The first is finding out who did, or who failed to do, what, and who bears responsibility for the horrendous losses imposed on Enron's and WorldCom's investors and employees. As this paper have mentioned, the Commission is actively and aggressively investigating these circumstances. The investigation will be thorough, and will deal effectively with any wrongdoing that may have occurred. The second facet of Enron and WorldCom is to see what lessons we can begin to learn about how to prevent failures like this from recurring.
The disclosure and financial reporting system is still the best in the world, but it has long needed improvement. Its inadequacies are more visible after Enron's and WorldCom's failure, and the need for change cannot be ignored any longer. This is not a problem that arose overnight. Investors here and abroad are entitled to rely upon our system as the finest in the world. The study will intend to fulfill that responsibility. There are many aspects of this problem. It further discussed that the system of periodic disclosure, for example, is old and not good enough.
Today, disclosures are made not to inform, but to avoid liability. This paper also described that accounting procedure need to move to a system of current disclosure. The present system, which has been in effect for 67 years, doesn't provide for current disclosure. Financial disclosures are dense, impenetrable. Corporate governance issues and the role of Audit Committees are also in need of review. The impact on accounting recently alerted companies and their Audit Committees of the need for transparent disclosure of key accounting principles and policies in annual reports.
Finally, there is a need for reform of the regulation of accounting profession. Organization cannot afford a system, like the present one, that facilitates failure rather than success. Accounting firms have important public responsibilities. Companies have had far too many financial and accounting failures. The Commission cannot, and in any event will not, tolerate this pattern of growing restatements, audit failures, corporate failures and investor losses. Somehow, community must put a stop to a vicious cycle that has been in evidence for far too many years. Introduction The two largest bankruptcies in U.
S. history, WorldCom in July 2002 and Enron in December 2001, stem from corporate mismanagement, and symbolize the broader crisis in corporate governance. This paper provide a ballpark estimate of the costs of the crisis, based on estimates of the effects of the crisis on stock market wealth and the preventive action that had been taken to avoid any unprofessional conduct in other organizations. On July 21,2002, the telecommunications giant WorldCom filed the largest bankruptcy petition in U. S. history, a petition almost twice the size of the next largest: Enron in December 2001.
1 Both bankruptcies resulted from accounting malpractice, and symbolize the broader crisis in corporate governance a crisis that involves top blue chip companies, has reached political leaders at the highest levels of government, and has resulted in high levels of volatility in U. S. stock markets. The collapse of Enron was a shock when it was announced early this year, both because of the size of the enterprise and, more importantly, because its underlying cause was corrupt corporate management. Yet at time it seemed an isolated, if unfortunate and costly event.
While Enron in isolation had a limited effect on the stock market, the combined effect of subsequent scandals has driven the market into a downward tailspin. Part of the problem stems from the public perception that the scandal is situated at the center rather than the periphery of the system. Flowchart 1 shows the Enron's missteps. Figure 1 : What Caused the Enron Collapsed Source : Toad a la Mode Failure by auditors to detect a material error or misstatement in accounting information at Enron and WorldCom can arise from three main causes, two of which may be attributed to audit failure (Hall and Renner, 1991).
First, auditors may either fail to detect a material error or misstatement, or, having detected an error, fail to recognize it, because they have carried out a substandard audit - i. e. the auditors are incompetent. Second, auditors may identify an error or misstatement and fail to report it or get the directors to put it right - i. e. the auditors lack independence. Third, directors may deliberately deceived auditors. In cases of deliberate deception, auditors may not be held responsible for failure to detect a problem.