Company Scandals Underpinned By Non Conformity And...

Company Scandals Underpinned By Non-conformity to Accounting Principles. Alex Kemp Accounting principles are an important foundation to allow business owners, shareholders, the government and accountants to understand the financial position of a company. A failure to apply appropriate accounting principles can lead to inaccurate reports being used in business decision making. This may result in inappropriate investment and business decisions and lead to collapses as evidenced by the scandals surrounding One-Tel and Worldcom. Accountants employed by these business have been found to have acted unethically by manipulating the financial accounts. Conservatism is the accounting principle of only recognising gains when earned and losses as†¦show more content†¦In an essay written by Reza Monem on â€Å"The One-Tel Collapse: Lessons for Corporate Governance† he says â€Å"It (One-Tel) was able to report small positive earning in its early years due to non-conservative accounting policy choices and large positive accruals.† (2). Large amounts of expenditure and loss were deferred to future years and losses were concealed, both of these actions being a result of not following the principle of conservatism. In 1998-99, ASIC found $48 million of expenditure and a loss of more than $40 million had been concealed in the financial statements of the company (2). Worldcom, a US based telecommunications company also went bankrupt largely due to poor financial management in 2002. Similarly to One-Tel, it failed to follow the two accounting principles of conservatism and reliability. Conservatism was not followed b y Worldcom with its handling of line cost expenses. These expenses were not included in their reports and resulted in them providing misleading information. It led people to believe that it made over $107 billion in profit and only $3.7 billion in expenses (4). This however was found to be grossly incorrect as they had, in fact, had $107 billion in losses. Both companies overall failed to comply with the principle of conservatism and this was one of the main reasons leading to their bankruptcy. Reliability refers to information the user can depend upon to be materially accurate and to faithfully represent the information that