Examining the multiple types of accounting Essay Example

the Indian parliament introduced the Information Technology Act in 2000. This act established a legal framework for electronic commerce.

In September 2008, AIG (American Insurance Group), a US insurance corporation faced a liquidity crisis due to credit rating downgrades. In response to this crisis, the United States Federal Reserve Bank created a $85 billion bailout package for AIG on September 16th. The purpose of this package was to meet collateral obligations resulting from the downgrade. As part of this financial support agreement, the bank received a stock warrant representing 79.9% of AIG's equity.

By May 2009, further financial assistance was provided by both the Federal Reserve Bank and the US Treasury. The total investments amounted up to $70 billion for AIG.Furthermore, AIG was provided with a $60 billion credit line and $52.5 billion to acquire mortgage-based assets that they either owned or were guaranteed by them. The overall support available amounted to $182.5 billion. According to the Securities and Exchange Commission, AIG participated in reinsurance transactions with General Re Corporation (Gen Re) in order to falsely inflate their loss reserves by $500 million and suppress criticism from analysts about declining reserves. The complaint also cited other instances where AIG misrepresented their financial results through fictitious transactions and entities created to deceive investors. There were allegations that two reinsurance transactions carried out between AIG and Gen Re in December 2000 and March 2001 lacked any economic value or substance behind them. During Q4 of 2000 and Q1 of 2001, AIG engaged in fraudulent transactions to boost its balance sheet by $500 million in fake loss reserves, aiming to silence analysts' criticisms regarding a prior reduction in reserves. Additionally,

it has been alleged that AIG utilized a transaction with Capco Reinsurance Company, Ltd., as a means of disguising $200 million in underwriting losses as capital or investment losses, thus minimizing the impact of these losses on AIG's financial position. Bernard L. Madoff masterminded a Ponzi scheme through his company BMIS which is based solely in New York City and is entirely owned by him.
BMIS, a registered broker-dealer and investment advisor, was established in the early 1960s. As Chairman of the board of managers at NASDAQ stock market, Madoff had control over investment advisor services and managed the funds within BMIS. The Securities and Exchange Commission (SEC) accuses Friehling and F of assisting Madoff's Ponzi scheme by falsely claiming that F&A audited BMIS according to auditing standards. Friehling claimed compliance with accounting principles and reviewed internal controls at BMIS but allegedly did not perform a thorough audit due to lacking necessary information. To avoid scrutiny from auditors, Friehling deceived the American Institute of Certified Public Accountants for many years. Both Friehling and H received illegal profits from Madoff and BMIS, including returns withdrawn from accounts under BMIS's name held by Friehling and his family members.WorldCom MCI, Inc., a telecommunications subsidiary of Verizon Communications based in Ashburn, Virginia, was created by merging WorldCom (formerly known as LDDS then LDDS WorldCom) and MCI Communications. The company went through various name changes like MCI WorldCom and WorldCom before adopting its current name on April 12, 2003 after emerging from bankruptcy. It initially traded as "WCOM" on NASDAQ but switched to "MCIP" later on. On July 7, 2006, Verizon Communications successfully acquired the company and it now operates as

Verizon Business division. During the integration process, the residential divisions were gradually merged into local Verizon subsidiaries. Between 2001 and Q1 of 2002, WorldCom allegedly engaged in misconduct by falsely representing itself as profitable by reporting earnings it did not actually possess. Instead of acknowledging approximately $3.8 billion in costs and deducting them accordingly, WorldCom took advantage of them and delayed their recognition - violating Generally Accepted Accounting Principles (GAAP). They deliberately partook in deceptive actions and manipulative accounting practices to align their earnings with estimates provided by Wall Street analysts. In 2001, they implemented an improper strategy that involved moving expenses called "line costs" to their capital accounts instead of correctly expensing them according to GAAP guidelines.The deception of investors occurred when expenses were understated and profits were overstated, resulting in inaccurate reporting of income for Compo Corporation. Kelsey, a senior accountant at the CPA firm, discovered a significant error in the cutoff procedure during the audit process for Compo. Despite being aware of the policy to document potential material adjustments, Kelsey's decision on such adjustments is ultimately determined by the audit partner. However, Bruce, the audit director, instructs Kelsey not to include this adjustment in their work documents as per the partner's decision based on Compo's closely held nature and lack of tax deductions. The urgency to submit their work promptly stems from Compo being their largest client. This situation creates cognitive dissonance for Kelsey as he struggles between adhering to ethical conduct and safeguarding company interests by not documenting the adjustment. The choice not to document it would mean neglecting societal responsibility; however, documenting it poses a risk of losing his job.During

the examination of Coshocton National Bank's (CNB) current-year audit working documents, engagement manager Jennifer Grace discovered an anomaly involving Antic Development's commercial loan in the loan rating documents. At the same time, Fantastic had failed to respond to both initial and second verification requests. To address these issues, the audit team used alternative procedures such as reviewing irregular cash collections and confirming loan documentation. These procedures also involved assessing recent unaudited financial statements that showed Fantastic's strong financial position and profitability.

It is worth noting that Jennifer had previously been the audit senior for Fantastic during the prior-year audit because Antic Developments was a client of her firm as well. However, she noticed that her understanding of Fantastic did not align with the discussions in the audit working documents regarding the financial statements provided to CNB. To clarify this discrepancy and understand why Fantastic seemed to have made significant improvements, Jennifer contacted Tom Ward, CFO of Fantastic.

Unfortunately, Tom was uncooperative and evasive when asked about these developments. He simply stated that business had improved and apologized for not personally reaching out to Jennifer's firm due to being busy. In addition, he informed her that Fantastic had decided to hire another CPA firm for their accounting and auditing needs.Jennifer was left confused by the response she received, as it seemed like her inquiry had been dismissed without a proper explanation. However, she couldn't ignore the possibility that Fantastic's fiscal statements for their loan application were misleading. Surprisingly, the bank didn't seem to share this suspicion.

As Jennifer reviewed Fantastic Development's commercial loan, she noticed something strange in the working documents related to loan evaluation - it had been

randomly selected for verification. This surprised her because she knew that the company had been struggling and consistently experiencing operating losses during previous audits.

The CFO informed Jennifer that they had decided to hire another CPA firm for their accounting and auditing needs, showing that taking on one's duties can be risky and lead to getting fired.

In another case, Maria and Andy successfully organized the accounting system and records for a growing Health Maintenance Organization (HMO). The two top executives, Bob and Connie, were primarily focused on company growth and its correlation with monthly and annual revenue. Bob also handled budget reports.

Maria and Andy prepared monthly fiscal statements that company officers would review and report in patient and employee newsletters. Often, these statements showed lower gross revenues than initially projected by Bob, which frustrated him due to low patient gross accumulations.Andy and Maria frequently discussed booking the budget, which they did monthly after reviewing the initial fiscal figures. Their main concern was gross sales and they were aware that auditors would not overlook Bob's recording practices at year-end. However, they were still frustrated with their precise accounting system that required monthly adjustments due to Bob and Connie's desire to impress the board. As expected, when year-end arrived, the positive financial news fell short of expectations. Although the deficit did not significantly impact HMO rates, it caused panic in the accounting department. Shareholders were not directly informed about this situation, leading to embarrassment as year-end adjustments and explanations for inaccurate monthly newsletters became necessary.

Maria and Andy successfully collaborated on developing an accounting system for a growing HMO. They generated monthly financial statements that underwent review by company

executives. Bob consistently expressed dissatisfaction whenever sales figures didn't meet his projections. He attributed it to low patient numbers and suggested the need for more revenue. This ultimately created panic in the accounting department as the previously optimistic financial outlook drastically missed projections by year-end.

This situation emphasizes the importance of prioritizing long-term goals over short-term gains. It also sheds light on creative accounting, which some argue is not illegal but lacks widespread endorsement.The ethical dilemma revolves around whether it is acceptable to engage in creative accounting practices, which involve manipulating financial statements, as they play a crucial role in accurately portraying a company's financial position. Managers and accountants have the ability to distort these statements using various techniques. However, not all instances of creative accounting involve manipulation; it can also be utilized legally and bring financial benefits to a business. In this paper, we define creative accounting as the act of accountants altering reported figures in a company's financial statements by applying their understanding of accounting rules. For example, managers have multiple options when calculating depreciation, such as straight-line, declining-balance, and double-declining-balance methods. They can select different approaches for different assets like buildings and equipment. This serves as just one illustration of the numerous legitimate accounting methods that companies can employ. Consequently, companies tend to choose the method that presents the most favorable image. Another complicating factor in drawing an ethical line on creative accounting is that managers and accountants must estimate certain figures in their calculations since not all numbers possess precise decimal values or closely match the "real" amount. Thus, those preparing financial statements must exercise their best judgment in these situations.
Managers need

to estimate an asset's residual value and useful life for calculating depreciation cost. These estimates are necessary because the actual values can only be determined when the asset is disposed of and can no longer be depreciated. While it is technically not illegal, managers manipulating depreciation amounts could become unethical if true values are significantly misrepresented.

Another creative accounting technique involves entering fictitious transactions into financial statements. This allows managers to manipulate figures on the balance sheet and transfer profits from one period to another. For instance, a company may conduct a "sale and leaseback" transaction where they sell an asset to a third party and then lease it back for the remaining useful life. By adjusting leases, a company can legally manipulate their income in financial statements by altering the sale value of an asset (Amat et al., 1999). However, whether this practice is ethical or not is open to debate.

Timing transactions to occur at preferred periods is yet another creative accounting technique employed by management. They have the discretion to choose when genuine transactions take place.The utilization of creative accounting has ethical concerns as it can artificially enhance a company's perceived performance by selecting specific accounting methods to improve financial statements. While some argue that these techniques adhere to the standards set by the Financial Accounting Standards Board (FASB), opponents view them as a form of accounting manipulation. They believe that managers and accountants employ creative accounting techniques to manipulate financial statements, disregarding the ultimate goal of increasing stock value. Although creative accounting may temporarily elevate a company's stock value, it ultimately hampers its long-term objective because these practices are not sustainable. Deceiving shareholders

with false figures through creative accounting cannot persist indefinitely; eventually, the truth will be revealed. This revelation not only negatively impacts stock value in the short term but also carries long-term consequences if the company fails to recover. The unethical and illegal nature of extreme creative accounting is evident in recent scandals involving Enron, WorldCom, Tyco, Adelphia, and other companies. Auditors, accountants, and managers associated with these companies failed to appropriately address ethical dilemmas in a timely manner (Jennings, 2004). Specifically in Enron's case, management engaged in "aggressive accounting," resulting in approximately $1 billion in accounting "errors" before the company collapsed.Critics argue against the use of creative accounting techniques, pointing to Enron as evidence. Supporters claim that Enron is an extreme case and does not represent the intended purpose of creative accounting. However, it is clear that management acted unethically at Enron and unfortunately employed creative accounting to achieve their goals. Despite the ongoing controversy surrounding creative accounting, complete elimination is unlikely. The existence of different accounting options ensures the persistence of creative accounting, whether used ethically or not. These options are unlikely to be eradicated, so creative accounting must be tolerated. However, it should only be used within legal boundaries and if it ultimately achieves the company's goal of increasing stock value. The benefits derived from creative accounting should consider long-term advantages rather than solely focusing on short-term gains.

Regarding personal information, Sue Chong is a sophomore student at the University of Southern California studying Accounting. She is part of the joint-degree program at the Leventhal School of Accounting and aims to obtain both her bachelor's and master's degrees in four years. After graduation, Sue

plans to pursue a career in the public accounting industry with aspirations to become a chief financial officer for a Fortune 500 company.