Accounting is boring… or is it?!
Accounting is often criticized as being a dry or boring profession. However, when done poorly or fraudulent practices are involved, accountancy sits at the heart of many of the most notorious business scandals and collapses in history.
Within the last 10 years alone, many huge companies – often household names – have been guilty of “creative accounting”, starting with top executives and carrying on all the way down to managers and employees.
The reasons for doing so are varied, but it is often the incentive for personal gain that drives people in all levels of accounting in the organisation to falsify or manipulate financial information.
Individual penalties, including long prison sentences, for many types of fraud have increased due to high profile scandals in recent years. In one example, Bernhard Madoff received a 150 year sentence after his investment company was revealed to be a giant Ponzi scheme.
Some of these scandals were contributing factors in worldwide events such as the recent Global Financial Crisis, the effects of which are still being felt by many people today.
Notable recent examples include:
|Autonomy Corporation||2012||United States||Subsidiary of Hewlett Packard|
|Olympus Corporation||2011||Japan||Tobashi scheme (loss hiding by investment firm)|
|Sino-Forest Corporation||2011||Canada-China||Inflating assets and earnings|
|Lehman Brothers||2010||United States||Failure to report Repo 105 transactions to investors|
|Satyam Computer Services||2009||India||Falsifying accounts|
|Anglo Irish Bank||2008||Ireland||Hidden loans|
|Bernhard L. Madoff Investment Securities LLC||2008||United States||Ponzi scheme|
Australia has not been immune and most people would recall the HIH Insurance and One.Tel Limited scandals that emerged last decade. Some types of accounting scandals include, but are not limited, to:
There are many types of accounting fraud, perhaps the most common being asset misappropriation through manipulating a variety of accounts or accounting processes.
- Payroll fraud – occurs when payroll staff create dummy workers who then receive regular pay from the organisation.
- Tax fraud – misrepresentation of profits by the directors of an organisation in order to avoid paying taxes to the relevant tax authority.
- Accounts receivable fraud – diverting funds or cheques that are meant to go to the company to an employee’s personal account.
- Invoice fraud – when employees duplicate their employer’s invoice and issue them in the name of a real customer or service provider
- Accounts payable fraud – where the fraudulent employee creates a dummy or shill company and then uses it to make claims for payment from their employer for goods and services that were never delivered.
- Financial statement fraud – a high level fraud normally committed by top level managers who wish to present a failing company as profitable. However, they may also under represent the value of a company to make it look like it is failing and make it easier to buy out in return for a kickback from the purchaser in the form of a golden handshake; often used when a publicly owned company is privatised as it allows the purchaser to buy it cheap, ‘fix it’ and resell for a large profit a few years later.
Accounting fraud has been at the heart of some of the biggest collapses in recent history, noticeably the Enron accounting scandal, which was caused by a variety of shady dealings, including the concealment of billions in debt from failed projects and deals. The bankruptcy of Enron also caused the defacto dissolution of Arthur Andersen – Enron’s auditors – when the depth of their involvement in the fraud was revealed.
The Ponzi scheme was named after Charles Ponzi, who became notorious in 1920 for using this technique. He wasn’t the first perpetrator and novels from the 1800s describe the practice, however the sums of money he garnered in his operation were so great that he became notorious throughout the United States when the size of his scheme was revealed.
The scheme involves paying returns to investors out of their own investment money or money paid by subsequent investors, rather than from real profits earned by the organisation or individual running the undertaking.
It is typified by extraordinary returns promised to investors, the source of which is attributed to vague sources such as “offshore investments”. New investors are attracted by these abnormally high or unusually consistent returns and join the scheme causing a cascade effect, whereby their money is used to pay returns to existing investors.
It relies on an ever-increasing flow of money from new investors to continue the high returns or it will inevitably collapse because any earnings are less than the payments to investors.
Bernhard L. Madoff Investment Securities LLC was the biggest Ponzi scheme in history, with almost $65 billion (including fabricated gains) missing from client accounts with an estimated actual loss to investors of $18 billion.
In many cases, accounting fraud is discovered through a small error in the books that turns out to be the tip of the iceberg in a much larger scandal. In these cases specialists are often brought in to uncover the full extent of the fraud and damage to the company.
These days forensic accounting has developed as the specialty practice of analysing and commenting on the work of other professionals, often for use in the court of law where they may also have to give expert evidence at an eventual trial.
Forensic accountants are also engaged for economic damages calculations from tort or breach of contract, securities fraud, business valuations, in cases of bankruptcy, insolvency, and reorganisation and many other situations. They may also be involved in recovering the proceeds of crime or confiscation of funds in proceedings relating to assumed proceeds of crime or money laundering.