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Acct 114 Accounting I Unit 2 Discussion Ethics and Financial Statements November 17, 2023 The Impacts of Corporate Scandal on Accounting Ethics The accounting profession has been conditioned by the sudden and constant changes brought by recent corporate financial scandals. The concept of accounting is not a new or unknown concept, and includes the processes of planning, control, analysis, and informing. Furthermore, as in any profession, there are certain rules of behavior, or professional ethics that should be adhered to too. In the accounting profession, the goal of accountants and auditors is to guide an organization using their professional knowledge and skills, with respect and loyalty to all ethical principles and codes of professional ethics. Accountants are expected to provide correct and reliable information to both the organization and the public, making certain that ethical standards are important for judging credibility and quality of the work done. In addition to behaving in accordance with rules that ensure confidence in the accounting profession itself (Marincic, et.al., 2020). To understand the importance of ethics in accounting, I will analyze four corporate firms that added to the greed and misdeeds that saw billions of dollars lost destroying not only companies, but people’s lives from the excessive greed of those hungry with power, that defined the corporate corruption that brought a need for the most sweeping corporate accountability reforms since Frankline Roosevelt (Whitehouse Archives, 2004), and the impacts they had on accounting ethics. 1998: Waste Management was a waste management company based in Houston, Texas, founded by CEO and Chairman Dean L. Buntrock. Recently appointed CEO Maurice Meyers and his management team discovered the reporting of an estimated $1.7 billion in fake earnings from 1992, well into 1997. In March 2002 the SEC charged Dean Buntrock (Founder & Chairman of the Board), Phillip Rooney (President and CEO), Thomas Hau (Vice President, Corporate Controller & Chief Accounting Officer), and Herbert Getz (Senior Vice President, General Counsel & Secretary) with perpetrating a massive fraud that lasted more than five years, alleging the defendants willingly engaged in a systematic scheme that falsified and

misrepresented WM’s financial results, overstating profits by $1.7 billion (Gray, 2019). Judgement: Defendants were ordered to pay over $30 million in penalties restitution. All defendants are prohibited from acting as an officer or director of a public company indefinitely and Getz was barred from practicing law for a period of five years (SEC, 2002). Auditor Arthur Anderson was ordered to pay $7 million in restitution (Gray, 2019). 2002: WorldCom Telecommunications was incorporated in Georgia and based out of Mississippi provided a broad range of communication services to businesses and consumers in more than 65 countries (SEC, 2005). An internal audit in June 2002 by then Vice President of Internal Audits, Cynthia Cooper, and auditor Gene Morse, discovered fraudulent balance sheet entries that totaled billions (Hayes, 2023). On March 2, 2004, Bernie Ebbers was indicted with charges of conspiracy and security fraud by federal authorities, and on May 25, 2004, federal prosecutors stepped in and escalated the list of charges to 9 felonies, adding 7 counts of filing false statements with securities regulators. A superseding indictment was also served on Scott Sullivan, WorldCom’s Chief Financial Officer (FBI National Press Release, 2004). Ebbers and Sullivan engaged improperly and fraudulently concealed the true operational and financial results and overstated reported income by $9 billion (SEC, 2004). Judgement: In 2002 it was ordered SEC’s monetary penalty judgement of $500 million in cash and the transfer of $250 million in common stock under the reorganized company that emerged from Chapter 11 Bankruptcy (MCI) to be transferred into a fund for later distribution to victims of the company’s fraud. They were also ordered to establish training and education to minimize the possibility of future violations of the federal securities laws. Four additional civil actions were filed against WorldCom employees in September and October 2002 (SEC, 2003). Both Sullivan and Ebbers were ordered to turn over all personal assets to be put in trust for affected shareholders (Courtlistener, 2004). Key Players: Scott Sullivan, former CFO, was found guilty from the U.S. Attorney’s Office to criminal charges, where he served five years due to testifying against Bernie Ebbers and others involved (Courtlistener, 2004). Bernie Ebbers, former CEO, was found guilty from the U.S. Attorney’s Complaint to criminal charges and sentenced to 25 years in prison, to which he was released in 2019 due to medical problems listed formerly as Dementia and passed away in 2020. (Courtlistener, 2004). 2002: Tyco International was a security solutions and fire protection company, as well as the world’s largest supplier of undersea fiber optic

cable with operational headquarters based in New Jersey. Involved in the scandal were CEO and Chairman Dennis Kozlowski and CFO Mark Swartz. SEC served complaint that alleges inflated operating income of $567 million from connection fees that were purchased as security monitoring contracts, failed to disclose proxy statements and annual reports on certain executive compensation, executive indebtedness, and related party transactions of its former senior management totaling an additional $150 million (SEC, 2006). Tyco funneled $500 million through acquisitions, unapproved loans, and fraudulent stock sales that had been taken out as executive bonuses and benefits. The scandal started with Kozlowski being investigated for evading $13 million in New York sales tax on paintings purchased for a 5 th avenue apartment he maintained for personal use by Tyco. Kozlowski resigned in 2002 and the new CEO, former head of Motorola, Edward Breen and he fired CFO Mark Swartz a week later, bringing to light financial statements pointing at Kozlowski’s widening problems. A Manhattan district attorney started an investigation to examine who was paying for Kozlowski’s personal expenses. Kozlowski was included $30 million spent to buy and decorate the New York apartment, and a $2.1 million birthday party for his then wife on the island of Sardinia, where Jimmy Buffet was imported for her entertainment for an additional $250,000, costing a total of $70,000 per guest for this six-day event. Mark Swartz was also indicted on September 12, 2002, for stealing $170 million through non-approved bonuses. Both Kozlowski and Swartz were charged with larceny for $430 million in stock sales with inflated process because the company’s finances weren’t properly disclosed. Tyco’s general counsel, Mark Belnick, was also indicted for not disclosing loans from Tyco and the $12 million bonus Belnick received after he convinced the SEC not to bring charges of theft because the loans had not been authorized. After being bailed out, Swartz was then charged with tax fraud and Tyco’s new management reversed all the loan forgiveness of those loans from the tax fraud and demanded repayment (Markham, 2006). Judgement: The first trial of Kozlowski and Swartz lasted for six months on the count of grand larceny which resulted in a mistrial. A retrial was set for 2005. The retrial was on the side of the prosecutors and after eleven days of deliberation both were found guilty of all charges and sentenced to eight to twenty-five years in prison. A class action suit forced them to pay back $2.92 billion to investors (Markham, 2006). 2003: HealthSouth Corporation in Birmingham, Alabama was one of the country’s largest healthcare providers of outpatient and rehabilitation services in the U.S. with over 1800 operating locations and had reported revenues of approximately $4 billion. Company founder and chairman, Richard Scrushy was indicted by the SEC on March 19, 2003, on 85 counts

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of account and other fraud, in addition to a related civil action for falsely certifying company financial statements and overstating company earnings. With the help of HealthSouth’s CFO, William Owens (and former bandmate with Scrushys band before he became an executive). Owens became a government informant due to his discontent with filing false financial documents with the SEC. Scrushy blamed Medicare changes, blamed subordinates, then defended himself on the television show 60 minutes, only to plead the 5 th Amendment only four days later at the Congressional hearings investigating the accounting problems at HealthSouth. The criminal trial charged Scrushy with $2.6 billion financial fraud. Combined with the Justice Department charges, there were a total of 85 counts of fraud, money laundering and account fraud. After it was proved that there was SEC misconduct, the recordings by Owens found to be inaudible and to cryptic, and the non-credible witnesses of HealthSouth executives trying to reduce their own sentences, and even SEC and Justice Department misconduct a judge dismissed 49 of those counts including money laundering. With the added information that 10 of the 15 executives pleading guilty to criminal charges and sentenced before the end of Scrushys trial and two being acquitted, combined with an ill-fated jury, Scrushy was acquitted on June 28, 2005, served no jail time, and got to keep his $300 million in assets. The day of this news, Bernie Ebbs of WorldCom was sentenced to what became life for him. (Markham, 2006). Judgement: HealthSouth settled Medicare Charges with the Justice Department for #325 million in January 2005, and entered an “Integrity Agreement” with the Office of Inspector for the Department of Health & Human Services that required HealthSouth to adopt a Code of Conduct and Create a Corporate Compliance and Ethics program. (Markham, 2006). However, Scrushys tale doesn’t end there. On June 28, 2007, Richard Scrushy was convicted of mail fraud, conspiracy to commit wire fraud, bribery, and obstruction of justice to the tune of $500,000 and was sentenced to 82 months in prison and released in 2012 (Department of Justice, 2007). But, with all this, Scrushy is back in the news, in May of this year a judge ordered Richard to turn over bank records due to being accused of being involved in a million-dollar money-laundering scheme. It is believed the account in question is connected to money that is still owed from his time at HealthSouth, alleging at least $7.3 million in checks had been written in connection with another previously disclosed account. It is being claimed that Scrushy has access to or is in control of the the account in question, which is in the name of a current prisoner of Alabama State Corrections, Eddie Briskett. Mr. Scrushy has maintained that he has no access to the account and that his only income is from social security (Nakashima, 2023).

The common strand between many of these scandals, Arthur Anderson & Company, paid to audit and be the contact for SEC reporting. Listed as one of the Big Five accounting firms solely of American origin with worldwide offices since the turn of the century. But the 1960’s is when Anderson started showing their true colors facing scandal after scandal. From the IOS-Robert Vesco scandal in the 1960s and the 1970 collapse of the Four Seasons Nursing Centers of America and other various scandals. From 1980 to 1985 Anderson paid out $191 million in settlements and fines for five failed auditing, one of those settlements was regarding the automobile company DeLorean, where Anderson was to have reported to divert $17 million from DeLorean to a Swiss Bank for personal use. The British Government sought retribution for this, and the verdict was $100 million where $35 million went to the British Government and Anderson was barred from British government contract work. The 1990’s continued to bring Anderson more problems having been involved in both the Charles Keating Lincoln Savings and Loan and Supercuts scandals totaling $317 million in settlements and fines. In 2002, Anderson was ordered to pay $7 million in penalties to the SEC for their role in the above Waste Management scandal, in addition to $220 million to settle the civil shareholder lawsuits from 1998. Before claiming Bankruptcy in 1999, Boston Market Trustee Corporation’s restated documents named Arthur Anderson & Co their auditor and were ordered to pay $10.3 million for a class action suit that challenged their auditing of Boston Chicken. Continuing this failing race to the finish line, Anderson was also involved in the McKesson Corp auditing debacle, who had purchased HBO in 1999, and the American Tissue Co, Inc in September 2001, which took place about the same time as their involvement with Qwest Communications Internationals inflating their revenue (Markham, 2006). After a failed attempt to promote their new consulting group with an unsullied new name, Enron, with pro-golfer Tiger Woods, the name Enron became a household name in October 2001. Anderson’s headquarters in Houston was not only the midst of the document shredding scandal, that office was the main hub for the shredding, convincing other Anderson offices to do the same. After finally being indicted in March 2002, they suffered client losses such as FedEx and Sara Lee. Every settlement offer being denied by prosecution ensured the collapse of Arthur Anderson, all during the new unfolding Adelphia Communications disclosure scandal and WorldCom’s Chapter 11 bankruptcy. The trial of Arthur Anderson took place after a Congressional hearing held regarding the Enron scandal. The trial against Arthur Anderson could not include previous settlements and fines

paid by Anderson from previous scandal outcomes and was focused on Enron. It was this trial brought a guilty verdict of Obstruction of Justice on June 15, 2002, lost its CPA licenses, and clients could no longer use their auditing services when the SEC barred them from auditing public companies, in addition to their liability insurer, based in Bermuda, announced it was unable to cover their settlements and money had to paid out of pocket. Arthur Anderson & Co criminal convictions allowed the remaining Bif Four accounting firms to raise their fees and limit their scope of engagement, and those raised fees were passed onto investors (Markham, 2006). Accounting abuses reflected in restatements cost investors and estimated $88 billion between 1993-2000. The overstatement of Waste Management cited in Congress was $1.32 billion (Markham, 2006). There are volumes upon volumes of laws and regulations attacking corporate governance, each being adopted as a response to one financial scandal after another, resulting in a never-ending cycle of reform that didn’t work or was easily forgotten. Whatever path lawmakers decide to take in the form of reform and corporate governance should be done without the very public scandals produced by such companies as Enron, Tyco, or HealthSouth. Referenced Courtlistener, Free Law Project. (2004, December 15). In Re WorldCom, Inc. Securities Litigation, 346 F. Supp. 2d 628 (S.D.N.Y. 2004). Retrieved from: https://www.courtlistener.com/opinion/2568801/in-re-worldcom-inc- securities-litigation/ Gray, A. (2019). ACCOUNTING SCANDALS. In The Handy Accounting Answer Book. Visible Ink Press. Retrieved November 17, 2023, from https://search.credoreference.com/articles/Qm9va0FydGljbGU6NDc2ODE2 Nw==?aid=279729 . Hayes, A. (2023, August 29). The Rise and Fall of WorldCom: Story of a Scandal. Investopia. Retrieved from https://www.investopedia.com/terms/w/worldcom.asp#:~:text=6-,The %20WhistleBlowers,and%20Gene%20Morse%2C%20another%20auditor JERRY W MARKHAM. A Financial History of Modern U.S. Corporate Scandals : From Enron to Reform . Armonk, N.Y.: Routledge, 2006. Disponível em: https://research.ebsco.com/linkprocessor/plink?id=e0a39245-2fec-3f61-9f09-20fd3bb5c069 Acesso em: 19 nov. 2023.

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Martincevic, I., Ambrosic, L., & Smoljic, M. (2020). The Impact And Importance Of The Professional Ethics Of Accountants On The Accounting Profession . Varazdin Development and Entrepreneurship Agency (VADEA). Nakashima, M. (2023). Richard Scrushy, former HealthSouth CEO, accused of stashing millions involved in scandal. CBS 42. Retrieved from https://www.cbs42.com/alabama- news/richard-scrushy-former-healthsouth-ceo-accused-of-stashing-millions-involved-in- scandal/ U.S. Department of Justice. (2007, June 28). Former Alabama Governor Don Siegelman and Former HealthSouth CEO Richard Scrushy Sentenced on Bribery, Conspiracy and Fraud Charges. Retrieved from https://www.justice.gov/archive/opa/pr/2007/June/07_crm_473.html U.S. Securities and Exchange Commission (2005, August 29). Securities and Exchange Commission v. Dean L. Buntrock, Phillip B. Rooney, James E. Koenig, Thomas C. Hau, Herbert A. Getz, and Bruce D. Tobecksen, Civil Action No. 02 C 2180 (N.D. Ill.) (Judge Andersen). Retrieved from: https://www.sec.gov/litigation/litreleases/lr-19351#:~:text=The %20complaint%20in%20this%20action,lasting%20more%20than%20five %20years . U.S. Securities and Exchange Commission (2003, August 7) Securities and Exchange Commission v. WorldCom, Inc. , Civil Action No. 02-CV-4963 (SDNY) (JSR). Retrieved from: Securities and Exchange Commission v. WorldCom, Inc. , Civil Action No. 02-CV-4963 (SDNY) (JSR). Retrieved from: https://www.sec.gov/litigation/litreleases/lr-18277 U.S. Securities and Exchange Commission. (2006, April 17). SEC v. Tyco International Ltd. , 06 CV 2942 (S.D.N.Y. filed April 17, 2006) SEC Brings Settled Charges Against Tyco International Ltd. Alleging Billion Dollar Accounting Fraud. Retrieved from https://www.sec.gov/litigation/litreleases/lr-19657 Whitehouse Archives. (2004, August). President George W. Bush. Record of Achievement – Corporate Accountability Reform. Retrieved from

https://georgewbush-whitehouse.archives.gov/infocus/achievement/chap9.ht ml