Financial scandal happens when management or employees steal company assets – from money and physical inventory to intellectual property and confidential information. It can be a result of incentives or pressure from senior managers, or from opportunities presented by circumstances. Regardless of the motivation, it can be very difficult for regulators to identify and prosecute fraudsters. The complex and inter-connected nature of the financial system amplifies the potential for fraud, as does the tendency of traders to hide their activities through a multitude of subsidiaries and tax-haven jurisdictions.
One of the most notorious financial scandals of recent times involved Bernie Madoff, who defrauded investors out of $64.8 billion in a Ponzi scheme. Another was the collapse of Lehman Brothers, whose toxic mortgage-backed securities played a significant role in the 2008 financial crisis. Among the most damaging financial scandals of all time was Enron, an energy giant that hid huge debts from its balance sheet by using off-record accounting and special purpose entities. The firm ultimately filed for bankruptcy and cost shareholders hundreds of millions of dollars. Enron CEO Kenneth Lay and several other executives ended up serving lengthy prison sentences.
More recently, German credit card issuer Wirecard and UK food chain Patisserie Valerie were accused of accounting fraud involving fake billing documents that resulted in EUR1.9 billion in accounts not being accounted for. The global agribusiness CHS also violated federal regulations in the US by falsely reporting freight contract values.