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 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 (SEC) in the United States.
In
2002, a wave of separate but often related accounting scandals became known to the public in the U.S.. Several leading public accounting firms—
Arthur Andersen,
Deloitte & Touche,
Ernst & Young,
KPMG,
PricewaterhouseCoopers, and others—have admitted to or have been charged with negligence in the execution of their duty as auditors to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies' financial status. In several cases, the monetary amounts of the fraud involved are in the
billions of dollars
USD.
Big Four major audit firms
(
Audit firms are listed, followed by select clients ensnarled by accounting scandals)
*
Deloitte & Touche:
Adelphia,
AES,
Duke Energy,
El Paso,
Merrill Lynch,
Reliant Energy,
Rite Aid,
Parmalat*
Ernst & Young:
AOL Time Warner,
Dollar General,
PNC Bank,
Cendant*
KPMG:
Citigroup,
Computer Associates,
General Electric,
ImClone,
Peregrine,
Xerox*
PricewaterhouseCoopers:
Bristol Myers,
HPL,
JP Morgan Chase,
Kmart,
Lucent,
MicroStrategy,
Network Associates,
NKFS,
TycoPredecessor and other U.S. audit firms
*
Arthur Andersen: CMS, Cornell, Dynegy,
Enron,
Global Crossing,
Halliburton,
Omnimedia,
Merck,
Peregrine,
Qwest,
Sunbeam,
Waste Management, Inc.,
WorldCom. Arthur Andersen was a former major audit firm that began to unwind its operations in 2002 after being indicted for obstruction of justice for shredding documents related to its Enron audit.
**
David Duncan*
Coopers & Lybrand LLP: Network Associates,
Phar-Mor. Former major audit firms
Coopers & Lybrand and
Price Waterhouse merged in 1998 to become
PricewaterhouseCoopers (see above).
* Gutierrez & Co.: Vivendi
*
Grant Thornton: Parmalat
*
MiniScribe (1989)
**
Q. T. Wiles*
Cendant (1998)
*
Xerox (2000)
*
One.Tel (2001) (Australia)
*
Enron (2001 -
Jeffrey Skilling, Kenneth Lay, Andrew Fastow)
2002 scandals
*
AOL*
Adelphia*
Bristol-Myers Squibb*
CMS Energy*
Computer Associates*
Duke Energy*
Dynegy*
El Paso Corporation*
Enron*
Freddie Mac*
Global Crossing*
Halliburton*
Harken Energy*
HealthSouth*
Homestore.com*
ImClone Systems*
Kmart*
Lucent Technologies*
Merck & Co.*
Merrill Lynch*
Mirant*
Nicor Energy, LLC*
Peregrine Systems*
Qwest Communications*
Reliant Energy*
Sunbeam*
Tyco International*
Waste Management, Inc.*
WorldComLater scandals
*Royal
Ahold (2003)
*
Parmalat (2003)
**
Calisto Tanzi (2003)
*
AIG (2005)
The Enron scandal resulted in the indictment and criminal conviction 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.
There was a general perception that there are other accountancy scandals waiting to be uncovered, which contributed to the
2002 stock market downturn.
On
July 9,
2002 George W. Bush gave a speech about recent accounting scandals that have 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 the largest corporate
insolvency ever.
These scandals reignited the debate over the relative merits of
US GAAP, which many believe to take a so-called "rules-based" approach to accounting, versus
International Accounting Standards and
UK GAAP, which many believe take a so-called "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 classying any system of knowledge, including accounting, as rules-based or principles-based.
In
2005, after a scandal on insurance and mutual funds the year before,
AIG is under investigation for accounting fraud. The company already lost over 45 billion US dollars worth of market capitalisation because of the scandal. This was the fastest decrease since the
WorldCom and
Enron scandals. Investigations also discovered over a billion US dollars worth of errors in accounting transactions. Future outcome for the company is still pending.
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 of
imaginary numbers for use in the business world.
*
Corporate abuse*
Corporate scandal*
Savings and loan crisis*
Securities fraud*
Forensic accounting*
U.S. Securities and Exchange Commission website*
Link to Bush speech*
A diagram of the scandals*
Article: Why Didn't Our Auditors Find the Fraud?* John R. Emshwiller and Rebecca Smith,
24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America or
Infectious Greed, HarperInformation, 2003, ISBN 0060520736
*
Lawrence A. Cunningham, The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And It Might Just Work)
