- Accounting scandals
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates.
In public companies, this type of "creative accounting" can amount to fraud and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States.
Scandals are often only the 'tip of the iceberg'. They represent the visible catastrophic failures. Note that much abuse can be completely legal or quasi legal.
For example, in the domain of privatization and takeovers:
It is fairly easy for a top executive to reduce the price of his/her company's stock - due to information asymmetry. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (eg. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce share price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company's earnings forecasts). There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates.
A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken private) - at a dramatically lower price - the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce share price. This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the hundreds of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives).
Similar issues occur when a publicly held asset or non-profit organization undergoes privatization. Top executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands. Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis - this reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell. It can also contribute to a public perception that private entities are more efficiently run reinforcing the political will to sell off public assets. Again, due to asymmetric information, policy makers and the general public see a government owned firm that was a financial 'disaster' - miraculously turned around by the private sector (and typically resold) within a few years.
All accounting scandals are not caused by top executives. Often times managers and employees are pressured or willingly alter financial statements for the personal benefit of the individuals over the company. Managerial opportunism plays a large role in these scandals. For example managers who would be compensated more for short term results would report inaccurate information since short term benefits outweigh the long-term ones such as pension.
Notable accounting scandals
Company Year Audit Firm Country Notes Nugan Hand Bank 1980 Australia ZZZZ Best 1986 United States Ponzi scheme run by Barry Minkow Barlow Clowes 1988 United Kingdom Gilts management service. £110 million missing MiniScribe 1989 United States Polly Peck 1990 United Kingdom Bank of Credit and Commerce International 1991 United Kingdom Phar-Mor 1992 United States Informix 1996 Ernst & Young United States Sybase 1997 Ernst & Young United States Cendant 1998 Ernst & Young United States Waste Management, Inc. 1999 Arthur Andersen United States Financial mistatements MicroStrategy 2000 PricewaterhouseCoopers United States Michael Saylor Unify Corporation 2000 United States Computer Associates 2000 KPMG United States Sanjay Kumar Lernout & Hauspie 2000 KPMG Belgium Fictitious transactions in Korea and improper accounting methodologies elsewhere Xerox 2000 KPMG United States Falsifying financial results One.Tel 2001 Ernst & Young Australia Enron 2001 Arthur Andersen United States Jeffrey Skilling, Kenneth Lay, Andrew Fastow Adelphia 2002 Deloitte & Touche United States John Rigas AOL 2002 Ernst & Young United States Inflated sales Bristol-Myers Squibb 2002 PricewaterhouseCoopers United States Inflated revenues CMS Energy 2002 Arthur Andersen United States Round trip trades Duke Energy 2002 Deloitte & Touche United States Round trip trades Dynegy 2002 Arthur Andersen United States Round trip trades El Paso Corporation 2002 Deloitte & Touche United States Round trip trades Freddie Mac 2002 United States Understated earnings Global Crossing 2002 Arthur Andersen Bermuda Network capacity swaps to inflate revenues Halliburton 2002 Arthur Andersen United States Improper booking of cost overruns Homestore.com 2002 United States Improper booking of sales ImClone Systems 2002 KPMG United States Samuel D. Waksal Kmart 2002 PricewaterhouseCoopers United States Misleading accounting practices Merck & Co. 2002 United States Recorded co-payments that were not collected Merrill Lynch 2002 Deloitte & Touche United States Conflict of interest Mirant 2002 United States Overstated assets and liabilities Nicor 2002 Arthur Andersen United States Overstated assets, understated liabilities Peregrine Systems 2002 KPMG United States Overstated sales Qwest Communications 2002 United States Inflated revenues Reliant Energy 2002 Deloitte & Touche United States Round trip trades Sunbeam 2002 United States Tyco International 2002 PricewaterhouseCoopers Bermuda Improper accounting, Dennis Kozlowski WorldCom 2002 Arthur Andersen United States Overstated cash flows, Bernard Ebbers Royal Ahold 2003 Deloitte & Touche Netherlands Inflating promotional allowances Parmalat 2003 Grant Thornton SpA Italy Falsified accounting documents, Calisto Tanzi HealthSouth Corporation 2003 Ernst & Young United States Richard M. Scrushy Nortel 2003 Deloitte & Touche Canada Distributed ill advised corporate bonuses to top 43 managers Chiquita Brands International 2004 United States Illegal payments AIG 2004 PricewaterhouseCoopers United States Accounting of structured financial deals Bernard L. Madoff Investment Securities LLC 2008 Friehling & Horowitz United States Massive Ponzi scheme. Anglo Irish Bank 2008 Ernst & Young Ireland Anglo Irish Bank hidden loans controversy Satyam Computer Services 2009 PricewaterhouseCoopers India Falsified accounts Lehman Brothers 2010 Ernst & Young United States Failure to disclose Repo 105 transactions to investors
The Enron scandal turned in the indictment and criminal conviction of one of the Big Five auditor Arthur Andersen on June 15, 2002. Although the conviction was overturned on May 31, 2005 by the Supreme Court of the United States, the firm ceased performing audits and is currently unwinding its business operations. The Enron scandal was defined as being one of the biggest audit failures. The scandal included utilizing loopholes that were found within the GAAP (General Accepted Accounting Principles). For auditing a big sized company such as Enron, the auditors were criticized for having a brief meeting few times a year that covered lots of material. By January 17, 2002 Enron decided to discontinue its business with Arthur Andersen claiming they had failed in accounting advice and related documents. Arthur Andersen was judged guilty of obstruction of justice for getting rid of many emails and documents that were related to auditing Enron. From this incident little less than 100,000 employees lost their jobs. Although later the ruling was overturned by the U.S. Supreme Court, the image of the auditing firm have been damaged beyond repair, and was never able to come back to its full operation capacity.
On July 9, 2002 George W. Bush gave a speech about recent accounting scandals that had been uncovered. In spite of its stern tone, the speech did not focus on establishing new policy, but instead focused on actually enforcing current laws, which include holding CEOs and directors personally responsible for accountancy fraud.
These scandals reignited the debate over the relative merits of US GAAP, which takes a "rules-based" approach to accounting, versus International Accounting Standards and UK GAAP, which takes a "principles-based" approach. The Financial Accounting Standards Board announced that it intends to introduce more principles-based standards. More radical means of accounting reform have been proposed, but so far have very little support. The debate itself, however, overlooks the difficulties of classifying any system of knowledge, including accounting, as rules-based or principles-based.This also led to the establishment of Sarbanes-Oxley.
On a lighter note, the 2002 Ig Nobel Prize in Economics went to the CEOs of those companies involved in the corporate accounting scandals of that year for "adapting the mathematical concept of imaginary numbers for use in the business world".
In 2003, Nortel made a big contribution to this list of scandals by incorrectly reporting a one cent per share earnings directly after their massive layoff period. They used this money to pay the top 43 managers of the company. The SEC and the Ontario securities commission eventually settled civil action with Nortel. However, a separate civil action will be taken up against top Nortel executives including Dunn, Beatty, Gollogly, Pahapill and Hamilton. These proceedings have been postponed pending criminal proceedings in Canada.
In 2005, after a scandal on insurance and mutual funds the year before, AIG was investigated for accounting fraud. The company already lost over 45 billion US dollars worth of market capitalisation because of the scandal. Investigations also discovered over a billion US dollars worth of errors in accounting transactions. The New York Attorney General's investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives. CEO Maurice R. "Hank" Greenberg was forced to step down and is still fighting civil charges being pursued by New York state.
- Accounting ethics
- Certified Forensic Accounting Professional
- Corporate abuse
- Corporate scandal
- Creative accounting
- Dotcom bubble
- Financial crisis of 2007-2010
- Philosophy of accounting
- Forensic accounting
- Sarbanes-Oxley Act
- Savings and loan crisis
- Securities fraud
- Vivien v. Worldcom
- White-collar crime
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- John R. Emshwiller and Rebecca Smith, 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America or Infectious Greed, HarperInformation, 2003, ISBN 0-06-052073-6
- Lawrence A. Cunningham, The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And It Might Just Work)
- Zabihollah Rezaee, Financial Statement Fraud: Prevention and Detection, Wiley 2002.
- U.S. Securities and Exchange Commission website
- U.S. President Bush's speech, 2002-07-09 NPR report (audio recording)
- "Why didn't our auditors find the fraud?", Wisconsin Law Journal, January 25, 2006
Types of fraud Financial Business related Family related Government related Other types Corporate scandals
South Sea Company (1720) · Panic of 1890 (1890) · Salad oil (1963) · Carrian Group (1983) · Polly Peck (1990) · Bank of Credit and Commerce International (BCCI) (1990) · Metallgesellschaft (1993) · Barings Bank (1995) · Long-Term Capital Management (2000) · One.Tel (2001) · Enron (2001) · Adelphia (2002) · WorldCom (2002) · Tyco (2004) · Bayou Hedge Fund Group (2005) · Société Générale (2008) · Bear Stearns (2008) · Anglo Irish Bank (2008 - ) · Satyam (2009) · Olympus (2011)See also: template Aspects of occupations · template Aspects of organizations · template Aspects of workplaces · template Corporate titlesAbuse · Appointeeship · Censorship · Citizenship · Communication · Crime · Design · Entertainment · Ethics · Identity · Interlocks · Liability · Narcissism · Nationalism · Opportunity · Pathos · Promoter · Propaganda · Raid · Recovery · Resolution · Scandal · Security · Services · Social entrepreneurship · Social media · Social responsibility · Sourcing · Statism · Sustainability · Synergy · Tax · Taxonomy · Title · Trainer · Transparency · Travel · Trust · Veil · Video
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