Analysis of Accounting Scandals, GAAP, and Financial Reporting

This report delves into the accounting scandals of the early 2000s, highlighting the Enron scandal as a prime example of audit failures and earnings management. It examines the role of Generally Accepted Accounting Principles (GAAP) in preventing such issues, emphasizing its importance in providing guidelines for financial reporting and reducing manipulative practices. The report discusses various GAAP principles, including those related to financial statement preparation, international standards, and key assumptions like accrual-basis accounting and the cost principle. The analysis concludes that the lack of proper accounting guidelines contributed significantly to the scandals, underscoring the necessity of GAAP for ensuring accurate and transparent financial reporting.

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Name of the Student
Name of the University
Author Note

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Introduction
Accounting principles is the guidelines that helps the auditors to properly implement
the accounting process in an organisation. The first part of paper has discussed on the
accounting scandals of the early 2000 and the next section has discussed on the importance of
GAAP accounting standards. The intense of this paper is to find the reason behind accounting
scandals that occurred during 2000s.
Accounting Scandals in the early 2000s
The main reason for accounting scandals during early 2000s is due to changing
professions of auditing and their role in accounting process. During the early 2000s, The
Enron Scandal was the biggest scandal that occurred. Arthur Andersen was the internal and
external auditor of Enron. During the internal control of the business, Arthur and the other
auditors had to attest their own figure (Kizil and Kasbasi2018). This caused huge doubts to
the accounting profession. Arthur has to go to various criminal charges in the year 2002.
During 2000, Enron was reported in practicing earning management techniques for doing the
adjustments. They had to go for many losses. Various investors were facing difficulties in
gaining the market capitalization, due to the audit failures.
Some of the firms are involved with earnings management projections of Wall Street
by misstating the actual figure and outcomes (Braswell and Daniels 2017). The managers and
auditors are involved in earning management practices, for manipulating the actual results in
order to show a better quality disclosure for the financial statement.
There were accounting scandals because of lack of a proper guidance and standards
for doing accounting practices. Arthur, along with the other auditors faced these type of
problems because, there were no such accounting rules and standards for the auditors. They

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had to manually attest the financial figure. Generally, Accepted Accounting Principle would
have helped the auditors, in preparing their financial reports according to the rules and
standards prepared by the Financial Standard Board (FASB). The international GAAP
promotes the various guidelines that is applied internationally (Shroff 2017). GAAP helps the
auditors to reduce the earning management practices in accounting process. GAAP principles
have guidelines for the following elements:
1. It provides the rules and standards for the companies who prepares the financial
reports.
2. It provides a separate description on how a financial statement should be prepared.
3. The international GAAP standards has guidelines for the International companies.
This accounting standard has focused on providing guidelines for the political and
other economic pressure that can arise in doing the business internationally.
Various assumptions in guidelines of GAAP standards are:
 GAAP allows the business to use accrual-basis accounting practices for reporting the
revenues and expenses from the sale.
 It allows the business to report their assets with their original cost of purchase.
 It requires the company to fully disclose their financial information in the annual
report (Black et al. 2018).
 GAAP requires to minimize the material misstatement of the business.
Conclusion
Therefore, it can be deferred that, the main reason for accounting scandals is due to
lack of proper guidelines in the accounting practices. GAAP standards is the generally

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accepted accounting standards that is promoted by Financial Accounting Standard Board for
reducing the earning management practices during the accounting practices.

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References
Black, D.E., Christensen, T.E., Ciesielski, J.T. and Whipple, B.C., 2018. Non‐GAAP
reporting: Evidence from academia and current practice. Journal of Business Finance &
Accounting, 45(3-4), pp.259-294.
Braswell, M. and Daniels, R.B., 2017. Alternative earnings management techniques: What
audit committees and internal auditors should know. Journal of Corporate Accounting &
Finance, 28(2), pp.45-54.
Kizil, C. and Kaşbaşı, B., 2018. Accounting Scandals and Eye-Catching Frauds: USA-Japan
Comparison by Considering the Role of Auditing. Journal of Asian Research, 2(3).
Shroff, N., 2017. Corporate investment and changes in GAAP. Review of Accounting
Studies, 22(1), pp.1-63.