Summary
The Enron, WorldCom, and Waste Management Inc. scandals are examples of well-known financial scandals. They led to the loss of investors’ money and assets worth billions of dollars. The executives of these companies accomplished the scandals through falsification of statements, misrepresentation of revenue, and reporting of fake earnings. The Enron scandal led to the bankruptcy of the company and the loss of jobs. The WorldCom scandal inflated the company’s assets by approximately $11 billion and led to the loss of about 30,000 jobs. Finally, the waste Management Inc. scandal led to the loss of approximately $6 billion and inflation of the company’s revenue by $1.7 billion. These scandals affected the global financial market adversely and contributed to the harsh global recession that affected many countries for several years.
Introduction
The business world has experienced many financial scandals in the past five decades. The scandals contributed to the global recession of 2007-2009 that led to the collapse of many companies and financial institutions. They involved misappropriation and falsification of billions of dollars. A financial scandal involves illegal accounting activities like overstating the value of corporate assets, illegally adjusting a company’s stock value, and misrepresenting liabilities and expenses (Markham, 2006). Many company executives perpetuate financial scandals by inflating expected earnings in order to increase their organizations’ stocks values, lowering projected expenses, initiating off-balance-sheet transactions, and reporting misleading projections of their companies’ earnings (Markham, 2006). Examples of the most well-known financial scandals involved companies that include Enron, Waste Management Inc., WorldCom, Tyco, HealthSouth, Freddie Mac, and American Insurance group.
The Enron financial scandal
Enron was a Houston-based company that dealt with commodities, services, and energy. It sold natural gas and electricity and provided financial services such as risk management. In addition, it provided services that included facilitating internet connectivity to clients across the world. Signs of the company’s collapse and financial mismanagement surfaced in 1997 when the top executives made certain managerial decisions that aimed to increase profits and conceal the company’s huge debts. The main players in the scandal were the then CEO Jeff Skilling and former CEO Ken Lay. The scandal led to the loss of $74 billion worth of investors’ money, loss of thousands of jobs, and loss of employees’ retirement benefits (Sterling, 2002). The two executives were able to execute the scandal by concealing the company’s huge debts.
They ensured that the debts were excluded from the balance sheets. In 1999, the management lied to investors that the company had acquired stocks to cushion its poorly performing assets from financial risk. In 2001, the company reported losses of about $683 million due to the failure of broadband service, and the depreciation of stocks that had been purchased to mitigate the financial risk of other assets (Sterling, 2002). During investigations, the Securities and Exchange Commission (SEC) discovered debts that amounted to $690 million. Enron’s unethical financial practices and intricate business model were the main reasons for using illegal accounting methods to give false earnings and alter the balance sheet in order to give the impression of good performance (Sterling, 2002). The company used the merchant model for revenue reporting. This method inflated revenues and was thus used to give the impression of the company’s excellent financial performance.
The Waste Management Inc. scandal
This scandal was perpetrated by a Houston-based waste management company known as Waste Management Incorporation. The scandal was spearheaded by the founder of the company, top executives, and auditors from the Arthur Andersen Company. They reported fake earnings that amounted to $ 1.7 billion, which inflated the company’s profits (Rezaee & Riley, 2011). On the other hand, investors encountered losses of more than $6 billion. The perpetrators managed to accomplish the scandal by illegally increasing the depreciation time of their assets on the balance sheet. These assets included company property, equipment, and factories. Actions that contributed to the scandal included avoidance of depreciation expenses on garbage trucks, assignment of arbitrary salvage values to certain assets, failure to report depreciation values of landfills, and failure to establish liabilities to cover for taxes and company expenses (Brooks & Dunn, 2009). The scandal was unearthed after a new CEO took over the management of the company. It had several consequences that included a $457 million lawsuit against the company’s top executives and a fine of $7 million for Arthur Andersen Company (Rezaee & Riley, 2011).
The WorldCom (MCI Inc) financial scandal
MCI Inc was established through the merger of WorldCom and MCI Communications. Initially, it was referred to as MCI WorldCom but the name was later changed to WorldCom. Today, the company is known as MCI Inc. The CEO of the company, Bernie Ebbers, committed financial fraud in two main ways. First, he underreported line costs by presenting them as capital expenditures on the company’s balance sheet rather than expenses (Gerber & Jensen, 2007). Second, he used dubious accounting techniques to misrepresent the company’s revenues. This led to the inflation of the value of assets by approximately $11 billion. Ebbers and the Chief Financial Officer (Sullivan) used fraudulent accounting methods to show that the financial earnings of the company were decreasing so that they could maintain the value of the stock. The scandal led to the loss of more than 30,000. Investors lost more than $180 billion worth of investments (Gerber & Jensen, 2007).
The scandal was unearthed after the company’s internal auditor reviewed the accounts and statements of the organization. The auditor uncovered $3.8 billion in fraud and gave several recommendations. The auditors carried out the investigation secretly at night and in the absence of the company’s CEO and CFO. After the revelations, the CEO and the CFO were dismissed. The company filed for bankruptcy and Ebbers was handed a 25 years jail sentence on grounds of fraud and filing false financial documents (Brooks & Dunn, 2009). The consequences of the WorldCom scandal led to the enactment of the Sarbanes- Oxley Act by Congress that was intended to prevent such scandals. The scandal affected the company severely because the inflation of assets affected the stock value of the company in the financial markets. WorldCom paid $750 million in cash to the United States Securities Exchange Commission as well as stocks to the new company, MCI (Gerber & Jensen, 2007).
Conclusion
Financial scandals have severe consequences that usually include loss of jobs, the bankruptcy of companies, and loss of investors’ money. In the last three decades, the financial world has experienced several financial scandals that have affected the financial markets adversely. Examples of well-known scandals include Enron, Waste Management Inc, and WorldCom financial scandals. They led to the loss of many jobs, loss of investments, and bankruptcy of some companies. Fraud was uncovered after auditors reviewed the companies’ statements. The scandals were accomplished because top management executives were the masterminds.
References
Brooks, L., & Dunn, P. (2009). Business and Professional Ethics: For Directors, Executives, & Accountants. New York: Cengage Learning.
Gerber, J., & Jensen, E. (2007). Encyclopedia of White-Collar Crime. New York: Greenwood Publishing Group.
Markham, J. (2006). A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform. New York: M.E. Sharpe.
Rezaee, Z. & Riley, R. (2011). Financial Statement Fraud Defined. New York: John Wiley & Sons.
Sterling, T. (2002). The Enron Scandal. New York: Nova Publishers.