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Anatomy of an Accounting Scandal

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Anatomy of an Accounting Scandal

Accounting fraud is simple to understand

  • Anytime money is stolen or hidden by an employee it is accounting fraud
  • over-recording sales revenue or under-recording expenses are both examples of accounting fraud
  • even avoiding disclosure of creative accounting practices can be fraudulent

Why would an employee become involved

  • some accounting frauds are started to attain money from unsuspecting investors
  • other times the fraud is started in order to hide errors

Infamous scandals

Lehman Brothers

Big players:

CEO Richard S Fuld, Jr. & Lehman executives

Several civil suits were filed against them; there have not been any prosecutions. Fuld has been keeping a very low profile ever since.

What happened

  • Lehman Brothers hid over $50b in loans by classifying them as sales
  • Auditor, Ernst & Young, manipulated the books by using accounting trick “Repo 105”
  • Repo 105 was a report that was “materially misleading”
  • it temporarily moved $50b of assets at the end of each quarter
  • This made them appear to be far less dependent on borrowed money than they actually were

 

When Lehman Brothers failed:

  • 26 thousands people became unemployed
  • millions of investors lost all of their money

The end of the scam

  • Lehman Brothers filed for bankruptcy in 2008
  • Largest bankruptcy ever reported (bigger than Washington Mutual, GM, Enron and WorldCom combined)
  • The entire global economy was affected by the fall of Lehman Brothers

Enron Scandal

Enron Corporation – an energy company based in Houston, Texas

Big players, where are they now:

Kenneth L. Lay – CEO, chairman, died from a heart attack during sentencing

Jeffrey K. Skilling – president, CEO, currently serving a 24 year sentence

What happened

  • investors lost over $70 billion
  • trustees and employees lost $2 billion
  • this major misappropriation of investments ultimately caused the bankruptcy of Enron

The end of a scam

  • Former VP of Enron, Sherron Watkins, reported the Enron scandal

Madoff Ponzi Scheme

Bernard L. Madoff Investment Securities LLC

Big players, where are they now:

Bernard Madoff, serving a 150-year prison sentence at Butner Federal Correctional Complex

What happened

  • investors were under the impression that the company was worth $64.8 billion dollars
  • $36 billion dollars of investors’ money was lost
  • Madoff’s personal collection of homes, art, and boats was worth an estimated $50 million dollars

The end of a scam

  • Bernie Madoff informed his sons about his ponzi scheme and they reported him to the F.B.I.

Avoiding the scam

  • avoid investments that seem to be “too good to be true,” they usually are
  • beware of the halo effect
  • many individuals involved in fraud will seem trustworthy
  • investors should avoid low-risk, high returns investments
  • investors should avoid becoming involved when the terms and/or legitimacy are not easily understood
  • many people involved in fraudulent activities will offer investors something free or easy with the expectation to receive something in return (your money!)

Sources

accountingscandalthumb