Creative Accounting Fraud and International Accounting Scandals 1st Edition by Michael Jones ISBN 0470057653 978-0470057650

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ISBN 10: 0470057653
ISBN 13: 978-0470057650
Author: Michael Jones

Business scandals are always with us from the South Sea Bubble to Enron and Parmalat.  As accounting forms a central element of any business success or failure, the role of accounting is crucial in understanding business scandals. This book aims to explore the role of accounting, particularly creative accounting and fraud, in business scandals. The book is divided into three parts. In Part A the background and context of creative accounting and fraud is explored. Part  B looks at a series of international accounting scandals and Part  C draws some themes and implications from the country studies.

Creative Accounting Fraud and International Accounting Scandals 1st Table of contents:

PART A

1 Introduction – Setting the Scene

1.1 Introduction

1.2 Exploring the Terms

1.2.1 Creative Accounting

1.2.2 Fraud

1.2.3 Other Terms

1.3 Structure of the Book

1.3.1 Increase Income

1.3.2 Decrease Expenses

1.3.3 Increase Assets

1.3.4 Decrease Liabilities

1.4 Conclusion

2 The Creative Accounting and Fraud Environment

2.1 Introduction

2.2 The Main Actors

2.2.1 Managers

2.2.2 Investment Analysts

2.2.3 Regulators

2.2.4 Auditors

2.2.5 Shareholders

2.2.6 Merchant Banks

2.2.7 Other Users

2.2.8 Legal Authorities

2.3 Effective Corporate Governance

2.3.1 Effective Internal Controls

2.3.2 Division of the Responsibility between Chief Executive and Chairman

2.3.3 Audit Committee

2.3.4 Independent Board of Directors

2.4 Economic Environment

2.5 Conclusion

3 Motivations to Indulge in Creative Accounting and Fraud

3.1 Introduction

3.1.1 Personal Incentives

3.1.2 Market Expectations

3.1.3 Special Circumstances

3.1.4 Cover-up Fraud

3.2 Conclusion

4 Methods of Creative Accounting and Fraud

4.1 Introduction

4.2 Basic Principles

4.3 Nature of Accounting

4.4 Methods of Creative Accounting

4.4.1 Strategy 1: Increase Income

4.4.2 Strategy 2: Decrease Expenses

4.4.3 Strategy 3: Increase Assets

4.4.4 Strategy 4: Decrease Liabilities

4.4.5 Strategy 5: Increase Operating Cash Flow

4.5 Simple Numerical Example

4.6 Fraud

4.6.1 Misappropriation of Assets

4.6.2 Fictitious Transactions

4.7 Conclusion

5 Evidence for Creative Accounting and Fraud

5.1 Introduction

5.2 The Descriptive Studies

5.2.1 Ian Griffiths, Creative Accounting (1986)

5.2.2 County Natwest WoodMac, Company Pathology (1991)

5.2.3 UBS Phillips & Drew, Accounting for Growth (1991)

5.2.4 Trevor Pijper, Creative Accounting (1993)

5.2.5 Frank Clarke, Graeme Dean and Kyle Oliver, Corporate Collapse: Accounting, Regulatory and Ethi

5.2.6 Frank Clarke and Graeme Dean, Indecent Disclosure: Gilding the Corporate Lily (2007)

5.2.7 McBarnet and Whelan, Creative Accounting and the Cross-eyed Javelin Thrower (1999)

5.2.8 Charles Mulford and Eugene Comiskey, The Financial Numbers Game (2002)

5.2.9 Beasley, Carcello and Hermanson, Fraudulent Financial Reporting 1987–1997: An Analysis of U.

5.2.10 Joseph Wells, Principles of Fraud Examination (2005)

5.3 The Statistical Studies

5.3.1 Earnings Management Studies

5.4 Conclusion

6 Impression Management

6.1 Introduction

6.1.1 Accounting Narratives

6.1.2 Graphs

6.2 Conclusion

7 Taking the Long View: Accounting Scandals over Time

7.1 Introduction

7.1.1 Ancient and Medieval

7.1.2 Seventeenth and Eighteenth Centuries

7.1.3 Nineteenth Century

7.1.4 Twentieth Century: Before Second World War

7.1.5 Twentieth Century: 1945–1980s

7.2 Conclusion

PART B

8 Accounting Scandals in Australia since the Late 1980s

8.1 Introduction

8.2 Overview of Accounting Scandals during and since the 1890s

8.3 Case Studies of Accounting Scandals since the Late 1980s

8.3.1 Adelaide Steamship

8.3.2 Bond Corporation

8.3.3 Harris Scarfe

8.3.4 One.Tel

8.4 HIH Insurance

8.4.1 Background

8.4.2 Why did HIH Collapse?

8.4.3 Accounting Issues

8.4.4 Legal Outcomes Arising from the HIH Collapse

8.5 Corporate Governance Reforms Following the Accounting Scandals of the Early 2000s

8.6 Conclusion

9 Corporate Accounting Scandals in China

9.1 Introduction

9.2 Summary of Corporate Scandals

9.2.1 Shenzhen Yuanye

9.2.2 Great Wall Fund Raising

9.2.3 Hongguang

9.2.4 Daqing Lianyi

9.2.5 Kangsai Group

9.2.6 Lantian Gufen

9.3 A Case in Depth – Zhengzhou Baiwen

9.3.1 Background

9.3.2 Themes of the Scandal

9.3.3 Who is to Blame?

9.3.4 Consequences of the Baiwen Scandal

9.3.5 Aftermath

9.4 Conclusion

10 Accounting Scandals in Germany

10.1 Introduction

10.2 Accounting Scandals Between 1985 and 2006

10.2.1 Co op AG (1988)

10.2.2 Balsam AG (1994)

10.2.3 Bremer Vulkan Verbund AG (1995)

10.2.4 Philipp Holzmann AG (1999)

10.3 Most Important Cases: Flowtex and Comroad

10.3.1 Flowtex Gmbh & Co. KG (2000)

10.3.2 ComRoad AG (2001)

10.4 Accounting Scandals and Regulatory Responses

10.5 Examinations of the German Financial Reporting Enforcement Panel 2005–2006

10.6 Conclusion

11 Creative Accounting and Fraud in Greece

11.1 Introduction

11.2 Two Accounting Scandals

11.2.1 ETBA Finance

11.2.2 Dynamic Life

11.3 The Bank of Crete Scandal

11.3.1 Koskotas’s Employment with the Bank of Crete

11.3.2 The Accounting Information Systems of the Time

11.3.3 The Economic Environment at that Time

11.4 The Aftermath

11.5 Conclusions

12 Corporate Creative Accounting in India: Extent and Consequences

12.1 Introduction

12.2 Some Examples of Creative Accounting in India

12.3 Some Important Corporate Cases in India

12.4 The Satyam Computer Services Ltd Scandal (2009)

12.4.1 Background

12.4.2 Satyam: A Global Organisation

12.4.3 Alleged Possible Processes and their Impact

12.4.4 Good Guy, Bad Choices

12.4.5 Role of the Auditors

12.4.6 Institution of Legal Proceedings

12.4.7 Salvaging Satyam

12.4.8 Rebuilding the Corporate Image

12.4.9 Some Antidotes

12.5 Aftermath

12.5.1 Changes in the Companies Act

12.5.2 Measures Taken by the SEBI

12.5.3 Prudential Norms of the RBI

12.6 Conclusion

12.7 Acknowledgements

13 Creative Accounting and Accounting Scandals in Italy

13.1 Introduction

13.2 Creative Accounting Practices in Italy: A Case Study Analysis

13.2.1 The Choice of Consolidation Technique

13.2.2 The Accounting of Stock Options

13.2.3 The Accounting of ‘Creative Gains’ in Football Club Companies

13.3 The Most Important Accounting Fraud in Italy: The Parmalat Case

13.3.1 Parmalat: Was it a Case of Creative Accounting or of False Accounting?

13.3.2 Key Accounting Issues at Parmalat: Some Examples of the Accounting Fraud

13.3.3 The Role of Corporate Governance Actors

13.3.4 The Role of Information Demand-side Actors: Institutional Investors, Financial Analysts and B

13.4 The Aftermath of the Parmalat Scandal and its Impact on Business and Society

13.5 Conclusion

14 Creative Accounting and Accounting Scandals in Japan

14.1 Introduction

14.2 Accounting Regulations and Standards in Japan

14.2.1 Accounting Regulations

14.2.2 Accounting Standards

14.3 Short History of Accounting Scandals Before the 1980s

14.4 Three Types of Accounting Scandal Post-1980s

14.4.1 Accounting Scandal to Maintain High Share Prices

14.4.2 Accounting Scandal Related to Contracts

14.4.3 Accounting Scandal to Avoid Bankruptcy

14.5 Consequences of the Accounting Scandals

14.5.1 Revision of Accounting Standards for Consolidated Financial Statements

14.5.2 Reorganization of Audit Firms

14.5.3 Establishing Internal Control Systems

14.6 Conclusion

15 Financial Accounting Scandals in the Netherlands

15.1 Introduction

15.2 Some Minor Accounting Scandals

15.2.1 Creative Accounting at Rijn-Schelde-Verolme (RSV)

15.2.2 Creative Accounting at Fokker

15.3 Royal Ahold

15.3.1 Consolidation of Joint Ventures at Royal Ahold

15.3.2 Consolidation Accounting in the Netherlands

15.3.3 Consolidation Accounting under US GAAP

15.3.4 The Control and Side Letters

15.3.5 Accounting for Vendor Allowances at US Foodservice (USF)

15.3.6 Proper Accounting Treatment Vendor Allowances

15.3.7 Measures Taken by Royal Ahold after Discovering the Fraud

15.3.8 Acquisition Accounting

15.3.9 Reserves, Allowances and Provisions

15.3.10 Lease Accounting

15.4 Conclusion

16 Creative Accounting and Financial Scandals in Spain

16.1 Introduction

16.2 Accounting Scandals in Spain Since the 1980s

16.2.1 The Banking Sector

16.2.2 Investment Service Firms

16.2.3 The Real Estate Sector: The Case of PSV and IGS

16.3 Investments in Stamps: The Latest Series of Financial Scandals in the Country. Afinsa and Fóru

16.3.1 Background of the Cases of Afinsa and Fórum Filatélico

16.3.2 The Nature of the Businesses and the Accounting for Investment Contracts

16.3.3 The Suppliers

16.3.4 Valuation of Stamps

16.3.5 Reflections on the Scandal

16.3.6 Where were the Auditors?

16.3.7 Was it a Surprise?

16.3.8 Consequences of the Scandal

16.4 The Aftermath of the Scandals

16.5 Conclusion

17 Accounting Scandals in Sweden – A Long Tradition

17.1 Introduction

17.2 Fermenta and Prosolvia: Swedish Stock Market Darlings

17.2.1 Fermenta – 1980s Biotech Company’s Accounting Errors

17.2.2 Prosolvia – 1990s Experts in Simulating Virtual Reality?

17.2.3 Reconstruction of Ownership

17.2.4 Fictitious Invoices, Invented Agreements and Premature Income Recognition

17.2.5 Insider Trading

17.3 Two Scandals in Multinationals that Dominated the Swedish Media

17.3.1 ABB – Shaken and Stirred

17.3.2 Skandia – A Shooting Star Turns into a White Dwarf

17.4 Conclusions

18 Creative Accounting – The UK Experience

18.1 Introduction

18.2 Historical Background

18.3 Some Recent Accounting Scandals

18.3.1 Bank of Credit and Commerce International (BCCI)

18.3.2 The Mirror Group

18.4 Polly Peck

18.4.1 Meyna

18.4.2 Vestel

18.4.3 Unipac

18.4.4 Accounting Policies at Polly Peck

18.5 The Immediate Aftermath

18.5.1 Accounting Regulatory Change

18.5.2 Governance and Enforcement

18.6 Subsequent Developments

18.7 Conclusions

18.8 Acknowledgements

19 Creative Accounting and Accounting Scandals in the USA

19.1 Introduction

19.2 Scandals since the 1990s

19.2.1 Premature or Fictitious Revenue Recognition

19.2.2 Capitalized Costs and/or Extended Amortization Periods

19.2.3 Overstated Assets and/or Understated Liabilities

19.2.4 Other Creative Accounting Practices

19.3 Enron and Worldcom

19.3.1 Enron Corp.

19.3.2 WorldCom, Inc.

19.4 Aftermath of the Scandals

20 Bank Failures and Accounting During the Financial Crisis of 2008–2009

20.1 Introduction

20.2

20.2.1 Kaupthing Bank

20.2.2 Northern Rock

20.3 Origins of the ‘Credit Crunch’

20.3.1 Sub-prime Lending

20.3.2 Types of Mortgage

20.3.3 Economic Downturn and Rising Unemployment

20.4 Financial Instruments Associated with the Credit Crunch

20.4.1 Collateralised Debt Obligations (CDOs)

20.4.2 Credit Default Swaps (CDS)

20.4.3 Collateralised Mortgage Obligations (CMOs)

20.4.4 Securitisation and Off-balance Sheet Financing

20.4.5 Repurchase agreements or ‘repos’

20.5 Creative Accounting in the Banking Sector

20.5.1 Loan-loss Allowances

20.5.2 Adjustment of Reporting Dates

20.5.3 Enhancing Profits through Disposals of Assets

20.5.4 Lawful Adjustments to Composition of ‘Level 3’ Assets in Banks’ Balance Sheets

20.5.5 Decline in Value of Outstanding Debt

20.6 Lehman’s, Madoff and Bear Stearns; Failures and Consequences

20.6.1 Lehman Brothers

20.6.2 Bernard Madoff

20.6.3 Bear Stearns

20.7 Conclusion

PART C

21 Identifying Some Themes

21.1 Introduction

21.2 Some Themes

21.2.1 Background

21.2.2 Creative Accounting or Fraud

21.3 The Major Methods Used

21.3.1 Strategy 1: Increasing Income

21.3.2 Strategy 2: Decreasing Expenses

21.3.3 Strategy 3: Increasing Assets

21.3.4 Strategy 4: Decreasing Liabilities

21.3.5 Other Methods of Creative Accounting

21.4 Methods of Fraud

21.5 Incentives for Creative Accounting and Fraud

21.6 Overstrong Personalities

21.7 Failure of Internal Controls

21.8 Failure of External Auditors

21.9 Conclusion

22 The Impact of Accounting Scandals and Creative Accounting

22.1 Introduction

22.2 Short-term Immediate Effects

22.2.1 Insiders

22.2.2 Outsiders

22.3 Long-term Effects

22.3.1 One-off Regulatory Responses

22.4 Cumulative Effects

22.5 Conclusion

23 Conclusion – Looking Backwards and Forwards

23.1 Overview

23.2 Thematic Analysis

23.3 Lessons for the Future

23.3.1 Factors Increasing the Possibilities of Creative Accounting and Fraud

23.3.2 Factors Reducing the Potential for Creative Accounting and Fraud

23.4 Prognosis

23.5 Conclusion

Appendix 1 Chronological List of Major Instances of Accounting Issues Across 12 Countries and Beyond

Appendix 2 Alphabetical List of Most Important Accounting Scandals Across 12 Countries and Beyond si

Index

EULA

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