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Abstract

Investment decisions in shares of companies listed on stock exchanges are traditionally built upon financial indicators, which are typically released in audited annual bulletins issued by these markets. Financial analysts often rely on these indicators to guide investors in making decisions related to the buying or selling of shares. However, despite this reliance, significant collapses occur in stock markets periodically. A prime example is the crisis that afflicted several American listed companies at the beginning of the current century. These collapses were the result of manipulation in accounting data, facilitated by the complicity of auditing firms with the managements of those companies. American technology firms were at the forefront of this crisis, as the sharp decline in their share values led to a sudden economic downturn. In 2001, share losses in this sector accounted for 60% of the total market capitalization of 280 companies operating in the field. These accounting scandals became manifest following the bankruptcies of Qwest Communications, Enron, Tyco, Global Crossing, and WorldCom. The latter was a leading giant in the U.S. telecommunications sector, serving approximately 50 million customers. Among these scandals was the discovery of accounting irregularities estimated at $3.85 billion for the year 2001 and the first quarter of 2002. This included internal account transfers amounting to $3.055 billion in 2001 and $797 million in 2002. Such events necessitated holding auditing firms accountable and prompted recommendations for the adoption of International Financial Reporting Standards (IFRS). Capital market collapses have persisted, most notably in the Gulf stock markets, such as the Saudi and Dubai exchanges in 2006. In these instances, the cause was not accounting irregularities or scandals as seen in the aforementioned American companies. This necessitates a critical pause to investigate the underlying causes, the most significant of which—in our view—is the credibility of the financial indicators that investors rely upon for their decision-making.

DOI

10.33095/jeas.v14i49.1382

Subject Area

Accounting

First Page

195

Last Page

211

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