You must reply to at least two colleagues in a manner that extends the discussion. A simple “I agree/disagree” will not be accepted. respond in a manner that further extends the discussion.
The biggest accounting fraud would be the story of the Enron Corporation. At the height of the company’s fraud, the stock price of Enron was worth $90.75. When the company collapsed at the end of 2001, the stock was worth $0.26. Leadership at Enron was able to mislead financial regulators and investors into believing that the company was extremely profitable, although the company was saddled with an enormous amount of debt.
How was Enron able to commit this fraud?: Enron was able to shield the truth of their crippling financial stat through the “Mark to Market” accounting method. By using Mark to Market accounting, the company was able categorize estimated profits and actual profits together as the company’s official profit. Enron also heavily utilized “Special Purpose Vehicles” (SPV)s and/or “Special Purpose Entities” (SPE)s to hide it’s debts and depreciating asset from their investors and other parties interested in the company’s financial position.
Why did Enron commit this fraud?: Enron committed this fraud to continue profiting from the illusion that the company was solvent and in great financial state. They believed that if the company’s true position was revealed, then the company would be at risk for failure.
Who in Enron participated in this scheme?: Andrew Fastow (Chief Financial Officer), David B. Duncan (Partner at Arthur Andersen LLP), Kenneth Lay (Former CEO), and Jeffrey Skilling (Former CEO).
Where there signs of Enron’s fraud in their accounting?: No, there was no immediate evidence of Enron’s fraud unless you noticed Andrew Fastow’s high usage of SPV and SPEs. If you were to monitor the amount of SPVs and SPEs in use prior to Fastow becoming CFO and after, it may have risen some alarms. Fastow’s usage of Mark to Market accounting helped conceal the fraud very well.
How could Enron’s fraud have been prevented?: This fraud largely could have been prevented if Mark to Market accounting had not been seen as a sure marker of a company’s financial status. Mark to Market allowed Enron to claim profits they had not actually acquired. Had they not been able to do this, the whole scandal could have been avoided.
How have the accounting rules changed since Enron’s fraud?: The failure of Enron in 2001 resulted in President George W. Bush signing the “Sarbanes-Oxley Act” into law. This law increased the penalties and punishments for destroying and/or fabricating financial statements with the intent of defrauding shareholders. Also, the act also saw the creation of new regulatory bodies such as the Public Companies Accounting Oversight Board and made the board of directors for companies more independent, which gave them the ability to monitor the audit companies and replace poor performing company managers.
Norris, M. (2005, May 31). Has Accounting World Changed Since Enron? Retrieved from https://www.npr.org/templates/story/story.php?storyId=4673933 (Links to an external site.)
Segal, T. (2020, September 22). Enron Scandal: The Fall of a Wall Street Darling. Retrieved from https://www.investopedia.com/updates/enron-scandal-summary/
post 2 .
Waste Management (WM)1998 Fraud Scandal
https://ensscpa.com/waste-management-inc-1998-fraud-scandal/ (Links to an external site.)
Overview: Over the years of 1992-1997, WM manipulated their earnings by $1.7 Billion, the largest restatement of earnings in history at the time. The scandal was helped with cozy relationships between the CFO James Koeing and CAO Thomas Hau, who were trained at Arthur Anderson, the company who audited Waste Management.
How did the company do it?
There were a few activities WM participated in to manipulate revenue. One of the fraud activities included avoiding depreciation expenses. WM inflated salvage values and extended the useful life of their garbage trucks the company owned. This in turn resulted in having higher asset value then what the company owned.
Another activity was not recording expenses for any decrease in land value for the landfills owned by WM. This resulted in less expenses for the company to increase revenue. Alongside this, the officers also did not record any expenses for unsuccessful or discarded landfill development projects that the company took part in.
WM officers also assigned salvage values to assets that had no salvage value at all. This resulted in an extension of residual value of an asset that that originally had 0.
Also, WM increased environmental reserves to avoid any irrelevant operating expenses. This in turn eliminated about $490 million in operating expenses.
Using geography entries, WM moved millions of dollars between various line items on their income statement. This ultimately resulted in false profits moving into retained earnings, false assets, and no increase in liabilities on their financial statements.
Finally, in 1998 when a new CEO was appointed, WM restated its 1992-1997 earnings by $1.7 BILLION, the largest restatement in history at the time.
Why did the company do it?
In an attempt to meet predetermined earnings goals, WM officers had to do something, although what they did happened to be illegal. Revenues were not increase as fast as projected. Officers would not have been compensated if they did not reach the revenue goals. In other words, greed took over operating in an honest manner.
Who in the company did it (name and title)?
CFO James Koeing, CAO Thomas Hau
Were there signs in the financial statements before the fraud was discovered? If so, what were they?
Arthur Anderson (AA), the company auditing WM, saw the fraud taking place. AA came up with adjustments to fix the errors made in the accounting books, but WM refused. These errors are listed above. To hide the fraud WM stakeholders bribed AA into issuing unqualified opinions in the audit report, and WM wrote off the accounting errors to conceal the fraud.
How could this fraud have been prevented?
This fraud could have been prevented if there was a different company doing the audit of WM. If Arthur Anderson did not commit to the bribe, none of this would have happened. It is hard to stop fraud from occurring when the people who are supposed to do it, help the company to do it.
Have the accounting rules changed since that fraud was committed?
The Sarbanes-Oxley Act (SOX) of 2002 has changed the accounting world ever since large companies have been caught committing fraud. CEOs and CFOs are responsible for the books and will be held liable if fraud occurs.