the focus in the debate between whether accounting standards should be principles or rules. Management
discretion is allowed with accounting principles, but would not be allowed with rules. The rules would be like laws.
Major financial frauds were committed as follows: McKesson and Robbins created fictitious sates and
inventories. Great Salad Oil Swindle used the fact that oil and water do not mix to fraudulently over-state the quantity of
oil in inventory tanks. The bottom part of the inventory tank was water and the top was salad oil. The auditors did not
test all the way to the bottom of the tanks. Equity Funding was about fake insurance policies. Cedant Corporation was
about fake revenues. Zzzz Best was a pyramid scheme. Sunbeam Corporation used what is called channel stuffing where
revenue recognition is accelerated inappropriately. Nortel used what is called a big bath. Nortel had deferred recognition
of expenses by recording as assets. This inflated total assets and total owners’ equity. After several years, they wrote off
the assets and recognized a huge loss that drove the owners’ equity down. It washed away the profits.
Worldcom also recorded assets when they should have recognized expenses. Enron is well known for using
Special Purpose Entities to hide huge losses. Enron creatively and fraudulently recorded non-existent revenues. Qwest
and Global Crossing used what are called swap sales to inflate reported income.