Financial Reporting Case Study Example | Topics and Well Written Essays - 2000 words

Financial Reporting - Case Study Example In a brief history of the cases, Enron, On October 16, 2001 Enron declared to SEC a net loss of $ 618 million for the third quarter effectively reducing share holder equity by $ 1.2 billion. SEC opened enquiry the very next day and called for details from Enron officials who in turn notified their Auditor Arthur Andersen. Pursuant to this, Andersen had his team destroy Enron-related documents. As a result, Enron, Andersen and his lead partner Duncan were convicted of obstruction of justice. Enron's Chief Financial officer faced indictment on 98 counts of fraud and related offences. Besides Enron is now bankrupt, and civil and criminal investigations continue to examine Enron's complex accounting practices and byzantine financial schemes. (Brickey) Close on the heels of Enron episode, WorldCom's fraud surfaced dwarfing the former. Both the cases involved accounting frauds with the companies managements' sole aim of keeping the share prices higher in spite of huge losses which they covered by manipulation of accounts. But for the whistle blowers from both the corporations, the frauds would not have come to light though bubble would have ultimately burst by the operation of economics. But more money would have been swindled, more would have fled the scene had it not been for the whistle blowers who had little protection prior to Sarbanes -Oxley enactment. Sherron Watkins, a Vice-President at Enron who discovered accounting fraud disclosed it to its Chairman Ken Lay in five memos detailing Enron's off-book partnerships, special purpose entities and urged him to disclose a ccounting irregularities. Though he agreed to engage a law firm to conduct preliminary investigation, he appointed the firm of Vinson & Elkins in spite of Watkins' advice not to engage them as they were also party to structure some of the questionable deals. And the law firm not surprisingly gave clean chit to the questioned transactions. Watkins preferred to depose before congressional hearings probing the Enron's affairs. Similarly Cynthia Cooper, Vice-President, Internal Auditing, WorldCom exposed a larger accounting in her corporation when she came to know of a sample fraudulent transfer of $ 400 million from Reserve account to inflate the corporation's earnings. Here again Arthur Anderson was the Auditor for the corporation. While he tried to convince her by insisting no abnormality, the CFO Scot Sullivan literally tried to silence her. (Ripley Amanda) She therefore independently conducted inspection of account books and found that the management had capitalised operating expen ditures and converted a $662 million loss into a fictitious $2.4 billion profit.CFO Sullivan learnt of her attempts to unearth such manipulations and warned of her dismissal if she did not stop. "After going to the audit committee, she and her audit team remained hopeful that they could find something they might have missed that would explain the unorthodox accounting. But Cooper's hopes were dashed when she confronted WorldCom Controller David Meyers, who conceded that the entries could not be justified. " (Brickey) The charges against Andersen were that he had knowledge of accounting irregularities at Enron, and fraud relating special purpose entities used by Enron, that he hired an out-side law firm in anticipation of