Company Scandals Underpinned By Non Conformity And Accounting Principles

1183 Words Mar 21st, 2016 5 Pages
Company Scandals Underpinned By Non-conformity to Accounting Principles.

Alex Kemp

Accounting principles are an important foundation to allow business owners, shareholders, the government and accountants to understand the financial position of a company. A failure to apply appropriate accounting principles can lead to inaccurate reports being used in business decision making. This may result in inappropriate investment and business decisions and lead to collapses as evidenced by the scandals surrounding One-Tel and Worldcom. Accountants employed by these business have been found to have acted unethically by manipulating the financial accounts.

Conservatism is the accounting principle of only recognising gains when earned and losses as
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Worldcom, a US based telecommunications company also went bankrupt largely due to poor financial management in 2002. Similarly to One-Tel, it failed to follow the two accounting principles of conservatism and reliability. Conservatism was not followed by Worldcom with its handling of line cost expenses. These expenses were not included in their reports and resulted in them providing misleading information. It led people to believe that it made over $107 billion in profit and only $3.7 billion in expenses (4). This however was found to be grossly incorrect as they had, in fact, had $107 billion in losses. Both companies overall failed to comply with the principle of conservatism and this was one of the main reasons leading to their bankruptcy.

Reliability refers to information the user can depend upon to be materially accurate and to faithfully represent the information that it purports to present. Significant mis-statements or omissions in financial statements reduce the reliability of information contained in them and can lead to misleading information being portrayed to shareholders and the public (1).

One-Tel failed to follow the principle of reliability in its company accounts. The company is said to have had “discrepancies in several records and documents including monthly trial balances, collection of accounts receivable, data description and outstanding balance of accounts receivable” (2). This unreliability led to people being misled by the company’s
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