Accounting scandals involve misdeeds by trusted executives who are responsible for large sums of money. They come up with devious ways to misuse or misdirect funds, understate expenses and liabilities, overstate revenues, and the value of the assets. In no particular order, here are four of the greatest accounting scandals of all time.
Bernard L. Madoff Investment Securities LLC
Bernie Madoff, a former NASDAQ chairman, orchestrated the biggest investment scam ever and had $21.2 billion in cash losses. It was a giant Ponzi scheme rubber-stamped by his accountants and aides. His accountant, David Friehling pleaded guilty to several charges of false audits. The main assistant who helped Madoff pursue his Ponzi scheme was Frank DiPascali. He also pled guilty to creating false trade orders and has been sentenced to 125 years in prison.
A Ponzi scheme pays investors from money given by new investors and not from profit earned through investments made by the company or organization. To attract new investors, the people running a Ponzi scheme promise much higher short-term returns than the investor could get in legitimate investments.
The accountants at Lehman Brothers lost more than $50 billion in disguised loans. They classified these loans as sales. The executives and auditor Ernst & Young manipulated the balance sheets by using an accounting trick called Repo 105. A top law firm in Britain helped Lehman Brothers hide its debts by signing off on questionable accounting techniques to disguise the $50 billion debt.
Repo 105 is an accounting ploy to classify a short-term loan as a sale. The cash that is received from this so-called sale is used to pay down debt which allows the company to appear to reduce its leverage. It pays down its liabilities temporarily, so the published balance sheet looks good. After the financial report is published, they borrow money and purchase back their original assets.
Enron was once the seventh-largest company in the U.S. In 2001, it collapsed because the executives used special purpose entities so that large debts would not appear on their balance sheets. This was the biggest accounting fraud of all time at the time. This false financial reporting hid the company’s true financial position from shareholders and analysts.
The unscrupulous executives including Jeffrey Skilling, Kenneth Lay, Andrew Fastow, and others kept their multi-billion debt off the books and the firm was portrayed as having a positive financial footing. When it fell, Enron was the largest bankruptcy ever at that time. The leading auditor Arthur Andersen, who audited Enron’s books, was dissolved. They looked the other way when they saw misdeeds and also shredded evidence of the scandal.
The executives at WorldCom organized an $11 billion accounting fraud scheme where Bernie Ebbers, the former CEO, took hundreds of millions of dollars in personal loans. At one time, WorldCom was the second-largest long-distance operator in the U.S. Ebbers masterminded an accounting fraud that was the largest in U.S. history at that time.
Ebbers needed to keep World Com afloat because his personal wealth was based on shares in the company. He borrowed from the company to buy more stock as well as mansions and a hockey team among other things. He used hidden expenses, phantom revenue, and hype to inflate earnings and perpetuate the illusion that the company was financially healthy. Scott Sullivan, the former CFO, pleaded guilty to conspiring with Ebbers to submit false reports to investors as well as regulators to hide the fact that WorldCom had weakening results. Not only did they use fraudulent and sloppy bookkeeping, but they also overvalued several acquisitions and instead of the profit they reported, but they also had a total of $79.5 billion loss.