« »

Friday, November 9, 2012

The 5 biggest accounting scandals of the last decade

Accounting scandals
Bernie Madoff operated one of the biggest ponzi schemes in history

By Les Fowler

Lots of money-related scandals have occurred over the last ten years but the underlying trend of some of the biggest scandals has been with falsification of accounting procedures and related reporting. While people can steal money or assets physically, those crimes tend to pale in comparison to some of the antics accounting-based activities have produced.

The Scandals

The following five events represent some of the biggest scandals over the decade just in dollar size alone:

1. Bernie Madoff

Using a classic Ponzi scheme, Bernie Madoff used standard financing investment accounting reports and processes to make up an entirely fake investment fund that swindled billions out of the hands of private and institutional investors. By the time he was caught, Madoff and pulled off an accounting and investment scandal totaling more than $65 billion in stolen funds from investors, higher than the original $50 billion first identified in 2008.

2. The Home Mortgage Scandal

From 2002 to 2008 mortgage broker and lenders pushed thousands of mortgages and home refinancing loans to home owners. The process continued until all the securities those loans were packaged into and resold to investors fell apart, almost taking down the U.S. banking system and public investment market with it. While the scandal itself was primarily the issuing of home loans that should have never been offered, a large amount of fuzzy accounting went into selling those mortgages as investment securities later on. The amount of loss was immense and triggered a $700 billion government bailout of just banks alone, not including other institutional help at taxpayer expense.

3. Enron

The energy company blazed through the late 1990s enjoying the sudden rise in value that came with turning regulated energy markets into commodity trading environments. However, Enron’s management crashed hard in 2001 when it’s large amount of debt finally became exposed, showing the company was just a paper shell. The debt was hidden behind fake projects to keep it from being labeled a liability on accounting reports, causing a $60 billion investors' loss.

4. AIG’s reporting fraud prior to 2008

AIG had already made the news prior to the real estate crash. In 2005 the company admitted fudging reinsurance records to inflate its required reserve balances on filed accounting reports with regulators and the public. The admission caused the company’s stock to plummet and raised serious questions about AIG’s accounting books from all corners. The company’s CEO was dismissed and ultimately had to personally pay $15 million fines along with the company and its own penalties. The fake reporting falsified $1.7 billion in balances.

5. Freddie Mac and overstated revenue

It’s one thing when a private company falsifies its books. It’s quite another when a government agency does the same. Freddie Mac, the federal government’s subsidized corporation that underwrites home mortgages was exposed for a $5 billion fudge in false revenues on its own books found in 2003. The agency settled the matter with the Securities Exchange Commission in 2007 with a fine of $50 million.

As noted earlier, thieves and robbers can take money and assets, but they don’t even come close the kinds of theft and fraud that occurs within normal accounting procedures in large organizations. Much of the activity is driven either by a need to cover up or a pure greed. However, in every case the scheme eventually falls apart under its own weight and all the paper proving what really happened.

About the author: Les Fowler is an accountant and guest author at Accounting-Degree.org, a site with guides and resources to help prospective students learn about top-rated online accounting degree programs.

Image license: Creative Commons image source