When Ethics Fail: Some of the Worst Accounting Scandals

Of the ten worst accounting frauds in the last 15 years, only one or two were discovered as the result of a whistleblower. The majority of the frauds were discovered as the result of more obvious events that brought them to the surface – bankruptcies, suspicious trades that invited SEC investigations, changes in management, and internal audits.

 

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The Association of Certified Fraud Examiners has published studies indicating that almost half of corporate fraud is discovered by a tip, so why have the largest frauds not followed this trend? Let’s look as some of the worst corporate frauds, as summarized by accounting-degree.org, and what they may have in common.

Bernie Madoff (2008)

  • Company: Bernard L. Madoff Investment Securities LLC was a Wall Street investment firm, founded by Madoff.
  • What happened: The firm tricked investors out of $64.8 billion through the largest Ponzi scheme in history.
  • How they did it: Investors were paid returns out of their own money or that of other investors rather than from profits.
  • How they got caught: Madoff told his sons about his scheme and they reported him to the SEC. He was arrested the next day.

Lehman Brothers (2008)

  • Company: Lehman Brothers, a global financial services firm.
  • What happened: The firm hid over $50 billion in loans, which they disguised as sales.
  • How they did it: By allegedly selling toxic assets to Cayman Island banks with the understanding that they would later buy them back. This created the impression that Lehman had $50 billion more cash and $50 billion less in toxic assets than it really did.
  • How they got caught: The firm went bankrupt.

American International Group (AIG) (2005)

  • Company: American International Group, a multinational insurance corporation.
  • What happened: Massive accounting fraud that totaled $3.9 billion, along with bid-rigging and stock price manipulation.
  • How they did it: Allegedly booked loans as revenue, steered clients to insurers with whom AIG had payoff agreements, and told traders to inflate AIG stock price.
  • How they got caught: SEC regulator investigations, possibly tipped off by a whistleblower.

Enron (2001)

  • Company: Enron, a Houston-based commodities, energy and service corporation
  • What happened: Shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts, and many employees lost their jobs.
  • How they did it: Kept huge debt off balance sheets.
  • How they got caught: Turned in by internal whistleblower Sherron Watkins; high stock prices fueled external suspicions.

Toshiba Corporation (2015)

  • Company: Toshiba Corporation, a manufacturer of technology products
  • What happened:  Fraudulent bookkeeping led to the inflation of profits by at least 1.2 billion over a seven year period.
  • How they did it: In the worst accounting scandal Japan has seen in years, a third-party panel found that Toshiba’s top management had pressured employees to reach overly ambitious profit targets, and that a closed corporate structure that didn’t allow subordinates to oppose their managers led to fraudulent bookkeeping. A further inflation of profits totaled 151.8 billion JPY over a seven-year period.
  • How they got caught: An independent investigative panel uncovered the accounting improprieties.

The American and Japanese examples share a relentless pursuit of profits and a closed corporate structure in common. Experts have suggested that promoting more diversity within these companies would help to introduce new perspectives, enhance transparency, and contribute to more holistic (and honest!) growth over time. Diversity management can be seen as a long-term investment that will enhance corporate value and reputations.

New England College’s Master of Science in Accounting degree is designed to help students grow their knowledge in taxation, financial reporting, cost accounting, auditing, and mergers and acquisitions. Graduates are prepared for careers in auditing and risk management, corporate accounting, management consulting, banking and financial services, government and nonprofit organizations, and taxation practices.

And a further concentration in forensic accounting is also available, for those students interested in preventing the next Enron or Toshiba.

 

References

 

http://www.reuters.com/article/us-toshiba-ceo-idUSKCN0XX0W2

http://www.huffingtonpost.com/bruce-kushnick/exposing-one-of-the-large_b_8767256.html

http://www.accounting-degree.org/scandals/

http://www.japantimes.co.jp/news/2015/08/14/business/corporate-business/toshiba-scandal-highlights-need-diversity-corporate-japan/#.V45b8ZMrKCQ

http://i-sight.com/resources/corporate-accounting-fraud-lessons-from-the-10-worst-scandals/

http://www.bloomberg.com/news/articles/2015-07-21/toshiba-executives-resign-over-1-2-billion-accounting-scandal

http://www.investopedia.com/articles/investing/081315/toshibas-accounting-scandal-how-it-happened.asp