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A Short Report on Major Financial Scandals

Enron

Enron scandal is worlds biggest financial scam. Enron within 15 years of its initiation of

its operations became one of the largest organizations of US. Companys new head

Jeffrey Skilling hired a team of cunning accountants to hide billions of dollars of debts

from the financial statements of the company. Within one year the share price dropped

from $90 to $1. Many executives and people from top management of the company were

found guilty and sentenced for various charges; some are still involved in inspection

process. As the depth of the deception unfolded, investors and creditors retreated,

forcing the firm into Chapter 11 bankruptcy in December.

WorldCom

Again a too big to fail corporation became victim of accounting and financial

manipulation. Bernard Ebbers the CEO of company convinced the board of directors to

provide him with millions of dollars to provide banks with the call money on companys

stock. Also with a cartel between himself, his CFO, and other accountants, he started

underreporting expenses and inflating profits with manipulations. The result was that

the rusty situation of companys financial position was put under the mat.

WorldCom's own internal audit department found approximately $3.8 billion of the

fraud in June 2002. The company's audit committee and board of directors were notified

of the fraud; many of the top management employees were fired and Stock Exchange

Commission was called for an investigation. By the end of 2003, it was estimated that

the company's total assets had been inflated by around $11 billion. On July 21, 2002,

WorldCom filed for Chapter 11 bankruptcy protection, the largest such filing in United

States history.

Failures of hedge funds LTCM

Long-Term Capital Management is one of the largest US hedge funds. Firms master

hedge fund by the name of Long-Term Capital Portfolio collapsed in 1990 but the

intensity of this collapse was so enormous that it was suggested to bailout the hedge

fund otherwise the wave could affect the global financial and economic environment. So,

14 major financial institutions of states provided a bailout package of $3.6 billion to

LTCM in 1998.

http://en.wikipedia.org/wiki/Jeffrey_Skillinghttp://en.wikipedia.org/wiki/Jeffrey_Skilling

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There are many risk management concerned attached to this scandal. This failure has

been widely ascribed to its use of Value at Risk (VaR) especially this tool was used by

LTCM. Moreover, companys information was concealed even from its own investors.

The breadth of the organization is also a very difficult task to handle. The geographic

expansion has brought financial manipulations in many branches such as in Russian

and England.

Financial Crisis of 2008

One of the biggest financial crises of the world is the 2008 crisis which was a result of

the complication spread by the financial institutions themselves. The crisis was built

upon the financial bubble generated by off balance sheet activities of firms, derivative

trading, transfer of risk, and sub-prime mortgages. Since the loan provider was no more

concerned about the debtors credibility, it become difficult to recover the loans. Such

loose financial loopholes brought the whole system into crisis. Many scholars are even

criticised for their biased and un-authentic analysis of the system. Icelands economy is

one such example which triggered the financial crisis till it reached Wall Street.

So the prime lesson which is learnt by these predicaments is that the size of the firm or

complexity of the system is no good sign of growth and strength of financial systems

rather these factors pose great responsibilities and require further transparency in

reporting of financial statements, information sharing, and corporate governance.