Accounting Scandals

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What is Accounting?
• Accounting is the process of recording and summarizing financial
information in a useful way.
Components of Accounting
Accounting consists of 2 parts
1. Book-keeping
2. Analysis
• Book-keeping, which is also known as financial accounting, is the process of
recording and summarizing financial information. Book-keeping involves the
recording of transactions which are then summarized and presented in the
form of financial statements which show the overall health of the business.
Importance of Accounting
• Record
Organizations need to have a reliable and systematic way of recording financial information. Accounting is
necessary to ensure that those running the business have a reliable record of financial transactions.
• Legal
Accounting helps organizations to determine their financial rights and obligations. Without proper accounting, it
would be very difficult for a business to calculate. For example, the exact amount a supplier needs to be paid.
Accounting is therefore necessary for a business to fulfill its legal obligations and asserting its own legal rights.
Maintaining accounting records and preparing financial statements is also often a legal responsibility for businesses
above a certain size.
• Performance
Accounting information is summarized to produce financial statements. Financial Statements provide an overview
of the financial activities of a business during a period as well as information about its financial position on a
specific date 
Financial Statements help owners in assessing the performance and position of their business which can guide their
investment decisions (e.g. whether they should invest more in the business, diversify or dispose their investment).
• Planning and Control
• Accounting helps organizations to plan their finances by developing budgets
and forecasts. This process helps organizations in planning their finances
ahead and controlling any deviations from the budget.
• Decisions
• Accounting provides a basis for managerial decisions. Examples of such
decisions include:
• Investment Appraisal
• Make or Buy decisions
• Pricing Decisions
What is an Accounting Scandal?
• Accounting scandals are political and business scandals which arise
due to misdeeds by trusted executives of large public corporations.
• Such misdeeds typically involve complex methods for misusing funds,
overstating revenues, understating expenses, overstating the value of
corporate assets or underreporting the existence of liabilities.
• All accounting scandals are not caused by top executives. Often
managers and employees are pressured or willingly alter financial
statements for the personal benefit of the individuals over the
company
First ever Accounting Scandal
• Company: Fred Stern and Company(Rubber Importer)
• Auditors:  Touché Niven (Deloitte)

• In 1924 auditors Touché Niven gave the rubber importer, Fred Stern and Company, an
unqualified audit certificate, having failed to discover that management had falsified entries
to overstate accounts receivable.
• The auditors knew that the accounts when certified would be used to raise money and for
that purpose supplied 32 certified and serially numbered copies: p. 442.
• On the faith of one of those copies, given to it on its demand, the plaintiff, Ultramares
Corporation, lent Fred Stern and Company money. Stern declared bankruptcy in 1925.
Ultramares sued Touché Niven for the amount of the Stern debt, declaring that a careful audit
would have shown Stern to be insolvent. The audit was found to be negligent, but not
fraudulent.
Enron Scandal
• Company: Enron Corporation. (Energy Commodities and Services)
• Auditor:  Arthur Andersen
• Enron's complex financial statements were confusing to shareholders
and analysts. In addition, its complex business model and unethical
practices the company is using accounting limitations to
misrepresent earnings and modify the balance sheet to indicate
favorable performance.
• Revenue Recognition.
• Market-to-Market Accounting.