What happened in corporate accounting scandals?
What happened in corporate accounting scandals?
When a corporation deliberately conceals or skews
information to appear healthy and successful to its shareholders, it has
committed corporate or shareholder fraud.
Corporate fraud may involve a few individuals or many,
depending on the extent to which employees are informed of their company's
financial practices. Directors of corporations may fudge financial records or
disguise inappropriate spending.
Fraud committed by corporations can be devastating, not only
for outside investors who have made share purchases based on false information,
but for employees who, through 401ks, have invested their retirement savings in
company stock.
Some recent corporate accounting scandals have consumed the
news media and ruined hundreds of thousands of lives of the employees who had
their retirement invested in the companies that defrauded them and other
investors. The nuts and bolts of some of these accounting scandals are as
follows:
WorldCom admitted to adjusting accounting records to cover
its operation costs and present a successful front to shareholders. Nine
billion dollars in discrepancies were discovered before the telecom corporation
went bankrupt in July of 2002.
Read Also: What Is Accounting Anyway?
One of the hidden expenses was $408 million given to Bernard Ebbers (WorldCom's CEO) in undisclosed personal loans.
At Tyco, shareholders were not informed of the $170 million
in loans that were taken by Tyco's CEO, CFO, and chief legal officer. The
loans, many of which were taken interest free and later written off as
benefits, were not approved by Tyco's compensation committee.
Kozlowski (former CEO), Swartz (former CFO), and Belnick
(former chief legal officer) face continuing investigations by the SEC and the
Tyco Corporation, which is now operating under Edward Breen and a new board of
directors.
At Enron, investigations against uncovered multiple acts of
fraudulent behavior. Enron used illegal loans and partnerships with other
companies to cover its multi-billion dollar debt.
It presented erroneous accounting records to investors, and
Arthur Anderson, its accounting firm, began shredding incriminating
documentation weeks before the SEC could begin investigations.
Money laundering, wire fraud, mail fraud, and securities
fraud are just some of the indictments directors of Enron have faced and will
continue to face as the investigation continues.
What is accounting fraud?
Accounting fraud is a deliberate and improper manipulation
of the recording of sales revenue and/or expenses in order to make a company's
profit performance appear better than it actually is. Some things that
companies do that can constitute fraud are:
--Not listing prepaid expenses or other incidental assets
--Not showing certain classifications of current assets and/or liabilities
--Collapsing short- and long-term debt into one amount.
Over-recording sales revenue is the most common technique of
accounting fraud. A business may ship products to customers that they haven't
ordered, knowing that those customers will return the products after the end of
the year.
Until the returns are made, the business records the
shipments as if they were actual sales. Or a business may engage in channel
stuffing.
It delivers products to dealers or final customers that they
really don't want, but business makes deals on the side that provide incentives
and special privileges if the dealers or customers don't object to taking
premature delivery of the products.
A business may also delay recording products that have been
returned by customers to avoid recognizing these offsets against sales revenue
in the current year
The other way a business commits accounting fraud is by
under-recording expenses, such as not recording depreciation expense. Or a business may choose not to record all of
its cost of goods sold expense fore the sales made during a period.
This would make the gross margin higher, but the business's
inventory asset would include products that actually are not in inventory
because they've been delivered to customers.
A business might also choose not to record asset losses that
should be recognized, such as uncollectible accounts receivable, or it might
not write down inventory under the lower of cost or market rule.
A business might also not record the full amount of the
liability for an expense, making that liability understated in the company's
balance sheet. Its profit, therefore, would be overstated.
Who uses forensic accountants?
Forensic accounting financial investigative specialists work
with financial information for the purpose of conveying complicated issues in a
manner that others can easily understand.
While some forensic accountants and forensic accounting
specialists are engaged in the public practice of forensic examination, others
work in private industry for such entities as banks and insurance companies or
governmental entities such as sheriff and police departments, the Federal
Bureau of Investigation (FBI), and the Internal Revenue Service (IRS).
The occupational fraud committed by employees usually
involves the theft of assets.
Embezzlement has been the most often committed fraud for the last 30
years.
Employees may be involved in kickback schemes, identity
theft, or conversion of corporate assets for personal use.
The forensic accountant couples observation of the suspected
employees with physical examination of assets, invigilation, inspection of
documents, and interviews of those involved.
Experience on these types of engagements enables the
forensic accountant to offer suggestions as to internal controls that owners
could implement to reduce the likelihood of fraud.
At times, the forensic accountant may be hired by attorneys
to investigate the financial trail of persons suspected of engaging in criminal
activity. Information provided by the
forensic accountant may be the most effective way of obtaining
convictions.
The forensic accountant may also be engaged by bankruptcy
court when submitted financial information is suspect or if employees
(including managers) are suspected of taking assets.
Opportunities for qualified forensic accounting professionals abound in private companies.
CEOs must now certify that their financial statements are
faithful representations of the financial position and results of operations of
their companies and rely more heavily on internal controls to detect any
misstatement that would otherwise be contained in these financials.
In addition to these activities, forensic accountants may be asked to determine the amount of the loss sustained by victims, testify in court as an expert witness and assist in the preparation of visual aids and written summaries for use in court. (*)