During the period of 1990s, the economy grew fast in the United States. Because of the deregulation of the financial markets, the stock market was booming. However, this prosperous economy did not last long. In the late 1990s, a series of accounting scandals happened, including the large companies like Enron and Worldcom. The atmosphere of corporate scandals contributed largely to the early 2000s recession. The stock market began to fall because people lost trust in the public traded companies.
Because of the economic growth in 1990s, companies became aggressive and wanted to earn more money. One way is to increase their stock price and in order to do that, some of the companies began to utilize accounting loopholes to make their financial statements look better. For example, Enron and Worldcom were two large companies that finally filed bankruptcy because of accounting fraud. Enron hide billions of debt by using the shortcomings of the “old” GAAP, special purpose entities, and poor financial reporting. Despite the CEO of Enron, the auditors were also responsible for Enron’s scandal due to their negligence. Also, the rule-based GAAP and the regulations at that time are the triggers that caused the falling of Enron. Finally, Enron was turned in by an internal whistle-blower. Unlike the complexity of Enron’s accounting fraud, Worldcom’s accounting department simply capitalized expenses on the balance sheet that should have been expensed and inflated its revenues. This $3.8 billion in fraud was detected by the company’s internal auditing department. Both the companies and audit firms have their own issues. The companies have earnings pressure, unregulated internal control and lack of oversight of accounting procedure. The audit firms lack of the knowledge of the companies’ internal control and professional skepticisms.
After the series of accounting scandals, in