Accounting scandals

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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— (Morgan Stanley), 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.. Several 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 dollars USD.

Contents

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Links to Scandals

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Big Four major audit firms

(Audit firms are listed, followed by select clients ensnarled by accounting scandals)

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Predecessor and other U.S. audit firms

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Accounting scandals by year first reported

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2002

(Client companies are listed, followed by their prominent executives, known to be culpable in committing fraud)

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Later scandals

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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 is a general perception that there are other accountancy scandals waiting to be uncovered, which has contributed to the 2002 stock market downturn.

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 have reignited the debate over the relative merits of US GAAP, with its rules-based approach to accounting, versus International Accounting Standards and UK GAAP, which favour a principles-based approach. The Financial Accounting Standards Board has announced it intends to introduce more principles-based standards. More radical means of accounting reform have been proposed but so far have very little support.

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.

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See also

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External links

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Further reading

  • John R. Emshwiller and Rebecca Smith, 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America or Infectious Greed, HarperInformation, 2003, ISBN 0060520736
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