chapter  20
25 Pages

Scandals

WithThomas A. Lee, Frank L. Clarke, Graeme W. Dean

This chapter examines accounting scandals over approximately the last 175 years that threaten corporate financial reporting’s credibility as a viable means of protecting stakeholders from corrupt senior managers. The first section addresses the effectiveness of accounting as a system of governance instrumentation. Corporate failures provide impetus for successive revisions of accounting standards intended to remove perceived malpractices. Paradoxically, however, they appear to have had the opposite effect. Instead of increasing the extent to which financial statements reveal wealth and financial progress, they have spawned greater problems thereby institutionalising tensions in the social function of accounting. The second main section examines recurring issues in corporate financial reporting which provide the basis for evaluating the effectiveness of auditing in detecting material fraud by dominant senior managers (DSM). Critical here is the extent to which management-prepared accounts fail to ‘tell it as it is’ – they fail to depict an entity’s wealth at a point in time and the change in that wealth since it last reported. Instead they contain material accounting misstatement (MAM). We analyse the responses of the state and the public accountancy profession to accounting scandals over many decades and in several jurisdictions, examining the credibility of audit as a means of protecting stakeholders from corrupt senior managers. Through instances of fraudulent reporting, this chapter reveals auditors denying or limiting their responsibility to detect MAM by DSM upon whose honesty they rely. The peroration of this chapter recounts the two paradoxes of false expectations from the history of corporate financial reporting generally and accounting scandals in particular, specifically the paradox of accounting as a governance instrument, and the paradox of auditing as a fraud detector. Both result from unexpected outcomes. Both are inconvenient and unwanted. Both threaten the credibility of the reporting system.