Abstract

Scandals relating to manipulation and fraud have dominated much of the history of business and the accounting profession in America since its founding. Crooks, corruption, scandals, and panics have been regular features of the business landscape ever since, with regulations and the expansion of financial disclosure, auditing, and regulatory agencies following major debacles. Prior to the creation of the Securities and Exchange Commission (SEC) in the 1930s and the development of generally accepted accounting principles (GAAP), few accounting rules existed and it is difficult to identify “accounting” scandals. Consequently, the primary focus is the post–World War II period, when accounting manipulation and fraud can be identified based on specific accounting violations.

The importance of this topic is demonstrated by the major accounting and finance scandals of the 21st century, some of the most destructive in our history. Enron may be the most extensive manipulation and fraud case in terms of multiple accounting-related abuses over an extended period of time. The multitrillion dollar real estate crises is the most gigantic and widespread and, seemingly, could have been easily avoided (it took a number of “fail-safe” failures for the financial system to crash). This pair of scandals has an extensive number of companions (if less severe and not as well known). The types of violations, causes, and results are equally valid today—these and similar issues continue to be of major concern.

Key points include the importance of incentive structures of key players and the need for effective regulation, which become more obvious by considering multi-decades of abuse. Executive compensation, pensions, special purpose entities, and derivatives continue to be accounting issues as they have for decades.

This short book can be used as a supplementary source in introductory financial accounting courses (elementary and intermediate), accounting- and finance-related MBA courses, and business history. The book can also be used as part of forensic accounting and fraud detection for continuing education. In addition, it can be useful for accounting and finance professionals wanting exposure to financial disclosure issues and other accounting risks, plus executives looking to expand their knowledge of accounting fraud and risk areas.

Keywords

accounting fraud, accounting standards, auditors, big 4 accounting firms, corporate fraud, earnings manipulation, earnings quality, Enron, Sarbanes-Oxley act, securities and exchange commission, subprime meltdown, transparency, WorldCom.