ACCOUNTING FRAUD

Luis Onofre

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Introduction
All businesses require and need finance, investors, and accountants who have to maintain their
business in order to grow and strive. Its like clockwork. Without owners retaining them, a business can
crumble down. As a college student wanting to become an accountant, the unethical choices that many
CEOs, auditors, and overseers make catch my interest. Big corporations over the years have been found
guilty of fraud and cheating the system. What led many of these successful leaders down the path of
unethical practices? Is the United States government and law system rightfully punishing these
wrongdoers or is it just a slap on the wrist?
Within a business model, besides sales, marketing, customer service, and research and
development they are in need of a financial head, or chief financial officer (CFO). The CFOs in all
corporations are responsible for accounting and treasury functions. They are accountable for planning,
operation, financial information, risk management, funding, and third parties. Without the CFOs there is
no control of the cash flow so where is the money going too?
The more I study accounting, the more I wonder how the CFOs manage the inflow and outflow
of debits and credits. These hard working group of accountants are responsible for keeping the books
clean and maintained. There is an ethical oath that they commit to every day. Per Merriam-Webster, the
word ethical by definition is involving questions of right and wrong behavior: following accepted
rules of behavior. Accountants are there to handle the companies, investors, and the employees money.
There is a line that should not be crossed and this line is to unethically fix a company financial statements
to overstate assets, increase revenues to bring investors, keeping debts off balance sheets, etc.
Some of the more notorious scandals that I researched are The Enron scandal, Tyco scandal,
Freddie Mac scandal, and Worldcom scandal. What they all have in common is that a person or group of
people within the business broke or crossed the ethical line. Inflations of revenues and earnings were set
aside and fraud and stock manipulations occurred. At the end of the day, they did this grow the company

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and to increase their own profits. There are many questions including: what led them to commit such
crimes and what punishments were given? Lets not forget the reason why. Why did they take the path
they did and why did they not focus on doing things the right way?
Research
Enron was a marketed electricity and natural gas company. They were ranked the sixth-largest
energy company in the world. Once the top executives were aware of the catastrophic event that would
happen a lot of them sold their stocks, yet lower ranked employees were unable to do so. These people
lost a chunk if not all of their life savings investing into Enron. The Chief Financial Officer Andrew
Fastow, begun shuffling much of its debt obligations into offshore partnership. (Christopher OLeary)
The company would also mark future sales as revenues instead of marking them as account receivable.
When doing this, Enron overstated its profits which ultimately created a rise and flow of the stock prices.
After things unraveled, Jeff Skilling, the CEO of Enron, was sentence originally for 24 years in prison.
After serving six years, a federal judge approved a deal resentencing Skilling to just 14 years. (John
Carney) The CFO, Andrew Fastow received six years but was liberated a year earlier.
Tyco International was an alarm system supplier based in New Jersey. Former CEO L. Dennis
Kozlowski, former Chief Financial Officer Mark Schwartz, and former general counsel Mark Belnick,
have been indicted for fraud and theft by the Securities and Exchange Commission (SEC). (Tyco Fraud)
The three of them were accused of taking out loans from the company and making personal purchases on
materialistic items. Yet after taking these loans, some of them were never paid. The three executives were
charged for also selling their stocks without the investors knowing which, by the SEC, its illegal to do so.
For the most part, the three former executives devised those moves to pocket in the money for their own
leisure without consideration of the consequences. Unlike the CEO of Enron, all three were indicted but
have pleaded innocent. They have been released on bail and Kozlowski has, been given a monthly living
expense of over $14,000. (Tyco Fraud)

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Freddie Mac was a federally backed mortgage and financing company. Freddie Mac is a
Government Sponsored Enterprise (GSE) which works closely with the government. (Mafruza Khan)
Freddie Mac intentionally overstated and understated revenues. This created a way to avoid paying taxes
on it. These fraud charges were lightly taken and none of the big heads were given any amount of jail
time, they were given only a fine. The SEC was accused of giving them, a slap on the wrist while hitting
the innocents with a massive fineSEC fined Freddie Mac $50 million; but, who is really paying this
$50 million fine? That's right, it is the investors of Freddie Mac -- those who were defrauded by the
management team. (Edward Ketz)
Telecommunications Company, formerly known as WorldCom, had one of the biggest accounting
scandals. The company set aside 3.8 billion dollars of expenses (Simon Romero & Riva Atlas) and
inflated assets by as much as 11 billion dollars. (Accounting Degree) There was an internal audit that
discovered the fraud and after things unraveled 17,000 jobs were cut. The Chief Financial Officer Scott
Sullivan, the senior vice president, and controller David Myers were let go from the company. (Jake
Ulick)
Findings
After many top corporations financial scandals were being discovered, U.S congressmen Paul
Sarbanes and Michael Oxley (Margaret Rouse) created the Sarbanes-Oxley Act (SOX) back in 2002.
SOX gave investors and the government accountability. SOX has sections set in place to regulate and
establish a system where nothing could slip within the cracks. There are many sections that still shape the
financial building blocks of businesses. Taken from the Sarbanes-Oxley Compliance website,
I have provided the sections that are regulated the most:
Sections 302:
The signing officers have reviewed the report
The report does not contain any material untrue statements or
material omission or be considered misleading

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The financial statements and related information fairly present the

financial condition and the results in all material respects
The signing officers are responsible for internal controls and have
evaluated these internal controls within the previous ninety days
and have reported on their findings
A list of all deficiencies in the internal controls and information on
any fraud that involves employees who are involved with internal
activities
Any significant changes in internal controls or related factors that
could have a negative impact on the internal controls
Section 401:
Financial statements are published by issuers are required to be
accurate and presented in a manner that does not contain incorrect
statements or admit to state material information. These financial
statements shall also include all material off-balance sheet
liabilities, obligations or transactions. The Commission was required
to study and report on the extent of off-balance transactions
resulting transparent reporting. The Commission is also required to
determine whether generally accepted accounting principles or
other regulations result in open and meaningful reporting by
issuers.
Section 404:
Issuers are required to publish information in their annual reports
concerning the scope and adequacy of the internal control structure
and procedures for financial reporting. This statement shall also
assess the effectiveness of such internal controls and procedures.
Section 409:
Issuers are required to disclose to the public, on an urgent basis,
information on material changes in their financial condition or
operations. These disclosures are to be presented in terms that are
easy to understand supported by trend and qualitative information
of graphic presentations as appropriate.
Section 802:
Imposes penalties of fines and/or up to 20 years imprisonment for
altering, destroying, mutilating, concealing, falsifying records,
documents or tangible objects with the intent to obstruct, impede or
influence a legal investigation. This section also imposes penalties
of fines and/or imprisonment up to 10 years on any accountant who
knowingly and willfully violates the requirements of maintenance of
all audit or review papers for a period of 5 years

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The Sarbanes-Oxley Act not only affects the financial side of corporations, but also IT departments
charged with storing a corporation's electronic records. (Margaret Rouse)
Many of these accounting scandals didnt only effect the executives who committed the crimes,
they mostly affected employees and investors. 401k retirement, stocks, and jobs are lost due to injustice
that these top executives created. Due to the fact that companies either inflated revenue or minimized
expenses, this fogged the faults of the company and lured in investors. Have these past crime findings
scared the white collar criminals? Within the Freddie Mac case, there was no harsh punishment since no
one had to spend years in prison. It was only a slap on the hand and fines that wouldnt break these
millionaires wallets.
The victims are often financially affected to a great degree and some victims have their life
savings taken. When leniency is applied to crimes such as fraud and identity theft, the only
winner is the culprit. White-collar crimes should be punished with stern judgment, just as any
other crime would be. Although no blood is shed with white-collar crime, it adversely affects the
lives and futures of the victims. (Amanda Haury)
Since many white collar criminals are still committing fraud and theft, corporations have their
own auditing team as well as outside parties who check in on the reports. There was a lot of surprise in
knowing that accounting scandals effect the employees, investors, and the economy. Reading case by
case, they seemed to all have one thing in common which was to increase their own money. There can be
speculation about what the company could be doing now if they did not take the wrong path. Some of
these top respected companies shocked the world as things came into the open. Acts like the SarbanesOxley Act have been set into place to crack down on the unethical practices that are committed.

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Work Cited
Carney, J. (2013). Why Jeff Skilling's Jail Sentence Got Downsized. Retrieved July 22, 2016,
from http://www.cnbc.com/id/100835443
CFO Job Description | Chief Financial Officer Job - AccountingTools. (n.d.). Retrieved July 22,
2016, from http://www.accountingtools.com/job-description-cfo
Haury, A. C. (2012). Sentences For White-Collar Criminals: Too Harsh Or Too Lenient? |
Investopedia. Retrieved July 24, 2016, from http://www.investopedia.com/financial-edge/0512/sentencesfor-white-collar-criminals-too-harsh-or-too-lenient.aspx
Ketz, E. (n.d.). Freddie Mac's Scandal and the SEC's Judgment. Retrieved July 22, 2016, from
http://accounting.smartpros.com/x59491.xml
Khan, M. (2004, January 1). The Scandal in Home Mortgage Financing. Retrieved July 23, 2016,
from http://www.corp-research.org/e-letter/scandal-home-mortgage-financing
O'Leary, C. (n.d.). Enron-What Happened?: Year In Review 2002. Retrieved July 20, 2016, from
https://www.britannica.com/topic/Enron-What-Happened-1517868
Romero, S. (2002). WORLDCOM FILES FOR BANKRUPTCY; LARGEST U.S. CASE.
Retrieved July 20, 2016, from http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-theoverview-worldcom-files-for-bankruptcy-largest-us-case.html
Rouse, M. (n.d.). What is Sarbanes-Oxley Act (SOX)? - Definition from WhatIs.com. Retrieved
July 22, 2016, from http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act
Sarbanes-Oxley Compliance. (n.d.). Retrieved July 24, 2016, from
http://www.soxlaw.com/compliance.htm

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The 10 Worst Accounting Scandals of All Time. (n.d.). Retrieved July 18, 2016, from
http://www.accounting-degree.org/scandals/
Tyco Fraud. (2006, December 31). Retrieved July 23, 2016, from
http://www.tycofraudinfocenter.com/information.php
Ulick, J. (2002, June 26). SEC hits WorldCom with charges. Retrieved July 20, 2016, from
http://money.cnn.com/2002/06/25/news/worldcom/