Accounting scandals are political and/or business scandals which arise with the disclosure of financial misdeeds by trusted executives of corporations or governments. 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 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 in the United States.
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 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.
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, 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, thereby 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.
executives. Often managers and
willingly change financial
benefit of the individuals over
opportunism plays a large role in
managers who would be
results would report
short-term benefits outweigh the
|scandals aren’t caused by top
employees are pressured or
statements for the personal
the company. Managerial
these scandals. For example,
compensated more for short-term
inaccurate information, since
long-term ones such as pension
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 the Supreme Court of the United States, the firm ceased performing audits and is currently unwinding its business operations. The Enron scandal was defined as being one of the biggest audit failures. The scandal included utilizing loopholes that were found within the GAAP. For auditing a big sized company such as Enron, the auditors were criticized for having brief meetings a few times a year that covered large amounts of material. By January 17, 2002 Enron decided to discontinue its business with Arthur Andersen claiming they had failed in accounting advice and related documents. Arthur Andersen was judged guilty of obstruction of justice for getting rid of many emails and documents that were related to auditing Enron. From this incident little less than 100,000 employees lost their jobs. Although later the ruling was overturned by the U.S. Supreme Court, the image of the auditing firm have been damaged beyond repair, and was never able to come back to its full operation capacity.
|On July 9, 2002 George W.
recent accounting scandals
spite of its stern tone, the
establishing new policy, but instead
current laws, which include
personally responsible for
|Bush gave a speech about
that had been uncovered. In
speech didn’t focus on
focused on actually enforcing
holding CEOs and directors
|In July, 2002, WorldCom
protection, in what was considered
insolvency ever at the time.
|filed for bankruptcy
the largest corporate
relative merits of US GAAP, which
approach to accounting, versus
and UK GAAP, which takes a
Financial Accounting Standards
intends to introduce more
radical means of accounting
so far have very little
however, overlooks the
system of knowledge,
establishment of Sarbanes-Oxley.
|reignited the debate over the
takes a “rules-based”
International Accounting Standards
“principles-based” approach. The
Board announced that it
principles-based standards. More
reform have been proposed, but
support. The debate itself,
difficulties of classifying any
including accounting, as
principles-based.This also led to the
|On a lighter note, the
Economics went to the CEOs of those
corporate accounting scandals of
mathematical concept of imaginary
|2002 Ig Nobel Prize in
companies involved in the
that year for “adapting the
numbers for use in the business
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 former CEO Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill and Hamilton. These proceedings have been postponed pending criminal proceedings in Canada, which opened in Toronto on January 12, 2012. Crown lawyers at this fraud trial of three former Nortel Networks executives tell the men defrauded the shareholders of Nortel of more than $5 million. According to the prosecutor this was accomplished by engineering a financial loss in 2002, and a profit in 2003 thereby triggering Return to Profit bonuses of $70 million for top executives.
|In 2005, after a scandal
funds the year before, AIG was
The company already lost
worth of market
Investigations also discovered over a
errors in accounting
General’s investigation led to a
criminal charges for some of its
Greenberg was forced to step down
charges being pursued by New
|on insurance and mutual
investigated for accounting fraud.
over 45 billion US dollars
capitalisation because of the scandal.
billion US dollars worth of
transactions. The New York Attorney
$1.6 billion fine for AIG and
executives. CEO Maurice R. “Hank”
and is still fighting civil