Accounting scandals are political and/or business scandals which arise with the disclosure of financial misdeeds by trusted executives of corporations or governments. 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.
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 (e.g. 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, thereby 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 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 obligations.
Most employees see the scandals as affecting the economy, and some say investor demands are weakening the corporate focus on meeting customer needs. The feelings with respect to the economy are very strong: More than nine out of ten employees (91%) agree that the scandals are a serious or very serious problem for the nation's economy, and nearly two out of three (62%) rank the scandals a "very serious" problem for the economy. Feelings about customer focus are almost as strong: Nearly three-fourths (72%) agree that recent pressure to satisfy shareholder expectations has led publicly held companies to focus more on meeting the demands of investors than customers. A significant minority (41%) say they have observed this trend in their own company.
List of reported accounting scandals
|Associated Electrical Industries, after being acquired by General Electric Company plc||1967||United Kingdom|
|Pergamon Press||1969||United Kingdom|
|Lockheed Corporation||1976||United States|
|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|
|Polly Peck||1990||United Kingdom|
|Bank of Credit and Commerce International||1991||United Kingdom|
|Phar-Mor||1992||Coopers & Lybrand||United States||mail fraud, wire fraud, bank fraud, and transportation of funds obtained by theft or fraud|
|Informix Corporation||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||Deloitte & Touche||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|
|Swissair||2001||McKinsey & Company||Switzerland|
|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||PricewaterhouseCoopers||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||PricewaterhouseCoopers||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||Pricewaterhouse Coopers||United States||Recorded co-payments that were not collected|
|Merrill Lynch||2002||Deloitte & Touche||United States||Conflict of interest|
|Mirant||2002||KPMG||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||1999, 2000, 2001 Arthur Andersen 2002 October KPMG||United States||Inflated revenues|
|Reliant Energy||2002||Deloitte & Touche||United States||Round trip trades|
|Sunbeam||2002||Arthur Andersen||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||United States||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||Ernst & Young||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|
|Sino-Forest Corporation||2011||Ernst & Young||Canada-China|
|Olympus Corporation||2011||Ernst & Young||Japan||tobashi using acquisitions|
|Autonomy Corporation||2012||Deloitte & Touche||United States||Subsidiary of HP.|
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 brief meetings a few times a year that covered large amounts 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 former CEO Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill and Hamilton. These proceedings have been postponed pending criminal proceedings in Canada, which opened in Toronto on January 12, 2012. Crown lawyers at this fraud trial of three former Nortel Networks executives say the men defrauded the shareholders of Nortel of more than $5 million. According to the prosecutor this was accomplished by engineering a financial loss in 2002, and a profit in 2003 thereby triggering Return to Profit bonuses of $70 million for top executives.
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.
- Penny stock scam
- Accounting ethics
- Corporate abuse
- Corporate scandal
- Dotcom bubble
- Financial crisis of 2007-2010
- Philosophy of accounting
- Forensic accounting
- Sarbanes-Oxley Act
- Savings and loan crisis
- Tobashi scheme
- Securities fraud
- Vivien v. Worldcom
- White-collar crime
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June 18, 2013