Discussion question:
1. What are the fundamental differences between the Nasdaq and the NYSE? Do firms and investors need these markets at all?
2. The WorldCom and Enron accounting scandal involved the firm classifying operating expenses as capital investments. Discuss the impact on Enron and WorldCom’s operating cash flow and their overall cash position. Did the financial statements contain any clues that could have warned investors of the fraud? Could the Enron debacle have Been Prevented? What actions could have been taken by auditors, regulators, and lawmakers?
GIVE PEER RESPONSE
Student reply 1:
1. What are the fundamental differences between the Nasdaq and the NYSE? Do firms and investors need these markets at all?
The Nasdaq is a dealer’s market, where market participants are not buying from and selling to one another directly but through a dealer, who, in the case of the Nasdaq, is a market maker.
The NYSE is an auction market, where individuals are typically buying and selling between one another, and there is an auction occurring; that is, the highest bidding price will be matched with the lowest asking price.
There are 14 other Markets, but these are the most popular two. I would say they need them because of all the historical data available, that you can use to predict the future.
2. The WorldCom and Enron accounting scandal involved the firm classifying operating expenses as capital investments. Discuss the impact on Enron and WorldCom’s operating cash flow and their overall cash position. Did the financial statements contain any clues that could have warned investors of the fraud? Could the Enron debacle have Been Prevented? What actions could have been taken by auditors, regulators, and lawmakers?
Both firms used account gimmicks to hide expenses, inflate its cash flow and report profits instead of losses. Which made them look good, to get better ratings, and investors investing into them.
Yes, it could have been prevented. Management could have adopted better accounting practices. There should have been independent auditors. Congress wanted to propose an SEC rule that would bar accountants from also acting as consultants, because it can be a conflict of interest.
Student reply 2:
What are the fundamental differences between the Nasdaq and the NYSE? Do firms and investors need these markets at all?
Essentially the fundamental difference between the Nasdaq and the NYSE is their trading principles. Nasdaq is a dealer’s market where dealers enter both prices for selling and buying. Trades are then completed by an electronic system that matches the prices of both buyers and sellers. The NYSE is an action market where buyers and sellers trade physically by comparing bid and asking prices. Buyers can then place an order through a floor broker or the Universal Trading Platform. A specialist supervises trades and acts as a middleman between the buyer and seller. I believe firms and investors need these markets because they provide a safe and regulated place where investors can buy and sell shares of stock and companies can acquire needed capital.
The WorldCom and Enron accounting scandal involved the firm classifying operating expenses as capital investments. Discuss the impact on Enron and WorldCom’s operating cash flow and their overall cash position. Did the financial statements contain any clues that could have warned investors of the fraud? Could the Enron debacle have Been Prevented? What actions could have been taken by auditors, regulators, and lawmakers?
Both WorldCom and Enron booked operating expenses as investments to inflate their net income by failing to include expense on the income statement and classified them on the balance sheet as an asset. This allowed the companies to depreciate the costs gradually instead of having to deduct them all at one as an operating expense. By doing this, cash flows, net income, and profit margins were artificially inflated. It can be very hard to detect these accounting “tricks” based solely on the financial statements. The Enron debacle could have been prevented if management followed their code of ethics, enacted better accounting practices, and provided proper disclosures and transparency for partners and shareholders. Auditor independence is needed to objectively assess and report on the fairness of a company’s financial statements. Therefore, auditors, regulators and lawmakers should work together to ensure that audits are preformed with independence to prevent future scandals.
Student reply 3:
1. What are the fundamental differences between the Nasdaq and the NYSE? Do firms and investors need these markets at all?
The Nasdaq has been actively pursing major companies who list their stock for trading on the NYSE, to encourage them to also list on their system. The Nasdaq has listed formerly small companies like Microsoft and Intel. A couple of decades ago, it was prestigious to list your company’s stock on the NYSE.
2. The WorldCom and Enron accounting scandal involved the firm classifying operating expenses as capital investments. Discuss the impact on Enron and WorldCom’s operating cash flow and their overall cash position. Did the financial statements contain any clues that could have warned investors of the fraud? Could the Enron debacle have Been Prevented? What actions could have been taken by auditors, regulators, and lawmakers?
The operating expenses are classifying as capital investments. Yes, the financial statements contain clues that could have warned investors of the fraud. The clues is that if the capital expenditure is done then which of the fixed assets is increased. No, the Eron debacle could not have been prevented. The actions that are taken by the auditor is that the qualified report is given on the financial statements and also warned the employees.
