Question

Ethically and to avoid fraud, it is very important for companies to record capital expenditures and revenue expenditures correctly.

Read “Ethics, Fraud, & Corporate Governance” on p. 414 of Financial Accounting.

Research an article about another company with a scandal related to fraudulent activities around capital expenditure versus revenue expenditure. You may not select the same article as another student.

Post a response in 150 to 200 words to the following questions, providing specific examples to support your answers:

•Provide a brief summary of the unethical fraudulent acts.

•How did the acts affect the shareholders and stakeholders?

•Did the company recover from the scandal? Where is the company now?

ETHICS, FRAUD, & CORPORATE GOVERNANCE A learning objective for this chapter is to distinguish between capital expenditures and revenue expenditures (a revenue expenditure is an operating expense). A capital expenditure is charged to an asset account rather than to an expense account. The largest instance of fraudulent financial reporting in U.S. history was primarily due to improper capitalization of operating expenditures. World Com Inc. (WorldCom) from as early as 1999 through the first quarter of 2002 overstated its reported income by approximately $11 billion, including approximately $7 billion of ordinary operating

Thank you for the help!

Answer 1

Summary on Unethical Fraudulent activities:-

A Company can have many unethical ways of doing business, one of the form of unethical way of doing business is through Fraudulent act.

Corporate frauds is viewed as illegal acts or omissions, punishable by the Government, civil or criminal law, which are the result of deliberate decision making or culpable negligence within a legitimate formal organization.' Corporate crimes also refer to criminal practices by individuals that have the legal authority to speak for a corporation or company. These can include Presidents, managers, directors and chairmen, sales people, agents, or anyone within a company that has authority to act on behalf of the firm. Examples of corporate criminal behaviour in most jurisdictions include: antitrust violations, fraud, damage to the environment in violation of environmental legislation, exploitation of labour laws, and failure to maintain a fiduciary responsibility towards shareholders.

Activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company. Corporate fraud schemes go beyond the scope of an employee's stated position, and are marked by their complexity and economic impact on the business, other employees and outside parties.

Corporate fraud can be difficult to prevent and to catch. By creating effective policies, a system of checks and balances and physical security, a company may limit the extent to which fraud can take place. It is considered a white collar crime.

As long as there have been opportunities, there have been fraudsters.

As per Association of Certified Fraud Examiners(ACFE), Fraud Includes:

• Corruption
• Asset Misappropriation
• Financial Statement Fraud

Globally Asset Misappropriation represents the large majority of fraudulent activity, Financial Statement frauds were rarer.

Effects of Act on Shareholders and Stakeholders

Shareholders found that there investments in different stocks had no value and there shares became worthless and vendors suffered losses as they cannot get the payment from the company and due to this effect the share price Nokia, Sony Ericsson and vodafone and other telecommunication companies declined.

Situation of Company after Scanda:-

After this Fraud the Worldcom got delisted from the Stock Market.

WorldCom CEO Bernard Ebbers was sentenced to 25 years in jail for his role in the scandal, and Sullivan was sentenced to five years. The company went bankrupt, recording the largest bankruptcy in American history until the financial crisis of 2008. Thousands of people lost their jobs

Worldcom emerged from bankruptcy and re-emerged as MCI which is a subsidiary of Verizon.

Another major Accounting Scandal was ENRON'S.