August 26, 2013
Case Study 1-6: Accounting in Crisis
Reliable financial reporting is important to businesses and investors especially when a financial crisis forms and a company’s fundamentals are put to the test. In the early 2000’s the U.S and Canada were affected by the recession that had spread to other countries including Russia, Europe and Japan (Wikipedia, 2013). Many believe that the recession was caused by the economic boom of the late 1990s with minimal inflation rates and low unemployment. This is only a part of the accounting crisis; other contributing factors were the Enron scandal, banking panics, and stock market crashes. A Banking crisis generally occurs due to the lending of funds to risky applicants resulting in the defaulting of loans. In the late 90’s Ecuador faced a banking crisis causing over half of the financial institutions to close down. This crisis is a result of increased lending to risky applicants, laid back banking authorities, and a mismatch in the currency of assets and liabilities (Martinez, 2005). In the last 90s stocks were already in a decline. Making things worse the U.S was faced with the Enron, WoldCom and Tyco scandals. For years the stock market was unusually high. In the mid 90s the Dow rose approximately 10% each year, however in the mid-late 90s the Dow rose nearly 15% each year (Wikipedia, 2013). In September 2002 the attacks on the world trade center contributed to the drastic drop in stock prices across the U.S, Canada, Asia and Europe. As each of these events occurred larger corporations were forced to restate their earnings many Americans and investors began to lose confidence in corporations and financial institutions throughout the U.S and overseas. B)
A major change that took place as a result of the accounting scandals in the early 2000s were the legislation and President George W. Bush’s implementation of the Sarbanes Oxley Act of 2002. This act was created due to the Enron...
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