The tumultuous financial crisis of 2008 was triggered by corporate accounting irregularities that wiped out billions in value. In the aftermath, regulators have been sifting through reports of companies engaging in fraudulent activities such as the theft or omission of money, misuse of company assets and off-books subsidiary shell corporations. Accounting fraud (also known as misstatements of financial statements) accounts for 22% of all economic crimes. The scandals of Enron, WorldCom and AHOLD, along with the growing popularity of complex financial products and transactions cloaked in labyrinthine corporate structures, have led to increased demands for transparent and accurate financial reporting. Regulators, however, often seem one step behind the ever-evolving tactics employed by fraudsters, resulting in gaps in detection and prosecution.
For example, the 2002 accounting scandal at global telecommunications firm WorldCom involved more than $7bn in false or misleading entries. Company CEO Bernard Ebbers inflated the company’s assets by capitalising instead of expensing costs and manipulated line-cost entries in order to report higher revenues. The fraud ultimately resulted in the company’s collapse and the imprisonment of Ebbers for 25 years.
Similarly, stockbroker Bernie Madoff ran an asset management firm that was essentially a Ponzi scheme. Named after Charles Ponzi in the 1920s, this type of scam involves paying current investors with money solicited from new investors rather than through genuine investments. The fraud cost investors—including several philanthropic foundations—$65bn and led to Madoff’s arrest in 2009. He died in 2021.