Question

1. What are some of the limitations of financial statement analysis highlighted by Enron’s success in sustaining its fraud over a long period?

b) What role did the SOX Act provision play in the HealthSouth fraud?

2. Discuss the reasoning behind Scrushy’s overstatement of the impact of changes in Medicare reimbursement?

b) What elaborate financial engineering technique was disclosed in the footnotes of Parmalat’s Brazilian unit; and how did it affect shareholder’s equity, and why is the technique an example of hedging?

Answer 1

1) What are some of the limitations of financial statement analysis highlighted by Enron’s success in sustaining its fraud over a long period?

--Analysts must be weary when the Beineish model coincides with non-transparent financial statements.
-- Failure if auditors to catch the errors

-- The auditors hold the ability to abuse GAAP
-- Companies put best efforts to make the statements unfathomable.

2) What role did the SOX Act provision play in the HealthSouth fraud?

ANSWER: In 1984 HealthSouth Corporation was established by Richard M. Scrushy with the four partners. However was identified that Scrushy committed accounting fraud and overstated revenues by $1.4 billion, starting in 1999. Because of Sarbanes-Oxley, the scandal was caught and identified very quickly. SEC emphasizes that act requirements are strategically and universally followed, and no exceptions are permitted. If it wasn’t for SOA, HealthSouth may still be overstating earnings and committing corporate fraud and taking benefit of their investors. The The SOA has improved the protection of whistleblowers in three prime ways, recognizing that they may have vital roles in uncovering frauds (Sarbanes Oxley and Whistleblower Protection, CPA Journal). The act played a vital role for stakeholder’s protection against unfair or fraudulent practices in the HealthSouth fraud. The top officials of U.S. asserted that with the SOX enactment, HealthSouth fraud prosecutions would intensify and the scandals would be identified in efficient and effective time.