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Accounting scandals

Scandal arising from the disclosure of financial misdeeds

Accounting scandals

Scandal arising from the disclosure of financial misdeeds

Accounting scandals are business scandals that arise from intentional manipulation of financial statements, with the disclosure of financial misdeeds by trusted executives of corporations or governments. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets, or underreporting the existence of liabilities; these can be detected either manually or by means of deep learning. It involves an employee, an accountant, or the corporation itself and is misleading to investors and shareholders.

This type of "creative accounting" can amount to fraud, and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States. Employees who commit accounting fraud at the request of their employers are subject to personal criminal prosecution.

Two types of fraud

Misappropriation of assets

Misappropriation of assets – often called defalcation or employee fraud – occurs when an employee steals a company's assets, whether those assets are of a monetary or physical nature. Typically, assets stolen are cash, or cash equivalents, and company data or intellectual property. However, misappropriation of assets also includes taking inventory out of a facility or using company assets for personal purposes without authorization. Company assets include everything from office supplies and inventory to intellectual property.

Fraudulent financial reporting

Fraudulent financial reporting is also known as earnings management fraud. In this context, management intentionally manipulates accounting policies or accounting estimates to improve financial statements. Public and private corporations commit fraudulent financial reporting to secure investor interest or obtain bank approvals for financing, as justifications for bonuses or increased salaries or to meet the expectations of shareholders. The U.S. Securities and Exchange Commission has brought enforcement actions against corporations for many types of fraudulent financial reporting, including improper revenue recognition, period-end stuffing, fraudulent post-closing entries, improper asset valuations, and misleading non-GAAP financial measures.

The fraud triangle

The fraud triangle is a model for explaining the factors that cause someone to commit fraudulent behaviors in accounting. It consists of three components, which, together, lead to fraudulent behavior:

  • Incentives/pressure: Management or other employees have incentives or pressures to commit fraud.
  • Opportunities: Circumstances provide opportunities for management or employees to commit fraud.
  • Attitudes/rationalization: An attitude, character, or set of ethical values exists that allows management or employees to commit a dishonest act, or they are in an environment that imposes sufficient pressure that causes them to rationalize committing a dishonest act. Incentives/pressures: A common incentive for companies to manipulate financial statements is a decline in the company's financial prospects. Companies may also manipulate earnings to meet analysts' forecasts or benchmarks such as prior-year earnings, to meet debt covenant restrictions, achieve a bonus target based on earnings, or artificially inflate stock prices. As for the misappropriation of assets, financial pressures are a common incentive for employees. Employees with excessive financial obligations, or those with substance abuse or gambling problems, may steal to meet their personal needs.

Opportunities: Although the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies in industries where significant judgments and accounting estimates are involved. Turnover in accounting personnel or other deficiencies in accounting and information processes can create an opportunity for misstatement. As for misappropriation of assets, opportunities are greater in companies with accessible cash or with inventory or other valuable assets, especially if the assets are small or easily removed. A lack of controls over payments to vendors or payroll systems can allow employees to create fictitious vendors or employees and bill the company for services or time.

Attitudes/rationalization: The attitude of top management toward financial reporting is a critical risk factor in assessing the likelihood of fraudulent financial statements. If the CEO or other top managers display a significant disregard for the financial reporting process, such as consistently issuing overly optimistic forecasts, or if they are overly concerned about meeting analysts' earnings forecasts, fraudulent financial reporting is more likely. Similarly, for misappropriation of assets, if management cheats customers by overcharging for goods or engaging in high-pressure sales tactics, employees may feel that it is acceptable for them to behave in the same fashion.

Several extensions to the fraud triangle have been proposed in the literature. The "fraud diamond" adds a fourth element, capability, emphasizing the perpetrator’s skills and position to exploit opportunities. Subsequent work introduced the "fraud pentagon," which further incorporates arrogance (or ego) to capture the attitude of superiority that can facilitate rule-breaking; this model has been examined empirically in studies of financial reporting fraud.

This is a photo of the fraud triangle. Perceived opportunities are like a lack of internal controls or there being too much trust. Pressure/incentives can be due to personal debt/financial obligations, meeting companies' standards, either due to pressure, getting a raise or to save their job. Rationalization could be like “Not feeling like you are being paid enough”, or “Everyone is doing it”, or “I intend to pay it back” or “we are helping the organization by raising money”(specifically for financial statement fraud)

Causes

Frauds such as embezzlement are easy to conceal when company records are opaque to begin with. Poor accounting, such as the absence of monthly reconciliations or an independent audit function, also indicates vulnerability to fraud.

Executive and managerial motivations for fraud

An executive can reduce the price of his company's stock due to information asymmetry. He can: accelerate accounting of expenses, delay accounting of revenue, engage in off-balance sheet transactions to make the company seem less profitable, or simply report very low estimates of future earnings. Executives may do this to make a company a more attractive takeover target. When the company is bought for less, the acquirer profits from the executive's actions to surreptitiously reduce the share price. This can represent tens of billions of dollars (questionably) transferred from former shareholders to the acquirer. The executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the hundreds of millions of dollars for one or two years of work. Managerial opportunism plays a large role in these scandals.

Employee motivations for fraud

Not all accounting scandals are caused by those at the top. In fact, in 2015, 33% of all business bankruptcies were caused by employee theft. Often, middle managers and employees are pressured to or willingly alter financial statements due to their debts or the possibility of personal benefit over that of the company, respectively. For example, officers who would be compensated more in the short-term (for example, cash in pocket) might be more likely to report inaccurate information on a tab or invoice (enriching the company and maybe eventually getting a raise).

List of the biggest accounting scandals

CompanyYearAudit firmCountryNotesFred Stern & CompanyHatry GroupRoyal Mail Steam Packet CompanyInterstate Hosiery MillsMcKesson and Robbins scandalYale Express SystemAtlantic Acceptance CorporationContinental Vending Machine Corp.National Student Marketing CorporationFour Seasons Nursing Centers of AmericaEquity FundingFund of Funds – Investors Overseas ServicesLockheed CorporationNugan Hand BankO.P.M. Leasing ServicesZZZZ BestNorthguard Acceptance Ltd.ESM Government SecuritiesBankers TrustBarlow ClowesCrazy EddieMiniScribeLiventPolly PeckBank of Credit and Commerce InternationalPhar-Mor[1992 Indian stock market scam](1992-indian-stock-market-scam)
Harshad MehtaInformix CorporationGainaxSybaseCendantCinarWaste Management, Inc.MicroStrategyUnify CorporationComputer AssociatesLernout & HauspieXeroxOne.TelEnronSwissairAdelphiaAOLBristol-Myers SquibbCMS EnergyDuke EnergyVivendi UniversalDynegyEl Paso CorporationFreddie MacGlobal CrossingHalliburtonHomestore.comImClone SystemsKmartMerck & Co.Merrill LynchMirantNicorPeregrine SystemsQwest CommunicationsReliant EnergySunbeamSymbol TechnologiesSteinhoff InternationalTyco InternationalWorldComRoyal AholdParmalatHealthSouth CorporationNortelChiquita Brands InternationalAIGBernard L. Madoff Investment Securities LLCAnglo Irish BankSatyam Computer ServicesBiovailTaylor, Bean & WhitakerMonsantoKinross GoldLehman BrothersNational Stock Exchange of India
NSE co-location scamAmir-Mansour AriaBank Saderat IranSino-Forest CorporationOlympus CorporationAutonomy CorporationPenn West ExplorationPescanovaPetrobrasTescoToshibaValeant PharmaceuticalsAlberta Motor AssociationOdebrechtWells Fargo[1Malaysia Development Berhad](1malaysia-development-berhad)WirecardLuckin CoffeeAdani GroupAmericanasEvergrandeBF Borgers
1925Touche, Niven & Co.United StatesTrial: *Ultramares Corp. v. Touche*
1929United Kingdom
1931Harold John MorlandUnited KingdomMisrepresented drawdowns from reserves as trading profits. Trial: Royal Mail Case (*R v Kylsant & Otrs*)
1937Homes and DavisUnited States
1938Price, Waterhouse & Co.United States
1965Peat, Marwick, Mitchell & Co.United StatesOverstated net worth and failed to indicate net operating loss
last=M. J. Rossantdate=November 14, 1965title=Atlantic Acceptance: Even the Big Ones Got Stung; U.S. Investors Lose Heavily Following Collapse of Canada's Atlantic Acceptancework=The New York Timesurl=https://www.nytimes.com/1965/11/14/archives/atlantic-acceptance-even-the-big-ones-got-stung-us-investors-lose.htmlurl-status=livearchive-url=https://web.archive.org/web/20171107031412/https://www.nytimes.com/1965/11/14/archives/atlantic-acceptance-even-the-big-ones-got-stung-us-investors-lose.htmlarchive-date=November 7, 2017df=mdy-all}}Wagman, Fruitman & LandoCanadaCPA conflicts of interest
1969Lybrand, Ross Brothers, & MontgomeryUnited StatesCPA partners convicted and fined
1970Peat, Marwick, Mitchell & Co.United StatesOverstatement of earnings
1970Arthur AndersenUnited StatesOverstatement of earnings; CPA partners indicted
1973Wolfson Weiner; Ratoff & LapinUnited StatesCreated fictitious insurance policies
1973Arthur AndersenCanadaMutual fund that inflated the value of assets
1976United States
1980Australia
1981Fox & CompanyUnited StatesCreated fictitious leases
1986United StatesPonzi scheme run by Barry Minkow
1980 to 1982Ernst & YoungCanada
1986Alexander Grant & CompanyUnited StatesBribery of CPA partner.
1988Arthur Young & CoUnited StatesHid an $80 million mispricing of derivatives contributing to profits by cutting bonuses.
1988United KingdomGilts management service. £110 million missing
last=Labatonfirst=Stephendate=September 7, 1989title=S.E.C. Files Fraud Case on Retailerwork=The New York Timesurl=https://select.nytimes.com/gst/abstract.html?res=FA0713F938580C748CDDA00894D1484D81access-date=September 7, 2006}}United States
1989United States
1989 to 1998Deloitte & ToucheCanadaFraud and forgery
1990United Kingdom
1991United Kingdom
1992Coopers & LybrandUnited StatesMail fraud, wire fraud, bank fraud, and transportation of funds obtained by theft or fraud
last1=Baruafirst1=Samir Klast2=Varmafirst2=Jayanth Rdate=January 1993title=Securities Scam: Genesis, Mechanics, and Impacturl=https://web.iima.ac.in/assets/snippets/workingpaperpdf/1992-09-01jrvarma.pdfjournal=Vikalpa: The Journal for Decision Makerslanguage=envolume=18issue=1pages=3–14doi=10.1177/0256090919930101s2cid=115119893issn=0256-0909access-date=February 3, 2023archive-date=October 6, 2021archive-url=https://web.archive.org/web/20211006125248/https://web.iima.ac.in/assets/snippets/workingpaperpdf/1992-09-01jrvarma.pdfurl-status=dead}}IndiaFraud, market manipulation, money laundering
1996Ernst & YoungUnited States
1996 to 1999JapanTax evasion by reporting fictitious costs for company software
1997Ernst & YoungUnited States
1998Ernst & YoungUnited States
1998Ernst & YoungCanadaMisuse of corporate funds
1999Arthur AndersenUnited StatesFinancial misstatements
2000PWCUnited StatesMichael Saylor
2000Deloitte & ToucheUnited States
2000KPMGUnited StatesSanjay Kumar, Stephen Richards
2000KPMGBelgiumFictitious transactions in Korea and improper accounting methodologies elsewhere
last=Patsurisfirst=Penelopedate=August 26, 2002title=The Corporate Scandal Sheetwork=Forbesurl=https://www.forbes.com/2002/07/25/accountingtracker.htmlurl-status=livearchive-url=https://web.archive.org/web/20161228182321/http://www.forbes.com/2002/07/25/accountingtracker.htmlarchive-date=December 28, 2016df=mdy-all}}KPMGUnited StatesFalsifying financial results
2001Ernst & YoungAustralia
2001Arthur AndersenUnited StatesJeffrey Skilling, Kenneth Lay, Andrew Fastow
2001PricewaterhouseCoopersSwitzerland
2002Deloitte & ToucheUnited StatesJohn Rigas
2002Ernst & YoungUnited StatesInflated sales
title=Archived copyurl=https://www.sec.gov/news/digest/dig080904.txturl-status=livearchive-url=https://web.archive.org/web/20170528152014/https://www.sec.gov/news/digest/dig080904.txtarchive-date=May 28, 2017access-date=August 27, 2017df=mdy-all}}PricewaterhouseCoopersUnited StatesInflated revenues
date=January 6, 2007title=Today in Business: Utility Settles Lawsuitwork=The New York Timesurl=https://query.nytimes.com/gst/fullpage.html?res=9D05E4D61430F935A35752C0A9619C8B63url-status=liveaccess-date=April 23, 2010archive-url=https://web.archive.org/web/20121111095736/http://query.nytimes.com/gst/fullpage.html?res=9D05E4D61430F935A35752C0A9619C8B63archive-date=November 11, 2012df=mdy-all}}Arthur AndersenUnited StatesRound trip trades
2002Deloitte & ToucheUnited StatesRound trip trades
2002Arthur AndersenFranceFinancial reshuffling
2002Arthur AndersenUnited StatesRound trip trades
2002Deloitte & ToucheUnited StatesRound trip trades
2002PricewaterhouseCoopersUnited StatesUnderstated earnings
2002Arthur AndersenBermudaNetwork capacity swaps to inflate revenues
2002Arthur AndersenUnited StatesImproper booking of cost overruns
last=Palmerifirst=Chrisdate=July 6, 2006title=How Stuart Wolff Got Himself Caught in a Trapurl=http://www.businessweek.com/the_thread/hotproperty/archives/2006/07/how_stuart_wolf.htmlurl-status=deadarchive-url=https://web.archive.org/web/20120406172054/http://www.businessweek.com/the_thread/hotproperty/archives/2006/07/how_stuart_wolf.htmlarchive-date=April 6, 2012access-date=November 1, 2011website=BusinessWeekdf=mdy}}PricewaterhouseCoopersUnited StatesImproper booking of sales
2002KPMGUnited StatesSamuel D. Waksal
title=SEC Charges KMart's Former CEO and CFO With Financial Fraudurl=https://www.sec.gov/news/press/2005-119.htmurl-status=livearchive-url=https://web.archive.org/web/20111104054132/http://www.sec.gov/news/press/2005-119.htmarchive-date=November 4, 2011access-date=November 1, 2011publisher=Sec.govdf=mdy-all}}PricewaterhouseCoopersUnited StatesMisleading accounting practices
2002PricewaterhouseCoopersUnited StatesRecorded co-payments that were not collected
2002Deloitte & ToucheUnited StatesConflict of interest
2002KPMGUnited StatesOverstated assets and liabilities
2002Arthur AndersenUnited StatesOverstated assets, understated liabilities
2002Arthur AndersenUnited StatesOverstated sales
2002Arthur Andersen (1999, 2000, 2001)United StatesInflated revenues
2002Deloitte & ToucheUnited StatesRound trip trades
2002Arthur AndersenUnited StatesOverstated sales and revenues
2002United States
2002United StatesOverstated sales and revenues
2002PricewaterhouseCoopersBermudaImproper accounting, Dennis Kozlowski
last1=Beasley, M. S.url=http://mfile.narotama.ac.id/files/Accounting%20&%20Financial/Auditing%20Cases;%20Instructor%20Resource%20Manual%20%284th%20Edition%29/Section%203%20%20Professional%20And%20Ethical%20Issues.pdftitle=Auditing Cases: Instructor Resource Manual, 6th Edition. Upper Saddle River, NJ.last2=Frank A Bucklesslast3=S. M. Gloverlast4=D. F. Prawittpublisher=Pearson.year=2015author-link2=Frank A Bucklessaccess-date=May 5, 2016archive-url=https://web.archive.org/web/20161010233832/http://mfile.narotama.ac.id/files/Accounting%20%26%20Financial/Auditing%20Cases%3B%20Instructor%20Resource%20Manual%20%284th%20Edition%29/Section%203%20%20Professional%20And%20Ethical%20Issues.pdfarchive-date=October 10, 2016url-status=deaddf=mdy-all}}Arthur AndersenUnited StatesFraudulent expense capitalization, Bernard Ebbers
2003Deloitte & ToucheUnited StatesInflating promotional allowances
2003Grant Thornton SpAItalyFalsified accounting documents, Calisto Tanzi
2003Ernst & YoungUnited StatesRichard M. Scrushy
2003Deloitte & ToucheCanadaDistributed ill-advised corporate bonuses to top 43 managers
2004Ernst & YoungUnited StatesIllegal payments
2004PricewaterhouseCoopersUnited StatesAccounting of structured financial deals
2008Friehling & HorowitzUnited StatesBiggest Ponzi scheme in history
2008Ernst & YoungIrelandAnglo Irish Bank hidden loans controversy
2009PricewaterhouseCoopersIndiaFalsified accounts
2009CanadaFalse statements
2009PricewaterhouseCoopersUnited StatesFraudulent spending
2009 to 2011DeloitteUnited StatesImproper accounting for incentive rebates
2010KPMGCanadaOverstated asset values
2010Ernst & YoungUnited StatesFailure to disclose Repo 105 misclassified transactions to investors
2010IndiaFraud and Market manipulation
2011IAO (audit organization) and other audit firmsIranBusiness loans without putting any collateral and financial system
2011IAO (audit organization) and other audit firmsIranFinancial transactions among banks and getting a lot of business loans without putting any collateral
2011Ernst & YoungCanadaChina Canada-ChinaPonzi scheme, falsifying assets
2011Ernst & YoungJapan*Tobashi* using acquisitions
2012Deloitte & ToucheUnited StatesSubsidiary of HP
2012 to 2014KPMGCanadaOverstated profits
2013BDO SpainSpainUnderstated debt, fraudulent invoices, falsified accounts
2014PricewaterhouseCoopersBrazilGovernment bribes, misappropriation, money laundering
2014PricewaterhouseCoopersUnited KingdomRevenue recognition
2015Ernst & YoungJapanOverstated profits
2015PricewaterhouseCoopersCanadaOverstated revenues
2016CanadaFraudulent invoices
2016BrazilGovernment bribes
2017KPMGUnited StatesFalse accounting
2018Ernst & Young, Deloitte, KPMGMalaysia[Fraud, money laundering, abuse of political power, government bribes](1malaysia-development-berhad-scandal)
2020Ernst & YoungGermanyAllegations of fraud
2020Ernst & YoungChinaInflated its 2019 sales revenue by up to US$310 million
last1=Findlayfirst1=Stephanielast2=Lockettfirst2=Hudsontitle='Modi's Rockefeller': Gautam Adani and the concentration of power in Indiaurl=https://www.ft.com/content/474706d6-1243-4f1e-b365-891d4c5d528baccess-date=24 January 2023publisher=Financial Timesdate=13 November 2020}}Shah DhandhariaIndiaAllegations of accounting fraud, stock manipulation, money laundering
2023KPMG and PWCBrazilAccounting inconsistencies related to forfeit, on the order of R$20 billion
2023PWCChinaRevenue overstatement on the order of $78 billion from 2019–2020, leading to the Evergrande liquidity crisis
2024United Statestitle=SEC Charges Audit Firm BF Borgers and Its Owner with Massive Fraud Affecting More Than 1,500 SEC Filingsurl=https://www.sec.gov/news/press-release/2024-51access-date=4 May 2024work=Securities and Exchange Commissiondate=May 3, 2024location=Washington D.C.id=2024-51quote=The Securities and Exchange Commission today charged audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers (together, “Respondents”), with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023. The SEC also charged the Respondents with falsely representing to their clients that the firm’s work would comply with PCAOB standards; fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards. To settle the SEC’s charges, BF Borgers agreed to pay a $12 million civil penalty, and Benjamin Borgers agreed to pay a $2 million civil penalty. Both Respondents also agreed to permanent suspensions from appearing and practicing before the Commission as accountants, effective immediately.}}

Notable outcomes

The Enron scandal turned into the indictment and criminal conviction of Big Five auditor Arthur Andersen on June 15, 2002. Although the conviction was overturned on May 31, 2005, by the Supreme Court of the United States, the firm ceased performing audits and split into multiple entities. The Enron scandal was defined as one of the biggest audit failures of all time. The scandal included utilizing loopholes that were found within the Generally Accepted Accounting Principles (GAAP). For auditing a large-sized company such as Enron, the auditors were criticized for having brief meetings a few times a year that covered large amounts of material. By January 17, 2002, Enron decided to discontinue its business with Arthur Andersen, claiming they had failed in accounting advice and related documents. Arthur Andersen was judged guilty of obstruction of justice for disposing of many emails and documents that were related to auditing Enron. Since the SEC is not allowed to accept audits from convicted felons, the firm was forced to give up its CPA licenses later in 2002, costing over 113,000 employees their jobs. Although the ruling was later overturned by the U.S. Supreme Court, the once-proud firm's image was tarnished beyond repair, and it has not returned as a viable business even on a limited scale.

On July 9, 2002, George W. Bush gave a speech about recent accounting scandals that had been uncovered. In spite of its stern tone, the speech did not focus on establishing new policy, but instead focused on actually enforcing current laws, which include holding CEOs and directors personally responsible for accountancy fraud.

In July 2002, WorldCom filed for bankruptcy protection in what was considered at the time the largest corporate insolvency ever. A month earlier, the company's internal auditors discovered over $3.8 billion in illicit accounting entries intended to mask WorldCom's dwindling earnings, which was by itself more than the accounting fraud uncovered at Enron less than a year earlier. Ultimately, WorldCom admitted to inflating its assets by $11 billion.

These scandals reignited the debate over the relative merits of US GAAP, which takes a "rules-based" approach to accounting, versus International Accounting Standards and UK GAAP, which takes a "principles-based" approach. The Financial Accounting Standards Board announced that it intends to introduce more principles-based standards. More radical means of accounting reform have been proposed, but so far have very little support. The debate itself overlooks the difficulties of classifying any system of knowledge, including accounting, as rules-based or principles-based. This also led to the establishment of the Sarbanes-Oxley Act. On a lighter note, the 2002 Ig Nobel Prize in Economics went to the CEOs of those companies involved in the corporate accounting scandals of that year for "adapting the mathematical concept of imaginary numbers for use in the business world."

In 2003, Nortel made a big contribution to this list of scandals by incorrectly reporting a one-cent per share earnings directly after their massive layoff period. They used this money to pay the top 43 managers of the company. The SEC and the Ontario Securities Commission eventually settled a civil action with Nortel. A separate civil action was taken against top Nortel executives, including former CEO Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly, and MaryAnne E. Pahapill and Hamilton. These proceedings were postponed pending criminal proceedings in Canada, which opened in Toronto on January 12, 2012. Crown lawyers at this fraud trial of three former Nortel Networks executives say the men defrauded the shareholders of Nortel of more than $5 million. According to the prosecutor, this was accomplished by engineering a financial loss in 2002, and a profit in 2003, thereby triggering Return to Profit bonuses of $70 million for top executives. In 2007, Dunn, Beatty, Gollogly, Pahapill, Hamilton, Craig A. Johnson, James B. Kinney, and Kenneth R.W. Taylor were charged with engaging in accounting fraud by "manipulating reserves to manage Nortel's earnings."

In 2005, after a scandal involving insurance and mutual funds the year before, AIG was investigated for accounting fraud. The company already lost over $45 billion worth of market capitalization because of the scandal. Investigations also discovered over $1 billion worth of errors in accounting transactions. The New York Attorney General's investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives. CEO Maurice R. "Hank" Greenberg was forced to step down and fought fraud charges until 2017, when the 91-year-old reached a $9.9 million settlement. Howard Smith, AIG's chief financial officer, also reached a settlement.

Well before Bernard Madoff's massive Ponzi scheme came to light, observers doubted whether his listed accounting firm – an unknown two-person firm in a rural area north of New York City – was competent to service a multibillion-dollar operation, especially since it had only one active accountant, David G. Friehling. Friehling's practice was so small that for years, he operated out of his house; he only moved into an office when Madoff customers wanted to know more about who was auditing his accounts. Ultimately, Friehling admitted to simply rubber-stamping at least 18 years' worth of Madoff's filings with the SEC. He also revealed that he continued to audit Madoff even though he had invested a substantial amount of money with him; accountants are not allowed to audit broker-dealers with whom they are investing. He agreed to forfeit $3.18 million in accounting fees and withdrawals from his account with Madoff. His involvement makes the Madoff scheme not only the largest Ponzi scheme ever uncovered, but the largest accounting fraud in world history. The $64.8 billion claimed to be in Madoff accounts dwarfed the $11 billion fraud at WorldCom.

References

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