Definition

Wikipedia defines accounting scandal as “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 revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates.”

Enron

Wikipedia defines Enron Corporation as “an energy company based in Houston, Texas. Prior to its bankruptcy in late 2001, Enron employed around 21,000 people and was one of the world's leading electricity, natural gas, and communications companies, with claimed revenues of $101 billion in 2000. Fortune magazine named Enron "America's Most Innovative Company" for six consecutive years. It became most famous at the end of 2001 when it was revealed that it was sustained mostly by institutionalized, systematic, and well-planned accounting fraud.”

On December 2, 2001 Enron filed for protection of bankruptcy under chapter 11. What was going on in the corporation is that they used partners to keep some of the $500 million debt off the books so it could still receive cash and credit to run their business. “If Enron had properly recorded the deals in fiscal 2000, its total debt would have been $14.4 billion – not the $10.2 billion is posted, according to congresstional investigators.” (Iwata 2) Although there were many people that were involved in the Enron Scandal, one person stands out as the “thread who binds all others together throughout Enron’s rise and fall.” (Moffett 1). That person was Kenneth L. Lay who was named CEO of the Enron corporation in February 1986.

WorldCom

Wikipedia defines WorldCom “MCI, Inc. was an American telecommunications company that was headquartered in Ashburn, Virginia. The corporation was the result of the merger of WorldCom, formerly known as MCI Communications, and used the name MCI WorldCom followed by WorldCom before taking its final name on April 14, 2003 as part of the corporation's emergence from bankruptcy.”

WorldCom acquired 60 companies and when you acquire that many companies you tend to use a different type of accounting called pro forma accounting instead of the standard accounting. Pro forma accounting is accounting that is not standard, but designed to explain how the company is performing. “what happened here is in the pro forma reporting, the real accounting got lost,” states Scott Cleland, a telecom analyst and CEO of the Precursor Group, an investment research company (Cleland 3). He also breaks down WorldCom’s real and not real profits, “there was $3.8 billion worth of real costs, which they essentially mortgaged. They put into debt. And they represented to people that they were actually profitable when, in fact, they had borrowed those profits. Those were not real profits” (Cleland 3).

Jeffrey Richie
April 2006