What is an Accounting Scandal?

Whenever large sums of money, large corporations, or financial misrepresentation is involved and accountants help in the unethical or unlawful practices, an accounting scandal is underway. Most people, and accountants, view their work as a highly-ethical profession. Forensic accountants are experts in discovering fraud and identifying the culprits when financial wrongdoing is suspected. More than just financial mismanagement, scandals involving accountants can destroy companies and result in long prison terms.

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Cressey’s Fraud Triangle

Donald Cressey was a sociologist and criminologist who studied organized crime, embezzlers, and financial criminals in the 1940s. Cressey’s research allowed him to come up with the “Fraud Triangle,” which stated that three factors had to be present for financial crimes to occur: opportunity, pressure, and rationalization. According to Marion Hecht and MaryEllen Redmond, frauds may start small, but they soon spiral out of control, including major thefts and scandals at WorldCom and Enron.

Corporate Money Scandals

All corporate or business financial scandals begin with falsified financial statements. Executives rely on accountants to conceal misappropriated funds, overstate profits, or falsify sales to cover up wrongdoing and theft. In the 2001 Enron debacle, thousands of employees lost their retirement funds, thousands more lost their jobs, and investors lost $74 billion. Jeff Skilling and Ken Lay, both chief executives, were sentenced to prison, although Lay died before he served his term. Then-famous accountants Arthur Andersen falsified Enron’s financial records, enabling the executives’ fraud. In 2002, the Worldcom scandal eclipsed Enron. Worldcom investors lost more than $180 billion, while 30,000 employees lost their jobs.

Investment Scandals and Schemes

The most famous money scandal of all didn’t involve a corporation, but an investment guru who bilked his customers out of nearly $65 billion. In 2009, Bernard Madoff was sentenced to 150 years in prison, and ordered to pay $170 billion in restitution to the customers he had cheated. He invested none of their money, and merely used the money from new investors to pay older ones in a classic “Ponzi” scheme, named after the original fraudster who came up with the tactic.

International Scandals

Many of the most famous corporate and finance crimes occurred in the 2000s, but new wrongdoing continues to emerge. In 2016, Japanese manufacturer Toshiba overstated its profits by over 150 billion yen over the course of several years, leading to the resignation of its President and other top executives. Camera manufacturer Olympus was snared in a $1.7 billion fraud in 2011, and British retailer Tesco overestimated its profits by almost 300 million UK pounds.

London’s newspaper The Guardian reports that the biggest collective financial scandals were the ones leading up to the international economic crisis of 2007 and 2008. In the United Kingdom, the Royal Bank of Scotland and Lehman Brothers were found to be “financially incompetent,” while in the United States, AIG and Lehman Brothers also experienced severe losses. Many of the largest financial institutions such as Bank of America and Chase assumed responsibility for and merged with smaller, fraud-ridden lenders like Countrywide and IndyMac Bank. At this level, accounting scandals can become international financial crises.