Financial Statements - Financial Statements Running head:...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Financial Statements 1 Running head: HOW DO PEOPLE MANIPULATE FINANCIAL STATEMENTS FOR How Do People Manipulate Financial Statements For Their Own Benefits Like in the Accounting Scandal in WorldCom Corporation? [Author’s Name] [Institution’s Name]
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Financial Statements 2 How Do People Manipulate Financial Statements For Their Own Benefits Like in the Accounting Scandal in WorldCom Corporation? Financial statements are the result of applying financial accounting standards or legal accounting rules to the transactions of a financial statement entity. However, the quality of financial statements depends not only on the quality of the standards that is their ability to adequately portray the economics of the underlying transactions and events. Even high- quality accounting standards result in high-quality financial statements only if they are properly applied. Those who use financial statement should be skeptical of the reliability of the information. If these difficulties are known, any standard-setter should explain what an equity number of a balance sheet is saying. Interestingly, there seems to be no clear answer within those frameworks, which argue that they will support information that is useful for decisions. Turning to my second point, fair-value measurement, there are again simplifications in accounting standards that might cause expectation gaps. (Baetge, J., Heitmann, C. 2000) The problems with fair values in accounting are as follows: 1. Fair-value measurement aims to provide information about (potential) market prices of assets and liabilities. However,
Background image of page 2
3 only in a world of perfect and complete markets can the fair value be precisely defined. But in such a world there would be no need for financial statement, which contains market prices. The information on quantities would be sufficient, since all users could find the relevant prices. In the real world, markets are imperfect and incomplete, and the standard-setter has to decide which market is relevant. Even if he can make this decision, there are differences between a market price and a value in use. Assuming a rational investor, he or she will only invest in an asset if the value in use exceeds the market price. This investment creates a positive net present value. Therefore, the information on market prices can only be a conservative estimate of the value in use at the time of investment, as Dieter Ordelheide (1998) has shown. 2. Selling prices are informative, but only if the enterprise really wants to sell the asset. Selling prices make sense for trading securities, but not for non-current assets like property, plant, and equipment, especially for special machinery, or for financial investments.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/29/2010 for the course MANAGEMENT EM-14793 taught by Professor Lindaryaan during the Spring '08 term at Windsor.

Page1 / 16

Financial Statements - Financial Statements Running head:...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online