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Transcript of Accounting Scandals
By: Conner Gould, Ashwin Thottupurath, Uzma Nadir, Shruti Raj and William Sarbaz
2)The Ponzi Scheme
The Ponzi Scheme
The scheme was named after Charles Ponzi who became very famous for using the technique in 1920 due to the large amount of money involved
it is an investment fraud where the perpetrator gives existing investors purported returns from the money contributed by new investors
these investments usually seem to have a low risk and high returns which is a good way to identify them
4) History of accounting scandals
5)Why are accounting scandals occurring
6)The effects of accounting scandals
7) Organizations who are trying to stop accounting scandals
8) Consequences faced by perpetrators
What is it?
An accounting scandal is the intentional misrepresentation or alteration of accounting records for financial gain. These records may regard sales, revenues, and corporate assets which may be under or over stated in order to attract various types of investors.
Example: A business may overstate its assets to increase its share prices
When did they first occur?
Accounting scandals have been occurring since the beginning of commerce. The earliest known case occurred in 300 B.C when a Greek merchant named Hegestratos commited a bottomry scam which was a large insurance policy that the ancient Greeks used.
Bottomry is when a captain of a boat borrows money from a lender and then starts to sail. If the captain makes it to his destination he must pay back the lender what was borrowed along with interest. If the boat sinks though the lender loses their money.
Why are they occurring?
1) Pressure from investors: Some investors may be looking to get a great return from many well known companies and as a result these companies may force their accountants to manipulate the values so that the company appears to be doing better than they are.
2) Executive greed: Perpetrators may be greedy to get a promotion which depends on records which they have access to. Out of this greed they may commit a fraud.
Pressure from investors.
here are several reasons why accounting scandals occur and the reason for every perpetrator may be different. Above are a few possible reasons.
The Pyramid Scheme
This scheme is structred like a pyramid hence the its name is the pyramid scheme
The initial investor is at the top of the pyramid and he/she recruits a new investor whose money is paid to the initial investor
Ex. An initial investor recuits a new investor who must invest $100 which is given to the intial investor
In order for the new investor to earn back their money they must recruit other investors below them
Ex. The new investor then recruits another 10 investors who each invest $100 as well. The new investor has then made $900 off the $100 he/she invested.
The second batch of investors now become recruits as well and must find new investors to earn back their money
Ex. Those 10 recruits now become recruiters and each recruit 10 more investors who invest $100 each.
This process continues until the new recuiters can no longer find any new investors which is when the whole pyramid collapses.
Skit number 2
The financial cost of accounting scandals can be enormous and has a direct affect on the corporation and the shareholders of that corporation.
There are also other effects that accounting scandals can have which effect everyone from the company’s employees to their investors and customers
There can be several people, businesses and agencies involved in an accounting scandal
What is the problem and what are the effects?
Shareholders lost over $60 billion
Enron created special purpose entities so that large debts would not appear on balance sheets.
People invested because it looked like a successful company.
When the scandal was revealed in 2001, the value of the shares dropped and thousands of people lost their savings and pensions.
It was one of the largest accounting scandals in history
They had a $79.5 billion loss
In the 1990s, the CEO, Bernard Ebbers, borrowed money to buy WorldCom stocks.
The telecommunication industry was doing well and Ebbers become rich.
In the early 2000s, the industry was doing poorly and the stock prices fell. In an attempt to stop going bankrupt, Ebbers and other company executives altered accounting statements.
WorldCom purchased the rights to another telecom company and labelled the cost as an asset instead of an expense. This increased the value of the company and their stocks.
The scandal was discovered by employees working in secret and the board of directors fired all of the executives.
Soon, WorldCom filed for bankruptcy.
Lost more than $50 billion
The accountants that were working at Lehman Brothers lost over $50 billion in loans.
These loans were classified as sales. The executives and auditing firm changed the balance sheet through a trick called Repo 105.
Repo 105 lets a short-term loan be classified as a sale.
This makes a balance sheet look better. Repo 105 can be used to conceal a company’s debt.
The company - The accounting records of this company are changed to look more impressive
The perpetrator(s) - Uses various tactics to mislead the executives for a financial gain.
The auditing firm - Responsible for looking through a business’ accounts.
Organizations/Individuals that are trying to Stop Accounting Scandals
"Don't commit a scandal its too much to handle"
Almost all Canadian Provinces have their own Provincial Securities Commission which is basically a corporation or agency that provides reliable information and protection to investors from unfair, improper or fraudulent practices and restores confidence in capital markets.
The Ontario Securities Commission(OSC) is responsible for providing this to the investors in Ontario. The OSC is an independent crown corporation that has been given their powers under the Securities Act (Ontario) the Commodity Futures Act (Ontario) and certain parts of the Business Corporations Act
Deliver responsive regulation
Deliver effective enforcement and compliance
Deliver strong investor protection
Run a modern, accountable and efficient organization
Support and promote financial stability
An American author by the name of Daniel Gross is also trying to prevent accounting scandals by writing an article on "the best way of preventing future accounting scandals." This will encourage the readers to take action and prevent them from making future mistakes.
The U.SA also has their own agency like Ontario's called the U.S. Securities and Exchange Commission(SEC) which serves a very similar purpose.
Consequences Faced By Perpetrators
After an investigation has been conducted and the perpetrator has been convicted there are several courses of action that can take place.
If the investigation is conducted by the OSC they might initiate an enforcement proceeding against the perpetrator in which they can:
impose sanctions, such as banning individuals from leadership roles in public companies
order firms and individuals to pay a penalty
In some cases the OSC has the authority to prosecute accused wrongdoers through the Ontario courts, which can result in jail terms as a possible sanction.
The Royal Canadian Mounted Police (RCMP) also has an Integrated Market Enforcement Team, a group of highly specialized investigators dedicated to ensuring that those who commit serious capital markets fraud offenses will be discovered, investigated, prosecuted, and incarcerated in an effective and timely fashion.
if a company declares bankruptcy thousands of workers will be laid off
the economy may not function properly as the workers are not putting money back into economy
In some cases the company may become defunct causing them to lose customers and it will be tough for them to gain new ones
the prices of their stocks will go down and people will stop investing in the company
even if the company manages to save itself from becoming defunct or bankrupt there will be a loss of credibility from potential investors due to the past actions of the corporation
How can we make a difference?
We can help by.....
Informing the public about the issue so that they are more cautious about accounting scandals
It is estimated that scandals costs U.S. companies more than $660 billion annually
Also it is estimated that the average organization loses about 6 percent of its annual revenue to fraud committed by employees.
3) Pyramid Scheme