Corporate fraud continues to be a hot topic in the United States with high profile indictments of company executives, the loss of billions of dollars of shareholders’ money and, in some cases, the loss of thousands of jobs. This news story covers some of the key developments to date, providing the background for our centre-page feature on revenue recognition.
The successful conviction for fraud and conspiracy of Enron's two top former executives is, perhaps, the most celebrated example of the US authorities' determination to root out those responsible for corporate malfeasance. After a four-month trial, the company's founder Kenneth Lay was found guilty of all six charges of conspiracy, securities and wire fraud against him in the corporate trial and all four charges in a separate, personal banking trial. Former CEO Jeffrey Skilling was found guilty of 19 out of 28 charges against him. Sentencing has been scheduled for September with Lay facing a maximum prison sentence of 165 years, while Skilling faces a potentially larger sentence of 185 years. It seems likely that both men will spend the rest of their lives in jail.
According to one commentator, Enron typified "multiple gatekeeper failure", that is, a failure to ensure corporate governance by directors, auditors and lawyers. However, while it may be the most high-profile case, Enron is only one of many. Two other recent examples are:
Computer Associates: earlier this year, two former executives of what is now the world’s fifth largest software company pleaded guilty to eight counts of securities fraud and obstruction of justice. Sanjay Kumar, former chief executive, left the company in June 2004, just two months after irregularities had come to light regarding the way in which revenue had been booked. It also appears that sales contracts were backdated in order to enable the company to meet analysts' forecasts. Together with former salesman Stephen Richards, Mr Kumar now faces the possibility of a heavy prison sentence.
Fannie Mae: a Washington regulatory agency, known as OFHEO (the Office of Federal Housing Enterprise Oversight), recently published a report describing a culture of corruption at the Federal National Mortgage Association. Known as Fannie Mae, the Association is the biggest source of money for mortgages in the USA.
In an attempt to stem the tide of corporate corruption, the Sarbanes-Oxley Act ("SarbOx") was passed in 2002. Its aim? To increase accountability for financial statements and make it more difficult for company executives to cook the books. So far, reaction to the Act has been mixed. Some say that the Securities and Exchange Commission's failure to use the Act's clawback provision has prevented companies from recovering bonuses from top executives despite the fact that there have been over 2,000 financial restatements by companies since SarbOx was enacted. Frustration has been compounded by the apparent failure of shareholder lawsuits to force executives to cough up their ill-gotten gains. In one key case, a federal judge said that it was the SEC's job to pursue such actions! Other critics claim that the Act was an over-reaction and that many of the means required to tackle corporate wrongdoing already existed.
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