When a financial scandal is exposed, regulators, investors and the public scrutinize its details to determine how it occurred. This typically involves a deep dive into financial statements and accounting standards to uncover the deception. Often, the underlying cause of financial scandal can be traced to a lack of robust internal controls and weak corporate governance oversight or unethical behavior by executives seeking personal gain.
Regulatory responses to financial scandals aim to prevent recurrence and enhance transparency in the financial system. However, a primary criticism is that sophisticated schemes can still evade detection for extended periods of time. Additionally, the human element – greed and a disregard for ethical conduct – continues to be a significant factor that legislation and internal controls cannot eliminate.
One of the most famous examples of this was the 2001 Enron scandal, in which the energy company used complex financial structures to hide debts and toxic assets from its balance sheet. This resulted in shareholders losing $74 billion and employees and investors losing their retirement savings. Enron was eventually brought down when its debt and liabilities piled up and the company filed for bankruptcy.
Another example was the Satyam scandal, in which senior Indian IT professionals were found guilty of fiddling with company accounts to steal millions of dollars from their employers. The fraud was uncovered by whistleblowers who were able to track down falsified invoices and accounting entries in the company’s books. In addition to the losses incurred by individual perpetrators, companies involved in financial scandal face massive fines and reputational damage.