Emerging issues in Accounting
Below is the list of some of the emerging issues we have seen recently. These emerging issues have raised many questions on the functioning of accounting around the globe.
Continuing demand for skilled professionals
Globalization and International Financial Reporting Standards (IFRS) The accountant and Corporate scandals.
The call for Auditor rotation.
Need for Global Code of ethics
We will discuss one of the emerging issues in details. We will try to understand what the issue was, why it happened and how it can be prevented in future.
The accountant and Corporate scandals.
Accounting fraud is a manipulation of company’s financial data so that the image of company looks better than actually is, this in turn will have a positive impact on the shareholders/stakeholders regarding the firm’s ability and will urge investors to invest more.
Recent Examples and ‘how can we minimize these incidents’ Recent accountant and corporate frauds have raised questions on the ability of independent auditors to uncover the financial fraud. Below are some of the frauds which have been reported in last 10 years. We will see the magnitude of these frauds and then we will try to locate the pin point, which caused these frauds, how these frauds got caught and what can be done in future to prevent these happening or what can be done so that these frauds can be caught at early stage. American International Group (AIG) Scandal (2005)
Company: Multinational Insurance Corporation.
What happened: Massive accounting fraud to the tune of $3.9 billion was alleged, along with bid-rigging and stock price manipulation. Main player: CEO Hank Greenberg.
How he did it: Allegedly booked loans as revenue, steered clients to insurers with whom AIG had payoff agreements, and told traders to inflate AIG stock price. How he got caught: SEC regulator investigations, possibly tipped off by a whistleblower. Penalties: Settled with the SEC for $10 million in 2003 and $1.64 billion in 2006, with a Louisiana pension fund for $115 million, and with 3 Ohio pension funds for $725 million. Greenberg was fired, but has faced no criminal charges. Lehman Brothers Scandal (2008)
Company: Global financial services firm.
What happened: Hid over $50 billion in loans disguised as sales. Main players: Lehman executives and the company's auditors, Ernst & Young. How they did it: Allegedly sold toxic assets to Cayman Island banks with the understanding that they would be bought back eventually. Created the impression Lehman had $50 billion more cash and $50 billion less in toxic assets than it really did. How they got caught: Went bankrupt.
Penalties: Forced into the largest bankruptcy in U.S. history. SEC didn't prosecute due to lack of evidence. Bernie Madoff Scandal (2008)
Company: Bernard L. Madoff Investment Securities LLC was a Wall Street investment firm founded by Madoff. What happened: Tricked investors out of $64.8 billion through the largest Ponzi scheme in history. Main players: Bernie Madoff, his accountant, David Friehling, and Frank DiPascalli. How they did it: Investors were paid returns out of their own money or that of other investors rather than from profits. How they got caught: Madoff told his sons about his scheme and they reported him to the SEC. He was arrested the next day. Penalties: 150 years in prison for Madoff + $170 billion restitution. Prison time for Friehling and DiPascalli. Satyam Scandal (2009)
Company: Indian IT services and back-office accounting firm. What happened: Falsely boosted revenue by $1.5 billion
Main player: Founder/Chairman Ramalinga Raju.
How he did it: Falsified revenues, margins and cash balances to the tune of 50 billion rupees. How he got caught: Admitted the fraud in a letter to the company's board of directors. Penalties: Raju and his brother charged with breach of trust, conspiracy, cheating and falsification of records.
1) Firm details and data have been referenced from accounting-degree.org
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