In a globalized economy, even minor fluctuations in investment trends can make a difference. Nothing can lead to a fluctuation in investment trends like a large-scale corporate accounting scandal can. The larger the size of the company or the corporation that is responsible for producing the scandal, the greater the potential scale of the scandal. And of course, the greater the size of the scandal, the greater the scale of influence it has over an intertwined, globalized economy.
These scandals represent the worst aspects of corporate affairs. But, these scandals also stand to remind us that there’s always a strict penalty for such scandals. After all, all the investors, all the stakeholders, and all the laid-off employees deserve justice for what they have suffered.
There’s a chance that you’ve already heard about this one. It has been labeled as one of the smartest accounting scandals in recorded history. The culprit was Enron Corporation, the result of a merger between two established players in the energy business – Houston Natural Gas and InterNorth. It was a tremendously gutsy scandal too, considering they were falsifying their balance sheet to an insane tune of over 70 billion dollars. CEO Jeff Skilling spent 24 years in prison after they were eventually turned in by their own high ranking personnel, Sherron Watkins. But, that didn’t happen before several of their employees lost their jobs. Other casualties included their shareholders, who lost an approximate 74 billion dollars, and their investors and employees, who lost their retirement accounts.
New Jersey-based Tyco International, headed by CEO Dennis Kozlowski and CFO Mark Swartz found themselves in the middle of a gigantic financial scandal when they were found guilty on multiple counts. First, it was because they embezzled money (to the tune of $150 million) from their own company to fund and finance their excessive splurging and extravagant lifestyle. Second, it was because it had been proven that they inflated the income of their company by an approximate $500 million. They were caught, at the end, when their dubious accounting practices were uncovered. Kozlowski and Swartz spent jail time worth 8 and 25 years respectively, while the company had to repay their shareholders a sum of $2.92 billion.
The shareholders certainly show more confidence in your stock when you continue to show steady earnings. While most companies are aware of this, not all companies then proceed to display fake earnings (to the sum of $1.7 billion) by obviously unethical means. These not-so-creative ways of displaying additional income were through extending the depreciation period of their many assets, capitalizing their list of expenses whenever possible, and by deliberately not recording the relevant liabilities they’re obligated to record. As a penalty for this accounting scandal, the company ended up paying up $457 million as settlement sum and $7 million as a personal fine to CEO Arthur Andersen.
2002 was sure a year of some high-profile accounting scandals. Naturally, the Congress was forced to implicate regulations to businesses in the wake of the Worldcom Scandal and the Enron Corporation Scandal a year prior. The standard tactic of using fake accounting transactions helped CEO Ebbers inflate their sum of assets by a remarkable $11 billion. The aftermath of the scandal was that 30,000 employees lost their jobs and stakeholders lost a stunning $180 billion. It must be said though, that not within WorldCom was rotten. After all, it was their own internal auditing team that was responsible for uncovering the fake accounting entries, discovering a potential fraud, and notifying the same to the SEC. As a result of the scandal, Ebbers lost his job and was sentenced 25 years in prison time for fraud and handing over false documents over to the concerned regulators.
When you make the cardinal mistake of selling off a tremendous amount of stock just a day prior to revealing a substantial loss, you can guarantee you’d have attracted the attention of the authorities. The darker aspect of the transaction remains that the stocks were only up because they asked their own employees to fake transactions to inflate the financial health (by $1.4 billion) of the company over a seven-year period. This was done to please the shareholders. Now, while CEO Richard Scrushy was acquitted of 36 charges relating to fraud, he was charged for bribing the Alabama Governor. The scandal cost him $2.9 billion to reverse the fraud suffered by the shareholders alongside jail time that lasted seven years.
Here’s one of the biggest accounting scandals in the history of recorded trade and commerce. This global financial services firm went on to fake the nature of its transaction to make a $50 dollar loan to seem like a $50 billion dollar sale, a classic case of “REPO 105”, a shabby accounting gimmick. The scandal was only exposed when the company went bankrupt, but Lehmann Brothers escaped prosecution owing to a lack of evidence. As a result of this bankruptcy, their investors ended up losing money. Funnily enough, Lehmann Brothers Inc. was named as the #1 most admired company in 2007 by Fortune Magazine, just a year prior to this accounting scandal.
While these accounting scandals are tremendous in size and led to millions and billions of dollars of combined losses for stakeholders, they ultimately stand to remind us how important it is to be ethical with your accounting. For those who think small accounting scandals that are relatively smaller in scale go unnoticed simply underestimate the Canadian Revenue Agency. To ensure your accounting functions are handled with ease and grace, reach out to Altitude Accounting for their professional accounting services.
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