Enron and worldcom scandals summary

Following the events of WorldCom and Enron, the SOX Act corrected many of the issues regarding lack of oversight. Unfortunately, these regulations were resulting consequences of these incredible accounting failures.

Both GAAP and IFRS standards, when used correctly, are sufficient for creating clear and understandable accounting profiles of a company. The create pipelines for financial information regarding both internal and external users and should be transparent. To prevent error, these records must be thoroughly reviewed by both internal and external accountants.

In the cases of Enron and WorldCom, egregious accounting errors and deliberate misstating of information led to two of the world’s largest corporate downfalls and criminal investigations in modern history. Both companies made errors in their accounting. Enron shuffled debt obligations and reported future contracts as revenue, altering their records to show massive growth (O’Leary, 2017.) WorldCom similarly euphemized their records by filing clear expenses as investments which do not appear on the income statement and thus, falsified their income as significantly higher than actual (Tran, 2002.) Both of these accounting errors, whether deliberate or not, are inexcusable and such negligence on this scale should be means for corporate bankruptcy and criminal investigation.

The third party that conveniently, and illegally, played a role in these situations was Arthur Anderson – a account consulting firm. Specifically in the case of Enron, Arthur Anderson deliberately shredded audit documents confirming the oil company’s failures (O’Leary, 2017.) Though AA did not have similar criminal investigations for their involvement in WorldCom, they did settle the lawsuit – which neither confirms or denies guilt - brought by WorldCom investors for failing to disclose pertinent accounting failures (USA Today, 2005.)

The SOX Act is designed to mitigate the lack of transparency and illegal behavior that caused these two mega-corporations to collapse; however, examples like Wells Fargo have proven that illegal and unethical accounting and business practices can exist in the face of regulation. It remains critical that corporations, as well as auditing accounting firms, are held to the utmost discipline with their reporting and indiscretion is considered criminal. Failure to competently and honestly report accounting figures, as seen in these cases, greatly affects employees, investors, and the greater stock market.

References:

O'Leary, C. (2002, December 31). Enron-What Happened?: Year In Review 2002. Retrieved August 30, 2017, from https://www.britannica.com/topic/Enron-What-Happened-1517868

Tran, M. (2002, August 09). WorldCom accounting scandal. Retrieved August 30, 2017, from https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2

USA Today. (2005, April 25). Arthur Andersen settles with WorldCom investors. Retrieved August 30, 2017, from https://usatoday30.usatoday.com/money/industries/telecom/2005-04-25-worldcom_x.htm