Lies, Damned Lies and Accounts

In a normal sense, an account of something means the telling of a story. What financial accounts do is to tell the story of business performance through numbers, although the story may require in-depth analysis to establish the real truth. Examination questions on accounts and finance are often avoided by students in IB examinations, but perfomance tends to be better on these ‘harder’ topics, than on the softer topics such a marketing and HRM, where there are no right answers.

As a student you may look at financial accounts and decide they appear relatively boring. However, behind the numbers may lie intrigue and deception that could be the script of any best-selling thriller – and indeed was in the 2005 film about the demise of Enron, The Smartest Guys in the Room.

After all, accounts can involve millions or possibly billions of dollars and the temptation to ‘fiddle the books’ has existed as long as even rudimentary accounts existed. Perhaps the U.S. has suffered most from high profile scandals surrounding companies such as Enron, WorldCom, Tyco and Freddie Mac, which left individuals ruined and others in prison with huge corporations like the accounting firm, Arthur Andersen, collapsing in the aftermath of the financial earthquake.

In the case of limited companies, accounts are public documents and the law lays down the information that must be included and the nature of how this information is reported. There is pressure on every business to make their accounts look as good as possible. The law and accounting regulators attempt to standardise reporting to provide a ‘true and fair view’ of a business. There are, however, still ways that firms can ‘window dress’ their accounts to present their operations in the best possible financial light. Sometimes this ‘financial massaging’ of the accounts is legal and sometimes it is not.

The early part of the millennium saw a number of financial scandals in the United States typically involving misuse of funds, overstating revenues, understating expenses, overstating the value of corporate assets or under-reporting the existence of liabilities, sometimes with the cooperation of officials in other organisations, including company auditors. Just this month, the CEO of the Japanese industrial and electronics giant, Toshiba, was forced to resign after bearing responsibility for the firm overstating its profit by more than $1.2 billion over seven years.

Enron Fraud

Enron filed for bankruptcy in December 2001. The former energy giant was undone by accounting fraud and off-the-balance-sheet transactions. In the Enron case, many players were involved in fraud at multiple levels. Investigations implicated several former high level executives and brought into question the roles of many others. Enron’s accounting firm, Arthur Anderson, LLP, was convicted of obstruction of justice, because the firm allegedly destroyed documents pertinent to the Enron case.  The founder of Enron, Kenneth Lay, and the CEO, Jeffrey Skilling, went on trial in 2006. Lay pleaded not guilty to the eleven criminal charges, claiming he was misled by those around him. He faced a total sentence of up to 45 years in prison, but died before sentencing. Skilling was convicted of fraud and sentenced to 24 years and 4 months in prison. The chief financial officer, Andrew Fastow, pleaded guilty to two charges of conspiracy and was sentenced to ten years, with no parole, in a plea bargain to testify against Lay and Skilling.

The Enron scandal is probably the most high-profile accounting scandal, but in the years leading up to the 2007 global recession and the 2008 credit crisis, there were other significant corporate scandals that contributed to worldwide market and financial instabilities, such as the collapse of Freddie Mac and Lehman Brothers.

Source: Accounting-Degree.org