Accounting Scandals and Corporate Failures

by | Jan 13, 2014 | Accountants, Auditors and Other Professionals

Accounting scandals and corporate failures?

I don’t quite know how I got onto this topic. Maybe it came to mind when I wrote a blog on creative accounting.

A review online reminded me of a number of accounting scandals that have happened over recent years. Some I remember well, others not quite as much. See what your memory is like.

scandalOne of the most recent scandals is the Bernard L. Madoff Investment Scandal:  this perpetrated the Ponzi scheme and robbed millions of people of their hard-earned money. It is acclaimed as the largest investment fraud ever committed by an individual. The scandal here is not in Madoff, himself (although he would have engaged in improper accounting practices to hide the fraudulent scheme), but on how such scheme escaped the watchful eyes of the auditors and the regulators. The amount of fraud is estimated to be around $10 to $17 billion.

But the most famous of all, is perhaps Enron. This scandal involved hiding debts, inflating revenues and corruption. The fallout resulted to the displacement of more than 20,000 people, the death of “America’s Most Innovative Company” for six years in a row and the dissolution of one of the Big 5 global accounting firms (Arthur Andersen). It also gave rise to the passage of Sarbanes-Oxley and more rigorous auditing standards.

I remember Arthur Andersen well. The former Deputy Chief Executive of Andersen Worldwide and Council member of the CBI, Don Hanson commented to Accountancy Age in 1986 when I launched The CharterGroup Partnership: “It’s no good being a mile wide and an inch high”.  I think it was intended as a disparaging remark intended to say that a large firm had much more to offer than medium-sized firms.

Perhaps the next best well-known collapse was Lehman Brothers. Barry Ritholtz wrote an excellent article last year entitled: “10 Things You May Not Have Known About Lehman Brothers”.  I can do no better than refer you to that article.

Moving onto the other well-known scandals and corporate failures:

  • Bank of Credit and Commerce International (BCCI): BCCI was founded in Karachi, Pakistan in 1972. It was a major international bank with 30,000 employees and had operations in 78 countries. It was the seventh largest private bank up to 1991 until it was closed following one of the largest scandals in the financial history. Allegations included: more than $13 billion funds unaccounted for.
  • Enron Corporation: Enron was founded in Houston, Texas and was one of the world’s leading electricity, natural gas, pulp and paper and communications company employing 22,000 people.  If failed in 2001: Allegations included: an accounting fraud which involved hiding liabilities and inflating profits.
  • WorldCom: WorldCom was a large US long distance phone company founded in 1983. In 2002, the company’s accounting scandal came into exposure. Its Chapter 11 bankruptcy filing is second only to that of Lehman Brothers in 2008. Allegations included: underreporting interconnection expenses by capitalising them on its balance sheet and several billions of cash was overstated as capital expenses rather than operating expenses. WorldCom is now known as MCI, Inc. and is part of the Verizon Communications group having emerged from bankruptcy in 2003.
  • Tyco International: Tyco international was a global manufacturing company founded in 1960. Its operational headquarters is in Princeton, New Jersey. With 118,000 employees. Allegations included: the CEO and former CFO being were accused of the theft of $600 million from the company in 2002.
  • Kanebo Limited: Kanebo Limited was a textiles/cosmetics group giant in Japan, established in 1887. It had 13,580 employees. In 2003 a major accounting fraud was revealed which was considered as the largest fraud in Japan. Allegations included: Inflating profits by $2 billion over a five-year period.
  • Waste Management, Inc: Waste Management, Inc was founded 1894 and was in Houston, Texas. This waste management and environmental services company had 50,000 employees and a network of 413 collection operations. Allegations included: inflating earnings by $1.7 billion understating the depreciation expense of the company.
  • Parmalat: Parmalat was founded in 1961 in Italy. This multinational Italian dairy and food corporation had more than 15,000 employees. This leading company collapsed in 2003 with an accounting scandal of $ 20 billion – considered as the biggest bankruptcy ever. Allegations included: investment disasters, non-existent cash in bank, fake transactions; hidden debts and the use of derivatives and accounting fraud to hide these facts.
  • Health South Corporation: Health South Corporation was founded in 1984 in Birmingham, Alabama, USA to offer healthcare services. The company had 22,000 employees and operated 100 Inpatient Rehabilitation Hospitals. Although the company’s accounts were falsified from 1996, the scandal came into exposure in 2003. Allegations included: overstating income by as much as 4,700 percent and $1.4 billion was inflated to meet the expectations of investors.
  • American International Group (AIG): AIG was founded in 1919 in Shanghai, China and went public in 1969. It is a major insurer based in New York City with 116,000 employees. Allegations included: lucrative payoff agreements, soliciting rigged bids for insurance contracts and inflated financial results by $2.7 billion in 2005.
  • Satyam Computer Services: Satyam Computer Services was founded in 1987 in Hyderabad, India to offer information technology services. With a network in 67 countries and 53,000 employees, an accounting scandal exploded in January. Allegations included: Inflating cash and bank balances of more than $1.5 billion overstating receivables by $100 million and understating liabilities by $250 million.

Wikipedia lists no less than 46 accounting scandals since 1980, here. Among them are:

Associated Electrical Industries (AEI): a British holding company formed in 1928 through the merger of the British Thomson-Houston Company and Metropolitan-Vickers electrical engineering companies. In 1967 AEI was acquired by GEC, to create the UK’s largest electrical group. The scandal followed the acquisition.

Pergamon Press: was an Oxford-based publishing house, founded by Paul Rosbaud and Robert Maxwell. It published scientific and medical books and journals.

Barlow Clowes International Ltd: Some 18,000 customers invested their money on the recommendation of intermediaries. The company was established as a ‘bond-washing’ operation, in which gilt-edged Government bonds were purchased and sold in order to create tax advantages. Whilst investors believed that their money had been invested risk-free, much of the money was diverted to fund the extravagant lifestyle of the company’s co-founder.

Polly Peck International (PPI): PPI was a small British textile company that expanded rapidly in the 1980s and became a constituent of the FTSE 100 Index before collapsing in 1990 with debts of £1.3bn. PPI was was one of several corporate scandals that led to the reform of UK company law, resulting in the early versions of the UK Corporate Governance Code.

I could go on. You get the picture, I am sure. For a murder, you need means, motive, and opportunity. Add to that greed plus a will to deceive and weak auditors as well as under-par regulators and you have the perfect combination for an accounting scandal to happen.

Martin Pollins
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