KAREN YVONNE R.

BILON AC401

Accounting scandals are business scandals which arise from intentional manipulation of financial
statements with the disclosure of financial misdeeds by trusted executives of corporations or
governments. Such misdeeds typically involve complex methods for misusing or misdirecting funds,
overstating revenues, understating expenses, overstating the value of corporate assets, or
underreporting the existence of liabilities.

Two of the world's biggest and worst accounting scandals involves the Enron Corporation and the
Worldcom.

The WorldCom scandal is regarded as one of the worst corporate crimes in history and its bankruptcy
filing in 2002 being the largest of such filing in U. S. history. Evidence shows that the accounting fraud
was discovered as early as June 2001, when several former employees gave statements alleging
instances of hiding bad debt, understating costs, and backdating contracts. That is why the US Securities
and Exchange Commission launched an investigation into these matters on June 26, 2002 and by the end
of 2003, it was estimated that the company’s total assets had been inflated by around $11 billion.

As a result, the SEC filed a civil fraud lawsuit against WorldCom and federal charges were filed against
several executives who then faced criminal charges for their involvement.

The fraud was accomplished primarily in two ways. First is by underreporting ‘line costs’ (interconnection
expenses with other telecommunication companies) by capitalizing these costs on the balance sheet
rather than properly expensing them and thus avoiding the loss of billion dollars. Second is by inflating
revenues with bogus accounting entries from “corporate unallocated revenue accounts”. WorldCom was
crushed by its $41 billion debt load.

On the otherhand, Enron Corporation was one of the largest energy company that sold electricity and
natural gas. They were also involved in the distribution of energy and risk management and financial
services to many people worldwide. The company became very successful and seemed indestructible.
Everything seemed rosy until they filed for bankruptcy in 2001.

At the end of 2001 it was revealed that its reported financial condition was sustained substantially by
institutionalized, systematic, and creatively planned accounting fraud, known as the “Enron scandal”.
With all this success and rapid expansion the company had to borrow money. This was in a bid to cover
up their excess debts. The debts would have made the stock value dip and they could not take that
chance. So they opted to hide their debts in special purpose entities or ‘partner’ corporations.

With this information under wraps Enron kept looking better because of their unethical and illegal
accounting practices.

It's unfortunate for both of the companies to face the same faith. They were both at the peak of success
only to fell so hard on the ground. Those people responsible for that downfall, are the ones who dug
their own pitfalls. They knew the right things to do but opted to do the opposite for their own benefit.
Risk taking is a common thing in the business world but to risk everything and cost people their
livelihoods as well as compromised their self-dignity is unacceptable.

Most corporate scandals are a result of employers and/or employees being so focused on the short-term
financial gain that they are willing to jeopardize the reputation of themselves and their company. They
are also the result of someone or multiple people disregarding their ethical beliefs and practicing
unethical behaviors.

It's a shame that an auditor, specifically Arthur Andersen, which was one of the five largest audit and
accountancy partnerships in the world, took part in covering up Enron's real status. He was supposed to
be relied on by the shareholders and other end users of the financial statements to reveal any
discrepancies if there is any and to make sure that the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework and adequately disclosing all
the relevant facts.

Instead he was accused of applying reckless standards in its audits because of a conflict of interest over
the significant consulting fees generated by Enron. It that was the case, he should have applied the
appropriate safeguards to avoid this disastrous situation.

Everyone was too focused earning and gaining personal advantages that they forgot their own duties and
responsibilities that led everyone to a downfall.