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How Companies Manipulate Their Accounts Using Accounting Ratios? Abstract ...


How companies manipulate their accounts using accounting ratios?

Abstract
The emergence of accounting scandals in the US has shaken the world over. Professionals, stakeholders, shareholders and regulatory authorities blame a multitude of factors for the proliferation of cases like Enron, Tyco, WorldCom and Xerox etc. The researcher is of the view that the rising number of bankruptcies and fraud cases in the corporate sector has been the result of weakness within the financial system and regulatory standards. In the US especially the flexibility of the financial standards has given firms the opportunities to manipulate accounts with the help of financial and accounting professionals for the benefit of top management. These individuals have knowledge of GAAP (generally accepted accounting principle) and its loopholes. They capitalize on these loopholes to the extent of crippling the economy and professional standards. The following research investigates the rationale for firms that resort to accounts manipulation through financial ratios and how it could be curbed. It identifies the measures for counteracting unethical professional behaviour by outlining the core weaknesses within the accounting standards and systems. It also compares the US standards with those of the UK to conclude that the UK is less liable to fraudulent behaviour because its authority has taken measures to strictly regulate accounting professionals, auditors and top executives to avoid engage in accounting manipulation and fraud.

Table of Contents
Chapter 1 Introduction4
Background4
Rationale7
Objectives8
Scope9
Work Map9
Chapter 2 Literature review10
Introduction10
Enron11
WorldCom13
Ratios15
Differing Accounting Standards in the UK and US19
Chapter 3 Research Methodology23
Inductive and Deductive Reasoning23
Qualitative and Quantitative Research24
Secondary and Primary Resources24
Research Rationale25
Chapter 4 Data collection and analysis26
Chapter 5 Conclusion and Recommendations30
Bibliography34
Appendices38

Chapter 1 Introduction
Background
The growing number of accounting scandals with the likes of Enron, Tyco, WorldCom and Xerox etc. has raised cause for concern for stakeholders, shareholders, professional bodies and trade authorities alike. They are of the view that corporate finance has undergone transformation for the worse in the last ten years. Williams' research (2002) indicates that accuracy of revenues and earnings help in operational decision support and formulation of corporate strategy for almost 60 percent of the firms. Others, approximately 58 percent, feel financial reporting transparency and compliance (93 percent) with external reporting requirements imperative for effective corporate and industry performance. However, the growing number of scandals related to fraudulent earnings, inflated asset values and understated liabilities have undermined this system of corporate governance (Lev 2003).


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