Topic: Accounting
Report on incidents of misuse of funds that might have been avoided if proper accounting and auditing practices had been followed. (500 words)
Enron Case
People have always been baffled by the way Enron, a company that appeared so large and powerful crumbled almost overnight like a house of cards. The big question has always been how its management managed to fool the Wall Street community and the regulators for such a long time with nonexistent off-the-books corporations (Seabury, 2010). The genesis of Enron collapse can be traced from the fall of 2000 when investigation revealed that Jeffrey Skiing, Enron CEO, started hiding its financial losses of the company trading business and its other operations through what has come to be referred as mark to market accounting (Seabury, 2010).
Normally, companys books rarely indicate accurately the market value of these items in the books. According to GAAP, companies ought to record their assets value at cost so that they can be conservative. This system has been hailed for ostensibly creating a semblance of a fair playing filed as far as valuation of companies is concerned. This however changed in the 1980s with the adoption of the mark to market accounting. According to mark to market accounting a number of assets can be valued at their fair market value, instead of at cost as is recommended by GAAP (Elmerraji, 2010). One of the greatest catalysts of this migration to mark to market accounting was new approach America started looking and doing business investing was increasingly becoming not only popular but also accessible, while business was now thinking that paIDing their coffer with bond and stocks was far much better than hoarding cash. This therefore rendered recording liquid assets at cost like derivatives and stock irrelevant, if anything investors wanted to be updated on the actual value of whatever was on their books. The accountants gave up, if anything the system was improved transparency for the investors. That is how this system that Enron management exploited came about (Elmerraji, 2010).
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