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List of Contributors xvii Preface xxiii Acknowledgements xxv Part A 1 1 Introduction - Setting the Scene 3 Michael Jones 1.1 Introduction 3 1.2 Exploring the Terms 4 1.2.1 Creative Accounting 4 1.2.2 Fraud 7 1.2.3 Other Terms 9 1.3 Structure of the Book 11 1.3.1 Increase Income 12 1.3.2 Decrease Expenses 12 1.3.3 Increase Assets 12 1.3.4 Decrease Liabilities 12 1.4 Conclusion 18 2 The Creative Accounting and Fraud Environment 21 Michael Jones 2.1 Introduction 21 2.2 The Main Actors 22 2.2.1 Managers 22 2.2.2 Investment Analysts 24 2.2.3 Regulators 24 2.2.4 Auditors 25 2.2.5 Shareholders 26 2.2.6 Merchant Banks 26 2.2.7 Other Users 27 2.2.8 Legal Authorities 27 2.3 Effective Corporate Governance 28 2.3.1 Effective Internal Controls 28 2.3.2 Division of the Responsibility between Chief Executive and Chairman 28 2.3.3 Audit Committee 28 2.3.4 Independent Board of Directors 28 2.4 Economic Environment 28 2.5 Conclusion 29 3 Motivations to Indulge in Creative Accounting and Fraud 31 Michael Jones 3.1 Introduction 31 3.1.1 Personal Incentives 33 3.1.2 Market Expectations 34 3.1.3 Special Circumstances 36 3.1.4 Cover-up Fraud 39 3.2 Conclusion 39 4 Methods of Creative Accounting and Fraud 43 Michael Jones 4.1 Introduction 43 4.2 Basic Principles 44 4.3 Nature of Accounting 45 4.4 Methods of Creative Accounting 45 4.4.1 Strategy 1: Increase Income 46 4.4.2 Strategy 2: Decrease Expenses 48 4.4.3 Strategy 3: Increase Assets 56 4.4.4 Strategy 4: Decrease Liabilities 58 4.4.5 Strategy 5: Increase Operating Cash Flow 60 4.5 Simple Numerical Example 61 4.6 Fraud 62 4.6.1 Misappropriation of Assets 64 4.6.2 Fictitious Transactions 65 4.7 Conclusion 67 5 Evidence for Creative Accounting and Fraud 69 Michael Jones 5.1 Introduction 69 5.2 The Descriptive Studies 69 5.2.1 Ian Grif ths, Creative Accounting (1986) 71 5.2.2 County Natwest WoodMac, Company Pathology (1991) 72 5.2.3 UBS Phillips & Drew, Accounting for Growth (1991) 73 5.2.4 Trevor Pijper, Creative Accounting (1993) 76 5.2.5 Frank Clarke, Graeme Dean and Kyle Oliver, Corporate Collapse: Accounting, Regulatory and Ethical Failure (2003, rst issued 1997) 77 5.2.6 Frank Clarke and Graeme Dean, Indecent Disclosure: Gilding the Corporate Lily (2007) 78 5.2.7 McBarnet and Whelan, Creative Accounting and the Cross-eyed Javelin Thrower (1999) 78 5.2.8 Charles Mulford and Eugene Comiskey, The Financial Numbers Game (2002) 79 5.2.9 Beasley, Carcello and Hermanson, Fraudulent Financial Reporting 1987-1997: An Analysis of U.S. Public Companies (1999) 81 5.2.10 Joseph Wells, Principles of Fraud Examination (2005) 82 5.3 The Statistical Studies 84 5.3.1 Earnings Management Studies 84 5.4 Conclusion 93 6 Impression Management 97 Michael Jones 6.1 Introduction 97 6.1.1 Accounting Narratives 97 6.1.2 Graphs 102 6.2 Conclusion 111 7 Taking the Long View: Accounting Scandals over Time 115 Michael Jones 7.1 Introduction 115 7.1.1 Ancient and Medieval 117 7.1.2 Seventeenth and Eighteenth Centuries 118 7.1.3 Nineteenth Century 119 7.1.4 Twentieth Century: Before Second World War 122 7.1.5 Twentieth Century: 1945-1980s 127 7.2 Conclusion 132 Part B 135 8 Accounting Scandals in Australia since the Late 1980s 137 Garry D. Carnegie and Brendan T. O'Connell 8.1 Introduction 137 8.2 Overview of Accounting Scandals during and since the 1890s 138 8.3 Case Studies of Accounting Scandals since the Late 1980s 141 8.3.1 Adelaide Steamship 142 8.3.2 Bond Corporation 143 8.3.3 Harris Scarfe 145 8.3.4 One.Tel 146 8.4 HIH Insurance 147 8.4.1 Background 148 8.4.2 Why did HIH Collapse? 149 8.4.3 Accounting Issues 150 8.4.4 Legal Outcomes Arising from the HIH Collapse 152 8.5 Corporate Governance Reforms Following the Accounting Scandals of the Early 2000s 155 8.6 Conclusion 156 9 Corporate Accounting Scandals in China 163 Catherine Huirong Chen, Yuanyuan Hu and Jason Zezhong Xiao 9.1 Introduction 163 9.2 Summary of Corporate Scandals 164 9.2.1 Shenzhen Yuanye 164 9.2.2 Great Wall Fund Raising 166 9.2.3 Hongguang 167 9.2.4 Daqing Lianyi 168 9.2.5 Kangsai Group 169 9.2.6 Lantian Gufen 170 9.3 A Case in Depth - Zhengzhou Baiwen 172 9.3.1 Background 172 9.3.2 Themes of the Scandal 174 9.3.3 Who is to Blame? 176 9.3.4 Consequences of the Baiwen Scandal 178 9.3.5 Aftermath 179 9.4 Conclusion 180 10 Accounting Scandals in Germany 185 Hansrudi Lenz 10.1 Introduction 185 10.2 Accounting Scandals Between 1985 and 2006 186 10.2.1 Co op AG (1988) 186 10.2.2 Balsam AG (1994) 187 10.2.3 Bremer Vulkan Verbund AG (1995) 189 10.2.4 Philipp Holzmann AG (1999) 191 10.3 Most Important Cases: Flowtex and Comroad 193 10.3.1 Flowtex Gmbh & Co. KG (2000) 193 10.3.2 ComRoad AG (2001) 195 10.4 Accounting Scandals and Regulatory Responses 200 10.5 Examinations of the German Financial Reporting Enforcement Panel 2005-2006 202 10.6 Conclusion 208 11 Creative Accounting and Fraud in Greece 211 George Kontos, Maria Krambia-Kapardis and Nikolaos Milonas 11.1 Introduction 211 11.2 Two Accounting Scandals 213 11.2.1 ETBA Finance 213 11.2.2 Dynamic Life 217 11.3 The Bank of Crete Scandal 220 11.3.1 Koskotas's Employment with the Bank of Crete 221 11.3.2 The Accounting Information Systems of the Time 223 11.3.3 The Economic Environment at that Time 225 11.4 The Aftermath 229 11.5 Conclusions 231 12 Corporate Creative Accounting in India: Extent and Consequences 233 Bhabatosh Banerjee 12.1 Introduction 233 12.2 Some Examples of Creative Accounting in India 234 12.3 Some Important Corporate Cases in India 239 12.4 The Satyam Computer Services Ltd Scandal (2009) 240 12.4.1 Background 240 12.4.2 Satyam: A Global Organisation 240 12.4.3 Alleged Possible Processes and their Impact 241 12.4.4 Good Guy, Bad Choices 243 12.4.5 Role of the Auditors 243 12.4.6 Institution of Legal Proceedings 245 12.4.7 Salvaging Satyam 245 12.4.8 Rebuilding the Corporate Image 246 12.4.9 Some Antidotes 247 12.5 Aftermath 247 12.5.1 Changes in the Companies Act 247 12.5.2 Measures Taken by the SEBI 248 12.5.3 Prudential Norms of the RBI 249 12.6 Conclusion 250 12.7 Acknowledgements 251 13 Creative Accounting and Accounting Scandals in Italy 253 Andrea Melis 13.1 Introduction 253 13.2 Creative Accounting Practices in Italy: A Case Study Analysis 255 13.2.1 The Choice of Consolidation Technique 255 13.2.2 The Accounting of Stock Options 256 13.2.3 The Accounting of 'Creative Gains' in Football Club Companies 257 13.3 The Most Important Accounting Fraud in Italy: The Parmalat Case 259 13.3.1 Parmalat: Was it a Case of Creative Accounting or of False Accounting? 260 13.3.2 Key Accounting Issues at Parmalat: Some Examples of the Accounting Fraud 261 13.3.3 The Role of Corporate Governance Actors 265 13.3.4 The Role of Information Demand-side Actors: Institutional Investors, Financial Analysts and Banks 271 13.4 The Aftermath of the Parmalat Scandal and its Impact on Business and Society 272 13.5 Conclusion 274 14 Creative Accounting and Accounting Scandals in Japan 279 Kazuyuki Suda 14.1 Introduction 279 14.2 Accounting Regulations and Standards in Japan 280 14.2.1 Accounting Regulations 280 14.2.2 Accounting Standards 280 14.3 Short History of Accounting Scandals Before the 1980s 281 14.4 Three Types of Accounting Scandal Post-1980s 283 14.4.1 Accounting Scandal to Maintain High Share Prices 285 14.4.2 Accounting Scandal Related to Contracts 289 14.4.3 Accounting Scandal to Avoid Bankruptcy 292 14.5 Consequences of the Accounting Scandals 296 14.5.1 Revision of Accounting Standards for Consolidated Financial Statements 296 14.5.2 Reorganization of Audit Firms 296 14.5.3 Establishing Internal Control Systems 297 14.6 Conclusion 298 15 Financial Accounting Scandals in the Netherlands 305 Henk Langendijk 15.1 Introduction 305 15.2 Some Minor Accounting Scandals 307 15.2.1 Creative Accounting at Rijn-Schelde-Verolme (RSV) 307 15.2.2 Creative Accounting at Fokker 309 15.3 Royal Ahold 310 15.3.1 Consolidation of Joint Ventures at Royal Ahold 310 15.3.2 Consolidation Accounting in the Netherlands 311 15.3.3 Consolidation Accounting under US GAAP 311 15.3.4 The Control and Side Letters 312 15.3.5 Accounting for Vendor Allowances at US Foodservice (USF) 315 15.3.6 Proper Accounting Treatment Vendor Allowances 315 15.3.7 Measures Taken by Royal Ahold after Discovering the Fraud 318 15.3.8 Acquisition Accounting 319 15.3.9 Reserves, Allowances and Provisions 320 15.3.10 Lease Accounting 320 15.4 Conclusion 320 16 Creative Accounting and Financial Scandals in Spain 325 Nieves Carrera 16.1 Introduction 325 16.2 Accounting Scandals in Spain Since the 1980s 326 16.2.1 The Banking Sector 327 16.2.2 Investment Service Firms 330 16.2.3 The Real Estate Sector: The Case of PSV and IGS 332 16.3 Investments in Stamps: The Latest Series of Financial Scandals in the Country. Afinsa and Fórum Filatélico 333 16.3.1 Background of the Cases of Afinsa and Fórum Filatélico 334 16.3.2 The Nature of the Businesses and the Accounting for Investment Contracts 335 16.3.3 The Suppliers 337 16.3.4 Valuation of Stamps 339 16.3.5 Reflections on the Scandal 340 16.3.6 Where were the Auditors? 341 16.3.7 Was it a Surprise? 341 16.3.8 Consequences of the Scandal 343 16.4 The Aftermath of the Scandals 344 16.5 Conclusion 346 17 Accounting Scandals in Sweden - A Long Tradition 359 Gunnar Rimmel and Kristina Jonäll 17.1 Introduction 359 17.2 Fermenta and Prosolvia: Swedish Stock Market Darlings 360 17.2.1 Fermenta - 1980s Biotech Company's Accounting Errors 360 17.2.2 Prosolvia - 1990s Experts in Simulating Virtual Reality? 363 17.2.3 Reconstruction of Ownership 364 17.2.4 Fictitious Invoices, Invented Agreements and Premature Income Recognition 364 17.2.5 Insider Trading 365 17.3 Two Scandals in Multinationals that Dominated the Swedish Media 365 17.3.1 ABB - Shaken and Stirred 365 17.3.2 Skandia - A Shooting Star Turns into a White Dwarf 368 17.4 Conclusions 373 18 Creative Accounting - The UK Experience 379 David Gwilliam and Richard H.G. Jackson 18.1 Introduction 379 18.2 Historical Background 381 18.3 Some Recent Accounting Scandals 382 18.3.1 Bank of Credit and Commerce International (BCCI) 383 18.3.2 The Mirror Group 385 18.4 Polly Peck 386 18.4.1 Meyna 389 18.4.2 Vestel 390 18.4.3 Unipac 390 18.4.4 Accounting Policies at Polly Peck 391 18.5 The Immediate Aftermath 398 18.5.1 Accounting Regulatory Change 398 18.5.2 Governance and Enforcement 400 18.6 Subsequent Developments 400 18.7 Conclusions 402 18.8 Acknowledgements 404 19 Creative Accounting and Accounting Scandals in the USA 407 Charles W. Mulford and Eugene E. Comiskey 19.1 Introduction 407 19.2 Scandals since the 1990s 410 19.2.1 Premature or Fictitious Revenue Recognition 410 19.2.2 Capitalized Costs and/or Extended Amortization Periods 412 19.2.3 Overstated Assets and/or Understated Liabilities 416 19.2.4 Other Creative Accounting Practices 416 19.3 Enron and Worldcom 419 19.3.1 Enron Corp. 419 19.3.2 WorldCom, Inc. 421 19.4 Aftermath of the Scandals 423 20 Bank Failures and Accounting During the Financial Crisis of 2008-2009 425 Simon D. Norton 20.1 Introduction 425 20.2 428 20.2.1 Kaupthing Bank 428 20.2.2 Northern Rock 429 20.3 Origins of the 'Credit Crunch' 430 20.3.1 Sub-prime Lending 430 20.3.2 Types of Mortgage 432 20.3.3 Economic Downturn and Rising Unemployment 432 20.4 Financial Instruments Associated with the Credit Crunch 432 20.4.1 Collateralised Debt Obligations (CDOs) 433 20.4.2 Credit Default Swaps (CDS) 433 20.4.3 Collateralised Mortgage Obligations (CMOs) 434 20.4.4 Securitisation and Off-balance Sheet Financing 434 20.4.5 Repurchase agreements or 'repos' 436 20.5 Creative Accounting in the Banking Sector 437 20.5.1 Loan-loss Allowances 437 20.5.2 Adjustment of Reporting Dates 437 20.5.3 Enhancing Pro ts through Disposals of Assets 438 20.5.4 Lawful Adjustments to Composition of 'Level 3' Assets in Banks' Balance Sheets 438 20.5.5 Decline in Value of Outstanding Debt 439 20.6 Lehman's, Madoff and Bear Stearns; Failures and Consequences 440 20.6.1 Lehman Brothers 440 20.6.2 Bernard Madoff 445 20.6.3 Bear Stearns 448 20.7 Conclusion 450 Part C 453 21 Identifying Some Themes 455 Michael Jones 21.1 Introduction 455 21.2 Some Themes 455 21.2.1 Background 455 21.2.2 Creative Accounting or Fraud 459 21.3 The Major Methods Used 460 21.3.1 Strategy 1: Increasing Income 461 21.3.2 Strategy 2: Decreasing Expenses 462 21.3.3 Strategy 3: Increasing Assets 464 21.3.4 Strategy 4: Decreasing Liabilities 465 21.3.5 Other Methods of Creative Accounting 466 21.4 Methods of Fraud 467 21.5 Incentives for Creative Accounting and Fraud 471 21.6 Overstrong Personalities 473 21.7 Failure of Internal Controls 474 21.8 Failure of External Auditors 475 21.9 Conclusion 477 22 The Impact of Accounting Scandals and Creative Accounting 479 Michael Jones 22.1 Introduction 479 22.2 Short-term Immediate Effects 479 22.2.1 Insiders 480 22.2.2 Outsiders 481 22.3 Long-term Effects 484 22.3.1 One-off Regulatory Responses 484 22.4 Cumulative Effects 487 22.5 Conclusion 490 23 Conclusion - Looking Backwards and Forwards 493 Michael Jones 23.1 Overview 493 23.2 Thematic Analysis 496 23.3 Lessons for the Future 499 23.3.1 Factors Increasing the Possibilities of Creative Accounting and Fraud 499 23.3.2 Factors Reducing the Potential for Creative Accounting and Fraud 501 23.4 Prognosis 505 23.5 Conclusion 506 Appendix 1 Chronological List of Major Instances of Accounting Issues Across 12 Countries and Beyond 509 Appendix 2 Alphabetical List of Most Important Accounting Scandals Across 12 Countries and Beyond since about 1980 519 Index 535

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