Imagine the head of security at a bank using his years of training in security procedures to orchestrate an incredible heist. This is essentially what happened to the corporate giant Tyco, only the person planning it was the CEO, Dennis Kozlowski and his right hand man CFO, Mark Swartz. Kozlowski and Swartz were at the helm of Tyco and used their experience and skills to carefully plan a scheme, along with the help of other henchman within the company, to siphon money out of Tyco in such a way that even after independent audits and scrutiny by the SEC, the fraud remained unnoticed. Tyco’s corporate was built upon their knowledge of audit procedures and internal controls that they would have learned in their fledgling years as practicing auditors. Dennis Kozlowski was an accounting major from modest beginnings who worked his way to the top of Tyco, but along the way he made an important career stop at Nashua Corporation, as the Director of Audit and Analysis. In keeping with his tactic to handpick his management team, along came his new CFO Mark Swartz. He was an impeccable choice for Kozlowski, fitting the requirements of being “smart, poor, and wants-to-be-rich” (Symonds) and since he began his career as a CPA auditor for Deloitte & Touche he had the perfect skill set to assist in Kozlowski’s corruption (Hamilton and Micklethwait 82). Before they could begin to pillage the company they needed to establish a way to avoid detection by the SEC, the board of directors and the auditors. In much the same way a bank robber would disable security cameras, they made their thieveries invisible or paid off those that would help them. First, Kozlowski organized the company so that the internal audit team reported directly to him ins... ... middle of paper ... ...rranted extensive tests for internal controls. This is an extreme example of what can happen when internal controls are fraudulently engineered by those skilled in scrutinizing them. Works Cited Hamilton, Stewart and Alicia Micklethwait. "Greed and Corporate Failure: The Lessons from Recent Disasters." New York: Palgrave MacMillan, 2006. 81-97. Securities and Exchange Commission v. Tyco International LTD. No. 06 CV 2942. United States District Court, Southern District of New York. 17 April 2006. Sorkin, Andrew Ross. New York Times. 13 September 2002. 26 February 2014 . Symonds, William C. Bloomberg Businessweek Magazine. 29 September 2002. 26 February 2014 .
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The scandal was mainly contributed by the CEO’s concern with analyst’s expectations. During that time, the CEO focus was to ensure that the analyst gave the firm positive reviews that would have improved the firm’s stock performance in the market. Who were the involved parties? The CEO and the founder Harold Ruttenberg, his son and vice president of new store development, Doan Allen Ruttenberg, Deloitte and Touché engagement partner, Steven H. Barry, CPA, the audit manager, Karen T. Baker and colluding executives from vendor companies were the parties involved in this fraud.
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
Preston, A. (2012). You eat what you kill: from scandal to catastrophe, the rise and fall of the investment bank. New Statesman, 141, 22
The three main crooks Chairman Ken Lay, CEO Jeff Skilling, and CFO Andrew Fastow, are as off the rack as they come. Fastow was skimming from Enron by ripping off the con artists who showed him how to steal, by hiding Enron debt in dummy corporations, and getting rich off of it. Opportunity theory is ever present because since this scam was done once without penalty, it was done plenty of more times with ease. Skilling however, was the typical amoral nerd, with delusions of grandeur, who wanted to mess around with others because he was ridiculed as a kid, implementing an absurd rank and yank policy that led to employees grading each other, with the lowest graded people being fired. Structural humiliation played a direct role in shaping Skilling's thoughts and future actions. This did not mean the worst employees were fired, only the least popular, or those who were not afraid to tell the truth. Thus, the corrupt culture of Enron was born. At one point, in an inter...
Korten, David, 2001. When Corporations Rule The World. Berrett: Koehler Publishers; 2nd edition. pp 21-23.
The law requires auditors to report any fraudulent activities discovered during the course of an audit to the SEC. This is when Article I of Section 51 of the AICPA Code of Professional Conduct comes into play. The auditor may uncover illegal acts or fraud while auditing the financial statements of a company. In such instances, the auditor must determine his or her responsibilities in making the right judgment and report their discovery or suspicions of the said fraudulent activities. Tyco International is an example of the auditors’ failure to uphold their responsibilities. Tyco’s former CEO Dennis Kozlowski and ex-CFO Mark Swartz sold stocks without investors’ approval and misrepresented the company’s financial position to investors to increase its stock prices (Crawford, 2005). The auditors (PricewaterhouseCoopers) helped cover the executives’ acts by not revealing their findings to the authorities as it is believed they must have known about the fraud taking place. Another example would be the Olympus scandal. The Japanese company, which manufactures cameras and medical equipment, used venture capital funds to cover up their losses (Aubin & Uranaka, 2011). Allegedly, thei...
During the prologue, it is described that a financial analyst, Meredith Whitney, made national headlines for successfully predicting that Citigroup firm needs to “slash its dividend or go bust.” This book makes gives the impression that Whitney started the beginning of the economic collapse. This seems unlikely; Whitney only made the prediction that she made based off of her analysis of the markets. Fortunately, she gained the nation's ear. She called out all Wall Street firms and told them that their investments and mortgages were worthless. She was bold and truthful when the everyone else doubted her.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
The Adelphia Communications Scandal in 2002 dominated the corporate mainstream when the company’s management prepared financial statements that failed to represent the economic reality of the company by excluding billions of dollars of debt. The Securities and Exchange Commission (SEC) calls the case “one of the most extensive financial frauds ever to take place at a public company” (Markon & Frank, 2002). At the center of the case is John Rigas, the founder, former chairman, chief executive of the company and the patriarch of the Rigas family. Also arrested are his sons, Timothy and Michael, both former executive board members, James R. Brown, former Vice President of Finance, and Michael C. Mulcahey, former Director of Internal Reporting. The lawsuit filed by th...
Due to such lack of monitoring, management continued to be unaware of such transactions that continued to impact the company negatively. This provided the Rigas family many opportunities to override controls since the lack of corporate governance enabled the decisions to be made by Rigas family without oversight. For example, the article “Adelphia Officials are Arrested, Charged with ‘Massive’ Fraud” discuses how Timothy Rigas had to limit himself to $1 million a month of compensation that was withdrawn from the company for personal use. All decisions were continuously made by such members of the family, in which case for Adelphia, was the team of management. With the lack of controls creating opportunity, they were free to do what they wished- which is something they took incredible advantage
Sandberg, J., Solomon, D., & Blumenstein, R. (2002, June 27). Accounting Spot-Check Unearthed A Scandal in WorldCom's Books. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB102512901721030520.html
The Enron Corporation was an American energy company that provided natural gas, electricity, and communications to its customers both wholesale and retail globally and in the northwestern United States (Ferrell, et al, 2013). Top executives, prestigious law firms, trusted accounting firms, the largest banks in the finance industry, the board of directors, and other high powered people, all played a part in the biggest most popular scandal that shook the faith of the American people in big business and the stock market with the demise of one of the top Fortune 500 companies that made billions of dollars through illegal and unethical gains (Ferrell, et al, 2013). Many shareholders, employees, and investors lost their entire life savings, investments,
Rose, John David. Rescuing capitalism from corporatism: greed and the American corporate culture. AuthorHouse, 2005.
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.