The 10 Worst Corporate Accounting Scandals of All Time
16 February 2018, Bachir El Nakib (CAMS) Senior Consultant Compliance Alert LLC
If you are not worried about fraud in your business – you should be.
The rapid and radical progress in various areas of our modern life, especially the tremendous developments in the field of information technology, has changed the style of fulfilling financial obligations to be done through some new payment methods. One of the most important new payment methods is credit cards. The vast expansion in using credit cards in the last decade has resulted in many positive and negative practices. The negative practices include various types of credit card frauds, whether those done by the legitimate credit card holder (the card owner), or by other illegitimate card holders. Those credit card fraudsters usually take advantage of the incredible technological developments that make it easy to counterfeit credit cards and penetrate Credit card confidential data in various ways.
Fraud is a complex and dynamic risk that presents a challenge to any organisation in any industry. The only limit to the types and mechanisms for fraud is the ingenuity of people, that's why there is an infinite variety of fraud risks, which vary in response to changes in the organisation or in its makers. It is also very difficult to measure progress in dealing with fraud risk.
Defining fraud
There are many definitions of fraud and corruption. Five of the largest international development banks developped the following definitions for the purposes of a mutual enforcement agreements:
- A corrupt practice is the offering, giving, receiving or soliciting, directly oir indirectly, of anything of value to influence improperly the actions of another party.
- A fraudulent practice in any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.
This definition is helpful as a starting point for assessing an organisation's exposure to fraud risks.
Defining fraud risk
At one end of the spectrum, there are frauds that are small in their monetary impact, but relatively high in frequency such as:
- falsification of invoices,
- fabrication of expense claims or payment for small kickbacka to secure contracts,
These ordinay' frauds as described, may be committed by individuals at any level of an organisation. Their prevalence could, over time, erode profits and undermine the culture of the organisation, but are unlikely to be a threat to the ongoing existence of the organisation.
At the other end of the scale, there are frauds that occur rarely but have a very significant determined impact on the organisation, perhaps threatening its independence or even its survival. These are the 'extraordinary' frauds that are most often committed by senior management and which tend to be complex and organised in nature . In addition to the large sums that are at risks, such frauds can fatally undermine third parties'confidence in the integrity of the organisation.
Corporate fraud consists of activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company.
Corporate fraud is a large concern around the world, Enron is probably the foremost example of corporate fraud, also known as white-collar crime. According to the Certified Fraud Examiners' 2004 statistics, "Fraud and abuse costs U.S. organizations more than $660 billion annually." Therefore, fraud is a significant issue that must be addressed by government agencies with the personnel to handle the reports. Knowing what you need to report fraud and where to report it will help ensure timely action of the agencies working to bring about justice.
Cybercrime: A unique challenge
The ubiquity of the internet and related technologies, such as emails,and online banking, enable a range of fraud threats which present some unique challenges. But the issue is not just one of scale, it is also an issue of the rate of change. Criminals, including fraudsters, target vulnerabilities in organisations in transition, thus it is precisely at the moment when companies adapt to the technologies required to keep their business competitive that they are vulnerable. One expert observed, "The computer can be either a tool or a target for the fraudster, and generally, it is both. Almost any fraud can involve a computer, but this does not make each such crime a 'cybercrime'. While David S. Wall preferring the term of 'cyberspace crime, cybercrime and cyberfraud to be an activity which is committed primarily through the use, or deliberate misuse of computers and the Internet. Cyberfraud itself is further distinguished by the facts that it entails theft and deceit.
Cyber-attacks
Cyber-attacks have pushed corporate fraud around the world to an all-time high, with information theft overtaking the appropriation of physical assets for the first time on record, according to new data. Levels of reported fraud have gradually climbed since 2012, but 86 per cent of companies around the world reported that they had experienced at least one cyber incident in 2017, according to responses given to Kroll’s annual global fraud and risk survey. The responses come as anxiety is high in boardrooms about hacking following a year when the WannaCry cyber-attacks targeted tens of thousands of organisations worldwide, disabling operations from the UK’s National Health Service to US delivery service FedEx. More recently, the flaws discovered in chips made by Intel, AMD and ARM, have raised fresh concerns that companies could be vulnerable to attacks.
Information-related risks are now the greatest concern cited among executives who participated in the survey, as the experience of Equifax has sharpened minds and shown that authorities are taking an increasingly robust response. The US credit-reporting company now faces criminal and regulatory investigations on both sides of the Atlantic after a cyber-attack resulted in the theft of personal data of as many as 143m US citizens. More than half the respondents to the survey believed that their companies were “highly or somewhat vulnerable” to information theft; a rise of six percentage points on last year. This year was the first where information theft overtook the stealing of physical assets and stock in the decade that Kroll has undertaken its survey. Just under 30 per cent of companies reported they had suffered information theft, loss or attack in 2017, making it the most common type of organisational loss. Nearly four in 10 executives said their companies suffered a virus or worm attack, while the second-most frequently cited attack was email-based phishing, the survey shows. While cyber-attacks are the most common way companies can lose information, companies can still be vulnerable to more prosaic routes. "People instinctively think about data being targeted by cyber-attacks, but not all threats to information are confined to the digital realm,” said Jason Smolanoff, senior managing director at Kroll.
“There is a convergence between physical and digital threats, with issues arising from equipment with sensitive data being stolen or lost, for example, or employees with access to highly sensitive information accidentally or intentionally causing a breach.”
The impact fraud can have on an organization can be monumental. Not only can it have a significant financial impact, but, depending on the type and severity, it can also destroy an organization. While there are many types of fraud, there are a select few that can cause the most damage.
The Rise of 'State-Sponsored Cybercrime
One new threat that is receiving a great deal of attention is that of the state-sponsred attack. Whilst the exact details are unclear, evidence suggests that many states are involved to some extent. Some of the stories are, perhaps unsurprising. For example, in July 2013, the South Korean government announced that it was allocating billions of dollars to counter the threat posed by its economy by North Korea'equally well funded cyber-warfare unit. In another widely reported case, the USA is believed to have been responsible for deploying the highly sophisticated 'stuxnet'virus at the control systems of Iranium nuclear processing plants.
Financial statement fraud.
Although it’s less common, financial statement fraud can be the most damaging to a company. Overstating revenue, earnings and assets – along with understating liabilities (or just plain concealing them) are the most common activities found with this type of fraud. Enron and WorldCom are two semi-recent, high-profile cases involving financial statement fraud.
Asset misappropriation.
Some of the more common types of fraud fall into the category of asset misappropriation, which closely-held businesses are most susceptible to.
Skimming of cash and cash larceny.
This type of asset misappropriation consists of taking cash before it even enters the company’s accounting system. It’s very hard to uncover (since it requires finding evidence of something that hasn’t been recorded yet) and it doesn’t require a lot of sophistication to execute, making it a popular choice among those that commit fraud. Check tampering, accounts receivable skimming, fake billing schemes, payroll schemes, fake or duplicate expense reimbursement schemes and inventory schemes are also other common examples of asset misappropriation.
Misuse of company assets.
Another common type of asset misappropriation is the misuse of company assets. Not only is it problematic since it’s the unauthorized use of company assets, but it can also open up the company to significant liability.
Theft of intellectual property and trade secrets.
As our world becomes increasingly driven by information and technology, an increase in the theft of intellectual property and trade secrets is on the rise.
Healthcare, insurance and banking.
Healthcare, insurance and banking are all industries that have billions of dollars flowing through their systems, making them prime targets for this type of fraudulent activity. Bogus health insurance claims, business insurance claims, and fraudulent bankruptcies are all ways individuals commit this type of fraud.
Consumer fraud.
Individuals targeted through cons, bogus telemarketing, email, Ponzi schemes, phishing, ID theft and other schemes, are all victims of consumer fraud. Whether it’s an organization system breach or bogus tax returns filed for large refunds, consumer fraud is on the rise. Companies can also be victims of email phishing scams – especially spear phishing, which involves sending targeted, disguised emails that contain malicious links.
Fraud can take many shapes and can impact an organization in many ways – not just financially. Understanding how and where your company may be vulnerable, as well as taking the proper steps to protect against vulnerabilities is a must.
The 10 Worst Corporate Accounting Scandals of All Time
If there is one theme to rival terrorism for defining the last decade-and-a-half, it would have to be corporate greed and malfeasance. Many of the biggest corporate accounting scandals in history happened during that time. Here's a chronological look back at some of the worst examples.
