Ministry of Education and Science of Ukraine

Simon Kuznets Kharkiv National Economic University

Topic: Finantial scandals

Project work
By Veremeenko Kateryna
A 3th-year student of managment and marketing
group 6.02.072.080.17.1

Scientific Advisor
Ph.D. (in Philology) Ass. Professor
Samsonenko, N.I.

Kharkiv – 2020
 Finantial scandals
Why bookkeeping? The question is not as simple as it may seem. It is believed that
it makes business activities transparent, information on business processes is more
reliable and structured. In addition, the possibility of abuse and theft is reduced. At
least that is how things should happen in theory. In practice, there are quite a few
stories where accountants are committed to successfully conceal losses, cover
management frauds and steal huge amounts from corporate accounts.

Enron
Before the story with Enron, most Americans were convinced that the built-in
system for monitoring the activities of corporate executives was almost perfect.
Several reporting levels, audits, internal financial monitoring - the credibility of
profit indicators was absolute. Therefore, when it became clear that the
management of Enron, with the connivance of its auditors, had falsified accounting
documents and drew non-existent profits for a decade, it was a real shock. Until
now, Enron will be in the top 10 most high-profile financial scandals in the United
States.

The main reason for this situation is the desire of management to receive bonuses,
despite fairly mediocre results. The largest gas trader in North America and
England for a long time worked at a loss, although according to financial reports
seen by shareholders and analysts, revenues grew seven and a half times. As a
result, the value of the stock soared to $ 90, and the market capitalization exceeded
$ 65 billion. Almost all of this money was lost by investors. The founder and the
permanent head of the company, Kenneth Lay, launched the scheme.

They bought products from Enron at inflated prices and sold them at a lower cost
chain. As a result, the company drew for itself any necessary financial result. It
turned out to reveal a scam only after a special investigation of the journalist
Bethany Macklin. All supervisors and auditors did not notice anything suspicious.

Moreover, in addition to the accountants of Enron itself, Arthur Andersen

specialists also noted in the scandal. They not only covered her dubious operations,
but also physically destroyed documents that could expose them.
 Olympus
One of the oldest Japanese companies also used very dubious accounting methods
to conceal their own losses. Unlike Enron, Olympus was able to survive and
continue to work, although it lost 80% of its value. The scandal undermined
confidence not only in the company itself, but also in the corporate governance
system in Japan, which had previously been considered impeccable.

The scam was revealed by British Olympus top manager Mike Woodfort. He
admitted that the company had been trying for almost twenty years to conceal the
loss of $ 1.5 billion from unsuccessful investments. For this, it used the so-called
“tobash scheme” and the help of external investment funds. For example, the
company paid almost a third of the transaction amount for consultations when
buying Gyrus, with the usual 1-2%. And for three non-core and small enterprises -
just $ 0.7 billion, which is much more than their real value.

In the nineties, they were safely checked by Arthur Andersen. The same ones that
were noted in the Enron scandal. The company then collaborated with KPMG and
Ernst & Young. Those also did not tell investors. The final for the company was
happy. Shareholders removed all management from their posts, those directly
responsible for concealing losses received from 2 to 4.5 years in prison, and
Woodfort became the man of the year according to several magazines.

WorldCom
Almost immediately after the Enron story, a series of revelations swept through the
United States. The loudest was the story of the telecommunications company
WorldCom. At one time, this company managed to grow from a very modest
telecom operator in the state of Mississippi to the second in the long-distance
telephone market. And then followed a real collapse and a major financial scandal.

Actually, telecommunication companies at that time were going through hard

times. Revenues began to fall, customers went to mobile operators, and the stock
market turned out to be “overheated”, which made their shares too overvalued and
began to get cheaper. However, it was not without various frauds. For example,
Adelphia owners simply took a million dollars every day without any reason or
documents. So WorldCom was noted.

In the summer of 2002, management announced that it was forced to revise

previously announced earnings due to an accounting error. That's just the sum of it
was $ 3.8 billion. It soon became clear that the financial director of the company
simply transferred part of the operating expenses to capital investments. After the
investigation, it became clear that in this way he wanted to hide the losses that the
company suffered through the fault of ex-head Bernard Ebbers, and $ 3.8 billion -
this is far from all. Assets were overpriced by $ 11 billion. Before the Madoff
scam, this was considered the largest fraud.

The article did not include some other financial scandals related to losses on the
exchange, such as the situation with Société Générale in 2008, or an outright crime
of the "investment" Madoff fund. Nevertheless, accounting has practically nothing
to do with them. In the first case, the problem surfaced immediately thanks to
accounting, and in the second, the fund initially forged all the documents.

Do not even think that after these three revelations, the companies became more
cautious, and the auditors carefully checked the statements. Not at all, such stories
regularly appear in the news feed. Maybe it's just not that massive. For example,
recently in the UK, Tesco retail chain management boomed in recognition of
overpriced profits of £ 263 million. Naturally, some trivial “accounting error” is to
blame. This is what the corporation itself insists on. True or not, it will be clear
after the investigation and trial.