This paper seeks to discuss the role of accounting in recent economic disaster (bankruptcy).  The paper will analyze the scandals, which got involved in complex methods of misusing or misdirecting funds, over stating revenues, understanding expense, overstating the value of assets and under reporting of liabilities.

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In any decision that one makes whether in business or in personal life, one needs to have an information.  That information must have the qualities of being truthful or accurate or reliable and relevant for the decision to be effective or informed.  In the world of business,  accounting provides that financial information for decision makers in terms of the balance sheet, income stamen, cash flow statements and the notes to financial statements. Any alternation therefore to violate the desired qualities of financial accounting information to be reliable and relevant would be misdirecting the fulfillment of the desired role of accounting that could produce the economic disaster.  Clear acts of accounting fraud as what happened in the cases of WorldCom and Enron are now discussed in the next subsections to demonstrate the wrong use of accounting that led to bankruptcies.

After becoming part of Telecommunication Company, WorldCom was eventually named to MCI in 2003, Inc. after several significant events, including its merger with LDDS and later with MCI Communications. MCI,  Communication was later acquired by Verizon Communication, which then just made the company as of Verizon Division. This sequence of renaming of WorldCom  may be taken as part of the company’s  strategy to remove that stigma from bankruptcy as caused by the scandals that the company went through.[1]

To state simply, the role of accounting in the resulting bankruptcy is to assert that the key officers of the WorldCom including its CEO,  financial and accounting officers, were able to engage in accounting fraud that eventually resulted to bankruptcy of the company to detriment of many affected investors.

Concerning pressures  and motivations in the case of WorldCom,  one could assert that the fraud perpetrators desired to become rich the easy way by wrongfully taking advantage of their knowledge of

Page 2 The role of accounting in recent economic disaster (bankruptcy) Essay

accounting.  This could be observed in relation decisions that were made with the leadership of the company’s CEO and other officers by increasing  the prices of their shareholdings and eventually selling the same.  This researcher asserts that kind of fraud committed in the case WorldCom implied knowing accounting principles and practices and manipulating the same to their advantage.  The taking advantage happened with the timing when people or various investors were looking for ways to earn without these latter people accepting the reality of the situation that they are being fooled.

Since the telecommunication industry  in 1998 was actually having a down turn at one point, investors are motivated by profits and refused to see that reality. The fraudulent accounting for WorldCom was therefore done in 1999 when the company’s management wanted to paint a good financial condition contrary to what was actually happening after the downturn in the telecommunication at that time.

To therefore paint a different picture,  is to deceive investors who also allowed themselves to be plainly deceived into investing as they happened to be blinded also by greed.  The simple lesson is to be learned from experience is just to be accepting the truth of the markets rather than going for the unrealistic projections for growth.  It must be easy therefore to see how the  management of WorldCom did to overstate revenues and understate expense to show the company continued to earn while the  truth was the very opposite. The management just did what investors wanted to believe.

 The reasons or the incentives  of perpetrators appear to be the most influential factor in the fraud commission in  WorldCom. The company’s stocks were used as means to create more wealth for its chief executive officer (CEO) Ebbers and other officers using people incidentally came from finance and accounting departments, who had come together to act at the expense of many investors[2]. The accounting fraud  is in simulating profitability what is real to attract investors to buy stocks. With simulated profitability for WorldCom, the price of the company’s stock rose significantly and such was intended encourage more investors to invest more.  As found later, the eventual purpose of the fraud was to sell the stocks  by perpetrators when it was time to profit more by those who knew that the accounting information do really support the market values of the stock.

The case of Enron is not exactly similar as that of WorldCom but the nature of scandal appears to include the same problem of greed as that of WorldCom.    Enron operated as engineering company and became known as  world leader in various industries such as in electricity, pulp paper, and natural gas and communication companies. Its total revenues was noted to have reached billion dollars in 2000 before its 2001 bankruptcy proceedings.[3]

Compared with WorldCom, it appears that accounting fraud committed in Enron was more subtle although the  fraud was also relating to securities.  The accounting fraud  occurred largely when the company entered into joint venture arrangements, while the company assuming as a limited and minority partner at same time. From these arrangements, Enron failed  disclose the extent of company’s contingent liabilities related to those partnerships, contrary to the existing federal securities laws. Enron should have should have  least disclosed these matters in its footnotes to financial statements.[4]  Hence, the non-disclosure could be therefore viewed as a clear act of accounting fraud.

This researcher considered this fraud as more subtle because the company wants to show that it played by rules but its intention was evil.  This is not however to downgrade the WorldCom fraud which like Enron’ was also deliberate.

The desire of some officers to enrich themselves   is also  very evident in case of Enron just like in WorldCom based on the failure to disclose information that should have affected decision makers particularly the investors.  The management’s  reason in practicing the use off-balance sheet liabilities or non-disclosure of said liabilities could only mean the same greed by managers, investors and the investment banks.

[1] Verizon, Company Website, 2009 {www document} URL, http://search.verizon.com/?tp=r&rv=r&q=worldcom, Accessed May 3, 2009
[2] Beresford, et. al ,  Report of Investigation to SEC ,  2003 {www document} URL, http://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm#ex991902_2, Accessed May 3, 2009

[3] Barreveld, Dirk. The Enron Collapse: Creative Accounting, Wrong Economics Or Criminal Acts?, iUniverse, 2002
[4] Morgenson, Gretchen.  Are New Woes Lurking in Financial Nether World?, The  Associated Press, 2001

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