There are two types of dishonesty.

One is the type of dishonesty that invokes the image of a burglar looting a gas station or a bank. As they
cruise by, they consider how much money is there, who might be around to stop them and what punishment
they may face if caught. On the basis of this cost-benefit calculation, they decide whether to rob the place
or not.
Then there is the second type of dishonesty. This is the kind committed by people who generally consider
themselves honest. This is evident from the figures from year 2004 of USA, for a year, employees’ theft
and fraud at workplace was estimated to be about $600 billion. This figure is dramatically higher than the
combined financial cost of robbery, burglary, theft totaling about $16 billion.
Xerox
it improperly classified over $6 billion in revenue, leading to an overstatement of earnings by nearly $2
billion. The SEC had charged the producer of copiers and related services with accounting manipulations.
It was estimated at the time, however, that the amount involved was about half that which is now stated, or
about $3 billion. A settlement was eventually reached that included a $10 million fine, as well as an
agreement to conduct a further audit. It was this audit that produced the $6 billion figure.
There were two basic manipulations that formed the basis for the SEC investigation. The first was the so-
called “cookie jar” method. This involved improperly storing revenue off the balance sheet and then
releasing the stored funds at strategic times in order to boost lagging earnings for a particular quarter. This
is a widely used manipulation. Earlier this year Microsoft settled an investigation by the SEC into similar
practices at the software giant.
The second method—and what accounted for the larger part of the fraudulent earnings—was the
acceleration of revenue from short-term equipment rentals, which were improperly classified as long-term
leases. The difference was significant because according to the Generally Accepted Accounting Principles
(GAAP)—the standards by which a company’s books are supposed to be measured—the entire value of a
long-term lease can be included as revenue in the first year of the agreement. The value of a rental, on the
other hand, is spread out over the duration of the contract.

The effect of the manipulation was that Xerox could count as earnings what was essentially future revenue.
This boosted short-term profits and allowed the company to meet profit expectations in 1997, 1998 and
1999, though it had the effect of reducing earnings during the past two years. In 1998 Xerox reported a
pretax income of $579 million, while it should have reported a loss of $13 million. On the other hand, the
$137 million loss for 2001 will become a $365 million gain after the manipulation is reversed. The $1.9
billion total that will now be subtracted from revenue reported from 1997-2001 will be added to future
reports.
Why carry out these manipulations when the extra money earned in one year would have to be
subtracted from future years? This was necessary because corporations are under enormous pressure
from Wall Street investors to keep up short-term earnings. Otherwise, their share values will drop, which
not only threatens companies heavily reliant on share values to finance debt, but also has financial
consequences for top executives, whose astronomical incomes are bound up with stock options.
The SEC investigation noted that “compensation of Xerox senior management depended significantly on
their ability to meet [earnings] targets.” Because of the accounting manipulations, top Xerox executives
were able to cash in on stock options valued at an estimated $35 million.
Xerox stock rose to a peak of $60 a share in mid-1999, when the company was carrying out the accounting
fraud. It has since declined sharply and is now trading at about $7.
Enron- Classic example of GREED GONE WRONG
Energy trader and supplier

CEO Jeffrey Skilling had a way of hiding the financial losses of the trading business and other operations
of the company; it was called mark-to-market accounting. This is a technique used where you measure the
value of a security based on its current market value, instead of its book value.

In Enron's case, the company would build an asset, such as a power plant, and immediately claim the
projected profit on its books, even though it hadn't made one dime from it. If the revenue from the power
plant was less than the projected amount, instead of taking the loss, the company would then transfer the
asset to an off-the-books corporation, where the loss would go unreported. This type of accounting enabled
Enron to write off unnprofitable activities without hurting its bottom line.

The mark-to-market practice led to schemes that were designed to hide the losses and make the company
appear to be more profitable than it really was. To cope with the mounting liabilities, Andrew Fastow, a
rising star who was promoted to CFO in 1998, came up with a deliberate plan to make the company appear
to be in sound financial shape, despite the fact that many of its subsidiaries were losing money.

A major player in the Enron scandal was Enron's accounting firm Arthur Andersen LLP and partner David
B. Duncan, who oversaw Enron's accounts. As one of the five largest accounting firms in the United States
at the time, Andersen had a reputation for high standards and quality risk management.

AOL
The main accusations in the lawsuits can be split into two categories: revenue claimed to be from
advertising that came from elsewhere (such as legal settlements), and revenue claimed to be from
advertising that was not revenue at all (such as barter deals with ads swapped between Internet
sites).
For Example:
AOL had purchased a company, MovieFone, which held a $23 million legal claim over its former parent,
the British conglomerate Wembley, PLC. Instead of going to court to force Wembley to pay, AOL struck
a deal in which the British company would buy a more or less equivalent amount of advertising on AOL.
Halliburton
Kellogg Brown & Root, Halliburton's engineering and construction unit, inflated its financial results by
overbilling for services, overstating its accounts receivable due from customers and understating accounts
payable owed to vendors. The filing also noted that one former employee in the accounting department said
superiors had told her to do ''whatever it took'' to make projects appear profitable and to meet Wall Street
estimates for the company's earnings.
Kmart
Kmart was forced into bankruptcy in 2002. During bankruptcy investigations it became apparent that there
had been some “creative accounting” going on that had inflated revenue figures by $42.3 million for the
second quarter of 2001 (findarticles.com, Feds Indict). This lead to identifying similar discrepancies (more
than $24 million) in the third and forth quarters as well (sptimes.com).

The improperly reported earnings were in the form of vendor “promotional allowances” (nytimes.com).
These were all fees paid by Kmart vendors to secure shelf space, fund advertizing and keep their own
competition off Kmart's shelves. They were recorded incorrectly, according the the legal indictment against
Kmart, because they were “subject to a pay-back provision and should have been amortized over the life of
the contract” (findarticles.com, Feds Indict). However, by recording them as earnings in a single quarter,
Kmart was able to inflate its profit by almost 10%. That was very attractive to the new CEO and others in
management who wanted to see Kmart's stock prices raise or at least quit falling.

The fraud is fairly straightforward in this case because of the way the transaction was treated. Although the
revenue was received in the quarter it was reported, according to GAAP (Burman & Knight, pg 59), if the
company will receive benefit for the revenue for an extended time, it must be recognized over time in the
form of amortization.
Nortel – Telephone Equipment Maker

In late 2000, Beatty and Pahapill broke US accounting rules to bring forward revenue recognition for the
sole purpose of meeting market expectations."However, because their efforts pulled in more revenue than
needed to meet those targets, Dunn, Beatty and Pahapill selectively reversed certain revenue entries during
the 2000 year-end closing process," the SEC said. Net result: "Nortel's Q4 revenues was inflated by $1bn,
and the company met, but did not exceed Wall Street targets."

In 2002 and early 2003, the execs illegally set aside two pots of excess reserves, of $300m and $151m to
smooth over gaps between company performance and Wall Street expectations. Under US company law,
Nortel should have declared this money as income. In the first and second quarters of 2003, Dunn, Beatty
and Gollogly released $490m from secret funds, "specifically to boost earnings, fabricate profits and pay
bonuses," the SEC charges.

"These efforts turned Nortel's first quarter 2003 loss into a reported profit under US GAAP, which allowed
Dunn to claim that he had brought Nortel to profitability a quarter ahead of schedule. In the second quarter
of 2003, their efforts largely erased Nortel's quarterly loss and generated a pro forma profit. In both quarters,
Nortel posted sufficient earnings to pay tens of millions of dollars in so-called "return to profitability"
bonuses, largely to a select group of senior managers."

Now for a punchy quote from Christopher Conte, an associate director of the SEC's division of enforcement:
"The defendants charged today all disregarded accounting principles and disclosure requirements designed
to provide investors with a clear and accurate picture of a company's performance. Investors were misled
for extended periods of time about the health and stability of Nortel's operations. Further, these defendants
all received significant compensation, in some cases in the millions of dollars, while they were
manipulating Nortel's financial results. In some cases, these individuals received such compensation
only because they manipulated Nortel's financial results."

Satyam
It is about corporate governance and fraudulent auditing practices allegedly in connivance with auditors
and chartered accountants. The company misrepresented its accounts both to its board, stock exchanges,
regulators, investors and all other stakeholders.
It is a fraud, which misled the market and other stakeholders by lying about the company’s financial health.
Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly
inflated to show the company in good health.
7500 Fake invoices raised, 5352Rs Crore fake revenue reported between April 2002 to Sept 2008.
A web of 356 investment companies was used to allegedly divert funds from Satyam. One such company,
with a paid up capital of Rs 5 lakh, had made an investment of Rs 90.25 crore and received unsecured loans
of Rs 600 crore
The cash so raised was used to purchase several thousands of acres of land across Andhra Pradesh to ride
a booming realty market. As Raju put it, "it was like riding a tiger, not knowing how to get off without
being eaten."

Importance of Ethics
Importance of Ethics- Adam smith reminded us that Honesty is really the best policy. Let us see at
those societies without trust to realise the importance of Ethics. Iran is a nation stricken by distrust.
Business there lacks a platform of trust. Because of this no one pays in advance, no one offers credit and
no one is willing to take risks. People hire within their families where some level of trust exists.

Two experiments of cheating,

DAN Ariely, a professore at Duke university conducted an experiment to check the integrity of so
called honest people,students at MIT and Harvard.
People cheat when they have chance to cheat. But if we are reminded of morality before the moment we
are tempted, then we are much more likely to be honest.

Let’s remember that lawyers do take an oath when they are admitted to bar, as doctors take when they enter
their profession. But occasional swearing of oaths and occasional statements of adherence to rules are not
enough.
Importance of Ethics- Adam smith reminded us that Honesty is really the best policy. Let us see at
those societies without trust to realise the importance of Ethics. Iran is a nation stricken by distrust.
Business there lacks a platform of trust. Because of this no one pays in advance, no one offers credit and
no one is willing to take risks. People hire within their families where some level of trust exists.