University of Adelaide

ACCOUNTING SCANDALS
LIES, DAMNED LIES AND MANAGED EARNINGS

Kate Harris Business School
Life Impact The University of Adelaide

University of Adelaide

What is the perception of accountants?
Traditionally either boring

Or:

Life Impact The University of Adelaide

University of Adelaide engaged in fraudulent activity! Life Impact The University of Adelaide .

University of Adelaide Fraudulent accounting ‡ Fraudulent accounting has an impact on the financial statements of a company ‡ Can give users the wrong impression of the financial situation ± both earnings and the financial position ± of a company ‡ Leads to accounting scandals Life Impact The University of Adelaide .

University of Adelaide Accounting scandals ‡ A long history of corporate collapses around the world ‡ Many because of fraudulent accounting practices ‡ Affects public confidence in financial reporting and in the accounting profession Life Impact The University of Adelaide .

‡ Mid.University of Adelaide Who commits financial fraud? ‡ Mostly senior management (CEO and CFO).and lower-level management Life Impact The University of Adelaide . and.

University of Adelaide How is accounting fraud committed? ‡ Common ways are: ± Fictitious or fabricated revenue ± Altering revenue recognition times ± Improper asset valuations and reporting Life Impact The University of Adelaide .

University of Adelaide How is accounting fraud committed? ± Concealing liabilities and expenses ‡Capitalising costs rather than expensing them ‡µbig bath¶ ± Improper financial statement disclosures Life Impact The University of Adelaide .

University of Adelaide QUESTION WHAT WOULD MOTIVATE A MANAGER TO COMMIT AN ACCOUNTING FRAUD? Life Impact The University of Adelaide .

University of Adelaide Why commit fraud? ‡ Seniors managers: ± Hide true business performance ‡Meet analysts forecasts ± Keep status and control ‡Value in the managerial labour market Life Impact The University of Adelaide .

University of Adelaide Why commit fraud? ± Maintain their own income and wealth ‡Remuneration based on profit ± Obtain loans ± Inflate share price of shares they plan to sell ± Political costs/benefits Life Impact The University of Adelaide .

and lower-level managers ± Hide poor performance of their division ± Earn performance-based bonuses Life Impact The University of Adelaide .University of Adelaide Why commit fraud? ‡ mid.

University of Adelaide Some examples ‡ Enron (US) ± Biggest US collapse ± Increased profits and hid debts of over $1 billion over several years ‡ Worldcom (US) ± Overstated earnings and assets by capitalising $9 billion of operating expenses Life Impact The University of Adelaide .

5 billion by misapplication of accounting rules ‡ Global Crossing Ltd (Bermuda) ± Inflated revenues (then shredded documents related to this accounting practice) Life Impact The University of Adelaide .University of Adelaide Some examples ‡ Xerox (US) ± Overstated earning for five years by $1.

‡ Harris Scarfe (Australia) ± Overstated inventory to boost profit and assets Life Impact The University of Adelaide .University of Adelaide Some examples ‡ Vivendi Universal (France) ± Inflated profits by intentionally violating certain accounting principles.

University of Adelaide Some examples ‡ Satyam Computer Services (India) ± The founder had recently received a Golden Peacock award for excellence in corporate governance ± Admitted to falsifying results and overstating assets ± Likened to Enron in the US Life Impact The University of Adelaide .

University of Adelaide Accounting scandals ‡ Get a lot of publicity in the media. damned lies and managed earnings ‡ Affects perception of the accounting profession Life Impact The University of Adelaide . For example: ± Golden Peacock plummets from grace ± Japanese massage ± corporate shenanigans in Japan ± Lies.

University of Adelaide Accounting scandals ‡ Accounting scandals that result in corporate collapses affect many others .not just the profession ‡ Give rise to corporate governance issues ‡ Question the business ethics of managers (and others involved in the fraud) Life Impact The University of Adelaide .

University of Adelaide QUESTION CAN YOU NAME TWO OTHER GROUPS WHO ARE AFFECTED BY ACCOUNTING SCANDALS THAT RESULT IN A CORPORATE COLLAPSE? Life Impact The University of Adelaide .

University of Adelaide Impact of accounting scandals ‡ Investors ± Rarely see a return of capital ‡ Creditors ± May not recover loans ‡ Employees ± Loss of jobs ‡ Community ± Suppliers ± Customers ± Local businesses Life Impact The University of Adelaide .

University of Adelaide Impact of accounting scandals ‡ Governments ± Increase regulation ‡Sarbanes-Oxley Act in US ‡CLERP 9 in Australia ‡ Public ± Lose confidence in financial markets ± Outcry over business ethics Life Impact The University of Adelaide .

University of Adelaide Is this ethical behaviour? Life Impact The University of Adelaide .

University of Adelaide Future accounting scandals? ‡ In the current economic climate µpreviously submerged wrecks can no longer remain hidden¶ ‡ Accounting fraud that is easier to hide in less stormy economic conditions are more likely to come to light Life Impact The University of Adelaide .

University of Adelaide ‡ Did you know that the word LEDGER takes its name from LEGGEN ± old English for TO LIE! ACCOUNTING SCANDALS ± FOOD FOR THOUGHT THANKYOU Life Impact The University of Adelaide .