Corporate Accounting Scandals

10 of the Worst, No-Good, Most Rotten Cases of Fraud

Money, money, money.

Money is the lifeblood of the economy, the driving force behind the millions of transactions that occur on a daily basis. But when greedy men and women decide that money is more important than value and integrity, thousands of lives are ruined.

An accounting scandal starts with the pressure to look good for investors, a motive, and an opportunity. When that pressure forces the executives of a company to lie, these executives need another lie to cover it up. Then they need another lie. Then they need another one. One year’s losses are covered by the profits of an “off the books” transaction. They “manage” the earnings. Executives tell the accounting department to recognize revenue before it has been earned, or even create false revenue. The lie snowballs. Sometimes it passes from one set of executives to another.

How do you destroy a company? When the lie gets out of control, all it takes is one brave man or woman determined to do the right thing. These whistleblowers are heroes. Though they weren’t always protected from retaliation, the sacrifice of these brave men and women have helped lay the groundwork for stronger legislation. They stood up and said, “Hold on, something fishy is going on here.” Sometimes when this happens a company is destroyed. If it survives, then it has a lot of work to do to make up for its mistakes, to earn the trust of its customers and employees again.

So long as money is involved, people will be tempted to do the wrong thing. Still, accountants have the power to  do the right thing and blow the whistle when they see something unethical happening.

These are some of the most disastrous accounting scandals of the last 20 years, because really, who doesn’t love a good scandal?

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Corporate Accounting Scandals – 10 of the Worst, No-Good, Most Rotten Cases of Fraud

Waste Management -1998

  • What happened? Executives of the company inflated income and deferred important expenses on their property, plant and equipment
  • $1.43 billion in overstated earnings
  • Villains – Founder/CEO Dean L. Buntrock
    5 other executives of the company
    Arthur Andersen auditors
  • Heroes – A new CEO and management team that realized the misstatements
  • Aftermath – WM settled a shareholder lawsuit for $457 million.
    The SEC find Arthur Andersen $7 million for failure in its audit responsibilities

Enron – 2001

  • What happened? Once the darling of Wall Street, Enron engaged in improper revenue recognition and kept losses and debt off the company’s books. When the scandal came to light, investors lost billions.
  • $74 billion of investor wealth lost
  • Villains – CEO Jeffrey Skilling
    Founder Kenneth Lay
    Arthur Andersen Auditors who tried to destroy the evidence
  • Heroes – Whistleblower Sherron Watkins drew attention to the accounting irregularities
  • The Aftermath – The Enron disaster brought down Arthur Andersen, and laid the foundation for the Sarbanes-Oxley Act of 2002, increasing penalties for unethical conduct, and tightening disclosure laws.

Qwest – 2002

  • What happened? From 199-2002 the telecommunications company generated fake revenue through false transactions. Some of these transactions were with Enron helping both firms perpetrate fraud.
  • $3.8 billion in fake revenue
  • $231 million of excluded expenses
  • Villains – CEO Joseph P. Nacchio
    COO Afshin Mohebbi
    7 other executives of the company
  • Heroes – a whistleblower allegation to the SEC led to an investigation that uncovered fraud
  • The Aftermath – Qwest agreed to pay a $250 million penalty. Since the scandal the company struggled financially before it was acquired by CenturyLink

WorldCom – 2002

  • What happened? WorldCom booked expenses as capital expenditures, and inflated revenues with fake accounting entries
  • $3.8 billion of fraud
  • Villains – CEO Bernie Ebberes
    Arthur Andersen Auditors
  • Heroes – a small team of internal auditors worked in secret to uncover the fraud
  • The Aftermath – Combined with the Enron Scandal, this scandal brought down Arthur Andersen and laid the foundation for the Sarbanes-Oxley act of 2002, legislation that introduces higher accountability to all companies

Freddie Mac – 2003

  • What happened? Owned by the government, Freddie Mac is supposed to stabilize the country’s mortgage markets. By over and understating revenues, the firm caused ripples throughout the housing market.
  • $5 billion in understated revenue
  • Villains – CEO Leland Brendsel
    COO David Glenn
    CFO Vaugh Clarke
    Former VPs Robert Dean
    and Nazir Dossani
  • Heroes – an SEC investigation prompted by a whistleblower
  • The Aftermath – $125 million in fines and the firing of the CEO, CFO and COO. Five years later, Freddie Mac would be one of the companies deemed “too big to fail,” receiving federal bail out money to keep it afloat.

American Insurance Group – 2005

  • What happened? AIG “dressed: loans as revenue, redirecting clients to “independent” companies that were owned by AIG
  • $3.8 billion of accounting fraud and bid-rigging
  • Villains – CEO Hank Greenburg (Greenburg ran the company for four decades)
  • Heroes –whistleblowers informed the SEC of accounting fraud and bid-rigging
  • The Aftermath – Deemed “too big to fail,” AIG received $61.7 billion of federal bailout money. Then, executives of the firm rewarded themselves with $165 million in bonuses, drawing the anger of Americans everywhere.

Lehman Brothers – 2008

  • Lehman Brothers is famous for being involved with the housing crisis of 2008
  • What happened? LB sold toxic mortgages to Cayman Island banks with the intention of buying them back, creating the illusion of more cash than they actually had.
  • $619 billion in debt when it filed for bankruptcy
  • Villains – Lehman Executives
    Ernst & Young Auditors hid and ignored concerns
  • Heroes –Senior VP Matthew Lee (After voicing his concerns he was fired on the spot)
  • The Aftermath – As many of the largest firms were bailed out by government funds, Lehman was left to go bankrupt because of the hole they dug themselves. Analysts argue whether this decision caused the panic that led into the housing crisis.

Olympus – 2011

  • What happened? Olympus tried to cover up huge losses by using the proceeds from company acquisitions to cover losses. The company’s culture made it hard for people to speak out against what happened.
  • $1.7 billion of concealed losses
  • Villains – CEO Hisashi Mori
    Hideo Yamada
  • Heroes –Whistleblower Michael Woodford. Mistakes made by the company revealed the losses.
  • The Aftermath – $7 million in fines. While investigations are still ongoing, the scandal initially wiped out 75% of the company’s stock, and many of the board resigned.

Tesco

  • What happened? The grocery giant accelerated recognition of unearned revenue from allowances that were dependent on hitting sales numbers that it didn’t reach.
  • $320 million overstated revenue
  • Villains – CFO Laurie Mcllwee
    Joun Scouler, Carol Rogberg, PricewaterhouseCoopers
  • Heroes –An anonymous tipster was ignored for months until a change in leadership finally listened
  • The Aftermath –So far Tesco has paid over $100 million in fines with more to come. Investigations are ongoing as to the extent of the fraud and whether there was intent to deceive the public.

Toshiba

  • What happened? The electronics company overstated revenues to project high earnings and cover losses. The fraud spanned over 7 years.
  • $2 billions in overstated revenues
  • Villains – CEO Hisao Tanaka
    Former CEO Norio Sasaki
    Atsustoshi Nishida
    Ernst & Young
  • Heroes –An independent panel hired by the company discovered the fraud
  • The Aftermath – Toshiba was fined 7.37 billion and EY was fined 17.4 billion. As an auditor EY had misplaced trust that Toshiba wouldn’t cheat. The investigation into this scandal is still ongoing.

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