The World's Biggest Accounting Fraud Scandals
If nothing else, the biggest accounting scandals can teach you one valuable lesson - how to prevent fraud in the first place! We explain what went wrong and how to mitigate risk.
The most notorious case of accounting fraud must now be the Lehman Brothers scandal. The global financial services firm hid over $50 billion in loans disguised as sales. Taking advantage of a loophole in the accounting standard language regarding repurchase agreements, they sold toxic assets to Cayman Island banks with the understanding that they would eventually be bought back. The scandal was exposed in September 2008, when Lehman brothers filed for bankruptcy.
The Bernie Madoff scandal came to light the very same year. Bernard L. Madoff Investment Securities LLC was a Wall Street investment firm founded by Madoff, who tricked investors out of $64.8 billion through the largest Ponzi scheme in history. Madoff and his accountants David Friehling and Frank DiPascalli paid investors returns out of their own money or that of other investors rather than from profits. Madoff was sentenced to 150 years in prison and was issued a $170 billion restitution bill. Friehling and DiPascalli were also given prison sentences.
A year later, in 2009, Indian IT services and back-office accounting firm Saytam admitted to falsifying revenues, margins and cash balances to the tune of 50 billion rupees. Although founder and Chairman Ramalinga Raju and his brother were charged with breach of trust, conspiracy, cheating and falsification of records, they were released after the Central Bureau of Investigation failed to file charges on time.
Prior to these incidents, another infamous case was the 2001 Enron scandal. He energy company kept huge debts hidden from the balance sheet, which resulted in shareholders losing $74 billion, thousands of employees and investors losing their retirement accounts, and many employees losing their jobs. They were famously caught when Sherron Watkins blew the whistle after becoming suspicious of high stock prices. CEO Jeff Skiling was sentenced to 24 years in prison. Former CEO Ken Lay was also given a prison sentence but died before serving time.
In the UK, we can go all the way back to the 18th century to find one of the earliest known cases of accounting fraud. In 1720, the UK signed the Treaty of Utrecht 1713 with Spain, allowing it to trade in the seas near South America. In actual fact, barely any trade took place as Spain renounced the Treaty, but this was concealed on the UK stock market. A Parliamentary inquiry revealed fraud among members of the government, including the Tory Chancellor of the Exchequer John Aislabie, who was sent to prison.
Recent fraud cases raise a question of responsibility
In early 2018, construction company Carillion came under fire regarding their finances and quickly went into liquidation, with a £900 million debt pile and £600 million pension deficit. By May 2018, accountants KPMG came under heavy criticism for allegedly rubber stamping figures that “misrepresented the reality of the business”. The scandal led to calls to break up the Big Four and make auditors accountable to Parliament.
In the summer of last year, KMPG were fined £2.1 million by the Financial Reporting Council (FRC) after admitting to misconduct in its audits of high street fashion chain Ted Baker during the period of 2013 to 2014.
Then in October, auditors came under the spotlight again after the Serious Fraud Office (SFO) and the FRC opened up investigations into accounting fraud by Patisserie Valerie. Finance director Chris Marsh was arrested after having been suspended and former auditors Grant Thornton were also placed under investigation.
The scandal became bigger than originally thought, with the popular bakery chain now having admitted to “thousands of false entries into the company’s ledgers”. The fraud has pushed the bakery chain into administration, with a statement revealing that the company “has been unable to review its bank facilities, and therefore regrettably the business does not have sufficient funding to meet its liabilities as they fall due.”
Nick Burchett, head of equities at Cavendish, who held shares in the business, told Insurance Journal, “Hopefully, this will prompt the industry to sharpen up their act, before the loss of yet another high-street company and large number of jobs.”
These recent cases have certainly brought up some important discussions around responsibilities. But should auditors be shouldering the blame for failing to uncover fraud? David Dunckley, head of Grant Thronton, Pattiserie Valerie’s former auditors, claims that normal audit procedures may not actually be able to identify sophisticated fraud.
Although we need to ensure auditors are doing their jobs well enough to dig up any signs of misconduct, companies should also be doing everything they can to implement best practices, procedures and training to prevent fraud from being carried out in the first place.
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