Mani Masood
I write this article “six prominent corporate fraud and scandals” for two reasons, one – for the most part as the Internal Audit and Internal Risk Management functions gain popularity as a profession there is still reluctance on part of the companies to invest appropriately in this area of business. Most of the time the Internal Auditing or Risk Management function is taken as a compliance to regulatory bureaucracy and not as a true profitability center for the organization.
And secondly, to show to those who consider the word “corporate scandal” as nothing more than paranoia that this is a real threat to an organizations survival.
The six examples I cite here have directly impacted 225,000 employees and their families, if you take into account indirect impact to associated firms that were doing business with these organization you can easily estimate the total impact to be upwards of 1 million families and households.
It is my firm belief that a professional auditing team with relevant technical background can provide assurance and guidance to the members of the board not only on Risk but also on strategy thereby greatly improving the odds of success.
The corporate graveyards are full of such example, here are a few:
1. The Financial Crisis – AIG, Lehman Brothers, and Fannie Mae
This is by far the cream of the cake, so many questionable practices combined with poor management and shortsightedness of the management makes it the “best” example of how good organizations can go bad.
Now perhaps this is not the correct place to list the financial crisis, the current financial crisis can not be attributed to corporate scandal in its entirety. There are other reasons what may have caused this crisis. Nonetheless, had these organization truly independent internal auditing and risk management practices this crisis would have been minimized substantially.
But it is fair to estate Lehman Brothers and the rest as it accounts for one of the largest corporate failure to date. While AIG was rescued by the government, Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion
AIG laid-off in 2009 – 20,000
Lehman Brothers laid-off – 27,000
2. WorldCom
Second-largest American long-distance telco at the time, WorldCom/MCI filed the largest Chapter 11 bankruptcy in American history in July 2002. Reasons – fraudulent accounting methods, namely under-reporting expenses and inflating revenues with bogus accounting entries, to the actual financial condition of the company.
An internal audit identified $3.8 billion in fraudulent transactions and activities, when all was said and done it was estimated that the company’s total assets had been inflated by around $11 billion.
Total Employees that lost their jobs and pension plans – 57,000
3. Enron
The Enron scandal was revealed in October 2001. It eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world.
Enron was attributed as the biggest audit failure in the world.The Shareholders of the company lost nearly $11 billion when Enron’s stock price crashed, which hit a high of US$90 per share in the mid-2000. It is estimated that the global losses and claims of liability due to Enron exceed $100 Billion.
The scrutiny of Enron during the trials revealed the management information systems and ERP systems were manipulated in a way and manner that the external auditors had sever limitations on their ability to actually identify the inappropriate or fraudulent transactions. Nonetheless, Arthur Andersen, one of the most revered names, shut down its operations due to its involvement and the destruction of documents.
Employees that lost their jobs – 22,000
4. Satyam Scandal
The Satyam Computers scandal was announced publicly on 7th Jan 2009 by its Chairman Ramalinga Raju on Indian national television channels. Admitting that Satyam’s accounts were falsified.
The Chairman and CEO were also accused of falsely claiming 23,000 additional employees on the company payroll and withdrawing close to $55 Million annually under salaries to their personal accounts, stated a non-existent cash balances of $1 Billion, and misreported operating margins of 24% (when the actual were around 3%).
Employees that lost their jobs – 55,000
5. Madoff Securities
One of the most prominent Ponzi scheme scandal to date. Before the revelations and admission Madoff Securities was a one of the most reputable and elite investment management and securities organization. The founder and CEO of Madoff securities served as the non executive Chairman of NASDAQ stock market.
The prosecutors estimated the size of the fraud as $65 Billion.
Number of impacted clients – 4,500
Number of employees that lost their jobs – 600
6. Global Crossing
Global Crossing’s rapid rise and fall attracted tremendous attention and it was quickly revealed that the company, particularly its executives, lavishly spent money on “themselves and their digs.” Four of Global Crossing’s CEOs received at least $23 million in personal loans from the company, some of which were forgiven entirely even when bankruptcy was becoming a greater possibility. These same CEOs also received over $13.5 million in after-tax signing bonuses along with lucrative stock options. Between 1998 and 2001, Winnick sold approximately $420 million in Global Crossing stock. Other executives with the company sold an additional $900 million, totaling $1.3 billion, an amount equal to the Enron inside sales for the same period.
Global Crossing’s bankruptcy filing listed total assets of $22.4 billion and debts amounting to $12.4 billion. If ranked by assets, Global Crossing’s bankruptcy is the seventh largest filing in American history.
Number of employees that lost their jobs – 38,000
Mani
