins with the preparing of accounts to management, to accountants and auditors' However even if auditors are been truthful in claiming not to be aware of the fraud, they are still wrong in giving the public the confidence that the financial statements are accurate. As the USA, SAS no. 53 (AICPA, 1988, para. 8) requires auditors to 'exercise due care in planning, performing and evaluating the results of audit procedures, and the proper degree of professional scepticism to achieve reasonable assurance that material errors or irregularities will be detected. ' (age 41). Though the problem with stating that it should provide 'reasonable assurance' is that it does not have a discrete boundary, but instead lies along a continuum. Therefore opinions will differ as to the cut-off point between what is reasonable and unreasonable to expect of auditors.
In conclusion one could say that no matter whether directors or auditors are responsible, they are all part of the accountancy professions. The accountancy professions has shown itself 'weak in technical matters, spineless in standing up to CEO's and eager to sacrifice its integrity for profits. '
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Research essay sample on Financial Statements Accounting Standards
