Effects of Manipulative Accounting Practices

Essay by msvuUniversity, Bachelor'sA, May 2009

download word file, 10 pages 4.0

This paper examines the use of manipulative practices by accountants and the impacts of their manipulation in an ethical context. In particular this paper discusses the major accounting scandals in recent years and the effects on the accounting industry.

Users of financial statements typically assume that financial statements are presented fairly and thus rely on them to make economic decisions. This is not always the case as preparers of financial statements can be persuaded to distort or manipulate financial statements to tailor the overall message the financial statements present to suit their needs. We have seen proof of this with the Enron and WorldCom scandals. This is typically described as creative accounting or earnings management and as we have seen in recent years this practice can have enormous economic consequences and greatly impact accounting standards.

In the past decade there have been a number of major accounting scandals that have occurred.

The most famous accounting scandal was likely with the Enron Corporation. The Enron Corporation filed for bankruptcy protection in 2001 (From collapse to convictions: a timeline, 2006). The events that led to this included years of fraudulent accounting. Although many shareholders of Enron thought that Enron's operations had promising returns they were unaware of the true financial position that Enron was in. Executives of Enron engaged in "creative accounting" to hide many of their liabilities. By utilizing special purpose entities (SPE), Enron was able to hide millions of dollars of liabilities and manipulate their financial ratios and credit ratings to what investors sought in the stock market.

WorldCom was another major accounting scandal that took place in the last decade. When WorldCom filed for bankruptcy protection in 2001 it went down in United States history as being the largest bankruptcy to have ever been filed (The WorldCom Story, 2006).