In recent decades, accounting has unfortunately become synonymous with scandal in the world of big business. While the vast majority of companies use legal and ethical accounting practices, many of those involved in scandals are or were major players with household names. This cast an unfortunate shadow over a very important and legitimate profession.
What causes accounting scandals? Greed is a factor, though some types of accounting frauds are carried out to protect the solvency of a company. Let’s look at five of the biggest headline-generating accounting scandals in recent memory and see what steps have been taken to prevent future occurrences.
Infamous Accounting Scandals
General Electric (2019)
In early 2018, the Securities and Exchange Commission (SEC) announced it was investigating General Electric (GE) for what it called “aggressive accounting” practices. Later the same year, the Department of Justice also began an investigation of GE. The following summer, a whistleblower accused the corporation of fraud to the tune of $38 billion. The company had financial woes due, in part, to losses in its long-term care insurance division. Put simply, policyholders were living longer than expected, forcing the company to pay out more claims year after year. The company was accused of hiding massive losses to disguise its true value. Its stock took a large hit, CEO John Flannery stepped down, and the company was removed from the Dow Jones Industrial Average after more than 120 years.
Bernie Madoff (2008)
One of the most highly publicized financial scandals was stockbroker Bernie Madoff’s Ponzi scheme. Named after Charles Ponzi, who conned investors in the 1920s, this type of scheme involves paying current investors with funds solicited, under the guise of an investment, from new investors rather than through an actual investment. The fraudsters typically skim some money for themselves from every transaction. Madoff was ultimately sentenced to 150 years in prison and had his $170 billion fortune and property seized. Several others who were involved in Madoff’s scheme, including one of his sons and a number of investors, committed suicide. His scheme wiped out the life savings—estimated in the billions—of investors worldwide.
Lehman Brothers (2008)
This renowned global financial services firm went bankrupt after misrepresenting its financial assets, constituting the largest bankruptcy case in U.S. history at the time. Executives at the company and Ernst & Young, the company’s auditor, collaborated to hide $50 billion in loans by listing them as sales. Lehman Brothers had been an aggressive lender during the housing bubble of the early 2000s. When the subprime mortgage market collapsed (starting around 2007), the firm was dealt a financial blow that eventually proved fatal. Ironically, Lehman Brothers had been named the #1 “Most Admired Securities Firm” by Fortune Magazine just one year before its collapse.
Multinational insurance company American International Group (AIG) acknowledged securities fraud to the SEC. In a press release, the commission declared that AIG “materially misstated its financial results through sham transactions and entities created for the purpose of misleading the investing public.” The press release details various irregularities connected with the corporation’s financial misstatements, concluding that “as a result of these actions and other accounting improprieties, AIG fraudulently improved its financial results.” The bailout of AIG, considered “too big to fail” since its assets were intertwined with so many other financial institutions worldwide, created its own scandal, as American taxpayers bankrolled the rescue with funds that AIG executives accepted as bonuses. AIG is still in operation to this day.
As a response to unchecked use of taxpayer funds that occurred after financial scandals such as AIG, efforts have been made to prohibit companies that receive coronavirus-related bailouts from enacting mass layoffs or compensating executives. So far, these efforts have been unsuccessful.
Enron Corporation was an energy, commodities, and services company that collapsed due to multiple financial offenses, taking with it the massive accounting firm Arthur Andersen. Enron had misled regulators with fake holdings and off-the-books accounting practices. The company, which had losses of $591 million and was $690 million in debt by late 2000, had managed to hide its debt and toxic assets from investors and creditors. Enron’s stock tumbled, the company declared bankruptcy, and thousands of employees lost their jobs and pension benefits. Some of Enron’s executives were eventually charged with conspiracy, insider trading, and securities fraud. Company founder and former CEO Kenneth Lay was convicted but died before sentencing. Lay’s replacement as CEO, Jeffrey Skilling, was convicted in 2006 and received a 17.5-year prison sentence; he was released in 2019.
Modern Efforts at Accounting Reform
As a result of the accounting scandals of the early 2000s, Congress passed the Sarbanes-Oxley Act to shield investors from fraudulent financial reporting by corporations. This law strengthened existing securities regulations and levied stricter penalties on lawbreakers. Later, in response to the financial recession that started in the U.S. in 2007, the Obama administration helped enact the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created a dedicated consumer financial protection watchdog, made financial markets more transparent, and gave the government more tools to monitor risk and rein in firms whose failure might jeopardize the country’s financial system.
Accredited Accounting Degree Programs Online
Learn modern accounting practices as you prepare for a career in accounting or position yourself to advance within the field in an online degree program from The University of Texas Permian Basin. Gain the skills that can help you thrive as a knowledgeable, ethical CPA or in other related professions. We offer multiple programs at the undergraduate and graduate level, including:
- Bachelor of Business Administration in Accounting
- Master of Business Administration in Accounting
- Master of Professional Accountancy
All of these programs are available 100% online through our AACSB-accredited College of Business, the gold standard for business schools. Classes are delivered asynchronously, which means you can complete coursework on your own schedule. This is a tremendous advantage when you have professional and family responsibilities to meet while you’re earning your degree.
See how you can become an ethical and successful financial professional with help from an online UT Permian Basin accounting program.