Accounting Scandals
Even though the accounting profession is one of
the most well-respected professions in our society and
its practitioners have proved themselves to be
absolutely critical to the operations of many
businesses—and to our economy as a whole—the profession
still has its problems and issues.
Whenever you mix money and people—and
opportunity—trouble can brew, and it occasionally does.
As the old saying goes, “the looser the money, the more
the trouble.” To begin with, accounting professionals
occupy a peculiarly unique position in our economy. It
is a position with a built-in dichotomy.
On the one hand, the government relies upon accountants
to basically enforce the tax code by requiring that they
only report information on taxpayers’ returns that they,
themselves, believe to be true and accurate. On the
other hand, however, taxpayers employ accountants to
circumvent full payment of taxes whenever it can be
perceived to be allowable under the tax code. This
is where creativity comes into play, for this is
obviously a wicked conundrum for accountants.
Naturally, this can, and often does, set up a
perfect storm. In this kind of environment, a lot of
abuses can occur. History is full of examples of the
types of problems this odd juxtaposition of motives and
methods imposes. To illustrate, let’s take a look at
some of the more recent examples of very poor accounting
practices that resulted in the tragic loss of life
savings and livelihoods for many thousands of people.
In the midst of the tech bubble of 2001, there
were several large financial information frauds that
involved Enron Corporation, the auditing firm Arthur
Andersen, Qwest, Sunbeam Corporation, the telecom giant
WorldCom, and others. At the time, loose money was the
norm, and so some people decided to take advantage of it
because they could—they were at the right place at the
right time and, unfortunately, had few scruples.
As a result of the massive business frauds
perpetrated by these companies and their accounting
firms, the government and leaders in the accounting
profession were required to step in and review the
effectiveness of existing accounting standards, auditing
regulations, and corporate governance principles.
It became clear that, in some cases, corporate
management and their accounting accomplices blatantly
manipulated data from financial reports in order to
report better financial results. In other cases, loose
regulatory and tax incentives encouraged the
over-leveraging of companies, and the making of poor
business decisions followed, which lead to extraordinary
and unjustified risks.
The Enron scandal was especially influential in
its impact on the roll-out of new regulations designed
to improve the transparency and truthfulness of
financial reporting. Because so much money was lost by
so many people, the scandal heightened public awareness
and served to underscore the importance of maintaining
understandable—and verifiable—accounting standards.
It became imperative that accounting firms maintain
their objectivity and independence when conducting
audits.
In addition to being the largest bankruptcy in
American history at its time, the Enron fiasco was also
undoubtedly the biggest audit failure. The scandal
rightly caused the dissolution of the Arthur Anderson
firm, which at the time, was one of the five largest
accounting firms in the world. Investigations revealed
that Arthur Andersen auditors were basically in bed with
Enron management and clearly betrayed their public
trust.
To the dismay of those who were lobbying for
less government oversight, a natural consequence of
these outrageous corporate scams was the passage of the
Sarbanes-Oxley Act in 2002. One of the good things the
act does is to raise the criminal penalties for
securities fraud and the penalties for
destroying, altering, or tampering with records in
federal investigations or becoming involved in any
scheme or attempt to defraud shareholders.
While this was clearly a step in the right
direction, the recent Bernie Madhoff fiasco and other
such Ponzi schemes proves that there are still huge,
gaping holes in our financial system that allow thieves
to steal from unsuspecting investors. At this time, of
course, we are still reeling from yet another round of
corporate malfeasance, as the U.S. attempts to climb out
from under yet another season of scandal. This
time, much of the scandal and fraud can be laid directly
at the feet of the financial industry itself.
So, to sum it up, it is
incumbent upon each of us as a thoughtful consumer to do
our best to locate an honest and competent accountant or
CPA and then build a long-term relationship with that
professional. Use the information we provide on this
site to manage that relationship and benefit by growing
your money and keeping it safe.
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Avoid Fraud