.png)
The expectation most shareholders have is for the decision-makers of the companies, to uphold integrity and be objective. This is expected to be reflected in the preparation of financial statements. Despite this, accounting scandals do happen. In this article, we define accounting scandals as business scandals that are a result of trusted company executives or government bodies intentionally falsifying financial information in an attempt to conceal their misdeeds or cases where disorder within the leadership of a company eventually led to a scandal.
These misdeeds include misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets, or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates. This is considered fraud and will affect all stakeholders of the company. But how do these cases occur?
Accounting fraud could occur in instances where decision-makers such as managers and directors are intentionally dishonest. They may have a motivation to, for example, benefit themselves at the expense of their business or to manipulate financial statements in an attempt to mislead other stakeholders.
An appropriate example where the dishonesty of a decision maker led to a case of accounting fraud is the case of Teo Cheng Kiat in 1987. Teo was a cabin crew supervisor and had the duty of processing the cabin crew allowances that were later paid to the cabin crew. He used the names of crew members who did not fly on several flights to make false claims. He channeled these payments to bank accounts that belonged to him and swindled $35 million Singapore dollars in the span of 13 years. He used this money to fund his gambling habit and the extravagant spending of himself and his family. Teo used his position of power and the trust his superiors and fellow employees had in him to get away with his crimes for this long.
His crimes were detected when an internal audit was conducted in 2000 and the discrepancies were detected. Teo was charged and given a penalty of 24 years imprisonment. This was considered Singapore’s worst financial crime and Singapore airlines was only able to recover $21 million of the $35 million stolen by Teo Cheng Kiat.
Another example would be Luckin Coffee. Luckin Coffee is a Chinese premium coffee chain. It went public on the US stock market in 2019 and peaked at a $9 billion valuation. But it turned out that a sizable amount of their income was fraudulent. Early in 2020, they were identified as a fraud and delisted from the NASDAQ.
It was revealed that Luckin had been using fabricated coupon sales to inflate its revenue. In 2019 itself, Luckin’s share price increased 60% from the IPO price. At this point, Luckin’s directors might have failed in questioning the rapid growth. This created a false appearance on their financial health. To entice investors, Luckin created fraudulent claims and misrepresented its financial performance. Luckin obtained money through false bank statements in addition to not disclosing proper revenue and costs.
It was possible that the directors chose to turn a blind eye as they put an emphasis on short-term earnings, ignoring the unethical practices made by the management. Furthermore, Luckin did not maintain accurate financial records or effective internal accounting controls. The business was aware that its financial records and statements were false and misleading. Luckin created fake charges and expenses by working with finance businesses, suppliers, and outside shell corporations.
In order to detect such fraud earlier, a rigorous system could have been put in place. a more robust code of ethics should have been applied throughout the company, from senior management to frontline staff. As for external parties, auditors can go through more fraud detection training so they will be more skillful to spot improper transactions.
Sometimes, leaders of a corporation do not intend for accounting fraud to occur. They could, for example, have poor accounting practices and disunity within leadership, leading to the failure of the business. Although they do not intend for their actions to cause harm to their business, their mismanagement and poor financial decisions led to their own downfall and sometimes, major accounting scandals. An appropriate example to support this would be the case of Hyflux Singapore.
Hyflux Ltd was a Sustainable product and research company that was founded in 1989 by Olivia Lum. It was the first water treatment company to be listed in Singapore. In 2016, Hyflux entered the electricity business expecting to earn high profits. However, when Singapore liberalized its electricity market, the prices of electricity collapsed. With their new business endeavors in disarray, Hyflux had a net loss of 116 million Singapore dollars in 2017 and 2.8 billion Singapore dollars in 2018. Olivia Lum and the other managers of Hyflux lacked the management expertise to run the business during this period of time.
Many also point out that sufficient risk assessments were not carried out before deciding to enter the electricity industry. Because of the debt they incurred, the values of their ordinary and preference shares also depreciated rapidly. Many shareholders lost a majority of their investments.
Figure 1: Line graph illustrating the fall of Hyflux’s share prices
Hyflux was liquidated in July 2021. This major scandal could have been entirely prevented if adequate research and actions were made by Hyflux’s managers.
Fraud can also arise when a company receives too much pressure from internal and external parties. British supermarket chain Tesco overstated profits to maintain company value amidst declining sales.
As of 2014, the British supermarket chain Tesco held approximately 29 percent of Britain’s grocery market, with more than 3,500 stores and over 310,000 employees. Tesco was Britain’s largest grocery chain and the third-largest retailer by sales in the world. However, with increased competition, Tesco saw a decline in sales. The market share was reduced by 3% while the competitors such as Aldi and Lidl increased by 4%. This was seen as a threat to them.
As a result, the perpetrators were incentivised to commit fraud as management pushed for higher profits. Tesco’s finance director Carl Rogberg, managing director Chris Bush, and food commercial director John Scouler were charged with the fraud. The issue came to light when Tesco's senior accountant, Amit Soni alerted senior management of the profit misstatement.
Accounting scandals greatly impact our economy and a majority of the stakeholders of a business. Some companies are unable to recover from these scandals while others do the necessary research to restabilize their business and minimize the effects the scandal had on its stakeholders. Despite the possibility to reverse the effects a scandal has on a business, the business decision-makers must conduct thorough research on how to prevent situations that would lead to scandals.
They must also conduct effective audits and internal evaluations to ensure that fraudulent activities are not carried out by those in power within the business. It should be noted that major cases of fraud are becoming more prevalent. Therefore, there is an increasing demand for fraud investigators to help eliminate this problem for the benefit of all businesses and individuals with a stake in them. Thus, it is essential to put policies in place to prevent the occurrence of accounting fraud.
References
PayrollHeaven https://payrollheaven.com/define/accounting-scandals/
تعليقات