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The biggest accounting frauds of the last decade (and how to avoid them in future)

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South Africa’s recent accounting scandals – VBS Bank, Steinhoff and Tongaat, to cite the most obvious ones – are chickenfeed in comparison to the whales like Wirecard , Luckin Coffee and Wells Fargo. Though the size of these accounting scandals may differ, they follow a familiar pattern.

We have some suggestions at the end of this article that will help reduce accounting fraud. But before we get there, we need to understand how they happen in the first place.

Wirecard, a German company providing electronic payment transaction services, risk management as well as physical and virtual cards, collapsed last year after faking sales transactions to inflate revenue and profits.

EY, Wirecard’s auditor for over a decade, refused to sign off on the company’s 2019 accounts, saying it had been provided false information about company accounts, and could not confirm whether balances worth €1.9 billion existed – around a quarter of Wirecard’s whole balance sheet. It took EY nearly a decade to blow the whistle on its client.

US bank Wells Fargo created millions of fraudulent savings and chequing accounts on behalf of clients without their consent and then charged fees on these accounts. KPMG had been Wells Fargo’s auditor since 1931. Though it was not accused of wrongdoing, US lawmakers questioned its role in ensuring the integrity and transparency of the financial information it was compiling. In 2017, KPMG collected $55 million in audit fees from Wells Fargo.

Luckin Coffee, a Chinese competitor to Starbucks founded in 2017, sprinted out of the starting blocks with thousands of kiosks offering discount coffee and other freebies. But an investigation by US investors found it was faking its sales volumes by hundreds of millions of dollars. Bloomberg reports that in May 2020, the “US Senate overwhelmingly approved a bill that would require Chinese companies with U.S. listings to submit to scrutiny by the Public Company Accounting Oversight Board, a body created in response to the collapse of Enron.”

The following table from Wikipedia shows the major accounting scandals of the last decade.  A large number of these involve overstating revenue, profits, fraudulent invoices and bribes.

CompanyYearAudit firmCountryNotes
Amir-Mansour Aria2011IAO (Audit organization) and other Audit firmsIranBusiness loans without putting any collateral and financial system
Bank Saderat Iran2011IAO (Audit organization) and other Audit firmsIranFinancial transactions among banks and getting a lot of business loans without putting any collateral
Sino-Forest Corporation2011[84]Ernst & YoungCanada-ChinaPonzi scheme, falsifying assets
Olympus Corporation2011[85]Ernst & YoungJapanTobashi using acquisitions
Autonomy Corporation2012Deloitte & ToucheUnited StatesSubsidiary of HP.
Penn West Exploration2012 2014KPMGCanadaOverstated profits
Pescanova2013BDO SpainSpainUnderstated debt, Fraudulent invoices, Falsified accounts
Petrobras2014PricewaterhouseCoopersBrazilGovernment bribes, Misappropriation, Money laundering
Tesco2014PricewaterhouseCoopersUKRevenue recognition
Toshiba2015Ernst & YoungJapanOverstated profits
Valeant Pharmaceuticals2015PricewaterhouseCoopersCanadaOverstated revenues
Alberta Motor Association2016CanadaFraudulent invoices
Odebrecht2016BrazilGovernment bribes
Wells Fargo2017KPMGUnited StatesFalse accounting
1Malaysia Development Berhad2018Ernst & YoungDeloitteKPMG [96]MalaysiaFraud, money laundering, abuse of political power, government bribes
Wirecard AG2020Ernst & YoungGermanyAllegations of fraud
Luckin Coffee2020Ernst & YoungChinaInflated its 2019 sales revenue by up to US$310 million

This becomes relevant to SA as it was announced this week that Steinhoff’s former auditor Deloitte has agreed to pay R1.3 billion to “certain claimants” as part of a wider $1 billion global lawsuit settlement that Steinhoff hopes will bring an early to end to some 90 court cases currently waged against it.

This is certainly welcome, as it will bring closure to a particularly tawdry episode in SA’s deteriorating standing in the accounting world.

There was another piece of interesting news coming out of the Big Four this week: KPMG confirmed that it will cease performing non-audit work for its JSE-listed clients from 31 March 2021.

These two bits of news may not seem related, but they are. The Big Four have for decades been using audit work as a leg in the door for other, more lucrative contracts. Income from non-audit work (such as consulting) has surpassed that of audit income. If you’re one of the Big Four, the real money is to be made in consulting, so you’re prepared to take a knock on audit fees provided you get your nose in the consulting trough. In this light, KPMG’s announcement that it will cease doing consulting for JSE clients is welcome.

Organisations that are guardians of transparency and good governance should be forced to disclose how and where they make their income, as Richard Brooks explains in the book The Bean Counters.

Here’s our appeal to the Big Four: take on smaller firms as junior partners in your engagements, both in audit and consulting. Saiba has more than 9,000 members, most of them who actually run their own businesses. They know what it is like to make payroll at the end of the month. They have had to upskill themselves in diverse disciplines like IT, cyber-security, blockchain audits and cloud computing. The bookkeeper of old – like the auditor of today – is a dying breed. Technology exists to conduct audits in real time using the blockchain. And firms will be able to do a 100% transaction verification rather than a 2% sample using blockchain technologies, which will be ubiquitous within a few years.

Here’s another suggestion: let’s have an independent body like Irba appoint auditors, rather than the paying client. That overcomes the Stockholm Syndrome of auditors and clients getting too close, personally and professionally, over an extended period of time.

In summary, we would suggest three amendments to the Auditing Profession Act which will vastly reduce the potential for conflicts, fraud and the cartelisation of the accounting profession:

  1. Require audit and accounting firms to disclose their sources of income;
  2. Require larger audit firms to engage with and support smaller accounting firms to share the work load and transfer skills;
  3. Mandate an outside agency such as Irba (Independent Regulatory Board for Auditors) to appoint auditors, rather than leave this to the client to determine.

We recognise that fraud will always be a feature of the accounting profession. Some of it is virtually impossible to detect before the fact. But some of the most glaring and costly frauds, overlooked by auditors either deliberately or by neglect, could have been avoided had the profession adopted some of the proposals we outline here.