The Bre X Scandal Accounting Essay

A short introduction to what happened. Explain the fraud.
Fraud is defined as intentionally deceiving or causing damage to another individual or individuals in order to acquire personal gain. It is a misrepresentation of specific facts by a person aware of the falseness in order to persuade others, so the individual is able to achieve that personal gain.
The Bre-X scandal is a perfect representation of fraud. It began in 1990 when a Canadian based company from Calgary, Alberta declared that they had made a discovery of a “world-class gold deposit” in Busang, Indonesia. The gold reserves kept on increasing until reportedly 200 million ounces of gold had been found. Along with this amazing discovery of gold, the share prices for the company increased drastically, leading to their listing on the Toronto Stock Exchange. With the success Bre-X had achieved, other powerful mining companies were interested in purchasing and buying them out. At this point, the insiders from Bre-X were multimillionaires.

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When an investigation began in 1997, people soon discovered that there was actually hardly any gold in Busang. It was discovered that alluvial gold dust had been purchased from local Indonesian placer miners to “salt” the rock cores. It was reported that in 1996, the salting had increased to the point where the metallurgists of Bre-X hired laborers involved in a construction project to assist with the mixing. It was a complete scam, and there was no recoverable gold. With this horrendous discovery, the share prices plummeted, resulting in a drop of $6 billion in market value. The individuals who were owners of these shares suffered gigantic and significant losses.
Introduce the company involved, what industry, financial health (before the fraud) and history.
Bre-X was founded and created in 1988 by David Walsh. The initial objective of the company was to search for diamonds located in the North West Territories of Canada. The company was not able to achieve success in finding any significant deposits of diamonds in the Northwest Territories. During this time, Bre-X Minerals Ltd’s stock listing was on the Alberta Stock Exchange, obtaining an average price of 27 cents between 1989 and 1992.
David Walsh filed for personal bankruptcy in 1993 due to the accumulation of $60 000 in credit card bills. Financially, Walsh and his company were not finding much success, so he decided to sell part of his ownership in Bre-X for $10 000. Walsh realized that his company was not achieving much success and that he had to find different opportunities. He decided to go to Indonesia to look for opportunities with his friend, a geologist named John Felderhof. Felderhof, along with another geologist, believed there was a special opportunity in one of the sites in Indonesia. This site was 57, 571 hectares in Samarinda, East Kalimantan, Indonesia. It was also known as Busang. After being convinced by Felderhof, Walsh decided to take the risk. Bre-X purchased the site for $80, 100.
Bre-X was not financially sound, and received three different private placements. The first placement was initiated with Ondaatje McCutcheon, Ltd for $4.5 million in March 1994. More capital was needed for further drilling to continue, so that the exploration was funded. The second private placement, initiated in May 1995, was with Nesbit Burns, Scotia McLeod, and McLean McCarthy Ltd for $7.5 million in common shares. This was used towards working capital and to proceed with and fund exploration. The third private placement was by Nesbit, Scotia McLeod, Levesque Beaubien Geoffrion, and First Marathon Securities for $30 million in February 1996. Bre-X used these private placements to cover the expenses of their drilling and exploration for gold.
State the “players” or key personnel involved in the fraud.
Most Bre-X employees were involved with this gold mining fraud, but there are three main individuals who orchestrated it. David Walsh, John Felderhof and Michael de Guzman were the key personnel involved in the fraud.
David Walsh was known as the founder of the company and the CEO. While he did not ever admit of any wrongdoing, it is clear that he was very involved. When Freeport analyzed the gold, they realized that the gold was alluvial, meaning it had originated from rivers, and was not gold that originates from volcanic deposits. The tests taken by Freeport were not matching the results reported by Bre-X. At this point, Walsh was threatening legal action upon false allegations because he knew that the results from his company were accurate. A couple of days, Bre-X admitted that some of the results were in fact overstated due to invalid samples. David Walsh was clearly aware of the entire scandal, which helped him earn millions, but constantly denied any reports of fraud.
The other two major players involved in the fraud were the two geologists who established Busang as the mining site, John Felderhof and Michael de Guzman. They were both confident with the existent of gold in this area, but eventually realized that they were mistaken. The reason of the salting is thought to be due to the faith of these two geologists in the gold that they thought was located at Busang. Salting the rock cores was a method of ensuring enough capital to fund the exploration for it. Eventually, Bre-X shareholders’ expectains grew, but there was no actual gold being found. Instead, the salting operation continued leading to the biggest mining fraud in history. Felderhof and de Guzman did not want to accept that they were wrong, so they used this method to cover it up until gold was finally discovered.
What happened to the “players”? Jail time, fines, etc.
The Bre-X fraud led to billions of dollars being lost, but there weren’t any consequences for the people involved. The three men that schemed and generated this entire scandal were never met with any type of consequences laid upon them legally. Whether it was lack of evidence or the Canadian court system, but it seemed as if everyone involved got off very easily.
David Walsh made earnings of $35 million by selling shares in Bre-X. Going from filing for bankruptcy to making $35 million is a large difference, especially knowing this success was obtained through a fraud. Walsh would not be charged legally, meaning he had become a multimillionaire through this scandal. After the collapse of Bre-X, Walsh moved to the Bahamas with his earnings. Shortly after, David Walsh would die due to brain aneurysm at the age of 52.
John Feldorhof, the chief geologist of Bre-X, made $84 million by selling his Bre-X shares. He would eventually move to the Cayman Islands, and still resides there. Out of all the people involved in the fraud, he was the only one who was tried in Canada. Felderhof was being tried on the charges of insider trading and misleading investors. Many argued that he should have been charged with fraud and not these less disciplinary charges. Either way, in July 2007, the judge reached a not guilty verdict on this case. John Felderhof was found not guilty.
Michael de Guzman is the most interesting case out of these three men. He was not able to gain as much as his partners through this mining fraud. Freeport had demanded to know about the differing results they had received from their examination of the gold, so de Guzman was sent to deal with the Freeport representatives. He jumped out of the helicopter that was taking him to Indonesia. He would fall 240 meters to his death. It was claimed that it was a large part due to his fight with Hepatitis B. It was just a couple of days before the fraud was uncovered to the public, leaving many people to suspect that he couldn’t take the pressure and eventual allegations.
State details of the actual fraud – type of fraud, $$ involved
The Bre-X scandal is the perfect example of a true fraud that results from dishonest and deceitful business ethics, morals, and principals. The Bre-X scandal is considered to be the biggest mining and gold scandal of all time, and one of the biggest stock scandals in Canadian history. The Bre-X scandal significantly damaged the Canadian Financial Markets and caused substantial reductions in consumer buying and trading confidence, which caused a considerable amount of damage to the Canadian economy. Subsequent to the collapse of Bre-X in 1997, its stocks and shares became worthless and left investors with significant losses.
The Bre-X scandal began in March 1993, subsequent to the company purchasing a large mining site in Busang, Indonesia (on Borneo). Subsequent to Bre-X purchasing the mining site in Busang, it boasted that it was sitting on the largest known gold deposit in the world. In October 1995, Bre-X announced that it had discovered significant amounts of gold on its mining site in Indonesia. Subsequent to this, the company had been followed and recommended by some of the best known gold analysts in both Canada and the United States. Consequently, there was a lot of optimism and sanguinity in the stock market, as investors and brokers wanted to invest into Bre-X in hopes that they will became instantly rich overnight. This led to Bre-X being added to the Toronto Stock Exchange’s TSE 300 index and traded on NASDAQ.
At its climax and peak, the market capitalization of Bre-X reached over 6 million Canadian dollars. This extremely high market capitalization is quite suspicious and apprehensive as Bre-X was a penny stock four years earlier and only had a peak market capitalization measured in the thousands. Bre-X’s massive growth and market capitalization expansion was all based on fraudulent claims and no real hard evidence and proof; the hype of the Bre-X stock from financial analysts coupled with the boastful comments made by Bre-X led to the skyrocketing and soaring prices and values of its stock, which, in turn, led to the increase in Bre-X’s market capitalization.
The Bre-X fraud began to quickly unravel on March 26, 1997 when the American firm Freeport-McMoRan, a forthcoming partner in excavating the Busang gold site, publicly announced that it conducted due-diligence core samples and found insignificant amounts of gold in the excavated samples. This public announcement caused the rapid selling of Bre-X stocks which, in turn, caused the postponing of a mining deal between Bre-X and Suharto. Bre-X blatantly denied the accusations by Freeport-McMoRan and demanded more reviews of the gold quantity at the site by other gold analyst companies. This led to a third-party independent company, Strathcona Minerals, being brought in to check the gold samples at Busang. When the report with the results from the Strathcona Mineral analysis was published on May 4, the Busang ore samples had been salted with gold dust. It was discovered that alluvial gold dust had been purchased from local Indonesian placer miners to “salt” the rock cores. It was reported that in 1996, the salting had increased to the point where the metallurgists of Bre-X hired laborers involved in a construction project to assist with the mixing. It was a complete scam, and there was no recoverable gold in the Busang mining site.
Subsequent to discovery of the gold scandal at Busang being revealed, Bre-X stocks plummeted in value and trading of the stock ceased and the stock was removed from the TSX and NASDAQ. Consequently, mutual funds, pension plans, and private investors all over North American took substantially heavy losses subsequent to the stock plummeting. Numerous class-action lawsuits were filed in Canada and the United States; some of these lawsuits were targeted towards Canadian and American investment firms because they had recommended the stock for so long.
State what GAAP principles were violated during the fraud and tell how the GAAPS were violated
The GAAP’s that were violated and contravened during the Bre-X scandal were: The Principle of Conservatism, The Objectivity Principle, and the Cost Principle. These GAAPs were all violated due to the fact that the accountants of Bre-X were refusing to undertake proper business ethics in their profession and create legible financial statements as they were personally involved in the fraud themselves.
The Principle of Conservatism states that the accounting for a business should be fair and reasonable so that the assets or profits of a business are neither overstated nor understated. In the Bre-X scandal, the Principle of Conservatism was violated because the accounting for the company, Bre-X, was not fair and reasonable as the assets of the company were blatantly overstated. The overstating of the assets affected the investing decisions of investors and brokers, as these individuals analyzed Bre-X’s financial statements and received an incorrect perception of the company’s strength and health. The overstating of the assets led to Bre-X being listed on the TSE and NASDAQ, which, in turn, led to the stock value sky rocketing and soaring to extreme highs that would’ve been something absolutely unprecedented to predict as the company was a penny stock only four years earlier. Overall, the Principle of Conservatism was violated by Bre-X in the fraud due to the overstating of its assets, which led to the massive expansion of Bre-X; in addition, this also led to significant losses to investors when the company crashed when the fraud was revealed.
The Objectivity Principle states that accounting will be recorded on the basis of objective evidence, which means that accountants have to base transactions on real factual evidence, rather than opinions, feelings, or falsified data. The Objectivity Principle was violated during the Bre-X scandal because falsified data was used to record the transaction for the purchase of the land in Busang, Indonesia. The price on the source document for the purchase of the land was not used by Bre-X accountants, as they used a falsified valuation of the land made by a Bre-X insider to record the transaction of the land. This fraudulent recording of the land asset led to the assets of Bre-X being overstated, which led investors to false and ambiguous conclusions when choosing where to invest; the higher asset valuation led more investors to investing into Bre-X, which only led to billions of dollars being lost by investors when the fraud was revealed. Overall, the Objectivity Principle was violated by Bre-X in the fraud due to the purchase of the land asset in Busang being blatantly overstated due to the use of a false asset valuation conducted by a Bre-X insider, rather than the use of the actual amount on the source document for the purchase of the land.
The Cost Principle states that the accounting for purchases must be at the cost price to the purchaser, which appears on the sources document for the transaction, in almost all cases, as there is no place for guesswork of wishful thinking when accounting for purchases. In addition, the Cost Principle states that when there is no source document for a purchase, the item has to be recorded at a fair market value that must be determined by some independent means (ex. third party auditor). The Cost Principle was violated during the Bre-X scandal, because the accountants for Bre-X did not state the value of the land asset that they bought in Busang, Indonesia at the price that they bought it at, as they conjured up falsified evidence and recorded the value of the land asset at a significantly higher asset price than what was paid for it. In addition, the Cost Principle was also because Bre-X should have consulted a third party auditor to evaluate their land asset, rather than using an insider from their own company to value the land. The company insider that evaluated the Busang land used falsified evidence from the Bre-X geologist, Michael de Guzman, to place an unfair market value on the land asset. Overall, the Cost Principle was violated by Bre-X in the fraud due to the value of the land asset in Busang not being recorded at cost price nor a fair market value, as inequitable and unwarranted asset valuation was done by a Bre-X insider.
Who were the auditors? What do auditors do? What role did they play in this fraud?
Auditors are independent certified public accounts that are responsible for examining the financial statements that a company’s accounting department prepares. Auditors are specialized in the testing of financial statements and accuracy within a company, hence, business hire auditors to perform audits to ensure that their financial statements comply with the laws laid out by the government and the Generally Accepted Accounting Principles (GAAPs). An audit is the examination of the accounting records and internal controls of a business to be able to express an opinion about the business’s financial position and results of operation. Subsequent to the audit, an auditor is responsible for providing a written report to the business that contains an opinion as to how the financial statements are prepared and if they comply with Government laws and GAAPs.

Cambridge Analytica Data Scandal: Quality Management

Executive Summary
This report is prepared to study the issue Facebook recently faces. It is in news because of the Cambridge Analytica data scandal in which the personal information of Facebook users have been improperly shared with Cambridge Analytica – a data mining and political strategy firm. When the scandal exposed the CEO and Chairman of Facebook, Mark Zuckerberg had to apologize publically for the data breach and said that it was a mistake made by Facebook for not designing a process to restrict third party developers to work on Facebook API. He also pledged to make changes in the design and reform the privacy policy. This study gives an understanding of loopholes in Facebook’s quality management system and how it could have been prevented if they have followed the theories of quality management gurus. By understanding different theories described by these gurus, a strong quality management system can be placed from the design stage itself. It also states that customer loyalty is a very important value which can be gained by continuous improvement in quality management system. A poor system result in loss of company reputation, customers and monetary value.
1.0 Introduction
Facebook is an American social media company providing social networking services to people around the world. It was founded in 2004. Mark Zuckerberg is the Chairman and CEO of the company. It has more than 2.2 billion active users. People use Facebook to stay connected to their friends and family and to share and express their views.
2.0 Issue of data breach
Recently Facebook’s data privacy scandal
came into limelight where Facebook members’ data were improperly shared with Cambridge Analytica, a data mining and political
strategy firm.  These data were accessed
during Donald Trump’s presidential campaign. Cambridge Analytica accessed the
data for more than 2 years. This is the biggest public relation crisis Facebook
has faced.
In April 2010, Facebook launched a
platform called Open Graph to third party apps. This allowed the external
developers to reach out to Facebook users and request permission to access
their personal data (CNBC, 2018).
In the year 2013, Cambridge University’s
researcher named Aleksandr Kogan created an App called “thisisyourdigitallife”. 
The app prompted users to answer questions for a psychological profile. About
270,000 people downloaded the ‘app’ and shared their personal information. This
gave Aleksandr Kogan to access data of not only Facebook users but also of the
users’ friends. These information were shared with Cambridge Analytica and used
to know about the personality of the people and to effectively target political
advertising on people. Cambridge Analytica obtained the information in total
violation of Facebook’s rule and didn’t tell anybody that the data will be used
for political campaigning.  (Casey, 2018)

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In the same year Facebook was made aware
about this violation of accessing data of not only who installed this app but
also of their friends. Facebook demanded Cambridge Analytica to delete all the
data and they agreed to delete all the data. Aleksandr Kogan in reality never
deleted the data and later on Facebook never investigated whether they have
deleted the data as promised (Casey, 2018).
In 2014 Facebook changed their rules for
external developers and restricted them from accessing user’s friends’ data
without taking permission from them.
With the approaching 2016 Presidential
elections, Cambridge Analytica did not have time to create its own data for
election campaign. It went to Aleksandr Kogan who created Facebook app that
paid users to take a personality test (The Guardian,
In the year 2016 “The Guardian” reported that
Cambridge Analytica is helping Ted Cruz’s presidential election by sharing
psychological data based on their previous research. Facebook waited for more
than two years before suspending Cambridge Analytica even after knowing about
the data breach.  
In mid – March 2018, this scandal was
exposed by The Guardian and The New York Times.
Facebook admitted that it did not read the
terms of the app that accessed the data of 87 million people and apologised for
the “breach of trust”.  Facebook’s CTO
Mike Schroepfer told U.K. lawmakers that Facebook did not notify the U.K.’s data protection
watchdog after it learned of the sharing of data with Cambridge Analytica and
it was their mistake. (Ryan, 2018).
According to U.K.’s data protection law,
sale or use of personal data without user’s consent is banned. In 2011, after
Federal Trade Commission complaint, Facebook agreed to get clear consent from
the users before sharing their data. The FTC now started investing whether
Facebook violated privacy protection of their users. The U.S.A. and U.K.
lawmakers are investing in their own way. Mark Zuckerberg apologized on behalf
of Facebook by publishing a personal letter in all major newspapers and make
changes and reform the privacy policy to prevent such kind of breaches.
By doing this Facebook has breached the trust
of users and privacy policy law.  A
customer or user shares information with a company trusting that personal
details are safe. A company’s name and reputation makes people to trust on
them.  Quality of the brand is very
important in building and growing a company.
Facebook is a very well know networking
site and it has monopoly in the market. People joined Facebook and disclosed
their personal details knowing that whatever information they share about
themselves and their friends will be confidential and will not be disclosed
anywhere outside without their consent.
3.0 Referring to statements made by Quality management Gurus
It is very important for a company to have
a well defined quality management system in place. For a company like Facebook,
where the personal data of people are at risk, there is a continuous risk of
hijacking the data for misuse.
How a good quality management system can
be placed, has been described by many Quality management gurus. Mentioned below
are some of the points stated by these gurus:
According to quality management guru W. Edwards Deming there are seven deadly diseases that are described as barriers in understanding the basic quality management system statistical principals. One of the diseases says that – A company runs on visible figures only. Deming argued that apart from the visible figures there are many costs and figures that are not know and cannot be calculated.  Customer loyalties gained as a result of continuous quality improvement are the numbers that are unknowable and management has to consider this (Deming, 2012).
It is also very important to gain confidence of the customers by building trust. In case of Facebook data breach scandal, it was very important for the company to monitor and improve the system. Once Aleksandr Kogan accessed the data of the Facebook users and their friends, it was important for Mark Zuckerberg to monitor and improve the system putting a barrier for third party developers to access data. This would have resulted in maintaining the confidentiality of the users’ data.
Based on the quality management guru J M Juran’s trilogy, it is very important to plan, improve and control quality.
Quality Planning – A proper quality plan
should be in place. This involves creating a process that will be able to meet
the goals .Once the process is in place it will not be difficult to respond to
customer needs.
Quality Improvement – It is important to continuously
improve the quality and run the process with optimal effectiveness.
Quality Control – To control and maintain good quality it is important to create a process that required minimal monitoring. This will help in running the operations in accordance with quality plan (Juran, 1986).
Facebook should have
created a process to maintain the privacy of their users’ information. This
process should have barred the third party developers to run their app in
Facebook API.
Quality guru Genichi Taguchi emphasized on improving the quality of the product and process at the design stage rather than achieving quality through inspection. Taguchi also developed a concept of quality loss and worked on it rather than just quality.  He defined quality loss as loss to the company cost such a reworking on design, scrapping and maintenance and also loss to customer through poor product or service and low reliability. (Taguchi, n.d)
After the scandal exposed, Facebook has faced huge loss in terms of its reputation, breaking customers’ trust and monetary value. Many users deleted their Facebook    account feeling that their personal information are not secured and can be misused by the company.         
4.0 Conclusion
It is very important for a company to develop a quality system at its designing stage and to control and improve the quality system with minimal inspection requirement. It is also important to know and understand the unknown costs and figures like customer loyalty that can be gained by continuously improving quality. A proper system should be in place with zero defects. A poor quality management system will result in loss of reputation, customers and monetary value.
5.0 References:
(2018, March). Retrieved from The Guardian:
April). Retrieved from CNBC:
Casey, N.
(2018, April). Retrieved from
Deming, E.
(2012, Janauary). Retrieved from
Juran, J.
(1986, May). Retrieved from The Quality Trilogy:
Ryan, B.
(2018, April). Retrieved from CNBC:
Taguchi, G.
(n.d). Retrieved from British Library:

The Bernard Madoff Investment Scandal

The organizational leadership of Bernard Madoff Investments Securities LLC was held by Bernard Madoff himself. Madoff’s charismatic leadership style included seducing friends, those in secluded groups, and even his own employees. He seduced his clients by making them to believe they were investing in something special. He would often turn people away, which helped Bernard in courting people and charities with more assets to offer. Bernard Madoff created a system which was promising high returns in short terms and was nothing else but the Ponzi scheme. The system’s idea relied on funds from the new investors to pay misrepresented and extremely high returns to the existing investors. He was doing this for years; tempting billions of dollars from wealthy individuals, charities by getting them to invest in his hedge fund. And they did so because of the extremely high returns, which were promised by Madoff’s firm. But if anyone would look deeply into the structure of his firm, it would definitely show that something is wrong. This is because nobody can make such big money, especially if no one else could at the time. How could one person, Madoff, who held all his clients assets, priced, and managed them. It is clearly a conflict of interest. His company was showing profits year after year, despite most of the companies having looses. In fact, Bernard Madoff’s case is absolutely amazing, both in its range and in its list of investors who got caught up in it.

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Bernard Madoff – Case Summary
Bernard Madoff opened his firm in 1960. His business began to grow when his father-in-law Saul Alpern, who was an accountant, came to the firm. Because there were a lot of competitive firms at that time, Madoff decided to use innovative computer information technology to spread its quotes, which later on became the NASDAQ. This technology provided his firm with a really good income and at this point his securities become the largest buying and selling “market maker” at the NASDAQ. Eventually, his scheme reached a staggering 50 billion dollars under his management. It came to an end after market conditions let to a considerable amount of redemptions when investors started to take their money back.
After Bernard Madoff, former NASDAQ chairman, was arrested on December 11, 2008, he acknowledged that his performance was nothing but the Ponzi scheme. He pled guilty to the biggest investor fraud ever committed by anyone on March 12, 2009. On June 29, 2009 Bernard Madoff was put in jail, and will spending there long 150 years.
Madoff was able to align himself with government, rich individuals, and businessmen. This empowered him to have an unlimited access to different groups of investors. Among Madoff’s Ponzi scheme victims, it is easy to find wealthy individuals, charitable organizations, and its stakeholders, such as employees, communities, vendors, and government.
Investors that took the biggest losses, which was billions, because of this scheme are marked in the Wall Street Journal; among them are Fairfield Greenwich Group, Tremont Capital Management, Banco Santander, Fortis, and others.
Investors lost their money because of their lack of conscious and unwillingness to understand or realize that it is impossible to have such high returns in a legally managed investment operation. They also failed to understand that one day they could lose everything. They would rather believe in a fairy tales about high returns in short terms, without any consequences.
7 Steps
1. What are the facts of the case?
Madoff’s business had obvious facts that showed he was doing a scheme. First of all, because he was being a pioneer in electronic trading, he refused to provide his clients with the on-line access to their accounts and sent out statements by mail. Though, most hedge funds in that time were e-mailing statements to their investors, in order to provide its customers with convenience and the ability to analyze their account. It should have been an important signal to investors, but it was ignored.
Secondly, Madoff’s firm processed all of its trades and appeared as its own broker-dealer. This made impossible for the outside investors to verify their actual holdings. In fact, one of Madoff’s unusual tactics was to get rid of his holdings by selling them at the end of the period. It helped him to avoid filing disclosures of his holdings with the SEC. As well, he was always refusing to talk to any outside audit for the reason of secrecy of his firm. This should raise questions and concerns amongst its investors, but again it did not.
The fact that Madoff’s fund only had five down months since 1996 could have shown investors that Madoff’s business was at least suspicious and warned them to avoid investing in his hedge fund. It is, for sure, impossible in investment or any business to have only a couple down months in more than 10 years of a company’s performance.
Besides, there are some known factors that helped Madoff to commit his fraud for years, including the following:
Madoff had a good reputation in the investment field over the years.
Madoff knew how to create the aura of trust.
Madoff constantly promised high and stable returns to his investors.
2. What are the ethical issues?
In 1980s Bernard Madoff was providing payments to his brokers to perform the customers’ orders through his brokerage. Later this system received a name, a “legal kickback”, and because of this he became the biggest dealer in the U.S. stock market. When academics questioned the ethics of these payments, Madoff replied that those payments did not change the price that the customer received, and were a legal business transaction.
The SEC investigated Madoff’s fraudulent practices and they had concerns that his firm did not show its customers’ orders to other traders, but they could not find anything illegal in the period from 1999 till 2000.
As well, Madoff was too secretive about his investment performance and kept all financial statements closely protected. He usually refused to meet directly with his investors. After some time, he decided to invent a new investment method that was promising constant returns to selected investors, rather than supplying all new investors with high returns. This new innovation was too complicated for outsiders to understand. That should, for sure, raise some questions in his investors, but they did not demand any information and explanation. Of course, there were some investors in the Madoff case that used caution and could see that something is not really clear in his business, and as well because they did not want to lose their money, they removed it. And it was their best decision in regards to this fraud.
3. What are the norms, principles, & values related to the case?
The culture of a company is heavily influenced by the actions of upper-level management. Their actions are seen by workers throughout the organization and help develop a cultural norm within the company. When lower level employees witness those above them acting unethically, they will think that those actions are acceptable and the norm. This can lead to all types of unethical actions like, fact concealing, budget twisting, and many other unethical actions that were prevalent in the Madoff case.
Ethical boundaries aren’t always clearly defined. The ethical action is not always perfectly obvious, placing investor’s money into risky investment while trying to gain in the short term is illegal. However, if not done carefully, it could be viewed as unethical. Because of this, it is necessary to train employees in ethical decision making processes. Then they will be able to make the right decision when the ethical thing to do is not completely obvious. In addition, an ethical environment must be set by management, in order to promote good ethical decision making processes.
Making the correct decision in an ethical dilemma requires good judgment. Having a good example to follow definitely helps. However, a person’s values and beliefs are important in making an ethical decision. If a decision does not seem morally right, then it is most likely not an ethical business decision. Promoting strong values and internal judgment helps employees at all levels of a company behave ethically.
4. What are the alternative courses of action?
a) It is very important to provide education to board members about financial and operational matters, as well as analyze and modify all procedures in governance policy and investment policy areas, and always to remember to avoid conflicts of interest in business practice.
b) It is also important to provide investors with company’s records, for the purpose of due diligence. Inform and explain to the investors about each company’s performance, even though it is a time consuming process. This effort will demonstrate a company’s commitment to its investors.
5. What is the best course of action?
The best course of the action is definitely to be open and clear with investors and committed to the best practices in governance and operations. This will help the company to succeed in the competitive investment environment.
6. What are the consequences of each possible course of action?
These actions will open new horizons to interest new investors and will lead the company to profit and success.
7. What is the decision?
The shocking Madoff scandal and an unfavorable economy created challenging times for stakeholders. In order foster a competitive environment that will interest new investors, a company needs to legally make profits and always provide clients with all the information. Laws are the minimum code of conduct to which the company has to abide by. The company can always take further actions, beyond what the law requires, in order to ensure investors confidence.
“What recommendations would you make to your client about the existing 35% investment with Bernard Madoff?”
I would explain to the client that keeping 35% investment in one investing company can be very risky, especially if the company is Bernie Madoff’s which is not regulated or publicly traded.
I would further advise my clients the following:
Sell off 30% investment with Bernard Madoff.
Invest 20% in equity mutual funds.
Invest 5% in equity exchange-traded funds.
Invest 5% in individual stocks.
“What recommendation would you make regarding the $100,000 they currently have in cash?”
I would advise that the $100,000 in cash cleverly would be to invest in different areas, such as in hedge fund – the $15,000, Treasuries – $25,000, mutual fund – $10,000, Madoff’s fund – $10,000, and the rest $40,000 to spend on buying fixed asset.
“How would your recommendation be affected if your client tells you that they would like to give the additional $100,000 to Madoff to invest?”
My recommendation would not change if my client tells me that they would be interested in investing additional money in Madoff’s fund. This is because my recommendation is based on the fundamentals of investments. However, I would spend more time explaining to my client the excessive risk they are taking by putting a significant portion of their eggs in one basket.
“With the information you have at this point in the case, is there anything else that you should do?”
Definitely, I have to inform the client of a possible risk of investing in Madoff’s fund. I will present one some arguments, such as:
Bernard Madoff denied outsiders access to records.
The company hedge fund was not registered until 2006.
Madoff’s fund rarely lost its value, even in times of economic downturn.
“Should you mention to your client that the $5 million in sales may draw the attention of the IRS, because of the relative size of that number compared to the rest of the return?”
Based on the AICPA’s Statements on Standards for Tax Services (SSTS) and Treasury Department Circular 230, which provides authority to the Treasury allowing disbarment or suspension from practice before the IRS, it is not considered unethical to mention to my client that the $5.0 million investment sales can interest and raise questions of the IRS. Though, I should make the client aware that $5 million in sales will be a red flag for the IRS because of its relative size to the rest of the return. At the same time I would need to let the client know that any sales number must be supported by proper documentation that would unquestionably prove its validity.
As a professional tax practitioner, I would refrain from making those kinds of comments without any valid evidence. It can even be misleading to the client to give this kind of unsubstantiated advice.
“Should you discuss with your client the possibility that their account is being “churned”?”
I would not discuss with my client the possibility of the account being “churned” because it is beyond the scope of regular tax preparation. Additionally, churning, if proven can lead to prosecution of the broker since it is considered a fraudulent practice.
Churning has been labeled as a falsified practice in 1934. Churning is when stock-brokers execute a large volume of sales on their customers’ accounts. Since those brokers are earning a commission on each transaction, they get paid more if they execute more transactions. So, those fraudulent brokers would carry out excessive amounts of small transactions, in order to earn their commissions, which would slowly drain the customers account. After awhile, the investor’s account would be reduced because of the constant charges. Eventually, the customer’s account would be drained and they would not know how it occurred, or that they had been defrauded.
In fact, if I would have suspicion that the client’s account is being churned, I should disclose that to the client. Churning is illegal and unethical, and suspected churning should be addressed. I should share with the client that sometimes brokers and traders maliciously trade securities very actively in a brokerage account in order to increase brokerage commissions rather than customer profits. And in this particular case Madoff may be tempted to churn the client’s account because Madoff’s income is not transparent and could be directly related to the volume of trading of the client’s account.
“Based on the information you have thus far in the case, what further information do you believe you need in order to prepare the tax return with regard to the Madoff investment?”
I would need following information:
The investment sale prices in order to estimate and accurately report capital gain/losses, and include the result in the gain/loss report.
The investment purchase prices in order to correctly calculate and report capital gains/losses, and include the result in the gain/loss report.
The date of the investment purchase and sale is also important in order to determine if the capital gain is short-term or long-term.
As well, I would need the following data to complete the return:
Investment sales price.
Investment purchase price.
Description of the securities purchased and sold during the year.
Gain/Loss from the options.
Market value of the open options at year-end.
For sure, in order to prepare tax return to the Madoff’s investment I should obtain all necessary tax forms from Madoff’s accounting firm, including a 1099B for sales, 1099DIV or 1099 INT. I cannot just rely on his accountant’s explanation on how to calculate dividend and interest. Moreover, since options trading is a very complex subject I must do additional research on how to report income on options trading, and be sure that all the necessary tax forms are provided by Madoff’s firm.
“We now know the Madoff investments for some period of time have been fraudulent.
Were there indicators that might have caused you to react differently with regard to your client’s investment?”
There were the following indicators:
There was no online access to accounts.
There was no issuance of forms a) 1099B (for investment sales transactions), b) 1099 DIV, and c) 1099 INT.
David G. Friehling, a sole CPA practitioner, audited the hedge fund.
Madoff did not file any disclosures of his holdings to the SEC, because he was easily selling his holdings.
The business cannot have only couple down months when operating for years, it is impossible.
In other words, the Madoff case was filled with signs of fraud that could have led one to think that something was going on and changed the way the average investor feels about investing. Fraud comes in many forms, it can be as simple as taking money from a company’s account, or it can become as complex as the Madoff case. In order to catch fraud in companies as complex as Mr. Madoff’s, one must pay attention to more subtle signs that could point to fraud.
The transparency of Mr. Madoff’s company was minimal and should have alerted someone that something was wrong. Mr. Madoff repeatedly denied outsiders access to records, which should have been available. The company’s hedge fund was not registered with the SEC until late in 2006, which should have been another sign that something was amiss. This shows that Mr. Madoff had something to hide, because he did not want the SEC evaluating his hedge funds. In addition, the company’s auditor was Mr. Madoff’s brother-in-law, which opens the door for fraudulent activity. Auditors are supposed to be independent and definitely not family members of the company that they are auditing. This situation becomes more alarming when you consider that Mr. Madoff was frequently opposed to outside audits of any type. A family member as an auditor and a strong resistance to all other audits should have been the first sign that something fraudulent was occurring.
Funds managed by Mr. Madoff’s company performed so well, that it could have been another clue to the fraud that was taking place. Forecasts were matching outcomes, in areas like earnings per share, to the point that it became unrealistic to be able to forecast that accurately. Earnings per share figures have so many variables that it is nearly impossible to predict them accurately time and time again. In 2008, one of Mr. Madoff’s hedge funds, which invested in the S&P 500, gained almost 6% in value, while the S&P 500 itself was down over 35%. This was yet another clue that something in this company wasn’t right. Mr. Madoffs’ funds rarely lost value, even in times of economic downturn. So, while most investors were losing money in the market, Madoffs’ funds continued to profit.
“With the advantage of hindsight, what additional due diligence could you have performed?”
“In regards to Financial Planning:”
A quick search on Google could have shown that Madoff’s practice starting 1990s was exposed to accusations that he was front-running his investors, and the idea of this practice was to buy or sell shares before filling investors’ orders. All of the articles and complaints about Madoff in the early 2000’s would have been revealed as well.
Independently investors have to check the stock prices and trades on a daily basis.
Dig into the small accounting Firm that audited Madoff’s Fund.
To check any Web sites in order to gain more information about his practice, such as the Financial Industry Regulatory Authority, or FINRA.
I would quickly come to the conclusion that my client should divest 100% of their investments in Madoff’s fund.
“In regards to tax preparation:”
Dig further into the multi-page printout of listing of hundreds of transactions.
Request for a formal 1099B (for investment sales transactions), 1099 DIV, and 1099 INT.
Recalculate the gain/losses reported on the summary sheet.
“If you run across a similar situation in the future, do you feel any more comfortable about how to handle it?” Yes.
“Would you report such situation to SES, IRS, or other regulatory body?” Yes.
Madoff stopped trading and has been fabricating investment return of his clients during middle 1990 till 2008. He and his accomplices have committed fraud. The crime was committed based on the value of greed and a get rich quickly scheme. From the investors position, greed is also what fueled billions of dollars to be invested in Madoff’s Hedge Fund.
Investors should have avoided the following:
Invest into an unregulated hedge fund.
Too little due diligence.
Higher than average returns usually cannot always be realistic.
Absence of the audit of financial statements.
Now that we know how Madoff performed his Ponzi scheme, we will able to figure out and try to avoid scheme in future, and do not forget to:
Broadly analyze the company performance.
Watch closely for warning signs.
Verify filing with the SEC.
Check for the company reputation.
6 Pillars
Though Madoff was performing the investment operations as a Ponzi scheme, but when his investors wanted to have their money back, they got it without any delays. Of course, this does not show his responsibility to all the investors, but a little percentage to those who were smart enough to withdraw their investment from his fund. Those investors definitely were aware that Madoff’s firm does not conduct its business transactions according to law and ethics.
In fact, Madoff has violated mostly all 6 pillars, such as trustworthiness, respect, responsibility, fairness, caring, and citizenship. His only goal was to benefit himself and his family, while completely ignoring the well-being of others. Madoff cared little about those he harmed and only worked to better himself at the expense of others.
Therefore, from an ethical perspective, Madoff’s scam was a white color crime. White color crime creates victims by establishing trust and respectability. As in this case, victims of white-color crime trusting clients, who believed there were many checks and balances certified the Madoff investment operation as legitimate. Madoff appears to be the classic white-collar criminal. He was an educated and experienced individual in a position of power, trust, respectability, and responsibility, who abused his trust of personal gains. From the inception of his investment business, he knew he was operating a Ponzi scheme and defrauding his clients. As a result, he is serving jail time and will be paying restitution for the rest of his life. In the end, he knew this day would come.

Siemens Change After Corruption Scandal

This change management report is intended to present the boundary condition of culture change efforts at Siemens after corruption scandal came to light on November 2006. Even prior to corruption scandal, Siemens had a system of rules, policies and procedures; however it had not done enough to entrench its values, policies and procedures into company practice. They lacked in subsequent leadership and culture, inconsistent communication, training and company did not take adequate measures to punish conduct in breach. Siemens understood that they have to make some changes to its business to bridge the gap between theory and practice.

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Siemens AG (Berlin and Munich) is a one of Germany’s largest publicly held corporations and Europe’s largest engineering conglomerate by sales. Siemens is a global powerhouse in electronics and electrical engineering, operating in the industry, energy and healthcare sectors. It activities include cross sector businesses and services, equity investments. The company has around 405,000 employees working to develop, design and install complex project and tailor a wide range of solutions for individual requirements. Siemens has built his reputation and world class with its technical achievements, innovations and internationality over 160 years, generating a sales volume in excess of €75 billion with communication division at the heart of business (Siemens, 2010).
Up until 1999 bribing foreign officials to secure contracts was not only authorized but tax deductable in Germany. Siemens were allowed to pay legal fees for employees who got arrested or prosecuted abroad for bribery. Corruption is a part of a country’s culture, so is Siemens. It maintained a culture in which corruption was “a likely business strategy” to enter into emerging markets. In addition Siemens had grown closer to government (Rawi Abdelal et al., 2008). A culture of corruption in a dominant organisation does not occur accidently. Why would workers willingly commit an offence? The only likely explanation is if the organisation rewarded such behaviour. Siemens is not the kind of organisation where tens of thousands of slush funds gets unobserved. It is conceivable, certainly plausible, that Siemens’ top management knew anything about the bribes and corruption scandal. But as top officials they share responsibility for the widespread see-no-evil-hear-no-evil corporate culture in their organisation, which suggest that Siemens lacked a corresponding leadership and culture. So it is evident that culture at Siemens was illegal and unethical.
Klaus Kleinfeld appointed as CEO of Siemens in January 2005-a conglomerate with 75 billion euro’s. He was called as wunderkind among shareholders of Siemens after turning the operation of communication division and making profits of 569 million euro’s or (3.2%) increase in sales. Later on November 2006, Klaus Kleinfeld announced that Siemens net income went up by 38% and sales growth were up by 16% from previous fiscal year (Rawi Abdelal et al., 2008). Leader will go wrong, if they jammed in single metaphor (Esther Cameron & Mike Green, 2009) and this is what Siemens witnessed. Despite knowing the corporate culture of the organisation, he broke accustomed consensual management style, instead he threatened to sell or restructure if they didn’t hit targets. Kleinfeld focused only on the colossal task of strategically restructuring the division and ways to improve the company growth. According to business daily Suddeutsche “Kleinfeld gave lot of attention about the financial markets demand and restructuring the company”. Spiegel particularly concentrated more on Klaus Kleinfeld’s tactical errors: Possibly his biggest failure was to underestimate the impact of bribery scandal (Rawi Abdelal et al., 2008). He seemed to not fully take control as bribery scandal kept whirling around the company. This shows that Kleinfeld’s recklessness and negligence.
This body of work presents the boundary conditions of the Siemens change effort. It has been believed that organisational leadership and culture, with in the present organisation’s business environment, are the most critical aspects that determine the dynamics of organisational change. Siemens had policies in place, but they were not lived up to the expectation, the corporate values were not incorporated and leadership has failed miserably, resulting cost of € 660 MM fines and € 650 MM attorney and consultant fees (Frank Schmidt & Kenny Mok, 2008). Reputation and trust were battered due to the series of corruption scandals which rocked Siemens. Siemens was blacklisted in Nigeria by Federal Government of Nigeria (Felix Onuah, 2007). As a result reputation and trust were battered due to the series of corruption scandals which rocked Siemens. So to keep hold of business, Siemens were in the position to change their culture and leadership style in order to get rid of corruption.
Corruption Scandal:
But one of the major concerns with Siemens was corruption kept escalating. Siemens has been at the middle of a very serious corruption scandal, since November 2006. Siemens officials have been investigated and scrutinized in a bid to clarify uncertain payments totalling some €1.3 billion ($2.07 billion). In 2006 Siemens was at the middle of one of the Germany’s biggest corporate corruption scandal. In November 2006 around 270 police and other German officials ransacked Siemens offices. Six executives were arrested, including CFO of telecommunications division. German officials alleged that the suspects had diverted some 200 million euro’s through secret bank accounts in Liechtenstein, Switzerland and through shell companies, paying bribes for winning contracts in Iraq, Venezuela, Bangladesh, Italy, Israel, Russia, China, Argentina and Greece (Rawi Abdelal et al., 2008).
Repercussions of the Scandal:
Siemens identified the expenses of corruption as very high, through slowing down financial growth, rising levels of poverty, foreign investment misallocation, reducing tax revenues and additional government costs. Siemens concentrated on some of the key areas where they lacked quality in order to get rid of corruption. It is also very imperative to keep up their brand name and reputation to do good business and compete against their rivals. After the corruption scandals were unveiled at Siemens, the management started many initiatives to reinforce its compliance controls and corporate governance.
New Governance Structure:
One of the most important challenges an organisation faces, apparent leadership is crucial if an organisation is to make sure that the board and employees are not engaging in bribery and corrupt practices. It is really imperative that the board members do not transmit mixed signals; urge officials and managers to follow strict codes and high standards. Siemens supervisory board members Huber, Ackerman and Cromme were against their former CEO Kleinfeld, although profits had increased by about a third and sales by about 10%. As a result Kleinfeld was asked to step down because the image of the company was in tatters. For the first time ever in the history, board members turned to an outsider as chief executive officer-the Austrian Peter Loscher (Rawi Abdelal et al., 2008). Siemens implemented new managerial board position for compliance and official matters. Peter Solmssen, Hans winters and Andreas Pohlmann were appointed as General Counsel, Chief Audit officer and Chief Compliance officer respectively (Dietrich G. Moller, 2009). Loscher was in a position to develop a power base for him and then make sure his acceptance. Unlike Kleinfeld, Loscher made sure to maintain co-operative relations with unions and employees. Understanding culture is desirable for leaders in order to lead and to make a successful change. For e.g., what the leaders pays more attention to, controls and measures on a regular basis, how do they respond to crises and critical situations, how do they assign limited resources, promotions, rewards and status, all these factors informs the culture that has been developed in an organisation.
Since Siemens’ was listed on New York Stock Exchange, it was expected that Security & Exchange Commission (SEC) would interrogate the scandal and might impose higher fines than authorities of German, whilst the U.S justice department would launch a criminal probe (Rawi Abdelal et al., 2008). To meet the challenge, Siemens had restructured the Compliance and started a comprehensive compliance program. So Siemens hired a cofounder of Transparency International to consult on compliance and hired the well-known United States law firm of Debevoise & Plimpton to investigate the bribery scandal. Top officials and divisional heads were asked to submit joint bids for projects, a measure designed to remove corruption. (Andreas Pohlmann, 2008)
Compliance program focussed on three important factors
Siemens concentrated on providing training, propagating awareness and understanding and implemented a control system in order to overcome substantial deficiencies. Training is very imperative to make sure the exact implementation of the controls. To avoid unethical business practices, the Siemens provided anti corruption programs as a part of training for more than 15,000 employees. In addition, Siemens launched a web based anti corruption training program for more than 120,000 employees (Andreas Pohlmann, 2008)
This graphs shows that training is gradually increasing from the year 2008 to 2009 and Compliance staff increasing from 86 in 2006 to 598 in 2009 (Dietrich G. Moller, 2009). Siemens thought, compliance is the common platform and the moral responsibility to sustain the mutual set of morals for which the firm stands: superiority, creativity and accountability.
Siemens relied on the loyalty of their employees towards the company, to detect and Identify potential problems at the early stages. They motivated and encouraged their employees to actively participate in developing a culture of reliability by not allowing anybody to violate in the organisation. They launched a helpdesk with “Tell us” and “Ask us” functions, so employees were asked to inform the helpdesk if anybody violates the rules (Dietrich G. Moller, 2009).
According to Ask me helpdesk, around 3000 questions were raised regarding particular compliance problems, and many individual violations have been reported at the helpdesk.
Siemens has started responding to non-compliance, violation and misconduct through regular and proper sanctioning across each and every departments of the business. Siemens had enforced more than 550 penalizing measures in fiscal year 2007 (Dietrich G. Moller, 2009).
Communication is an imperative factor for Siemens to incorporate its new strategic direction of superior ethical behaviour, corporate social responsibility and transparency. Siemens has started concentrating on more direct discussion between the employees and Managing Board — in both directions. Through this way, Siemens communication of morals and values can be sustained right through the business, without being lost in transformation. Siemens has placed tactical significance on making its anti corruption strategies and compliance guide easy to read, this would help the employees to understand better (Article 123, 2008).
Approaching Change:
Altering the culture of an organization may be the toughest job a CEO will ever take on. The culture in an organisation or department is shaped over years of relations among organization members. The change process requires statistics, cautious study and good consideration of results.
Scheins’ Organisational culture model:
Culture is the ‘pattern of basic assumptions that a given group has invented, discovered or developed in learning to cope with its problem of internal integration and external adaption’ (Schein, 1990). Culture is not only about programmes and initiatives, it is everywhere in the company (Cameron & Mike Green, 2004). Thus culture gives a sense of organizations’ norms, values, beliefs, rituals and language; the way in which things are to be done around. To understand organisational development, learning and planned change, culture is considered as primary resource (Schein, 1999). Though Schein’s model has been criticised (e.g. Collins 1998, Hatch 1993, Parker 2000), it specifies the main aspects of culture, namely its partly learned and unconscious nature. Organizational culture, consequently, is not simply a single new entity which illustrates organizations and which can be also identified from the other entities that impact an organization performance. Scheins assumes culture as a set of shared postulations, which can examined at three important levels. The first level of Schein’s culture model consists of perceptible organizational process and various artefacts that can be heard and felt by uninitiated observer. First of all, the fact that will shape the entity of this investigation is culture itself (Schein 1992). Artefacts consist of any physical or tangible elements in a company. Dress code, furniture, history and architecture all represent organizational artefacts (cf. Reason 1997). According to Schein, it is really difficult to understand the true meaning without detailed study, since it symbolizes the most superficial cultural phenomenon i.e. only reflections of the exact business culture The second level of Schein’s model consists of the company’s espoused values. These are very comprehensible in, for example, the company’s objectives, declared values, operating philosophy and norms. However, espoused values do not always reflect an organisation’s daily functions and businesses. Most key and imperative in terms of functions is the in-depth culture level, i.e. its principal assumptions (Schein 1985, 1992). Actions and behaviours of a successful individual employee in the organisation become benchmarks on which other employees refer to. Such historical behaviours and actions become organizational key values. Third level of Schein’s model consists of basic assumption and underlying values. The essence of culture is characterized by the fundamental underlying values and assumption, which are difficult to distinguish as they present at an unconscious level. Underlying values is a array of decisions that form the culture further. Therefore, they are not static (Schein 1985, 1992). Basic Assumptions are considered as an ultimate source of actions and values.
Analysing culture: Assessment (What to look for)
In order to assess the culture, Siemens has to identify their artefacts. Artefacts can be identified by conducting surveys, group meetings or personal interviews that asks the employees to list their reactions to various artefacts. A pattern for identifying artefacts include: level of formality in relations, working hours, dress codes, rituals, ceremony, myths and how decisions are made (Scheins, 1999). Secondly, espoused values should be examined. This can be obtained easily since every organisation has their written values. According to Argyris & Schon, the best word is ‘espoused’ values, since most of the organisations have written values but ‘act out’ different values (Scheins, 1992). Finally, underlying assumptions should be identified. Possibly the best way to spot basic assumptions are through progression meeting – where all the artefacts are listed, underlying values and assumptions are reviewed (Scheins, 1992).
Analysing culture: Analysis (Congruence Test)
Using the assessment Siemens can compare the cultural artefacts to the stated values to check if the stated values are congruent with physical materializations of the organisation. Second level is to compare the espoused with the actual value of the Siemens. Then, analyse the type of culture that enhances the mission of the Siemens. Find out the new value and implement it in order to accomplish the company’s mission and goal. Finally, culture can be compared to the employees. Here, the employees would be observed in terms of personal ideas, values of what is significant, and personal decision making procedures.
Analysing culture: Implementation (Finding changes
Final step is to figure out the changes in the organisation to accomplish the mission. Whilst execution of cultural changes is a colossal undertaking that ‘changes sensibly conceived, but conventionally fail’ (Bolman and Deal, 1997), the gaps between artefacts and espoused values, assumptions and espoused values, workforce and culture or culture and mission are identified in the analysis stage.
Implementing Change:
Kotter’s eight step model:
Kotter established eight steps and he believed that these 8 steps would lead to successful changes. He has developed an 8 step model where the first four levels focus on unfreezing the organisation, the next three levels focus on what needs to be changed , and the last level refreezes the company with a brand new culture. When organisations need to make huge changes effectively and significantly, these are the eight steps to be followed in sequence.
Establish a sense of urgency:
For change to take place, Siemens really have to develop a sense of urgency. In order to do that Peter Loscher and other board members have communicated to their employees about the need for change and significance of acting without delay. They examined the market strategies, competitive realities, reputation, how to prevent corruption and potential problem of the failure. This is not merely a matter of just telling employees about the corruption, poor sales statistics or discussing about increasing competition. Board members explained about the drawback of corruption and why corruption has to be removed. It is really imperative for Siemens to spend significant energy and time to develop the urgency in order to lead the change.
Form a powerful guiding coalition Team:
Top management of Siemens should shape powerful corporate governance with enough leadership skills, authority, credibility, communication ability and energy to lead the change. Leaders should be able to convince the employees that change is necessary. So Siemens appointed Peter Loscher as their CEO in 2007. Siemens implemented new managerial board position for compliance and official matters. After joining the company Peter Loscher communicated both his and shareholders expectations, and to set comprehensible compliance targets based on values of responsibility and integrity for all firm departments, units and levels.
Develop a clear vision and strategy:
The mission is to create a culture of openness and honesty right through the business, evidently driven from the board. The first step will typically be for the CEO to make a presentation to the board, possibly after review by board committee or risk management function. The important lesson learnt at Siemens is that a cadre of managerial positions is necessary at organisations to make sure the reliability, operation and integrity of the organisation. The frequency and level of bribery and unprofessional behaviour had significantly increased until Peter Loscher took over; top management, board and employees realised that they wanted to change their culture when world largest corruption scandal came to light. Tone from the share holders after corruption scandal
“The tone from the shareholders” is

“Only Clean Business is Siemens Business!
Everywhere – Everybody – Every Time!”
“Compliance as Part of Corporate Responsibility is 1st Priority!”

Peter Loscher and board restructured the corporate governance and enhanced the compliance department.
Communicate the Vision:
In this step the new vision and strategies should be communicated in every possible ways to employees. Make sure that everybody in the organisation understand and accept the strategy and vision. After identifying the strategies, Siemens communicated those strategies to the employees by the compliance department and anti corruption programmes. To avoid unethical business practices, the Siemens provided anti corruption programs as a part of training for more than 15,000 employees. In addition, Siemens launched a web based anti corruption training program for more than 120,000 employees. Training is very vital for altering the mindset and developing a culture of integrity and responsibility. Siemens vision is to remove the corruption and change the culture, because Siemens understood the cost and impact of corruption and were very desperate to get rid of corruption.
Empower others to act on the vision:
They motivated and encouraged their employees to actively participate in developing a culture of reliability by not allowing anybody to violate in the organisation. They launched a helpdesk “Tell us” function, so employees were asked to inform the helpdesk if anybody violates the rules. It is really imperative for Siemens in order to get rid of obstacles. So they enforced around 500 disciplinary measures in the year 2007, mostly the cases of violation, and corruption.
Create Short term wins:
Changing the culture, either good or bad, it is not going to happen overnight. Siemens achieved their short term goal when their employees began to realize that they were anticipated to do their duties in a professional and ethical manner. Siemens monitor the progress of the compliance program by conducting employee survey. Survey results include: Positive perception of compliance program, compliance communications understood and well regarded. Siemens thought that compliance issues have changed the economy and society – and it has changed Siemens.
Consolidate improvements and producing still more change:
Siemens engaged in variety of co-operative initiatives with international organisations committed to fight against corruption and sustaining and establishing freedom of competition. Siemens continuously improved their compliance program by co-operating with international and non government organisations, such as World Bank institute by exchanging knowledge and vice versa. By monitoring the process and receiving the feedback continuously will help Siemens to improve change.
Institutionalise the new approaches:
Siemens needs to believe a leading role in integrity, transparency and compliance with the clear aim of becoming a respected international organisation in the fight against bribery and corruption. They needed to move towards a value based culture and to bench mark with the best. In order to achieve these objectives they have to inst­­­itutionalise the new strategies and approaches.
The above study has looked at the context, content and process adopted by Siemens in order the change their culture after the bribery came into light on November 2006. This study will also give an overview of how Siemens has implemented detailed anti programmes policies on bribery and corruption, altered its management structure to fit its new values and policies, developed a new compliance department and has made changes to their communication with direct conversation between workforce and management. The Scheins model analysis helps us to understand the culture of the organisation and what changes needed to be done, while Kotters model helps us to understand how the change can be implemented. Unprofessional behaviour and violation of rules and standards are something all organisations must constantly be alert of. Eventually, the changes at Siemens have allowed the management to successfully meet its mission, which is an obligation to public safety.

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Disguise and Identity in The Importance of Being Earnest and The School for Scandal

The Role of Disguise


Disguise refers to anything changing or concealing the appearance of a person or thing including the physical appearance to hide secret identities. In superhero stories and books, disguises are used to conceal secret identities and retain special secret powers from the people who are ordinary (Hyland 102). In the plays “The Importance of Being Earnest” by Wilde Oscar and “The School for Scandal” by Brinsley Richard the predominant theme is a disguise. However, the two texts display in many instances significance similarities and differences of disguise in the entire plays. The play by Wilde can be defined as a trivial or farcical comedy firstly performed in 1895 in London whose protagonists maintain fictitious identities or personas to avoid burdensome social obligations. On the other hand, the play by Richard is a manners comedy satirizing the customs and behaviors of upper classes through dialogues which are witty and with the plot that is intricate and having comic situations that expose the shortcomings of the characters. This essay seeks to explore the importance of disguise as demonstrated in the plays “The Importance of Being Earnest” by Wilde Oscar and “The School for Scandal” by Brinsley Richard, including the plot differences while focusing on the characters such as Jack and Joseph in the plays.

Disguise in “The Importance of Being Earnest“

In his play, Wilde hilariously satirizes the Victorian caricature and the values of disguise held by the by the individuals that time. He exposes disguising ideals and social beliefs of the society of aristocracy by mocking their contemporary character traits in a derisive manner; which can be termed as voguish traits. An irony is created of false perceptions of living earnestly; such that many appear to live a disguised manner which does not concur with the Victorian values (Wilde 302). Earnestness can be defined adequately by showing the sincerity of being or feeling serious in purpose, effort or intention. Also, it means the determination to be true and not hiding any secret identities. Jack is one of the characters leading a corrupt life in the code of conduct of Victoria. The Victorians regard earnestness as the sublime virtue to attain in life for acceptance in the aristocratic society; however, Jack and other character revere it trivially (Tropsha 72). Jack felt pressure to live up to the standards of being earnest and perceived it as tiresome, and therefore decided to devise the manner in which he could satisfy himself as well as the society. By disguise, people are able to sustain a given image which is respectable in the society but change when they are elsewhere. Jack fictitiously creates a brother named “Ernest” to leave his duty of being a guardian and his home in the country under pretenses which are false. He says that his brother is sick to venture the town without being suspected or in disguise. In town, he courts Gwendolen, his love, and engages in pricey pleasures in disguise. Similarly, Algernon pretends to be Ernest, Jack’s brother to win Cecily’s heart because he knew that such name was loved by women (Tropsha 76).

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Jack is presented as a Justice of Peace in Hertfordshire where he owns a country estate and he is recognized as responsible and serious guardian to his adoptive granddaughter, Cecily and represents Victorian morality values; respectability, honor, and duty. In the Victorian setting, the place of a guardian requires one “to have a moral high tone on all matters,” and Jack stands as a person qualifying these criteria which are not true (Wilde 301). He also pretends that his brother, Ernest lives an irresponsible and scandalous life which makes him get into trouble always and leaves London in disguise to assist his brother who is in trouble. As a matter of fact, Jack intention was to “get up to town” and not because of his brother, and goes missing for several days while living a life that he seems to disapprove in the country (Tropsha 74). This shows that Jack is using an excuse of Ernest as a disguise to maintain intact his honorable image. Also, Jack does not know his real name since he was found in a cloak-room in a handbag at Station of Victoria as a baby.

Moreover, the theme of disguise is also used by Wilde in the play as revealed in the strategies and language of lying to exploit the society’s hypocrisy such that the use of disguise may be seen as lying. Both Jack and Algy make christenings’ request and it can be seen Chasuble as if connected highly to the notion of name-giving; which mean giving a definition (Clay 24). The christenings theme in the play depicts Jack as if they would want to go back to childhood to change their identity. Changing one’s name can be viewed in the postcolonial era as an intention to conceal one’s otherness and nationality (Hyland 123). One can get better or fit in a given society by changing their identity for more prospects in disguise. While using the name Jack Worthing, Jack is hindered from marrying but he gets better prospects to marry when using the name Ernest Moncrieff which is a disguise since it is not his name. Apparently, Jack is forced to say the truth about his life while in the conflicts within some social class. While in the relationship with Algy, Jack is engaged in jokes revealing the truth about his life. The conflict involves a general characteristic of Victorian farce, which is food, where Jack and Algy are dining and emphasizes on the moral vitality of eating; for example, Jack says “he does not like people who are not serious with meals” (Wilde 303). In act II Algy is approached by Jack who says “it is heartless to eat muffins under the circumstances” but his intention was to have the muffins but Algy denies him.

Despite the fact that Jack has the secret life in the play, he claims to be speaking the truth. The character states the truth conveying his morality as well as emphasizes truthfulness which is the major theme in the play. Jack is accused by Algy of untruthfulness when he speaks as a dentist, and this indicates disguise and she says “it creates an impression which is false” (Wilde 300). Jack tells Algy that he is not living in Shropshire and after revealing the truth about his life he says that “truth is never simple and is rarely pure” (Wilde 301). Jack also reveals that he did not tell Gwendolen the truth when he states that “truth is not told to a nice, refined girl” (Wilde 313). Furthermore, Jack finds out that his real name is Ernest and that he has been speaking the truth; however, he was convinced that he had lived a disguised life (Wilde 357). All the lies are revealed as the truths at the end of the play.

Disguise “The School for Scandal”

In the play, some characters such as Joseph Surface represent false appearances. Lady Sneerwell is attracted to Joseph’s brother Charles Surface, and plots with Joseph to break the relationship between Maria and Charles. Joseph Surface is the bad brother but in disguise pretends to be a gentleman who is honorable. The fate of Joseph is foreshadowed by Mrs. Candour’s gossips, who deliver false accounts using the metaphor of money (Brinsley 256). Joseph attributes that scandal like the one which ruined his financial success. Joseph Surface has a reputation of an upright man but beneath is the villain; that is with evil intentions and motives indicating that he is in disguise. Joseph uses lies with the intention to attract Maria and marry her for financial interest (GALE 2). Also, Sir Oliver uses disguise to discover their distinction about the one who is a good brother between Charles and Joseph.

Surface brothers take central characters in the play while displaying reputation which is undeserved; that is their true identity is concealed from being in the real world. Joseph cultivates a goodness reputation yet he is a hypocritical moralist, whereas his brother has a bad reputation but he is honest at his core. Both Joseph and his brother’s earn their reputations over the course of the play when their true nature is revealed. The two brothers also have a similar name, “Surface” which indicates that their only difference is the characters and reputation (Brinsley 206). Joseph appears to be good on the surface but deep down he is evil, implying that he is hiding his flaws in disguise. When a person portrays him-or herself as loving, charitable and loyal yet their true nature is opposite, such person is disguising and in the play the characters have the names which tend to reveal their main traits (GALE 3).

The plot of the play shows concealed elements of the natures of the characters which fittingly, is concealed and exposed through the literal acts. The rich uncle to Joseph, Sir Oliver Surface, who lived in India for many years tests Joseph and his brother to know the truth about their identities to the surface. He uses different persona to test each nephew to see whether they would recognize him when he returned (Brinsley 267). Sir Oliver wanted to know their true nature by seeing how each of them would respond. Moreover, the screen scene, which is the most famous scene of the play the characters’ true natures are revealed when they hide physically in the room and then exposed. Lady Teazle pays a visit to the house of Joseph because she is looking forward to becoming his lover. When the husband to Teazle arrives and tells Joseph about his wife having an affair with Charles, Lady Teazle is concealed by the screen. When Charles arrives, Sir Peter hides as eavesdrop on Joseph to discover whether Charles had a love affair with Lady Teazle. At the end of the play, all the characters appear from their hiding place exposing Joseph’s true nature as the one trying to steal the wife from a friend and not Charles. This shows that Joseph had lived in disguise of an honorable gentleman who is finally exposed as an evil person or bad brother to Charles Surface (GALE 4).

When comparing the play by Wilde and Richard, both ending of the plays with revealing the true nature of each character. Also, the characters develop a new union than they had realized before having come to par with the truth. In the play by Wilde, Jack discovers that despite having lived in disguise, he was the true Ernest as he has been claiming. On the contrary, Joseph knows his true nature but he does not want to destroy his reputation as an honorable person, however, in the end, his true nature is revealed in front of all the character in the play unlike Jack. All the characters in the plays come to acknowledge the importance of living according to their true nature rather than conceal their identities which in the end are exposed.


In the plays, the authors appear to alter the characters’ identities to serve the purpose of bringing out the irony, building the theme, advancing the plot and creating comic innuendo. In other cases of the plays, there is no disguise in such that the characters do not transform their appearance but they hide true ideas or feelings behind a façade; for example, when all the characters gathered in Joseph’s house and each of the hid to conceal their feelings. In such cases, both Wilde and Richard traverse through the distinction between the inner reality and appearance of the characters. This essay has therefore demonstrated the role of disguise in plays “The Importance of Being Earnest” by Wilde Oscar and “The School for Scandal” by Brinsley Richard as well as the differences in the plots while exploring the appearances of Jack and Joseph in the plays.

Works Cited

Clay, Diskin. “The theory of the Literary Persona in Antiquity.” Materiali e discussion per l’analisi dei Testi classic (1998): 9-40.

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GALE, CENGAGE L. E. A. R. N. I. N. G. Study Guide for Richard Brinsley Sheridan’s “School for Scandal.”. DETROIT: GALE, CENGAGE LEARNING, n.d. Internet resource.

Hyland, Peter. Disguise on the Early Modern English Stage. Routledge, 2016.

Bottom of Form

Top of Form

Brinsley, Richard, and Michael Cordner. The Rivals. Oxford: Oxford Univ. Press, 1998. Print.

Tropsha, Alexander, Paola Gramatica, and Vijay K. Gombar. “The importance of being earnest: validation is the absolute essential for successful application and interpretation of QSPR models.” QSAR & Combinatorial Science 22.1 (2003): 69-77

Bottom of Form

Wilde, Oscar. The importance of being earnest. Broadview Press, 2009.


Sumitomo Corporation And Yasuo Hamanakas Copper Scandal Finance Essay

The financial world had been confronted heavily by trading scandals in 1995, with Japan’s Daiwa Bank and the rouge trader, Nick Leeson. When it seemed the scandals couldn’t get much worse, the Sumitomo Copper Scandal emerged. This was the biggest scandal in the history of commodities trading and ranked in the top five trading losses in financial history up until the late 1990’s. Sumitomo Corporation is a Japanese trading house, which is currently one of the largest worldwide trading companies headquartered in Tokyo, Japan. In the 1990’s Sumitomo owned large amounts of both physical copper, which was stored in warehouses and factories, as well as numerous futures contracts. Copper was a relatively small market compared to other metals, such as aluminum. According to Andrew Beattle’s article, “The Copper King: An Empire Built on Manipulation”, copper is an illiquid commodity that cannot be easily transferred around the world to meet shortages. For example, a rise in copper prices due to a shortage in the United States will not be immediately cancelled out by shipments from countries with excess copper. This occurs because moving copper between storage and delivery costs money, which can cancel out the price differences. It is important to note that Yasuo Hamanaka was the chief copper trader of this trading house, and attempted to corner the entire world’s copper market leaving Sumitomo with a loss of more than $1.8 billion (Beattle).

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For ten years, Yasuo Hamanaka had successfully managed to control the world’s price of copper. He eventually came to control five percent of the entire supply of copper, which may not seem like much considering ninety-five percent was in other trader’s hands (Beattle). However, due to the fact the abundant and cumbersome challenges that exist in the copper market (in movement, delivery, etc.) and the fact that even the largest traders in the market owned an even smaller percentage, Hamanaka’s five percent was indeed very significant.
During the ten years of his manipulation he was able to use Sumitomo’s size and large cash reserves to corner and squeeze the market through the London Metal Exchange. The London Metal Exchange is the world’s biggest metal exchange. Furthermore, the London Metal Exchange’s copper price essentially dictated the world’s copper price at the time (Beattle). Although the London Metal Exchange was large in size, it was fairly poor in terms of regulation. In fact, this exchange had little to no regulation at the time of Hamanaka’s rampant market manipulation. The Sumitomo Copper Scandal lasted for about a decade due to these negligent and almost nonexistent regulations on behalf of this particular exchange.
To put the entire crisis into laymen’s terms, one must first understand that Hamanaka was taking a long futures position on copper and simultaneously buying up a substantial amount of physical copper as well. This caused any one trader who took a short futures position to have to buy long positions in order to cancel out their short positions. Due to the fact that Hamanaka had a large number of long positions, those people looking to buy them had to pay increasingly higher prices. These skyrocketing futures prices are what Hamanaka was able to control; the more the prices rose, the more money he made. This is because those with short positions were still paying this higher price in order to liquidate those positions. Another way that Hamanaka was making money was that while these prices continued to rise, some people holding short positions thought that instead of paying a high price for a long position they would buy the physical copper and deliver it to the holder of the long positions. So, because Hamanaka also owned 5% of the physical copper he could charge a very high price to those with short positions because they didn’t want to keep paying money to liquidate their short positions. Essentially, he was making money by owning long futures as well as physical copper.
There are no assured reasons as to why Hamanaka engaged in such illegal trades. Perhaps he felt pressured to maintain the consistent levels of annual revenue for Sumitomo’s traditional copper business-about ten billion dollars. He would therefore maintain his reputation as a phenomenal copper trader as well as his firm’s dominance in the commodities market.
It is also important to note that individuals such as Hamanaka, do attempt to corner the market in order to create an unfair advantage by purchasing a significant amount of shares. This eventually increases the price of shares, making them appear to have a greater value. As the price of the shares continues to rise, more buyers become attracted, and then demand further increases the price of the shares. This causes short sellers to be driven out of the market through a short squeeze. In the article Short Squeeze, it explains that a short squeeze is a situation in which an increase in the price of the stock triggers a rush of buying activity among short sellers. Therefore, it is necessary for the short sellers to buy stock in order to close out their short positions to minimize their losses, causing a further increase in stock prices. Overtime, this causes one to sell their holdings at an artificially inflated price and then leave their investment or opt to sell their shares with the knowledge that the price will decrease once normal supply and demand forces return (Investing Answers).
Yasuo Hamanaka, also referred to as “Mr. Copper,” was the former copper trading chief for Sumitomo Corporation. Following research of the Sumitomo Copper Scandal, one can confidently say that Hamanaka is the key player who is held responsible for the 2.6 billion dollar loss over a ten-year period. In fact, the article, Sumitomo Corporation states that, “it believed that Mr. Hamanaka was solely responsible for the unauthorized trading” (215). His attempted action to corner the world’s entire copper market by falsifying financial records and forging signatures alluded to such a significant loss for the company.
It is also important to note that prior to the discovery of Hamanaka’s accumulation of illegal trades, he was given a great amount of responsibility within the company. This was because he was perceived by top executives to have superior knowledge and experience within copper trading. Therefore, one can also conclude that the top executives within the corporation can also be held responsible for the Sumitomo Copper Scandal. This is because the Sumitomo Corporation and senior management did not have secure safeguards in place to ensure that they knew exactly what their employees were doing. Furthermore, Hamanaka’s reputation as being a superstar copper trader only worked to solidify the lack of regulation and discipline (Sumitomo Corporation).
When Sumitomo Corporation’s reputation began to tarnish from individuals outside the company, they responded to the allegations by stating that Merrill Lynch and JPMorgan Chase were the two banks responsible. In the article The Copper King: An Empire Built On Manipulation, author Andrew Beattle explains that Sumitomo Corporation claimed that Merrill Lynch and JPMorgan Chase granted the loans to Hamanaka via future derivatives; hence the two banks kept the scheme going. Consequently, both banks were found guilty to some extent (Beattle).
Historically, there has been a close correlation in the behavior of metal prices. When one metal falls, the others tend to follow. However, the Sumitomo announcement did not harm other metals despite the recent dramatic drop in copper prices. Copper is a relatively small market compared to other metals, such as aluminum and gold. The price of the metal was above $1.25 a pound in New York in early May of 1996, but it fell to $1.04 on June 13, just before Sumitomo announced its loss. Following the announcement, copper was trading at about 89 cents (Wall). The decline in prices of copper before the Sumitomo scandal was believed to have risen from people being concerned about the number of new copper mines that were planned and the potential supply problems that it could bring about (Wall). Copper prices fell ten percent in the weeks following Hamanaka’s removal (Fletcher), however, prices had been falling for a while, and the scandal only exacerbated the trend (Uchitelle).
The main effect of Sumitomo’s losses was the decline in public confidence in financial institutions. Americans wondered how well their local financial institutions were handling oversight of management. They also were concerned about a temporary decline in stock prices as well as higher interest rates for money to seek to borrow from banks (Uchitelle).
The dollar is driven by people’s perception of commodity price movements, and although the dollar had weakened before news of the Sumitomo scandal, the fall in copper prices has contributed to the dollar’s softness (Wall). The Sumitomo affair concerned the United States about the openness of Japan’s financial system and the implications for interest rates. These worries as well as the copper crisis had contributed to the decline of the yen. The collapse in copper prices also hurt the Australian dollar.
In the Sumitomo copper scandal, the financial debacle originates from the failures of proper risk management. By entering into fictitious trades for over ten years and manipulating several accounts, Hamanaka successfully misled his management into believing that he was making huge profits. Hamanaka had been trading on the London Metal Exchange forward market for copper. Sumitomo was the largest participant in the physical market for copper-he handled twice the volume as his competitors. Hamanaka was known in the copper markets as “Mr. Five Percent” because Sumitomo’s copper trading team traded approximately 500,000 metric tons of copper a year, which was five percent of the total world demand for copper (Weston).
In regards to risk management, whenever any hedge fund or speculator who was aware of manipulation tried to take short positions, Hamanaka invested more money into his positions, thus sustaining a higher price because he dominated the market. However, despite these illegal practices no action was taken against Hamanaka because of the profits he generated for the company (Weston).
There are several reasons from a management perspective as to why the scandal carried on as long as it did. The middle office may have bypassed early warning signals perhaps because Hamanaka was perceived as an experienced senior trader. Hamanaka was chief of the trading office and intentionally had an incentive to maximize profit opportunities through illegal ways. Employees within the firm may have allowed the fraud to occur by turning the other way. This is a case of decentralization (Tschoegl).
The Sumitomo scandal has provided valuable insight and enables one to appreciate and understand the importance of internal and external controls. If there had been any controls, it is believed that the scandal would have been detected much earlier and before a loss of $1.8 billion.
The Sumitomo Copper Crisis was, at its core, a very preventable crisis-almost embarrassingly so. The huge financial swings that the copper market saw in the late 1980s and early 1990s as a result of Hamanaka’s indiscretions were exactly that: the result of one man’s greed and indiscretions. Hamanaka initiated and participated in the illegal trade of copper-like making off the book deals in order to recover unrealized losses-and incited a wave of regulatory laws by the London Metal Exchange and the Commodity Futures Trading Commission (CFTC).
Hamanaka exploited various agents and partnerships in his ten-year long market-manipulating extravaganza. He was able to do this due to serious misgivings and loopholes in the commodity futures markets, as well as taking advantage of gaps in the chain of command and knowledge. Hamanaka maintained two different sets of trading books: one that recorded fabricated profits for the Sumitomo Corporation and another real record of all the off-the-book and under-the-table deals that were made to maintain control of the market. This long-term interference and domination of the copper market was nonetheless very hard to maintain due to one key fact: in order to corner a commodities market, the company must actually hold the assets, which presents an additional strain on resources and funds. This very requirement may be the answer to preventing scandals like this in the future (Wall).
As aforementioned, the Sumitomo Copper Crisis was largely unavoidable simply because one man’s poor decisions affected the rest of the affiliated market. “The essence of the problem was unauthorized trading that the culprit undertook to enhance his firm’s profitability and then his own career and pay,” Adrian Tschoegl mentioned in The Key to Risk Management. However, the true debacle is a result of a lack of internal and external controls. The Sumitomo Corporation, which was divided into essentially three separate “offices” (front, back and middle), simply did not harbor or even encourage communication between departments and sectors (Tschoegl). The middle office (which is responsible for one of the most key business functions: risk management) can easily be said to have failed most spectacularly in this scandal. The lack of risk awareness and management led to a loss of $1,800 million dollars and a stain on the Sumitomo name, all because of a decentralized, non-communicative corporate structure (Tschoegl).
The most effective approach to avoiding something like this in the future is basically three-pronged: more and better management-level controls, independent transaction monitoring, and more stringent regulation (of the London Metal Exchange, by the government, and of corporations e.g. “corporate social responsibility”) (Tschoegl). The management-level controls should consist of a conscious effort at centralizing every part of the company, as well as maintaining strict inter-company discipline and training. Independent transaction making should be monitored so no “two-book” accounting systems are permissible; that is to say, that there is a system of checks and balances within the corporation to ensure above-board transactions. In terms of regulation on behalf of various agencies and governments, it’s only necessary to say that more of it is probably needed to avoid price manipulation. Perhaps a system of rigorous reporting and accounting policies could be implemented, which would strengthen the market’s effectiveness anyways.
It’s fair to say that the Sumitomo Copper Crisis leaves the skilled and careful trader with a few pivotal takeaways. First, both internal and external management controls are absolutely crucial to the success of any company, but if said management is left to run unchecked through the system, mishaps and misdeeds are bound to occur. Strict and standardized corporate training and discipline is the remedy to this pitfall. Second, given the right amount of determination and finesse, the market on almost any given commodity can be cornered, for better or for worse. Events like this, despite their far-reaching negative implications for the perpetrator, always help make the market a more efficient and fluid network. The lessons that are learned from scandals such as the Sumitomo Copper Affair in the long run only work to better and enhance the market.

Impact of the Enron Scandal on Accounting Standards

Every firm and its managers are expected to maximize investor returns while complying with regulatory standards, avoiding principal-agent conflicts of interest, and enhancing the reputational capital of their firms. However, in practices, being ethically is not just about giving large sum of charity’s money but recognizing and acting on potential ethical issues before they become legal problems are more important aspects to taking care of. Enron collapsed as the result of unethical management practices such as the equivocation of taxes and fraudulent accounting practices. The Enron scandal is the most significant corporate collapse in the United States since the failure of many savings and loan banks during the 1980s. This scandal demonstrates the need for a close look at the ethical quality of the culture of business generally and of business corporations in the United States. Organization need to infuse ethics and integrity throughout their corporate cultures as well as into their definition of success. Unethical and illegal business practices at Enron led to the creation of Serbanes – Oxley Act of 2002. This report will discuss and find out illegal and unethical activities, impacts on stakeholders and lessons from the Enron case.

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The Enron Scandal and Ethical Issues
Enron Corporation is an energy trading, natural gas, and electric utilities company located in Houston, Texas that had around 21,000 employees by mid-2001, before it went bankrupt. Its revenue in the year 2000 was more than $100 billion and named as “America’s most innovative companies for six consecutive years by Fortune. Enron was a company that was able to profit by providing the delivery of gas to utility companies and businesses at the fair value market price. Enron was listed as the seventh largest company in the United States and had the domination in the trading of communications, power, and weather securities (Corporate Narc, nd).
At first sight, Enron looks like an excellent corporate citizen, with all the corporate social responsibility (CSR) and business ethics tools in community (Sims & Brinkmann, 2003). However, the scandal of Enron has been the largest corporate scandal in history, and has become emblematic of institutionalized and well-planned corporate fraud; the Enron scandal involves both illegal and unethical activities.
According to Carroll and Buchholtz (2008), the CFO Jeffrey Skilling and the CEO Ken Lay played major roles in the Enron scandal. Both of them committed securities fraud and conspiracy to inflate profit. In disguise debts of Enron, Lay and Skilling used off-the-books partnerships, after that “they lied to investors and employees about the company’s disastrous financial situation while selling their own company’s shares” (Carroll & Buchholtz, 2008, p. 256). Enron’s top level management has violated several accounting laws, SPE laws, and bent the accounting rules to satisfy their own desires of profit in the short term but ignoring long term repercussions for investors, stockholders, employees and the business itself. The close relationships that were formed among top leading executives and the board of directors grew arrogant, thinking they were invincible and causing them to act in an unethical manner. Enron allowed Andrew Fastow, the Chief Financial Officer to control two SPE’s (special purpose entities) that were knowingly connected to Enron, and gave him an opportunity to abuse his power.
Enron also parked some of its debt on the balance sheet of its SPVs and kept it hidden from analysts and investors. When the extent of its debt burden came to light, Enron’s credit rating fell and lenders demanded immediate payment in the sum of hundreds of millions of dollars in debt (Sims & Brinkmann, 2003). It means that Enron’s decision makers saw the shuffling of debt rather as a timing issue and not as an ethical one. They maintained that the company was financially stable and that many of their emerging problems really were not too serious, even though they knew the truth and were making financial decisions to protect their personal gains.
No discussion of the Enron scandal would be complete without a discussion of the involvement of Enron’s accountants, the firm Arthur Andersen. Arthur Andersen was one of many causes of the Enron collapse when they were the conflict of interest between the two roles played for Enron, as auditor but also as consultant. Andrew Fastow, the Chief Financial Officer of Enron pushed many deals across where he had a vested interested on both sides of the deal. By creating and knowingly participating in these deals, he put his financial greed above the responsibility to his position for the company. According to Paul and Palepu (2003) in 2000, Arthur Andersen earned $25 million in audit fees and $27 million in consulting fees, this amount accounted for roughly 27% of the audit fees of public clients for Arthur Andersen’s Houston office. The auditors’ methods were questioned as either being completed solely to receive its annual fees or for their lack of expertise in properly reviewing Enron’s revenue recognition, special entities, derivatives, and other accounting practices. Due to these relationships that Enron had with Arthur Andersen, it was just too easy for both Enron and the accounting firm to work together in covering up financial losses and debt. Andersen was also responsible for some of Enron’s internal bookkeeping, with some of Andersen’s employees eventually leaving to work for Enron. The result of the accounting scandal was that many of the losses that Enron encountered were not reported in its financial statements. In November, 2001, Enron revises financial statements for the previous five years to account for $586 million in losses (Corporate Narc, nd).
After a series of scandals involving irregular accounting procedures bordering on fraud involving Enron and its accounting firm Arthur Andersen, it stood at the verge of undergoing the largest bankruptcy in history by mid-November 2001. As Enron was considered a blue chip stock, this was an unprecedented and disastrous event in the financial world. Enron’s plunge occurred after it was revealed that many of its profits and revenue were the result of deals with special purpose entities (Corporate Narc, nd).
Enron’s leaders also ignored, then denied serious problems with their business transactions and were more concerned about their personal financial rewards than those of the company. When the company’s stock price began to drop as the problems were becoming public, the company was transitioning from one investment program to another.
Impacts on Stakeholders
Every business has a moral obligation to serve its stakeholders, whether they are business partners, customers, stockholders, or employees. Enron’s bankruptcy has injured several parties including banks, stockholders, former employees, customers, suppliers, communities, and also the United States.
Impacts on Employees
The first thing, and most important thing the Enron scandal had an effect was the job situation. Carroll and Buchholtz (2008) argued that “when Enron went bankrupt and then the Arthur Andersen accounting firm went out of business in 2002, employees were displaced and significantly affected” (p. 47). Enron’s financial implosion has cost thousands of employees their jobs, left thousands of people still employed by the bankrupt trader and “left 5,600 employees jobless and facing retirements with no nest eggs” (Carroll & Buchholtz, 2008, p. 256). Many employees had their entire pensions vested in Enron stock, Kenneth Lay advised employees keep their Enron stock when the firm was crashing, and he was selling his own. While the employees were unable to sell their stock, Lay and other executives were quickly selling off many of their shares. The lives and savings of thousands employees were destroyed. They also were deprived of the freedom to diversify their retirement portfolios; and they had to stand by helplessly while their retirement savings evaporated at the same time that top managers cashed in on their lucrative stock options.
Impacts on Investors and Stockholders
As the result of Enron scandal, individual and institutional investors lost millions of dollars because they were misinformed about the firm’s financial performance reality through questionable accounting practices, and all of the shareholders lost the money that they had invested in the corporation after it went bankrupt. Shareholders lost nearly $11 billion when Enron’s stock price, which hit a high of US$90 per share in mid-2000, plummeted to less than $1 by the end of November 2001 (, 2010). Investors those who were hurt can never be made totally whole once again after the terrible experiences of Enron.
Impacts on the United States and Communities
Political parties, such as the Bush administration, who accepted contributions from Enron, were finding themselves in positions where returning the funds to Enron or donating them to a charitable. Enron also affected the United States in several important ways. If anything positive can be said about the Enron scandal, it is that the scandal itself heightened awareness of the importance of integrity in Accounting and business in general, and led to the creation of new safeguards to make sure that something like this would not happen again, or at least not to the full extent of the Enron damage.
Enron cynically and knowingly created the phony California electricity crisis of 2000 and 2001. Between 30 percent and 50 percent of California’s energy industry was shut down by Enron a great deal of the time, and up to 76 percent at one point, as the company drove the price of electricity higher by nine times (Corporate Narc, nd).
Impacts on Other Stakeholders
The Enron scandal also harmed other stakeholders. For example, Enron top managers pressured Arthur Andersen to certify maximum-risk; questionable accounting practices in part to retain their consulting business and, by acceding to this pressure, Arthur Andersen won huge contracts in the short run however ultimately lost their professional credibility and client base. Some investment banks such as Citigroup, J.P. Morgan, and Merrill Lynch made over $200 million in fees from deals that helped Enron and other energy firms boost cash flow and hide debt, and, by failing to exercise their own adequate due diligence, they multiplied the harm done to other stakeholders. Citigroup and JP Morgan Chase in particular appeared to have significant amounts to lose with Enron’s fall.
Thousands of aggrieved employees, investors, and other stakeholders were waiting to find out what punishment will be meted out to those who covered up Enron’s true financial position so successfully for so long. Three individuals that participated in the various frauds that were committed by Enron included the former president and CEO of Enron, Jeffrey Skilling; former chief financial officer in charge of LJM, Andrew Fastow; founder, former chairman, and CEO, Kenneth Lay. At first, in 2002, Enron’s former chief financial officer, Andrew Fastow, and three other current and former Enron executives exercise their Fifth Amendment right not to testify at a congressional hearing. He was charged with securities fraud, wire fraud, mail fraud, money laundering, and conspiracy. It is alleged that Fastow and others devised a scheme to defraud Enron and its shareholders (, 2006). Fastow, his wife Lea Fastow and nine other former executives faced 31 more charges and 98 counts of fraud and they were also indicted on a host of fraud, insider trading, and other counts (Associated Press, 2006). Andrew Fastow pleaded guilty to two counts of conspiracy. The plea called for a 10-year sentence and his aid in targeting former top Enron executives Kenneth Lay and Jeffrey Skilling. Lea Fastow pleaded guilty to filing false tax forms. Finally, in March 2006, Fastow had already pleaded guilty and faced up to 10 years in prison on two counts of conspiracy.
Lay and Skilling went on trial for their part in the Enron scandal in January 2006 in Houston. Skilling faced 31 counts ranging from fraud to lying to auditors for allegedly lying about Enron’s financial state. Lay faced seven counts of fraud and conspiracy for allegedly perpetuating the scheme. After six days of deliberations, on May 25, 2006 a verdict was reached in the Houston trial of former Enron chiefs Kenneth Lay and Jeffrey Skilling. Skilling was convicted of 19 of 28 counts of securities fraud and wire fraud and acquitted on the remaining nine, including charges of insider trading, making him the highest ranking former executive charged in the collapse of Enron. He was sentenced to 24 years and 4 months in prison for his role in one of the biggest corporate scandals in U.S. history (, 2006). Lay was convicted of all six counts against him, including conspiracy to commit securities and wire fraud and he faced a total sentence of up to 45 years in prison. However, before sentencing was scheduled, Lay died on July 5, 2006 due to a heart attack (, 2010).
Lessons from the Enron Case
In the new economic, the Enron scandal has been being the morality lesson. The case will teach executives and the American public the most important ethics lessons. The first lesson it that both individuals and organizations or firms should only earn money by providing goods or services that have real value in the new economic. Moreover, executives who are paid too much can think they are above the rules and can be tempted to cut ethical corners to retain their wealth and perquisites. Every firms need to demonstrate that they have eliminated all off-books accounts which distort the public’s understanding of the financial health of the organization and they should to pledge that they will not suspend the company’s code of conduct, or at least report to the public when they do. In order for companies to prevent an Enron-like scandal, there needs to be supervision over managers and executives as they exercise their own business judgments about what is in the best interest for an organization.
Kirk Hanson (2002), executive director of the Markkula Center for Applied Ethics, explained that the Enron scandal “demonstrates the need for significant reforms in accounting and corporate governance in the United States, as well as for a close look at the ethical quality of the culture of business generally and of business corporations in the United States”. Due to the accounting frauds that occurred in the Enron scandal, several accounting firms should reorganize their employees towards remaining loyal to the ethical standards demanded by the SEC. In order for companies to prevent an Enron-like scandal, there needs to be supervision over managers and executives as they exercise their own business judgments about what is in the best interest for an organization. On the other hand, when accounting firms have been moving to sever in both auditing and consulting services for their consulting businesses, the SEC should probably adopt additional disclosure requirements. Government regulations and rules need to be updated for the new economy, not relaxed and eliminated.
Looking at the Enron scandal from the retrospective viewpoint of history, essentially most of the problems faced by Enron derive from the immoral and unethical actions taken on by the board of directors in their attempt to achieve personal profits. The Enron scandal changed the lives of everyone in America and perhaps just as importantly, it forced everyone to look at themselves and fully realize the consequences of reckless greed and the breakage of laws on a whim. Most of individuals and organizations had been receiving proper punishment and lessons for their relevance.

Woodrow Wilson’s Scandal

Woodrow Wilson was the 28th president of the United States. Wilson was born on December 28th, 1856, he was an American scholar who was best remembered for leading the United States into World War I. Woodrow was born into a religious family and also very well-educated. In 1885 future President Wilson married his first wife, Ellen Louise Axson. Ellen was the daughter of a Presbyterian minister. Wilson and Axson met at her father’s church in Rome, Georgia, they were instantly attracted to each other, together they shared a strong religious belief and an even stronger passion for arts and reading. A year into Woodrow’s presidency, Ellen succumbed to kidney failure brought on by Bright’s disease. Bright’s disease is involving chronic inflammation of the kidneys.

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The main individual involved in Woodrow Wilson’s engagement/affair was Woodrow Wilson who was the 28th president and was born in 1856. Ellen Louise Axson who was born in Savannah, Georgia, graduated from Romeis Female College and was recognized for her artistic ability, she had 3 children and one died in 1905, then Axson died on August 6, 1914. Woodrow married Ellen Axson and had 3 children, Axson died then a year later after her death Wilson married Edith Galt.Galt was married to Wilson in 1915 and believes to be a descendent of Pocahontas. Wilsons affair started in his marriage with Ellen and went through his marriage with Edith. Woodrow had an affair with Mary Allen Hulbert. Hulbert met Wilson when he showed up at her door and said he was on a mission of national urgency.
This scandal has many facts to prove what has happened. “It was during Wilson’s tenure at Princeton University that Ellen found herself in the role of the betrayed wife” (Wilson – A portrait). During this time Ellen had sent Wilson alone to Bermuda while she stayed home to watch after the children. “Wilson was absolutely devastated by Ellen’s death she had been his greatest emotional support. And now suddenly she was taken away” (Wilson – A portrait). Before Ellen passed away she was always concerned with her husband’s well being, she had the family physician make a promise to her to always make sure to look after Wilson when she no longer could. “Wilson wandered alone through the White House. He was heard by his staff to mutter one phrase, again and again “My God, what am I to do?” (Wilson – A portrait). Wilson wanted to love and support a strong woman like Ellen. “Wilson was not a widower for long. He met and married Edith Bolling Galt,… in December 1915” (Woodrow Wilson marries Ellen Axson in Savannah, Georgia). The couple was introduced by Wilson’s cousin and a mutual friend. In 1916 when the presidential campaign started to fire up, many of the advisors for Wilson worried that his marriage to Edith so soon after his first wife’s death would become a political responsibility. “Edith Bolling Galt, with whom he was in love, and would soon marry” (An Honorable Affair). Edith was always at Wilson’s side but her presence irritated and frustrated Wilson’s advisors. “..she was accused of signing Wilson’s signature without consulting him, though she insisted this was not the case and blamed the accusations on her husband’s political opponents” (Woodrow Wilson marries Edith Bolling Galt). In October of 1919 Wilson suffered a stroke while touring the nation to promote his plan for the League of Nations, the League of Nations was an international organization designed to prevent any further conflicts like World War I. During Wilson’s recovery from the stroke Edith consumed the role of “steward”, screening his mail and official papers. “Hulbert and Wilson met in 1907 in midwinter on the island of Bermuda. She was 44 and temporarily alone, on her yearly escape from a loveless marriage in Massachusetts. Wilson was 50, then president of Princeton University, also vacationing alone, decompressing from a grueling fight with university trustees and a popular dean over the disposition of private endowments to the graduate school. Ellen, was back in New Jersey, ailing, beset by a depression that strained their marriage” (An Honorable Affair). In Bermuda the bougainvillea, a flower, was in bloom. Bermuda was “the setting for an affair,” Hulbert owned Shoreby, a huge, estate on the island. Hulbert entertained governors and captains of industry like Mark Twain. She was everything the Princeton president was not, vivacious, free spirited, and fun – loving. Hulbert was to have said; if any letters are to exist they would only be from Wilson and give him a bad reputation. Wilson was said to have been a virgin until his first marriage at 28. His long face and glasses gave him a look of impossible correct thinking, and the high starched collars and stovepipe hat in which he was frequently photographed in. Wilson seemed more modern but also unapproachable. “The story of the alleged love affair, more or less, died with her” “Dearest friend” is how the married Woodrow Wilson addresses his most ardent letters to Hulbert. “With infinite tenderness” is how he signs them. “He was smitten” (An Honorable Affair).
The time of this affair ranges from 1885 to 1961. In 1885 Wilson married Ellen Axson, although they both became instantly attracted to each other they did not marry until 1885, because Ellen was unwilling to leave her heartbroken father. 27 years later, Wilson became president and Ellen became the 28th first lady; of those who knew Ellen in the White House they described her as “calm and sweet, a motherly woman, pretty, and refined” (Ellen Axson Wilson). In 1914 Ellen died at the age of 54, it was still the Victorian Age. Doctors didn’t share any prognosis they didn’t know of with the patient or the patient’s family, but Dr. Grayson knew Ellen, she was a “steel magnolia” who demanded the truth. A year after Ellen’s death Wilson married Edith Galt in 1915. “Edith, who claimed to be directly descended from Pocahontas, was the wealthy widow of a jewelry store owner and a member of Washington high society” (Woodrow Wilson marries Edith Bolling Galt). In 1916 Wilson had an affair with Mary Allen Hulbert. “Theirs may have been the most proper and dignified and discreet and downright honorable illicit affair in history. Hulbert, the woman in the hotel room, was said to have possessed compromising letters that attested to a lengthy extramarital dalliance between herself and Wilson” (An Honorable Affair). 1919, Wilson had suffered a stroke. 8,000 miles in 22 days had cost Wilson his health, Wilson had just cut his tour short of the country to promote the League of Nations. Wilsons suffered constant headaches, collapsing from exhaustion in Colorado, he managed to return back to Washington to suffer a near-fatal stroke on October 2nd. Wilson left office in March of 1921, he and a partner established a law firm, Wilson died at his home on February 3, 1924 at the age of 67. Woodrow was buried in the Washington National Cathedral and he was the only president to be buried in the nation’s capital.
Circumstances surrounding this case are results of an affair between Woodrow Wilson and Mary Allen Hulbert. “That a serious sex scandal would have been devastating to Wilson’s presidency, and eroded his moral authority at a critical time in history” (An Honorable Affair). Hulbert said that any letters that could possibly exist would only hurt Wilson’s credit and further burnish his good name. “When rumors of an affair initially surfaced during Wilson’s first presidential campaign in 1912, his opponent, Teddy Roosevelt, peremptorily dismissed them: “You can’t cast a man as a Romeo when he looks and acts so much like an apothecary’s clerk” (An Honorable Affair). Wilson had an eventful eight-years of presidency, the gossip of Mary Hulbert then known as by her married name, Mary Peck, escalated. “…, the president’s second wife, tens of thousands of his personal papers became available for publication by the Liberty of Congress” (An Honorable Affair). These papers, Hulbert sold to an official biographer, long after Wilson passed.
All along “There had long been rumors to that effect. Hulbert and Wilson had long denied them. But now there was, apparently, an offer on the table” (An Honorable Affair). This rumor was never proven because Mary Hulbert wouldn’t talk, Ms. Hulbert claims that the only letters that could possibly be found would be the ones that Wilson sent to her.

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The government was affected in many ways. “…enjoyed having her sit in the Oval Office while he conducted business, which led to accusations that she had undue influence over who was allowed access to the president” (Woodrow Wilson marries Edith Bolling Galt). At this time Wilson was recovering from his stroke, Galt assumed the role of looking after Wilson, screening his mail and official papers. ” In their first year she convinced her scrupulous husband that it would be perfectly proper to invite influential legislators to a private dinner, and when such an evening led to an agreement on a tariff bill, he told a friend, “You see what a wise wife I have!” (Ellen Axson Wilson). The Wilsons preferred to being without an inaugural ball and the First Lady’s entertainments were simple, but her disorganized feelings made her party’s successful. “The story of the alleged hotel room bribe appeared in the 1925 series of memories Hulbert wrote for the Liberty magazine, a year after Wilson’s death. When it was published, there was a one-day furor in Congress. Rep. Frank Reid, an Illinois Democrat, introduced a resolution demanding an investigation” (An Honorable Affair). If Hulbert would have been right there had been much effort to give up on an innocent man and underestimate the Constitution for political gain.
“During this time he would abandon his lifelong caution, initiating a series of moves that would lead to his resignation from Princeton” (An Honorable Affair). This would cause a political career that would lead him first to the governorship of New Jersey and then to one of the great presidents in American history. “Wilson lost stature as an academic administrators but gained a national reputation as a fighter for intellectual freedom and an enemy of the monied elite” (An Honorable Affair). Speaking before the next graduating class when his letters indicated a growing passion for Hulbert, he told the graduates that there are things one does for duty and things one does for joy.
Had President Wilson not met Edith Galt and had been defeated in the 1916 re-election, Wilson might have married Mary Hulbert. But for a presidential candidate to have acknowledge any serious intentions toward her, a divorce, would have been, social and political suicide.”The story of her alleged love affair, more or less, died with her” (An Honorable Affair). Edith Wilson may never have been able to read the letters her husband wrote to Hulbert but in her last years she told Wilson’s scholars Arthur S. Link and David W. Hirst that there probably wasn’t much of anything in them. For the rest of Edith’s life she was dedicated above all else to preserve her husband’s image of greatness. ” As the 1916 presidential campaign heated up, many of Wilson’s advisors worried that his whirlwind courtship and marriage to Edith so soon after his first wife’s death would become a political liability” (Woodrow Wilson marries Edith Bolling Galt).
“A man and a woman loved and respected each other. They did not permit whatever passion they shared to destroy marriage. What happend, happend. They took it it to their graves. Whatever degree of intimacy they enjoyed, the details should remain — as one might argue these matters should remain — completely, eternally, gloriously private” (An Honorable Affair). Hulbert always found men with agendas, and politicians more attractive but she always denied it. It was said by Gene Weingarten that Wilson and Hulbert loved each other and that the relationship they had was a mystery to Wilson’s presidency. Weingarten also had the question of “But were they lovers?” (An Honorable Affair). When the married Wilson addressed his letters to Hulbert it would start with “Dearest friend” and signed “With infinite tenderness”. Wilson told Hulbert he missed her when she was not in Bermuda while he was. “Yet she must have instinctively realized that Wilson’s secret romance had been restorative and life enhancing to him and that, she, too, owed a debt of gratitude to Mary Hulbert” (An Honorable Affair).

Parmalat Accounting Scandal | Summary

The Parmalat Accounting Scandal
1. What were the events leading up to the Parmalat accounting scandal and ultimately the revelation of the accounting fraud and the reasons behind the scandal?
Evolving from a small dairy shop into an international concern, Parmalat appeared to be a gigantic and stable dairy producer. At some point in time, it may well have been gigantic and stable, but in December 2003, shocking news was broken to Parma, Italy, and the world at large. Parmalat was no longer a success as it once may have been, and it was bankrupt, and had been bankrupt for several years without this ugly truth being exposed. The truth had apparently been concealed due to a number of people being at least somewhat aware that something was amiss with transactions on the books, but had not spoken out. Through the years that Parmalat was going bankrupt, there were several events that took place before Parmalat’s condition was finally exposed. To begin with, as early as 1990, there were signs that Parmalat was in debt. In accordance with what has been uncovered, Parmalat’s fraudulent activities are said to have ‘taken off’ in 1990. This was when their stock went public, and reflected the need for a big company like Parmalat to perform in the international market so that their performance improved and met investor expectation (Family Arrests in Parmalat Scandal, 2004).

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The following year [1991] the Tanzis purchased Parma Football Club of which Tanzi’s son, Stefano, was president, and also was Parmalat board member. With this purchase, the football club rose to fame quickly, but faced large losses that recorded a deficit of over €77m in 2002. According to investigations, Parma Football Club was the first asset to be sold[1].
Another set of purchases that went along with purchasing the Parma Football Club included Tanzi buying up his competitors. Once he had established Parmalat Milk in the global market, his financial ventures proved to be devastating. This included his family’s financial interest in football and tourism, as well as his failed attempt to outdo Belosconi when he purchased a TV network, Odeon TV. At this point, Parmalat’s finances were a mess.
Purchasing Odeon TV Network was a disaster as Tanzi had to sell the network off for a around £30m. From this point on though, it is said that Parmalat still progressed in spite of its major losses. This was largely achieved through altering the books and attaining bank loans and investments against falsified figures.
Parmalat had spent €130 million on Odeon TV, but it collapsed within 3 years. In order to prevent bankruptcy at this point, Parmalat had to sell itself to a company that was already listed on the Milan stock exchange. This helped to produce €150 million from external investors, and paved the way for Parmalat to be in public view in 1990. It also enabled them to patch up some of its accounts[2].
It is thought that Parmalat began altering its books in 1993. If Parmalat had not ‘cooked’ its books it would have registered financial losses every year. However, they registered profits, which meant that they would still be viewed as a viable organization and one that was worth investing in. Therefore, they managed to avoid being suspected of any losses and attracted much investment.
Parmalat managed to cover losses through a combination of fictitious transactions and aggressive acquisition. This commenced in 1992, when Parmalat started ‘snapping up’ various companies in Argentina, Italy, Brazil, Hungary and the U.S. However, beyond 1995 it is thought that Parmalat was not able to fund its own needs. Yet it managed to prove to investors that it was registering significant profits. Perhaps, Parmalat’s profits registered were so convincing that the Bank of America alone, in 1997, provided $1.7 billion through bonds and private placements for U.S. investors. It also received $30 million or more as payments and commissions[3].
One of the main events that lead up to the Parmalat accounting scandal exposure includes the company changing its external auditor. In accordance with Italian law, an external auditor can be changed once in 9 years. So, in 1999, Parmalat, in accordance with Italian law replaced Grant Thornton with DeLoitte and Touche.
Grant Thornton was keen to keep working with Parmalat, which was a high profile company, as it would be good for their reputation still being developed. Therefore, they recommended that Parmalat spin off its travel and other businesses, and permit these to be under them [Grant Thornton]. Such an arrangement would be convenient to both Parmalat itself and Grant Thornton. Through such an arrangement Parmalat could then satisfy its new external auditors [DeLoitte and Touche] with Grant Thornton making illicit payments to Parmalat. This was made possible through the executives at Parmalat creating debts, and Grant Thornton creating false accounts from which Parmalat could be paid. Grant Thornton would then produce these records to DeLoitte and Touche who saw little wrong with them.
Numerous reports reinforce that Grant Thornton was aware of the ‘shell games’ that Parmalat was playing. One example of these games includes case of “cooking the books,” that reports the Cayman Islands subsidiary Bonlat claiming to have sold a large quantity of powdered milk in a span of one year to Cuba. It claimed that this quantity was sufficient to produce 55 gallons of milk for every individual on that island.
Another interesting event that lead up to Parmalat’s exposure of the accounting scandal was that Grant Thornton and Deloitte & Touche signed off on its increasingly surreal accounts. In return, it is said that they booked millions of dollars (Parmalat Scandal Deepens…, 2006).
In Parmalat’s final weeks, Deutsche Bank had taken on helping it work with Standard & Poor’s, hardly ten days before the exposure. Around this time, analysts around the world kept encouraging investors to continue purchasing its stocks and bonds.
In 1999, finance director Alberto Ferraris laid out a financing scheme. He managed this through a Delaware company known as Buconero. This was the Italian for “black hole,” that Citigroup established for Parmalat in 1999[4]. This company loaned out $137 million to a Swiss subsidiary of Parmalat. From here, the money was transferred to Parmalat companies. In return for Buconero’s service to Parmalat, it received a return of around 6%, in addition to $7 million in payments for Citigroup. Just like Parmalat made use of Buconero, it also used other offshore companies to dress up its debt till the time of its exposure[5].
Back in 1995, Parmalat also commenced concealing its debt through shell companies. It had been losing $300 million annually in Latin America, and decided to wipe this debt off the company’s financial records. It managed to do so by using 3 shell companies situated in the Caribbean.
The huge debt patchwork through the 90s began to raise concern by the end of the decade. Esteban Pedro Villar, expressed concern and filed an “early warning report” (Gumbel, 2004). This was regarding Parmalat’s Latin American set-ups. He had so many questions that his concerns were termed as “offensive and ridiculous” (Gumbel, 2004). Then suspiciously, Deloitte’s Parmalat business in Argentina was terminated. In response, Deloitte was silenced, and the accounts were certified.
In addition to the above concern that was demonstrated by a Deloitte partner in Latin America, there were others. On March 28th, 2003, Deloitte’s Maltese office raised questions regarding a $7 billion intercompany transfer they suspected was fictitious. Wanderley Olivetti, the Deloitte auditor in Brazil, raised such concern at the Milan office regarding Parmalat’s Brazilian accounts that the matter went straight to Deloitte’s chief executive in New York City at that time, Jim Copeland. However, Olivetti’s objections were mysteriously ignored and he was soon removed from dealing with the Parmalat account. Deloitte claims it behaved within its rights to remove any employee it wishes to, and this may be done for a number of reasons. It also said that the investigation of Parmalat started in October 2003, after Deloitte Italy had drawn attention to Parmalat’s financial dealings[6].
Following the suspicions raised by auditors, Epicurum was established in an attempt to show that Parmalat was due considerable amounts of money. However, this attempt to erase debt from the records at Parmalat failed, and the company admitted that it could not retrieve the amount they were due from Epicurum.
One of the key events that led to the exposure of Parmalat includes Tanzi and his son’s meeting with private equity firm Blackstone Group in New York. Tanzi and his son Stefano, one of the main executives at many of the family’s concerns, met with the Blackstone Group to discuss the sale of 51 percent of the family’s share in the food empire. It was in the course of conversation regarding preparation for the books to be opened to a transition team from Blackstone, that Tanzi and his son slipped out with the fact that the cash on hand was less than the 3 billion Euros registered in the company’s annual report. In addition to this, they revealed that there were barely any liquid assets. They even further stated that the company was in debt of about 10 billion Euros.
In addition to the suspicion that was brought against Parmalat through observations of its faulty accounting records, it is this final attempt to sell of 51 percent of family shares that marks the end of the road for Parmalat’s long trail of fraud.
The following facts presented date-wise are interesting to note as they map the path that Parmalat took since its inception till its end on 13th December 2003:

1961 Parmalat was founded by 22-year-old Calisto Tanzi. It was established as a small family food business that pasteurised and sold milk
1963 Parmalat introduces Tetrapak for packaging its ‘long-life’ milk products.
1980s Parmalat starts producing fruit juice, biscuits and ready-made sauce.
1990 Parmalat is listed on the Milan stock exchange.
Through the 1990s Parmalat grows after flotation. It then reaches into America, Brazil, few South American countries, and Eastern Europe and Australia. Tanzi aims at expanding a television network to outdo tycoon Prime Minister Silvio Berlusconi. However, his Odeon television foray flops and costs Parmalat £30m. Parmalat products also get sale in 20 countries.
1999 Parmalat‘s Bonlat subsidiary is established in the Cayman Islands.

11 November Crisis escalates when shares are hit after auditors raise questions regarding accounting of transactions with mutual fund Epicurum [a Cayman-based company linked to Parmalat].
15 November Alberto Ferraris resigns from the position of Finance director.
8 December Parmalat admits failure to recover €496.5m from Epicurum. This amount was needed to service debt.
15 December Tanzi resigns as chairman and CEO.
16 December Enrico Bondi takes control of the company.
17 December Bank of America denies the credibility of documents that affirm Bonlat account existence.
24 December Parmalat files for irregular administration operations.
27 December Italian authorities hold Tanzi in their custody in Milan [7]
29 December Tanzi admits to siphoning off €500m of company funds; Bondi takes charge as Parmalat administrator; US Securities and Exchange Commission bring charges against Parmalat for fraud.
30 December Tanzi is formally charged with fraud.

31 December Parmalat officials are arrested. These included former CFO Fausto Tonna and Luciano Del Soldato, and two officials from Grant Thornton’s Italian branch that audited Bonlat.

2. How was fraud perpetrated and how was the company able to continue with the fraudulent practice for such a long time?
Parmalat started out as many other businesses have. It was first a small dairy shop that slowly progressed and expanded its range of products, and finally turned into a large dairy producer that sold its products in several countries. From the early 1990s and onwards, Parmalat appeared to make significant progress, registering profits annually that was encouraging enough for investors to go on investing in the company. However, the truth of the matter was that these very investors were all being deceived due to Parmalat’s fraudulent practices largely perpetrated by Tanzi, top managers, the Parmalat’s external lawyer, Gian Paolo Zini, and two external auditors, Maurizio Bianchi and Lorenzo Penca. However, Zini, Bianchi and Penca claim that they are innocent[8].
Falsifying Credibility and Obtaining Loans and Investments:
Tanzi and all those who were allegedly involved in what is known to be one of the biggest scams, managed to borrow money from banks and even justified these loans for Parmalat through inflating revenues and fictitious sales in records between 1990 and 2003. They would also ‘cook’ its books in order to make debt vanish. They managed to do this through transferring debt to offshore ‘shell’ companies. In addition to covering up debt in this manner, there were other tactics that Parmalat resorted to (Parmalat Dream Goes Sour, 2004).
One of the other methods Parmalat used in order to cover their debt when it got too big to cover with the offshore shell companies included their invention of a bogus milk producer, supposedly situated in Singapore. Parmalat claimed that the company had supplied 300, 000 tons of milk powder to Cuba. This process included Bonlat, a Caymen Island subsidiary of Parmalat. Bonlat had a fictitious account in the Bank of America. This whole setup is so surprising that it has left many baffled as to how could such a fraudulent concept have been so successful and convincing when there was no concrete evidence in it[9].
Looking at the above example of the manner in which Parmalat faked transactions, it can be observed that the whole concept is such that it would have an ordinary person believe that it was authentic. Who would have suspected that any of it was fictitious, particularly because Parmalat had been a company in operation for several years? Ordinarily, one would suspect a company if it had a single concern that was being publicized. However, since Parmalat was projecting trade being conducted that included different physical points, there was little suspicion raised. There was the exporter in Singapore, the importer in Cuba, and Bonlat involved too in the Caymen Islands. The scheme thought up was very believable also because of the fact that Bonlat supposedly had an account in the Bank of America.
Different Roles Played to Conceal Debt:
Considering the debt that was actually showing up in the books, Parmalat had to have people who could cover it up well enough. This called for people on the inside as well as the outside to co-operate. External auditors, internal auditors as well as the top-notch individuals at Parmalat had to play their roles. One the inside, the books were maintained in the hands of trusted people. External auditors were told to keep this quiet. In this case, it was chiefly Grant Thornton that aided Parmalat in carrying out its fraudulent practice for so long.
Grant Thornton’s Role:
Grant Thornton played a major role in helping Parmalat continue its long-term fraudulent practice. It did so because it had a great deal to gain from Parmalat, and so did Parmalat have a lot to gain from Grant Thornton working with them.
Grant Thornton was and up and coming auditing firm that needed to be have sound clients in order to help its reputation in the market. Parmalat paid Grant Thornton considerable amounts to conceal debts. Quite obviously, this seemed to work for several years, and did so till 1999, when Parmalat were compelled to replace Grant Thornton with DeLoitte and Touche. This was necessary because by Italian law, an external auditor should be changed every nine years. Parmalat abided by the law, but was also proposed a way of continuing its fraudulent practice.
With DeLoitte and Touche taking charge as external auditors meant that debts would no longer be concealed, and Parmalat could be exposed. This could have happened in 1999. However, since Parmalat maintained Grant Thornton for its spin offs [its travel and other businesses], they were able to continue tricking everyone far and wide. This scheme was simple as well, and included another series of false records in order to show that Parmalat was still making profits annually. This was possible through illicit payments that these spin offs could make to Parmalat. Executives at Parmalat would create debts while Grant Thornton would create false accounts from which they could make payments to Parmalat. They would produce these records to DeLoitte and Touche, and they would be approved[10].
More Actions that helped to Conceal Parmalat’s Debt:
Basically, it could be asserted that it was the executives on the inside of Parmalat and the external auditors that were hand in glove; together they managed to conceal debt. However, in addition to this practice that lasted for many years, the innovative idea of offshore concerns enhanced credibility. In addition to this, the fact that Parmalat products were popular in several countries meant that fewer questions would be asked. Also, for a whole decade none of the auditors in any location raised any concerns. It is thought that the amount concealed by 1995 amounted to $300 million annually in just Latin America. By this time, debt was already enormous and it is obvious that a great deal was being done to conceal it well enough. However, since Parmalat’s increasing debt went unnoticed for a few more years, it is obvious that more action needed to be taken in order to make sure that it stayed covered. This meant that Parmalat had to transfer debt off its financial statements. In order to do this, it had to make use of ‘shell’ companies in the Caribbean. These companies had to show sales, and Parmalat would send them fictitious invoices in order to legitimize the sales. Parmalat would then make out notes to banks in order to show them that they were owed so much finance. Against these notes, Parmalat would be granted loans, as it appeared that the Parmalat was making profits. In order to make their debts disappear, Parmalat transferred its debts to its offshore subsidiaries that were based in tax havens (Parmalat Dream Goes Sour, 2004).
The Beginning of the End:
Parmalat had been making use of offshore shell companies until 1999. Parmalat shifted operations of its three offshore shell companies to Bonlat, in the Cayman Islands in 1999. This is thought to be the beginning of the end for Parmalat. At this point, debt was so high that it was becoming difficult to conceal it. Fictitious assets at Bonlat amounted to around $8 billion, which forced Parmalat to create a Cayman Islands-based investment fund, Epicurum, which would take over part of the fictitious credit. It was Epicurum that caught auditors’ attention as well as Italy’s stock market regulator [November 2003]. It was just a matter of a month before everything was exposed and the company officially was declared bankrupt[11].
Finally, it may be asserted that it was the auditors through which Parmalat managed to deceive everyone for so long with the help of top-level management at Parmalat. If Parmalat had not been able to get Grant Thornton to work in their favor along with their internal auditors and top-level management, the entire scam would not have been possible. This dates back to the beginning of the fraud when Parmalat first began to conceal its debt. If it did not have an external auditor on its side to conceal the large debt it incurred because family business and unnecessary purchases, Parmalat’s debt would have been in public view in the early 1990s. However, this was not to be due to a ring of people working to conceal debt. Though there were several people involved in making debt disappear off the records, it can be observed that it was the auditors that made each of Parmalat’s fraudulent schemes possible. This is true to say whether one looks at the debt covered in the earliest days of fraud or towards the end. The fictitious transactions with shell companies too were made possible due to the auditors who ‘cooked’ the books. However, it can also be asserted that the auditors were not solely to blame in making sure this fraud lasted for so long, as there had to be others in on these schemes too. This included key people of Parmalat such as the executives, its CEO, its internal auditors as well as external auditors and individuals at key financial institutions. In order for a fraudulent scheme to last as long as it did in the case of Parmalat, there had to be a whole ring of people involved, which also explains why it took such a long time and deep investigation to uncover all those were responsible for the scandal.
3. The role and the responsibility of auditors in preventing financial scandals and ensuring and upholding the principles of good corporate governance.
In organizations such as Parmalat and other large organizations where there are several shareholders and many people dependent on the progress of these corporations, executives and top-level managers have a responsibility towards them. Generally, it can be asserted that corporate governance refers to ways in which rights and responsibilities are shared between various corporate participants, the management and the stakeholders[12]. Governing corporations such as Parmalat consists of fixed processes, customs, policies, laws and institutions that impact the way it is directed and administered. These are processes that should have been conducted responsibly in order to make sure that Parmalat made progress. If Parmalat was facing debt, executives and all those concerned should have been honest and made sure that these debts were made known (Gumbel, 2004). This would have saved the organization in its earliest days of trouble. Therefore, it can be asserted that being honest and responsible in corporate governance is important.
It is important to assert that corporate governance also encompasses the relationships among the many participants involved in the process (the stakeholders) as well as the goals for which the corporation is managed or governed. The principal participants are the shareholders, management and the board of directors. In addition to these main players there are other stakeholders: employees, suppliers, customers, banks and other lenders, regulators, the environment and the even community[13]. This is because all these people and institutions are affected in one way of another by the actions and repercussions of a corporation and the decisions it makes.
In view of the many people that corporate governance impacts as in the case of Parmalat, accountability, fiduciary duty and mechanisms of auditing and control are of immense importance.
Responsibility of Auditors:
Auditors, whether they are external or internal auditors, have responsibility towards all those involved with a corporation. Particularly, it may be asserted that there are many individuals who are not directly involved with the operations of a corporation, but they may be dependent on its operations significantly. These are the kinds of people that really need to be protected, and auditors have a great responsibility towards them (Gunz and McCutcheon, 1996, 7-15).
To begin with, a very basic and generally stated duty of auditors is to make sure that a corporation’s operate efficiently, their records are maintained properly, and its taxes are handed in on time. Auditors generally offer these services to their clients, which include government, public and management accounting. In offering these services, their role includes preparing reports, analyzing, and verifying financial statements and documents for the purpose of providing information to their clients. By performing these tasks honestly and not concealing any information auditors fulfill their duties (Gunz and McCutcheon, 1996, 7-15). This is precisely what is required of them when they deal with huge corporations like Parmalat. The role of auditors would include exposing whether the corporation is actually making huge annual profits or whether they are concealing their debts[14].
In addition to the roles that auditors play in offering their services to corporations, other services they provide include financial and investment planning, budget analysis, information technology consultation, and limited legal services. However, these are services can only be carried out if they perform their fundamental duties responsibly. This is because the figurers that they provide after performing their fundamental tasks impact these additional processes. For example, if debts of a corporation are not presented accurately and annual profits are fictitious, how can an authentic and realistic budget be prepared? Therefore, it can be asserted that auditors cannot work and produce any realistic figures if they distort debts and profits made annually. In recent times, this is what has been occurring. Corporations hire auditors to check their statements. Somehow, these auditors have gotten involved in illegal behavior and have hidden debts and elevated profits. Based on these figures they helped in painting pretty pictures for the corporation’s reputation in the market. This is how Parmalat managed to remain in the global market for a long time without being suspected of having immense debt.
Having asserted the above, it is also important to consider the fact that in the US there are limitations imposed on auditors that investigate a corporation’s financial statements. Due to the fact that there have been corporate scandals that have involved auditors being involved, it is now illegal for an accounting firm that audits a corporation’s financial statements, to advise areas such as investment banking, legal matters, etc. of that firm. One exception to this prohibition is that auditors may provide advice on tax issues that would benefit the company (Young, 1997).
Forensic Auditing:
Having asserted the necessity of making accurate reports of financial figures regarding a corporation’s annual budgets or debts, it must be asserted that one major and specialized accounting practice is forensic accounting. Several public accountants specialize in this, as it is of growing importance in today’s world where corporate scandals appear to occur frequently.
Forensic accounting includes investigation and interpretation of white-collar crimes. This type of crime includes bankruptcies, securities fraud and embezzlement, and contract disputes. In addition to this, criminal financial transactions, such as money laundering, are also included in white-color crime. It can be asserted that auditors who specialize in forensic accountancy play an important role in preventing corporate scandals such as the one that took place with Parmalat. However, it should be remembered that auditors who do not specialize in forensic accountancy are no novices. This means that if there are any unusual entries and irregularities in records, any auditor should be to detect them, and this is why all auditors are said to have responsibility to report any irregularities[15].
Though auditors generally are able to detect any irregularities, those that specialize in forensic accounting make use of accounting and finance knowledge, law and investigative techniques. They use this combination in order to detect illegal activity in a corporation, and it is obviously a greater advantage to them as they are more specialized.
It is known that there are several forensic accountants that work in tandem with personnel from law enforcement departments during investigations. However, this occurs normally after a corporate scandal has been detected. Considering this, it might be a good idea for forensic accountants to work in this manner as part of regular and standard procedure in order to safeguard everyone involved with a corporation. If such a practice were adopted as standard procedure, it would become more difficult for financial scandals to take place. This is considerate of acknowledging that corporations usually appoint their own auditors. Auditing firms might be required to adhere to practices that would make regular procedures more thorough and transparent as a result[16].
Aside from considerations for current practices of audit firms and ones that could be included in order to prevent financial scandals, the general concept of internal and external auditors reviewing and analyzing financial statements of firms aims at doing the same thing.
Fundamental Responsibilities of Auditors:
It is the primary responsibility of internal auditors to make sure records are accurately maintained. These records are also checked for any form of irregularity, which may include things like mismanagement or even fraud.
Internal auditors are not only supposed to maintain records of financial figures, but their roles also encompass examining the firm’s operations with regard to finance and information systems, management, and internal controls. Examining these operations are important as they help to make sure that financial records are accurately maintained. In addition to this, these steps also examine the adequacy of controls to protect the firm against financial scandals (Gunz and McCutcheon, 1996, 7-15).
Further, it can be asserted that internal auditors have the responsibility of evaluating important areas of the corporation such as effectiveness, compliance with all standards and corporate policies and procedures, efficiency, laws, and government regulations.
Since there are so many types of operations to take care of in a corporation, there are areas of specialization for internal auditors as well. Some of these may include environmental, engineering, electronic data-processing, legal, insurance premium, banking, and healthcare auditors.
The reason for specialization in these areas is because there are technical procedures that need to be understood in order to evaluate things like efficiency and effectiveness. Having deeper understanding of individual industries helps internal auditors to evaluate a corporation’s operations more specifically (Bavly, 1999, 25-30).
Among the important steps that internal auditors may take towards better controls within a corporation, recommendation of better controls is high on the list of priorities for better auditing processes. An example of recommendations that internal auditors may make in a firm, internal auditors may help managers through co

Enron Accounting Scandal: Changes to SAS 99

The Enron accounting scandal is one of the most shocking nightmares in the profession’s history. Enron rises to success quickly after its establishment in 1985. However, despite attracting huge share prices, the company files for bankruptcy in December 2001 and its share value plummets from $92 to $0.67 within a span of one month. The question that most stakeholders still have is how such a huge company, one of the most promising in the United States, comes crumbling down overnight. The underlying problem in Enron’s case is the lack of sufficient accounting oversight to ensure that the figures executives post reflect a true and fair view of the company’s position (McLean & Elkind, 2003). Massive deregulation and the lack of an independent accounting firm to audit Enron’s books helps to keep the con going for years. Though the company starts failing in the late 1990s, it is not until late 2001 that the world realizes what is going on behind the scenes. Main players in the scandal including CEO Jeffery Skilling, Enron former CEO Kenneth Bay and innovative CFO Andrew Fastow are all convicted of insider trading and fraud related charges. Arthur Andersen LLP, the accounting firm that fails report Enron’s misrepresentation is closed and convicted for obstructing justice, though this conviction is overturned.

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The SEC works with a tight regulatory framework looking to prevent companies from pulling stunts like the ones in Enron’s case. However, there are loopholes that allow Enron to thrive. Among them is a mechanism that allows companies to influence the progress of their share values on the stock market. Mark-to-market accounting allows Enron to peg its share value on the market price, rather than the value reflected on its books(Collins, 2006)On top of this, allowing companies to hedge their stock using SPV’s in the balance sheet represents a failure in preventing companies from unfairly influencing the progress of their stock value. These are only basic aspects that Enron’s exploits, but there is a bigger safeguard of them all, an independent audit firm. Arthur Andersen LLP fails in its obligation to provide a true and fair view of Enron’s operations. This allows the company to continue its fraud over an extended period of time. At this time, rather than report to the board of directors, the audit firm directly reports to the company executives, which limits its independence significantly, as well as introduce a loophole in the mechanism that allows executives to perpetuate their own interests at the expense of the shareholders (McLean & Elkind, 2003).
Changes to SAS 99
Communication of potential fraud: SAS 99 improves look to ensure that there is greater oversight against corporate fraud. As a result, the reporting framework has been expanded to include more than just management. The board of directors and other stakeholders are now more engaged in the communication of fraud process (Thomas, 2002). Furthermore, the obligation of the independent auditor has shifted and they now cover a wider stakeholder scope, which means that offering information to management alone is not enough. Failure to provide a thorough breakdown of the audit to other stakeholders now amounts to a failed engagement.
Fraud risk factors: auditors heavily rely on information that they gather in the course of an engagement to make a decision about the nature of a company’s financial statements. However, revisions to SAS 99 means that they can now establish ways to detect fraud by assessing the audit environment. That is, auditors can rely on more than just the financial information that a company presents to determine whether or not there is any misrepresentation in the information sent to the public or board of directors.
Greater auditor independence: SAS 99 reviews what is expected of an independent auditor in the course of an audit engagement. The greatest transformation that occurs to SAS in this regard is to distinguish the role of management from that of auditors. Initially, there is a small line between the auditor and management to the extent that the auditors are allowed to have other interests that are connected with management. What this change in the standard does is to eliminate the conflict of interest by drawing a line between these two key stakeholder groups when it comes to preventing accounting fraud. Greater independence not only comes because of regulations, but also a greater scope in the number of stakeholders that auditors report to (Thomas, 2002).
Client’s illegal operations: SAS 99 does provide a new perspective when it comes to reporting illegal acts that the audit discovers are conducted by the client. Initially, failing to report these acts fell under the jurisdiction of criminal justice and was labelled as obstruction of justice. However, SAS 99 offers a fresher approach to the issue by outlining procedures and obligations of an auditor when it comes to reporting and handling perceived illegal operations by the client. Therefore, for the first time, the auditor does have a responsibility under accounting principles when it is suspected that there are illegal acts by the client.
Collins, D. (2006). Behaving Badly: Ethical Lessons from Enron. Dog Ear Publishing, LLC.
McLean, B. & Elkind, P. (2003). The Smartest Guys in the Room. New York: Portfolio Trade.
Thomas, W. (2002). The Rise and Fall of Enron. Journal of Accountancy. Retrieved from