The University of Chicago WorldCom and Enron Accounting Scandal Discussion

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elna97

Economics

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The WorldCom and Enron accounting scandal involved the firm classifying operating expenses as capital investments. Discuss the impact on Enron and WorldCom's operating cash flow and their overall cash position. Did the financial statements contain any clues that could have warned investors of the fraud? Might there be broader market implications from Enron's failure? And could the Enron debacle have Been Prevented?

In addition, you need to reply to three other publishers about this discussion. These three discussions are in the attached word document. Each reply needs 100-150 words. Can not simply reply "I quite agree with you".

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Discussion 1: Because of Enron's current and former CEO's classifying the company's operating expenses as capital investments, many things were impacted. They had been hiding billions of dollars of debt when submitting the company's balance sheets. The scandal leads to the company filing for bankruptcy; shareholders lost over $74 billion as Enron's share price collapsed from around $90 to under $1 within a year, eventually leading to the company filing for bankruptcy and twenty thousand employees losing their job. With WorldCom CEO also was classifying the company's operating expenses as capital investments, many investors and employees were impacted. Unfortunately, WorldCom investors lost over one-hundred and eighty billion dollars, and thirty thousand employees lost their jobs. The CEO's actions caused their companies' cash flows, net income, and profit margins to be artificially inflated. I'm not quite sure if the company's financial statements contain clues or red flags that could have alerted your average investor. If the investor had the knowledge and tracked the information contained in a company's financial statement, then yes, "how could this be" questions would have risen. As I read both scandals, it was clear to me that there may be broader market implications from Enron's failure. Lastly, could the Enron debacle has been prevented, my response is a definite yes. Internal auditors found these discrepancies but were told to keep quiet, which they did. Should they have followed, orders that they knew were wrong, of course not. But let's start from the top as upper management had to have known, including their Board of Directors. There also should have been external auditors, and the CEO violated their code of ethics. Discussion 2: The WorldCom and Enron scandals created a huge change for the accounting world and also created the Sarbanes-Oxley Act in July 2002. The Sarbanes-Oxley Act is a federal law that created new rules and regulations for public and even some for private companies to enforce legitimate accounting practices. Filing expenses as capital investments caused WorldCom to overstate their profits by "around $3 billion in 2001 and $797 million in Q1 2002, reporting a profit of $1.4 billion instead of a net loss." Some clues that could have alerted investors of the fraud could be that WorldCom was reporting profits of about $175 billion during the doctcom bubble burst. Enron's failure to report accurate profits/losses causes a dark mark on the accounting world, but it also causes laws to be written so this could not happen again. This would have happened (and probably has happened on smaller scales) if Enron had be honest in their reportings. Enron just caused their demise to be prolonged. They were a failing company but they became too greedy. They did not want to go the way of other failing companies and they did what they thought would not hurt anyone. This debacle could have been prevented if the Sarbanes-Oxley Act had been enacted sooner. This act was only put into place though after these situations. Discussion 3: The Enron situation has affected the confidence of its investors greatly. This has caused a decline in the United States stock market as well as impacting the markets of the future foreign exchange. The net income on the financial statements is easily falsified in reference to the cash flow statement. Most investors don’t analyze the company’s financial statements but are looking for any indication the company is profiting. Before Enron’s scandal was recognized, Enron’s cash flow statement showed that its cash and operating income were inconsistent. When comparing the balance sheet, income statement, and cash flow statement it is simpler to recognize the problem of inappropriate records of liabilities, assets, and profits. The financial statements were whitewashed, making the records difficult for most people to identify. When the Enron incident was made public, the United States enacted the Sarbanes-Oxley Act, imposing stricter requirements on auditor’s independence and increased criminal liability to company management to further strengthen the supervision of accounting professions. This debacle has changed the accounting profession in the U.S. to ensure companies don’t continue to record financial statements fraudulently or misrepresent their profits to future and current investors. With proper accounting principals in place and accounting supervision, this could have been prevented.
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Attached.

Running Head: WORLDCOM AND ENRON CORPORATE ACCOUNTING SCANDAL

WorldCom and Enron Corporate Accounting Scandal
Name
Instructor
Institutional Affiliation
Date

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WORLDCOM AND ENRON CORPORATE ACCOUNTING SCANDAL

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Discussion
The case of Enron and WorldCom present some of the world’s most serious corporate
accounting scandals of all time. The case of Enron and WorldCom showcases the implication of
manipulation of financial statements of the company. After the merger with a Texas based
company, Enron started generating year-after-year profits for investors. The continuous growth
in profit attracted many investors making the company’s name to appear in the Forbes list of
Fortune 500 companies (Brickey, 2003). In less than one year, things started turning for Enron as
the company had gone from being one of the most profitable to filing for Bankruptcy protection.
Following an inquiry by the SEC, it became evident that the company executives had
exaggerated the company earnings and instead of taking profits, the company had actually been
posting losses amounting $586 million. Within a year, the stock value of the company had
depreciated from high of $90 to $ 1 per share. In December, 2001 Enron filed for bankruptcy
protection (Brickey, 2003). Seven months later, the case of WorldCom emerged. WorldCom
filed expenses as capital investment resulting to overstatement of the company’s profit in tune of
over $3 billion and reporting a profit of ov...


Anonymous
Excellent resource! Really helped me get the gist of things.

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