18: Accounting Scandals: Enron, Worldcom, and Global Crossing

The consequences of financial statement fraud cannot be overemphasized. The Committee of Sponsoring Organizations of the Treadway Commission indicates that the consequences of financial statement fraud can be severe, ranging from Chapter 11 bankruptcy filings to changes in ownership as well as stock exchange delisting to a dramatic decline in stock value (PwC 2013). Executives found guilty of perpetrating financial statement fraud often suffer personal consequences including forced resignation or outright dismissal; loss of value of their personal stock ownership; sanctions, fines, and/or jail time from the Securities and Exchange Commission (SEC) (Rezaee 2005). Investor confidence in financial information is severely compromised resulting in hundreds of billions of dollars in lost market capitalization. Shareholder investments are put at risk with the consequential damage to a firm's reputation and the public's skepticism as to whether the company can prevent financial statement fraud from recurring in the future thus possibly resulting in a permanent decline in share price (Pathak and Wells 2008). Employees suffer the devastating effects of the fraudulent decisions made by their managers and executives. Many lose their jobs (Zahra, Priem and Rasheed 2005) and often find obtaining other employment difficult as the stigma of their previous employer remains with them long after the company's liquidation. Employee retirement savings suffer huge, if not complete, losses resulting from the decline in the company's share price.