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What Constitutes Accounting Fraud?

Accounting fraud has been around as long as there has been accounting, but it’s not always clear to the laymen what the distinction is between “creative accounting” and a criminal act. “Accounting fraud” is not necessarily in and of itself a specific crime, but refers more generally to acts that violate state and federal rules relating to accounting. Many of these rules are highly complex and specific to certain types of businesses and reporting standards. That said, a brief round-up of some of the more notable accounting scandals of the past two decades will give a sense of the range of accounting fraud crimes:

  • Enron’s Shell Companies: In 2001, the markets were shocked to learn that one of the largest companies in America, Enron, had engaged in systematic accounting fraud to hide mounting losses at the company. This was partially accomplished through the use of “special purpose entities” – shell companies created by Enron executives to hide losses. In one case, two shell companies were created to buy Enron’s poor assets at inflated prices. As a result of the massive accounting fraud, Enron went bankrupt, its audit firm went out of business, and several executives went to jail.
  • Tyco’s Illegal Executive “Loans”: Hot on the heels of Enron in 2002, it was discovered that Tyco’s two top executives had siphoned $150 million out of the public company for their personal benefit and inflated the company’s earnings by $500 million to cover up the hole. The siphoning largely occurred through “loans” made to the executives which were then “forgiven.” The executives went to prison and the company paid its shareholders nearly $3 billion in damages.
  • AIG’s Inflated Stock Price: The international insurer got into trouble in 2005 when it came to light that it had treated a $500 million loan made to it by a Berkshire Hathaway subsidiary as revenue. The insurer then used this fake revenue to make it appear as though the company was healthier than it was in order to boost its stock price. The company also got into trouble for bid-rigging and stock manipulation schemes.
  • Lehman Brother’s Hidden Loans: Similar to the Enron and AIG scandals, Lehman Brothers engineered transactions in order to disguise $50 billion (100 times the amount in the AIG case) in loans as sales in order to hide the toxic assets on its books as the subprime mortgage crisis unfolded. The company swiftly went bankrupt.
  • Bernie Madoff’s Ponzi Scheme: Compared to the other scandals, the Madoff accounting fraud was somewhat old-fashioned in its execution, although massive in the damage it inflicted on individual investors. Madoff’s investment company managed money for wealthy private investors, paying out handsome returns. Problem was that he and the company were faking the returns by simply creating fake documents that did not reflect the actual returns. Eventually, the fraud was discovered, investors lost over $60 billion, and Madoff was sentenced to fail for 150 years.

Work With an Experienced Criminal Defense Lawyer

The above accounting scandals were all massive affairs. Criminal accounting fraud can happen in all sizes of company, and owners, managers, and employers can become implicated in accounting fraud investigations, even if they are nowhere near the accounting department. Investigators and prosecutors can use sophisticated and aggressive tactics to bring charges against companies and individuals, who may be blindsided by such charges.

If you are under investigation or charged in connection with accounting fraud, you will want an equally sophisticated and aggressive lawyer in your corner, defending your interests and protecting your freedom. Contact the office of J. Patrick Quillian today to schedule a free consultation regarding your circumstances.

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