"What 's Wevenue?"
Managerial Accounting
Article Summary
Unethical accounting practices can put a company, and its accounting firm, at the center of attention. California Micro Devices Corp (referred to hereafter as Cal Micro) was a chip manufacturer that decided to write off half its accounts receivables in August of 1994. This announcement not only negatively impacted their stock price, but it also triggered an investigation which uncovered many unethical accounting practices. One example of such practices included faking product shipments so that sales could be booked. By midsummer 1994, as much as 70% of quarterly revenue was false. The company had ignored early warnings, such as their auditor Price Waterhouse LLP telling
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When 1994 arrived the company had dug itself into such a hole it was impossible to reset itself on the right path. In 1994, one-third of the company’s revenue was bogus. Their attempt to try and recover by writing off half its account receivables drew the immediate attention of shareholders who quickly accused them of “financial shenanigans”. This triggered the beginning of the end for the unethical accounting practices.
Accounting Rules
As a result of increasingly complex accounting rules, abuse of the rules is becoming harder to identify. Ethical accountants believe in full disclosure and communicate the real economic performance and position of a company. From an internal accounting perspective, many of the Cal Micro executives behaved in a way or were in a role which prevented fair accounting. For example, the chairman at the time sat on the board’s audit committee and owned 45.7% of the company. This is clearly a conflict of interest and may have contributed towards less than accurate reports to the board. Another example is the CFO, later holding other titles as well, admitted to falsifying his resume. The only background in accounting he had was a course he had taken in college and received a D in. Yet another example was the credit accountant who created false documents and allegedly lied to the auditors. Due to the roles of these executives being filled by people who were morally comprised, it resulted in unethical behavior.
in the amount of $150 million and $771 million, respectively, without detailed support. It was
In addition, associated with the misapplication of accounting methods, the financial industry has been plagued with one disaster after another involving numerous scandals from top leading American companies. Consequently, the Sarbanes-Oxley Act was passed in 2002 compromising eleven sections that are generated to insure the responsibilities of the company’s managers and executives. This act identifies criminal penalties for particular unethical practices and currently has new policies that a corporation must follow in their financial reporting. The following examples describe some of biggest accounting methods as a result of the greed and the outrage of the ethical and financial misconduct by the senior management of public corporations.
Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay
“ In order to prevent fraudulent financial reports and statements, the American Institute of Certified Public Accountants(AICPA) has created ethical standards” (Ethical standards in a financial statement, 2011). These standards aim to make financial professionals accountable for their accounting practices. This includes the integrity of financial reporting and ensuring financial reporting is done fairly and factually. Financial accountants and professionals should maintain professional integrity, objectivity, and independence to reduce the risk of resulting legal action, loss of profits, and a poor reputation if improper financial reporting is done (Ethical standards in a financial statement, 2011).
After reviewing the financial information of the Tech Tennis, USA, there was a concerned due to some unusual changes in the company’s accounts. Financial statements play a crucial part in the determination of the progress of an organization. It assists the relevant personnel to identify whether the company is making profits or making losses. Although unethical, some companies will tend to deliberately misrepresent some of their financial statement information to create a false impression of the company’s success. There are various techniques that organizations utilize to manipulate their financial statements such as overstating their revenues (Bierstaker, Brody, & Pacini, 2006). In addition, some organization will tend to inflate their sales without considering their cash flow amount that the organization has acquired which will be a red flag to investigate. Consequently, financial statements provide vital information that helps both internal and external users to understand the position of the organization. Some companies in an attempt to continue in the market, they end up manipulating their financial statements that create an illusion of the success of the organization.
In the later part of 1990s, there was an epidemic of accounting scandals which arose with the disclosure of financials transgressions by trusted corporate executives. The misdeeds involved misusing or misdirecting funds, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, and overstating of revenues.
The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.
HealthSouth Corporation was one of the largest publicly traded owners of rehabilitative hospitals within the Untied States and paved the way for its industry. However, prior to 2003 the company had a very dark secret: fraud. In 2003 HealthSouth was accused of making $2.7 billion in false journal entries in the company’s system (Helios, 2013). These false entries allowed the corporation to inflate its earnings and revenue. While the corporation was dabbling in a fraudulent, aggressive account system, auditors were unable to detect the extent of the fraud occurring. If not for Michael Vines and Weston Smith, HealthSouth Corporation might have continued its false entries and continued deceiving shareholders and even Wall Street itself. HealthSouth serves as a historical example of how corporate culture can use fraud and deception schemes to not only rationalize what it is doing, which is an element of the fraud triangle, but also encourage fraudulent financial statements.
In recent year we have seen numerous companies fail as a result of these bad and/or fraudulent practices. In 1998 the publicly traded Waste Management Company falsely reported 1.7 billion in earnings. They got caught when the new CEO and management team went through the books.
Accountants and auditors are often faced with having to make decisions that bring ethics into question. The American Institute of Certified Public Accountants (AICPA) sets the standards for professional conduct that dictates what accountants are allowed to do and what they are not allowed to do. However, issues do arise that have not been addressed by the AICPA and when this occurs it is up to management to use their best judgment to make a determination about the ethical implications of their actions (Allen, 2011).
Businesses, investors, creditors rely on accounting ethics. The accounting profession requires honesty, consistency with industry standards, and compliance with laws and regulations. The ethics increase the responsibility and integrity of accounting professionals, and public trust. The ethical requirements influence the management behavior and decision-making. The financial scandal of Enron and Arthur Anderson demonstrates the failure of fundamental ethical framework, such as off-balance sheet transactions, misrepresentation of financial statements, inaccurate disclosure, manipulations with earnings, etc. The confronted accounting profession and concern for ethics in businesses forced regulators to revise the conceptual framework of accounting processes.
Imagine trusting your hard-earned money like your retirement savings to a financial adviser or Certified Public Accountants (CPA) only to lose it all in a fraudulent Ponzi scheme. In today’s world of business many organizations, financial planners and accountants are in the news due to the financial ethical breaches that have affected their customers, employees, and the general public. A CPA has to be responsible for their audits and take any punishments as a result of their mistakes, incompetence or illegal actions. CPAs are expected to have integrity in their work,
Phar-Mor was known as one of the major discount chain retailers in the late 1980’s - early 1990’s. It was founded by Mickey Monus, a gambler in nature, who with the help of senior management was “cooking the books” for years to cover up his loses. The reason why senior management agreed to do this fraud is the belief in unique ability of their leader to fix everything later on. This case is known as one of the biggest accounting frauds in the corporate history of the U.S. This paper will analyze who was affected by this fraud, the motives behind it and what systems of control failed to prevent it.
The key to the article “Cooking the Books” is to cover the business ethics of an accounting manager ordering one of his accountants to falsifying a company’s accounting ledger. The Generally Accepted Accounting Principle of expense recognition was not followed. The accounting manager was attempting to commit fraud for personal gain, he does this by manipulating the books to show higher revenue in order to meet the volume for management bonus. The accounting manager also created a hostile working environment by threating his accountant’s job security if he didn’t comply with his orders. The Sarbanes-Oxley Act will also be explored to see if there was a violation due to the unethical behavior of the
This paper will discuss the corporation WorldCom, a telecommunications company that was based in Mississippi. In 2002 WorldCom was involved in one of the largest accounting scandals in the United States. WorldCom inflated its assets by nearly $11 billion dollars, which eventually lead to about 30,000 employees losing their jobs, as well as, 180-billion dollars in losses for its investors. The CEO at the time of this accounting fraud was Bernard Ebbers and led to him receiving a 25-year prison sentence. This paper will go into the details of how WorldCom was able to manipulate its accounting records to deceive its internal auditors, as well as, investors.