Question

- Discuss, in detail, at least 2 major accounting frauds in the past 25 years.

Answer 1

The last two decades saw some of the worst accounting scandals in history. Billions of dollars were lost as a result of these financial disasters, which destroyed companies and ruined peoples’ lives. Many of these accounting scandals were a result of the excessive greed of a few individuals whose actions led to disastrous consequences which brought down whole companies and affected millions of people. In this article, we look at the 2 biggest accounting scandals in recent times.

Waste Management Scandal (1998)

Waste Management Inc. is a publicly-traded US waste management company. In 1998, the company’s new CEO, A Maurice Meyers, and his management team discovered that the company had reported over $1.7 billion in fake earnings.

The Securities and Exchange Commission (SEC) found the company’s owner and former CEO, Dean L Buntrock, guilty, along with several other top executives. In addition, the SEC fined Waste Management’s auditors, Arthur Andersen, over $7 million. Waste Management eventually settled a shareholder class-action suit for $457 million.

Enron Scandal (2001)

Enron Corporation was a US energy, commodities, and services company based out of Houston, Texas. In one of the most controversial accounting scandals in the past decade, it was discovered in 2001 that the company had been using accounting loopholes to hide billions of dollars of bad debt, while simultaneously inflating the company’s earnings. The scandal resulted in shareholders losing over $74 billion as Enron’s share price collapsed from around $90 to under $1 within a year.

An SEC investigation revealed that the company’s CEO, Jeff Skillings, and former CEO, Ken Lay, had kept billions of dollars of debt off the company’s balance sheet. In addition, they had pressured the company’s auditing firm, Arthur Andersen, to ignore the issue.

The two were convicted, largely based on the testimony of former Enron employee, Sherron Watkins. However, Lay died before serving time in prison. Jeff Skillings was sentenced to 24 years in prison. The scandal led to the bankruptcy of Enron and dissolution of Arthur Andersen.

After the fact, the convictions were as controversial as the company’s collapse had been shocking, as prosecutor Andrew Weissman indicted not just individuals, but the entire accounting firm of Arthur Andersen, effectively putting the company out of business. It was little consolation to the 20,000 employees who had lost their jobs when the conviction was later overturned.

ADDED ONE MORE EXTRA REFERENCE

WorldCom Scandal (2002)

WorldCom was an American telecommunications company based out of Ashburn, Virginia. In 2002, just a year after the Enron scandal, it was discovered that WorldCom had inflated its assets by almost $11 billion, making it by far one of the largest accounting scandals ever.

The company had underreported line costs by capitalizing instead of expensing them and had inflated its revenues by making false entries. The scandal first came to light when the company’s internal audit department found almost $3.8 billion in fraudulent accounts. The company’s CEO, Bernie Ebbers, was sentenced to 25 years in prison for fraud, conspiracy, and filing false documents. The scandal resulted in over 30,000 job losses and over $180 billion in losses by investors.