Corporate Accounting Scandals

Freddie Mac Scandal: What happened?

$5B of earnings were misstated

If the auditor determines that a material misstatement is or may be the result of fraud, the auditor should (5)

1) Attempt to obtain audit evidence to determine if fraud has occurred 2) Consider the implications for other aspects of the audit 3) discuss the matter and approach to further investigation with an appropriate level of management that is at least one level above those involved in committing the fraud and with senior management. 4) suggest that the appropriate level of management consult with legal counsel. 5) consider withdrawing from the engagement.

Waste Management Scandal: How they Got Caught?

A new CEO and management team caught it when going through the books

Repo 105

Accounting rules permit recording of a repo as a sale if the assets transferred had a value of at least 105% of the cash received.

Healthsouth Scandal: How they did it?

Allegedly told underlings to make up numbers and transactions from 1996-2003

TYCO Scandal: What happened?

CEO and CFO stole $150 M and inflated company income by $500 M

What was the purpose of SPEs

Conceptually, SPEs were supposed to by separate entities governed by the rules/contracts that established them

Healthsouth Scandal: What happened?

Earnings numbers were allegedly inflated $1.4B to meet stockholder expectations

What purpose did the SPEs serve for Enron?

Enron hid speculative assets generating mark-to-market losses by selling the assets to the SPEs. Enron then guaranteed the assets with Enron stock

Saytam Scandal: What happened?

Falsely boosted revenue by $1.5B

Saytam Scandal: How they did it?

Falsified revenues, margins, and cash balances to the tune of 50B rupees

Lehman Brothers Scandal: What happened?

Hid over $80B in loans disguised as sales

Freddie Mac Scandal: How they did it?

Intentionally misstated and understated earnings.

WorldCom Scandal: How they got caught

Internal Audit uncovered $3.8B in fraud

Bernie Madoff Scandal: How they did it?

Investors were paid returns out of their own money or that of other investors rather than profit

Enron Scandal: How they did it?

Kept huge debts off of the balance sheet

How did Lehman Brothers use Repo 105 rule

Lehman brothers used repo 105 to remove "high grade" assets from its books (high risk mortgage backed securities) and to record revenue rather than a liability

Bernie Madoff Scandal: How they got caught?

Madoff told his sons about his scheme, they reported him to the SEC. He was arrested the next day.

American Insurance Group Scandal: What happened?

Massive accounting fraud to the tune of $3.9B was aligned, along with bid-rigging and stock price manipulation

SPE 3% Rule

No consolidation needed if at least 3% of SPE total capital was owned independent of Enron

TYCO Frauds (3)

Overstated financial statements Failed to report related party transactions theft and corruption

WorldCom Scandal: What do the "line costs" refer to, and what was WorldCom doing with them?

Paid outside service providers for carrying WorldCom Customers on their lines. Most of lines were leased. High fees for unutilized leased networks. Those costs should have been expensed, not capitalized.

Special Purpose Entities (SPEs)

Partnerships that could borrow from outside investors and not have to be consolidated on the company's financial statements

Waste Management Scandal: What they did?

Reported $1.7B in Fake Earnings

Freddie Mac Scandal: How they got caught?

SEC Investigation

TYCO Scandal: How they got caught?

SEC and Manhatten D.A Investigation uncovered questionable accounting practices, including large loans made to Kozlowski that were forgiven.

American Insurance Group Scandal: how they got caught

SEC regulator investigations, possibly tipped off by a whistle blower

Enron Scandal: What happened?

Shareholders lost $74B, thousands of investors and employees lost their retirement accounts, and many employees lost jobs

TYCO Scandal: How they did it?

Siphoned money through unapproved loans and fraudulent stock sales. Money was smuggled out of the company disguised as executive bonuses or benefits.

Healthsouth Scandal: How did they get caught?

Sold $75M in stock a day before the company posted a huge loss, triggering SEC suspicions.

Waste Management Scandal: How they did it?

The company allegedly falsely increased the depreciation time length for their PPE on the balance sheets

Enron Scandal: How they got caught?

Turned in by internal whistle blower, Sherron Watkins, high stock prices fueled suspicions

How much $ in speculative assets had Enron sold to SPEs by 2002

over $1B

How many SPEs did Enron create?

over 3000

Bernie Madoff Scandal: What happened?

tricked investors out of $64.8 B through the largest ponzi scheme ever

WorldCom Scandal: How did they do it?

underreported line costs by capitalizing rather than expensing, and inflated revenues with fake accounting entries

Lehman Brothers Scandal: How they got caught?

went bankrupt

Saytam Scandal: How they got caught?

admitted the fraud in a letter to the company's board of directors

American Insurance Group Scandal: How they did it?

allegedly booked losses as revenue, steered clients to snsurers with whom AIG had payoff agreements, and told traders to inflate stock prices

Lehman Brothers Scandal: How they did it?

allegedly sold toxic assets to Cayman Islands banks, with the understanding that they would be bought back eventually. Created the impression that LB had $50B more cash and $50B less toxic assets that they did

WorldCom Scandal: What happened?

inflated assets by as much as $11B, leading to 30,000 lost jobs and $180B losses for investors