10 Scandals That Rocked the Accounting World
I’m an accountant. My profile says so. My resume highlights it. And yet, I have written only one hub about accounting (and that was looonnnggg time ago). So here I am finding myself writing my second hub related to my profession (and my 49th all in all). I googled the phrase “accounting scandals” and I was shocked by just how many they were. Shheeeessh, no wonder we are getting all these new accounting standards (IFRS???), auditing standards (heard about the new ones coming in), reporting requirements (Sarbanes-Oxley, anyone?), etc., etc.
So, okay, in honor of my profession (although this hub is far from “honoring” it, really), I compiled some of the most famous (or infamous) of these scandals. Some of these maybe well-known, some are not. I may have skipped over some more important ones but if I had, feel free to call my attention to it.
So what exactly are accounting scandals? Let me just use Wikipedia's definition – “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 other words, somebody did something wrong and tried to cover it by cooking the (accounting) books, not necessarily in the same order.
Here are some of these scandals and how they rocked the accounting (my) world:
The First 5 Accounting Scandals
Enron – This is the most popular of them all and is still being referred to even after 8 years. This scandal involved hiding debts, inflating revenues and corruption. It resulted to the displacement of more than 20,000 people, the death of “America’s Most Innovative Company” for six years in a row and the dissolution of one of the Big 5 global accounting firms (Arthur Andersen). It also gave rise to the passage of Sarbanes-Oxley and more rigorous auditing standards.
Parmalat – a company based in Italy, Parmalat used to be the biggest dairy company in Europe but it collapsed in 2003 and subsequently declared bankruptcy. The company went under for a variety of reasons: investment disasters; non-existent cash in bank; fake transactions; hidden debts and the use of derivatives and accounting fraud to hide these facts. These illegal acts were carried out worldwide, and they affected not only the company and its people but international financial institutions, as well.
Waste Management – one of the big companies which offers a comprehensive waste management and environmental services in the US. Unlike the first two, Waste Management still exists. The scandal? Inflating income by a whopping $1.7 billion by understating the depreciation expense of the company.
WorldCom – WorldCom is now known as MCI, Inc. and is part of the Verizon Communications group. The company emerged from bankruptcy in 2003. The allegations? Inflating total assets through capitalization of operating costs. The amount? Estimated to be around $11 billion. WorldCom’s Chapter 11 bankruptcy filing is second only to the Lehman Brothers in 2008 in the history of such filings in the US.
Qwest Communications – a telecommunications company providing services to 14 states in the US. The company still exists. In 2002, it was found out that the company engaged in fraudulent accounting practices resulting to the inflation of its revenues generated from its deals with Enron.
The Last 5 Accounting Scandals
Tyco International – an international manufacturing company with diversified product lines (safety products, fire protection, electrical products, to name a few). The fraud actually involved misuse of the company’s funds by its former CEO and CFO. They utilized improper accounting practices to cover up the misuse of these funds.
Health South Corporation – used to be a leading healthcare service provider based in Alabama, the company took a beating in 2003 when it was exposed that the company inflated its revenues by $1.4 billion. The inflation of revenues was worse in certain years, going as high as 4,700%. The reason? To meet the expectations of the company’s investors.
Bernard L. Madoff Investment Scandal – this perpetrated the Ponzi scheme that robbed millions of people of their hard-earned money. It is acclaimed as the largest investment fraud ever committed by an individual. The scandal here is not in Madoff, himself (although he would have engaged in improper accounting practices to hide the fraudulent scheme), but on how such scheme escaped the watchful eyes of the auditors and the regulators. Although Madoff has already pleaded guilty to such charges, the investigations on the involvement of other people and how regulators failed to detect the scheme are still ongoing. The amount of fraud? Estimated to be around $10 billion to $17 billion.
AIG – one of the foremost insurance company in the US and is one of the recipients of the bailouts from the US Government. The (accounting) scandal (among others) here involved the inflation of the company’s net worth by $2.7 billion.
Satyam Computer Services – a company based in India (now known as Mahindra Satyam). This is the most recent scandal (declared only in 2009) among those on this list. The accounting fraud in this case involves overstating cash ($1.5 billion) and receivables by $100 million and understating liabilities by $250 million. Taken together, Satyam’s assets were inflated by about $1.85 billion.
- 10 Major Accounting Scandals | Bizcovering
Very recently, the scandal of Satyam Computer Services stunned the corporate world. This is the first major accounting scandal in India and one of the major accounting scandals in the world. There are many such accounting scandals in history. The fol
- Accounting scandals - Wikipedia, the free encyclopedia
Details some of the accounting scandals that happened since 1980. There are 46 scandals included in this page.
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