Accounting scandals

Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations.

In public companies, this type of "creative accounting" can amount to fraud and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States.

In 2002, a wave of separate but often related accounting scandals became known to the public in the U.S. Large Fortune 500 companies such as Enron and WorldCom were found to have been cooking the books to improve their financial figures

Several leading public accounting firms – Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers, and others – have admitted to or have been charged with negligence in the execution of their duty as auditors to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies' financial status. In several cases, the monetary amounts of the fraud involved are in the billions of dollars USD.

Outcomes

The Enron scandal has so far resulted in the criminal conviction of the Big Five auditor Arthur Andersen, and that firm has had to divest itself of its non-US partners. In July, 2002. WorldCom filed for bankruptcy protection, in the largest corporate insolvency ever.

The scandals gave investors and regulators a rude awakening concerning the reality that companies were hiding the ugly truth between the lines of financial data. In order to rally investor confidence, the Sarbanes-Oxley Act of 2002 was created. This act of Congress created policies to protect investors against future incidents of corporate fraud. 

These scandals have reignited the debate over the relative merits of US GAAP, with its rules-based approach to accounting, versus International Accounting Standards and UK GAAP, which favour a principles-based approach. The Financial Accounting Standards Board (FASB) has announced it intends to introduce more principles-based standards. More radical means of accounting reform have been proposed.

DEVELOPING VOCABULARY

1. Complete the sentences with words derived from ‘ethics’.

1) ……. are moral beliefs about what is right and wrong.

2) A company is behaving ……. if it pollutes the environment.

3) Working conditions here are very poor; the organization ‘Ethics in Business’ blames ……. employers and agencies for exploiting the workers.

4) The television industry should adopt a ……. ……. ……. on violence in its programmes.

5) ‘…… behaviour is good for business,’ says Carol Marshall, vice president for ethics and business conduct. ‘You get the right kind of employees, and it’s a great draw for customers.’

6) This action is ……. questionable.

7) The ……. of some people in business seems to be to maximize profit and it doesn’t matter how.

2. Derive nouns from the following adjectives, make use of an appropriate suffix from the list: - (i)ty, -ence/-ance, -ism; use the nouns in the sentences.

objective, (in)competent, confidential, different, professional, diverse, independent, important, legal, (in)compatible.

3. Complete the table; refer to a dictionary if necessary. The first has been done for you.

Noun: wrongdoing	Noun: wrongdoer	Verb: (he/she …-s)	Noun: thing made or done in the crime	Related adjective
counterfeiting	counterfeiter	counterfeits	a counterfeit	counterfeit
	embezzler
	faker	fakes	a
fraud		defrauds	a
		juggles	-
		falsifies
	money launderer		-	-
	briber/ bribe taker	bribes / takes a bribe

4. Match the names of ethically dubious business practices with their definitions.

1) insider trading/ dealing 2) price fixing 3) market rigging 4) creative accounting 5) cooking the books 6) money laundering 7) spending money on lobbying

a. misleadingly optimistic, though not illegal, forms of accounting, using ambiguities in the regulations; b. paying to people who try to persuade politicians to pass laws favourable to your particular industry; c. the practice of falsifying financial records and statements with the intention of misleading others on the financial performance or financial position of an entity; d. dealing in company securities with a view to making a profit or a avoiding a loss using the information that is not publicly available; e. the practice when a group of companies in the same market secretly agree to fix prices at a certain level, so they do not have to compete with each other; f. the practice of moving money which has been obtained illegally through banks and other businesses to make it seem to have been obtained legally; g. the practice when a group of investors work together to stop a financial market functioning as it should, to gain an advantage for themselves

5. Read the following descriptions and answer the questions using the expressions from the previous activity.

1) Two ferry companies with ferries on the same route secretly meet in order to decide the prices they will charge next summer. What are they guilty of?

2) A company that wants to keep its share price high makes secret payments to investors who buy its shares. What are the company and the investors guilty of?

3) A rich businessman lends $1 million to a politician so that he can buy a house. The politician pays no interest on the loan and does not mention it when asked to give a complete account of his finances. Which word, used especially about politicians, do people use to talk about this?

FOCUS ON FUNCTIONS

‘Cause and Effect’ Relationship

1) Verbs and verb phrases

a) saying that A causes B

be responsible for, be the cause of, bring about, cause, give rise to, precipitate, produce, trigger

A	→	B
The sharp drop in interest rates	has led to	benefits for many small companies.

b) saying A is one of causes of B

be a factor in, contribute to, facilitate, have a hand in, influence, play a part in, underlie

c) B is caused by A

arise from/out of, be attributable to, be due to, be the result of, can be ascribed/

attributed to, derive / follow / stem from, result from

B	←	A
Many benefits	have resulted from	the drop in interest rates.

2) Clauses of cause

a) Conjunctions: because, as, since

B	←	A
Small companies can invest	because	interest rates have fallen.

2. Participial clauses

A → B

Having improved quality, we noticed a sharp increase in orders.

3) Prepositions and phrases

because of, due to, owing to , on account of, as a consequence of

B	←	A
Due to	high interest rates	the drop in interest rates.

4) Sentence connectors

therefore, so, accordingly, consequently, as a consequence/result

A	→	B
Interest rates are down.	Therefore,	we can consider new investments

1. Establish a cause and effect relationship in the following sentences. Mark cause with A and effect with B. Then reverse the order of the cause and effect by using the verb given in brackets. The first has been done.

A B

1) Poor economic policy has led to a severe crisis in manufacturing. (result from)

A severe crisis in manufacturing has resulted from poor economic policy.

2) The fall in inflation stems from strict government control of the money supply in the past five years. (bring about)

3) Lower taxation contributed to a spending boom at the end of the last decade. (result from)

4) Higher government spending is partly attributable to higher unemployment. (lead to)

5) Considerable social changes were brought about by new technology. (cause)

6) Lower tax revenue arises from increased numbers of business failures. (give rise to)

7) Retail price rises result from increased energy costs. (result in)

8) Major spending will lead to substantial improvements in housing. (result from)

9) The report has triggered a fierce response from the president. (produce)

2. The following text contains four phrases of cause; find them. Then rewrite the text, changing each phrase of cause into a clause of cause. An example:

Because of a poor harvest the cost of grain is higher this year.

Since the harvest has been poor, the cost of grain is higher this year.

The British engineering company Harrow tried, unsuccessfully, to sue a German competitor, Bauer, for breach of copyright. However, the court rules that Harrow had never correctly registered the patent of the item concerned. On account of Harrow’s mistake, the product had never been patented. Because of the non-existence of the patent, Bauer did not contravene (преступать) any law of ownership. As a result of the court’s ruling against Harrow, the company had to pay legal fees. Also, due to the publicity surrounding the case, Bauer expect sales to benefit.

3. Rewrite the following sentences, using participial clauses of cause as in the first sentence.

1) The company cut the workforce and improved its profitability. →Having cut the workforce, the company improved its profitability.

2) Since we had been invited to the party by the Chief Financial Officer himself, we could hardly refuse to go.

3) As I had no financial track record, it was hard to obtain a bank loan to start my own business.

4) As he’s been unemployed for over two years, he found it difficult to get work. 

5) We merged with our competitor and managed to cut costs.

6) They were accused of overstating the profits and had to appear before the court on a charge of falsifying financial records.

7) I invested $10,000 in a China fund because I hoped that the market would go up/

8) As he wasn’t an experienced negotiator he made too many concessions.

4. Think about the national economic policy in your country. Write 5 sentences containing cause and effect relationship.

LISTENING 1

1. Discuss the following questions

● Why should companies be ethical?

● Why should companies have written codes of ethics?

2. Now listen to the interview to learn what Claire Bebbington, External Affairs Manager for a division of BP (British Petroleum), thinks about these issues.

Make sure you know the meanings of the following words from the interview:

commitment n – strong belief that something is good and that you should support it

get into hot water – get into trouble

facilitate v (facilitation n) – make it easier or possible for something to happen

nepotism n – the practice of using your power and influence to give jobs or unfair advantages to people in your family instead of to people who deserve to have them

3. After listening to the first part decide whether these statements are true or false according to the interviewee.

1) The issue of ethics is simple.

2) If a company puts its code of ethics in writing, it is more likely to act on it.

3) Following up a code of ethics is difficult.

4. After listening again to the first part of the interview, complete the two extracts below.

1) Firstly, it makes a ……… to certain good ……… and so it’s a way of ……… the importance of good behaviour to all of its ……… and ……… .

2) If you express these things in writing, especially, then you will be held accountable for them.

5. Listen to the second part of the interview and say which ethical dilemma Claire Bebbington addresses and what examples she gives to illustrate the question under the discussion.

6. Give a short summary of Claire Bebbington’s ideas in 5-7 sentences.

LISTENING 2

You are going to watch a video about economic crime.

1. Before you watch

a) make sure you know the following words

thief = burglar = robber n - вор, грабитель

murderer n - убийца

forger n – фальшивомонетчик

smuggler n - контрабандист

swindler = trickster = crook n – мошенник

be blinded – быть ослепленным, обманутым

slaughter house n – бойня, мясокомбинат

offer on favourable terms - предлагать на выгодных условиях

dubious a – сомнительный

white-collar a – канцелярский, конторский

b) discuss with your partner the features of economic crime that distinguish it from other types of crime; choose from the list given below.

● it involves violence

● it is mostly committed by white-collar workers

● it causes people physical harm

● its purpose is material gain

● it involves stealing physical objects

● it involves cheating people

● it is sometimes hard to recognize as crime

● it is often committed in the course of normal business activities

● it causes damage that is not always obvious

2. Watch the video to check your ideas.

3. Watch the video again to answer the following questions about the details.

1) Why is it hard to catch white-collar criminals?

2) Who are ‘small time crooks’? What example of their activities is given in the video?

3) What are the details of the fraud involving meat transaction with the slaughter house?

4) What example of a trickster cheating the state and its citizens is given in the video?

5) Why is it said that economic crime undermines business morality? Explain by using the example of the unethical butcher from the video.

6) What conclusion is drawn in the video?

SPEAKING

1. Prepare oral summaries of the news articles from the “Supplementary reading” section reporting on fraudulent activities involving accounting.

2. Get ready to participate in a seminar on the topic “Accounting Ethics”. Contribute to the discussion by preparing a short presentation on one of the following issues:

● Business ethics is a topical issue

● Codes of ethics in accounting

● Accounting Ethical Standards

● Accounting scandals and their implications for the accounting profession

WRITING

1. Cloze test. In the following text about every eighth word is deleted; supply the missing words which can be any notional or functional item. Get ready to explain the phenomenon described.

Cook the Books is a buzzword describing … activities performed by corporations in order to … their financial statements. Typically, cooking the books … augmenting financial data to yield previously non-existent … .

Examples of techniques used to cook the … involve accelerating revenues, delaying expenses, manipulating pension … and implementing synthetic leases.

During the first couple … years of the new millennium, large Fortune 500 … such as Enron and WorldCom were found to …   been cooking the books to improve their financial … . The resulting scandals gave investors and … a rude awakening concerning the reality that … were hiding the ugly truth between … lines of financial data.

In order to rally … confidence, the Sarbanes-Oxley Act of 2002 … created. This act of Congress created policies to … investors against future incidents of corporate fraud. 

fraudulent, falsify, involves, earnings, books, plans, of, companies, have, figures, regulators, companies, the, investor, was, protect

2. Prepare a written summary and abstract of the article ‘Accountants seek to stay glamorous” (see Supplementary reading).

3. Write an essay of about 200 words to prove particular importance of ethics and integrity for the accounting profession.