Top five frauds in accounting

Debt and death, lies and LIBOR – all have been involved in some of the biggest frauds in accounting. Kayleigh Ziolo charts the top five crimes and their punishments

Ethics has never had a higher profile in accountancy than right now, and remains a key area to get to grips with whether you’re studying or a member in practice. Frauds in accounting are nothing new, of course, and have been commonplace since the start of the last century through to the present day. But what were the biggest?

1. The Pyramid Schemer: Charles Ponzi (1920)

The crime: Carlo “Charles” Ponzi has the dubious honour of giving his name to the Ponzi scheme, in which he turned the innocuous international reply coupon (IRC) into a multimillion-dollar racket.

His Securities Exchange Company sold coupons for a supposed investment in these IRCs, promising a 50% profit return in just 90 days. This promise led to a huge uptake in the sale of the coupons, meaning he could pay the first round of investors in half the time. He had not bought the IRCs he had promised, but as more people invested, he continued to pay investors with other investors’ money.

The punishment: The house of cards toppled when suspicions about the quick returns triggered a run on his company. Ponzi was charged with 86 counts of mail fraud and eventually served more than ten years in jail. He died, penniless, in 1949.

2. The Italian Job: Banco Ambrosiano (1982)

The crime: Roberto Calvi was at the centre of a web of deceit, which was named at the time as the biggest post-war financial scandal. Banco Ambrosiano collapsed in 1982, with debts of up to $1.5bn. An investigation found that millions of lire were transferred illegally out of the country. There was evidence of links to the Mafia and Propaganda Due Freemasons.

The punishment: Calvi was found guilty of illegally transferring $26million out of the country, but kept his job. While on bail pending an appeal, his body was discovered hanging from Blackfriars Bridge, London, his pockets full of bricks.

An initial inquest declared his death suicide, but a second came to the conclusion that he had been murdered. Five suspects were acquitted in 2007. The perpetrator was never brought to justice.

3. The Big Five becomes the Big Four: Enron (2001)

The crime:  One of the biggest frauds in accounting in recent years. Exploiting every accounting loophole at their disposal, Enron’s senior executives, together with accountancy major Arthur Andersen – pre-Enron, we talked of the Big Five – essentially fabricated the company’s success.

Senior management and staff hid hundreds of millions of dollars worth of debt from bad deals, via special purpose entities and reams of dodgy reporting. It was a story so big, playwright Lucy Prebble wrote a successful play about it.

The punishment: In 2006 Jeffrey Skilling (CEO and COO) was sentenced to 24 years in prison, and was ordered to pay $45mn to a restitution fund for victims of the fraud. Kenneth Lay, former chairman and CEO, could have faced up to 45 years, but he died before sentencing was carried out. A further 21 people were convicted for offences committed at Enron, including four Merrill Lynch bankers.

4. Irish eyes are weeping: Anglo Irish Bank (2008)

The crime: As the recession hit Ireland, Anglo Irish Bank was accused of being reckless with loans to big developers. But it was the uncovering of secret loans paid to the bank’s own executives that led to former chairman and chief executive Sean FitzPatrick’s arrest in 2012.

The collapse – and subsequent nationalisation – of the bank left the Irish taxpayer to take on a burden of debt of €30bn.

The punishment: As of April 2013, the trial is ongoing. FitzPatrick faces 12 charges of giving auditors false or misleading information on directors’ loans totalling €139m. He was declared bankrupt in 2010, leaving his loan from the bank (more than €100m) yet to be repaid.

5. In a fix: LIBOR (2012)

The crime: This recent debacle stunned the world when it emerged that the banks – already in the public’s bad books following the banking crisis – were fixing benchmark lending rates.

The London interbank offered rate (LIBOR) is the benchmark rate at which banks lend funds to each other – but it is used as a base for setting the interest on consumer and corporate loans, affecting the cost of borrowing for everyone.

Fixing the rates allowed the partaking institutions to cover up any instability and gain financially. Barclays, UBS, RBS and 14 other institutions are under investigation for manipulation of the rates between 2005 and 2009.

The punishment: Only three arrests have so far been made in connection to LIBOR fixing. Barclays Bank was fined $453m, UBS $1.5bn, and the Royal Bank of Scotland (RBS) $612m.

For more advice on dealing with fraud in accounting visit the AAT Ethics website, where you can get a host of resources to help.

Kayleigh Ziolo is a freelance journalist and writer based in Ireland.