Financial scandals

Enron

Enron was founded in 1986 by the merger of HNG and InterNorth and became an oil and natural gas company. In the early 1990s, he had a stake in a 4,100 km long gas pipeline in Argentina and started dealing with energy companies around the world. In 1994, Fortune magazine ranked Enron No. 1 in a new category, pipelines, and No. 39 on its list of "America's Most Admired Companies." In the 1990s, Enron rapidly expanded its business structure into energy production, high-speed Internet, and finance. 31.12.1996, Enron's shares amounted to 21 7/16 (adjusted for the split), and on 31.12. In 2000, they jumped to 83 1/8. In 2001, Enron's shares experienced a dramatic decline, and on the list of the most successful companies, Enron fell from first to 523rd place according to the criterion of the use of company assets and 521st place according to the criterion of fiscal strength. Skilling resigned after six months as CEO, while one of Enron's directors, Clifford Baxter, committed suicide.

Enron carried out its criminal activities and improper accounting practices through a large number of off-balance sheet special purpose entities (SPEs), which manipulated $40 billion in debt through off-balance sheet records. Correct accounting practice dictated that SPEs be treated, not as off-balance sheet, but as consolidated, because they were neither independent in terms of control nor in terms of financing. Enron's admission that $1.2 billion in debt was concealed through financial statement manipulation devalued its credibility - with creditors, investors and the general public. Enron's transactions with the Raptors (SPEs) were done with the intention of avoiding tax, any payment from a Raptor or similar SPE was not counted as income. The purpose of SPEs was to improve the appearance of the financial health of the corporation, but they had no legitimacy. If the value of the shares had continued to rise, the SPEs would have been well funded, and the debt would probably have been reduced over time by the right payments. However, that did not happen. Since the SPEs concealed Enron's debt, it could be publicly attractive to potential investors. And when Enron's directors were presented with ominous internal reports on Enron's finances, they still presented Enron as a profitable company to analysts. Enron's trick with SPE was very similar to the Ponzi scheme.

Enron's admission that $1.2 billion in debt was concealed through financial statement manipulation devalued its credibility - with creditors, investors and the general public.

The accounting firm Arthur Andersen was in charge of auditing Enron. During many discussions of Andersen employees, SPEs were discussed, but such practice of creating off-balance sheet entities was never prevented, what's more, the audit company itself participated in the creation of some SPEs. After the meeting on February 6, 2001 A list of what needs to be done about Enron was drawn up, but none of the items concerned the accounting procedures at the SPE or the correction of the financial statements. In 2000, Andersen received $25 million from Enron for auditing services and $27 million for consulting services. For structuring Raptor and LJM, Andersen received another million dollars. In a conference call, Andersen officials expressed concerns about independence given the amount of compensation. However, Andersen's accountants felt that the amount of compensation did not compromise their independence because the nature of those services was more important, so the ethical concern was dropped. But they were wrong, because they applied the wrong ethical standard. They drew an irrelevant distinction between the amount and the nature of the compensation. The decision to terminate the engagement had to be made. The Powers report said: "That drive to avoid public exposure, coupled with the importance of the transactions to Enron's income and balance sheets, should have alerted senior management as well as Enron's external auditors and lawyers." Unfortunately, that was clearly not the case."

Andersen 23.10.2001. makes a decision on the destruction of documents related to Enron. Tons of papers related to the Enron audit were immediately destroyed, and the physical shredding machine ran non-stop. Ten large trucks loaded with Enron documents were sent to Houston to be destroyed there. And files related to Enron were systematically removed from computers. The SEC (American Securities Commission) is 31.10.2001. initiated a formal investigation against Enron, and on November 9, 2001. Andersen stopped the physical destruction of documents when he was called to testify in court. The auditing company is 14.3.2002. accused of obstruction of justice. By May 2002, they had lost more than 500 clients who had been audited in the previous year. Dated, 14.6.2002. In 2010, the Arthur Andersen company was found guilty and banned from auditing publicly registered clients with the SEC. The Big Five were reduced to the Big Four.

David Duncan, Arthur Andersen's lead auditor in charge of Enron, said in April 2002 that he felt guilty about destroying Enron-related documents. Koper pleaded guilty in August 2002 to conspiracy to commit fraud and money laundering. Thus, he lost $12 million from unfair dealings with SPE units. Andrew Festow was indicted on 78 counts in October 2002 and his accounts were frozen. Festow pleaded guilty to two charges on 13.1.2004. years. He was sentenced to 10 years in federal prison. His wife Lea was sentenced to a year in prison for tax evasion. Jeffrey Skilling and Rick Causey were indicted on February 21, 2004. due to responsibility in the entire Enron case, and on 7.7.2004. Kenneth Lay was also accused. Andersen's license to audit US public corporations was revoked.

Parmalat

Parmalat was the eighth largest industrial group in Italy, an undisputed giant in the dairy and food products market. It employed about 30,000 people and occupied half of the dairy market in New York and the southeastern United States. Calisto Tanzi founded the company in 1962, in the small town of Collecchio near Parma. "Milk from Parma" soon began to be sold in cities all over Italy, and with the introduction of tetrapacks and the technique of making long-lasting milk, it strengthened its position in the world. By the 1990s, the company expanded its production to yogurts, vegetables, fruit juices, pastries and mineral water. At the beginning of the 90s, "Parmalat" already had serious financial difficulties, and the Tanzi family converted 49% of the company into shares and released them on the stock market, in order to save themselves from bankruptcy. Employees of the company and other ordinary people invested their saved money in shares with a total value of around two billion euros, thinking that they would thus ensure a nice pension. Today, those shares are worth practically nothing.

A letter from Bank of America confirming that Bonlat, Parmalat's subsidiary in the Cayman Islands, had made a deposit of about $4 billion set off an avalanche of events that would end up restructuring the mighty giant. Namely, that letter is a forgery made using a scanner and a copier. Former Parmalat director Fausto Tona personally used money from the Luxembourg branch and admitted that the corporation took bribes from suppliers. In December 2003, Parmalat's first problems surfaced, related to the payment of $150 million in bonds. The problems came to a head when the corporation used the "black hole method" to record $3.9 billion in cash that did not exist. Bank of America stated that no such account of Bonlat exists with them. The court in Parma declared Parmalat insolvent and appointed a receiver on 27.12.2003.

The problems came to a head when the corporation used the "black hole method" to record $3.9 billion in cash that did not exist.

The failures of several auditing firms were at the center of the scandal. Three auditing companies performed the statutory audit of Parmalat: Hodgson Landau Brands (Italy) in the 1980s, Grant Thorton SpA from 1990 to 1998, and from 1999 Deloitte & Touche as the main auditor and Grant Thornton as the secondary auditor. When the Parmalat scandal came to light Grant Thorton had no response to requests for information and questions the public demanded. From 1990 to 2003, Parmalat borrowed from banks, and its guarantee was the income from fictitious sales to retailers. Callisto Tanzi and a group of associates and lawyers redid the books of accounts to make the debt disappear, shifting it to related companies based in tax haven countries. Considering the scale of fraudulent accounting, it is unclear how audit firms with high reputations were unable to detect such criminal activities. At the court in Milan on December 18, 2008. Calisto Tanzi was sentenced to 10 years for providing false information to the regulator for financial exchanges and manipulating the market, and the court in Parma on December 9, 2010. sentenced Tanzi to 18 years in prison on charges of fraudulent bankruptcy and criminal conspiracy.

WORLD COM

WorldCom is an example of how much creative accounting can (not) achieve. Due to the need to maintain constant growth and development when the telecommunications industry was in sharp decline, simple accounting frauds were resorted to, culminating in the capitalization of period costs.

WorldCom was created by the breakup of AT&T in the reverse direction, and the condition for the breakup is that AT&T made its international lines available for leasing at significant discounts. Bernie Ebers founded the company LDDS and saw an opportunity to make a quick profit. Ebers previously worked as a milkman, bartender, security guard, car salesman, truck driver, foreman and high school basketball coach. In order to make money, it was necessary to achieve economies of scale. This involved the purchase of extremely expensive switchboard equipment to provide services to business and public agencies. A successful strategy that resulted in rapid growth was acquisitions and mergers based on stock value when it began listing on the NASDAQ in 1989. In the early 1990s, the LDDS company made significant acquisitions such as Mid-American Communications, AmeriCall, FirstPhone, Advanced Telephone, World Communications, Dial-Net, TRT and Metromedia with Resurgens and the company was already called WorldCom and was an example of an incredibly fast rise . In 1995, WorldCom bought Williams Telecom for $2.5 billion, in 1996, MFS for $12.4 million, and Intermedia in 2001 for $6 billion. The rise for novels ended due to the weakening of the telecommunications industry, customer losses due to the dot.com collapse and the failed merger with Sprint. In 2002, WorldCom's financial statements had $30 billion in revenue, $104 billion in assets, and about 60,000 employees. The failure of the merger with Sprint led to a dramatic drop in shares, and as early as March 2002, the SEC began an investigation into possible irregularities. The May issue of Forth Worth Weekly carried an interview with a person who was allegedly fired for complaining about unfair practices (not paying vendors until the end of 2001 and improper reclassifications on investment projects) within WorldCom. Ebers resigned as CEO in April 2002, and in June of the same year Cynthia Cooper reported to the Audit Committee that there was widespread accounting fraud at WorldCom for which management was responsible. After that, WorldCom's stock was worth just a few pennies a share. Finally, on 21.7.2002. WorldCom filed for bankruptcy under Chapter 11 of the US Bankruptcy Code. Already then, the auditing company Andersen ceased to exist. On the Ide of March[1] 15.3.2005. Ebbers was convicted of criminal conspiracy and false accounting in 2010, and the Wall Street Journal editorial board opined that this ruling was more healing for corporate accounting than the entire SoXa regulations. From the starry skies to the scandals and rapid decline, it was understandable that WorldCom would slow down a bit and the stock price would experience a decline, but no one expected such a crash. Damage was done to both investors and the national economy as a result of the dishonesty, misrepresentation, illegal accounting practices and total lack of professionalism and integrity of the accounting and auditing professions in charge of WorldCom.

Ebers resigned as CEO in April 2002, and in June of the same year Cynthia Cooper reported to the Audit Committee that there was widespread accounting fraud at WorldCom for which management was responsible.

The cause of the criminal act should be sought in the criterion for telecommunications companies that the ratio between costs and income should be 42% (E/R=42%) prescribed by the analyst. WC achieved economies of scale through greater access to telecommunications lines through leasing, i.e. line costs. While demand grew, the expansion strategy worked, but when demand fell, a dilemma arose. Leasing withdrawals entailed penalty fees, and on the other hand, the E/R ratio had to remain at 42% to preserve the value of the shares. This caused a lot of pressure on employees at all levels. WC maintained its 42% E/R ratio through a series of illegal or questionable practices: improper unblocking of accruals (from the second quarter of 1999 to the end of 2000); previous automatic entries from the top of documented income, recorded as "undistributed corporate" income (beginning in the fourth quarter of 1999); the approach of "reducing the disparity" in daily accounting decision-making (starting from the second quarter of 2001 to the end of 2002); and finally, and most daringly, the capitalization of period costs (starting from the third quarter of 2000). Myers got 3.3 out of the improper unblocking of the timing accruals. billions of dollars and thus reduced expenses of the period and analogously, increased the income, in order to thereby support the E/R ratio. Increasing income by simply entering numbers in the income accounts is the practice of WC without any "grit" and finesse. The questionable income was booked as corporate retained earnings and was in the millions or tens of millions of dollars. They appeared at the end of the month ending the quarter totaling $2 billion (between 1999 and 2000). "Gap filling" is another dubious practice by WorldCom aimed at reducing the disparity between planned and targeted revenue in order to meet external growth plans. It artificially created about a billion dollars in questionable income. A flagrant violation of accounting rules by the WC is the capitalization of the costs of the period since 2001. Leasing can be capitalized if the user assumes the benefits, risk and financial burden of ownership. This is not the case with the leasing of telecommunications lines, so it is treated as an operating expense, which WC did until the accruals were exhausted, so the E/R ratio had to be maintained in another way. In 2002, Sullivan decided that period costs for underutilized lines should be capitalized. There was no convincing argument for this procedure, and Sullivan, when the criminal act became public, gave a written statement that the accounting practice was completely ad hoc (!). The period cost correction had nothing to do with underutilized capacity but with maintaining the E/R ratio at 42%. Capitalizations made were randomly distributed on the balance sheet, and Sullivan did not discuss the change in accounting procedure with the external auditor at all.

Audit firm Andersen failed to maintain independence and due diligence in the WorldCom case. Andersen told WorldCom's Audit Committee that he considers himself a "dedicated team member" of WorldCom. This phrase refers to the representative role of Andersen which is inappropriate for the position of an independent auditor. From 1999 to 2000, WorldCom paid Andersen $7.8 million for auditing services and about $50 million for other services, including tax consulting. Andersen proposed to the WorldCom Audit Committee a control-based audit, which relies heavily on the internal control system, the reliability of which is the responsibility of management. In relation to WorldCom, professional skepticism was not necessary because Andersen used software that gave the result that WC was only a high-risk client. Andersen's partners nevertheless declared WC a maximum risk client, but Andersen failed to take the steps required by a maximum risk client. Andersen repeatedly requested a review of the general ledger accounts, but the management refused each time. But it remains unclear how Andersen could then issue a positive audit report on WorldCom when it did not have access to the general ledger accounts. In October 2000, a WorldCom employee told Andersen's UK affiliate that he had been ordered to unblock $33.6 million in accruals, which had caused a shortfall in accruals. WorldCom's internal audit is seen as a hero in the collapse of this technology company. Media attention was directed towards them, and department head Cynthia Cooper was named by Time magazine as the person of the year in 2002. In May and June 2002, Cooper and associates audited capital expenditures, but late in the day so as not to be suspicious. Huge round amounts of capitalization were identified, so they approached the Audit Committee and that's how the criminal activity came to light. However, the internal audit was not without errors either. In December 2001, the audit of capital costs began. When the equity reporting department submitted a report that accidentally or mistakenly included a $2.3 billion negative adjustment under the heading "corporate," internal audit omitted that $2.3 billion from the final report because it was content with the explanation it heard. Then an opportunity is missed to investigate a lead that was directly brought before the internal audit.

Bernie Ebers on 22.09.2005 sentenced to 25 years in federal prison for criminal conspiracy and filing false documents with regulatory authorities. The jury concluded that Ebers had the greatest motive because much of his wealth was tied up in WorldCom stock. He is currently serving time in Louisiana. Scott Sullivan became a state witness against Ebbers, so even though he was the mastermind behind the crimes, he received a relatively light sentence of 5 years. Mayer and Yates were each sentenced to one year in prison, and Betty Vinson, the manager of the accounting department, was sentenced to 5 months in prison and 5 months of house arrest. The fate of Andersen was already known at that time, with the collapse of Enron, it ceased to exist. And Cynthia Cooper, Time magazine's 2002 Person of the Year, has served as counsel to the PCAOB and is in demand as a public speaker.