Question

GAAP rules are clear about when a company needs to consolidate or not, but companies tend to find loopholes to circumvent this rule. GAAP clearly indicates that consolidated financial statements are “usually necessary for a fair presentation when one of the companies in the group directly or indirectly has a controlling financial interest in other companies: the usual condition for a controlling financial interest is ownership of a majority voting interest.”

Controlling financial interest means to own more/greater than 50% of the voting stock of another company.

Because of this “greater than 50% of the voting stock,” some of the companies have taken advantage of the criterion, causing serious problems in the business world. Companies were destroyed and with it, employees lost their jobs, their pensions, and 401Ks. So FASB had to make changes to GAAP for consolidations and issued new guidelines.

As a student of accounting, you must know these rules. Please research and discuss the new guidelines issued by GAAP for consolidating entities.

Give an example of a company that was involved in this kind of unethical behavior.