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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. All of the 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 USD.

List of companies involved in scandals

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, HealthSouth
KPMG: Citigroup, Computer Associates, ImClone, Lernout and Hauspie, New Century, Peregrine, Xerox, Siemens AG, Banco Nacional S.A. (Brazil), BMW Group
PricewaterhouseCoopers: Bristol Myers, HPL, JP Morgan Chase, Kmart, Lucent, MicroStrategy, Network Associates, NKFS, Tyco

Predecessor and other U.S. audit firms

Arthur Andersen: CMS, Cornell, Dynegy, Enron, Global Crossing, Halliburton, Liberate Technologies, Martha Stewart Living Omnimedia, Merck, Peregrine, Qwest, Sunbeam Products, 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

Notable Accounting Scandals (Year First Reported -- Principal Participants)

Nugan Hand Bank (1980)
ZZZZ Best (1986)
MiniScribe (1989)
Polly Peck (1990)
Bank of Credit and Commerce International (1991)
Phar-Mor (1992)
Q. T. Wiles
Bio Clinic (1994 to 1995)
Sunrise Medical (1994 to 1995)
Cendant (1998)
Microstrategy (2000 - Michael Saylor, Sanju Bansal, Mark Lynch)
Xerox (2000)
Unify Corporation (2000)
One.Tel (2001) (Australia)
Enron (2001 - Jeffrey Skilling, Kenneth Lay, Andrew Fastow)

2002 scandals

Later scandals

Royal Ahold (2003)
Parmalat (2003)

Calisto Tanzi (2003)

Outcomes

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 stock market downturn of 2002.

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 takes a "rules-based" approach to accounting, versus International Accounting Standards and UK GAAP, which takes a "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 classifying 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".

External links

U.S. Securities and Exchange Commission website
U.S. President Bush's speech, 2002-07-09 NPR report (audio recording)
"Why didn't our auditors find the fraud?", Wisconsin Law Journal, January 25, 2006