click for all 10 scandals

Full graphic after the jump

 


Source: Accounting-Degree.org

Category: Corporate Management, Crony Capitalists, Digital Media, Legal

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8 Responses to “10 Worst Corporate Accounting Scandals”

  1. ConscienceofaConservative says:

    With the exception of Enron’s Arthur Anderson, the auditor is never culpable.

  2. Internet Tourettes says:

    They missed some real good ones…. How ’bout Lucent recognizing revenue on product sitting in tractor trailers in their parking lot. The use of percent complete accounting at GE under Jack Welch to smooth revenue gaps (every quarter was “1 cent over estimate”)! Qwest miscategorizing onetime IRU revenue as recurring revenue (Nacchio BoP# 33973-013)! But I don’t think that Madoff should be on the list in that he just committed an outright fraud that was not dependent on accounting principals.

  3. hammerandtong2001 says:

    That’s “American International Group” – not “American Insurance Group.”

    And, on this one, I believe the volume of credit default insurance issued skyrocketed after Greenberg left, as apart of the initial accounting charges which were brought forward by the illustrious NYS Attorney General: Elliot Spitzer. It was that CD insurance which sunk the firm forcing the bailout.

    .

  4. farfetched says:

    Yet Rudy Giuliani was on Bloomberg telling viewers that it’s “difficult” to prosecute these crimes. Yes, he said it with as straight a face as he is capable of making. It’s only difficult when it’s your friends, employers and campaign contributors, right Rudy?

  5. constantnormal says:

    What about the neutering of FASB 157?

    Surely the Govporation counts as a corporation too …

  6. raholco says:

    Ah yes, the obligatory mention of SarbOx. Think Dimon will ever face that over the London Whale debacle?

  7. Crocodile Chuck says:

    Satyam was in India; and throw out Madoff: with the exception of Waste Management, all of these were prosecuted by the Bush Administration. Where’s Inspector Plod under Obama? Asleep at the switch?

  8. rjensen65 says:

    Barry is a financial analyst with a political science background [BR: Actually, I am an attorney who has a background in Math & Sciences] As an accounting professor I claim that he missed some of the biggest accounting scandals even if we leave out the really big scandals before 1950 (e.g, leave out the South Sea Scandal of monumental proportion).

    There are really two tacks that one can take in the definition of “Corporate Accounting Scandals.” One is the size of the “theft” resulting from accountant and/or auditor negligence. Barry probably had this in mind, but he missed a few such as the Franklin Raines earnings management scandal at Fannie Mae.

    The other tack is gross accountant and/or audit negligence even when the size of the theft is somewhat smaller for a worse crime. For example, there was enormous accountant and/or auditor negligence when pilfered $53 million from Dixon, Illinois —
    “Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison,” by Casey Glynn, CBS News, February 14, 2013 —
    http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/

    There are many such thefts by accountants that are bad as it gets even if the amounts they stole is are not in the record books.

    Here are some examples of accounting examples Barry should’ve also considered::
    When KPMG Got Fired
    Fannie Mae may have conducted the worst earnings management scheme in the history of accounting.
    You can read the following at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
     

    . . . flexibility also gave Fannie the ability to manipulate earnings to hit — within pennies — target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.

    Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie’s executives — whose bonus plan is linked to earnings-per-share — to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull’s-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.

    That same year Fannie installed software that allowed management to produce multiple scenarios under different assumptions that, according to a Fannie executive, “strengthens the earnings management that is necessary when dealing with a volatile book of business.” Over the years, Fannie designed and added software that allowed it to assess the impact of recognizing income or expense on securities and loans. This practice fits with a Fannie corporate culture that the report says considered volatility “artificial” and measures of precision “spurious.”

    This disturbing culture was apparent in Fannie’s manipulation of its derivative accounting. Fannie runs a giant derivative book in an attempt to hedge its massive exposure to interest-rate risk. Derivatives must be marked-to-market, carried on the balance sheet at fair value. The problem is that changes in fair-value can cause some nasty volatility in earnings.

    So, Fannie decided to classify a huge amount of its derivatives as hedging transactions, thereby avoiding any impact on earnings. (And we mean huge: In December 2003, Fan’s derivatives had a notional value of $1.04 trillion of which only a notional $43 million was not classified in hedging relationships.) This misapplication continued when Fannie closed out positions. The company did not record the fair-value changes in earnings, but only in Accumulated Other Comprehensive Income (AOCI) where losses can be amortized over a long period.

    Fannie had some $12.2 billion in deferred losses in the AOCI balance at year-end 2003. If this amount must be reclassified into retained earnings, it might punish Fannie’s earnings for various periods over the past three years, leaving its capital well below what is required by regulators.
    In all, the Ofheo report notes, “The misapplications of GAAP are not limited occurrences, but appear to be pervasive . . . [and] raise serious doubts as to the validity of previously reported financial results, as well as adequacy of regulatory capital, management supervision and overall safety and soundness. . . .” In an agreement reached with Ofheo last week, Fannie promised to change the methods involved in both the cookie-jar and derivative accounting and to change its compensation “to avoid any inappropriate incentives.”

    But we don’t think this goes nearly far enough for a company whose executives have for years derided anyone who raised a doubt about either its accounting or its growing risk profile. At a minimum these executives are not the sort anyone would want running the U.S. Treasury under John Kerry. With the Justice Department already starting a criminal probe, we find it hard to comprehend that the Fannie board still believes that investors can trust its management team.

    Fannie Mae isn’t an ordinary company and this isn’t a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie’s implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That’s quite a confidence game — and it’s time to call it.

    Wikipedia has a listing of major accounting scandals that I don’t think Barry looked at when listing his “10 Worst Corporate Accounting Scandals” —
    http://en.wikipedia.org/wiki/Accounting_fraud#List_of_major_accounting_scandals

    And if we move beyond accounting per se, the recent LIBOR scandals are bigger than all of his “10 Worst” combined —
    http://www.trinity.edu/rjensen/FraudRotten.htm