Top 10 Accounting Scandals in the U.S.

Accounting scandals, a.k.a. accounting frauds, have been rocking the business world and causing financial turmoil, legal repercussions, and public outcry for a while.

Harming thousands of innocents or causing an irreversible financial loss, these frauds have demonstrated the need for transparency and integrity in accounting practices.

Let's look into the most infamous accounting scandals!

Top 10 Accounting Scandals in the U.S. [Recent History]

From Ponzi schemes to billion-dollar frauds, the following events have shaken the economy causing irreparable economic mayhem.

1. American International Group Inc. (AIG) Accounting Scandal

• When was it discovered: 2005
• Key actors: high-level executives within AIG 
• Type of scandal: fraudulent transactions

One of the biggest multinational insurance firms, AIG, was embroiled in an accounting scandal in 2005 when it was found out it was misleading investors and using fraudulent accounting methods to hide its losses and inflate its earnings.

As a result of an investigation conducted by the SEC, the Justice Department, and the NY State Attorney General, the CEO Hank Greenberg was ousted for stock manipulation, AIG received a $1.6 billion fine, and several executives were charged.

2. Bernie Madoff Ponzi Scheme

• When was it discovered: 2008
• Key actors: Bernie Madoff
• Type of scandal: Ponzi scheme

As the perpetrator behind the biggest Ponzi Scheme in history, Bernie Madoff was found to have tricked the investors of the Bernard L. Madoff Investment Securities LLC out of almost $65 billion, which resulted in a 150-year sentence and $170 million in restitution.

In Bernie Madoff's case, investors received their earnings and returns from other investors' money instead of the company's profits. Funnily enough, Madoff got caught after telling his sons of the scheme, after which they informed the authorities.

3. Peregrine Systems Fraud

• When was it discovered: early 2000s
• Key actors: the company's top executives including CEO Steve Gardner
• Type of scandal: fraudulent accounting practices

Several executives of Peregrine Systems, Inc.—a defunct software company based in San Diego—committed a multibillion-dollar securities fraud in the early 2000s. Their goal was to inflate the company’s worth, thus raising its stock price.

After a lengthy investigation by the FBI and the SEC, most of the company’s top brass were indicted in 2004. Some agreed to settlements, but Stephen Gardner—the former CFO—received an eight-year sentence for his role in the fraud.

4. General Electric Accounting Scandal

• When was it discovered: 2017

• Key actors: high-level executives including ex-CEO Jeff Immelt

• Type of scandal: manipulations to artificially boost financial results

Like similar fraud offenders, General Electric used illegal practices to overstate its earnings and hide the company’s losses in 2016/2017—a scandal revealed after the SEC initiated an investigation revealing GE’s fraudulent accounting methods.

While no criminal charges have been filed yet, GE was instructed to pay the SEC a $200 million penalty for violating the relevant securities laws, and its stock price fell by over 75%. Shareholders name the company’s former CFO, Jeffrey Bornstein, and CEO, Jeff Immelt, as the main culprits in the scandal.

5. Lehman Brothers Scandal

• When was it discovered: 2008
• Key actors: top executives including former CEO Richard Fuld
• Type of scandal: manipulations to hide debt and risky investments

This global financial services giant based in New York City had a long and storied history that died infamously in 2008 after it was discovered it used crafty accounting loopholes to hide over $50 billion in loans and disguise it as sales.

Before its collapse, Lehman Brothers was the fourth-largest U.S.-based investment bank, with over 25,000 employees and over $1.2 trillion in assets and liabilities combined.

6. WorldCom Scandal

• When was it discovered: 2002

• Key actors: senior executives led by founder and CEO Bernie Ebbers

• Type of scandal: accounting manipulations to inflate revenue

Based in Ashburn, Virginia, WorldCom was one of the biggest U.S. telecommunications companies before its fraudulent activities were made known to the public.

In essence, the company used a simple and common accounting deception to inflate its assets by almost $11 billion with false entries in its books.

After the audit department discovered the scandal by flagging almost $4 billion in fraudulent accounts, the company and its CEO—Bernie Ebbers—were ruined: he was sentenced to 25 years, 30,000 people lost their jobs, and investors lost $180 billion. 

7. Enron Accounting Scandal

• When was it discovered: 2001

• Key actors: top company executives including former CEO Jeffrey Skilling

• Type of scandal: manufactured balance sheet to show favorable performance

Operating out of Houston, Texas, the Enron Corporation was an energy, commodities, and services company that was found to be using accounting sleight of hand to hide billions of dollars in debt on its balance sheets.

In addition to the 20,000 lost jobs and massive investor losses of $74 billion, Arthur Andersen, Enron’s accounting firm, was also closed after experiencing a huge backlash. Furthermore, Jeff Skillings—Enron’s CEO—was sentenced to 24 years in prison for his involvement in the scandal.

8. Tyco International Embezzlement Case

• When was it discovered: 2002

• Key actors: former CEO Dennis Kozlowski and CFO Mark Swartz

• Type of scandal: embezzlement

Our list wouldn’t be complete without a major case of embezzlement—the $170 million discovered to be stolen by Tyco International’s top executives in 2002.

Both Dennis Kozlowski (CEO) and Mark Swartz (CFO) were looting the company for a long time to facilitate their extravagant lifestyles. Both officials were sentenced to 25 years in prison, and Tyco settled the charges by paying $26 million in damages.

9. HealthSouth Scandal

• When was it discovered: 2003

• Key actors: CEO Richard Scrushy

• Type of scandal: overstated earnings

This Alabama company was a publicly traded healthcare giant that inflated its earnings by over $1.8 billion via various false accounting tactics.

The presumed motivation behind the fraud, masterminded by the then CEO Richard Scrushy, was meeting the expectations of its shareholders. Surprisingly, he was convicted for other unrelated bribery charges, which put him in jail for seven years.

10. Autonomy Corporation

• When was it discovered: 2011

• Key actors: founder and former CEO Mike Lynch

• Type of scandal: misrepresentation of the company’s value before acquisition

HP bought Autonomy not realizing it was not just a failing firm but a multibillion-dollar accounting ploy. They found that instead of software, Autonomy sold hardware at a loss, and then falsely reported the sales as software licensing revenue.

In the end, HP had to take an $8.8 billion write-off that plunged Autonomy’s value. They also filed and won a lawsuit against the company's ex-executives.

Key Takeaways

As you can see, the last two decades witnessed the worst accounting scandals in the country’s history with massive economic repercussions. Unfortunately, there have been, are, and will always be people in power who misuse their position for personal gain.

Preventing such dishonest actions and their far-reaching consequences is a very realistic goal, but both companies and oversight agencies have to implement and abide by several measures, including but not limited to the following:

• Improving the financial reporting processes and internal controls,
• Facilitating better communication between management and the board,
• Use modern technology to identify patterns of abuse,
• Implement an anonymous whistle-blowing policy,
• Nurture a culture of honesty based on ethical standards,
• Conduct thorough background checks when hiring,
• Enforce and comply with all relevant laws.