Question

In the early 2000s, many news stories reviewed the questionable accounting practices and financial collapses of major corporations, such as Enron, Worldcom, and other companies. Do you think accounting rules can be developed and applied in a way that would prevent corporate failures?

Answer 1

Accounting rules can be developed and applied in a way that would prevent corporate failures

Corporate failures arises due to dishonest management and unethical practices. The Corruption is in human mind not in the profession.

New accounting standards and rules have been adopted by many countries to have a same accounting practices and disclosure requirements in all countries. IFRS have helped many corporates and countries, still alot need to be done.

Whatever rules comes, 100% assurance cannot be placed on financial statements of any company as malpractices happens and will happen and no amount of regulations can stop that. offcourse, it has been reduced, however it is impossible to completely stop it.

Major reason is Insider Trading.

There are a variety of ways that insider trading can be conducted:

1. Members of an organization purchasing a security. Employees or members of publicly traded companies are in key positions to access information that would not otherwise be available to the general public. Some of them buy and sell securities based on this information and hope to profit from it when the news is eventually released. Employees are given stock options so there are legal instances where they can purchase shares. However, the rules are complicated and the line is often blurred between what is a legal form of insider trading and what is not.
2. Professionals who do business with the corporation. Bankers, lawyers, paralegals, and brokers are but a few of the consultants who have access to confidential documents of their corporate clients. They may choose to abuse this privilege as an opportunity to make a quick buck through insider trading.
3. Friends, family, and acquaintances of corporate employees. Corporate employees often share information within their own circles that is not shared with Wall Street and the general public. Sometimes these disclosures are made innocently, but other times they are made with the intention of allowing their friends to trade securities with an advantage that other investors would not have. Employees may give these tips to help out a friend in a tough time or they may be asking their friends to pay them a small incentive. Employees may trade through their friends and acquaintances since they are less likely to be scrutinized by the SEC than the employees themselves.
4. Government officials. Officials of different government agencies can gain access to confidential information through the execution of their duties. They may conduct insider trading with this information.
5. Hackers, corporate spies, and other thieves. Clever criminals find a number of ways to gain access to corporate information which they can use to conduct securities fraud.

All the above practices are very difficult to find. Its all depends on integrity of person.