Financial Fraud Scandals: A Governance Question?


Financial fraud scandals have dotted the economic and financial landscapes over the years. Many of these frauds were orchestrated by corporate executives and Board members leaving disastrous effects on investors, creditors and the society at large.

Beyond the financial losses that arise as a result and direct consequences of these scandals, the reputation of several participants in the financial sector is also tarnished. It fundamentally raises questions about the know-how and ability of regulators within the market, the role of Auditors, Credit Rating Agencies, and the Board.

Most of the world’s biggest financial scandals are in the form of accounting and financial manipulation. These frauds are oftentimes committed by executives who have a way of manoeuvring organisational structures and operations in their favour.

The most notorious accounting fraud is that of Lehman Brothers. The global financial services firm hid over $50 billion in loans disguised as sales. Taking advantage of a loophole in the accounting standard language regarding repurchase agreements, it sold toxic assets to foreign Banks while understating that they would eventually be bought back. Lehman Brothers later filed for bankruptcy in 2008.

Bernie Madoff is reputed to have run the biggest Ponzi scheme in history. Madoff cheated and tricked investors out of $64.8 bn over a period of more than three decades.

The collapse of Enron was another accounting fraud. The energy company kept huge debts from the balance sheet that resulted in shareholders losing $74 billion, with thousands of employees and investors losing their retirement investments, while some lost their lives.

What all these financial and accounting scandals showed is the lack of good governance.

Apart from efforts that have been made to strengthen and improve the quality of governance globally, a new school of thought that forensic accounting professionals will also be of great preventive measures in saving global institutions and corporates from collapse due to accounting fraud.

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