Why investors and creditors need accounting...

We’ve all heard the terms of accounting language and no different than high school, I still get flustered with terminology that means plus but is also know as a credit which then is illustrated as an expense.  But in all reality, after you separate all of the jargon and apply it to every day business management, understanding it all can prove quite useful.  Accounting is termed as the language of business~costs, prices, sales volume, profits and return on investment are all accounting measurements.

My introduction to this course was the tale of Bear Stearns founded in 1923 as an equity trading house.  As a global investment bank and broker, it grew rapidly early in the new millennium and reported in 2006 its fifth consecutive year with record breaking incomes of $2 billion topping 40% increases from the year before.  Stock prices soared in January 2007 at $172 per share but by March 2008, Bear Stearns was forced to sell itself to JP Morgan Chase for $10 per share to avoid going into bankruptcy. 

Moral of the story?  When you have a large amount of debt ratio of loan capital against the value of your common stock, invested owners will lose confidence in your published annual stock reports, while the value of all related securities plunge in the interim.  Bear Stearn’s risk management controls failed to protect the firm from the dramatic decline in the value of subprime mortgage-related securities and credits no longer felt assured to lend them funds.

The accounting system is devised by creating a functional and sound system of internal control  And like any other organization’s goals, the control environment sets the tone of the type of factors related to the company’s trust element.  Buzz words like integrity, ethical values, competence of company personnel, management’s philosophy, responsibility, hiring procedures, oversight by board of directors are all elements that define a company’s track record.

Ethics, Fraud & Corporate Governance

With the dawn of a new millennium came the fraudulent financial reporting practices of large corporations like Enron, WorldCom, HealthSouth, Adelphia Communications, Tyco and Qwest.  Senior management are usually the most contributing perpetrators to this crime involved in more than 83% of fraud-related enforcement actions charged by the Securities and Exchange Commission (SEC).  Corporate governance is the structure for overseeing the actions of the board of directors and to ensure that the company is being run with the best interests of the shareholders in mind.