07-12-2012, 04:09 PM
Famous Financial Fraudsin Bankruptcy
Famous Financial Frauds.ppt (Size: 3.55 MB / Downloads: 26)
Impact of the Major Management Frauds
New Public Company Accounting Oversight Board (PCAOB)
End of Arthur Andersen (85,000 employees)
AICPA under fire for its conflicts of interest policies
AICPA’s Auditing Standards Board role reduced
FASB under fire (issuing accounting standards that are inadequate and unintelligible and slow to get approval)
Thirty new bills proposed in Congress
Cenco Corporation
Changed quantities on inventory tags
Altered quantities on computer listings
Management created fictitious tags
Company Background:
Origin traced back to the 1983 break-up of AT&T as a discounted long distance service provider.
Telecom industry evolved rapidly in the 1990’s.
Focused on both domestic and international growth through approximately 20 acquisitions during the 1990’s.
The industry moved to transporting data packages (voice, data, and video) over fiber optic cables.
By 1998, WorldCom became a full service telecom company able to supply virtually any business with a full complement of telecom services.
In 1999, WorldCom was the 2nd largest long distance operator and attempted to acquire Sprint but the transaction was denied by the U.S. Justice Department.
After the Sprint transaction failed, the company had a lack of a strategic sense of direction.
Corporate Culture:
Ebbers had no technology experience when hired, but his most useful qualification, according to him, was being the meanest SOB they could find.
Growth through acquisition created a “hodgepodge” of people and cultures.
Ebbers did not include the Company’s lawyers in his inner circle and demonstrated his displeasure with them when he received their advice.
Each department had its own rules and management.
WorldCom encouraged an attitude from the top down that employees should not question their superiors, but just do what they are told.
Director of Internal Audit reported directly to the CFO.
Motives/Pressures:
In 2000, the telecommunications was faced with heightened competition, overcapacity, and reduced demand for services. Companies reduced their prices and WorldCom was forced to match. However, Ebbers and Sullivan demanded that WorldCom’s most important performance indicator, the Expense to Revenue ratio, remain constant at 42%.
Matching Principal
The matching principle is a fundamental part of Accrual Basis accounting and includes the following concepts:
Expenses are required to be recorded on the income statement in the same period as the revenues that were earned as a result of the expenses.
Report expense when the economic or financial effects of the transaction impact the entity.
The economic effect of an expense is incurred when the benefic expires, not when cash is paid.