Accounting Scandals: What we have learned from Enron and World Com Debacle? Pertemuan 04 Matakuliah:...
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![Page 1: Accounting Scandals: What we have learned from Enron and World Com Debacle? Pertemuan 04 Matakuliah: F0122 – Seminar Akuntansi Tahun: 2009.](https://reader031.fdocuments.net/reader031/viewer/2022020417/5697c0271a28abf838cd6512/html5/thumbnails/1.jpg)
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Accounting Scandals: What we have learned from Enron and
World Com Debacle? Pertemuan 04
Matakuliah : F0122 – Seminar AkuntansiTahun : 2009
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Accounting Scandals: What we have learned from
Enron and World Com Debacle?
Accounting SeminarWeek 9
Prepared by:Gatot Soepriyanto SE. Ak., M.Buss (Acc)
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The Recent Scandals• The obvious corporate greed—is it more
widespread than in earlier periods?• Earnings manipulation is part of (and usually
central to) most of the scandals • Prominent industries included energy companies
and telecommunications (+ accommodations by investment banks)—importance of deregulations
• Scale: these were big firms involved
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Enron• Stogy gas transmission company started with
massive debt • Formed a gas trading company, expanded
into electricity, risk mgt. & telecom; expanded internationally
• Based on economic reality, many of these were failures
• Based on earnings magic, all were successful
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Enron 2• Gas trading: deregulated & volatile, need for spot
market purchases & related derivatives, volatility increased trading profits
• Problem of massive & potential junk bond ratings• Use of special purpose entities (SPEs) to reduce
perception of too much debt
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Enron 3• Importance of meeting quarterly earnings,
initially through cost savings, then increasingly more gimmicks
• Scheme 1: revalue physical assets using “fair value” models (SFAS 125, designed for financial assets)—front-loading profits
• Scheme 2: using SPEs in virtually any complex context to record earnings
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Enron 4• SPEs were mishandled• CFO Andy Fastow manipulated these for his own
enrichment + independence problem• Particularly shady SPEs approved by auditor
Arthur Andersen, attorneys, & board of directors; accommodated by investment banks & no obvious oversight by SEC
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Enron 5• Some operations were successful, others were
major blunders; the net effect was to dramatically increase financial risk, & Enron’s unwillingness to disclose real losses as they occurred
• Mid-2001: stock price dropped, executives bailed out of stock options, bond ratings back to junk status
• Enron restated earnings in 3rd quarter 2001• With no credibility, Enron declared bankruptcy in
December 2001, the biggest bankruptcy until …
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WorldCom• Bernie Ebbers started long-distance telecom
company in 1983 (name changed to WorldCom in 1995)
• Growth through merger strategy (note earnings magic of business combinations)
• WorldCom “looked” solid, with total assets of $104 billion & debt-to-equity of 79.3%, but half the assets were goodwill & other intangibles
• In 2002 internal audit found operating expenses capitalized
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WorldCom 2• New auditor KPMG reviewed the books, old
auditor Arthur Andersen was fired; Ebbers resigned in April
• In June 2002 WorldCom announced $3.8 billion in accounting errors, mainly by capitalizing “line costs” (fees to other telecom companies for network access rights—these are operating expenses)
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WorldCom 3• WorldCom restated earnings, CFO was fired• Actual capitalization misstatements totaled over
$11 billion• WorldCom filed for bankruptcy in July 2002,
replacing Enron as the largest bankruptcy in US history
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What do Enron & WorldCom Have in Common?
• Deception on a massive scale—manipulation at the highest levels of the companies
• Growth through acquisitions plus related Business combination accounting abuse
• Importance of meeting quarterly earnings targets at all costs—related enrichment of senior executives
• Accommodating auditors, attorneys & boards of directors
• All two restated earnings
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What Happened at Arthur Andersen?• One of original Big 8, founded in 1913, stressing
integrity & consistency• Especially since the 1980s, AA had a history of
“aggressive auditing,” clients became too valuable to defy (Toffler)
• Associated with many of the big scandals: Sunbeam, Waste Management, Enron, WorldCom & Global Crossing
• Found guilty of obstruction of justice in Enron case
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The Lessons of History• It’s the incentives, stupid • Irrational exuberance • Corporate culture • Regulation follows the business environment • Regulations are not fool-proof • The political environment • Financial, operating and credit risks • The economy is global
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Assignments:• Discuss and present your answer related to the
WORLDCOM CASE STUDY.• You may use external sources other than those
provided in this teaching materials.