Following are some of the most extreme examples of gross misconduct regarding fraud in our history. The Waste Management Scandal in 1998. They reported 1. 7 billion in fake earnings by increasing the length of depreciation time for property, plant and equipment on the balance Page 2 sheets. The fraud was detected when a new CEO was brought in and the new management team went through the books. Motivation seems to be that this publicly traded company needed to keep stock prices up to keep investors and shareholders happy. Incentive, opportunity and rationalization are all at play here.
The Enron Scandal in 2001. Enron was inflating its income by $586 million. Thousands of employees and investors lost their retirement accounts. Thousands of employees lost their jobs. Shareholders lost $74 billion. Enron was able to hide and keep huge amounts of debt off of the balance sheets by using a mark to market accounting system which measures the stock at current market value instead of book value. The fraud was reported by an internal employee. Again, all about keeping stock prices up. Interestingly, Arthur Anderson was involved and found guilty in both The Waste Management and Enron scandals.
The World Com Scandal in 2002. WorldCom inflated assets by $11 billion. Thirty thousand employees lost their jobs. Investors lost $180 billion. WorldCom was able to keep debt off the books by under reporting expenses by capitalizing them instead and inflating revenues using fake accounting entries. The internal auditing department discovered this fraud after a request from the SEC regarding accounting procedures and loans to officers. Congress passed the Sarbanes-Oxley Act within weeks of WorldCom’s scandal. The Tyco Scandal in 2002.
Tyco inflated company income by $500 million and the CEO and CFO stole $170 million through unapproved loans and fraudulent stock sales. They sold 7. 5 million shares of unauthorized stock. The loans were embezzled disguised as executive bonuses. Tyco was caught when they were investigated by the SEC for questionable accounting practices. The Health South Scandal in 2003. Earnings were inflated by 1. 4 billion to meet stockholder expectations. HealthSouth used false accounting transactions authorized by the CEO to show an increase in earnings.
The CEO sold $75 million in stock in a single day triggering SEC suspicions and an investigation uncovered the fraud. The Housing Market Scandals. The Freddie Mac Scandal was discovered in 2003. Freddie Mac reported $5 billion in misstated earnings by understating its profits. This was done intentionally to meet the stockholder expectations of steady earnings. Freddie Mac intentionally inflated earnings. The Fannie Mae Scandal was in 2004. The CEO stole $90 million disguised as executive bonuses. Earnings were misstated by improperly reporting $200 million in expenses to future periods.
Again, tied to the pressure of meeting stockholder expectations. Both of these were uncovered in SEC investigations. The American International Group Scandal in 2005. AIG committed accounting fraud in the amount of $3. 9 billion dollars. CEO, Hank Greenburg falsely reported loans as revenue. He also told traders to intentional inflate the stock prices. This fraud was uncovered by an SEC Page 3 investigation that may have involved a whistleblower. AIG disgustingly rewarded themselves $165 million in executive bonuses after being bailed out with taxpayer dollars. The Lehman Brothers Scandal in 2008.
Lehman hid over $50 billion in loans by reported that amount in sales. Not only were the CEO and Lehman Brothers executives involved but also the auditing firm Ernst & Young was suspected but not prosecuted because of lack of evidence. The fraud was uncovered when the firm was forced into bankruptcy. This was the largest bankruptcy in US history. The Bernie Madoff Scandal in 2008. Investors were tricked out of $4. 8 billion through the largest Ponzi scheme in history. There were no profits and returns to investors were paid from the investors own money or the money of other investors.
Bernie Madoff’s accountants were involved in this fraud. Bernie Madoff’s own sons reported him to the SEC. He was arrested the following day. “The worst thing about these scams, is that you never know until it’s too late. Those convicted of fraud might serve several years in prison, which in turn costs investors/taxpayers even more money. These scammers can pick a lifetime’s worth of garbage and not even come close to repaying those who lost their fortunes. The SEC works to prevent such scams from happening, but with thousands of public companies in North America, it is nearly impossible to ensure that disaster never strikes again. http:// www. accounting-degree. org/scandals/accounting-scandals. jpg “Fraud investigations and obtaining civil remedies are very costly, and it is generally believed that prevention activities are the most economical way to control losses from fraud.
Effective prevention activities usually involve maintaining an organizational culture of honesty and high ethical standards, assessing fraud risk, and reducing the opportunities to commit fraud. ” BY MARKJ. NIGRINI, PH. D. AND NATHAN J. MUELLER August 1, 2014 – See more at: http://www. ournalofaccountancy. com/issues/ 2014/aug/fraud-20149862. html#sthash. svcQtV31. dpuf Andrew Ceresney the Co-director of the Division of Enforcement for the SEC did a talk in 2013 concerning accounting fraud. He said that in the wake of the financial crisis, the SEC was very focused on financial crisis cases with little emphasis and fewer resources devoted to accounting fraud. His belief is that the SarbanesOxley action was responsible for a greater focus over the last 10 years on accounting issues resulting in an improvement in inancial reporting. Page 4
However, he goes on to say he has doubts about whether we have experienced such a drop in actual fraud in financial reporting. Although there may not be such Scandals as WorldCom or Enron, he doesn’t believe that a reduction in fraud will occur just because of Sarbanes-Oxley or other reforms. “The incentives are still there to manipulate financial statements, and the methods for doing so are still available. We have additional controls, but controls are not always effective at finding fraud. ” http://www. sec. ov/News/Speech/Detail/Speech/ 1370539845772 The SEC has set into place a FRAud Task Force. (The Financial Reporting and Audit Task Force).
There are 12 people on the task force comprised of lawyers and accountants. Its objective is to improve the ability to detect and prevent financial statement and other accounting fraud. To do this the task force will set into place a monitoring system to identify potential misconduct in regard to high-risk companies. The task force will also analyze performance trends by industry. The task force will also use data analytics to pick up on financial statement anomalies. Although effective enforcement can increase the confidence that investors bring to the markets, ultimately we will only succeed if investors believe the numbers reported on the bottom line. Comprehensive, accurate and reliable financial reporting is the bedrock upon which our markets are based. For our capital markets to thrive, investors must be able to receive an unvarnished assessment of a company’s financial condition.
Financial reports must provide transparency for investors, and must not obscure the truth, even if that truth is inconvenient. ” http://www. sec. ov/News/ Speech/Detail/Speech/1370539845772 So, with all the theories in place about why fraud occurs. Identifying the fraud risk factors that might be present. The specific internal controls that are set in place to minimize risk and the SEC Division of Enforcement’s Fraud Task Force. How can we be ensured as investors that we are receiving accurate financial information? We can’t be. How likely is it that fraud will continue to occur? Very likely. Although, all the efforts are in place to minimize fraud, people are people and past behavior is usually the best indicator of future behavior.
