BUS7C2 Finance & Accounting for Business Assignment Sample

Introduction
Accounting scandals have the potential to shake the confidence level of market investors that
causes financial distress. Concerning the past two decades, the accounting scandal of Eron
Debacle stands out that provides example of financial mismanagement as well as corporate
fraud. It severely affects the stock market performance and reduces the effectiveness of the
stock market by reducing market participation. The current report, in this respect, identifies
the scandal that happened in the recent past 2 decades with respect to the accounting scandal
made by companies like Enron, Tyco, HealthSouth, and WorldCom. The report focuses on
describing the background of the identified accounting scandal. In addition, it also analyses
the accounting or financial reporting violates that are related wih the scandal. However, it
highlights the lessons learned from the scandal as well as identified ways in which this
accounting scandal could have been avoided.
Identification and background of the accounting scandal that happened in the past 2
decades
Identification of the accounting scandal
Enron Debacle was energy organisation with its headquarters in Houston Texas. It was
considered to be one of the most successful and innovative organisation in the United States,
however, it was dissolved in the year 2001 due to the accounting fraud conducted. It has
emerged from the studies that the executive managers of the company incorporated
accounting practices that inflated the financial line items such as the revenue levels, thereby
presenting itself as the seventh largest organisation in the US market (Petra & Spieler, 2020).
In addition, the executives were found to hide the debt levels in its subsidiary firms to reflect
itself as the successful company in the competitive market. Similarly, in 2002, WorldCom
and Tyco were found to hide financial lossess from the market investors and inflate revenue
earnings respectively (Bhaskar & Flower, 2019). Moreover, in 2003, HealthSouth had been
found to be practicing similar accounting fraud reflecting the inclusion of accounting
techniques to inflate revenue earnings in the market.
In this respect, the case of Enron was found to be significant as the company not only inflated
the revenue levels but hid its financial losses in the financial reports that were presented
before the investors. This reflects that the accounting scandal of inflating revenue earnings
and hiding losses from the market investors have been highly practiced in the past 2 decades
which impacted the stock market conditions as well as investor sentiments in the market.
Additionally, this reflects that the executives of the mentioned organisations depicted

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unethical behaviour which creayed a negative corporate culture ad affected the long-term
sustainability of the businesses in the market.
Background of the scandal
Enron was an energy organisation being the resultant of a merger between the “Omaha-based
InterNorth Icorporated and Houston Natural Gas Company” which was formed in 1986. The
CEO of the company has been Kenneth Lay at the same time. Enron has been rebranded as a
trader and supplier of energy and it provided a variety of utility and energy services to
customers around the world. In 1990, the then CEO appointed Jeffrey Skilling, who had been
working as a consultant at McKinsey. At that time, the company was found to gain immense
support from the market due to its operational success in 1990. On the other hand, later it was
reported that the company has been internally fabricating the financial records thereby
creating illusion to the investors regarding the success of the company. The company was
listed under the S&P and it traded with 56% increase in 1999, and 87% increase in 2000 (Iren
& Kim, 2023).
Furthermore, concerning the financial loss of $102 million in the second quarter of 2001, the
CEO of the company sold 93,000 shares that reflected valuation of $2 million and influenced
the investors to continue buying the stock to have higher profits in the long term. In this
process, the company obtained a total of $20 million from the market by selling more than
350, 000 shares. Concerning the third quarter of 2001, the comany further incurred a loss of
$618 million and the CEO announced of revising the financial statements from 1997 to 2000
to resolve the accounting violations (Constable, 2021). The company has been found to
acquire $7.2 billion from financial institutions such as Deutsche Bank, Royal Bank of
Scotland, and Citigroup for settling legal issues. On the other hand, the credit rating agencies
in the mrket reduce the score of the company which further made the company fall in the
situation of bankruptcy. However, the company’s share price reduced to $0.26 from $90.75
after the discovery of the financial fraud conducted by the company.
Accounting/financial reporting violations associated with the scandal
Accounting or financial reporting fraud refers to the unethical practices followed by
organisational leaders to manipulate the financial information from the investors for personal
interest and gains. As per the words of Zahari et al., (2020), organisational leaders have been
found to be engaged in undertaking deceptive practices such as inflate revenue earnings, hide
financial losses, manipulate financial statements as well as falsify the financial records and
misleads the investors in the market regarding the performance, financial health and position
in the market. In addition to this, organisational leaders focus on achieveing personal goals

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rather than depicting the actual performance of the company to te investors. The view sheds
light on an understanding that accounting or financial frauds are conducted by organisations
where leaders focus on personal gains rather than organisational growth in an overall basis.
With respect to the fraud made by Enron, it has been evident that there have been several
violations of the accounting as well as financial practices which the CEO of the company
integrated thereby causing a financial distress in the market. The detailed accounting and
financial reporting violates related with this scandal can be further explained in detailed as
follows.
Off balance-sheet arrangements
It has emerged from the scandal that the company has been engaged in hiding the financial
losses incurred in the subsidiary firms. The company has been found to hide the debt levels
from the balance sheet to reflect on the stable financial health to the investors with the use of
“special purpose entities” (Amir et al., 2020). In addition to this, concerning one accounting
or financial violation, the financial statement such as the balance sheet of the firm understated
the liabilities and reflected an overvalue of the equity thereby aligning with the depiction of
inflated earnings (Khan et al., 2022). It can be stated that with the off-balance sheet
arrangegments, the company have been capable of inflating the profit levels, overvalue and
undervalue its equity and liability levels as well as manipulate the financial ratio. Thus, it can
be said that there has been a financial reporting fraud committed by the company.
Manipulation of revenue recognition
Concerning the scandal, the company was found to be engaged in accounting practices that
helped in inflating the profit levels reflecting violations relating to the revenue recognition
practices (Karim & Mofid, 2021). It has arisen that the company has been recording revenues
from long-tern contracts without any legal document or revenue receipt. This process assisted
the company in showcasing a high profitability position through its financial report reflecting
stable growth of the company. In other words, it can be stated that the company engaged in
falsification of revenue records which is considered to be one of the major accounting frauds.
Role of mark to market
The company has been further found to incorporate “mark to market” accounting practice
with the help of which the organisation recognised future profits before it even happening. In
other words, the expected profits have been recorded as profits earned by the company before
its actual realisation (Gallop & Lewis, 2022). This has been one of the aggressive accounting
practices that helped the company depict a false profit performance concerning its profit and
loss statement within the financial reporting system. In addition to this, this accounting

6practice helped the company in inflating the stock prices as well which have been found to be trading at $90.75 before the discovery of the fraud and failure of the company to hold the
investor’s confidence.
Insider trading
On the other hand, it has been found that Enron sold more than 350,000 shares in the market
by falsely influencing the investors to invest in the company in order to attain higher financial
returns from the investment reflecting the future growth prospective of the company (Batten
et al., 2020). In this context, it can be mentioned that in order to gain from the market, the
executives of the company conducted insider trading thereby selling off their own shares in
the market before the financial fraud became public. This has also been a major accounting
fraud that was included in this scandal.
Lessons to be learned and possible wayouts
Lessons learned
Based on the analysis of the accounting scandal, it has been prominent that organisations
need to focus on accounting transparencyand disclosure thereby providing accurate, and clear
information to the market investors and the other stakeholders with the timely disclosure of
the financial reports (Oino, 2019). This can help organisations increase the accountability as
well as prevent the practice of financial manipulation. In addition to this, it is essential for
organisations to set up a strong corporate governance structure that helps in setting up values
and morale for the employees as well as the managers of the company and prevent corporate
misconduct (Martins & Ventura Júnior, 2020). Moreover, with strong corporate governance,
organisations can ensure ethical behaviour of the employees. On the other hand, the BUS7C2 Finance & Accounting for Business Assignment Sample
appointment of ethical leaders in an organisation is of utmost important as it improves the
transparency of the business activities and fairness thereby enabling the organisation in
developing a trustworthy relationship with the stakeholders as well as shareholders (Hashim
et al., 2020).
Furthermore, it has been evident from the analysis of the scandal that it is essential for
organisations to incorporate risk management strategies that helps in identifying potential
risks and provides an opportunity to the organisations to develop mitigation strategies
(Abdullah & Said, 2019). In this context, it can be stated that with the inclusion of risk
management system, organisations can refrain themselves from any kind of violations
thereby improving the financial growth of the same. However, incorporating the system of
conducting audits in a quarterly basis is also important which can help in detecting financial
frauds and help organisations optimise strategies.

7 Strategies to avoid such scandals
Considering the Enron scandal, it has been found that the company lacked a strong corporate
governance structure and there has been no transparency concerning the business activities
conducted. In this regard, in order to avoid the accounting violations, the CEO of the
company could have incorporated corporate governance that prevents any individual from
associating with any kind of corporate frauds or violations of rules. In addition to this, it can
be further mentioned that it has been necessary for the executives to focus on transparency
and disclosure reflecting transparency of the business activities including the financial
transactions as well as disclosure of the financial statements timely with the financial
reporting system.
On the other hand, concerning the inflated profit earnings and hidden finacial losses, it can be
stated that the company could have included the system of auditing. The inclusion of regular
audits and reviews of the financial statements could have helped in identifying the frauds and
could have further helped in undertaking strategies to improve the same (Roszkowska, 2021).
Moreover, the implementation of the whistleblower program also could have helped the
stakeholders of the company in reporting any kind of frauds without any fear. However, this
could have further helped in establishing an independent investigation regarding the activities
of the company and reduce the risk level of the investors.
Conclusion
The study concludes that the accounting or financial fraud conducted by companies like
Enron, Tyco, WorldCom, and HealthSouth reflected inflating profit earnings and hiding
financial losses from the market investors and influencing them to buy more stocks and
misleading. The study further concluded that with strong corporate governance, ethical
leadership, and transparency of the business activities, financial frauds can be prevented.
However, internal and external audits also play a significant role in reducing financial frauds.

8 Reference List
Abdullah, W. N., & Said, R. (2019). Audit and risk committee in financial crime prevention.
Journal of Financial Crime, 26(1), 223-234.
Amir, E., Ghitti, M., Amir, E., & Ghitti, M. (2020). Special Purpose Entities. Financial
Analysis of Mergers and Acquisitions: Understanding Financial Statements and Accounting
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Batten, J. A., Lončarski, I., & Szilagyi, P. G. (2020). Insider Trading and Market
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Constable. S. (2021), How the Enron Scandal Changed American Business Forever,
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Gallop, G. F., & Lewis, M. J. B. (2022). Mark-to-Market Accounting Misuses and Abuses in
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