Accounting fraud examples: 10 high-profile scandals and their impact

When considering what makes a business successful, we often look at tangible metrics such as revenue growth, customer acquisition, and market share. But there’s one intangible factor that underpins all else: trust.

Many things can shatter the trust that customers, investors, creditors, and even staff have in a business, but few are more damaging than accounting fraud. In this article, we’ll explore 10 of the most notorious accounting scandals and their impact — so we can learn from the mistakes made and avoid them in the future.

10 high-profile accounting fraud examples

Despite the potential legal, financial, and reputational risks involved, accounting fraud is surprisingly prevalent, with 41% of businesses estimated to report misleading financial information. While accounting fraud happens at every level of business, here are 10 high-profile examples that shocked the world.  

1. Enron scandal

One of the most high-profile accounting scandals of all time, Enron’s fraudulent activities came to light in the early 21st Century. In 2005, the popular accounting-related film Enron: The Smartest Guys in Room further revealed the company’s corrupt business practices to the world.

What happened?

Once the seventh largest company in the US and a leader in the energy and commodities industry, Enron used shady accounting practices to drastically inflate its revenue. 

For example, it would record the projected profits of newly built assets, such as power plants, as actual profits. If the asset didn’t bring in the already-logged income, the company used complex financial structures known as special-purpose entities (SPVs) to hide its debt and toxic assets off the balance sheet, deceiving investors and regulators about its financial woes. By 2000, things started to unravel, and Enron filed for bankruptcy in 2001. 

Consequences

• Enron shareholders saw their positions all but destroyed, with the stock price plummeting from a peak of $90 to just 26 cents
• In total, shareholders lost $74 billion in the four years leading up to Enron’s bankruptcy
• Senior leaders involved in the scandal received lengthy prison sentences and hefty fines
• The company’s 20,000-plus workforce all lost their jobs
• Arthur Anderson, Enron’s auditor and one of the “Big Five” audit firms at the time, collapsed

Lessons learned

The Enron scandal highlighted the need for transparency in financial reporting, as well as the importance of effective independent audits. Following the company’s collapse, a wave of new regulations and legislation was drafted, including the 2002 Sarbanes-Oxley Act, which imposed strict penalties for falsifying financial records. 

2. Lehman Brothers collapse

In the midst of the 2007-08 financial crisis, Lehman Brothers — one of the largest investment banks in the US — filed for bankruptcy, sending the global financial markets into a tailspin. As the firm began to collapse, the extent of its shady accounting practices was revealed.

What happened?

Prior to its collapse, Lehman Brothers exploited an accounting loophole for repurchase transactions, known as Repo 105. This enabled the firm to move its repurchase agreements off the balance sheet during reporting periods, thus deceiving investors and other stakeholders about the amount of leverage it held on its books. In total, Lehman Brothers hid $50 billion of assets this way.

When the housing market collapsed, Lehman was left holding a huge number of securities based on subprime mortgages, resulting in catastrophic losses that led to the firm’s demise. Had shareholders known about the firm’s true financial position prior to the collapse, they may have been able to get out sooner and protect their money.

Consequences

• Lehman Brothers filed for bankruptcy, with over $600 billion in debt
• The firm’s collapse triggered a global financial crisis
• 26,000 employees lost their jobs
• The Financial Accounting Standards Board closed the Repo 105 loophole

Lessons learned

The sad tale of Lehman Brothers is a testament to the risk of excessive leverage and the need for transparency in financial reporting. The firm also repeatedly overrode its own internal controls, highlighting the need for strict professional standards and regular audits. 

3. WorldCom scandal

Another high-profile accounting scandal of the early 2000s, WorldCom was one of the USA’s biggest telecommunications companies. But when the company leadership started to falsify its financial reports in an attempt to keep its stock price high, the writing was on the wall.    

What happened?

In the wake of the Dotcom Bubble, companies slashed their spending on telecommunications services and equipment. This hit WorldCom hard, and in an attempt to maintain the illusion of growth and profitability to board members and shareholders, the company’s leadership resorted to accounting tricks in a classic case of “cooking the books”. 

Specifically, WorldCom exaggerated its earnings by recording expenses as investments. This allowed it to fraudulently “boost” its books by almost $4 billion. When an internal audit identified some concerning inconsistencies in the firm’s financial statements, whistleblowers alerted external auditors about the issue. 

Consequences

• WorldCom filed for bankruptcy in 2002, with over $40 billion in debt
• The perpetrators received prison sentences ranging from 5-25 years
• This and several other high-profile scandals led to the Sarbanes-Oxley Act
• Whistleblower Cynthia Cooper was named Time magazine’s Person of the Year in 2002

Lessons learned

Again, the WorldCom scandal highlighted the importance of strict internal controls and audits. In particular, it showed the key role whistleblowers play in the detection of accounting fraud, leading to legislation that provided greater protections for whistleblowers. 

4. Fannie Mae scandal

Fannie Mae, a government-sponsored enterprise formally known as the Federal National Mortgage Association (FNMA), made headlines for all the wrong reasons in 2004 when it was revealed that senior executives had been manipulating accounting information.

What happened?

Senior executives at Fannie Mae falsified the company’s accounts to meet compensation targets and trigger undeserved bonuses. Over six years, the corrupt leaders “earned” fraudulent bonuses in the tens of millions of dollars. Upon investigation, it was also found that Fannie Mae had a culture of excessive risk-taking and poor risk management.

Consequences

• Fannie Mae was fined $400 million by the Securities and Exchange Commission (SEC)
• The company also agreed to have its mortgage holdings capped and make sweeping changes to its corporate culture
• The senior executives involved were forced to pay a total of more than $30 million in fines

Lessons learned

The Fannie Mae scandal showed the issues that can occur when corporate culture becomes rotten from the top down. It also highlighted that tying executive compensation to short-term financial results can be problematic if you have unethical leaders. 

5. Olympus scandal

Japanese manufacturing giant Olympus Corporation made the news in 2011 in what was one of Japan’s longest-running and most high-profile incidents of accounting fraud. 

What happened?

When newly appointed CEO Michael Woodford was ousted from the company for raising concerns about questionable transactions made to shady companies, it was clear that something wasn’t right at Olympus. What was uncovered in the following year turned out to be the biggest loss-hiding scandal in Japanese corporate history. 

A corrupt group of people in Olympus’ leadership had been using fraudulent acquisitions and advisory fees to cover its poor financial performance, in an attempt to pull the wool over investors’ eyes.

Consequences

• Olmypus’s entire board resigned, while several were arrested, including a former CEO
• The company was forced to cut 2,700 jobs, or around 7% of its entire workforce
• Woodford was given multiple Business Person of the Year awards for his role in uncovering the scandal

Lessons learned

The Olympus scandal is another example of the importance of whistleblowers — and what happens when corrupt practices become embedded at the top of a company.

6. Bernie Madoff Ponzi scheme

The name Bernie Madoff is now synonymous with financial fraud. The infamous American financier defrauded thousands of investors of a total of $65 billion, in what was the largest Ponzi scheme of all time. 

What happened?

Madoff, a former chairman of the Nasdaq stock exchange, used his prominent position in the finance world to lure investors with the promise of consistent returns — only to use their deposits to pay returns to earlier investors. 

Consequences

• Madoff was sentenced to 150 years in prison
• Thousands of investors lost their savings
• Wealth managers who invested their clients’ money in the scheme faced criminal charges
• Following a detailed investigation, several SEC employees were disciplined for failing to spot the warning signs

Lessons learned

The Bernie Madoff scandal showed the need for thorough due diligence and skepticism when investing, both for individual investors and wealth managers alike. It also highlighted the need for regulators to act proactively to protect investors from harm.

7. Wirecard scandal

One of the more recent incidents of accounting fraud on this list, German payment processor Wirecard became embroiled in a financial scandal in 2020 when a series of accounting irregularities came to light.

What happened?

Wirecard had faced accusations of malpractice for many years, rising to a climax in 2020, when it became clear that the company had been inflating profits by creating fake backdated contracts. Wirecard also used third-party acquiring partners to simulate revenue streams that didn’t actually exist. In total, Wirecard “lost” €1.9 billion and owed a further €3.2 billion. 

Consequences 

• The company was dismantled and its assets sold
• Senior executives were sentenced to jail time
• Wirecard’s former COO is still at large and is on Europol’s list of most-wanted fugitives
• Auditor Ernst & Young was sued by investors
• The European Commission called for an investigation into BaFin, Germany’s financial regulatory authority 

8. Satyam scandal

Often referred to as “India’s Enron”, the Satyam scandal unfolded in 2009, when senior executives of the Indian IT services company were found guilty of fiddling with the books, inflating share prices, and stealing company funds.

What happened?

Over several years, Satyam’s founder and chairman had used various “creative” techniques to manipulate accounts and deceive investors. These included altering the books to account for money that didn’t exist, creating fake employees and pocketing their salaries, and falsifying documents to obtain loans. A lot of this money was then spent on real estate deals, and when the property market crashed in 2008, the money vanished.

Consequences

• The company’s founder was arrested on charges of criminal conspiracy, forgery, breach of trust, and more
• Satyam stock ceased trading on major stock exchanges
• Its share price plummeted, wiping out billions in market value
• The company was eventually acquired by Tech Mahindra in 2013

9. Toshiba scandal

Toshiba became embroiled in a major accounting scandal in 2015, when the giant Japanese conglomerate was found to have overstated its profits by a whopping $1.2 billion. 

What happened?

Like most companies, Toshiba suffered reduced sales and financial worries during the global financial crisis of 2007-08. During the following seven years, the company engaged in a combination of inappropriate accounting practices to inflate profits, including booking profits early and pushing back losses.

This negligent behavior was made possible by a toxic corporate culture, where staff were placed under great pressure to achieve targets and were expected to obey their superiors at all costs.

Consequences

• Several top-level executives resigned, including the CEO
• Regulators ordered the company to change its corporate culture and improve its corporate governance
• Toshiba’s stock plummeted over 60% as investors lost confidence and trust 

Lessons learned

The Toshiba scandal shone a light on the damage that unrealistic corporate targets and a culture of fear can have on a workforce, pushing people to make unethical decisions in an attempt to keep senior staff happy. 

 10. Parmalat scandal

When Parmalat collapsed in 2003, the Italian dairy and food giant had a massive €14 billion hole in its accounts. As investigators tried to unravel what happened, it soon became clear that the company had been engaged in fraudulent accounting practices for many years. 

What happened?

Senior executives at Parmalat had been falsifying company accounts for over a decade, creating fake transactions through a double-billing scheme. They then used the “income” from these fake transactions as collateral for bank loans. Parmarlat also had a highly complex corporate structure, with over 200 subsidiaries spread across 48 different countries, which it used to hide its losses.

Consequences

• Parmalat was declared insolvent
• The company was delisted from the Milan stock exchange
• Parma football club, which was owned by Parmalat, was plunged into financial turmoil
• Parmalat’s CEO was later sentenced to 18 years in prison

Lessons learned

The Parmalat scandal shows the need for effective audits and internal controls in complex multinational corporations. Like many other instances of fraud, this case was a prime example of how unethical practices can lead to wide-scale corruption. 

How modern tools can help

In today’s digital world, technology plays a central role in preventing and identifying accounting fraud. Accounting and audit professionals are well blessed with an array of different tools and platforms designed to spot suspicious transactions and improve the transparency, compliance, and oversight of accounting processes. In this section, we’ll look at some key examples. 

Accounting software

Modern accounting platforms such as QuickBooks Online and Xero automate many of the repetitive processes involved in accounting, ensuring compliance and accuracy at scale. Removing manual work from the equation also mitigates the risk of accounting fraud. Key features include:

• Automated data entry, account reconciliation, and payroll
• Real-time financial reporting and monitoring
• Comprehensive audit trails

Audit management and compliance software

Platforms such as AuditBoard and Workiva help streamline and automate the processes associated with financial audits and compliance, helping accounting firms to identify suspicious activity and suggest recommendations for improving internal controls and procedures. Key features include:

• Risk assessment tools
• Automated audit workflows
• Real-time reporting and analytics

Fraud detection software

Tools such as HyperVerge and Sift can flag and analyze suspicious transactions and activities in real time, helping you to identify and investigate instances of fraud as quickly as possible. Key features include:

• Machine learning algorithms that spot anomalies and outliers
• Real-time monitoring and alerts
• Automated fraud detection for signatures, photos, and deep fakes

Practice management software

Practice management software also has a key role to play in fraud prevention. With a comprehensive platform such as TaxDome, for example, accounting teams can centralize their data and processes, enabling them to improve transparency and accountability across their workflows. 

At the same time, TaxDome offers a range of features designed to improve accuracy, security, and auditability, including:

• Automated workflows, including automated billing and payments
• Detailed audit trails, with time-stamped activity logs
• Granular access rights and permissions
• Secure document management and chats
• Robust security measures, including two-factor and biometric authentication
• Integration with popular accounting and tax software for seamless data transfer

To sum up

Accounting fraud is a serious crime with major repercussions. Not only can the perpetrators be sentenced to jail time, but entire businesses — and in some cases even economies — can be left in tatters, affecting a huge number of people. 

The examples in this article show the real-world implications of corrupt financial practices. But they also stand as cautionary tales to today’s accounting professionals on the importance of trust, integrity, and ethical decision-making. 

When it comes to building accounting practices that are highly transparent and compliant, choosing the right technology is key. With a practice management platform such as TaxDome, you can gain complete visibility into your firm’s processes, jobs, and data, while increasing efficiency and accuracy through workflow automation. To see our award-winning platform in action, request a demo today!