Accounting Scandals - A Look At Nortel

What Is Accounting? What Is It Used For?

Accounting is often referred to as the language of business as it usually facilitates the communication of the financial position of a company in a way that various users can understand. In simple terms, accounting basically involves setting up, maintaining, and reviewing the accounting records of a company in order to properly understand its financial position.

There are many users, both internally and externally, of the accounting records of an entity. Internal users typically refer to the management, while external users refers to investors and lenders. Accurate information has to be given as regards the financial position of the establishment as manipulation this information can be of great risk to the organization.

 

What Are Accounting Scandals?

Accounting scandals arise from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments.

 

Consequences Of Restatement

The ‘Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover’ paper by Anup Agrawal and Tommy Cooperpaper examine the consequences of accounting scandals perpetuated by Crown lawyers at the fraud trial of three former Nortel Networks executives. According to the prosecution the men defrauded $5,000,000, accomplished by engineering a financial loss in 2002, and a profit in 2003 thereby triggering return to profit bonuses of $70 million to top executives.

Using logistic regression models, which control for the other determinants of management turnover, strong evidence of greater CEO and CFO turnover was found among restating firms compared to the control sample. Restatement is the revision and subsequent publication of prior financial statements. Over the three years surrounding the year of restatement announcement, CEOs and CFOs, respectively, faced a 14% and 10% greater probability of being replaced if they worked at restating firms, as opposed to normal firms.