Corporate scandals have always been shocking news for investors and stakeholders. Typically these scandals involve understating the company’s expenses, overstating earnings, overstating value of the assets or/and under reporting current liabilities. A corporate wrongdoing sometimes also involves unfair methods used by the company to misuse or misdirect funds. Here is a list of the top ten corporate scandals that involved all these aspects and shocked the world by their negative boldness:
Navigation Menu of the Top 10 Corporate Scandals
1. Enron
2. WorldCom
3. Bernie Madoff
4. Satyam Computers
5. Subprime Mortgage
6. Barlow Clowes
7. Daewoo
8. Fannie Mae and Freddie Mac
9. American International Group
10. Bank of Credit and Commerce International
One of the largest corporate scandals in the 21st century was involving Enron- a former NYSE ticker and energy company that originated in Nebraska. The company was accused of conducting a securities fraud that led the company to file for bankruptcy in 2001.
Initially investors with this company expected to gain a lot of money from the company’s growth in the gas and electricity sectors. However, the company was unable to deliver and it hid the truth from the public. To salvage their financial situation, Enron borrowed money, which they could not repay later. As a result of this, the company, whose stocks were worth $90 per share in 2000, later saw their shares drop to less than a dollar by the end of 2001. In the wake of this loss, Enron’s shareholders lost close to $11 billion.
WorldCom, a long distance phone company was involved in a financial scandal from the beginning of January 2001 till March 2002. During this period WorldCom used unfair accounting methods to cover up its financial decline and falsely projected financial growth. The company did this in two ways. Firstly their accounting department underreported expenses related to interconnecting with other telecommunication companies. Secondly, they used false accounting entries from unallocated accounts in their business to increase their revenue figures to $11 billion.
In 2002, the company’s internal audit department discovered a $3.8 billion fraud, which then led to a series of charges put on the company’s management. Eventually, in July 2002, the telecom company filed for Chapter 11 bankruptcy protection, which also came to be known as the largest bankruptcy filing in this category in the United States of America.
Bernie Madoff was the former chairman of NASDAQ and also the founder of Bernard L Madoff Investment Securities. He was convicted for a $50 billion investment scandal involving a Ponzi scheme, which he confessed to having committed. This scandal is considered to be the biggest investor fraud to have been committed by a single person.
The Ponzi scheme fraud led to him being sentenced to 150 years in prison- the maximum sentence that can be given to a person convicted for having committed a corporate fraud. Reports state that Madoff has claimed that his firm has approximately $50 billion liabilities. Prosecutors approximated Madoff’s fraud to be in excess of $64 billion.
India’s fourth largest information technology company, Satyam Computer Services’ scandal was publicized when its then chairman confessed that the company’s accounts had been made up. During the confession, the chairman stated that Satyam’s balance sheets contained inflated cash and bank balance figures. The company also stated non-existent 10,000 employees, whose accounts were allegedly used to siphon off money from the company.
Subprime mortgage debacle took place in several stages. Initially, during the second half of 2007, more than 100 mortgage lending companies were financially ruined when they were not allowed to sell mortgage backed securities to investors to acquire funds. The next stage started during the last quarter of 2007 and has continued since then in each quarter of the years to come.
During each quarter financial institutions fine tuned the value of their loan backed securities to a small percentage of the price for which it was purchased. At this time, along with deteriorations in the housing market these lending institutions have come to recognize that they have incurred huge losses as a result of which they have less stable capital from which they can lend. The third stage was during the first quarter of 2008 when Bear Streans an investment bank merged with J P Morgan to counter its inability to continue borrowing to fund its operations.
In the late 1980s, the Barlow Clowes affair, one of England’s biggest corporate scandals surfaced. Barlow Clowes was a gifts management service that was closed down in 1988 when the scandal came to light. When the company was closed, a number of pensioners lost their life savings that they had invested with the company and the British government had to pay close to 150 million pounds as compensation to them. Close to 110 million pounds was deemed missing from the company and this scandal is considered one of the worst to have hit Britain’s savings sector.
South Korea’s second largest conglomerate Daewoo had businesses in close to 100 countries. The company however, went bankrupt when it accrued debts nearing $84 million. The company was closed down in 1999 as a result of poor financial management, financial crisis and increased labor unrest. Also, in 2005, the chairman of Daewoo was charged with having organized an accounting fraud, borrowing illegally and smuggling close to $3.2 billion out of South Korea. Daewoo’s collapse resulted in losses that ran into billions of dollars and also in a political crisis.
Fannie Mae and Freddie Mac were charged with having committed fraud in relation to the September 2008 economic crisis that happened on Wall Street and this conviction was a result of a major investigation undertaken by the FBI. With the collapse of Fannie Mae and Freddie Mac, millions of investors lost their retirement accounts and had to witness the collapse of their portfolios. Fannie Mae was fined $400 million in 2006 for having used accounting methods that showed investors a relatively optimistic view of the company’s financial health than what it actually was.
9. American International Group
One of America’s top corporations, American International Group, stated that it had tried to enhance its reserves using fraudulent methods. The company did this by wrongly accounting their reinsurance transactions. American International Group has also detailed a number of other wrong accounting methods that they have used. In addition to this the company also made public the delay of its annual 10 K filing which may have contributed to inflating its worth by $1.7 billion.
10. Bank of Credit and Commerce International
The Bank of Credit and Commerce International was an international bank instituted by Agha Hasan Abedi and it had head offices in both Karachi and Luxembourg. The bank reportedly had a 5.5 billion pound deficit at the time of its closure.
This is considered to be the largest financial fraud in the world. Regulators had come to know of widespread fraudulent practices by the bank that affected close to 8,00,000 depositors the world over. The public was not aware of the bank’s illegal activities till the Bank of Credit and Commerce International was indicted.
