Increase Productivty

What? Another Accounting Scandal? (3)

The predicament about corporate liabilities worsens as we understand how generally accepted accounting principles (GAAP) have aided and abetted corporate managers. This situation is most poignantly seen in the case of Enron, in which some of the company’s swindles actually followed the profession’s rules. I also discuss how auditors could better understand their purpose and assist capital markets by requiring better and more accurate and more complete disclosures—even if GAAP does not require such disclosures. Later I expand these points by looking at the equity method, lease accounting, and pension accounting. From that base, I then look more carefully at special-purpose entities, their use and their abuse, and examine more carefully the amount of debts involved and how firms have deceitfully hidden these debts from their balance sheets.

The rest of this chapter provides a thumbnail sketch about accounting and auditing abuses, including how the investment community aches because we did not listen to the warning voices of Abraham Briloff and Eli Mason. After this, I review the concept of financial risk and then take a more in-depth look at Adelphia, Enron, Global Crossing, and WorldCom, since these malfunctions specifically entail lies about each firm’s true amount of debt. I conclude with some thoughts on accounting ethics and why I think these accounting frauds form a serious threat to American society.