Corporate Crises and Improved Accounting Regulations

The increased globalised business practices together with the technological reforms,
has not only led to the further increment in the corporate failures across the globe, but also
requiring the entities to follow enhanced mechanisms of preparation and reporting of the
financial statements to various stakeholder groups. The establishment of the enhanced
provisions of the accounting standards and the changes incorporated to the existing practices
together form the base for the enhanced reporting by the entities. The following assignment
will explore how corporate crises lead to the improved accounting regulations.
One of the earliest corporate failures were that of the year 1994, of the California
Micro Devices, Inc. in which the shareholders had filed the suit against the company in
relation to the accounting improprieties concerning a large write-off of accounts receivable
close to the end of fiscal year 1994. The major issue was that there was no prospects of
getting paid and therefore a large number of accounts receivables were written off. Thus, the
accounting standards governing the revenue recognition were needed to be amended.
One of the major collapses in Australia was that of the entity One- Tel in the year
2001, which was fourth largest telecommunications company in Australia back then. On
evaluation of the corporate collapse of the One –Tel, a numerous reasons were found ranging
from weaknesses in internal control system, the executive pay-to-performance, financial
reporting quality, management communication with the board, and the overall audit quality
(Monem, 2011). This was followed by yet another major global scandal that took place
during the year 2001 was that of the entity Enron which was an American based energy
company, and whose management had employed a number of practices such as the mark to
market accounting approach, use of the special purpose entity (SPE), exercising influence
over the stock as well as payment of high compensation as executive levels (da Silveira,
2013). These practices together led to the impacting the results of the entity, leading the
entity to be bankrupt while undermining the interests of the various stakeholder groups. It is
significant to note that prior to the accounting scandals in 2001-2002, there was a wide
appreciation by the Americans towards the US GAAP in comparison to the international
rules. The chief culprit of the fall of Enron was regarded as the Special Purpose Entities
which was abused by Enron, in the form of $500 million Joint Energy Development Initiative
(“JEDI”). The SPE activities of Enron were considered as very well within the US GAAP
rules. The study of the scandal was initiated in which the pros and cons of the adoption of a
principles-based accounting system in the United States were analysed.