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Merger between WorldCom and Sprint Corporation
The past few years have been characterized by trends such as privatization, liberalization and deregulation in industries once managed by the government. Take the telecommunications sector as an example: In the early 1990s, over 129 countries set up privately owned regulatory agencies, and another 100 countries privatized the government-controlled telecom companies. The Federal Communication Commission (FCC) of the US telecom Industry strives to control competition, standardize prizes and inspect foreign communication. The same issues licenses to various service providers under their jurisdiction. The institution also helps telecom services across the country to establish themselves and get running. Protection of consumer rights is also part of their mandate. They are also the ones behind the National Broadband Plan (National Research Council, 1995).
The debate on the government policy on the information industry has been on for quite some time now. As a matter of fact,…… [Read More]
Mark started acquiring more assets, the biggest, a 30-year concession to provide water and sewage services to two million residents of Argentina's Buenos Aires province, for which she paid three times the second highest bid.
Mark was determined to take Azurix public, giving her an independent company far removed from Jeff Skilling. In June 1999, she floated a third of the company at nineteen dollars per share, raising $695 million. Azurix however, was doomed from the start. Water is a localized business that lacks the continent-spanning pipelines and transmission systems that allow natural gas, oil and power to be moved and traded between locations, and could never be traded the same way. The regulated water business has extremely low margins, with utilities making money by cutting expenses to the bone, but Mark took the opposite approach. She ran Azurix as if money was never an issue, overpaying for acquisitions and…… [Read More]
This value may not be immediately apparent, however, as investments are long-term projects, and expected to grow over time, hence a new factory is allowed to be accounted for differently than say, a new box of paperclips. But under orldCom's accounting system, a new ream of computer paper was just as much as a 'investment project' as introducing a new computer operating system designed to increase efficiency.
From an accounting perspective, this meant that orldCom could spread the costs of such fictional investment expenses over a number of years, instead of having to account for these outlays on a regular basis as expenditures that detracted from its profit margin. This made orldCom's profits look much greater than they were in comparison to its telecommunications rivals, had the figures been computed accurately, like other, competitor firms. Thus, the company seemed much more attractive to investors, because of this artificially inflated profit…… [Read More]
Companies that stress financial results measured as earnings before interest, taxes, depreciation and amortization, should be one potential red flag for regulators (Krantz 2002:2).
Because it is extremely difficult for ordinary investors to carefully compare companies like orldCom with their rivals, so they can see how other companies capitalize their costs, this underlines the need for greater oversight of emerging technical companies, as well as large-scale firms, in terms of what constitutes a cost and an investment. The damage done by orldCom is not confined to its executives, accountants, and to the individuals who perpetuated the fraud, but the millions of ordinary employees and investors that relied upon the company for their livelihood. Nothing can restore the financially secure future these individuals expected. They assumed that they would be able to count on the now-bankrupt firm for their pension, health insurance, and future advancement. The FASB must issue more specific…… [Read More]
MCI- World Com
My name is Thada Parker, and I am submitting a suggestion that could make MCI World com be able to achieve its goal in maintaining its services to society. No one wants to see MCI-World com lose its business. You have brought the Internet to us, which has significantly advanced our lifestyles. As you know, the Internet has made a great contribution to the economy. I have read about the objectives of World com written by the Chief Executive, John Sidgemore, to continue to provide services to the community. The purpose of my paper to prove how MCI-World com can take every ones focus away from the accounting error and place the focus on the positive effects of the Internet that you brought to us by making the Internet much more widely available.
Every company has had setbacks and disappointments, and the accounting problem was major because…… [Read More]
Other stakeholders were not given a voice to participate in the decision- making discourse. Therefore, the principles that were constructed that allowed the executive financial team to make these decisions led to unethical results.
Statement of Position:
Once reviewing these three ethical concepts and using them to analyze the WorldCom scandal, it becomes clear that the actions of WorldCom were unethical. This was not a matter of simply not understanding the effects their deceitful actions would have, but purposeful deceptive strategies to fool investors and other stakeholders into thinking the company was financially healthier than it truly was.
Arguments in Support of this Position:
The events of the WorldCom scandal will forever be replayed in business and accounting history, along with the variety of other corporate fraud activities recorded in the late 1990s and early 2000s. Common to all ethical concepts is the concept of 'good' (Darwall, 2003). WorldCom's actions…… [Read More]
The first three organizations in line to recuperate their funds were Citigroup, J.P. Morgan and General Electric Group. They had been offering financial solutions and encouragement to purchase the WorldCom stock based on a favorable business relationship. However, at the time when bankruptcy procedures were commenced, the three organizations recognized their losses and intended to recuperate them.
A succinct presentation of the period surrounding the crisis could be reveled by the media stories:
27 June 2002 - information on the people affected by the WorldCom crisis become available - about 60 banks across the globe had granted loans to the organization or purchase bonds
27 June 2002 - SEC charges the organization with fraud and three organizational leaders are subpoenaed before a governmental committee
28 June 2002 - John Sidgmore announced a cut in costs by $1 billion and the downsize on 17,000 employees
U.S. President George Bush condemns organizational…… [Read More]
First, the decreasing subscription of land-line telephone service due to the proliferation of cellular technology. Since 2001, there has been a steady decline in market share of land-line telephones as more and more users chose to use cell phones as their permanent phone provider. WorldCom, with its specific focus still on land-line services has created a multitiered strategy to promote land-line use. They emphasize new packages that are more affordable than older packages, with shorter time commitments, as well as more land-line services than previous offers. WorldCom believes that this strategy promotes greater diversification of land-line services across many different platforms that will increase the overall usage and service provision for American consumers. The second major issue that impacts WorldCom's future strategic vision is the emergence of VIP services as a mode of land-line phone services. VIP (Voice over IP) are internet-based telephone services that utilize the internet connections to…… [Read More]
Worldcom financial disaster provided many substantial learning points while helping expose the importance of accuracy and integrity in accounting procedures and standards. Eight years ago, when the true nature of the rise and fall of this telecommunications giant became public, many in the financial sectors of the world demonstrated shock and disbelief at the remarkable scope of corruption seemingly stemming from this agency. The purpose of this essay is to highlight worthwhile lessons of the Worldcom accounting scandal occurring at the early part of this century in an attempt to gain understanding of the temptations, consequences and regulations of the ever changing world of finance and its accounting procedures.
Understanding and defining fraud is helpful in understanding the events of the Worldcom situation. My personal definition of fraud states that fraud is an intentional act to deceive another in order to gain a competitive advantage over that targeted person or…… [Read More]
Madoff Investment Securities LLC (BLMIS) committed one of the greatest financial frauds in U.S. history. Investigations revealed that Mr. Madoff operated an elaborate "Ponzi Scheme" that started operating in 1980s.Even though Madoff was initially supposed to invest all of his clients' money in the securities markets, he never did so. Instead, he deposited the whole amount in a certain bank account that he held with the Chase Manhattan Bank. He therefore fulfilled his client's redemption requests using his own money. The fraud value was estimated at $50 billion and became a matter of public knowledge only after Madoff confessed to the crime. It can be regarded as the biggest financial fraud in U.S.'s history and it affected a large number of investors.The financial industry blamed the investors as well as regulators for neglecting the various warning signals that enabled Maddoff to continue with the fraud for several decades.
The Board…… [Read More]
The reality was that a company which aspired to be "the No. 1 stock on all Street" was instead steadily bleeding money while claim growth in the billions.
The pressure placed upon accountants at ordCom was reflective of the pressure facing accountants throughout the economy during this period of widely absence securities oversight. Indeed, the relationship between regulation and accounting is essential, and this diminished link would have catastrophic implications for the profession as a whole. Such is shown by the Scott text, which tells that "efficient securities market theory has major implications for financial accounting. One of these is that supplementary information in financial statement notes or elsewhere is just as useful as information in the financial statements proper. Another is that efficiency is defined relative to a stock of publicly known information. Financial reporting has a role to play in improving the amount, timing, and accuracy of this…… [Read More]
The first was the motivation on the part of Ebbers and Sullivan. The second was the complicity of employees within orldCom's accounting department. The third was the complicity of the external auditor, Arthur Andersen. In order to prevent such frauds from occurring, these different factors should be addressed. ith respect tot Ebbers and Sullivan, two problems occurred that should be prevented in future.
The first is the heavy emphasis on option-laden compensation. This created an incentive for Ebbers to manipulate the company's stock, as his options were under water. A greater emphasis on hard salary and bonuses would partially address this problem, or an emphasis on performance-based compensation that takes long-run performance into account would be more useful. In addition, too much control was held by too few. For instance, the internal auditor was informed by the external auditor that he only answered to Sullivan. This concentration of power enabled…… [Read More]
Prior to the corporate financial scandal, WorldCom was one of the largest long distance telephone companies (euters, 2003). Initially headquartered in Mississippi it later moved to Virginia. The company grew fast by acquiring other companies such as MCI Communications in 1998 and UUNET technology in 1996. Other companies acquired included, Metromedia in 1992, esurgens Communications Group in 1993. In the course of this acquisition spree, WorldCom undertook two complex takeovers. The first was the 1998 acquisition of CompuServe from H& Block where it retained the network division, sold off the online service to American Online (AOL) and the second, the acquisition of Digex in 2001, and disposed of all Digex assets to Allegiance Telecom (Kaplan & Kiron, 2004). With these acquisitions, it gained a favorable reputation in the market as a company with a solid foundation.
Facts of the WorldCom Case
The WorldCom fraud case is one of the…… [Read More]
WorldCom Noose Getting Tighter: Bankruptcy Tough to Avoid" illustrates dramatic business news, relevant to current issues in the telecommunications slump. The WorldCom bankruptcy declaration is also personalized because it reminds the reader of the fragility of the economy as well as the possibility of individual financial ruin.
The fact that the $3.9 billion fraud disclosure was a "record" indicates controversy and drama, no doubt conflict-filled. Because this dollar amount is clearly stated as being a "record" signifies the novelty of this particular incident. That banks could "force" WorldCom into default depicts actual action in the business world. Newsworthiness of this piece increases with the stress on the sullying of the WorldCom name, which is "permanently scarred," and "damaged beyond repair."
Investors are angry, notes the journalist: the issue is personalized, identifiable, and conflict-filled. The mentioning of 20 million customers further drives home the fact that you, the reader, are directly…… [Read More]
In 2001, WorldCom was a company at the top of its game. Although 2001 was difficult for them, it was difficult for all telephone companies. The number of local phone companies had dropped from 330 to 150 in 2000. They lost market share and encountered significant competition to their internet services. However, it still had more than $30 billion in annual revenues, and even after extensive layoffs, had over 60,000 employees (Warder, 2004), including Cynthia Cooper, Vice President of Internal Audit. They had over 20 million residential accounts, and business accounts well into five figures (Warder, 2004). They provided internet services to over 100 countries (Warder, 2004).
In spite of industry turmoil, Worldcom was optimistic about its long-term prospects, and CEO ernie Ebbers continued to make acquisitions for the company, leveraging them with company stock. These efforts put strains on customer support, which appeared to be a major reason…… [Read More]
By "spreading these large expenses over decades rather than years," WorldCom's appeared to do the impossible: "cut annual expenses, acknowledge all MCI revenue, and boost profits from the acquisition" (Moberg & omar 2008).
Who wouldn't want to invest in such a profitable company? Investors, mislead by such accounting data, flocked to buy the stock, Based upon analysts' recommendations, many people used the stock to bolster investment portfolios designated for retirement and college savings. While it is acknowledged that buying stocks always entails some risk, WorldCom's inaccurate financial reporting made an objective evaluation of its policy impossible. Upon acquiring companies, WorldCom management chose also chose to ignore credit department lists of customers who had not paid their bills for a long time, thus discounting the financial drain of non-collectable bills.
Management planning: Contingency planning and corporate social responsibility
The complete lack of contingency planning on the part of WorldCom management was…… [Read More]
Betty Vinson was horribly unjust, especially considering that she cooperated completely with federal prosecutors. Indeed, it is difficult to imagine how their case against WorldCom CEO Bernard Ebbers could have proceeded as well as it did without the cooperation of Ms. Vinson. Certainly, if the federal government is to be expected to attract the small "fish" to give up the big "fish," then this certainly is counterproductive.
Certainly, Ms. Vinson made the decisions that she made due to the fact that she was fearful about losing her job if she did not engage in the activity that she did. After all, did the accounting agency pick up on the fraud? The above conviction is especially unbelievable since she took the stand not just against Ebbers multiple times, but also Troy Normand was only given three years' probation and did not impose a fine on him. This was especially the case…… [Read More]
Bush, who declared that corporations which jeopardized the investments and jobs of millions of individuals should pay their dues. The United States Senate and the House of epresentatives also became involved and proposed numerous modifications.
The pillar of the changes occurred in financial reporting after the accounting scandals is based on increased transparency and more support in conducting audit operations. The XBL system for instance will allow the Securities and Exchange Commission to conduct analyses in a more efficient manner. All efforts to improve the financial reporting system have been condensed into the Sarbanes-Oxley Act. It represents the most important regulatory act of the past 70 years and it is applicable all around the world; it addresses issues that refer to all players in the corporate reporting chain.
Bautista, L.., 2004, Implications and Effects of Sarbanes-Oxley Act, Securities and Exchange Commission, etrieved at http://www.adbi.org/conf-seminar-papers/2006/03/30/1739.implications.effects.sarbanesoxley/onMarch 13, 2009
Cooper, C., 2007,…… [Read More]
NASDAQ v AMEX
NASDAQ is a U.S. electronic stock exchange that began trading in February 1971. At that time, it was the world's first electronic stock market. It is now the largest U.S. electronic stock market as it lists the most companies (approximately 3,300) and, on average, trades more shares per day than any other U.S. stock market.
The American Stock Exchange (AMEX), on the other hand, traces its origins back to colonial times when stock brokers created outdoor markets to trade new government securities; it is now the third largest stock exchange in the United States after NASDAQ and NYSE.
The AMEX is operated by American Stock Exchange LLC, a subsidiary of the National Association of Securities Dealers (NASD) who are also the operators of NASDAQ. Out of the three major American stock exchanges, the AMEX has the most liberal policies regarding company listing, and most of the companies…… [Read More]
Though the director claimed to have no knowledge of the accounting fraud, analysts wonder what other than his silence could possibly warrant such a high compensation package (English 2002). This is yet another company where slews of jobs were lost, pensions and benefits disappeared, and yet many top executives received lucrative compensation and severance packages, five years before any TAP funds were available to provide them.
There is some hope that the situation might change, however. In the wake of the financial scandal, and even in the years leading up to it, many CEOs signed deals agreeing to limit their own pay should their companies hit troubled waters (Penttila 2009). Congress has also been considering legislation that would either directly limit executive compensation in public companies, or allow for direct shareholder say in the compensation of company officers, but often this type of "consideration" is really political double-speak for seeming…… [Read More]
He is serving a twenty-five-year sentence for his conviction.
The reason Ebbers was found guilty of criminal fraud, despite being in a business, is because his actions met the above referenced elements of fraud. For example, his filing of false statement was an intentional act that contained an untrue representation of an important fact: WorldCom's accounting. Further, this untrue statement was believed by the company's investors, or in this case, the victims. Further, the investors relied upon Ebbers' statement as being true and thus acted on it in terms of their investment decisions. Finally, as a result of the investor's reliance and action upon Ebbers' false statements, they lost a significant amount of money. Thus, because Ebbers' actions satisfy the elements for criminal fraud, it does not matter whether or not he was acting within a business capacity.
Associated Press (2005): "Former WorldCom Chief Signs Agreement Over Fraud Charges."…… [Read More]
Sarbanes-Oxley Act of 2002
administration as also a majority of other western administration witnessed the collapse of corporate giants like Enron & Worldcom in the aftermath of noticeably fraudulent executive actions of these companies. This led to shareholders losing confidence and stringent laws was felt necessary in the form of new legislation to avoid repetition of Enron and Worldcom like incidents. The then President George W. Bush entrusted Senator Paul Sarbanes and Congressman Mike Oxley to come up with stringent new laws which would arrest or at least diminish probability of corporate scandals from repeating which came to be known as the Sarbanes-Oxley Act, of 1992. (Holt, 2008)
Key components of SOX Act covered under major Sections of the Act:
Sec 406 of the Act mandates every senior Financial Executive to be signatories of a Code of Ethics. Sec 409 mandates that companies make adequate disclosure regarding material financial alterations…… [Read More]
And the ability to know when to sell shares made the executives careless in their management, as they would know when they could "cut their losses."
Critics of insider trading laws would contend that the problem with Enron and WorldCom was insufficient oversight of these corporation's accounting procedures, not insider trading. The criminal behavior was not the fact that key executives knew when to buy and sell their shares, but their manipulation of company profits. Even many sophisticated investors were duped. And finally, the credit crisis of 2007 shows how no human being can perfectly predict market behavior, and is often duped by misleading indicators. Inside information is no guarantee of financial largess.
Legally, insider trading can be difficult to prove -- it must be demonstrated that the person sold their stock in an irregular fashion based upon non-public information he or she demonstrably possessed prior to the "fire sale"…… [Read More]
Dishonesty in either could result in disaster for companies. Communication is the element that unites everything else. Employers should encourage employees to communicate either grievances or suggestions. This opportunity will result not only in better mutual understanding, but also in loyalty that arises from being valued as an employee.
4. I certainly would want to do homework on any company I enter for the first time - and particularly one where my predecessor left under a cloud. It could mean many things, which my investigation is obviously meant to reveal. It could mean that the person who left was him- or herself not honest and brought about an unsavory situation. It could also however mean that working conditions became such that the person had no other choice than to leave, even if it meant that unsavory reputations would remain. I would want to thoroughly investigate to determine what the situation…… [Read More]
Most companies are today setting up certain 'ethical codes of conduct', which the employees, right from the top echelons, are expected to follow; in fact, it is considered a business imperative to follow a code of ethics within the various operations of the firm. (Ethics in Business)
hat prompted this sort of measure was the fact that not only were quite a few companies suffering losses from the breach of trust that the lack of ethics was inflicting, but also because of the fact hat investors and consumers were also suffering. The recent wave of scandals that rose from the series of frauds and the feeling of a lack of ethics among the top personnel in companies on all Street that came to light has brought the attention of the entire world on the changing ethics in the major companies of today, and this has led to a need to…… [Read More]
crime doesn't pay sometimes is a whole point which can't be applicable, especially when you're trusted with the management of multi-billion dollar corporation, and to be in charge of the well -- being of thousand of people. It's so difficult to criminalize someone's action, if such action doesn't cause any harm to anyone or if someone doing a lot of critical charity works. The case of Richard M. crushy can be described as one of the most important scenario which can acts as one of the success stories, showing how far most of these business ethnical values can be abused to hurt everyone for a period of time. As stated by Jennings (2012) in his book "Business Ethnics Class" unethical practices can only last for a short time, and nothing helpful can be found out of it.
However, the carpenter teachings regarding people who do not pursue wisdom that are…… [Read More]
Values and Morals in the Accounting Industry
The important questions to be addressed are taken from the "…business ethics/corporate social responsibility literature, oriented towards business enterprises but also of relevance to professional bodies: whether being ethical 'pays' in financial terms; and whether formal codes are useful in promoting ethical behavior…" (Cowton, 2009, p. 177).
Accountants are charged with carrying out ethical and moral decisions in their everyday work, but judging from some of the scandals in recent years (Enron, orldCom, the Anderson Accountancy, etc.) not all accountants are up to speed with those ethical and moral decisions. This paper reviews the judgments that accountants should be making based on morality and ethical values, whether the accountant is working for a multinational corporation or for a small business with only half a dozen employees.
Accounting Students and Moral Decision-Making
Deborah Leitsch writes in the Journal of Business Ethics that auditors are…… [Read More]
Hastie Group Governance Failure
Hastie Group Corporate Governance
Hastie Governance Failure
The downfall of the Hastie Group reads much like the other major corporate failures around the world including Enron and MCI Worldcom in the United States. There is general pattern emblematic to more corporate scandals. That pattern is when figures are "massaged" or even completely made up. This pattern manifested itself yet again with the Hastie Group. Once someone caught on to the massive amount of lies and misdeeds, it was too late for most workers and the company itself.
Deficiencies & Circumstances
It was reported in August 2012 that the Australian Securities and Investment Commission (ASIC) by the administrator of Hastic, that being PPB Advisor, and its receiver, that being McGrathNicol, the substance and extent of the misdeeds of Hastie relative to the allegations that were levied. Even though the review at that point was in its nascent…… [Read More]
Nortel Case Study
Nortel Networks Corporation, more commonly referred to as Nortel, was a global company of Canadian origin that at its peak in the early 2000's had comprised of one-third of the total valuation of the companies listed on the Toronto Stock Exchange (TSX). Nortel was founded in 1895 in Montreal, Quebec, with its manufacturing headquarters currently located in Mississauga, Ontario. The company manufactured data networking equipment along with offering telecommunication services. It employed over 94,500 employees worldwide.
Nortel's troubles began in the 1990's when under CEO John Roth, the company expanded into the internet technology market. Roth used media to alter public perception of the company. The sale of the optic fibre networking gear by the company from then on was hyped up by the speculators in the market, driving the share price of the company up, even though the company failed to produce overall annual profits. This…… [Read More]
corporate ethical breaches in recent times, assess whether or not you believe that the current business and regulatory environment is more conducive to ethical behavior. Provide support for your answer.
Unethical behavior has drawn the attention of the public for the few last decades in all kinds of business. Many transformations in the business environment have taken place, including immoral conducts and the tendency for corruption. Unethical accounting behavior is also included as a consequence. So the government has been forced to increase regulations and inspect actions taken in business, most especially after the Enron, Tyco, WorldCom and other unethical accounting scandals. As a result of the mentioned scandals, the government then passed the Sarbanes-Oxley Act in 2002 providing regulatory requirements for better precision in business action, accountability and assurance of ethical accounting behavior by publicly held companies and accounting firms. According to Calle (2000), the total number of boards…… [Read More]
WorldCom (CEO Bernard Ebbers) supported by years of profitability arising from the deregulation of phone companies was a fast moving stock that was highly toted by stock specialists as a must buy, even while it was seriously hemorrhaging from bad and fraudulent business deals and its own shoddy accounting, cover ups and bad investment deals.
WorldCom quickly supplanted at&T as the favorite of many investors, based heavily on Grubman's recommendations. The investment world quickly sang WorldCom's praises as a result. A technology magazine, Network World, named it one of the ten most powerful companies, behind only Cisco and Microsoft. After listing its virtues, the magazine went on to conclude that, "MCI WorldCom will probably be a keeper on this list." 18 as for its investment virtues, Grubman claimed that it was a traditional "widows and orphans" stock, to be held for the long-term. Based partially upon his recommendations, Fortune listed…… [Read More]
This strategy was successful for some time but when WorldCom tried to acquire MCI (a company with two times more revenues than WorldCom), the binge of acquisitions was ended due to objections from antitrust and other stakeholders.
WorldCom's strategy was to display revenues and profits in extremely positive basket; for which the company had to make false misstatements in their accounting records. I think, it was the social and ethical responsibility of WorldCom to avoid misinterpretations in their financial statements and to show clear picture of the company to its stakeholders.
This strategy resulted in expansion of WorldCom through acquisitions and the expansion became so huge that the management of WorldCom was unable to handle the business. The debt of the company touched $41billion with $11billion of accounting frauds and misinterpretations. These all were the fruits of strategies implemented by Ebber just to display a very sound and positive picture…… [Read More]
NSome of the key questions that were presented in the article include; How could a company as successful as Enron meet such a demise? What lessons can be learned from the Enron Debacle? Was the Bush administration aware of the problems at Enron before they became apparent to the rest of the country What can be done to prevent this from occurring again? Why did WorldCom collapse? Can the collapse of WorldCom interrupt internet connections? Why did Arthur Anderson ignore the discrepancies with Enron's business practices? Is Arthur Anderson to blame for the problems with Enron? Have the actions of Arthur Anderson tainted the profession of accountants? Why wasn't there more accountability for the practices of the companies? Why didn't the SEC know that these problems were occurring?
What is the most significant question?
The most significant question is What can be done to prevent this from occurring again? This…… [Read More]
SAS Number 99 and the Corporate Audit
This report attempts to explain how the new SAS No.99 will change the way accounting firms will be required to conduct corporate audits. News about the collapse of Enron continues to dominate the American media circuits and in the wake of the now infamous Enron accounting scandal, accounting firms will be required to pay more attention then ever. Since the recent American Institute of Certified Public Accounts issue of SAS 99, the approach of auditors in the United States will for ever more be greatly enhanced. ith SAS 99 for example, external auditors will be required to discuss and gather facts with internal auditors. As of SAS 99, corporate America will now be required to monitor and share the findings of internal auditors who may be privy to critical fraud-related data residing with their clients. SAS 99 will therefore provide new opportunities for…… [Read More]
" hile there are factors like peer pressure and authority that come into play, some research claims to have isolated significant features of an individual's character that make them more likely to commit acts of fraud, bribery and falsification in the corporate context (27, 2009). For example, those people with "high levels of ambition were more likely to transgress moral codes, competitively stab colleagues in the back and make dubious decisions relating to asset-stripping, disinvestment, and so on" (27, 2009).
Trevino's (1986) work is relevant when it comes to understanding individuals and corruption. There are a couple questions regarding moral personality that come up: first of all, whether or not a person sees an event or issue as a moral problem; the second is how they decide to act in relation to that problem. Kohlberg's theory of cognitive moral development emphasizes the cognitive or reasoning aspect of moral-decision making (604,…… [Read More]
ehavioral Finance and Human Interaction a Study of the Decision-Making
Processes Impacting Financial Markets
Understanding the Stock Market
Contrasting Financial Theories
Flaws of the Efficient Market Hypothesis
Financial ubbles and Chaos
The stock market's dominant theory, the efficient market hypothesis (EMH) has been greatly criticized recently for its failure to account for human errors, heuristic bias, use of misinformation, psychological tendencies, in determining future expected performance and obtainable profits.
Existing evidence indicates that past confidence in the EMH may have been misdirected, as the theory's models do not show a thorough understanding of trading operations in a realistic light.
Researchers have suggested that a variety of anomalies and inconsistent historical results demand that traditional financial theories, namely the EMH, be reconstructed to include human interaction as a key decision-making process that directly affects the performance of financial markets.
This research paper aims to determine whether or not there is a…… [Read More]
The political pressure of the past several years following the dot.com bubble and the collapse of several major companies created a need for new securities legislation, which culminated last year in the Sarbanes-Oxley Investor Protection Act, which establishes new guidelines for the securities industry. Initially a Democratic brainchild, the act became favored by epublicans in the House when it was realized that such adjustments would be of great benefit to shareholder value in that they enhanced general financial stability. This is the most prominent piece of financial legislation since the establishment of the Securities and Exchange Commission in the early 1930's. The most widely recognized feature of the new legislation, which was introduced in 1992, is that board members are held personally and criminally liable for the accounting practices that the company employees. This act also establishes guidelines as to the coverage of securities by sell-side analysts who face…… [Read More]
For Sidney, there are two points of concern. The first is identifying the potential ethic issues in the finance and accounting departments. The second is evaluating the cost and benefits of the ethics department. The latter is not the primary focus on the meeting, and the decision appears to be a fait accompli so Sidney is going to let it rest. The focus of Sidney's position will therefore be on eliminating potential risk of ethical violations in the finance and accounting departments.
Sidney has a significant stake in this meeting. Many of the high profile scandals outside of PIE, such as those at Enron and orldCom, involved the accounting and financing departments. The CEO was involved in the ethical problems in each of those firms. Thus, Sidney needs to ensure that his department not only has strong procedures and training programs to ensure compliance with all regulations regarding…… [Read More]
It has been shown that the acquisition of talent not an area specific to each individual position at top companies. The highest-performing companies build pools of talent from which they can draw as needed (Michaels et al., 2001). Thus, there will inevitably be talented people who are at times underutilized. Their higher-order needs are not being met and thus they must be generously compensated. Otherwise, when the time comes to move someone from the organization to a fulfilling, higher-order executive position, the talent will not be there.
CEO pay proponents also point out that the bulk of the "excessive" executive compensation comes in the form of stock or options. These instruments were brought into executive compensation packages specifically to align the interests of management with those of the shareholders. It was the shareholders and the boards of directors who initiated this, as a means to protect shareholder wealth. There have…… [Read More]
In the company it has ushered in a better accounting and the management with upgrades in technology and competence, there will be a requirement for training and upgrading managers and staff to meet the contingencies of the proposed systems and controls. The Sarbanes-Oxley section will help the companies on the other hand gain a lot of investment and support from the investors by providing a quality and timely information, with a competitive advantage. (Shanley, 2004)
For the officer and the shareholder and those dealing with the company it ensures that the financially literate directors at the helm and will have internal controls which make the company relatively safe. It is however to be noted that the act is for public companies and many companies have cut issues to escape the provisions of the act. The Auditing firms and the auditing process all have undergone vast changes in the process of…… [Read More]
Another expample, as Dahlin (2007) notes, WorldCom was in the heart of one of the largest accounting scandals in history. Add to this the Wal-Mart effect of business in general, with companies having to compete with Wal-Mart's low costs, made possible partially due to their low wages, failure to pay overtime, nonexistent benefits, and resistance to unionization, and a ripple effect has been cast on the waters, causing other companies to follow suit, in an effort to be competitive.
Changing Society Equals a Changing Demand for Corporate Social esponsibility:
Today's changing society has increased the demand for corporate social responsibility. The decades of ethical abuse, coupled with the recent financial soul shattering scandals, has called for businesses to renew their social contract with society (Basu & Palazzo, 2008). Society now demands that corporations take responsibility for their interactions with the world.
A generation ago, most people didn't think tobacco was…… [Read More]
However, because of the costliness of this requirement, many believe it is especially unfair to small businesses who are already struggling to be competitive in an increasingly hypercompetitive, globalized economy.
As such, small, public companies have been given a temporary reprieve from some of Section 404's strict and costly requirements. In addition, there have been new guidelines set forth for auditors, with a hopes of reducing the cost of compliance of the Section, for all companies (Basilio, 2007; Grumet, 2007).
Bradford and Brazel (2007) note that these costs due indeed seem to be decreasing. In research they quote from AM, organizations spent $4.5 million on compliance with the Act, in 2004. This was reduced to $3.8 million in 2005, and further decreased to $2.9 million in 2006.
However, despite these decreasing total costs of compliance, the Act is still a costly requirement for public companies. Bradford and Brazel (2007) further…… [Read More]
The statute of limitation for the discovery of fraud is increased to two years from discovery date and five years following the act. Criminal penalties for securities fraud was increased to 25 years, by SOX.
Each public company's CEO and CFO must certify financial statements and reports. Personal loans are banned, to executive officers and company directors, with the enactment of SOX. It is also now required to accelerate reporting of insider trading ("H.. 3763").
In addition, SOX now prohibits insider trading during pension fund blackouts. Compensation and profits for the CEO and CFO must be made public.
Auditor independence is now specifically required. and, American companies must have an internal audit function, that is certified by external auditors. Audit firms are prohibited from providing services, unrelated to their audit work, to clients. One of the most important provisions is an increased accountability, holding CEOs and directors accountable, for crimes…… [Read More]
here are three primary factors that influence the company's current strategic, tactical, operational and contingency planning. he first factor is the increase in competitiveness within the industry in general. he rise in private and small scale CPA practices within the United States now makes almost all of Anderson's clients institutional in nature. Although this is sustainable at the current level, the concern is that Anderson will not be able to grow its organization at a grassroots level. he implication is that if small to midsized companies are now employing private companies and individual CPAs rather than large accounting corporations, then Anderson must compete exclusively with the other four major corporations for large-cap companies. his is a strategy concern that has influenced Anderson's current tactical decision making. As a result, it has jettisoned many subsidiary operations in order to focus on its core auditing and financial services offerings. his was represented…… [Read More]
Pattern of inductive reasoning is as follows: Theory ?Tentative Hypothesis ?Pattern ?Observation. While inductive approach is concerned with the open-ended explanatory, deductive reasoning chooses a narrow perspective by testing or confirming the hypothesis. (Trochim, & Donnelly 2007). Typically, inductive reasoning chooses qualitative approach to test the hypothesis. However, the deductive approach employs quantitative method to test hypothesis before arriving at confirmation. In qualitative research, it is not necessary to generate hypothesis to begin research, however quantitative studies make use of hypothesis to begin research. One of the advantages of deductive approach is that the researcher is able to test the hypothesis by using data. The limitation of quantitative approach is that the hypothesis could only be tested when there is enough data. (Ali, & Birley, 1998).
In accounting research, testing the hypothesis with the use of the statistical analysis is the common method to arrive at confirmation. The validity of…… [Read More]
Removing losses from the company's books made the main corporation look more attractive. Enron appeared to be operating at a profit; a key factor in the valuation of any company's stock. By virtue of this "success," Enron was able to raise even more money for more investments.
The architects of all this "growth" profited accordingly. Ken Lay and his associates held large amounts of exceedingly valuable and overvalued stock. hen Enron's cheating was finally exposed, it became painfully apparent to what extent Ken Lay, Jeff Skilling, and other Enron executives had been making vast sums of money on the backs of gullible workforce, and a gullible public:
The "Enron Nine" (if we may call them that) are J.P. Morgan Chase, Citigroup, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Bank of America, Merrill Lynch, Barclays, Deutsche Bank and Lehman Brothers. These financial institutions collaborated with the now-bankrupt energy company…… [Read More]
Has the 2008 financial meltdown in the U.S. And the ongoing economic crisis in Europe have practically ended the era of economic globalization?
Following the financial crisis that marred the U.S. economy along with other global economies as well as the ongoing Eurozone debt crisis, there have been projected concerns that this predicament would end economic globalization. The purpose of this paper is to assess this claim. Going by Immanuel Wallenstein's World Systems Theory, the political economy of Third World economies and developed economies of the West are mutually dependent. Wallenstein's conjecture is that the growth and expansion of Third World economies relies on constant interaction with Western developed economies seeing as the world is characterized by a structural division of labor where the developing nations of the Third World provide cheap labor and raw materials while the developed economies are the holders of capital and controllers of…… [Read More]
On June 4, 2003, the Securities Exchange Commission announced that it was pursuing charges against investor Martha Stewart and stock broker Peter Bacanovic for securities fraud. The fraud occurred on December 27, 2001 when Stewart sold stock in ImClone Systems, after receiving an unlawful tip from Bacanovic, who at the time was working for Merrill Lynch. The SEC also accused the two of attempting to cover up the insider actions, and of making false statements regarding the ImClone trades to SEC investigators (SEC, 2003). Stephen Cutler, the SEC director of enforcement said in the SEC's press release about the charges that "It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip. It's worse still when the individual engaging in the insider trading is the Chairman and…… [Read More]
Ethics and Financial Reporting
Role of ethics
In financial reporting, ethics assumes a key role. Shareholders must feel confident enough to trust a company with their money. Financial reporting is the representation of all information about a company's historical, current and projected health. In most cases, shareholders and investors depend on the financial statements available to make educated and informed decisions. o support entities maintain financial reporting and adhere to business regulations, shareholders tend to trust the current firms designed to supervise various aspects of the accounting field. he basic organizations include the Financial Accounting Standards Board (FASB), Securities and Exchange Committee (SEC) and the Public Company Accounting Oversight Board (PCAOB). In collaboration, these bodies guarantee financial reporting is reliable, available and fair to all investors.
he usefulness of ethics in financial reporting and business is to promote investor and public confidence in businesses. In the absence of a powerful…… [Read More]
The claim that a board member familiar with forensic accounting would have been able to uncover such a fraud holds little water given that it took a team of experts working in secret many months to uncover the fraud. However, the argument generally holds that better board composition, and more engaged board members, would have prevented such a fraud. Nadler (2004) argues that better boards are less important for preventing frauds as they are for driving better performance. This then shifts the emphasis of the board away from governance and towards performance enhancement.
Nadler's argument supports Nohria's claims about the relative irrelevance of strong corporate governance. No matter whether the boards take a strict shareholder approach or the expanded stakeholder approach proposed by Post et al. (2002), there are limits as the impact that they can have over a company's performance, no matter how well-composed the board is. If the…… [Read More]
190). The Act also helped to create a "too-big-to-fail" mindset (Walter, 2004) that would have profound implications during the economic downturn of 2008 and beyond.
Why did you include this piece of legislation in your list? The Act is described by Sammin (2004) as being "the biggest revision in financial services law since the Great Depression" (p. 653).
iegle-Neal Interstate Banking and Branching Efficiency Act of 1994
What were the problems/conditions giving rise to the legislation? apid consolidations among the nation's banks were creating the potential for diverting needed banking resources from communities (ose, 1997).
What were the major provisions of the Act? The iegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (hereinafter "the Act") contained the following major provisions:
A. Bank holding companies that are adequately capitalized and managed can acquire a bank anywhere in the United States one year after this law is enacted.…… [Read More]
The stock was trading on pink sheets at $0.165 per share at the end of April 2003" (8).
As noted above, one of the key factors involved in what happened at HealthSouth was the enormous pressure to perform in the increasingly competitive for-profit healthcare industry, pressure that directly affected the decisions that were made concerning the types of accounting practices that were needed to "deliver the goods," at least on paper. Although absent from the foregoing list, Scrushy's name appears time and again in the investigation that followed. According to Jennings, "Like Enron, orldCom, and Tyco, HealthSouth placed tremendous pressure on employees to 'meet the numbers.' In April 1998, CEO Richard Scrushy told analysts that HealthSouth had matched or beat earnings estimates for 47 quarters in a row" (8). The role played by Scrushy in engineering the corporate culture that would allow these estimates to be reported with a straight…… [Read More]
According to these analysts, "The implicit assumption underlying the price-to-earnings method is that the fair market value of the closely held business can be approximated from the market value of comparable publicly traded businesses. To implement this method, the valuator must be able to identify a set of presumed-to-be comparable publicly traded companies and obtain sufficient information on each to verify the extent of comparability from an economic, management, and financial perspective. No publicly traded company will be precisely comparable to the closely held business being valued, so informed judgment must be exercised" (p. 81). As a general rule, the smaller in size and the more limited the scope of activities of the business being valued, the less likely there will be a set of publicly traded companies that are comparable, or even a single comparable publicly traded company. Publicly traded companies are for the most part large, measured in…… [Read More]
Engle (2009) also notes that the costs of compliance in both monetary and human terms are greatly reduced by a willingness to embrace the regulation as a tool rather than shunning it as a "necessary evil." Though stating the obvious, he says what many in the business world simply couldn't bring themselves to hear just over a year ago, namely that "smart managers approach compliance before there is a problem that impacts the company and its stakeholders" (Engle 2009, p. 18). The issues at Bear Stearns and Lehman Brothers could have been prevented with regulation, but those at Enron and WorldCom were exacerbated by outright fraud, and the regulations provided by the Sarbanes-Oxley Act would have prevented such egregious mistreatment and mis-management of the company and its shareholders.
Strangely, the detection and prevention of fraud is not a benefit often perceived in the regulations of the Sarbanes-Oxley Act by…… [Read More]
corporate form of "the business corporation," its structure, prerogatives, and procedures, leads to ethical problems arising, or being difficult to resolve. Ethics in business has always seemed to be a struggle, because the main purpose of a business is to turn a profit, and for some businesspeople, that may be at any cost. However, after scandals such as Enron, WorldCom, and Bernie Madoff, among others, business ethics has emerged as an important part of a healthy business environment. The smart business corporation knows ethics and corporate social responsibility (CS) are an important aspect of their daily operations, and yet, businesses still seem to overlook that ideal at the most inopportune times.
The Business Corporation
What is a business corporation? To begin a discussion on ethics, it is important to first define a business corporation. A business corporation is a company doing business that enjoys certain legal protections as a corporation.…… [Read More]
However, when a shock happens that changes that pattern, the information is no longer relevant. In periods of turmoil, only the most up-to-date information is relevant. The usefulness of the information wanes quickly as the behavior of the company becomes more erratic. After a period of erratic behavior and change, the company may be forced to make internal changes that affect the way they do business. They may make changes that affect their inventory management, sales cycle, stock levels, supply chain, distribution network or other fundamental business functions. New patterns may emerge and the old information no longer applies.
The term "relevancy" can have many different meanings depending on what is happening with the company. A new accounting regime may need to be instituted when a change takes place. Looking at the most recent historical information is one way to determine the relevancy of the accounting information. The analyst needs…… [Read More]
It should not be treated as a separate exercise undertaken to meet regulatory requirements." (ICA, 29) Here is expressed a philosophical impetus that drives the focus of this research, that such compliance which will generally concern matters such as corporate accounting, the practice of internal oversight and the practice of financial transaction must be considered inextricable from other aspects of practical, procedural and legal operation in terms of its relevance and necessity.
The practice of corporate governance may perhaps best be understand from the perspective that deregulation has largely defined the processes and direction of the global economy across the two decades following the Cold ar and its inevitable opening of economic channels. This is because in practice, corporate governance is a concept which has suffered much neglect. To the point, the statistics availed by organizations such as the orld Bank and the International Monetary Fund illustrate that…… [Read More]
The statement regulating accounting for stock-based compensations defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The fair value-based method is preferable to the Opinion 25 method for purposes of justifying a change in accounting principle under APB Opinion No. 20, Accounting Changes. Entities electing to remain with the accounting in Opinion 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value-based method of accounting defined in this statement had been applied.
Stock options are the most frequently used method in…… [Read More]
" A unified strategy begins at the fundamental education level, students who will become the future corporate leaders and operators must be taught at an early age to have strong business ethics and values. The lack of such education is an essential cause for why corporate abuse is rampant in the world today. In 1980, a survey conducted USA Today asked Harvard Business School graduates what their top career priority was, an overwhelming 85% answered to "make money." This statistic is emblematic of the corporate culture for the past two decades. Changes within the education system to reinforce the importance of values at the collegiate and graduate level will have a profound impact on corporate leaders of the future. Evidence of this can be seen in another recent USA Today survey. When the same survey was presented to Harvard graduates in 2004, only 42% answered that money was their number…… [Read More]
Premeaux's investigation into ethics and business behavior resulted in four categories that can lead to ethical problems: a) coercion and control (the use of threats or extortion to force a manager to make a certain decision); b) conflict of interest (a manager has more than one interest and if he pursues both, harm may come to the company); c) physical environment (this relates to conflict of interest that can harm the environment); and d) personal integrity (making a decision based on one's own needs can raise a red flag in terms of right and wrong even if the law doesn't specifically spell out a guideline to follow) (16).
In a survey of managers, Premeaux received 413 questionnaires to test ethical responses. The results of those surveys (there is not enough room in this paper to report appropriate data) showed that managers have "…a heightened sense of ethical awareness with most…… [Read More]