Over the course of the last decade, the number of companies using legal, but deceptive accounting practices has increased dramatically. Sunbeam, WorldCom and Enron are among some of the most notable organizations to utilize accounting practices that were clearly unethical. While the public has called for these individuals and organizations to pay for their accounting transgressions, the reality of the situation is that it is difficult, if not impossible, for the government and its regulatory agencies—such as the Securities and Exchange Commission (SEC)—to effectively prosecute organizations for using unethical accounting practices. Unless the specific action taken by the organization in some way violates the law, there is little recourse for the government or the public.With the realization that accounting practices of the organization can be legal, but grossly unethical, there is a clear impetus to consider how these situations can be avoided. Accounting concepts define the assumptions on which the financial statements of an organization are prepared. However, this does not mean that the need for judgments and estimations by preparers of accounts is eliminated or that choices in accounting measurement are restricted.
[...] Reviewing what has been written about the basic assumptions that are made in the context of financial statements, Colson (2005) notes that after the conclusion of World War II, the Financial Accounting and Standards Board (FASB) began working on the “standards for general purpose financial statements.” Colson goes on to argue that standards for accounting are focused on two specific goals: First, standards reduce the costs of specific negotiations over the form and content of financial statements. Standards for general purpose financial statements facilitate contracting because they constrain insiders from producing financial statements that reflect only inside concerns. [...]
[...] Specifically, this organization is best known for its policy of “bill and hold.” Explicating how this process worked, Frederick and coworkers go on to note that in order to dump some of its inventory, the organization sold items at deep discounts in the off- season. Distributors were given six months to pay for the merchandise and flexible terms that made these seem unbeatable. In addition, Sunbeam offered to hold the merchandise in warehouses until the distributors wanted to take delivery. [...]
[...] Although the GAAP provides a clear framework for the development of accounting practices and financial reporting, McClenahen and Jusko (2002) observe that because the FASB cannot institute laws with respect to the development of financial statements, the ability of government to enforce the standards developed under the GAAP becomes an issue of paramount concern. According to these authors, the situation created because of the inability of the government to enforce the GAAP as law is one that continues to erode the very integrity of financial statements reported by all organizations: “Financial reporting should be transparent, truthful and complete whether it is 'old economy' or 'new economy' accounting A new model for accounting won't be worth much if managers are opaque, misleading and deficient. [...]
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