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.
My Sources
- 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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Comments
i just hope i will also be an excellent one like you.
As an accountant myself it saddens me to see to see things like this can happen to anyone in the accountant world me and my business have been lucky and we are well aware of the dangers, I enjoyed the read and keep safe everyone.
Again I emphasise the necessity of skepticism in the audit profession, but this time I would hasten to add that a proper knowledge of business in general and particularly the business of the client in question is crucial, otherwise the auditor has no ethical grounds to perform the audit.
Emie
The Enron scandal will be remembered for years to come. It shook up not only the accounting world but also threw light on business malpractices in general. This is a good list that made for an interesting read!
Princesswithapen
It is so surprising how we are really engaging in these scandalous activities,most recent one theLehman Brother's use of REPO 105 TRANSACTIONS to improve its leverage position at financial reporting period ends. This is so terrible and putting our profession at risk and with a BIIIIIIIG question mark. You and me must do something to uophold our core values of Integrity and professionalism,otherwise we will keep misleading Investors,regulators and even our fellow professionals.
Good summary. If I remember correctly, Parmalat involved the auditors totally missing something blatantly obvious and not uncovering the scandal when they should have.
Madoff was able to pull off his scam because the people who invested with him, never asked questions. Plus they never bothed to research what he was selling. It was much like the ones that decided that they wanted to invest their own 401(k) rather than leave it to professionals, and they new nothing about investing in stocks. Then they complained about losing their money. The reality is, if you are going to invest in something, do your research first. Money in this day and age is hard to get, so take care.
As with most scams, people get away with them because no body bothers to ask questions or research them before giving them their hard earn money. The saying, "Buyer beware" does apply with them. And it doesn't matter how well known the name is, always do your research....
I thank God for you. it's really terrible, but we accountants must arise to do things right. This will go a long way to curb this accounting scandals. Thanks, bravo!
- AUTHOR
@Audit Guru, I agree with what you said. Unfortunately, the initial reaction when faced with this kind of case is to blame the external auditor and the external auditor is always hard pressed to defend himself when this happens. Usually by the time the auditor is found not at fault, it's too late, his good reputation as an auditor is gone and it is very difficult to get it back. Thanks for your comment.
Skepticism in auditing can only get you so far - if these companies are going to institutionally defraud - an auditor wont catch it until it boils over, sadly enough.
Great read! I work for the regulator of auditors in South Africa. The main reason for these management teams to get away with it is, in my opinion, a lack of skepticism by the auditors when auditing these listed firms. The key to prevention is a healthy auditing profession.
Crazy reality but makes for good reading. Nicely done.
Great read. I'm an accountant too (recently graduated). Anyway, I guess you could say that these scandals helped our profession in a way. They led to the Sarbanes Oxley legislations which led to more jobs for us. :)
oh.... that's not good to hear....
emievil,
I thought about writing about this - glad I found this - could not top you - excellent! A legacy Hub for all time - very well done - concise with all the pertinent information.
The separation of Arthur Anderson and Accenture might make an interesting read....
Thank you!
Wow! What a great hub!! So many unethical businesses. It's disgusting how these companies can get away with all they do. It's just like Allied Van Lines, which ripped me and other people horribly!!!
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
- AUTHOR
@Money Glitch, I'm sorry to hear that. I can't imagine how it must feel to work for one of these companies and then to watch everything just go down. The employees are the ones who suffer the most in these cases, and they are the most innocent. Thanks for sharing this.
@Shalini, same question occurred in my mind when I was writing this. Sure they go to prison or, at the least, they get charged but after that? I haven't seen any news which says their belongings were taken to pay back shareholders or creditors. And to top it all, regulators respond by tightening the rules, which may or may not really stop these from happening again. But I'm getting off topic here :). Thanks for reading my hub!
Hi Emie - I followed some of these stories and it's amazing how they get away with it! Many of them are back in business again - what about all that money that belonged to shareholders that they played around with?
Great idea for a hub! Hopefully, the world will learn from these scandals and move forward toward creating a more secure environment for people to entrust their money. I worked almost 9 years for one of these listed and trust me it is no fun losing your job and watching the funds in your retirement account disappear. :( Excellent way to provide a reminder of these scandals for future reference.:)
More good informations thanks for helping me out. Always a pleasure to see information that is useful, thanks again
- AUTHOR
Thanks Peter.
Thanks for your comment Fiona. It makes me glad to read what you wrote =).
Great hub, and a brilliant, well thought out outline of the scandals of the financial world ;)
A useful report of all the corporate frauds.
- AUTHOR
Hello, some (like Enron) already got convictions but well, these might just be a slap on their wrists, not good enough for what they did. The irony is that those CFOs/CEOs/Accountants who did nothing wrong are the ones affected because of new standards / regulations that are meant to "prevent" such things from happening again. Not to mention that (by my count) almost 20,000 employees were affected by the scandalous behavior of their top management.
BC, hmmmmmmmmmmmmmmmmmmmmmm, seriously? No I didn't know. Tell me more please =).
Lol I bet you didn't know I also work in Finance ;)
I think we all been taking for a ride and shook up. What really amaze me and annoys me is that no government is doing anything about it? Surely, there must something that can be done and must be done. Another scandel - Rover went bankrupt and the directors are getting £6 billion payout. I would like to know how it is done. 2000 people losing their jobs. They will carry on until nothing is left and then what.
- AUTHOR
wesley, there are lots and lots. Before this I've heard of only 5 or 6 but I realized there are a lot more. You may be glad about the auditing standards but we, accountants / auditors, are not =). j/k
This is great information. I was only aware of Enron and AIG. I am also glad to know that the IRS has increased its auditing standards because of this.
- AUTHOR
Thanks Cris A. That's actually salmon sashimi shaped like a rose =).
Jane, they're lucky they're still alive =). Thanks for the info.
IslandVoice, I also wondered the same thing. And the thing is, they pulled down a lot of people and institutions because of what they did.
Sarovai, you're welcome. Yup, there's no scarcity. I just scratched the surface, there are still a lot of them out there.
Thanks for the comments everyone.
For Scandals , there is no scarcity. Thank for highlighting the scandals.
Shockers indeed! I followed the stories on Enron and Madoff, and wonder how in the world they were able to pull it off, without using their billions to cover their tracks.
Interesting hub. We use to use Waste Management, actually they were contracted as the only service for our town. Our city finally allowed other companies to come in & boy was Waste Management taking us for a ride on their high prices.
We still have Quest, its one of the major providers in our area. They contract with MSN & we can only get high speed internet if we agree to yearly contracts & use MSN...it really sucks, I hate MSN!
I'm used to hearing about scandals involving at least 2 people (3 is tops!) but these put the S's in significantly serious! Enjoyed the read (not that I'm into schadenfreude).
Btw, is that a striped rose, ie ur avatar, or am I short on caffeine?
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