Problem Analysis and Decision-Making Term Paper

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Creative accounting" may be considered a very old technique which has conserved its appeal over the ages. However, using such methods could prove costly. The motivation behind techniques of this type varies: sometimes, executive and financial officers, accountants or auditors have a lot to gain by presenting false data to the interested parties. The victim may be the state, which collects less income taxes, creditors, who are not aware of the real situation of the company they have lent money to, clients, who continue to do business with an organization that could go bankrupt at any time and so on.

In other cases, the terrible pressure to which businesses are subjected by the fact that investors and resources are scarce, induces their managers to use deceptive or even fraudulent accounting practices. Usage of such methods often leads to drastic consequences, both from a legal and an economical point-of-view. Although these practices are not always illegal, they certainly cannot be justified by the people who employ them. The Enron disaster made investors aware of the role of fraudulent accounting in creating an aura of financial healthiness around a company, while the real situation is radically different.

The government has proposed some measures to fight against such practices, in order to heal the wounded psyches of creditors and investors. President Bush held a speech in which he called for a "new ethic of corporate responsibility." However, an ethical code has to be enforced, so adequate sanctions have to be provided for. Investor confidence is practically the backbone of the American economy. No one invests in a company one does not trust. Since the number of open-type companies is higher every day and since the most important stock market in the world -- the NYSE -- acts as an intermediary between investors and companies which seem to have a habit of constantly changing something in the management boards, strict accounting and reporting rules have to be applied in order to maintain the interest of the investors in the economy.

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Financial safety cannot be achieved unless discipline and consistency is enforced. That is why certain solutions have to be found for the problem of fraudulent accounting. (or, as some people like to call it -- "creative accounting").

Some solutions may be the setting of standards for the accounting industry by an independent board, establishing limits on the consulting services accounting firms can perform for their audit clients, providing for new criminal penalties for corporate financial fraud and obstruction of justice involving shredding documents (including mail, wire and pension fraud), requiring corporate chief executives and chief financial officers to personally attest to the accuracy of their financial reports, or prohibiting companies to make personal loans to executives and directors.

The first solution to the problem of fraudulent accounting is the setting of accounting standards by an independent board. Multiple ways of recording the operations of a company are not only a source of constant trouble for fiscal authorities, shareholders and investors, who have to cope with various standards, but are also an excellent method for "wise" accountants to elude the provisions of the law and to provoke irreparable damage to the investors' interests. Therefore, a standardized solution for all accounting operations would be welcomed by all interested parties and would simplify the control activity conducted by various persons. A disadvantage of this method is that it would require accountants and financial officers to re-learn some basic elements of their work, so a transition period would be unavoidable.

The second solution for avoiding troubles similar to those caused by Enron would be to limit the consulting services accounting firms can perform for their audit clients. Critics argued that Arthur Andersen had conducted both consultancy and audit services, which lead to an inherent conflict of interests. It is matter of common sense that the one who gets the job done and the one who checks if the job was done correctly cannot be the same person, especially if the interests of other people are at stake.….....

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