Scandals in Managerial Accounting

Test your knowledge about some of the greatest scandals in managerial accounting.

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By Sarah Stevenson

In managerial accounting, also known as management accounting, the future financial health of the company is paramount—which means that any wrongdoing on a grand scale is likely to be extensive, insidious and irreparably damaging.

Managerial accountants analyze an organization's financial information in order to assist with budgeting, reporting, and strategic planning. An individual managerial accountant's work may focus on issues of tax handling, asset management or cost accounting, but regardless of specialty, management accountants usually work very closely with other executives.

That, in a nutshell, is why so many prominent corporate scandals have been inextricably linked to managerial accounting practices. When financial corruption permeates the highest levels of a company's administration, it often gets traced to the management accountants who are supposed to prevent such fraudulent activity in the first place.

Despite the high profile—and deservedly bad rap—of managerial accounting scandals, we see them crop up in the news again and again. How well do you remember the fall of Freddie Mac, or the disgrace of Bernie Madoff? Take our quiz and find out.

• 4 – 5 Correct: Chief Financial Officer
• 2 – 3 Correct: Managerial Accounting Whiz
• 0 – 1 Correct: Go Back to Accounting School!

1. What is the name of the 2002 law enacted to strengthen control over managerial accounting practices in the wake of prominent scandals such as those affecting Enron, Tyco and Worldcom?

1. Budget and Accounting Act
2. Sarbanes-Oxley Act
3. Uniform Accountancy Act
4. Americans with Disabilities Act

2. Which of the following crimes was Enron CEO Kenneth Lay charged with in the wake of the company's collapse?

1. conspiracy
2. false statements to banks
3. securities fraud
4. all of the above

3. In the 2009 Bernie Madoff scandal, Madoff's accountant, David Friehling, pleaded guilty to issuing "rubber-stamp" audits that allowed Madoff to conceal what illegal activity?

1. money laundering
2. fraudulent managerial accounting
3. Ponzi investment scheme
4. smuggling

4. By exploiting a loophole in United States managerial accounting standards, this financial services firm was able to disguise more than $50 billion in loans by classifying them as sales.

1. Lehman Brothers
2. Arthur Anderson
3. AIG
4. Charles Schwab

5. Worldcom's accounting fraud is one of the largest in US history. CEO Bernie Ebbers not only tapped hundreds of millions in loans for personal expenditures, but also inflated Worldcom's books to keep it afloat and create the illusion of growth. What was the overall cost of Worldcom's accounting fraud?

1. 30,000 jobs
2. $11 billion in accounting fraud
3. $180 billion cost to investors
4. All of the above

Answers: 1. b, The Sarbanes-Oxley Act, known in the Senate as the Public Company Accounting Reform and Investor Protection Act, was sponsored by and named after two US senators, Paul Sarbanes (D-MD) and Michael G. Oxley (R-OH). It set new accounting standards for public companies and accounting firms. 2. d, Kenneth Lay was charged with all of these crimes and more. He was convicted of six counts of securities and wire fraud, for a total prison sentence of up to 45 years, but he died before the sentence was delivered. Other Enron executives were similarly charged. 3. c, Bernie Madoff became infamous for having suckered investors into a Ponzi scheme. BusinessDictionary.com defines a Ponzi scheme as a "Scam in which gullible public is enticed with the promise of very high returns in a very short time, but is based on paying off the early 'investors' from the cash from (hopefully ever increasing number of) new 'investors.' The whole structure collapses when the cash outflow exceeds the cash inflow. The originators of the scheme, however, usually disappear with large sums a few days before the crash." 4. a, Lehman Brothers executives used a managerial accounting trick called "Repo 105" to manipulate their balance sheets and hide the $50 billion in loans. 5. d, All of the above. According to Time magazine, "To keep WorldCom afloat, prosecutors charge, Ebbers allegedly resorted to a combination of hype, hidden expenses and phantom revenue to inflate earnings by all those billions and perpetuate the illusion that WorldCom was worth its lofty share price. When the hoax finally emerged, the stock went into a slow-motion collapse from 2000 through 2002, costing investors $180 billion—three times the amount of wealth destroyed at Enron."