To err is human, but to scam employees, investors, and taxpayers? That takes a real piece of work. Several massive accounting scams have rocked the economy and investors in the past couple decades. Here’s a look at the top 5 worst accounting scams in US history.
The energy company went bankrupt in 2001 after company executives began questioning shady accounting practices. Enron used special purpose entities to hide huge debts and heavy losses, making the company look much more profitable than it actually was. The financial statements were so complex that even seasoned analysts had trouble deciphering the disclosures.
Enron’s bankruptcy caused thousands of employees to lose their jobs and retirement accounts and wiped out $78 billion in stock market value. The class action settlement of $7.185 billion that followed was the largest of all time.
Former President Jeff Skilling is serving a 24-year sentence for his role in the scandal. Former CEO Ken Lay died before serving any time. The scandal also led the collapse of Enron’s auditor, Arthur Andersen, one of the largest audit and accounting firms in the world.
Cendant Corporation was formed in 1997 when CUC International merged with HSF, Inc. Shortly after the merger, extensive accounting improprieties at CUC were discovered. Vice Chairman E. Kirk Shelton had inflated the company’s revenue by $500 million during a period of three years. After the deception was disclosed, the stock lost almost half its value in one day.
In March of 2001, former Chairman Walter Forbes and Shelton were indicted by a federal grand jury and sued by the SEC. Forbes was sentenced to 12 years in prison and ordered to pay $3.275 billion in restitution. Shelton is serving a 10-year prison sentence.
The telecommunications giant found itself in the middle of an accounting scandal in 2002 after internal auditors revealed $3.8 billion worth of fraud. From 1999 through 2002, CEO Bernard Ebbers, CFO Scott Sullivan, and Controller David Myers used fraudulent accounting methods to maintain the price of WorldCom stock.
The fraud involved capitalizing expenses on the balance sheet and inflating revenues with bogus accounting entries.
After internal auditors brought the fraud to the attention of the board of directors, Sullivan was fired, Myers resigned, and Ebbers was sentenced to 25 years in prison.
4. American Insurance Group (AIG)
In 2005, the world’s largest insurance and financial services company disclosed that a deal with Gen Re should have been accounted for as a liability rather than revenue on their 2004 earnings report. The restatement amounted to a $1.32 billion reduction in AIG’s net income for 2004.
New York Attorney General Eliot Spitzer filed a civil suit against AIG, alleging they had engaged in misleading financial reporting, using sham insurance transactions to give investors the impression that the company had larger reserves than it had.
An investigation into two particular transactions ballooned into a huge accounting scandal, with the SEC filing a complaint in U.S. District Court and investigators looking into a host of accounting shenanigans.
In 2006, AIG agreed to pay more than $1.6 billion in restitution and penalties. Former Chairman Hank Greenberg agreed to pay $15 million in penalties.
5. Lehman Brothers
The investment bank with $600 billion in assets borrowed significant amounts to fund investments in the years leading up to its bankruptcy. A significant portion of this investment was in housing-related assets. The 2008 subprime mortgage crisis resulted in unprecedented losses for Lehman, leading to bankruptcy in September 2008.
In March of 2010, Bankruptcy Examiner Anton R. Valukas drew attention to the use of Repo 105 transactions to boost the Lehman’s financial position on the year-end balance sheet. These short-term repurchase agreements were classified as sales. Cash from the sale was used to pay down debt and improve balance sheet presentation. After financial reports were published, Lehman would borrow cash again and repurchase its original assets.
New York Attorney General Andrew Cuomo filed charges against the bank’s auditors, Ernst & Young in December 2010, alleging the firm had assisted fraud by approving the accounting treatment.
There you have it – the top 5 accounting scams in US history. We hope these infamous events publicize the importance of upholding company ethics and taking corporate responsibility.