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Corporate accounting scandals

Article · January 2014

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Corporate Accounting Scandals
Cristo Cronje
(Skool vir Filosofie, NWU Potchefstroomkampus)
Background
N o business entity has ever been able
to afford an unreliable record of as-
sets and liabilities or receipts and
payments. Increases in wealth and pros-
perity in the past demanded a type of
agency reporting whereby agents who ac-
ted on behalf of their masters, using dele-
gated powers to run their affairs, had to
report on the running of their masters’ af-
fairs and the protecting of their interests,
for example the assets. According to the
wording of the gospel of Luke (16:2) “turn
in the account of your management [of my
affairs]” it would seem that reporting to
stakeholders on the state of affairs was
important even in Biblical times.
A historical perspective
In ancient civilisations, the collection of pu-
blic funds in the form of taxes gave rise to
a system of accounting and reporting.
These activities were not without their ob-
stacles, as most of the people were still il-
literate and transactions were recorded on
materials such as stone tablets. The recor-
ding process was difficult, took a long time
and, in most cases, money as a means for
measuring worth did not exist. In spite of
all the inconvenience, this information was
perceived to be so important that it was
preserved on tablets of stone. To ensure
maximum publicity, information and ac-
counts were engraved on stone and con-
served in strategic places.
In the year 1494, Luca Pacioli (Latinised
as Lucas Patiolus), a Franciscan monk,
mathematician and university teacher,
published his book Summa de Arithmetica,
Geometria Proportioni et Proportionalità in
Venice in which he explained the princi-
ples of the double-entry system, which had
been in use in Venice for more than two
Woord en Daad / Word and Action – Vol. 53 no. 423
Verkenning / Reconnaissance
hundred years. He was not the developer
of the double-entry bookkeeping system,
but documented the practices of his time.
The double entry system has been refer-
red to by Johann Wolfgang von Goethe as
“among the finest inventions of the human
mind”. It would seem that accounting was
invented with aims such as righteousness,
fairness, sustainability, frugality and ethics
in mind. Sadly however, throughout history
and even today these aims were not al-
ways achieved. Let us consider some of
the worst corporate accounting scandals
over the last decade-and-a-half.
Corporate accounting
scandals in the United
States and elsewhere over
the last decade-and-a-half
contributed largely to the
present global recession.
Corporate accounting scandals in the Uni-
ted States and elsewhere over the last de-
cade-and-a-half contributed largely to the
present global recession. Aspects such as
greed, dishonesty, conspiracy and the
misrepresentation of accounting figures
and disclosures are the main causes for
such scandals.
For information purposes, this article high-
lights the 10 worst global corporate ac-
counting scandals of the last decade-and-
a-half.
The 10 worst scandals
The following table reflects the 10 worst
corporate accounting scandals of the last
decade-and-a-half, stating the company,
2014 15
Verkenning / Reconnaissance
the year in which the scandal occurred, a indication of the role players who were in-
description of the scandal as well as an volved.

Company Year Scandal Role players

Waste 1998 Income was overstated by 1.7 billion The Chief Executive Offi-
Management dollars. The depreciation period for cer (CEO) of the compa-
their property, plant and equipment ny, top executives and
was falsely increased. auditors Arthur Andersen.

Enron 2001 Huge debts were not reported on the CEO and former CEO.
statement of financial position. Thou-
sands of employees and investors
lost their retirement benefits and in-
vestors lost 74 billion dollars. Many
employees became unemployed.

Worldcom 2002 Income was inflated with fraudulent The CEO of the company.
accounting entries. Assets were over-
stated by as much as 11 billion dol-
lars, by capitalising certain expenses.
This resulted in the unemployment of
30 000 employees and 180 billion
dollars in losses for investors.

Tyco 2002 Income was fraudulently overstated The CEO and the former
by 500 million dollars. The CEO and Chief Financial Officer
CFO stole 150 million dollars. (CFO).

Healthsouth 2003 Income was overstated by 1.4 billion The CEO of the company.
dollars to meet shareholder expecta-
tions. Junior employees were alle-
gedly instructed to overstate income
from 1996-2003.

Freddie Mac 2003 Income was intentionally misstated The President, CEO and
and understated by five billion dollars. ex-CFO of the company.

American 2005 Loans were recorded and reported as The CEO.

Insurance income. Accounting fraud of 3.9
Group billion dollars was committed.

Lehman 2008 Over 50 billion dollars in loans were Top executives and the
Brothers disguised as sales. company’s auditors Ernst
& Young.
Bernie 2008 Investors lost 64.8 billion dollars The CEO and his accoun-
Madoff through a Ponzi scheme. Investors tant.
were paid returns out of their own
money or that of other investors
rather than profits.

Saytam 2009 Income and cash was overstated by The Founder and Chair-
1.5 billion dollars. man of the company.

Source: http://www.accounting-degree.org/scandals/ (adapted)

16 Woord en Daad / Word and Action – Vol. 53 no. 423 2014

 Verkenning / Reconnaissance
In the case of the Waste Management Possible remedies for the
Scandal factors like greed, the misrepre-
sentation of accounting figures and disho-
future
nesty were some of the main causes. Au-
It would seem that accounting and organi-
ditors were also involved. As far as Enron
zations are in desperate need for a rene-
is concerned, again the misrepresentation
wed focus so that accounting reports could
of accounting figures, obfuscation and
faithfully represent credible information
greed led to the loss of investments and
through the use of financial reporting prac-
jobs. Unsound corporate disclosures led to
tices for the benefit of stakeholders. A re-
the Worldcom scandal fuelled by greed,
turn to the teachings of Scripture is neces-
resulting in the loss of investments and
sary, so that the following words of Luke
jobs. Unethical behaviour by Tyco’s mana-
16:1-2 will not be upon us. “Also Jesus
gement, dishonesty, greed and misrepre-
said to the disciples. There was a certain
sented accounting disclosures were the
rich man who had a manager of his estate,
main aspects responsible for this scandal.
and accusations [against this man] were
In respect of Healthsouth group pressure,
brought to him, that he was squandering
unethical behaviour, dishonesty and the
his [master’s] possessions. And he called
resultant misrepresentation of accounting
him and said to him: “What is this that I
information were the main causes for this
hear about you? Turn in the account of
scandal. The Freddie Mac case was cha-
your management [of my affairs], for you
racterised especially by dishonesty and
can be [my] manager no longer...” Conti-
the misstatement of accounting figures. In
nued strives are necessary for values such
the case of American Insurance, fraud,
as righteousness, fairness, sustainability,
corruption and greed led to the overstate-
frugality and an ethical mind.
ment of income, thereby misrepresenting
accounting figures. Again an overstate-
ment of revenue, inspired by greed and Conclusive remarks
dishonesty led to the bankruptcy of
Lehman Brothers. Auditors were also in- The reporting to stakeholders of the state
volved. In the case of Bernie Madoff, frau- of affairs was already a common practice
dulent activities and greed caused inves- in Biblical times. Ancient civilisations dee-
tors to lose their money. The Satyam med accounting information so important
scandal reflected aspects such as breach that it was recorded even on materials
of trust, conspiracy and the falsification of such as stone. In 1494 Luca Pacioli, a
accounting records. monk, published a book explaining the
double entry system. From this and other
The main causes books, it was evident that accounting had
aims in mind such as righteousness, fair-
ness, sustainability, frugality and an ethical
Continued strives are state mind. Sadly, accounting scandals
necessary for values such occurred through history. The 10 worst
corporate accounting scandals of the last
as righteousness, fairness, decade-and-a-half point out problems
sustainability, frugality and such as dishonesty, corruption, conspi-
racy, greed and the misrepresentation of
an ethical mind. accounting disclosures. These could be
viewed as the fruits of a ground motive an-
chored in greed and materialism. A rene-
From the above, factors such as greed,
wed focus on the teachings of scripture is
dishonesty, conspiracy, group pressure,
necessary for management and accoun-
corruption, fraud and the resultant misre-
tants to apply values such as righteous-
presentation of accounting figures emerge.
ness, fairness, sustainability, frugality and
Are these the fruits of materialism and
an ethical state of mind.
greed? Is the ground motive of these cor-
porate giants anchored in materialism and
greed? Are there possible remedies for the
future?

Woord en Daad / Word and Action – Vol. 53 no. 423 2014 17

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