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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.

Unfortunately, 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. Ironically, 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.

Contents

Notable accounting scandals

Company Year Audit Firm Country Notes
Nugan Hand Bank 1980[1] Australia
ZZZZ Best 1986[2] United States Ponzi scheme run by Barry Minkow
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
Informix 1996[8] United States
Cendant 1998[9] Ernst & Young United States
Waste Management, Inc. 1999[10] United States Financial mistatements
Microstrategy 2000[11] PricewaterhouseCoopers United States Michael Saylor
Unify Corporation 2000[12] United States
Computer Associates 2000[13] KPMG United States Sanjay Kumar
Xerox 2000[14] KPMG United States Falsifying financial results
One.Tel 2001[15] Ernst & Young Australia
Enron 2001[16] Arthur Andersen United States Jeffrey Skilling, Kenneth Lay, Andrew Fastow
Adelphia 2002[17] Deloitte & Touche United States John Rigas
AOL 2002[14] Ernst & Young United States Inflated sales
Bristol-Myers Squibb 2002[14][18] PricewaterhouseCoopers United States Inflated revenues
CMS Energy 2002[14][19] Arthur Andersen United States Round trip trades
Duke Energy 2002[14] Deloitte & Touche United States Round trip trades
Dynegy 2002[14] Arthur Andersen United States Round trip trades
El Paso Corporation 2002[14] Deloitte & Touche United States Round trip trades
Freddie Mac 2002[20] United States Understated earnings
Global Crossing 2002[14] Arthur Andersen Bermuda Network capacity swaps to inflate revenues
Halliburton 2002[14] Arthur Andersen United States Improper booking of cost overruns
Homestore.com 2002[14][21] United States Improper booking of sales
ImClone Systems 2002[22] KPMG United States Samuel D. Waksal
Kmart 2002[14][23] PricewaterhouseCoopers United States Misleading accounting practices
Merck & Co. 2002[14] United States Recorded co-payments that were not collected
Merrill Lynch 2002[24] Deloitte & Touche United States Conflict of interest
Mirant 2002[14] United States Overstated assets and liabilities
Nicor 2002[14] United States Overstated assets, understated liabilities
Peregrine Systems 2002[14] KPMG United States Overstated sales
Qwest Communications 2002[14] United States Inflated revenues
Reliant Energy 2002[14] Deloitte & Touche United States Round trip trades
Sunbeam 2002[25] United States
Tyco International 2002[14] PricewaterhouseCoopers Bermuda Improper accounting, Dennis Kozlowski
WorldCom 2002[14] Arthur Andersen United States Overstated cash flows, Bernard Ebbers
Royal Ahold 2003[26] Deloitte & Touche Netherlands Inflating promotional allowances
Parmalat 2003[27][28] Grant Thornton SpA Italy Falsified accounting documents, Calisto Tanzi
HealthSouth Corporation 2003[29] Ernst & Young United States Richard M. Scrushy
Chiquita Brands International 2004[30] United States Illegal payments
AIG 2004[31] PricewaterhouseCoopers United States Accounting of structured financial deals
Bernard L. Madoff Investment Securities LLC 2008[32] Friehling & Horowitz United States Ponzi scheme run by Bernard Madoff. 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 in regards to this Ponzi scheme. He faces up to 105 years in prison on all of the charges.[33]
Satyam Computer Services 2009[34] PricewaterhouseCoopers India Falsified accounts

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.

See also

References

  1. ^ Owen, J. Sleight of Hand : The $25 million Nugan Hand Bank Scandal; Balmain, Sydney, Australia: Colporteur Press, 1983. ISBN 0-86399-023-1
  2. ^ Minkow, Barry, Clean Sweep:The Inside Story of the Zzzz Best Scam... One of Wall Street's Biggest Frauds, ISBN 0-7852-7916-4
  3. ^ http://www.independent.co.uk/news/business/news/deloittes-john-connolly-faces-call-to-resign-over-barlow-clowes-link-572880.html
  4. ^ "Fraud Is Cited at Miniscribe". AP. New York Times. 1989-09-13. http://query.nytimes.com/gst/fullpage.html?res=950DE3DE1130F930A2575AC0A96F948260. Retrieved 2007-10-12.  
  5. ^ Cases in Corporate Governance by Robert Wearing, Pages 41 to 53
  6. ^ Cellan-Jones, Rory (2005-11-02). "The end of an epic". BBC News Online (BBC). http://news.bbc.co.uk/1/hi/business/4401210.stm. Retrieved 2007-09-28.  
  7. ^ FRONTLINE: how to Steal $500 Million
  8. ^ A financial history of modern U.S. corporate scandals, p. 228
  9. ^ http://money.cnn.com/1998/08/27/companies/cendant_folo/
  10. ^ http://money.cnn.com/2001/11/07/news/waste_mgt/index.htm
  11. ^ http://www.olapreport.com/Comment_MicroStrategy.htm
  12. ^ http://www.sec.gov/news/press/2002-71.htm
  13. ^ http://money.cnn.com/2006/04/24/technology/kumar/index.htm
  14. ^ a b c d e f g h i j k l m n o p q r s http://www.forbes.com/2002/07/25/accountingtracker.html
  15. ^ http://www.smh.com.au/news/business/onetel-auditor-was-linked-to-packer/2005/10/25/1130239522655.html
  16. ^ Robert Bryce, Pipe Dreams: Greed, Ego, and the Death of Enron (PublicAffairs, 2002) ISBN 1-58648-138-X
  17. ^ http://www.msnbc.msn.com/id/5396406
  18. ^ http://www.sec.gov/news/digest/dig080904.txt
  19. ^ http://query.nytimes.com/gst/fullpage.html?res=9D05E4D61430F935A35752C0A9619C8B63
  20. ^ http://www.forbes.com/2003/12/11/cx_aw_1211freddie.html
  21. ^ http://www.businessweek.com/the_thread/hotproperty/archives/2006/07/how_stuart_wolf.html
  22. ^ Ex-ImClone boss admits fraud
  23. ^ SEC Charges KMart's Former CEO and CFO With Financial Fraud
  24. ^ http://money.cnn.com/2002/05/21/news/companies/merrill/
  25. ^ SEC Settles With Ex-Andersen Partner In Sunbeam Probe
  26. ^ http://www.washingtonpost.com/wp-dyn/content/article/2005/11/28/AR2005112800144.html
  27. ^ http://news.bbc.co.uk/2/hi/business/7790803.stm
  28. ^ http://www.italiansrus.com/articles/ourpaesani/parmalat.htm
  29. ^ http://www.sec.gov/litigation/litreleases/lr18044.htm
  30. ^ http://www.radionetherlands.nl/news/international/6133135/Chiquita-protection-money-scandal-resurfaces
  31. ^ http://www.insurancejournal.com/news/national/2004/11/24/47993.htm
  32. ^ "Wall Street legend Bernard Madoff arrested over '$50 billion Ponzi scheme'". Times Online (London: Times Newspapers Ltd). December 12, 2008. http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece. Retrieved December 13, 2008.  
  33. ^ http://online.wsj.com/article/SB123738779664971505.html
  34. ^ http://in.reuters.com/article/companyNews/idINHKG30879120090108

External links

Further reading

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