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#accounting-fraud
3 articles
WorldCom and the $11 Billion Accounting Fraud
By the turn of the millennium, WorldCom was one of the largest telecommunications companies on earth — a sprawling empire assembled in barely a decade by a former milkman and basketball coach named Bernard Ebbers, who had bought up dozens of rivals to turn a tiny Mississippi long-distance reseller into a colossus that carried a huge share of the world's internet traffic and owned the famous MCI brand. Then the telecom bubble burst, revenues sagged, and the company faced an impossible problem: how to keep reporting the steady profits that Wall Street demanded when the underlying business was deteriorating. The answer, devised by its finance department, was breathtakingly simple and entirely fraudulent. Ordinary operating expenses — the fees WorldCom paid other networks to carry its calls — were quietly reclassified as long-term capital investments, the way a company might treat the cost of building a factory. With a few accounting entries, billions of dollars in costs vanished from the books and reappeared as assets, and the losses turned, on paper, into healthy profits. The deception eventually totalled some $11 billion, the largest accounting fraud yet seen. It was uncovered not by regulators or outside auditors but by WorldCom's own internal-audit team — a handful of people led by a vice-president named Cynthia Cooper, who pursued the anomalies in secret, often at night, against the resistance of the company's own chief financial officer. When they brought their findings to the board in June 2002, the company collapsed into the biggest bankruptcy in American history, its CEO was sent to prison for twenty-five years, and Congress passed a sweeping law that changed how every public company in the country keeps its books. This is the story of the fraud, the woman who exposed it, and the reckoning that followed.
Enron and the Most Innovative Company That Never Really Made Money
For six consecutive years, Fortune magazine named Enron the most innovative company in America. The Houston-based energy company had, the story went, transformed itself from a sleepy operator of natural-gas pipelines into a dazzling new kind of business — a trading powerhouse that bought and sold energy and almost anything else, light on physical assets and heavy on financial genius, the very model of the modern corporation. Its stock soared; its executives were celebrated as visionaries; its revenues, on paper, rocketed past $100 billion. And then, in the autumn of 2001, it all came apart with breathtaking speed. It emerged that Enron's reported profits were substantially an illusion, manufactured through aggressive and deceptive accounting; that the company had hidden enormous debts and losses in a web of hundreds of secretive off-the-books entities, some named after Star Wars characters; and that the 'innovation' the world had admired was, to a damaging degree, the art of making a company that did not really make money look as though it made a great deal. In about six weeks, Enron went from a $60 billion blue-chip giant to the largest corporate bankruptcy in American history to that point. Twenty thousand employees lost their jobs and, in many cases, their retirement savings, which had been tied up in Enron stock. Its auditor, Arthur Andersen — one of the five great global accounting firms — was destroyed in the fallout. The scandal sent executives to prison, prompted landmark reforms, and became the defining symbol of corporate fraud at the turn of the millennium. This article tells the story of how the most admired company in America turned out to be a confidence trick, and how the trick unravelled.
Wirecard and the €1.9 Billion That Never Existed
For years, Wirecard was a German success story almost too good to question. A digital-payments processor based outside Munich, it had risen from obscurity to become one of the most valuable companies in the country — admitted in 2018 to the DAX, the index of Germany's thirty biggest blue-chip firms, replacing a venerable bank. It was hailed as proof that Germany, too, could produce a world-beating technology champion, a fintech to rival Silicon Valley, and its share price soared to give it a value of around 24 billion euros. There was only one problem, and it was a fatal one: a large part of the company was fiction. In June 2020, Wirecard was forced to admit that 1.9 billion euros it claimed to be holding in trustee accounts in Asia — a sum representing the bulk of its supposed profits — could not be found, and, in the company's own startling words, probably did not exist. The admission detonated one of the largest accounting frauds in modern European history. The company collapsed into insolvency within days; its chief executive was arrested; and its chief operating officer, Jan Marsalek, vanished, fleeing the country and surfacing in the orbit of Russian intelligence. The most damning part was that the alarm had been sounding for years: the Financial Times, in a long and lonely investigation, had reported again and again that Wirecard's numbers did not add up — only to be attacked, sued, and investigated itself, while German regulators went after the journalists and short-sellers rather than the company. This article tells the story of the money that never existed, the reporters who refused to let it go, and how a country's pride blinded it to a fraud in plain sight.
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