Accounting scandals, unsurprisingly, take feature spreads when they occur. It’s probably something to do with the terrifying scale of losses relocated, hidden or redefined – juxtaposed with the, seemingly benign, finance manager.
Still – you can sometimes sympathise with capital managers who go in for a bit of ‘creative accounting’: dramatic shares dips, slashed bonuses – and even dismissal – face the FD who can’t make the numbers look attractive.
The Olympus Scandal
Easily one of the most famous accounting scandals in history, the discovery of accounting fraud at Japanese firm Olympus Corporation shook the country. Tobashi schemes – Japanese for ‘fly away’, when losses are transferred by the investment firm to another portfolio company – had plagued Japanese corporate governance previously – and they weren’t as suppressed as the government believed.
In brief, British-born Michael Woodford, was made CEO two weeks prior to the scandal emerging and was alerted to the possibility of the asset impairment scheme.
He made these concerns public and was dismissed, before being replaced by board chairman Tsuyoshi Kikukawa. However, subsequent investigations uncovered 117.7bn Yen ( £680m) in investment losses. As well as other payments going as far back as the 80s – none of which were known to shareholders.
The impact of the investigations on Olympus were dramatic: its stock market valuation plummeted 75-80 per cent; 7 per cent (2,700) of staff were let go; much of the board resigned (or were arrested); and a fear of nationwide ‘creative’ fiscal governance spread.
To top it off, there were suspicions that Yakuza, Japanese crime syndicates, were somehow in involved in the scheme.
WorldCom’s revenue scandal ended in a series of rolling heads – something like the end of ‘The Godfather’.
An internal auditing team carried out investigations into the company’s reports, discovering purposefully mislabelled expenses and made-up revenue accounts, which had been used to mask falling revenues.
The result: CFO Scott Sullivan was dismissed. David Myers, controller, was out. And of course CEO ‘Bernie’ Ebbers – who became very wealthy through his buffered holdings in WorldCom stock – was imprisoned on a 25-year sentence, ongoing, and named a few times over as one of the most corrupt CEOs in history.
Then there was John Sidgmore – COO at the time – who was ‘instrumental in turning around the scandal”; prevented by acute pancreatitis, of which he subsequently died in 2003.
The affair, in total, cost WorldCom investors possibly $100bn, or 61.30bn.
Worldcom, cleared of upper management in only a few years, as if by a fiscal hurricane, filed for bankruptcy in 2002, from which it emerged in 2004 and now a subsidiary of Verizon.