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Tax Tip of the Week | No. 462 | The 10 Worst Corporate Accounting Scandals of all Time May 30, 2018

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Tax Tip of the Week | May 30, 2018 | No. 462 | The 10 Worst Corporate Accounting Scandals of all Time

Let’s take a break from the new tax law this week. Instead, let’s go back into the past and revisit some of the HUGE accounting scandals. For those who fail to learn from history are doomed to repeat it.

I have focused for the most part on only three facets of these scandals – 1) How they did it, (2) How they got caught, and 3) Fun facts. Not sure what the author defines as “Fun” fits my definition. The word ”Interesting” at least in my humble opinion may have been a better choice. I will let you be the final judge. The top 10 accounting scandals of the last twenty or so years follow:

Waste Management Scandal (1998)

•    How they did it:  The company allegedly falsely increased the depreciation time length for their property, plant and equipment on the balance sheets.
•    How they got caught: A new CEO and management team went through the books.
•    Fun fact:  After the scandal, new CEO A. Maurice Meyers set up an anonymous company hot-line where employees could report dishonest or improper behavior.

Enron Scandal (2001)

•    How they did it:  Kept huge debts off balance sheets.
•    How they got caught:  Turned in by internal whistle-blower Sherron Watkins; high stock prices fueled external suspicions.
•    Fun fact:  Fortune Magazine named Enron “America’s Most Innovative Company” 6 years in a row prior to the scandal.  (That is funny!)

WorldCom Scandal (2002)

•    How he did it:  Under-reported line costs by capitalizing rather than expensing and inflated revenues with fake accounting entries.
•    How he got caught:  WorldCom’s internal auditing department uncovered $3.8 billion of fraud.
•    Fun Fact:  Within weeks of the scandal, Congress passed the Sarbanes-Oxley Act, introducing the most sweeping set of new business regulations since the 1930s.

Tyco Scandal (2002)

•    How they did it:  Siphoned money through unapproved loans and fraudulent stock sales.  Money was smuggled out of company disguised as executive bonuses or benefits.
•    How they got caught:  SEC and Manhattan D.A. investigations uncovered questionable accounting practices, including large loans made to Kozlowski that were then forgiven.
•    Fun fact:  At the height of the scandal Kozlowski threw a $2 million birthday party for his wife on a Mediterranean island, complete with a Jimmy Buffet performance.

HealthSouth Scandal (2003)

•    How he did it:  Allegedly told underlings to make up numbers and transactions from 1996-2003.
•    How he got caught:  Sold $75 million in stock a day before the company posted a huge loss, triggering SEC suspicions.
•    Fun fact:  Scrushy now works as a motivational speaker and maintains his innocence.

Freddie Mac (2003)

•    How they did it:  Intentionally misstated and understated earnings on the books.
•    How they got caught:  An SEC investigation
•    Fun fact:  1 year later, the other federally backed mortgage financing company, Fannie Mae, was caught in an equally stunning accounting scandal.

American International Group (AIG) Scandal (2005)

•    How he did it:  Allegedly booked loans as revenue, steered clients to insurers with whom AIG had payoff agreements and told traders to inflate AIG stock price.
•    How he got caught:  SEC regulator investigations, possibly tipped off by a whistle-blower.
•    Fun fact:  After posting the largest quarterly corporate loss in history in 2008 ($61.7 billion) and getting bailed out with taxpayer dollars, AIG execs rewarded themselves with over $165 million in bonuses.

Lehman Brothers Scandal (2008)

•    How they did it:  Allegedly sold toxic assets to Cayman Island banks with the understanding that they would be bought back eventually. Created the impression Lehman had $50 billion more cash and $50 billion less in toxic assets than it really did.
•    How they got caught:  Went bankrupt.
•    Fun fact:  In 2007, Lehman Brothers was ranked the #1 “Most Admired Securities Firm” by Fortune Magazine.

Bernie Madoff Scandal (2008)

•    How they did it:  Investors were paid returns out of their own money or that of other investors rather than from profits.
•    How they got caught:  Madoff told his sons about his scheme and they reported him to the SEC.  He was arrested the next day. Penalties:  150 years in prison for Madoff + $170 billion restitution. Prison time for Friehling and DiPascalli.
•    Fun fact:  Madoff’s fraud was revealed just months after the 2008 U.S. financial collapse.

Satyam (2009)

•    How he did it:  Falsified revenues, margins and cash balances to the tune of 50 billion rupees.
•    How he got caught:  Admitted the fraud in a letter to the company’s board of directors.
•    Fun fact:  In 2011, Ramalinga Raju’s wife published a book of his existentialist, free-verse poetry. Raju and his brother charged with breach of trust, conspiracy, cheating and falsification of records. Released after the Central Bureau of Investigation failed to file charges on time.

Credit to CPAGold Newsletter/Blog by Richard Jorgesen May, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

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