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Financial Reporting

Financial Reporting

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Published by prabakaran

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Published by: prabakaran on Aug 21, 2009
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Financial Reporting & Investors Financial LossesCHAPTER 1INTRODUCTION Business practices have always been connected with fraud andhave always been affected by financial collapses. Recent accounting scandals likeEnron, WorldCom, Parmalat, Tyco etc have cost not only billions of dollars to thestakeholders but also have damaged the accounting profession. Frauds are “the onpurpose misleading presentation of financial information by one or more persons,who are member of the company’s personnel or management, as a consequence of manipulation, creation or falsification of documents or files, withholding assets,registration of fictive transactions, false appraisals & valuations, etc.”(I.B.R.1998)Enron is the largest bankruptcy in the US corporate history. In just fifteen yearsEnron grew as one of ten largest US companies and became the shinning exampleof the US corporate world. Enron stock price rose to $83.3 in 2001 and its marketcapitalization exceeded $60 billion. Enron was rated the most innovative companyin America in fortune magazine (Palepu 2002) but the Enron’s success was based oninflated earnings and fraudulent accounting practices. The dramatic fall of Enronhas shaken the confidence of investors. In the words of Der (2002): “The heat is onfor corporate America. In the wake of Enron debacle, the quality of earnings is beingquestioned as never before…earnings jitter may yet rock the MAcc 1
Financial Reporting & Investors Financial Lossesmarkets. More shaky accounting practices could come to light. Some companieswon’t have registered the full impact of downturn on their books, while others stillmessage their numbers…investors have every reason to be twitchy”.Four former Merrill Lynch executives and a former mid-level Enron finance executiveare in prison after being convicted of helping push through a loan to Enron disguisedas a sale. Former accountancy giant Andersen, which failed to audit the Enron bookscorrectly, collapsed with the loss of 7,500 jobs in the US, and 1,500 in the UK. (BBC2006)Enron’s place in US corporate history cannot be disputed, especially its innovatorydrive, nor can its ground breaking innovations in energy market or WorldCom statusas internet provider. These innovative companies have one thing in common thatthey are collapsed. (Oliver 2003) and all these corporate have used financialreporting to mask their financial difficulties and “due to which profession of accounting has suffered serious erosion of confidence ……in its standards, in itsrelevance of its work and financial reporting process” (D.Miller 1990) The Enron’s collapse has been evolved into many dimensions resulting into raisingquestions about external auditors, corporate governance, ethical practices of directors and financial reporting issues.MAcc2
Financial Reporting & Investors Financial Losses The concept of financial transparency has got more momentum in the wake of Enron, WorldCom and Parmalat scandals. There is every reason to believe that thesecorporate have used financial reporting to mask their real face. “Eronist”are beingdetected all over the world and investors ask questions companies they own. In thefinancial system of present day institutional and individual investors rely on thefinancial statements everyday if these statement lose their transparency andcannot be trusted then the investor are victimized and suffer immensely. Lack inreliability of financial statements damage the fundamental purpose of securities.(Weiss 2004)In this thesis I have examined the Enron case in relation to the financialreporting and shareholders value. I have tried to answer the following researchquestion in this thesis.Can quality financial reporting minimize the financial losses to investors and createvalue to shareholders in the long run (a case study of Enron)?In this thesis I have investigated that: if Enron had produced quality financial reportsthen the financial losses of the investors could have been minimized and thatquality reporting can create value to the shareholder in long run. This thesis can be divided into four parts in the first part of the thesis I havepresented the corporate objective of shareholder wealth maximization. I havepresented shareholder value creation models and discussed the social MAcc 3

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