Abstract
The modern financial world has experienced its share of changes. It has experienced moments of growth as well as moments of stagnation and decline. This has affected both the private sector as exemplified by private firms as well the public sector which is represented by governments. Perhaps the financial meltdown that began from Wall Street and led to a recession is the freshest in our minds. The global economy is yet to regain from this devastating financial shock.
Financial scandals are accounting malpractices that affect the finances of a corporation or company, and they lead to the weakening and even collapse of the financial base of a firm. This is generally considered fraud and takes many forms. Some top executives can collaborate with other members of the management team and divert funds from the firm to personal accounts resulting in a weak financial base for the firm. Also, some top executives can make imprudent investment choices for the firm whereby the choices result in massive losses for the companies involved. The losses are experienced by all members of the public who have shares in such companies.
Another way in which financial scandals arise is through unsound investments that lead to losses and the resultant shame and fear of retribution. These twin elements of shame and fear of retribution force the executives to make alterations in the financial records of the company so as to present a fake image of financial strength to the public. In most cases, this is done in the hope that the company will recover and provide sufficient profits that can be plowed back to seal the gaping losses. As history shows, the holes or losses are never sealed and the public gets to know anyway.
This research paper seeks to establish whether there are unique steps that are taken by the management of some firms at some point in time during the post-scandal period, that lead to the survival of the companies. This will form the basis for the argument on the inability of other firms to survive the post-scandal time. The logic is that if what is done by the surviving firms is what makes them survive the scandals, then the non-surviving firms die out due to their failure to take these same actions. A careful look at the information that is available on Xerox, Computer Associates, computer software and hardware development firm as well as WorldCom, and Enron will serve as the examples or anchors for this paper’s central argument. Computer Associates managed to survive the financial scandal that rocked it despite unending controversy while Enron and WorldCom withered.
Literature that is available on this financial scandal is reviewed and the resulting position is that the relative financial position at the post-scandal period together with the action that is taken makes the difference. Firms that are in a fairly stable financial position in the post-scandal period tend to do better. If the best management actions are taken immediately the financial scandal is unearthed, the companies end up surviving. Those in weak financial decisions at the post-scandal moments always have a difficult time recovering even with the best management team. The recommendations this research makes, therefore, are that best actions should be followed by an attempt to strengthen the financial standing of firms at the post-scandal time if the aim is to enhance survival.
Introduction
The economy of a country is not independent of the financial standings of the private firms. These two entities are inextricably intertwined. A shock affecting one of them always touches on the other. Depending on the nature of the shock, it is always reflected on the other side. A healthy financial position of private firms means a vibrant economy for the country. But what does this mean for the world?
We live in a global village. Globalization has shortened the routes of commerce has hastened communication. Stocks are traded online and the impact of any economic activity is felt all over the world within a very short duration. This means that when a country is affected by a financial scandal, the rest of the world is not economically safe. It is a serious issue when the country in question is an economic powerhouse such as the United States. This is why the recent collapse of the financial system in the United States led to a global recession. The global financial meltdown provides the best lesson for watching against financial or accounting scandals in private firms. The results are disastrous and those who are not directly linked to the fraudulent actions end up suffering the consequences.
Financial scandals are always connected to those in management positions as well as accountants and auditors. The chief executive officers, the directors, and the accountants have been touched by the recent accounting scandals that have rocked the financial world. This is the case for the companies that are under focus in this paper. They are Enron and WorldCom for the non-surviving side and Computer Associates and Xerox for the surviving side. This research paper progresses through the next section of background to the problem of financial scandals and the related ability to survive or go out of operation, followed by a hypothesis statement. This is then followed by the methodology that was employed in data collection, collation and, presentation. The next phase after methodology is the presentation of the results and the resultant analysis. The conclusion that avails a summary of the research paper follows closely and recommendations for future research are the hallmark of the paper.
Background
The Long-Running History of Financial Scandal
History is full of financial scandals. Enron (Fusaro & Miller 21-27), WorldCom, Xerox, and Computer Associates are not the only companies that have been victims of accounting scandals. Britain recorded a momentous financial scandal in the year 1719. The company that was involved in this historical scandal was the South Sea Company. Important politicians in Britain such as ministers and even the royal family itself had a business connection in this firm (Roberts 274). The management, therefore, ensured that the prices were well inflated, and this led to the bursting of this bubble in the period covering 1719-1720. The more connected and powerful shareholders ran for the hills while the small shareholders remained inside the floating financial bubble nursing their financial burns. The most recent financial scandal is that of Bernard Madoff’s Ponzi scheme that went down with millions of investors’ money (Efrati1). The tendency is to shift blame from one corner to the other. Much of this blame-shifting is thoughtless. Since the companies under examination in this research paper, it is important to note that American financial systems are operated under the US GAAP.
Some analysts both in the United States and the rest of the world have come out pointing out the fact that the United States deregulated system is behind the numerous scandals that have rocked the United States firms’ financial sectors. The multinational nature of these corporations has led to crises in several parts of the world where these companies such as Enron had a foothold. Regulation may not be the best but it is working in some parts of the world such as Europe, another important economic region in the world after the United States. Here, a new set of rules under the International Financial Reporting Standards usually abbreviated as IFRS have been put in place as the basis to be used in recording financial statements. It was adopted by the European Union n(EU) which went ahead to direct all the major companies within the European Union block to adopt this financial system in their accounting practices. It is quickly replacing the United Kingdom GAAP, which is the equivalent of the United States GAAP.
Relationship between US GAAP, UK GAAP, IFRS and Scandals in Companies
All three (US GAAP, UK GAAP and IFRS) are guidelines or principles that guide the practice of financial transactions. GAAP in full means Generally Accepted Accounting Principles. When the set of principles is not strong, companies find the space to report inconsistent financial details and manipulate the figures to cover fraud. Once the GAA principles are strong, financial scandals are reduced. The US GAAP has been blamed for the scandals that have hit major companies. It has been compared to the UK GAAP that is not in use anymore, having been replaced by the IFRS.
The immense support for IFRS from the regional supragovernment of the EU, the state governments and the major companies is a pointer to the fact that this system may be having its strengths compared to the one they used earlier; the UK GAAP.IFRS is a product of the International Accounting Standards Committee normally abbreviated as ISAC. The organization that existed before the ISAC, the International Accounting Standards Board (IASB) played a role in the formation of IFRS (Briginshaw 1). The IFRS is as different from the US GAAP as the UK GAAP was from the IFRS.
The Securities and Exchange Commission has plans of taking the US GAAP off the financial operations of the United States and replacing them with IFRS. The US GAAP is largely based on specific regulations. This is totally different from IFRS that has its operations rooted in principles (Briginshaw 2009). Why is there a push to take the US financial system in the direction of the IFRS? The reason is that most of the massive financial scandals that have threatened the very heart of the United States economy have been traced to the luxurious operational latitude that the management is afforded by US GAAP. Therefore, the reasoning is that if this financial system is changed, the room for greedy maneuvers by selfish company executives will be eliminated thus making companies safe and thus free from financial scandals. But while the US GAAP reigns supreme, at least till 2014 (Briginshaw 1), the SEC has to contend with the tenuous task of guiding the reconciliation of financial transactions between IFRS and US GAAP (Brackney and Witmer 1).
Enron, Xerox, WorldCom and Computer Associates Scandals and related action
Enron
The United States economy experienced a moment of rapid growth in the 1990s. Everyone was laughing at the bank with pockets full of dollars. Large companies had it even better; making huge profits, an aspect that widened their taste for an adventure into the deeper financial waters. The market boom was exceptional. In 1991, the Dow Jones had a dismal industrial average. It was estimated to be below 3000 (Markham 3). In a short span of five years, the industrial average had jumped to over 6000; double the 1991 average. The New York Stock Exchange recorded a unique rise of 20% in a period of fewer than two years. It is estimated to have taken one year: between 1998 and 1999. By 1997, (Markham 3) reports that the economy had managed to hit a Gross Domestic Mark of $ 7.2 trillion. This is the kind of climate in which the then indomitable energy company, Enron, found itself. It was lifted off the bottom of the ocean by the rising economy all the way to the surface.
From the above point, the management decided to get creative and adjust the accounting records whenever losses were recorded. Coupled with risky financial instruments such as credit derivatives (Markham 8) as well as the inclusion of inexistent assets or overvalued assets, the unfortunate turn of events in 2001 led to the company recording a debt of 20% in the course of just one day. What happened from that period is a sad story for investors. Stock prices hit a record low and the auditors who were assigned to look into the financial practices discovered a long history of fraud. The avoidance of debts in their statements so as to make admirable balance sheets that would attract investors was one of the practices. There was also the over-pricing of financially unworthy assets as well as the recording of assets that the company never had. The sadness of the story comes in when it is revealed that the recording of losses by Enron was not taken as a warning sign by the management. They went ahead with their apparently unfriendly practice of not recording the losses. The result is that the company deteriorated financially such that by the time the scandal was discovered, it was weak beyond recovery.
WorldCom
WorldCom had created a reputation for itself as a potential market controller in the telecommunications sector. For a time, the management wisely made investment moves under the leadership of Bernard Ebbers. This was until 1998 when the private actions of the Chief Executive Officer, Bernard Ebbers began having an impact on the company’s operations. Reduced financial resources led to poor operations and the stock market responded accordingly to the fears that had begun building. The move that followed was the conversion of the expenses of the company to assets, a move that remained unknown to the SEC for a while. The response from investors slowed and Bernard was called upon to redeem this blue-chip company. They did not know that he was behind the imminent collapse. It did not help matters that he had diverted funds from the company to personal ventures in the timber and yacht business (Jonesington 2).
Upon Bernard’s exit from office, a phenomenon made possible through pressure from the other members of the top management team, the same activities that Ebbers had been guilty of continued. Interference with the accounting records continued and the end result was the bankruptcy of the company. All the top guys were rounded up and charged. Most of them, including Ebbers himself who reported to authorities in 2006 are serving their incarceration sentences for charges ranging from securities fraud to conspiracy to commit securities fraud (Jonesington 2).
The most important aspect of the WorldCom case is that upon the kicking out of Ebbers, the incoming management did not do anything to right any wrongs. Instead, they continued with the same practices that had made the once productive firm travel down this financially destructive road. The cooking of the financial records continued and the hiding of losses moved on. It is not possible to establish whether the leaders of these companies knew that SEC would catch up with them or not.
Another important area that is worth pointing out is that by the time the Securities and Exchange Commission (SEC) was moving into action to investigate and try to identify any wrongdoing, the company’s financial position had been fundamentally destroyed. Ebbers had taken more than $ 400 million from the company and the inflation was more than 10 billion dollars. This is a complicated financial position for any company however huge its asset base may be. The company has not yet recovered since the time of this scandal. People owed by WorldCom are yet to be paid. The debt is estimated at more than $ 5 billion.
WorldCom came out of the famous chapter 11 bankruptcy in 2004 and the former company boss is serving a record 25 years prison sentence (BBC.UK 1). It is a sad chapter in a long book of financial success for WorldCom. Whether it will be able to emerge from these doldrums and be vibrant once more like it used to be is a sight many in the finance and business world are waiting to set their eyes on. It will definitely take a great deal of effort and time to turn it around.
Computer Associates
The specialization of Computer Associates has always been computer-related items. It began with the handling of mainframe computers; an area that it purchased from the computer development giant; IBM. Computer Associates experienced a period of unparalleled growth in its formative years. The floating cash motivated the management to stage hostile takeovers of smaller and other poorly managed firms; actions that contributed to the continued expansion of the company. But this did not go on for long. By the year 2000 and parts of 2001, the company was the subject of investigation and criticism for engaging in scandalous financial practices. Insider trading was pointed out together with interference with financial statements whereby previous financial period collections were added to current financial times to beat expectations by investors. There was also abnormally high compensation for some of its executives in the late 1990s. The case of insider trading was traced to the then boss; Sanjay Kumar.
The above woes that afflicted Computer Associates are not any different when compared with what befell Enron and WorldCom. But the fact that Computer Associates was able to put its financial act together and go back to profitability is something that will be pointed out in this research paper. The management of Computer Associates came together quickly and sent Sanjay Kumar packing. Takeovers were slowed down and the new boss was given a chance to lead the company in the way he knew best. Is this why we are still able to hear people talking about Computer Associates? Is it the reason why it was able to survive? This research paper will answer all these questions.
Xerox
This company that is a leader in copier and printer production was a victim of an SEC investigated scandal in 2002. Leases were recorded as sales, revenues were inflated and books were cooked to give a false impression of financial stability. They ended up paying more than 32 million dollars as fines both for the company and the leadership.
The Impact of the scandals….
The financial scandals had a number of effects on the lives of people in the United States and around the World. By mentioning the world, I am considering the fact that these were multinational companies that had subsidiaries in a number of countries. These subsidiaries were affected by the scandals thus touching on the countries in which they were operating too.
The most immediate effect that came with the collapse of all these companies was the loss of jobs. With reduced company finances, and in some cases such as Enron’s totally absent funds, there was no need to keep any employees or many employees. The number of jobs that disappeared with the collapse of these organizations was so high that it had a big impact on the country’s employment levels.
Apart from the loss of jobs, the people who had invested their money in these companies lost their investments. Enron collapsed with people’s money as was the case with WorldCom and Computer Associates. It is a far worse scenario for the non-surviving companies such as Enron because the chances of investors getting their money back are close to zero. Companies that survive after the financial scandal can struggle and gain stability after which they can extend payment to the shareholders. Computer Associates is an example in this category of companies.
Both job losses and loss of investments by shareholders have a far-reaching impact on the economy. The shareholders in other companies develop cold feet and stop buying shares as they rush to sell what they have. The abundance of sellers of shares and the scarcity of buyers compromises the stock markets; a factor that can lead to market crashes. The market crash of 1929 that led to the Great Depression was characterized by share abundance in the stock market with no buyers. The panic eventually overwhelmed the economy and the resulting scenario was a deep economic depression that is indelibly imprinted in the annals of history.
Data Collection and Sampling
Survival simply means the ability to make it through the financial challenges that are brought upon the company’s balance sheet by the financial scandal. The company normally moves forward to a period of profitability and stability. Non-survival on the other hand can mean the inability of the company that has been affected by the financial scandal to rise above the low position that has resulted from the devastation of the scandal. The company may continue experiencing declining strength or it may disappear altogether. This, therefore, means that we have two cases within the non-survival category. This is the reason why we collect data.
There’s no better method to determine the position of the company than the financial statements. This is true for the surviving companies and the non-surviving (declining) companies. For the non-existent companies, there is no need for a financial statement to determine the position. The fact that it took a massive hit that made it difficult for it to survive is sufficient to take a stand and make a conclusion. Computer Associates is the best example of surviving company. Before the scandal, the company has sales of $ 1 billion. The scandal affected stock prices, and sweeping action followed whereby the boss was sent packing and prosecuted; receiving a term of twelve years (Merced 1). The post-scandal period has shown Computer Associates recording sales of more than $ 1.4 billion. Enron on the other hand is not alive while WorldCom is yet to pay $ 5.7 billion in debts.
Hypothesis/Proposition
This research paper’s intent is to establish the elements that make some companies survive financial scandals while others perish. The already established actions or factors are the financial position of the firm or company after the scandal as well as the action after that is taken immediately the scandal is discovered.
Upon the entry into a period of growth in the economy of the United States in the late 1990s (Markham 3), Enron was among a huge group of companies that benefitted from the market boom. Dealing in energy, the management decided that it was time to diversify since the market was available anyway. This rapid expansion was not taken well by the company. Faced with a situation of losses and declining value for its assets, the top leaders decided to engage in what is popularly referred to as creative accounting in the world of company financial scandals. The improper financial actions of the company leadership did not come in handy when the company began taking hits. A share value drop of 20% in 2001 within a single day was a record drop (Markham 8).
From the available records resulting from the investigations that were carried out by the Securities and Exchange Commission (SEC), the company did not change its actions even after realizing that the interference with the financial records of the company was doing the company more harm than good. Instead, they kept on giving mediocre assets high values and failing to record the losses the company was incurring on its balance sheet. It did not take long before the reality emerged. The company was heavily indebted and its assets were nearly valueless. The management panicked and no sensible action was taken. By the time it was going down, Enron was trying to gather $ 20 billion to distribute to its creditors. Nothing is expected to remain on the balance sheet apart from a huge debt by the time most of the creditors have received their dues.
The company is now dead and buried and all that analysts are left asking is what might have been done to change the circumstances. The truth is that if at the detection of the first financial problem the company management had come clean and sought help instead of fraudulently adjusting the books of account, the company might have survived. Investors are not quick to run away from a company that is being revived since profitability is possible. Computer Associates changed the management immediately financial malpractices were discovered in the company and the company survived. WorldCom may have sent the scandalous boss, Bernard Ebbers packing, but he was replaced by an equally corrupt group of leaders who perpetuated their former boss’s actions. WorldCom got into a financial coma from which it is never recovered. Hence the first hypothesis takes the following format:
- Hypothesis 1: Appropriate action that includes change of top company leadership at the earliest detection of financial trouble can alleviate bankruptcy.
- Note: Earliest in this hypothesis refers to the moment when little financial damage has been done. It does not mean time since some devastating financial scandals can occur within a very short time.
What if despite all the repeated interference with the financial statements, Enron had managed to pull through this scandal with a substantial amount of money? The answer to this is that the payment of debts would have been easier and prudent investment in the post-scandal period would have led to profitability and survival. Computer Associates moved out of the scandal period with enough cash to not only clear debts and pay fines, but also make more investments. The company has survived hence its continued presence in business. The latest announcement of the production of lean Information Technology systems to minimize costs is evidence of its continued growth (Computer Associates 2009 1) WorldCom emerged from the scandal with a tattered balance sheet carrying inflation of $ 11 billion. To this date, it has $ 5.7 billion that it is supposed to pay to other parties. It did not survive. This takes us to the second hypothesis that takes the format below:
- Hypothesis 2: A fairly strong post-scandal financial position as indicated by a higher asset value and few liabilities can make a company effectively fight for survival.
- Note: Financial position as used in hypothesis 2 refers to the net worth of the company. If a balancing of the assets and liabilities of the company gives a substantially positive value that can keep the company afloat, then the financial position is strong.
The Court Cases Involving the Four Companies: Enron, WorldCom, Xerox, And Computer Associates
The Securities and Exchange Commission (SEC) has initiated litigation over all three companies. In the case of Enron, company officials who participated in concealing accounting documents are sued and therefore documented as defendants in courts cases. Such officials include David T.Leboe, Dale G.Rasmussen among others (SEC 1). Similar charges against Bernard Ebbers led to his 25-year jail sentence (Jonesington 2), whereas the case against Computer Associates led to Sanjay Kumar getting a jail term of 12 years and fines to affected parties (BBC.uk 1). Xerox was fined more than 32 million dollars by the SEC.
Methodology
This research takes a descriptive model. Elements of statistics through tabulation are used too. Comparing the figures that are available such as the amount of debt a company has and the number of sales a company records will give us the position of the company in terms of survival and non-survival. The examination of the actions taken in each case will also point in the direction of either recovery or death of the company. The data available indicates that WorldCom is yet to clear debts amounting to $ 5.7 billion to second parties or creditors. It is important to point out that not every debt is necessarily bad. This is because a company can be in debt because it has borrowed money and invested it. In this case, it is always easy to recover the money with time and clear the debt. Debts that are a result of poor investment decisions or diversion of company funds to personal affairs always cause financial problems for companies. It is now more than five years since it was struck by the financial scandal, but still, it has not managed to come out of the woods..
[Insert Table 1.1 here].
Another crucial figure here is the eleven billion ($ 11 billion) by which the balance sheet had been inflated by the time the Securities and Exchange Commission (SEC) was catching up with it in terms of interference with its financial statements (Jonesington 1). This is the ultimate evidence that the financial manipulation that was taking place in the company was of high proportions. Since inflation of eleven billion would not have occurred just at once, the possible explanation is that this was done on an incremental basis. The management kept on interfering with the records maybe with the hope of the company realizing huge profits; which would they would then plow back to cover the inflation.
Enron on the other hand incurred more than $ 20 billion in debts. They are still being paid even after the demise of the company. Computer Associates on the other hand was able to pay its fines as imposed on it by the SEC. It recorded a sales value of more than $ 1.4 in the last quarter of 2009.
In addition to the above, WorldCom sent home its corrupt boss and replaced him with more corrupt ones. These fellows went ahead to maintain the Bernard tradition of concealing losses that the company was incurring. They also included assets that were not owned by the company as a means of improving the image of the company in the eyes of investors. This was geared at making the shares of the company marketable. Enron did not live long enough to witness leadership change. After claiming to be in possession of assets that were never there and showing profits in the company balance sheet instead of the heavy losses, the resultant impact of the scandal was too huge for the company to survive. Computer Associates saw its boss get a twelve-year jail term for his financial crimes. Sanjay Kumar was accused of spearheading the illegal insider share trading that was part of the financial scam.
Results: Presentation and Analysis of Results
WorldCom emerged from the scandal with a huge debt of more than $ 5.7 billion that is still being paid up to this moment. The assets that are in the hands of the company are of less value and the balance sheet is unhealthy financially. Enron suffered a massive debt of more than $20 billion that is also still being paid long after the company is dead. Most of the subsidiaries that it had acquired during its massive expansion have been sold in a bid to pay creditors. These cases tell us that when companies emerge from scandals with huge debts, they do not survive in the business world anymore. Computer Associates emerged from the scandal with a fairly robust financial base and paid fines. It also continued with its investments leading to its realization of sales worth more than $ 1.4 million in the year ending 2009. Xerox too emerged from the 2002 scandal with the ability to pay all debts and still continue to do business. The message that we pick from here is that when a company emerges from a financial scandal in a fairly strong financial position, survival is possible.
What about the actions that are taken? There are so many actions that can be taken. Change of top company leadership is one of them. As shown from the three examples, the nature of the leadership that comes in after the scandal is significant. Good leadership that followed the Computer Associates and Xerox scandals led to their recovery while the corrupt leadership that came in at WorldCom after the scandal added to its woes. Enron is in a different category given that by the time the scandal was being unearthed, the damage was already too big to warranty any remedy through a leadership change.
On a much larger scale, these results point to the fact that there are some factors that are necessary for the survival of the company. More often than not, Business entities are placed in the hands of individuals who become victims of circumstances. They lack ideas on what is supposed to be done as far as the finances of the company are concerned, and given the rising economic fortunes of the company that is a product of generally good economic times, these visionless company leaders get carried away and begin misbehaving with company resources. They make reckless investment decisions and divert company finances to private affairs thus reducing the liquidity strength of the company. The list of executives who have behaved in this manner is long if you count the executives of Enron as well as those of other failed companies that got out of business due to financial scandals.
Prudent leaders in the business world are always calculative. By prudent leaders I mean the wise executives who know what is right for the company. They take their time to look through the history of other organizations, and this forms a basis for some of their actions. For instance, if a company executive is informed, then he or she will not escape the fact that repeated financial malpractices do not better the financial standing of the company but instead plunge it into more trouble. The hundreds of financial scandals that have been recorded in the business world in the United States of America, the United Kingdom, and other parts of the world provide sufficient lessons for present business leaders. But do they learn? The behavior, of the CEO of the recently collapsed Ponzi scheme, Bernard Madoff, as well as that of the WorldCom leader, Bernard Ebbers, point in the opposite direction.
Conclusions
The driving force and objective of this research were to establish what makes some companies survive financial scandals while others fail to survive. With careful examination of leadership dynamics and financial transactions of three companies that formed the basis of this research, it has been established that actions taken after the financial scandal such as leadership change can determine the next position that the company will take. Good leadership will increase the chances of survival as shown by Computer Associates and Xerox while bad leadership will cripple the financial position of the company even more.
Also, the financial position of the company at the post-scandal period is significant in determining whether a company survives or not. Companies that emerge from scandals with fairly strong finances (more assets and few liabilities) are more likely to survive as shown by Computer Associates and Xerox as opposed to those that emerge from scandals with weak finances as illustrated by Enron and WorldCom. A combination of the right action and strong financial standing at the post-scandal time is a plus for any company.
Recommendations
It is necessary the right action is taken at the post-scandal period of survival is to be realized in companies that have been affected by financial scandals. In most cases, the leaders who witness the financial mistakes are being made never come up with any tangible solution to the problem. As shown by the WorldCom case, they in fact continue doing the same thing in the hope of getting different results. This, therefore, means that someone from the outside is supposed to take over the reins of power and guide the recovery process. It is also important that a serious oversight body is in place for the purpose of checking the finances of companies from time to time. The focus should be to confirm the presence of alleged assets and the actual position of the companies’ finances. In the case of loans to other bodies, it should be established clearly in terms of who has the loans and the means and time of return; with sufficient security to cover up cases of default in payment. The internal and external auditors have been around for as long as the financial world has been around but they are not able to stop these devastating financial calamities. Huge firms like Enron collapsed in broad daylight and the presence of a respected audit firm.
Besides the above, it can be helpful if the rules that govern executive compensation are tightened so as to put caps on the limits on the number of money executives can be paid for working in their respective companies. Human greed seems to be uncontrollable, and the executives have not shown to be particularly able to manage their appetite for obscenely high compensation. Putting caps and following the same with strict implementation will mean that these officials will only get paid a set sum of money for the job they do. Any increment can be set as a percentage of growth realized by the company. Besides avoiding misuse of company funds, this will make them work harder as they will be trying to raise performance, make more profits and thus raise their pay or compensation.
The financial positions of companies that have been hit by scandals can also be enhanced through the injection of more cash as a way of strengthening their financial positions thus raising their chances of survival. A further recommendation is that more research on this topic be carried out with an aim of establishing whether there are other factors that affect the survival of companies after they have been affected by financial scandals.
Lastly, there seems to be a wide consensus over the weakness of the rule-based accounting system of the United States that is commonly referred to as US GAAP. Financial analysts and the Securities and Exchange Commission have both voiced their concerns over the apparent inability of this accounting framework. Shifting to the principle-based and globally appreciated International Financial Reporting Standards (IFRS) may be the medicine that is needed to get rid of these financial scams once and for all.
Works cited
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Efrati, Amir. Accountant Arrested For Sham Audits. Wsj.com. 2009. Web.
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Merced, Michael. Ex-Leader of Computer Associates Gets 12-Year Sentence and Fine. The New York Times.nytimes.com. 2006 Web.
Roberts, Richard. City: A Guide to London’s Global Financial Centre.2nd ed.London: Profile Books Limited/The Economist, 2008.Print.
Securities and Exchange Commission (SEC). Accounting and Auditing Enforcement Releases.SEC v. Sanjay Kumar and Stephen Richards, 04 Civ. 4104 (E.D.N.Y.) (Glasser, I.L.); 2004.Web.
Xerox.com.Xerox Annual Financial Report. 2009. Web.
Appendices
Appendix 1
Table 1.1. Amount of debt in billion $ that the companies had after the scandal and their current status.
Appendix 2
Table 1.2. Xerox Financials. (Millions). Source: Xerox.com. Xerox 2009 Annual Report.