1. What are the fundamental differences between the Nasdaq and the NYSE? Do firms and investors need these markets at all?
The largest difference is that the NYSE is an auction market and the Nasdaq is a dealer market. In the former, the highest bid for a stock is matched with the lowest asking price. In the latter, buying and selling happens in split seconds electronically through dealers.
The way in which securities on the exchanges between the vendors and purchasers are transacted lays the ultimate difference between the NYSE and the Nasdaq. Essentially, in the Nasdaq market, a dealer is involved who is commonly known as the market maker. This dealer is responsible for availing the point of trade which eliminates the direct transaction between the buyer and the seller. Instead, they buy and sell through the market maker. On the other hand, the NYSE is a market which involves auctioning where buyers and sellers trade directly from one another with an act of bidding. Investors and firms need these markets because the Nasdaq is known for its high-tech products including the internet and electronics. NYSE’s stocks are less volatile thus making them a better choice for trade (Healy, Paul, Krishna & Palepu, 2003).
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?
With the firm classifying operating expenses as capital investments, the payables began to be stretched out from the year 2001 which increased the operating cash flow. The provided financial statements showed that the organizations gained a large number of benefits to cash flow from operation. Within a short duration of time, the benefit started to slow down in intervals. This showed that the GE would eventually not be able to support growth in operating cash flow. The high reported profits in the financial statements were enough clues for the investors to note a possibility of fraud in the company. Normal annual growth for an energy company is estimated to be at least 2-3% but the companies reported a much higher profit. The Enron debacle could have been prevented. The auditors, regulators, and lawmakers should have increased their focus on the statements containing the cash flow. This could have helped them to understand the performance of the company financially as well as its position. Frequent audits and statement checks could have provided them with details on the quality of the earnings as implicated in the income statement (New York Times, 2007).