Accounting Scandals

Proper accounting methods are more important now than ever before in light of recent corporate
scandals. The names of Enron, Arthur Andersen, and WorldCom are enough to bring a shudder
to any auditor. The fall of these corporate giants due to unscrupulous accounting practices is one
reason that many companies are placing a renewed focus on accountant training and education.
Three of the biggest of the “creative accounting” scandals that surfaced in the early 2000s:

Enron
The fraud that was uncovered in 2001 at this blue chip Energy leader was so egregious that it led
to the largest bankruptcy in history, hundreds of employee lay-offs, the dissolution of accounting
firm Arthur Andersen, and 16 criminal convictions.
Evidence showed that through irregular accounting practices, Enron deliberately hid its debts and
losses and falsely reported profit to banks, auditors and shareholders.
As the scandal was revealed the company’s stock plunged from $90 to just pennies, causing
many Enron employees to lose their entire life-savings and retirement funds.

WorldCom
An American telecommunications company, WorldCom eventually went bankrupt in 2003 after
years of using fraudulent accounting methods to hide its declining financial health.
In June 2002, the company’s internal audit department uncovered $3.8 billion of accounting
fraud and alerted the company’s new auditors KPMG (who had replaced accounting firm Arthur
Andersen).
Their findings showed that between 1999 and May 2002, WorldCom allegedly underreported
expenses by capitalizing costs on balance sheets rather than expensing them. It also inflated
revenue with false accounting entries. It was estimated that the asset inflation hovered around
$11 billion.
WorldCom filed bankruptcy and paid $750 million to the Securities Exchange Commission in
cash and stock, which was intended to be paid to wronged investors.

Halliburton
Another world leader in the Energy sector, Halliburton has been the subject of several
controversies. Its accounting practices were questioned in 2002, when shareholders brought a
suit against the company alleging it improperly inflated its profits by accounting for cost
overruns as revenue.
Included as a defendant in the suit was accounting firm Arthur Andersen LLP and Arthur
Andersen Worldwide.
Halliburton countered that its practices were approved by its accounting firm and conforms to
generally accepted accounting practices. In 2004, the company paid $7.5 million in fines to settle
the issue.