Accounting scandals

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 ofliabilities, 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.

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. 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.

Notable outcomes

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 theSupreme 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 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.

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.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 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 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 Dunn, Beatty, Gollogly, Pahapill and Hamilton. These proceedings have been postponed pending criminal proceedings in Canada.

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.^[43] CEO Maurice R. "Hank" Greenberg was forced to step down and is still fighting civil charges being pursued by New York state.

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]	Ernst & Young[9]	United States
Sybase	1997[10][11][12]	Ernst & Young[13]	United States
Cendant	1998[14]	Ernst & Young	United States
Waste Management, Inc.	1999[15]	Arthur Andersen	United States	Financial mistatements
MicroStrategy	2000[16]	PricewaterhouseCoopers	United States	Michael Saylor
Unify Corporation	2000[17]		United States
Computer Associates	2000[18]	KPMG	United States	Sanjay Kumar
Lernout & Hauspie	2000	KPMG	Belgium	Fictitious transactions in Korea and improper accounting methodologies elsewhere
Xerox	2000[19]	KPMG	United States	Falsifying financial results
One.Tel	2001[20]	Ernst & Young	Australia
Enron	2001[21]	Arthur Andersen	United States	Jeffrey Skilling, Kenneth Lay, Andrew Fastow
Adelphia	2002[22]	Deloitte & Touche	United States	John Rigas
AOL	2002[19]	Ernst & Young	United States	Inflated sales
Bristol-Myers Squibb	2002[19][23]	PricewaterhouseCoopers	United States	Inflated revenues
CMS Energy	2002[19][24]	Arthur Andersen	United States	Round trip trades
Duke Energy	2002[19]	Deloitte & Touche	United States	Round trip trades
Dynegy	2002[19]	Arthur Andersen	United States	Round trip trades
El Paso Corporation	2002[19]	Deloitte & Touche	United States	Round trip trades
Freddie Mac	2002[25]		United States	Understated earnings
Global Crossing	2002[19]	Arthur Andersen	Bermuda	Network capacity swaps to inflate revenues
Halliburton	2002[19]	Arthur Andersen	United States	Improper booking of cost overruns
Homestore.com	2002[19][26]		United States	Improper booking of sales
ImClone Systems	2002[27]	KPMG	United States	Samuel D. Waksal
Kmart	2002[19][28]	PricewaterhouseCoopers	United States	Misleading accounting practices
Merck & Co.	2002[19]		United States	Recorded co-payments that were not collected
Merrill Lynch	2002[29]	Deloitte & Touche	United States	Conflict of interest
Mirant	2002[19]		United States	Overstated assets and liabilities
Nicor	2002[19]	Arthur Andersen	United States	Overstated assets, understated liabilities
Peregrine Systems	2002[19]	KPMG	United States	Overstated sales
Qwest Communications	2002[19]		United States	Inflated revenues
Reliant Energy	2002[19]	Deloitte & Touche	United States	Round trip trades
Sunbeam	2002[30]		United States
Tyco International	2002[19]	PricewaterhouseCoopers	Bermuda	Improper accounting, Dennis Kozlowski
WorldCom	2002[19]	Arthur Andersen	United States	Overstated cash flows, Bernard Ebbers
Royal Ahold	2003[31]	Deloitte & Touche	Netherlands	Inflating promotional allowances
Parmalat	2003[32][33]	Grant Thornton SpA	Italy	Falsified accounting documents, Calisto Tanzi
HealthSouth Corporation	2003[34]	Ernst & Young	United States	Richard M. Scrushy
Nortel	2003[35]	Deloitte & Touche	Canada	Distributed ill advised corporate bonuses to top 43 managers
Chiquita Brands International	2004[36]		United States	Illegal payments
AIG	2004[37]	PricewaterhouseCoopers	United States	Accounting of structured financial deals
Bernard L. Madoff Investment Securities LLC	2008[38]	Friehling & Horowitz	United States	Massive Ponzi scheme.[39]
Anglo Irish Bank	2008[40]	Ernst & Young	Ireland	Anglo Irish Bank hidden loans controversy
Satyam Computer Services	2009[41]	PricewaterhouseCoopers	India	Falsified accounts
Lehman Brothers	2010[42]	Ernst & Young	United States	Failure to disclose Repo 105 transactions to investors