Definition of Accounting Scandals
The term “accounting scandals” refers to the business scandals that are the results of manipulations of financial statements which are being done deliberately by some trusted executives of companies or organizations. Examples of such financial misdeeds include misuse of funds, overstatement of revenue, understatement of expenses, overvaluation of assets etc.
List of 10 Major Accounting Scandals
In this article, we will briefly discuss 10 major accounting scandals that surfaced in the recent past.
In the year 2001, it came to notice that this Houston-based company was hiding huge debt by classifying it as off balance sheet item. The issue was partly uncovered by internal whistleblower Sherron Watkins, while high stock prices movement also raised suspicion. As a result, $74 billion worth shareholders’ money was lost alongside thousands of investors and employees who lost their retirement funds. The key individuals in the scandal – Jeff Skilling (CEO) and Ken Lay (former CEO) were found guilty and were put in prison.
In the year 2002, WorldCom (now MCI Inc.) was found guilty of underreporting expenses by capitalizing them while at the same time inflating revenues by using fake entries. Eventually, the internal audit team unearthed the $3.8 billion of fraud that led to loss of $180 billion of investor money while 30,000 people lost their jobs. The CEO of the company (Bernie Ebbers) was sentenced to 25 years in prison for charges of fraud and conspiracy.
In the year 2002, the CEO (Dennis Kozlowski) and CFO (Mark Swartz) of the company were accused of siphoning money using unapproved loans and fraudulent stock sales. In fact, the money was getting drawn out in the disguise of executive bonuses or benefits. Both of them embezzled around $150 million and inflated company’s income by $500 million. Eventually all these came to the notice of SEC and Manhattan D.A. who uncovered the fraud. Both Kozlowski and Swartz were sent to jail while the company had to pay $2.92 billion to the investors.
This company was cooking up numbers by generating fake transactions since 1996 which finally surfaced in the year 2003. The SEC sensed something fishy when the company’s CEO (Richard Scrushy) sold stock worth $75 million a day before the company posted a huge losses. Although Scrushy later got cleared of all the charges of accounting fraud, he was found guilty for bribing the governor of Alabama and handed a 7-year jail.
5. FREDDIE MAC
This mortgage-financing giant, which was backed by the Fed, were found to be guilty of understating book earnings to the tune of $5 billion. The SEC then investigated to uncover the fraud in the year 2003. The entire senior management was involved and as such the company was fined $125 million while the CEO (Leland Brendsel), COO (David Glenn) and CFO (Vaughn Clarke) were fired.
6. AMERICAN INTERNATIONAL GROUP (AIG)
This multinational insurance company engaged in fraudulently booking loans as revenue and inflating stock price in cohort with unscrupulous traders. Eventually, in the year 2003, SEC unearthed the accounting fraud of around $3.9 billion that was primarily cooked up by Hank Greenberg, who was the CEO then. Penalties were charged in the form of settlement of $10 million and $1.64 billion in the year 2003 and 2006 respectively. Although Greenberg was fired, he was acquitted of criminal charges.
7. LEHMAN BROTHERS
The entity faked liquidity generated through alleged sale of toxic assets to Cayman Island banks. The transaction was based on the assumption that Lehman Brothers would eventually buy them back. The accounting fraud involved loan assets to the tune of $50 billion. The fraud got noticed when the company went bankrupt in the year 2008.
8. BERNIE MADOFF
In the year 2008, the company was found guilty of cheating investors with one of the largest Ponzi schemes in the history, which was worth $64.8 billion. In a Ponzi scheme, an investor is deliberately paid off from the money of another investor and not the profits. Interestingly, Madoff’s own sons eported him to the SEC. Madoff was served 150 years in prison.
This Indian IT company created false transactions to boost revenue, margin and liquidity that inflated the revenue per se by $1.5 billion. Eventually in the year 2009, Ramalinga Raju (Chairman) confessed the fraud to the company’s board of directors in a letter. The CBI investigated the fraud but failed to file any charges against him.
10. GENERAL ELETRIC (GE)
In the year 2018, SEC started investigating some of its dubious accounting practices, which uncovered non-cash transaction worth $22 billion pertaining to acquisitions. The DOJ also launched an investigation in this regard. Consequently, John L Flannery resigned as the Chairman and CEO and GE suffered major reputational loss in the market.
Causes of Accounting Scandals
Some the major causes of accounting scandals have been listed down:
- Excessive greed for generating quick money
- Lack of transparency in financial reporting
- Poor quality of management information (such as inaccurate and irrelevant information)
- Very lavish performance linked bonus programme
- Non independence of the internal audit team
- Low moral grounds established by company’s leadership/ senior management (such as corrupt behavior)
- The extremely convoluted organizational structure
- Lack of proper control on financial reporting/ accounting
- An individual feeling that they are above the system
- Complacence on the part of the managers
This is a guide to Accounting Scandals. Here we also discuss the introduction to accounting scandals with the list of 10 major Scandals along with major causes. You may also have a look at the following articles to learn more –