BA3321

Current Developments in Accounting Theory

Name : Sheirgene Ng
ID : 00013772
Course : BAAF

Introduction
In this current year, some of accountant because of their self-interest they againts the
accountig standards that alredy set by higher-level. Those accountants will try their best to
help their clients to make the accounting reports nicer. These will not only cause financial
collapses and also will cause accounting scandals.
Defintion of accounting scandals
Accounting scandals are political or business embarrassments which emerge with the
divulgence of money related offenses by trusted administrators of organizations or
governments. Such offenses ordinarily include complex strategies for abusing or misleading
assets, exaggerating incomes, downplaying costs, overstating the estimation of corporate
resources or underreporting the presence of liabilities, once in a while with the participation
of authorities in different companies or partners.
Benefits and costs from accounting scandals.
Benefits and costs from accounting scandals, we assume that the accountant has a less
expensive lifestyle and has less public scrutiny. This would be the case even if the accountant
received a very high salary. However, is often paid a salary viewed as exorbitant by the
public. The CEOs money, power and influence can support a flamboyant lifestyle. His or her
reputation and public image are important to the CEO and their potential loss is an important
risk of engaging in accounting fraud.
The CEO derives a number of benefits from the scandals, however, the expected benefits are
not solely for personal gain. Benefits of scandals to the CEO include financial and
professional perks. The company benefits, at least in the short-term, from higher stock prices,
increased profits, improved reputation, and greater access to the capital markets.
The benefit of engaging in accounting scandals for the accountant is primarily financial. The
accountant may receive cash from the CEO, a pay raise, and a promotion. Sometimes, the
accountant perpetrates the scandal to keep his or her job. Most likely, the accountant will also
own shares of stock and would participate, as any other shareholder, from the increase in the
value of the stock if the fraud has such an effect. An additional benefit of engaging in
accounting scandal for the accountant is that such activity creates a tighter bond with the
CEO, which may provide a future advantage.

When compared with the accountant, however, the CEO has more to lose if caught engaging
in fraudulent behavior. Both face similar costs including job loss, income loss, jail time and
damage to their reputations among friends and family. The CEO, however, faces another cost,
a decline in his or her reputation as a public figure. If caught, the CEO incurs significant
damage to his or her public image which can lead to great personal loss.
The marginal costs of scandal to both the accountant and CEO change as the level of scandal
changes. Marginal cost (MC) to the accountant increases as the quantity of fraud increases;
the marginal cost curve is upward sloping. The more scandal committed, the greater the cost
of maintaining secrecy about the crime. The more the accountant fudges the numbers, the
greater the likelihood of getting caught. This is different from the government official in the
corruption scandal of Shleifer and Vishny (1993) whose marginal cost remained constant no
matter what level of fraud was undertaken.
The demand curve or net marginal benefit curve for the CEO is the standard downward
sloping demand curve facing a pure monopolist. The CEOs demand curve is downward
sloping because, as in the case of the accountant, (s)he faces the rising marginal cost of
maintaining the secrecy of the crime. In addition we assume the CEO has diminishing
marginal benefits (MB) from the fraud.
Although accounting scandals have benefits, but in my opinion, we should not because of
these benefits and againts the accounting standards This is not ethical and is a negligence of
accounting prefessionals.
Reasons that cause accounting scandals.
There are few reasons that cause accunting scandals. First, is company have no independent
internal audit department. where an organisations internal audit department is not
independent, e.g. where it does not report to a truly independent audit committee but to the
Finance Director, the more likely that when there are signals that a fraud is occurring the
more likely they will be ignored. It is indeed interesting to note that Cynthia Cooper (Head of
Internal Audit at WorldCom) had to bypass her boss (the CFO) and go directly to the audit
committee to report the discovery of the capital expenditure fraud. Second reason is Lack of
clear moral direction from senior management. leadership comes from the top. Where the
senior management indulge themselves in semi corrupt behaviour, e.g. adjusting their
expense claims upwards, others will follow adopting the well worn mantra everyones at it.

Poor accounting controls also one of the reason that cause accting scandals. where the
accounting controls, such as a monthly reconciliation of the bank account, are lapse the
singnals that a fraund has occurrend will be missed.
Accounting scandals can have an impact on any person or organization that has a financial
interest in the success or failure of a company. A manipulation of the companys reported
earnings or assets can affect a bank that extends credit to the company, a shareholder who
invests money in the company, and those organizations that enter into contracts or agreements
with the company.
The manipulation of financial statements also affects employees. It has the power to put
employees out of work once the fraud is exposed or collapses. It also has the power to enrich
employees mostly those involved in the fraud, but potentially those who are not. Good
financial results (actual or fabricated) can be linked to promotions, raises, enhanced benefit
packages, bonuses, and the value of stock option awards.
Ways to prevent accounting scandals.
When companies are proactively trying to prevent accounting scandals within their
organization, there are certain things to look for in employees. (It is important to note,
however, that fraud is not always committed by employees of the organization. Customers,
third party vendors, or other individuals can also commit fraud against a company.) There are
several personality traits that are common in people who commit fraud. These include:
controlling behavior, resistance to other people reviewing their work, a strong desire for
personal gain, living beyond their means, an unusually close relationship with customers or
vendors, inability to relax, and excessive overtime work
Individuals with a sudden change in behavior may also be showing signs that they have or
may potentially committed fraud. Employees who go on a sudden spending spree, brag
aboutnew purchases, carry unusual amounts of cash, or becomes extremely upset when
questioned may have already committed fraud. Employees who have creditors/bill collectors
call or show up at work, borrow money from coworkers, or discusses family or financial
problems may potentially commit fraud due to the financial pressures they are experiencing

When scandals is uncovered, auditors must use professional skepticism as they consider how
to proceed. When investigating further, there are certain procedures that auditors should take.
It is important to note that the auditor should not contact the person who committed the fraud
directly because this may give them an opportunity to cover their tracks. The auditor should
obtain an understanding of the situation, and talk to management at least one level above the
fraudster (or go directly to the audit committee if upper management is the suspected
perpetrator).Besides, auditor should

obtain more evidence, consult with legal counsel,

communicate with the audit committee, and resign from the engagement--depending on the
extent of the fraud--as this is a last resort.

Example of past case.

Worldcom is one of the past cases example. The fraud committed by WorldCom was
characterized mainly by the improper reduction of linecosts and false adjustments to report
revenue growth. Line cost is the cost that WorldCom had topay to other telecommunication
companies due to using their phone calls. If WorldComcustomer made a phone call from New
York to London, then the call would first go through thelocal telephone companys line in
New York to WorldComs long distance and finally toLondons local telephone companies.
This process was very costly for WorldCom; in fact thiswas half of the cost that they had
incurred in a particular time period. WorldCom had to reducethose costs to make them
profitable. Especially after 2000 it became crucial for them to managethose costs in a way
that would help them to show shareholders that WorldCom was profitable.WorldComs
competitors such as Sprint and AT&T had line costs that were 52% of revenues.WorldCom
reported line costs of about 42% of revenues, in reality these costs were 50%-52%
ofrevenues. WorldCom had made inappropriate accrual releases both in the domestic
andinternational divisions that amounted to about $3.3 billion (Beresford, Katzenbach, &
Rogers.
Top management of WorldCom had personal financial incentives to fraudulently report
financial statements in order to inflate the financial position of the company. They had a
motivation to 14 make the company look successful and record income, which would not
have occurred if the true losses had been recorded. As stated in WorldComs Filing Proxy
Statement from May 2000, the companys executive compensation plans had three elements:

base salary, annual incentive compensation, and long-term incentive compensation. The base
salary was set by the Committee each year and was based upon the responsibility level of the
position and pay levels of similar executive positions in comparable companies. As for annual
incentive compensation, the Proxy Statement states that the key components in determining
the amount of such awards include the financial performance of the Company in the context
of the overall industry and economic environment, generally as evidenced by the individual
growth and success of the Company as measured primarily by revenues and other
performance goals. This means that without showing strong financial performance and
profits, the top executives would be sacrificing large amounts of personal compensation. For
example, CEO Bernie Ebbers received $7.5 million in bonuses in 1999, while CFO Scott
Sullivan received $2.76 million. That was very strong motivation for them to commit fraud.
For the long-term incentive compensation, the Proxy statement explains that the Committee
believes that long-term incentive compensation in the form of stock options is the most direct
way of making executive compensation dependent upon increases in shareholder value. The
Company's stock option plans provide the means through which executive officers can build
an investment in Common Stock which will align such officers' economic interests with the
interests of shareholders. In terms of their long-term compensation, committing the fraud
would have benefited them because the stock price of the company would have increased as
profits did. Their personal wealth would have increased and they have had the potential to
sell their shares during the periods of earnings manipulation.
Considering it was top management and accounting personnel of WorldCom who perpetrated
the fraud, opportunity definitely existed. These individuals simply had to override the internal
controls in place in order to commit the fraud. The rationalization most likely used by the
perpetrators was that it was a one time thing and they would make up for it in the future, so
there was no need to hurt investors now if things were going to turn around soon.
Benefits and cost of punishment toward accountant.
For Sarbanes-Oxley act there are a few significant benefits and cost of it. Benifits of this act
is an increase in the disclosure of material weaknesses in internal controls; an increase in
conservatism in financial reporting, including re-issuances when necessary; and an increase
in the perceived independence of auditors. In a study performed in September 2005, 261
companies that had disclosed an internal control weakness following the August 2002
effective start date of SOX were investigated The material weaknesses commonly cited were

related to deficient revenue-recognition policies, lack of segregation of duties, deficiencies

in the period-end reporting process and accounting policies, and inappropriate account
reconciliation. In a way, SOX scared companies who were afraid of punishments for leaving
something out. This led to increased conservatism with respect to gains and other items.
Costs of the Sarbanes-Oxley Act include: the requirement to rotate audit partners every 5
years and the actual expense to companies to comply with the act, especially Section 404.
Public companies experienced significantly increased audit fees and increased internal fees to
implement and maintain requirements of SOX. Retraining a new partner every five years is
both costly and time consuming. Once a partner knows the business really well, it is time for
them to leave and someone else to come in.
In my opinion, although there are only few successful prosecutions, but with this act at least
will reduce some accounting scandals, due to some accountants worry that they will be sue
under Sarbenas Oxley Act.
Conclusion
When it comes to fraud, there are many preventative measures that can be taken, but it is
nearly impossible to fully extinguish it. If someone wants to commit fraud, they will most
likely find a way to do it no matter what controls are in place. That is why preventing
opportunities, through internal controls or otherwise, is the most important part of the fraud
triangle. Once an individual has established a rationalization and motive, they will commit
the fraud once an opportunity presents itself

References
http://www.pbs.org/wgbh/americanexperience/features/timeline/rails-timeline/
http://www.thecaq.org/
https://www.sec.gov/litigation/complaints/complr17627.htm
http://www.pbs.org/wgbh/americanexperience/features/timeline/rails-timeline/
http://www.nbcnews.com/id
http://scholars.unh.edu/cgi/viewcontent.cgi?article=1099&context=honors
http://www.forbes.com/forbes/welcome/?
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http://metro.co.uk/2012/09/14/top-10-reasons-frauds-occur-3817555/