An accounting scandal is a business scandal that arises from intentional manipulation of financial statements, with the disclosure of financial misdeeds by trusted executives of corporations or governments. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstatingIn Italian law the phrase "still subject to evaluation" now refers to material facts that are untrue: it was a clarification for "informations", but totally inconsistent with the "facts" reported in accounting documents: the value of corporate assets, or underreporting the existence of liabilities; these can be detected either manually or by means of deep learning. It involves an employee, an accountant, or the corporation itself and is misleading to investors and shareholders.
This type of "creative accounting" can amount to fraud, and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States. Employees who commit accounting fraud at the request of their employers are subject to personal criminal prosecution.
Two types of fraud
Misappropriation of assets
Misappropriation of assets – often called defalcation or employee fraud – occurs when an employee steals a company's assets, whether those assets are of a monetary or physical nature. Typically, assets stolen are cash, or cash equivalents, and company data or intellectual property. However, misappropriation of assets also includes taking inventory out of a facility or using company assets for personal purposes without authorization. Company assets include everything from office supplies and inventory to intellectual property.
Fraudulent financial reporting
Fraudulent financial reporting is also known as earnings management fraud. In this context, management intentionally manipulates accounting policies or accounting estimates to improve financial statements. Public and private corporations commit fraudulent financial reporting to secure investor interest or obtain bank approvals for financing, as justifications for bonuses or increased salaries or to meet the expectations of shareholders. The U.S. Securities and Exchange Commission has brought enforcement actions against corporations for many types of fraudulent financial reporting, including improper revenue recognition, period-end stuffing, fraudulent post-closing entries, improper asset valuations, and misleading non-GAAP financial measures.
The fraud triangle The fraud triangle is a model for explaining the factors that cause someone to commit fraudulent behaviors in accounting. It consists of three components, which, together, lead to fraudulent behavior: Incentives/pressure: Management or other employees have incentives or pressures to commit fraud. Opportunities: Circumstances provide opportunities for management or employees to commit fraud. Attitudes/rationalization: An attitude, character, or set of ethical values exists that allows management or employees to commit a dishonest act, or they are in an environment that imposes sufficient pressure that causes them to rationalize committing a dishonest act. Incentives/pressures: A common incentive for companies to manipulate financial statements is a decline in the company's financial prospects. Companies may also manipulate earnings to meet analysts' forecasts or benchmarks such as prior-year earnings, to meet debt covenant restrictions, achieve a bonus target based on earnings, or artificially inflate stock prices. As for the misappropriation of assets, financial pressures are a common incentive for employees. Employees with excessive financial obligations, or those with substance abuse or gambling problems, may steal to meet their personal needs.
Opportunities: Although the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies in industries where significant judgments and accounting estimates are involved. Turnover in accounting personnel or other deficiencies in accounting and information processes can create an opportunity for misstatement. As for misappropriation of assets, opportunities are greater in companies with accessible cash or with inventory or other valuable assets, especially if the assets are small or easily removed. A lack of controls over payments to vendors or payroll systems can allow employees to create fictitious vendors or employees and bill the company for services or time.
Attitudes/rationalization: The attitude of top management toward financial reporting is a critical risk factor in assessing the likelihood of fraudulent financial statements. If the CEO or other top managers display a significant disregard for the financial reporting process, such as consistently issuing overly optimistic forecasts, or if they are overly concerned about meeting analysts' earnings forecasts, fraudulent financial reporting is more likely. Similarly, for misappropriation of assets, if management cheats customers by overcharging for goods or engaging in high-pressure sales tactics, employees may feel that it is acceptable for them to behave in the same fashion.
Several extensions to the fraud triangle have been proposed in the literature. The "fraud diamond" adds a fourth element, capability, emphasizing the perpetrator’s skills and position to exploit opportunities.Wolfe, D. T.; Hermanson, D. R. (2004). "The Fraud Diamond: Considering the Four Elements of Fraud". The CPA Journal. Available via Kennesaw State University Digital Commons: https://digitalcommons.kennesaw.edu/facpubs/1537/ Subsequent work introduced the "fraud pentagon", which further incorporates arrogance (or ego) to capture the attitude of superiority that can facilitate rule-breaking; this model has been examined empirically in studies of financial reporting fraud.Burlacu, G.; Robu, I.-B.; Munteanu, I.; et al. (2025). "The Use of the Fraud Pentagon Model in Assessing the Risk of Fraudulent Financial Reporting". Risks 13(6):102. https://www.mdpi.com/2227-9091/13/6/102
Causes Frauds such as embezzlement are easy to conceal when company records are opaque to begin with. Poor accounting, such as the absence of monthly reconciliations or an independent audit function, also indicates vulnerability to fraud.
Executive and managerial motivations for fraud An executive can reduce the price of their company's stock due to information asymmetry. They can: accelerate accounting of expenses, delay accounting of revenue, engage in off-balance sheet transactions to make the company seem less profitable, or simply report very low estimates of future earnings. Executives may do this to make a company a more attractive takeover target. When the company is bought for less, the acquirer profits from the executive's actions to surreptitiously reduce the share price. This can represent tens of billions of dollars (questionably) transferred from former shareholders to the acquirer. The executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the hundreds of millions of dollars for one or two years of work. Managerial opportunism plays a large role in these scandals.
Employee motivations for fraud Not all accounting scandals are caused by those at the top. In fact, in 2015, 33% of all business bankruptcies were caused by employee theft. Often, middle managers and employees are pressured to or willingly alter financial statements due to their debts or the possibility of personal benefit over that of the company, respectively. For example, officers who would be compensated more in the short-term (for example, cash in pocket) might be more likely to report inaccurate information on a tab or invoice (enriching the company and maybe eventually getting a raise).
List of the biggest accounting scandals