ACCT20074: Corporate Crises and Accounting Regulations Report

This report examines the relationship between corporate crises and the evolution of accounting regulations and standards. It explores how major corporate failures, such as those of California Micro Devices, One-Tel, and Enron, have prompted significant changes in financial reporting practices. The report highlights the weaknesses in existing regulations and the need for enhanced transparency and accountability. The analysis includes the impact of these crises on revenue recognition principles, the role of special purpose entities (SPEs), and the convergence of U.S. GAAP and IFRS. The establishment of the Public Company Accounting Oversight Board (PCAOB) and the changes introduced by the Sarbanes-Oxley Act of 2002 are also discussed. The report concludes by emphasizing the importance of continuous improvement in accounting standards to mitigate the risks associated with corporate failures and to protect the interests of stakeholders. The evolution of IFRS 15, which aims to streamline revenue recognition processes across various industries, is also discussed, as a result of the corporate failures.

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.

After the Enron scandal, the vital to note that America’s regulators have softened their
approach towards the international standards. This was evident by the Financial Accounting
Standards Board (FASB) in the U.S. and the International Accounting Standards Board
(IASB) entering into the Norwalk Agreement with the aim of issuing converged, high-quality
standards. The most significant development in the accounting profession was the
establishment of the Public Company Accounting Oversight Board under the Sarbanes Oxley
Act of 2002. Further, accordingly, the significant changes were made to the U.S. GAAP and
International Financial Reporting Standards (IFRSs). Though the full convergence could not
be achieved due to the risk of eroding the U.S. authority and control over its own markets, yet
some of the significant changes that had occurred were the changes in the self-regulatory
accounting mechanisms, corporate governance reforms, increment in the criminal penalties
for the violation of the laws and likewise.
At present the practice as stated in IFRS 15 is aimed to more transparent reporting of
the revenues and cash flows arising out of the contracts of the customers. The basic principle
in IFRS 15 today is to recognise the revenues at an amount and in a manner that is reflective
of the consideration expected by the entity for the exchange for those goods or services
(Tong, 2014). Thus, the standard is aimed at streamlining the revenue recognition processes
across the various industries and sectors to represent true and fair picture of the business of
the entities.
Hence as per the discussions conducted in the previous parts, it can be stated that the
corporate scandals like that of One Tel, Enron and the California Micro Devices, Inc.
highlighted the need to reform the revenue recognition principles. This was required so that
the same are not misused by the entity towards their own enrichment, and keeping the
interests of the other stakeholders aside.

References
da Silveira, A. (2013). The Enron Scandal a Decade Later: Lessons Learned?. SSRN
Electronic Journal. doi: 10.2139/ssrn.2310114
Monem, R. (2011). The One.Tel Collapse: Lessons for Corporate Governance. Australian
Accounting Review, 21(4), 340-351. doi: 10.1111/j.1835-2561.2011.00151.x
Tong, T. L. (2014). A Review of IFRS 15 Revenue From Contracts With Customers.
Çevrimiçi) http://www. masb. org/my/images/2014-09-15% 20Review% 20of%-
20IFRS, 20.