Written by: Alex Cordray
Fraud is defined as “wrongful or criminal deception intended to result in financial or personal gain” and negatively impacts all stakeholders of a company, including investors, employees, customers, suppliers, the community, government and trade associations. Fraudulent actions in companies are increasing at a rapid rate. In fact, 45% of United States businesses have experienced some form of fraud in the past two years (Susco, 2014). In this blog, we will explore popular accounting fraud cases, why they happened, and how the fraud could have been avoided. First, we look at a fraud scheme at Tyco in the early 2000’s.
According to the New York Times, Former Tyco Chief Executive Officer, Dennis Kozlowski, and former Chief Financial Officer, Mark Swartz, were indicted on charges resulting from stock fraud, unauthorized bonuses, and falsified expense accounts. The two acquired $430 million by secretly selling Tyco stock while “artificially inflating” the value. They made additional improper payments to themselves in the form of bonuses and company loans in order to cover personal expenses, such as apartments, homes, jewelry, and art. They hid the cost of these illegal loans by bullying employees into hiding the amounts in falsified expenses with phony journal entries.
This is an example of executive fraud and bullying. Lower employees are often scared to lose their jobs, so they do what they are told to do by superiors, even if it is illegal. Fraud by executives resulting in a loss of millions of dollars by a company can be avoided by implementing more internal controls, such as a harsher system of checks and balances and whistleblower protection. Checks and balances on superior management’s actions in a company can reinforce a company’s fraud detection. Even high-up management should be held accountable for their actions in a company. Offering whistleblower protection can encourage lower employees to speak out against wrongful actions of other employees. The fraud at Tyco teaches us that strong internal controls can help better protect a company against fraud and loss
Susco, J. (2014, March 14). Businesses Face Growing Accounting Fraud. Bond Beebe. Retrieved July 27, 2015.
Sorkin, A. (2002, September 13). 2 Top Executives Charged With $600 Million Fraud Scheme. The New York Times. Retrieved July 21, 2015.
Fraud In Accounting 
Unfortunately, fraud is real and does exist more than it should. I am naïve and believe everyone is honest and will make ethical choice and follow the golden rule, but as Alex discussed, this is not true. It is sad to see business executives such as Dennis Kozlowski and Mark Swartz become greedy. There is a TV show on CNBC called “American Greed” and each episode explains a different fraudulent action in a work place (This show has been on for multiple seasons now…. which is kind of disturbing). American Greed had an episode about Dennis Kozlowski and Tyco. The episode explained how Dennis did not grow up in a wealthy family and he was the first to go to college so when he first started making money, he became addicted to the luxurious lifestyle. He even bought a $6,000 shower curtain, which he claims he was not aware of that purchase. American Greed went to the prison and interviewed Dennis and he still believes that he did not do anything wrong, he simply believes that people did not like the fact that he was making too much money.
Like Alex explained, lower employees are scared of blowing the whistle because they do not want the risk of losing their jobs. Since this is a common issue, there needs to be a well-known solution to anonymously report potential fraud. Fraud and greed have become a major issue and will continue to be an issue if it remains to go unreported.
-Shelby Taylor
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It is shocking to think about how much fraud has occurred in corporate history, especially in the early 2000’s. There were many similar situations occurring between Tyco, WorldCom, Enron, as well as some others. I watched an episode of American Greed that was over Tyco. It was insane how much company money was being used for personal benefits. One of the crazy things I remember the CEO doing was buying millions of dollars’ worth of paintings and art, but having them shipped to a different state in order to avoid paying taxes on them. Another insane thing the CEO did was spend $2,000,000 of company money on a lavish birthday party.
One would think that someone who had worked so hard to make their way to the top and become successful would not be so risky and breaking the law. I know if I had invested so much time and money into growing a company I would try my hardest to prevent fraud from finding its way into my company. It seems that once people get wrapped up in the material benefits of success, they become greedy and want more. This eventually leads to their downfall.
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It is always so interesting to me how executives can get away with these elaborate schemes. We actually talked about this case in my internal audit class. Like Alex said, Mr. Kozlowski and Mr. Swartz bullied their employees and stole money because they were able to! They received personal loans for lavish items and asked others to cover their tracks.
When we talked about this in class, we discussed the reasons why the kinds of frauds occur. The fraud triangle tells us that there are three components that, when put together, can lead to fraud. The three components are pressure, opportunity, and rationalization. Pressure occurs when an employee feels they need to commit fraud in order to support their family, keep their job, or maintain their social status. Opportunity is when an employee feels they can commit a fraudulent act and get away with it. Rationalization is when an employee convinces himself or herself that it’s okay to commit fraud. In the Tyco case, the executives probably committed these illegal acts to keep up their social appearance, they thought they could get away with it because they were in charge, and their rationalization could have been that they were heads of the company and they deserved the money.
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This was really interesting, great job Alex. I had no idea that 45% of United States businesses have experienced some sort of fraud in the past two years, that’s insane. I have always thought that fraud in account was really interesting.
I have always heard about Tyco, but I was never really sure as to what happened there. Now I know that top management was charged with stock fraud, unauthorized bonuses and made up expense accounts. It’s sad that they bullied employees into playing part in the fraud as well.
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This was Katelyn Windham by the way
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The first paragraph is a great entry for the first blog post. It might serve better in the “About” section of your blog though.
The third paragraph of this article offers great insight to how an organization can prevent fraud from happening. However, I believe that this is general information that does not just apply to Tyco. A separate blog post could be made about this topic.
This article was well-written with professionalism. The references in the first and second paragraphs offer assurance for the statistics that are used.
-Blake Murray
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It is so hard to imagine such large fraud happening just once much less several times and among several companies. It is amazing how often fraud happens. I did not realize that it has happened as often as it has in the last two years. 45% percent of companies is huge!
It is amazing how much money these executives were able to steal before somebody figured it out. The power these executives had over their employees was huge. They were able to scare their employees so much that they would rather cover up fraud than find a new job. It is shocking that there were no laws or common practices back then that would help prevent this type of behavior from top executives.
Hayley Heeney
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Almost half of the American businesses have experienced fraud in the past two years? That is unbelievable! I saw online that the Enron scandal alone cost shareholders over $74 billion! Alex, you make a great point that if companies want to prevent fraud from happening, they need to implement more internal controls. They should also consider better detective measures to actually find the fraud before it gets out of hand. If Tyco had discovered this fraud sooner, they may not have lost as much money and the confidence of shareholders. Also, another great point was stating the need for a whistleblower protection program! Any type of anonymous hotline, incentive, etc. would encourage the employees to come forward and report any type of suspicious activity. While this could lead to an inflow of pointless investigations, at least the company would be better safe than sorry.
Fraud and the master minds behind it have always been fascinating to me! After I put in my time with the audit world, I strive to join the Forensics team at Deloitte. I would love to know what makes fraudsters do what they do, and try to invent new internal controls to deter fraud from occurring so often! I really look forward to reading your other posts about famous accounting fraud cases!
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