2015-16 ACCOUNTING SCANDALS
Wells Fargo Fake Accounts Scandal Case
The Wells Fargo case that broke in 2016 included phony accounts with real customer
money was a corporate scandal. Moreover, this case offers important lessons for how
organizations can abstain from creating a culture vulnerable to corruption. In this case, the
employees were involved in furtively creating new bank and credit card accounts for
clients without their insights, resulting in overdraft and other fees. Around 5500
employees were fired because of this issue. The major concern here was that this unethical
behavior was not derived from gaining financial benefits but was a result of workload and
meeting aggressive sales goals, such as the bank’s- “Gr-Eight initiative”. The employees
working for wells fargo defined pressure in wells fargo by saying that to meet the
unrealistic sales targets they had to open bogus accounts so that they don’t get fired.
Conclusion: so, according to me there are 2 topmost reasons that may have left
employees vulnerable to unethical behavior-
1. Pressure- One variable that was likely affecting everything at wells fargo was
overly aggressive goals and performance pressure. Due to this, the employees are
more likely to be ethically separated, and to think about bamboozling to match the
grade.
2. “It’s just a business” thinking – This thinking eliminates the personal feelings,
values, and ethics from professional situations.
Link- http://fortune.com/2016/10/12/wells-fargo-scandal-john-stumpf/
Weatherford international’s accounting fraud
In this case, The Securities and Exchange Commission declared on September 27, 2016 that
oil services company weatherford international have consented to pay a $140 million
penalty to settle charges that it inflated earnings by using deceptive income tax accounting.
Two of the organization’s senior accounting officials have consented to settle charges that
they were behind the plan.
As per SEC’s structure, Weatherford deceitfully brought down its year end arrangement
for money assesses by $100 million to $154 million every year so the organization could
more readily adjusts its income results with its prior declared projections and analysts’
expectations. James Hudgins, who served as weatherfoard’s vice president of tax, and
Darryl Kitay, who was a tax manager made various post shutting changes in accordance to
fill the gaps and meet its recently revealed effective tax rate (ETR). Weatherford
consistently touted its positive ETR to experts and financial analysts as one of its key upper
hands and the fraud created the misperception that weatherfoard’s designed tax structure
was far more successful than reality. Also, weatherford was subsequently compelled to
restate its financial statements on three occasions in 2011 and 2012, lowering reported
earnings by $500 million.
Conclusion: It was believed that the Company’s non-compliance with the accounting rules
and computation of tax was deliberate and with the intention of showing high profits and
to gain financially. These adjustments made by the two topmost officers led to so much of
chaos in the organization which ultimately resulted in payment of heavy charges on the
part of company as well as the officers.
Link: https://www.reuters.com/article/us-weatherford-sec-idUSKCN11X1NL
http://www.fcpablog.com/blog/2016/9/27/weatherford-pays-sec-140-million-for-
accounting-fraud.html
Toshiba’s Accounting Fraud
In this case improper accounting was found to have occurred through the span of seven
years, embroiling two former CEO’s in the scandal. When the investigation took place, the
investigators found direct proof of inappropriate accounting practices and overstated
profits in various Toshiba business units, including the visual products unit, the PC unit and
the semiconductor unit. Investigators discovered proof of booking future profits early,
pushing back losses, pushing back charges and other ways that result in overstated profits.
The major reason behind this scandal was Toshiba’s corporate culture, which demanded
obedience to superiors, and enabled emergence of fraudulent accounting activities. The
culture operated on the level of business unit presidents and on every level of authority
down the chain to the accountants who ultimately employed the accounting techniques.
Conclusion: The study of this case points out the weak corporate governance and a
poorly functioning system of internal controls at every level of Toshiba’s organization.
Various divisions like, finance division, risk management division and the securities
disclosure committee did not work and co-ordinate properly, hence, failed to stop the
inappropriate behaviors.
The recommendations can be-
Reformation of the corporate culture
Elimination of the challenge system of profit targeting
Re-establishment of internal controls and strong corporate governance.
Link: fortune.com/2016/10/13/toshiba-accounting-scandal-lawsuit/
ACCOUNTING FRAUDS
What is Accounting Fraud?
Accounting fraud is the purposeful control of financial statements to create a façade of a
company’s financial health. It includes an employee, account or the organization itself and
is deluding to investors and shareholders. An organization can misrepresent its financial
statements by overstating its income or resources, not recording expenses and under
recording liabilities.
Types of Accounting Frauds-
1. Payroll Fraud: It is defined as employees cheating the payroll system at their
workplace to receive funds to which they are not entitled. Various ways in which
payroll fraud can be committed are, from-
Salary
Hourly and Commission workers
2. Invoice Fraud: This is defined as, when fake invoices are sent to targeted
businesses in an attempt to extract money from organizations with default in their
accounts payable processes.
3. Accounts Payable Fraud: The difference in the accounts payable fraud and the
invoice fraud is that the culprit of the accounting fraud creates a dummy or
duplicate company that never existed and afterwards makes claims for payments
for goods and services that were never delivered.
4. Financial Statement Fraud: This refers to misrepresenting balance sheets, income
statements and cash flow statements to fool the audience who reads them. The
fraudster might be out for individual gain, or is attempting to keep the business
above water.
5. Tax Fraud: In this type of fraud, the topmost level of the organization
misrepresents financial fact to hide the profits. The ultimate aim is to get exemption
from paying taxes to the tax authority. Tax evasion is subset of tax fraud.
