Corporate Failure and Accounting Malpractices

This report discusses the reasons behind corporate failure and accounting malpractices, with a focus on wrong accounting practices. It explores the impact of these practices on organizations and the importance of corporate governance mechanisms in preventing fraud. The report also highlights the need for proper internal control mechanisms and external audits to detect and prevent fraud in accounting.

Accounting
Executive Summary
There are many instances of corporate failure that has shaken the entire world. The main reason
for the downfall has been in the area of accounting practices, audit failure and failure of
corporate governance. In the current report, the major emphasis is provided on the corporate
failure that happened in the past two decades and the same has been discussed considering
various practices. The main reason is attributed to the wrong accounting practice and the same is
studied by giving adequate consideration to the wrong accounting practice. The report initiates
with the introduction followed by the downfall of the corporates.
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Accounting
Introduction 3
Section 1: Failure of corporate governance mechanisms 3
Section 2: Omission of amounts 4
Section 3: Falsification, alteration or manipulation of material 4
Section 4: Fraud prevention 5
Conclusion 6
References 7
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Accounting
Introduction
There are a lot of big enterprises that are found to have indulged in malpractices with respect to
accounting their actual well being in their financial statements. The regular unveiling of mishaps
in accounting practices is garnering a lot of public attention. Malpractices in accounting can even
lead to the collapse of an organization in no time. This states the intensity of the adversities
caused as a result of material misstatements in accounting. The untimely demise of Arthur
Andersen and Enron as a result of unending accounting malpractices shocked the entire
accounting industry. WorldCom that used to be the largest telecommunications organization has
been regarded as one of the biggest bankruptcies (Ghassan , 2014). The intensity of the impact
arising out of untimely disintegration of Enron was so huge that even WorldCom went bankrupt.
The accounting malpractices was however not just a US phenomenon as a lot of organizations
worldwide failed to exist as a result of it such as Parmalat in Italy, HIH in Australia, Equitable
Life Assurance Society in the UK, Royal Ahold in the Netherlands and so on. These suspended
accounting problems paved ways for Enronitis which is a slang term used to denominate the
doubts held in accounting and auditing practices. The confidence of the public was ruined in the
financial system of an organization as more and more revelations came into the picture
(Carnegie,Brendan, & Connel, 2014).
Section 1: Failure of corporate governance mechanisms
The failure of corporate governance systems in identifying the mishaps in accounting practices
and averting the disintegration of eminent organizations has been the most drastic side of the
corporate system. Failure in corporate governance mechanisms suggests that the lawful
guidelines pertaining to the responsibilities of directors and managerial personnel were not
properly established and as a result of which the stakeholders and potential investors were not
provided with the true and fair view of a company’s actual financial well being in the financials
of the same (Babic, 2011). Corporate governance mechanisms must be executed with an
objective to detect the underlying frauds and errors in the financial system of an organization so
as to enhance the fairness of the financials of the same and gain the trust of the existing and
potential investors.
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Section 2: Omission of amounts
Accounting and financial fraud can probably be done by means of accounting irregularities and
manipulating earnings. Accounting and financial fraud are undoubtedly done intentionally in
order to misconstrue the readers of the financial statements by means of portraying an enhanced
picture of the financial performance of an organization. The material misstatements can be
caused as a result of frauds or errors or both. These errors can be either intentional or
unintentional or both. Irregularities can be labeled as a type of fraud that is entirely intentional.
The intensity of adversities is relatively lower in the case of errors that are incidental or
unintentional in nature (Mark, 2012). These unintentional errors can be easily traced and
rectified.
Not all fraudulent earnings are represented with an intention to deceive the users. If these
earnings qualify the parameters of true earnings that is if it corresponds to actual or factual
earnings, then the representation of same in the financials cannot be accounted as accounting
irregularities (Babic, 2010).
The relationship between an organization and various investors is a very complicated one and it
can be managed only by means of external financial information. However, external financial
information relies on various local and global accounting laws and regulations. The victims of
fraud can be both external creditors, suppliers, consumers, stakeholders, external auditors, etc.
and internal participants like audit committees, employees, etc) of an organization.
Section 3: Falsification, alteration or manipulation of material
Financial fraud can be caused as a result of material falsification, alteration or manipulation. This
is done deliberately by means of material misrepresentation and omissions. The management
might deliberately opt for certain accounting policies, procedures, and principles so as to
measure and record financial transactions in the financials of an organization with an intention to
deceive the users of the same. Frauds can be categorized further into employee frauds and
management frauds (Aguilera & Jackson, 2011). It is difficult to trace management frauds and
the failure to identify a smaller mistake can later be regarded as a fraud. There must be adequate
and efficient internal control mechanisms in an organization so as to detect management frauds
easily.
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Accounting
Section 4: Fraud prevention
Identification and prevention of fraud in accounting aren’t easy. However, the prevention of
fraud is still possible if an organization has a proper internal audit function, internal control
mechanism, external audit function, corporate code of conduct and efficient corporate
governance mechanisms. It is not necessary that an organization will commit fraud in the
absence of vigilant corporate governance systems in the same. An organization shall commit a
fraud only if it has a valid reason or if there are some probabilities of better opportunities arising
as a result of the same (Aduda, Chogii, & Magutu, 2013) . Engaging in such fraudulent activities
possesses a huge threat to the reputation of an organization. The organization will not only lose
the faith of its investors but might also get entangled into legal actions on account of fraudulent
activities with respect to accounting. The corporate culture of an organization can be enhanced
only when there are no fraudulent activities with respect to accounting and reporting. This could
be possibly achieved by means of having vigilant corporate governance mechanisms as well as
proper and effective internal and external control mechanisms (Mark, 2012).
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Conclusion
In order to fix these underlying trust issues, the accountants are now trying hard to draft required
amendments as and where possible by means of redesigning guidelines pertaining to audit
independence, financial reporting, and corporate governance practices. In the USA, the
Sarbanes-Oxley Act of 2002 with the help of Public Company Accounting Oversight Board
(PCAOB) has transformed the audit independence, financial reporting, and corporate governance
practices in a manner that enhances the overall accounting system of the country. The Public
Company Accounting Oversight Board in the USA is operating with an agenda to reinstate the
users’ confidence in the audited financials of an organization.
The corporate governance system in the developed countries is not sufficient enough to reduce or
eradicate the risks of accounting malpractices as understood from the recent stigma faced by the
European countries. The intensity of the influence of an outsider on an organization’s business
activities decides the structural variations between the European and US economic system. The
US-based organizations value their shareholders and regard them as the owners of the same.
Buying the securities of a company gives the right to the shareholders to gain influence over the
same.
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Accounting
References
Aduda,J, Chogii,R & Magutu,P.O. (2013) An empirical test of competing corporate governance
theories. Europeon Scientific Journal. 9(13). DOI: http://dx.doi.org/10.19044/esj.2013.v9n13p
%25p
Aguilera, R.V & Jackson,G. (2011) Comparative and International Corporate Governance,
SSRN.1-73. Available from: https://eujournal.org/index.php/esj/article/view/1044 [Accessed 13
June 2019]
Babic, J. (2010) Rethinking Board Role Performance: Toward An Integral Model. Available
from http://www.doiserbia.nb.rs/img/doi/0013-3264/2011/0013-32641190140B.pdf [Accessed
13 June 2019]
Babic,V. (2010). Corporate Governance in Transition Economics. Ekonomske teme, 34(2),
555,568. Available from: http://citeseerx.ist.psu.edu/viewdoc/download?
doi=10.1.1.612.271&rep=rep1&type=pdf [Accessed 13 June 2019]
Carnegie, G.D., Brendan, T, & Connell, O. (2014) A longitudinal study of the interplay of
corporate collapse, accounting failure and governance change in Australia: Early 1890s to early
2000s. Critical perspective on accounting 25(6), 446-448. Doi:
https://doi.org/10.1016/j.cpa.2013.04.001
Ghassan H. (2014) Multiple classification schemes for signalling corporate collapse,
International Journal of Accounting and Information Management, 22(2), 46-156, Doi:
https://doi.org/10.1108/IJAIM-11-2012-0073
Mark E. H. (2012) Partnering with your leadership development provider: seven worst practices.
Strategic HR Review, 11(6), 335-339, Doi: https://doi.org/10.1108/14754391211264802
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