What Went Wrong? Accounting Fraud Andlessons from the Recent Scandals
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In the public eye, Enron 's mission was nothing more than the cover story for a massive fraud.
--Bethany McLean and Peter Elkind
CORPORATE FRAUD, BANKRUPTCIES, AND VARIOUS ILLEGAL ACTS HAVE
always been part of the business environment. Every time fiascos erupt there is a shock, but business history records dozens of major failures, frauds, and other measures of massive corruption each decade. The big ones often hit during recessions or periods of other economic problems, as expected. The high-risk firms are the most vulnerable to economic shocks. The recent scandals are no exceptions. The most important scandals are the focus of this paper and are summarized in table 1.
Although the problems that exist are diverse, a few common characteristics stand out. The first is the obvious backdrop of corporate greed. Presumably, senior executives expect to get away with it. They also fit the financial-corporate culture described above. And earnings manipulation is part of (and usually central to) most of the scandals. Some of them used brazen and unsophisticated approaches (such as WorldCom), while others used new, sophisticated devices to defraud (like Enron). Determining the existence of criminal acts takes years.
Two industries were particularly prominent in the scandals: the energy companies and telecommunications. Deregulation allowed the stodgy energy companies that carried out such basic operations as transmitting natural gas to become high-tech energy traders using sophisticated derivatives and structured-finance deals. The result was giant profits for the lenders. Continued big profits meant increasing risks and more complex deals. For Enron and others it also meant hiding the losses in controversial and often fraudulent off-balance-sheet schemes. The telecommunications industry transformed from monopolist AT&T in the 1970s to a group of dynamic and competitive high-tech giants, all trying to integrate and dominate with new
In the public eye, Enron 's mission was nothing more than the cover story for a massive fraud.
--Bethany McLean and Peter Elkind
CORPORATE FRAUD, BANKRUPTCIES, AND VARIOUS ILLEGAL ACTS HAVE
always been part of the business environment. Every time fiascos erupt there is a shock, but business history records dozens of major failures, frauds, and other measures of massive corruption each decade. The big ones often hit during recessions or periods of other economic problems, as expected. The high-risk firms are the most vulnerable to economic shocks. The recent scandals are no exceptions. The most important scandals are the focus of this paper and are summarized in table 1.
Although the problems that exist are diverse, a few common characteristics stand out. The first is the obvious backdrop of corporate greed. Presumably, senior executives expect to get away with it. They also fit the financial-corporate culture described above. And earnings manipulation is part of (and usually central to) most of the scandals. Some of them used brazen and unsophisticated approaches (such as WorldCom), while others used new, sophisticated devices to defraud (like Enron). Determining the existence of criminal acts takes years.
Two industries were particularly prominent in the scandals: the energy companies and telecommunications. Deregulation allowed the stodgy energy companies that carried out such basic operations as transmitting natural gas to become high-tech energy traders using sophisticated derivatives and structured-finance deals. The result was giant profits for the lenders. Continued big profits meant increasing risks and more complex deals. For Enron and others it also meant hiding the losses in controversial and often fraudulent off-balance-sheet schemes. The telecommunications industry transformed from monopolist AT&T in the 1970s to a group of dynamic and competitive high-tech giants, all trying to integrate and dominate with new
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