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Accounting Scandals. Case Analysis

Accounting and reporting issues have the power to diminish a company in a short amount of time. Enron’s case is a proof – one of the largest companies in the United States went from $90 to $0.26 per share in a matter of days (Segal, 2020). The management of the company had been misleading regulators and investors with off-the-book practices. They effectively hid debt and assets that were not generating any revenue. As a result, Enron’s stocks remained an attractive option on the market, which ensured their continuous increase in price. The company used Special Purpose Entities (SPEs) for their off-the-book accounting (Segal, 2020). The problem was that these entities were financed from Enron’s capital. When Enron stopped generating enough revenue to sustain these entities, the truth was revealed (Segal, 2020). The central figure in the scandal was Kenneth Lay, the company’s founder. He died in 2006, several months before his scheduled sentencing.

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Another example of a scandal is Toshiba’s accounting fraud of 2008-2015. It was not discovered until an external investigation by a third party. The company’s management had constantly inflated its profit to be more attractive to investors and win government-funded projects (Rahman & Bremer, 2017). The lack of transparency, weak corporate governance, and the corporate culture all contributed to the fraud (Rahman & Bremer, 2017). Mr. Burns’ description of transparency in financial reporting would have benefited the organization because the managers accused of misconduct would not have any opportunity to manipulate with the numbers. In turn, the government of Japan and investors would have received accurate profit reports, which would help them make more informed decisions. Therefore, it can be concluded that transparency is of paramount importance in contemporary financial reporting practices.

References

Rahman, K. M., & Bremer, M. (2017). The implications of the Toshiba accounting scandal for auditor liabilities in Japan [PDF document]. Web.

Segal, T. (2020). Enron scandal: The fall of a Wall Street darling. Investopedia. Web.

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