What history’s least ethical accountants can teach you

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Accounting and finance professionals are supposed to command respect and unquestioning trust. After all, they’re the arbiters of financial truth. However, the practice of cooking the books is as old as the abacus.

Here’s our selection of some the most significant accounting scandals of the last hundred years, where a handful of accounting and finance professionals have fallen far, far short of these standards. 

Arthur Andersen and Enron

When Enron filed for bankruptcy in 2001, the Houston-based energy trader’s labyrinthine accounts revealed that it hid huge debts and losses from the balance sheet. Once declared, the company imploded, wiping out $74bn of shareholder funds along with the pensions and jobs of thousands of employees.

Former chief executive Jeff Skilling was sentenced to 14 years in prison, while Enron founder Kenneth Lay died of heart failure while awaiting a likely sentence. Enron auditor Arthur Andersen collapsed the following year after being convicted of obstruction of justice — it had ordered staff to shred documents relating to its Enron work.

The Supreme Court overturned that conviction in 2005, saying the trial jury hadn’t been told that conviction requires “consciousness of wrongdoing”.

Harold Morland and Lord Kylsant

Lord Kylsant built the Royal Mail Steam Packet Company into the world’s greatest shipping operator through a series of acquisitions that included the White Star Line in 1927 for £7m — around £420m at today’s prices.

While the group had prospered in the first world war as the government paid to requisition its ships as military supply vessels, during the 1920s the profits of the company rapidly dropped, and Kylsant began supplementing the company income by taking money from the reserves.

The complex share structure of companies within the group allowed him to hide trading losses in individual firms by moving reserves around. At the time the ruse was discovered, the company had a trading deficit of £300,000 a year, the reserves were exhausted, and the company owed £10m — £600m at today’s prices.

Raymond Marien

In 1938, the police arrested Homes & Davis accountant Raymond Marien for forging cheques from the bank account of one of the firm’s clients, Interstate Hosiery Mills. During the ensuing investigation, the New York Attorney General’s office found that Marien had “juggled” the books of the corporation and that these accounting irregularities inflated Interstate Hosiery Mills’ assets by $1.9m (or $35m at today’s prices) — about 40% of the company’s assets.

For almost four years the firm had been basing its salaries, dividends, bonuses, and general financial policy on balance sheets that Marien had made up. He was tried on a charge of forgery and sentenced to two and a half years at New York’s Sing Sing prison. 

Dennis Kozlowski

Dennis Kozlowski began his career at Tyco International as an auditor, working his way up the corporate ladder to become CEO in 1992. Over the next decade, Tyco grew from a small New Hampshire conglomerate into a global giant operating in more than 100 countries with 250,000 employees and $40bn in annual revenue.

Kozlowski resigned in 2002 after it emerged he was being investigated for tax evasion. In 2005, Kozlowski and former chief financial officer Mark Swartz were found guilty of stealing more than $150m of company money in unauthorised bonuses and forgiven loans.

Two years later, PricewaterhouseCoopers (PwC) paid $225m to settle a class-action lawsuit brought by Tyco shareholders who had claimed that as auditor, PwC had failed to uncover the fraud. The SEC barred PwC partner Richard Scalzo from auditing the accounts of a public company, finding that he had been “reckless” and had ignored and failed to act on several visible signs that Tyco was being looted.

Lessons to learn

  1. Keep audit and accounts teams as separate as possible
  2. Beware of hidden reserves
  3. There should be limits to what an accountant in practice can do for a company
  4. Be vigilant about directors’ loans  
  5. A toxic corporate culture creates susceptibility to corruption

Further reading:

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