Accounting scandals


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Accounting scandals

  1. 1. Accounting scandals, or corporate accounting scandals, are political and businessscandals which arise with the disclosure of misdeeds by trusted executives of large publiccorporations. Such misdeeds typically involve complex methods for misusing or misdirectingfunds, overstating revenues, understating expenses, overstating the value of corporate assets orunderreporting the existence of liabilities, sometimes with the cooperation of officials in othercorporations or affiliates.In public companies, this type of "creative accounting" can amount to fraud and investigationsare typically launched by government oversight agencies, such as the Securities and ExchangeCommission (SEC) in the United States. Contents [hide]1 Causes2 List of major accounting scandals3 Notable outcomes4 See also5 References6 Further reading7 External links[edit]CausesIt is fairly easy for a top executive to reduce the price of his/her companys stock – dueto information asymmetry. The executive can accelerate accounting of expected expenses, delayaccounting of expected revenue, engage in off balance sheet transactions to make the companysprofitability 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 ismore common for top executives to do everything they can to window dress their companysearnings forecasts). There are typically very few legal risks to being too conservative in onesaccounting and earnings estimates.A reduced share price makes a company an easier takeover target. When the company getsbought out (or taken private) – at a dramatically lower price – the takeover artist gains a windfallfrom the former top executives actions to surreptitiously reduce share price. This can representtens of billions of dollars (questionably) transferred from previous shareholders to the takeover
  2. 2. artist. The former top executive is then rewarded with a golden handshake for presiding overthe firesale that can sometimes be in the hundreds of millions of dollars for one or two years ofwork. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefitfrom developing a reputation of being very generous to parting top executives).Similar issues occur when a publicly held asset or non-profit organizationundergoes privatization. Top executives often reap tremendous monetary benefits when agovernment 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 reducesthe sale price (to the profit of the purchaser), and makes non-profits and governments more likelyto sell. It can also contribute to a public perception that private entities are more efficiently runreinforcing 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. Oftentimes managers and employeesare pressured or willingly alter financial statements for the personal benefit of the individualsover the company. Managerial opportunism plays a large role in these scandals. For examplemanagers who would be compensated more for short term results would report inaccurateinformation since short term benefits outweigh the long-term ones such as pension.[1][edit]List of major accounting scandals Company Year Audit Firm Country Notes UnitedLockheed Corporation 1976 StatesNugan Hand Bank 1980[2] Australia United Ponzi scheme run by BarryZZZZ Best 1986[3] States Minkow United Gilts management service. £110Barlow Clowes 1988[4] Kingdom million missing
  3. 3. Company Year Audit Firm Country Notes UnitedMiniScribe 1989[5] States UnitedPolly Peck 1990[6] KingdomBank of Credit and UnitedCommerce 1991[7] KingdomInternational mail fraud, wire fraud, bank UnitedPhar-Mor 1992[8] Coopers & Lybrand fraud, and transportation of States funds obtained by theft or fraud UnitedInformix Corporation 1996[9] Ernst & Young[10] States UnitedSybase 1997[11][12][13] Ernst & Young[14] States UnitedCendant 1998[15] Ernst & Young StatesWaste Management, United 1999[16] Arthur Andersen Financial mistatementsInc. States UnitedMicroStrategy 2000[17] PricewaterhouseCoopers Michael Saylor States UnitedUnify Corporation 2000[18] Deloitte &Touche States UnitedComputer Associates 2000[19] KPMG Sanjay Kumar States
  4. 4. Company Year Audit Firm Country Notes Fictitious transactions in KoreaLernout & Hauspie 2000 KPMG Belgium and improper accounting methodologies elsewhere UnitedXerox 2000[20] KPMG Falsifying financial results StatesOne.Tel 2001[21] Ernst & Young Australia United Jeffrey Skilling, KennethEnron 2001[22] Arthur Andersen States Lay, Andrew FastowSwissair 2001 McKinsey & Company Switzerland UnitedAdelphia 2002[23] Deloitte &Touche John Rigas States UnitedAOL 2002[20] Ernst & Young Inflated sales States UnitedBristol-Myers Squibb 2002[20][24] PricewaterhouseCoopers Inflated revenues States UnitedCMS Energy 2002[20][25] Arthur Andersen Round trip trades States UnitedDuke Energy 2002[20] Deloitte &Touche Round trip trades States UnitedDynegy 2002[20] Arthur Andersen Round trip trades States
  5. 5. Company Year Audit Firm Country Notes UnitedEl Paso Corporation 2002[20] Deloitte &Touche Round trip trades States UnitedFreddie Mac 2002[26] PricewaterhouseCoopers Understated earnings States Network capacity swaps toGlobal Crossing 2002[20] Arthur Andersen Bermuda inflate revenues United Improper booking of costHalliburton 2002[20] Arthur Andersen States overruns 2002[20][27] PricewaterhouseCoopers Improper booking of sales States UnitedImClone Systems 2002[28] KPMG Samuel D. Waksal States UnitedKmart 2002[20][29] PricewaterhouseCoopers Misleading accounting practices States United Recorded co-payments that wereMerck & Co. 2002[20] Pricewaterhouse Coopers States not collected UnitedMerrill Lynch 2002[30] Deloitte &Touche Conflict of interest States UnitedMirant 2002[20] KPMG Overstated assets and liabilities States United Overstated assets, understatedNicor 2002[20] Arthur Andersen States liabilities
  6. 6. Company Year Audit Firm Country Notes UnitedPeregrine Systems 2002[20] KPMG Overstated sales States 1999, 2000, 2001 ArthurQwest United 2002[20] Andersen 2002 October Inflated revenuesCommunications States KPMG UnitedReliant Energy 2002[20] Deloitte &Touche Round trip trades States UnitedSunbeam 2002[31] Arthur Andersen States Improper accounting, DennisTyco International 2002[20] PricewaterhouseCoopers Bermuda Kozlowski United Overstated cash flows, BernardWorldCom 2002[20] Arthur Andersen States Ebbers UnitedRoyal Ahold 2003[32] Deloitte &Touche Inflating promotional allowances States Falsified accountingParmalat 2003[33][34] Grant Thornton SpA Italy documents, Calisto TanziHealthSouth United 2003[35] Ernst & Young Richard M. ScrushyCorporation States Distributed ill advised corporateNortel 2003[36] Deloitte &Touche Canada bonuses to top 43 managersChiquita Brands United 2004[37] Ernst & Young Illegal paymentsInternational States
  7. 7. Company Year Audit Firm Country Notes United Accounting of structuredAIG 2004[38] PricewaterhouseCoopers States financial dealsBernard L. Madoff UnitedInvestment Securities 2008[39] Friehling& Horowitz Massive Ponzi scheme.[40] StatesLLC Anglo Irish Bank hidden loansAnglo Irish Bank 2008[41] Ernst & Young Ireland controversySatyam Computer 2009[42] PricewaterhouseCoopers India Falsified accountsServices United Failure to disclose RepoLehman Brothers 2010[43] Ernst & Young States 105 transactions to investorsSino-Forest Canada- 2011[44] Ernst & YoungCorporation ChinaOlympus Corporation 2011[45] Ernst & Young Japan tobashi using acquisitionsAutonomy United 2012[46] Deloitte &Touche Subsidiary of HP.Corporation States[edit]Notable outcomesThe Enron scandal turned in the indictment and criminal conviction of one of the Big Fiveauditor 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 iscurrently unwinding its business operations. The Enron scandal was defined as being one of thebiggest 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, theauditors 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
  8. 8. they had failed in accounting advice and related documents. Arthur Andersen was judged guiltyof obstruction of justice for getting rid of many emails and documents that were related toauditing Enron. From this incident little less than 100,000 employees lost their jobs. Althoughlater the ruling was overturned by the U.S. Supreme Court, the image of the auditing firm havebeen 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 beenuncovered. In spite of its stern tone, the speech did not focus on establishing new policy, butinstead focused on actually enforcing current laws, which include holding CEOs and directorspersonally responsible for accountancy fraud.In July, 2002, WorldCom filed for bankruptcy protection, in what was considered the largestcorporate 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 StandardsBoard announced that it intends to introduce more principles-based standards. More radicalmeans of accounting reformhave been proposed, but so far have very little support. The debateitself, however, overlooks the difficulties of classifying any system of knowledge, includingaccounting, 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 companiesinvolved in the corporate accounting scandals of that year for "adapting the mathematicalconcept ofimaginary numbers for use in the business world".In 2003, Nortel made a big contribution to this list of scandals by incorrectly reporting a one centper share earnings directly after their massive layoff period. They used this money to pay the top43 managers of the company. The SEC and the Ontario securities commission eventually settledcivil action with Nortel. However, a separate civil action will be taken up against top Nortelexecutives including former CEO Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly andMaryAnne E. Pahapill and Hamilton. These proceedings have been postponed pending criminalproceedings in Canada, which opened in Toronto on January 12, 2012.[47] Crown lawyers at thisfraud trial of three former Nortel Networks executives say the men defrauded the shareholders ofNortel of more than $5 million. According to the prosecutor this was accomplished byengineering a financial loss in 2002, and a profit in 2003 thereby triggering Return to Profitbonuses of $70 million for top executives.[48][49][50][51][52]
  9. 9. In 2005, after a scandal on insurance and mutual funds the year before, AIG was investigated foraccounting fraud. The company already lost over 45 billion US dollars worth of marketcapitalisation because of the scandal. Investigations also discovered over a billion US dollarsworth of errors in accounting transactions. The New York Attorney Generals investigation led toa $1.6 billion fine for AIG and criminal charges for some of its executives.[53] CEO Maurice R."Hank" Greenberg was forced to step down and is still fighting civil charges being pursued byNew York state.[54][55][edit]