Accounting scandals
Encyclopedia
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.
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.
In July, 2002, WorldCom filed for bankruptcy protection, in what was considered the largest corporate insolvency
ever at the time.
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 number
s 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.
In public companies, this type of "creative accounting
Creative accounting
Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules...
" can amount to fraud and investigations are typically launched by government oversight
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
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
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
and takeovers:
It is fairly easy for a top executive to reduce the price of his/her company's stock – due to information asymmetry
Information asymmetry
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure...
. 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
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
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
Golden handshake
A golden handshake is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses his or her job through firing, restructuring, or even scheduled retirement...
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
Reputation
Reputation of a social entity is an opinion about that entity, typically a result of social evaluation on a set of criteria...
of being very generous to parting top executives).
Similar issues occur when a publicly held asset or non-profit organization undergoes privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
. 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
Opportunism
-General definition:Opportunism is the conscious policy and practice of taking selfish advantage of circumstances, with little regard for principles. Opportunist actions are expedient actions guided primarily by self-interested motives. The term can be applied to individuals, groups,...
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 Nugan Hand Bank Nugan Hand Bank was an Australian merchant bank thatcollapsed in 1980 in sensational circumstances amidst rumours of involvement by the Central Intelligence Agency and organized crime.-Founding:... |
1980 | Australia | ||
| ZZZZ Best | 1986 | United States | Ponzi scheme Ponzi scheme A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation... run by Barry Minkow Barry Minkow Barry Jay Minkow is a former businessman, pastor and convicted felon. While still in high school, he founded ZZZZ Best , which appeared to be an immensely successful carpet-cleaning and restoration company. However, it was actually a front to attract investment for a massive Ponzi scheme... |
|
| Barlow Clowes | 1988 | United Kingdom | Gilts management service. £110 million missing | |
| MiniScribe MiniScribe MiniScribe was a manufacturer of disk storage products, founded in Longmont, Colorado in 1980. MiniScribe designed and sold stepper motor-based hard disk drives with a large amount of onboard intelligence for the time. They eventually moved into higher-profile voice coil motor designs, at which... |
1989 | United States | ||
| Polly Peck Polly Peck Polly Peck International was a small and barely profitable United Kingdom textile company which expanded rapidly in the 1980s and became a constituent of the FTSE 100 Index before it collapsed in 1990 with the then colossal debts of £1.3bn... |
1990 | United Kingdom | ||
| Bank of Credit and Commerce International Bank of Credit and Commerce International The Bank of Credit and Commerce International was a major international bank founded in 1972 by Agha Hasan Abedi, a Pakistani financier. The Bank was registered in Luxembourg with head offices in Karachi and London. Within a decade BCCI touched its peak... |
1991 | United Kingdom | ||
| Phar-Mor Phar-Mor Phar-Mor was a United States chain of discount drug stores, based in Youngstown, Ohio, and founded by Michael "Mickey" Monus and David S. Shapira in 1982. Some of its stores used the names Pharmhouse and Rx Place... |
1992 | United States | ||
| Informix Informix IBM Informix is a family of relational database management system developed by IBM. It is positioned as IBM's flagship data server for online transaction processing as well as integrated solutions... |
1996 | Ernst & Young Ernst & Young Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers .... |
United States | |
| Sybase Sybase Sybase, an SAP company, is an enterprise software and services company offering software to manage, analyze, and mobilize information, using relational databases, analytics and data warehousing solutions and mobile applications development platforms.... |
1997 | Ernst & Young | United States | |
| Cendant Cendant Cendant Corporation was a New York-based provider of business and consumer services, primarily within the real estate and travel industries. In 2005 and 2006, Cendant broke up and spun off or sold its constituent businesses... |
1998 | Ernst & Young | United States | |
| Waste Management, Inc. | 1999 | Arthur Andersen Arthur Andersen Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations... |
United States | Financial mistatements |
| MicroStrategy MicroStrategy MicroStrategy, Inc. , is a business intelligence software vendor. MicroStrategy's software enables leading organizations worldwide to analyze the vast amounts of data stored across their enterprises to make more strategic business decisions... |
2000 | PricewaterhouseCoopers PricewaterhouseCoopers PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms.... |
United States | Michael Saylor |
| Unify Corporation Unify Corporation Unify Corporation , one of the early developers of database management systems and tools for database development, was founded in 1980 and is headquartered in Roseville, California... |
2000 | United States | ||
| Computer Associates | 2000 | KPMG KPMG KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands.... |
United States | Sanjay Kumar Sanjay Kumar Sanjay Kumar Sanjay Kumar Sanjay Kumar (Sanjay Kumar (Sanjay Kumar ([[hindi) (born [[Dhanbad,India]]) was the [[Chairman]] and [[CEO]] of [[CA, Inc.|Computer Associates International]] (now CA Technologies), until April 2004.-Emigration:... |
| Lernout & Hauspie Lernout & Hauspie Lernout & Hauspie Speech Products, or L&H, was a leading Belgium-based speech recognition technology company, founded by Jo Lernout and Pol Hauspie, that went bankrupt in 2001... |
2000 | KPMG | Belgium | Fictitious transactions in Korea and improper accounting methodologies elsewhere |
| Xerox Xerox Xerox Corporation is an American multinational document management corporation that produced and sells a range of color and black-and-white printers, multifunction systems, photo copiers, digital production printing presses, and related consulting services and supplies... |
2000 | KPMG | United States | Falsifying financial results |
| One.Tel One.Tel One.Tel was a group of Australian based telecommunications companies, including principally the publicly listed One.Tel Limited established in 1995 soon after deregulation of the Australian telecommunications industry, most of which are currently under external administration by court appointed... |
2001 | Ernst & Young | Australia | |
| Enron Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with... |
2001 | Arthur Andersen | United States | Jeffrey Skilling Jeffrey Skilling Jeffrey Keith "Jeff" Skilling is the former president of Enron Corporation, headquartered in Houston, Texas. In 2006 he was convicted of multiple federal felony charges relating to Enron's financial collapse, and is currently serving a 24-year, four-month prison sentence at the Federal... , Kenneth Lay Kenneth Lay Kenneth Lee "Ken" Lay was an American businessman, best known for his role in the widely reported corruption scandal that led to the downfall of Enron Corporation. Lay and Enron became synonymous with corporate abuse and accounting fraud when the scandal broke in 2001... , Andrew Fastow Andrew Fastow Andrew Stuart Fastow was the chief financial officer of Enron Corporation that was based in Houston, Texas until the U.S. Securities and Exchange Commission opened an investigation into his and the company's conduct in 2001... |
| Adelphia | 2002 | Deloitte & Touche | United States | John Rigas |
| AOL AOL AOL Inc. is an American global Internet services and media company. AOL is headquartered at 770 Broadway in New York. Founded in 1983 as Control Video Corporation, it has franchised its services to companies in several nations around the world or set up international versions of its services... |
2002 | Ernst & Young | United States | Inflated sales |
| Bristol-Myers Squibb Bristol-Myers Squibb Bristol-Myers Squibb , often referred to as BMS, is a pharmaceutical company, headquartered in New York City. The company was formed in 1989, following the merger of its predecessors Bristol-Myers and the Squibb Corporation... |
2002 | PricewaterhouseCoopers | United States | Inflated revenues |
| CMS Energy CMS Energy CMS Energy is a public utility supplying electric power and natural gas to Metro Detroit and most of Michigan. Its headquarters are located in Jackson, Michigan. The company has operated since 1890.... |
2002 | Arthur Andersen | United States | Round trip trades |
| Duke Energy Duke Energy Duke Energy , headquartered in Charlotte, North Carolina, is an energy company with assets in the United States, Canada and Latin America.-Overview:... |
2002 | Deloitte & Touche | United States | Round trip trades |
| Dynegy Dynegy Dynegy Inc. , based in Houston, Texas, United States, is a large owner and operator of power plants and a player in the natural gas liquids and coal business... |
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 Global Crossing Global Crossing Limited was a telecommunications company that provides computer networking services worldwide. It maintained a large backbone and offered transit and peering links, VPN, leased lines, audio and video conferencing, long distance telephone, managed services, dialup, colocation and... |
2002 | Arthur Andersen | Bermuda Bermuda Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida... |
Network capacity swaps to inflate revenues |
| Halliburton Halliburton Halliburton is the world's second largest oilfield services corporation with operations in more than 70 countries. It has hundreds of subsidiaries, affiliates, branches, brands and divisions worldwide and employs over 50,000 people.... |
2002 | Arthur Andersen | United States | Improper booking of cost overruns |
| Homestore.com Move.com Move, Inc. is a real estate web site, which operates the Move Network of real estate web site for consumers and real estate professionals. The Move Network of websites captures more than 15 million monthly visitors and includes: REALTOR.com, Move.com, MortgageMatch.com, Moving.com, TOP PRODUCER... |
2002 | United States | Improper booking of sales | |
| ImClone Systems ImClone Systems ImClone Systems Incorporated is a biopharmaceutical company dedicated to developing biologic medicines in the area of oncology. It was founded in 1984 and is headquartered in New York City. On October 6, 2008, it accepted a $6.5 billion acquisition offer from Eli Lilly and Company, and became a... |
2002 | KPMG | United States | Samuel D. Waksal Samuel D. Waksal Samuel D. Waksal is the founder and former CEO of the biopharmaceutical company ImClone Systems, which developed the drug Erbitux... |
| Kmart Kmart Kmart, sometimes styled as "K-Mart," is a chain of discount department stores. The chain acquired Sears in 2005, forming a new corporation under the name Sears Holdings Corporation. The company was founded in 1962 and is the third largest discount store chain in the world, behind Wal-Mart and... |
2002 | PricewaterhouseCoopers | United States | Misleading accounting practices |
| Merck & Co. Merck & Co. Merck & Co., Inc. , also known as Merck Sharp & Dohme or MSD outside the United States and Canada, is one of the largest pharmaceutical companies in the world. The Merck headquarters is located in Whitehouse Station, New Jersey, an unincorporated area in Readington Township... |
2002 | United States | Recorded co-payments that were not collected | |
| Merrill Lynch Merrill Lynch Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York... |
2002 | Deloitte & Touche | United States | Conflict of interest |
| Mirant Mirant Mirant Corporation, an Atlanta-based energy company, produces and sells electricity in the United States. The company was spun off from its former parent, Southern Company, on April 2, 2001... |
2002 | United States | Overstated assets and liabilities | |
| Nicor Nicor Nicor, Inc. is an energy and shipping company headquartered in Naperville, Illinois. Its largest subsidiary, Nicor Gas, is a natural gas distribution company. Founded in 1954, the company serves more than two million customers in a service territory that encompasses most of the northern third of... |
2002 | Arthur Andersen | United States | Overstated assets, understated liabilities |
| Peregrine Systems Peregrine Systems Peregrine Systems, Inc., an enterprise software company, was founded in 1981 and sold enterprise asset management, change management, and ITIL-based IT service management software. Following an accounting scandal and bankruptcy in 2003, Peregrine was acquired by Hewlett-Packard in 2005... |
2002 | KPMG | United States | Overstated sales |
| Qwest Communications | 2002 | United States | Inflated revenues | |
| Reliant Energy Reliant Energy RRI Energy, Inc. , based in Houston, Texas, United States, was an energy company that provided electricity to wholesale customers in the United States. The company was one of the largest independent power producers in the nation with more than 14,000 megawatts of power generation capacity across... |
2002 | Deloitte & Touche | United States | Round trip trades |
| Sunbeam Sunbeam Products Sunbeam Products is an American brand that has produced electric home appliances since 1910. Their products have included the Mixmaster mixer, the Sunbeam CG waffle iron, Coffeemaster and the fully automatic T20 toaster. Sunbeam is owned by Jarden Consumer Solutions after Jarden's acquisition in... |
2002 | United States | ||
| Tyco International Tyco International Tyco International Ltd. is a highly diversified global manufacturing company incorporated in Switzerland, with United States operational headquarters in Princeton, New Jersey... |
2002 | PricewaterhouseCoopers | Bermuda | Improper accounting, Dennis Kozlowski Dennis Kozlowski Leonard Dennis Kozlowski is a former CEO of Tyco International, convicted in 2005 of crimes related to his receipt of $81 million in purportedly unauthorized bonuses, the purchase of art for $14.725 million and the payment by Tyco of a $20 million investment banking fee to Frank Walsh, a former... |
| WorldCom | 2002 | Arthur Andersen | United States | Overstated cash flows, Bernard Ebbers Bernard Ebbers Bernard John "Bernie" Ebbers is a Canadian-born businessman. He co-founded the telecommunications company WorldCom and is a former chief executive officer of that company.... |
| Royal Ahold Ahold Ahold is a major international supermarket operator based in Amsterdam, Netherlands. Ahold is listed on Euronext Amsterdam and the Frankfurt Stock Exchange.-History:... |
2003 | Deloitte & Touche | Netherlands | Inflating promotional allowances |
| Parmalat Parmalat Parmalat SpA is a multinational Italian dairy and food corporation. Having become the leading global company in the production of ultra high temperature milk, the company collapsed in 2003 with a €14 billion hole in its accounts in what remains Europe's biggest bankruptcy... |
2003 | Grant Thornton Grant Thornton Grant Thornton LLP encompasses the U.S. operations of Grant Thornton International, the largest accounting organizations outside of the Big Four . The member firms of Grant Thornton International comprise a global network of 27,000 employees and 2,207 partners in more than 110 countries... SpA |
Italy | Falsified accounting documents, Calisto Tanzi Calisto Tanzi Calisto Tanzi is an Italian businessman notorious for embezzling an estimated eight-hundred million euros from Italian company Parmalat, founded by him, resulting in a great loss for the company. Tanzi was the founder of Parmalat and its CEO, at the time. Tanzi founded Parmalat in 1961, after... |
| HealthSouth Corporation | 2003 | Ernst & Young | United States | Richard M. Scrushy Richard M. Scrushy Richard Marin Scrushy is an American business man and founder of HealthSouth Corporation, a global healthcare company based in Birmingham, Alabama.... |
| Nortel Nortel Nortel Networks Corporation, formerly known as Northern Telecom Limited and sometimes known simply as Nortel, was a multinational telecommunications equipment manufacturer headquartered in Mississauga, Ontario, Canada... |
2003 | Deloitte & Touche | Canada | Distributed ill advised corporate bonuses to top 43 managers |
| Chiquita Brands International Chiquita Brands International Chiquita Brands International Inc. is an American producer and distributor of bananas and other produce, under a variety of subsidiary brand names, collectively known as Chiquita. Other brands include Fresh Express salads, which it purchased from Performance Food Group in 2005... |
2004 | United States | Illegal payments | |
| AIG American International Group American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in... |
2004 | PricewaterhouseCoopers | United States | Accounting of structured financial deals |
| Bernard L. Madoff Investment Securities LLC Madoff investment scandal The Madoff investment scandal broke in December 2008 when former NASDAQ chairman Bernard Madoff admitted that the wealth management arm of his business was an elaborate Ponzi scheme.... |
2008 | Friehling & Horowitz David G. Friehling David G. Friehling is an American accountant who was arrested and charged in March 2009 for his role in the Madoff investment scandal. He later plead guilty to these charges.-Early life:... |
United States | Massive Ponzi scheme. |
| Anglo Irish Bank Anglo Irish Bank Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009.... |
2008 | Ernst & Young | Ireland | Anglo Irish Bank hidden loans controversy Anglo Irish Bank hidden loans controversy The Anglo Irish Bank hidden loans controversy began in the Republic of Ireland in December 2008 when the chairman of Anglo Irish Bank, Ireland's third largest bank, admitted he had hidden a total of €87 million in loans from the bank, triggering a series of incidents which led to the eventual... |
| Satyam Computer Services | 2009 | PricewaterhouseCoopers | India | Falsified accounts |
| Lehman Brothers Lehman Brothers Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker... |
2010 | Ernst & Young | United States | Failure to disclose Repo 105 Repo 105 Repo 105 is a repurchase agreement which results in an accounting maneuver where a short-term loan is classified as a sale. The cash obtained through this "sale" is then used to pay down debt, allowing the company to appear to reduce its leverage by temporarily paying down liabilities—just long... transactions to investors |
| Olympus Corporation Olympus Corporation is a Japan-based manufacturer of optics and reprography products. Olympus was established on 12 October 1919, initially specializing in microscope and thermometer businesses. Its global headquarters are in Shinjuku, Tokyo, Japan, while its USA operations are based in Center Valley, Pennsylvania,... |
2011 | Ernst & Young | Japan | tobashi using acquisitions Olympus scandal The Olympus scandal was precipitated on 14 October 2011 when British-born Michael Woodford was suddenly ousted as chief executive of international optical equipment manufacturer, Olympus Corporation... |
Notable outcomes
The Enron scandalEnron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world...
turned in the indictment and criminal conviction of one of the Big Five auditor Arthur Andersen
Arthur Andersen
Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations...
on June 15, 2002. Although the conviction was overturned on May 31, 2005 by the Supreme Court of the United States
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
, 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
Obstruction of justice
The crime of obstruction of justice, in United States jurisdictions, refers to the crime of interfering with the work of police, investigators, regulatory agencies, prosecutors, or other officials...
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
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
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.
In July, 2002, WorldCom filed for bankruptcy protection, in what was considered the largest corporate insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
ever at the time.
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
Financial Accounting Standards Board
The Financial Accounting Standards Board is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles within the United States in the public's interest...
announced that it intends to introduce more principles-based standards. More radical means of accounting reform
Accounting reform
Accounting reform is an expansion of accounting rules that goes beyond the realm of financial measures for both individual economic entities and national economies...
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
Ig Nobel Prize
The Ig Nobel Prizes are an American parody of the Nobel Prizes and are given each year in early October for ten unusual or trivial achievements in scientific research. The stated aim of the prizes is to "first make people laugh, and then make them think"...
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 number
Imaginary number
An imaginary number is any number whose square is a real number less than zero. When any real number is squared, the result is never negative, but the square of an imaginary number is always negative...
s for use in the business world".
In 2003, Nortel
Nortel
Nortel Networks Corporation, formerly known as Northern Telecom Limited and sometimes known simply as Nortel, was a multinational telecommunications equipment manufacturer headquartered in Mississauga, Ontario, Canada...
made a big contribution to this list of scandals by incorrectly reporting a one cent per share earnings directly after their massive layoff
Layoff
Layoff , also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs...
period. They used this money to pay the top 43 managers of the company. The SEC and the Ontario
Ontario
Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa....
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
American International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
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
Maurice R. Greenberg
Maurice Raymond "Hank" Greenberg is an American business executive and former chairman and CEO of American International Group , which was the world's 18th largest public company and its largest insurance and financial services corporation.He is currently chairman and CEO of C.V. Starr & Co., Inc....
was forced to step down and is still fighting civil charges being pursued by New York state.
See also
- Accounting ethicsAccounting ethicsAccounting ethics is primarily a field of applied ethics, the study of moral values and judgments as they apply to accountancy. It is an example of professional ethics. Accounting ethics were first introduced by Luca Pacioli, and later expanded by government groups, professional organizations, and...
- Certified Forensic Accounting ProfessionalCertified Forensic Accounting ProfessionalCertified Forensic Accounting Professional is a person who has undergone training to become an expert in the field of forensic accounting, forensic auditing, litigation support and investigative accounting....
- Corporate abuse
- Corporate scandalCorporate scandalA corporate scandal is a scandal involving allegations of unethical behavior by people acting within or on behalf of a corporation. A corporate scandal sometimes involves accounting fraud of some sort...
- Creative accountingCreative accountingCreative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules...
- Dotcom bubble
- Financial crisis of 2007-2010
- Philosophy of accountingPhilosophy of accountingThe philosophy of accounting is the conceptual framework for the professional preparation and auditing of financial statements and accounts. The issues which arise include the difficulty of establishing a true and fair value of an enterprise and its assets; the moral basis of disclosure and...
- Forensic accountingForensic accountingForensic accounting is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally...
- Sarbanes-Oxley ActSarbanes-Oxley ActThe Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
- Savings and loan crisisSavings and Loan crisisThe savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
- Tobashi schemeTobashi schemeA Tobashi scheme is a financial fraud where a client's losses are hidden by an investment firm by shifting them between the portfolios of other clients. Any real client with portfolio losses can therefore have their accounts flattered by this process. This cycling cannot continue indefinitely and...
- Securities fraudSecurities fraudSecurities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
- Vivien v. WorldcomVivien v. WorldcomVivien v. WorldCom, Inc., No. 02-01329 WHA established a new legal theory permitting workers to recover for losses in their 401 retirement plans caused by investment in their employers’ stock.-Facts:...
- White-collar crimeWhite-collar crimeWithin the field of criminology, white-collar crime has been defined by Edwin Sutherland as "a crime committed by a person of respectability and high social status in the course of his occupation" . Sutherland was a proponent of Symbolic Interactionism, and believed that criminal behavior was...
Further reading
- John R. Emshwiller and Rebecca Smith, 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate AmericaCorporate AmericaCorporate America is an informal phrase describing the world of corporations within the United States not under government ownership....
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.
External links
- U.S. Securities and Exchange Commission website
- U.S. President Bush's speech, 2002-07-09 NPRNPRNPR, formerly National Public Radio, is a privately and publicly funded non-profit membership media organization that serves as a national syndicator to a network of 900 public radio stations in the United States. NPR was created in 1970, following congressional passage of the Public Broadcasting...
report (audio recording) - "Why didn't our auditors find the fraud?", Wisconsin Law Journal, January 25, 2006