...edu Wei Kevin Luk Kevin.luk@stmartin.edu AIG’s “LOSs Reserve” accounting Scandal 2005 AIG’s “LOSs Reserve” accounting Scandal 2005 Introduction AIG, American International Group Inc., is one of the top multinational insurance corporations. AIG, with asset of 556 billion, provides insurance service for more than 150 different countries and it has over 630, 000 employees over the world. Even though AIG is such a giant corporation, it has encountered financial problems in the early 2000s. Under financial pressure and a lack of internal control, AIG have committed frauds resulting in several scandals. One of the accounting scandals was disclosed during 2005 which involved a material mis-statement due to false transactions during 2000. This scandal set to prelude leading the downfall of AIG in 2008. In this paper, I will analyze the cause, the transactions and finally effects of the scandal. The Accounting Scandal The Players The CEO of AIG was Maurice “Hank” Greenberg. Greenberg joined AIG in 1962 and led AIG for thirty eight years until his retirement in March 2005. Greenberg was not only the CEO, but also the chairman of the board of AIG. AIG also have several subsidiaries, which include National Union Fire Insurance Company of Pittsburgh (NUFIC) and Hartford Steam Boiler Inspection (HSB). Their financial information are consolidated in AIG’s financial statements. The scandal also involves another corporation General Re Corporation. General...
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...responsibilities of the forensic accountant; and lastly, 4) The role of the forensic accountant in a couple of major accounting fraud scandals. The world of Accounting has seen several major scandals since the early 1990s. These include major accounting failures such as Enron, WorldCom, Adelphia, Tyco, Phar-Mor, Cendant, Computer Associates, AOL, Freddie Mac, ImClone, Qwest Communications, Royal Ahold, Health South Corporation, AIG, Lehman Brothers, and most recently the Olympus Corporation. Some of these have resulted in the collapse and dissolution of the company – Enron, Adelphia; others have resulted in a major restructuring of the company – AOL, AIG, Freddie Mac. Whatever the result, they have all been caused by accounting fraud – either “cooking the books” to hide major losses or to hide the theft of funds. It has also resulted in the failure and absorption of the one of the Big Five Accounting firms – Arthur Anderson. Besides the whistle blower who brought most of these to public view and the lawyers who have been involved their dismantling one of the other major role players, though unsung and unknown, has been the Forensic Accountant. We will be taking a look at this last individual or groups of individuals in most cases. We will look at what they do, their “required” skills and role in courtroom and possibly examine their role in a couple of the noted scandals. The Forensic Account What is a forensic accountant? Bolgna...
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...There have been four serious financial crises and countless more corporate scandals with global implications in just the last decade. All of them driven by greed and corruption, all of them led by dynamic, charismatic business leaders who initially showed fantastic promise, innovation and financial leadership. And it seems with the most recent of these crises, many of the key players in the 2008 global recession have not only not been punished, but are still in the same positions of power and able to continue their transgressions. Here are some interesting highlights of the last decade: Enron scandal (2001): Andrew Fastow the CFO of Enron along with Kenneth Lay the Chairman and Jeffrey Skilling the CEO develop an offbalancesheet mark to market fraud that loses $11 billion and bankrupts Enron. It is the largest bankruptcy reorganization in US history at the time. They are charged with conspiracy, wire fraud, securities fraud, false statements, insider trading and money laundering. Fastow serves 6 years in prison, Lay passes away before sentencing and Skilling is sentenced to 24 years in prison. WorldCom scandal (2005): Bernard Ebbers the CEO of WorldCom loses $100 billion of shareholder value in the largest accounting scandal in US history (until Madoff). Ebbers is charged with securities fraud and conspiracy and is serving 25 years in prison. Bernard Madoff (2008): Bernard L. Madoff Investment Securities LLC heads a $50 billion ponzi scheme, the largest in history, and is charged with securities fraud...
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...ACCOUNTING FRAUDS CONTENTS WHAT ARE FRAUDS? | WHAT ARE ACCOUNTING FRAUDS? | NOTABLE FRAUDS | NOTABLE OUTCOMES | MANIPULATION & FALSIFICATION OF RECORDS | MISAPPROPRIATION OF CASH BALANCES | MISAPPROPRIATION OF GOODS | TEEMING & LADING | WINDOW DRESSING | SECRET RESERVES | ENRON FRAUD | WORLDCOM FRAUD | WHAT ARE FRAUDS ??? FRAUDS AND THEIR CHARACTERISTICS Misstatements in the financial statements can arise from fraud. In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual, Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud Industries most commonly effected by fraud are banking, manufacturing, and government. Fraud can be committed through many media, including mail, wire, phone, and the Internet (computer crime and Internet fraud). * The term “fraud” refers to an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage. Although fraud is a broad legal concept, the auditor is concerned with fraudulent acts that cause a material misstatement in the financial statements. Misstatement of the financial statements may not be the objective of some frauds. Auditors do not make legal determinations of whether fraud has actually occurred. Fraud involving one or more members of...
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...key to the article “Cooking the Books” is to cover the business ethics of an accounting manager ordering one of his accountants to falsifying a company’s accounting ledger. The Generally Accepted Accounting Principle of expense recognition was not followed. The accounting manager was attempting to commit fraud for personal gain, he does this by manipulating the books to show higher revenue in order to meet the volume for management bonus. The accounting manager also created a hostile working environment by threating his accountant’s job security if he didn’t comply with his orders. The Sarbanes-Oxley Act will also be explored to see if there was a violation due to the unethical behavior of the company’s management and the inaccuracy of the company’s financial information. Keywords: Integrity, Ethics, Sarbanes-Oxley, Fraud Cooking the Books The problem is that the accounting manager has ordered his employee to falsify the books so that the company can show higher revenue in their current year in order to meet volume for a management bonus. These actions are unethical, fraudulent and may violate the Sarbanes-Oxley Act. Basis of violation Business ethics comes in to play for the mere reason that as soon as the company starts to manipulate the books in order to get a bonus, the company’s trust is lost. If they will do this then what else will they do in order to make themselves look better? The accounting manager openly admitted that the only reason that he wants the 1.2 million...
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...Accounting Ethics 2 1. Given the corporate ethical breaches in recent times, assess whether or not you believe that the current business and regulatory environment is more conducive to ethical behavior. The ethical breaches in recent times, Weygandt, Kimel, Kieso( 2012) researched that “financial press open full articles and documents facts about financial scandals at Enron, WorldCom, HealthSouth, AIG, Adelphia Communication and Cable and more. As the scandal came to light people did not play the stock market if they believe that the stock prices were rigged.” Weygandt, Kimel, Kieso (2012) researched that; “the United States government regulators and lawmakers were very concerned that the economy would suffers if investors lost confidence in corporate accounting because of unethical financial reporting. In response, Congress passed the Sarbanes-Oxley it is intent is to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals. As a result of SOX, top management must now certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements and increased the oversights role of boards of directors. The effective financial reporting depends on sound ethical behavior...
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...Our case study discusses the rise and fall of one of the largest telecommunications corporations in the world, Nortel Networks Corporation. Nortel was one of the many early 21st century telecommunications companies that failed due to upper echelon management, a dysfunctional board of directors, inflated costs and earnings, and a smoke and mirrors illusion of stability. There were many avenues that could have been taken that would have prevented the demise and fall of the organization, but those roads were not traveled. Many argue that government intervention could have prevented the backlash and whitewater effect of Nortel’s bankruptcy, but due to corporate ties within the government and the Securities and Exchange Commission the many CEO’s continued to elude the government auditors and the stakeholders. From an ethical perspective, there were several factors that contributed to the rise and fall of Nortel. The initial CEO and founder of Nortel, John Roth, demonstrated altruistic behavior because he did want the company to profit, the investors to profit, as well as their primary stackholders. Nortel’s fall from grace came swiftly and on many fronts. Its market capitalization climbed to an all-time high of $398 billion in September 2000. Two years later, in August 2002, the amount had plunged to just $5 billion (Collins, 2011, pg. 536). In 2000, Nortel was Canada’s largest producing company and employed 93,000 people worldwide. Their research and development team was renowned...
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...Memo of law Question/Issue Presented What evidence can be found during a legal discovery and how does this affect the record-keeping policy of a business organization? Applicable Law and Ethical Standards Newby v. Enron Corp. , 2002 U.S. Dist. LEXIS 28397 (S.D. Tex. May 1, 2002) Newby v. Enron Corp. (In re Enron Cor... , 2003 U.S. Dist. LEXIS 1668, Fed. Sec. L. Rep. (CCH) P92404 (S.D. Tex. Jan. 28, 2003) United States v. Arthur Andersen LLP , 2002 U.S. Dist. LEXIS 26870 (S.D. Tex. May 24, 2002) 18 USCS § 1512 Discussion/Analysis (of Law and Facts) During a legal discovery which includes the procedures of Deposition, Interrogatories and Production of Documents there can be different evidence found depending on the area of work the business organization is involved in. An example could be that a company tried to create false documents with the intent to seem like a good investment or to avoid paying taxes. During a deposition evidence can be found that people questioned tell conflicting stories. It is crucial to be able to deliver the right documents requested during a discovery. Therefore, it is important to have an organized record-keeping policy for any organization. Furthermore, a business should keep its records as correct as possible and not be tempted to give in to fraud, changing documents or destroying important documents. A company should follow the law to keep the required documents. It would be a crime to hide, destroy and/or withhold subpoenaed...
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...Final Paper: Case Study of WorldCom Financial Statement Fraud Introduction This paper will discuss the financial statement fraud committed by WorldCom by examining what led up to the fraud, who committed it and why, and the impact it caused on various stakeholders and the economy. WorldCom applied aggressive and undisclosed accounting tactics to provide financial statements that reflected a $10 billion profit for the years 2000 and 2001, rather than the actual combined loss of $73.7 billion that occurred (Romar, 2006). Opportunity, pressure, and rationalization were all present in this severe example of financial statement fraud which had a devastating impact on stakeholders globally. Basis for Understanding Financial Statement Fraud Prior to taking a deep dive into this specific example, it is important to first understand what constitutes financial statement fraud. Financial statement fraud can be defined as “deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors” (Wells, 2011, p. 299). Financial statement frauds can be broken down into five distinct categories: fictitious revenues, improper asset valuations, concealed liabilities and expenses, timing differences, and improper disclosures” (Wells, 2011, p. 292). The History of WorldCom “WorldCom began in Mississippi as a small provider of long distance telephone services” (Lyke, 2002). However, due to deregulation...
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...Falling short of their words, we find the falling of this company through their illegal ethics that brings forward much of their self-interest needs and not those of the company and investors that they are responsible for and to. After the investigation, their accounting firm, Anderson, played both sides by providing dual services, auditing and consulting, which is considered a conflict of interest. They would take money from new investors and pay the old ones, they knew how to hide the debts and only show where there were profits. Falsifying documents and shredding of reports to hide what they didn’t want investors & employees to see as well. Senior executives cashing out their stocks to make millions for themselves and telling the rest of the company that they cannot cash out theirs, that it’s for the sake of the company to keep being invested. At the cost of the employees and investors, the executives were unethical, breaking the rules of the SEC and seek to gain it all for themselves, this is “self-interest” and illegal. They knew what they were doing, especially when it was reported by an Enron accountant saying she was “incredibly nervous that we will implode in a wave of accounting scandals.” They never warned employees or the public of their problems, but instead Chairman Ken Lay lied to the staff. A distribution email was sent by him to the staff stating, “Our performance has never been stronger; our business model has never been more robust;...
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...(kickbacks, extortion); and fraudulent statements (financial statements, employment credentials)” (Akron/Canton, 2012). Without the knowledge of occupational fraud and abuse a company’s bottom line could be seriously affected. Not only does occupational fraud and abuse affect a company’s bottom line, but it can also affect employee morale, and customer loyalty. Undetected fraud and abuse can and has destroyed companies in the past and we as a company should make sure this does not happen. 2) U.S. governmental oversight of accounting fraud and abuse and its effect on the company. The United States government has implemented rules and regulations to handle occupational fraud and abuse. These rules and regulations come with penalties on companies and management personnel that have committed occupational fraud and abuse. In 2002 the United States government enacted the Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act. The SOX act is an oversight that makes the top management certify that the financial...
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...Regardless of the term accounting in forensic accounting, the discipline isn’t related to simply reading financial statements that are available to the public or dealing with other accounting issues; the usual accountants, portfolio managers, investment analysts, and etc. already do the regular financial tasks. Instead, forensic accounting scrutinizes the financial documents that are internal which aren’t readily available to the public; these documents are usually considered in litigation affairs. Generally, the field of accounting was undergoing a major overhaul; before the recent economic crisis that has devastated some parts of the western world, the accounting scandals regarding WorldCom and Enron pushed the field towards change. Accounting in general was put under scrutiny as a result of increasing white collar crime and the economic crisis pushed that process even faster and further. Ergo, there was an increasing need to have forensic accountants and the field in general needs proper development in its education system and practice for it to be effective. Overall, the laws of the developed world favor the ones who commit white collar crimes rather than a person robbing a convenience store with a gun. The problem with policymaking in the current democratic regimes is that it’s a paradox that allows white collar crimes like WorldCom and Enron to get away or only end up with a milder outcome than the robbers who may physically go out and do it with a gun. Of course, debating...
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...REPORT OF INVESTIGATION BY THE SPECIAL INVESTIGATIVE COMMITTEE OF THE BOARD OF DIRECTORS OF WORLDCOM, INC. Dennis R. Beresford Nicholas deB. Katzenbach C.B. Rogers, Jr. Counsel Wilmer, Cutler & Pickering Accounting Advisors PricewaterhouseCoopers LLP March 31, 2003 I. SUMMARY AND CONCLUSIONS ................................................................................. 1 A. The Nature of the Accounting Fraud....................................................................... 9 1. 2. B. C. D. E. Reduction of Reported Line Costs .............................................................. 9 Exaggeration of Reported Revenues ......................................................... 13 WorldCom’s Culture ............................................................................................. 18 Compromising Financial Arrangements ............................................................... 24 Why WorldCom’s Auditors Did Not Discover the Fraud..................................... 25 WorldCom’s Governance...................................................................................... 29 1. 2. 3. 4. Board’s Lack of Awareness of Accounting Fraud .................................... 29 Adequacy of Board’s Oversight of Company ........................................... 30 Stock Sales ................................................................................................ 33 Lease of Airplane to Chairman of Compensation Committee ......
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...their business elsewhere. 3. If Baidu.com could reassure their stakeholders that their information is reliable. And the companies that pay for advertising will receive the services expected. If they are unable to restore their creditability they could possibly go out of business as indicated by the drop in their stock. ‘5. By developing a culture of openness and by diminishing that culture of secrecy. And the government putting laws in place to determine the behavior of the country. WorldCom: The Final Catalyst 1. WorldCom created excess reserves or provisions for future expenses, which they later released or reduced, thereby adding to profits. The manipulation of profit through reserves or provisions is known as “cookie jar” accounting. According to the SEC first, WorldCom improperly released certain reserves held against operating expenses. Second, WorldCom improperly recharacterized certain operating costs as capital assets. 2. I am uncertain, but I believe the Arthur Andersen auditor lost its independence when conducting the WorldCom audit. Two members of upper management were previous employees of Arthur Andersen made personal. And the fact that Andersen’s...
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...twenty first century, and in the wake of the terrorist attacks of 9/11, the business world was rocked with news of financial and accounting scandals at major Fortune 500 companies. Enron, a Texas based energy company, lied about profits and was accused of concealing debts so they did not show up in the company’s accounts (BBC News, 8/22/2002). Arthur Andersen, an accounting giant, member of the “Big Six”, and Enron’s corporate auditor, collapsed completely after being found guilty of deliberately destroying evidence of its relationship with Enron (BBC News, 8/22/2002). Tyco executives L. Dennis Kowlowski and Mark H. Swartz were indicted and charged with misappropriating more than 170 million dollars from the company as well as outright stealing 430 million additional dollars through sale of fraudulent shares of Tyco stock (Daniels Funds Ethics Initiative). MCI Worldcom was found guilty of accounting fraud in relation to an overstatement of earnings in 2001 and 2002 (CSR Report for Congress, 8/29/2002), during which time its own auditor was also Arthur Andersen. Executives at each firm (Kenneth Lay, Bernard Ebbers, Dennis Kozlowski, and Mark H. Swartz amongst others) served jail time for their role in these scandals, which severely eroded the public’s trust in the corporate sector. Tyco’s stock plunged from $60.00 to $18.00 in the wake of the scandal, and many employee stockholders saw their savings dissolve (Daniels Fund Ethics Initiative). MCI Worldcom employees/stockholders...
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