EXTRA- Corporate scandlas and business failures Flashcards
1
Q
Enron (2001)
A
- What Happened: Enron, a major American energy, commodities, and services company, used complex accounting practices (like special purpose entities) to hide its massive debts and inflate profits, making the company appear far more profitable than it actually was.
- Why: The company’s executives wanted to keep the stock price high and meet Wall Street expectations. They manipulated financial statements to present a false picture of financial health.
- Impact: When the fraud was exposed, Enron went bankrupt, leading to the largest corporate bankruptcy in U.S. history at that time. The scandal also led to the dissolution of Arthur Andersen, one of the largest audit firms, and spurred the creation of the Sarbanes-Oxley Act to increase corporate accountability.
Arthur Anderson became complicit in the scandal as Enron’s auditor.
2
Q
WorldCom (2002)
A
- What Happened: WorldCom, one of the largest telecommunications companies in the U.S., engaged in accounting fraud by improperly capitalizing $3.8 billion in operating expenses, thus inflating its assets by over $11 billion.
- Why: The company was under pressure to maintain profitability and meet market expectations. Executives manipulated accounting records to cover up declining profits.
- Impact: WorldCom’s bankruptcy was the largest in U.S. history at the time, surpassing Enron. The scandal contributed to further financial regulation reforms and eroded investor confidence in corporate governance.
3
Q
Freddie Mac (2003)
A
- What Happened: Freddie Mac, a government-sponsored mortgage finance company, was found to have misstated earnings by billions of dollars over several years to smooth out volatility in its financial results and meet earnings targets.
- Why: Executives wanted to present the company as stable and consistently profitable to maintain investor confidence.
- Impact: The scandal led to the resignation of top executives, fines, and a loss of credibility for government-sponsored enterprises. It also contributed to the broader scrutiny of financial practices in the lead-up to the 2008 financial crisis.
4
Q
Bernie Madoff (2008)
A
- What Happened: Bernie Madoff, a respected financier and former chairman of NASDAQ, ran the largest Ponzi scheme in history, defrauding investors of approximately $65 billion over decades.
- Why: Madoff promised consistently high returns and used new investors’ funds to pay returns to earlier investors, creating the illusion of a profitable business.
- Impact: Madoff’s arrest and conviction led to a 150-year prison sentence. The scandal devastated thousands of investors, including individuals, charities, and financial institutions, leading to widespread calls for regulatory reform in the investment industry.
5
Q
Parmalat (2004)
A
- What Happened: Parmalat, an Italian dairy and food company, was involved in one of Europe’s largest financial scandals when it was discovered that the company had falsified its financial statements, hiding billions of euros in debt.
- Why: Executives wanted to conceal financial difficulties and maintain the company’s image as a profitable enterprise.
- Impact: The company’s bankruptcy shocked European markets, leading to criminal charges against executives and calls for stronger corporate governance in Italy and Europe.
6
Q
Satyam (2009)
A
- What Happened: Satyam Computer Services, an Indian IT services company, was found to have inflated its revenues and profits by falsifying accounts, resulting in an overstatement of $1.5 billion in cash balances.
- Why: The company’s chairman manipulated financial statements to hide poor performance and maintain the company’s stock price.
- Impact: The scandal led to the collapse of Satyam’s stock, the resignation and arrest of the chairman, and significant damage to investor confidence in India’s corporate sector. It also led to a government takeover and the eventual sale of the company to Tech Mahindra.
7
Q
Olympus (2013)
A
- What Happened: Olympus, a Japanese optics and camera company, was involved in a decades-long scheme to conceal $1.7 billion in losses from bad investments by using fraudulent accounting techniques.
- Why: To protect the company’s reputation and avoid scrutiny from shareholders and regulators.
- Impact: The scandal led to the resignation of top executives, criminal charges, and a significant loss of investor trust in Japanese corporate governance. It also highlighted weaknesses in Japan’s financial regulatory environment.
8
Q
BP and Deepwater Horizon (2010)
A
- What Happened: An explosion on BP’s Deepwater Horizon oil rig in the Gulf of Mexico resulted in the largest marine oil spill in history, causing massive environmental damage.
- Why: The disaster was largely attributed to cost-cutting measures and inadequate safety procedures, which compromised the rig’s integrity.
- Impact: BP faced billions of dollars in fines, compensation payments, and cleanup costs. The disaster also led to stricter regulations on offshore drilling and significantly damaged BP’s reputation.
9
Q
Volkswagen (2016)
A
- What Happened: Volkswagen, the German automaker, was caught installing software in its diesel vehicles that manipulated emissions tests, making the cars appear to meet environmental standards when they did not.
- Why: To gain a competitive advantage in the market by marketing their cars as environmentally friendly while avoiding the costs associated with making the cars genuinely compliant with regulations.
- Impact: The scandal, known as “Dieselgate,” resulted in billions of dollars in fines, legal actions, and recalls. It severely damaged Volkswagen’s reputation and led to increased scrutiny of emissions standards worldwide.
10
Q
Eastman Kodak (2012)
A
- What Happened: Eastman Kodak, once a leader in photography and film, filed for bankruptcy after failing to successfully transition to the digital age.
- Why: The company was slow to embrace digital technology, leading to a decline in its core business as consumer preferences shifted from film to digital photography.
- Impact: Kodak’s bankruptcy marked the decline of a once-dominant brand, serving as a cautionary tale of the risks associated with failing to innovate in the face of technological change.
11
Q
Dynegy (2012)
A
- What Happened: Dynegy, an American energy company, filed for bankruptcy after years of financial mismanagement, including hiding debt and overstating earnings.
- Why: The company engaged in aggressive accounting practices to mask its financial difficulties and present a stronger financial position to investors.
- Impact: Dynegy’s bankruptcy highlighted the dangers of aggressive financial strategies and poor corporate governance. The scandal led to a significant loss of shareholder value and a restructuring of the company.
12
Q
British Home Stores (2016)
A
- What Happened: British Home Stores (BHS), a UK retail chain, collapsed due to financial mismanagement, pension fund deficits, and a failure to modernize its business model.
- Why: The company struggled to compete in the changing retail environment and was burdened by a massive pension deficit, which the owners failed to address.
- Impact: The collapse of BHS led to the loss of thousands of jobs and left a significant pension deficit that affected thousands of former employees. The scandal prompted investigations into corporate governance and the responsibilities of business owners.
13
Q
Carillion (2018)
A
- What Happened: Carillion, a major UK construction and facilities management company, collapsed due to overexpansion, risky contracts, and poor financial management.
- Why: The company took on too many projects at low margins, leading to cash flow problems and an inability to service its debts.
- Impact: Carillion’s collapse caused widespread job losses, disrupted public services, and raised serious concerns about the UK government’s reliance on outsourcing to private firms. It also led to calls for reform in public procurement and corporate governance.
