Accounting Scandals: Beyond Corporate Governance

Abstract

Accounting scandals are becoming perpetual in nature. They range from the ancient Mesopotamia, to the South Sea Bubble of 1720, to the famous Enron of 2001, down to Parmalat, Tesco, and Toshiba of today. The series of accounting scandals that have occurred in the last two decades calls for a greater concern by the accounting profession. The accounting scandals that have occurred in this 21st century alone have shown that there is a need to look beyond corporate governance in the fight against financial deception. In this paper, we argue that even in the face of the Sarbanes-Oxley Act (SOA) of 2002 and other regulations around the world that are targeted towards effective corporate governance, accounting scandals have never ceased to occur. Most of the legislations that have been passed in recent times were targeted at corporate governance, forgetting the crucial role that audit plays within the agency relationship. And whenever there is any revelation of fraudulent financial reporting, investors do not ask who are the directors, but the first question they ask is who are the auditors? Hence, there is a need to improve audit quality by approaching it from a forensic accounting perspective in order to reduce the incidence of financial statement frauds in this era of information revolution, thus restoring investors' confidence back in the financial reporting process and corporate governance. In this paper, we propose a forensic accounting paradigm as a viable option for reducing accounting scandals, since this will compliment corporate governance systems.

Why Audit will Continue to Fail!

“…The first question the business community is always quick to ask after any fraudulent financial reporting announcement is who are the auditors? (Awolowo, et al, 2018) Nowadays, the frequency at which corporate entities collapse because of financial statement fraud has raised a serious question on whether the current accounting system of reporting and financial controls is working (Smith & Crumbley, 2009;Garrow, et al, 2019). We witnessed Patisserie Valerie's collapse into administration in early 2019 due to financial statement fraud (Uttley, 2019).…”

“…Another interesting dimension to this is that auditors are usually the first set of people to lose their job after any revelation of fraudulent reporting. Such was Tesco's case which ended their 32 years audit relationship with PWC after the announcement of their accounting scandal in 2014 (Awolowo, et al, 2018). Lookers have equally announced that they are ending their audit relationship with Deloitte due to their accounting scandal.…”

International Financial Reporting Standards Compliance, Disclosure and Relevance of Financial Statements as Perceived by Investors with Regards to their Decision Making

“…In 2001, news of the Enron accounting scandal of corporate corruption and fraud broke out and the company's investors lost $74 billion; in 2002, WorldCom was involved in fraudulent expense capitalization. In 2003, news of the Parmalat accounting scandal broke in Europe of falsifying accounting documents; 2011 saw the revelation of the biggest accounting scandal (Olympus) in Japanese history revealed; in 2014, Tesco was caught overstating its profit by £263 million; and in 2015, Toshiba's financial statement fraud of overstating profits came to light (Awolowo, 2016;Awolowo et al, 2018). All these scandals had a negative impact on the capital markets and have contributed to the erosion of trust of the investing public (Awolowo et al, 2018).…”

Critical review of the role of accounting in the decision-making process

“…Empirical evidence shows that such information has not been properly considered in the managerial decision-making process, thus creating issues for the accounting profession. For instance, the increased number of accounting scandals in the early 21st century revealed a bigger flaw in financial reporting quality (Awolowo et al , 2018; Camfferman and Wielhouwer, 2019). As a result, corporate performance may be managed opportunistically to meet particular objectives (Guarini, 2016) while diminishing the influence of financial information content, raising information asymmetry and agency costs (Hassanein and Hussainey, 2015; Kılıç and Kuzey, 2018), capital and financing expenses (Enache and Hussainey, 2020) and lowering efficiency and public confidence (Salehi et al , 2016; Bhimani and Bromwich, 2010).…”