Accounting scandals

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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.

Contents 1 Notable accounting scandals 2 Notable outcomes 3 References 4 See also 5 External links 6 Further reading

[edit] Notable accounting scandals

Company	Year	Audit Firm	Country	Notes
Nugan Hand Bank	1980[1]		Australia
ZZZZ Best	1986[2]		United States
Barlow Clowes	1988[3]		United Kingdom	Gilts management service. £110 million missing
MiniScribe	1989[4]		United States
Polly Peck	1990[5]		United Kingdom
Bank of Credit and Commerce International	1991[6]		United Kingdom
Phar-Mor	1992[7]		United States
Cendant	1998[8]	Ernst & Young	United States
Waste Management, Inc.	1999[9]		United States	Financial mistatements
Microstrategy	2000[10]	PricewaterhouseCoopers	United States	Michael Saylor
Unify Corporation	2000[11]		United States
Computer Associates	2000[12]	KPMG	United States	Sanjay Kumar
Xerox	2000[13]	KPMG	United States	Falsifying financial results
One.Tel	2001[14]	Ernst & Young	Australia
Enron	2001[15]	Arthur Andersen	United States	Jeffrey Skilling, Kenneth Lay, Andrew Fastow
Adelphia	2002[16]	Deloitte & Touche	United States	John Rigas
AOL	2002[13]	Ernst & Young	United States	Inflated sales
Bristol-Myers Squibb	2002[17][13]	PricewaterhouseCoopers	United States	Inflated revenues
CMS Energy	2002[18][13]	Arthur Andersen	United States	Round trip trades
Duke Energy	2002[13]	Deloitte & Touche	United States	Round trip trades
Dynegy	2002[13]	Arthur Andersen	United States	Round trip trades
El Paso Corporation	2002[13]	Deloitte & Touche	United States	Round trip trades
Freddie Mac	2002[19]		United States	Understated earnings
Global Crossing	2002[13]	Arthur Andersen	Bermuda	Network capacity swaps to inflate revenues
Halliburton	2002[13]	Arthur Andersen	United States	Improper booking of cost overruns
Homestore.com	2002[20][13]		United States	Improper booking of sales
ImClone Systems	2002[21]	KPMG	United States	Samuel D. Waksal
Kmart	2002[13][22]	PricewaterhouseCoopers	United States	Misleading accounting practices
Merck & Co.	2002[13]		United States	Recorded co-payments that were not collected
Merrill Lynch	2002[23]	Deloitte & Touche	United States	Conflict of interest
Mirant	2002[13]		United States	Overstated assets and liabilities
Nicor	2002[13]		United States	Overstated assets, understated liabilities
Peregrine Systems	2002[13]	KPMG	United States	Overstated sales
Qwest Communications	2002[13]		United States	Inflated revenues
Reliant Energy	2002[13]	Deloitte & Touche	United States	Round trip trades
Sunbeam	2002[24]		United States
Tyco International	2002[13]	PricewaterhouseCoopers	Bermuda	Improper accounting, Dennis Kozlowski
WorldCom	2002[13]	Arthur Andersen	United States	Overstated cash flows, Bernard Ebbers
Royal Ahold	2003[25]	Deloitte & Touche	Netherlands	Inflating promotional allowances
Parmalat	2003[26][27]	Deloitte & Touche|	Italy	Falsified accounting documents, Calisto Tanzi
HealthSouth Corporation	2003[28]	Ernst & Young	United States	Richard M. Scrushy
Chiquita Brands International	2004[29]		United States	Illegal payments
AIG	2004[30]	PricewaterhouseCoopers	United States	Accounting of structured financial deals
Bernard L. Madoff Investment Securities LLC	2008[31]	Friehling & Horowitz	United States	David G. Friehling was charged with securities fraud, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the Securities and Exchange Commission. He faces up to 105 years in prison on all of the charges.[32]
Satyam Computer Services	2009[33]	PricewaterhouseCoopers	India	Falsified accounts

[edit] Notable outcomes

The Enron scandal resulted in the indictment and criminal conviction 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.

On July 9, 2002 George W. Bush gave a speech about recent accounting scandals that have 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.

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 2005, after a scandal on insurance and mutual funds the year before, AIG is under investigation for accounting fraud. The company already lost over 45 billion US dollars worth of market capitalisation because of the scandal. This was the fastest decrease since the WorldCom and Enron scandals. Investigations also discovered over a billion US dollars worth of errors in accounting transactions. Future outcome for the company is still pending.

[edit] References

[edit] See also

• Corporate abuse
• Corporate scandal
• Creative accounting
• Dotcom bubble
• Forensic accounting
• Financial crisis of 2007-2009
• Philosophy of accounting
• Sarbanes-Oxley Act
• Savings and loan crisis
• Securities fraud
• Vivien v. Worldcom
• White-collar crime

[edit] External links

• 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

[edit] Further reading

• 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.