Individual Writing Assignment
Summary
The subsequent collapse of US originating firms in the early 2000s not only irritated millions of shareholders, but also espoused the consequences of Creative Accounting. The reveal of accounting frauds engaged by two of the world’s leading firms ENRON and WORLDCOM shakes the basis of accounting methods that were adopted by thousands of US companies. In this paper, some noteworthy scandals in accounting field will be used to illustrate the creating practices developed from 1990s in US. Based on the nature of practices, real examples will be categorized into four groups and followed by elaboration of ENRON and WORLDCOM cases, showing the bankruptcy of them is an inevitable corollary of improper accounting exercises.
Occurrences of accounting disgraces are stemmed from violation of important principles in accountancy. Those US accounting scandals are being distinguished into four groups and which will be discussed accordingly.
The common feature of the first type of “problematic” US companies is that they infringe the RECONIZATION principle on revenue with the aid of side letters with unreasonable terms written. Under this accounting premise, many firms in the U.S.A. intended to overstate their revenues by recording revenues on a premature or fictitious basis. Premature recognition is mainly a problem on the timing in recognizing revenues earned while fictitious recognition is a cheat on generating positive revenues.
Another creative accounting means was introduced in the 1990s, namely Cost Capitalization or Extension of Amortization Periods. With the conspiracy to portray a rosy picture for the companies’ performance, many cooperates specially treated periodic expenses as assets favoring better income statements as well as balanced sheets to be sketched. The third method was observed from companies who inaccurately record the quantity of their liabilities and assets. Firms appeared to overstate their assets and do...