The Hindu Business Line : Corporate frauds over the years

Enron: In early 2000, Enron moved away from its core business (electricity and natural gas) to trading in derivatives. It believed that the profits from derivatives could be used to mask the losses of its primary business. Enron star ted incurring massive debt. Though its derivatives related asset yields grew by good numbers, liabilities also piled up rapidly.

Trouble began in 2001. To hide bad investments in derivatives as well as its poorly performing assets in the energy business, it created multiple Special Purpose Vehicles.

It started avoiding millions in tax dues by using its stock options. Its financial condition was sustained by institutionalised, systematic and creatively planned accounting fraud. In the meantime it lost exclusive rights to its pipelines.

For the third quarter of 2001, it reported a huge $618 million loss and on November 4, 2001 it told its investors that they were restating profits for the last four and a quarter years. Finally, on December 2, 2001 the company filed for bankruptcy. The scandal created such waves in the auditing community that it led to the dissolution of Arthur Andersen, one of the world’s top accounting firms.

WorldCom

WorldCom was the US’ second largest long-distance phone operator between 1998 and 2002. During the 1990s, WorldCom was involved in acquisitions and completed several “mega-deals” which later turned out detrimental. In the year 1999, revenue growth stalled. The company started borrowing money to cover up losses. By March 2002, the Securities and Exchange Commission (SEC) requested for information from WorldCom suspecting fraud, as AT&T was losing mone y even as WorldCom wasn’t.

In July, the company announced bankruptcy and later that month it declared that it had been inflating profits by $3.8 billion over the previous five quarters. The company inflated profits by classifying routine expenses as investments and long term expenses, it also capitalised “line costs” — fees paid to third party operators to carry traffic.

Xerox

In June 2002, shortly after the WorldCom scandal broke, office equipment-maker Xerox admitted to overstating its revenues and profits for the years 1997-2001. This allowed the company to meet profit expectations.

The SEC began an investigation that exposed the fact that over five years the company had improperly classified over $6 billion in revenue, leading to an overstatement of earnings by nearly $2 billion.

America Online (AOL)

This internet service provider was accused of playing around with its financials even in the early 1990s. In these years, changing its amortisation policies and capitalizing revenue expenses was a commonly followed practice. The magnitude of fraud began to increase with competition.

From March 2000 through January 2002, the company indulged in material misstatements of its financial results, including overstatements of operating income and free cash flow, overstatements of net income, understatements of net losses and total debt. The intention was to report that it had met its new subscriber targets, an important metric the market used to evaluate AOL. Meanwhile Times Warner had taken over AOL. This resulted in Time Warner paying $300 million to SEC as civil penalties.

S. HAMSINI AMRITHA

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