The Biggest Cases of Accounting Fraud and How You Can Protect Your Business
The past few years have seen some of the most shocking accounting fraud cases in history. To add to this, around 40% of large companies have agreed to committing accounting violations in the past. Businesses face legal scandals for financial misconduct, from crypto scams to money laundering.
In this article, we'll be looking at some of the most shocking cases of accounting fraud and how you can adhere to financial regulations and protect your livelihood as a business owner.
FTX Fraud and Money Laundering Charges
Case Overview
The growing popularity of cryptocurrency saw many companies rake in billions overnight. It is estimated that 21% of American adults have owned some form of cryptocurrency as of 2022. FTX was the third largest cryptocurrency exchange, with over a million users.
In November 2022, the cryptocurrency trading platform committed major accounting fraud by misusing customer investments and falsifying accounts. As a result, the Bahamas-based firm filed for bankruptcy before seeking a bailout from private investors. Rival cryptocurrency exchange, Binance, offered to buy FTX but walked away after conducting their due diligence.
Chronology of Events
- Nov 2 - CoinDesk leaks FTX’s balance sheets
- Nov 6 - Binance sells all FTT tokens
- Nov 8 - Binance offers to buy FTX but backs out of the deal
- Nov 12 - FTX reports a cyber hack and moves assets to cold storage
- Dec 12 - Bankman-Fried is arrested in the Bahamas
- Dec 22 - Bankman-Fried is released on the largest bond in history - $250 million
FTX collapsed ten days after suspicions arose about FTX’s sister company, Alameda Research. A news site leaked a report and balance sheets that stated Alameda Research was valued at $5 billion in FTT - the cryptocurrency created by FTX. Many celebrity investors lost money in the FTX scandal, including Shark Tank’s Kevin O’Leary and Tom Brady.
Luckin Coffee Fake Revenue Scandal
Case Overview
The Chinese company Luckin Coffee misused investor funds by creating false accounts and company revenue statements. The business used two separate databases to store its revenue and expenses to keep its actual orders and sales hidden from the public.
The chairman and CEO of Luckin Coffee were removed from their positions and ordered to pay a $180 million fine by the United States Securities and Exchange Commission (SEC).
Chronology of Events
- 2018 - Luckin raises $200 million to start their business, and is valued at $1 billion
- 2019 - Luckin becomes China’s largest coffee chain overtaking Starbucks
- 2020 - Muddy Waters Research raises questions about Luckin’s financial reports
- 2022 - Luckin is ordered to pay a $180 million penalty by SEC
The Starbucks rival has agreed to pay the SEC fine but has not agreed to any of the charges. However, a representative of the SEC revealed that “Luckin Coffee intentionally overstated its revenue and expenses in public financial reports from 2019.” Luckin has since admitted that their Chief Operating Officer and other staff fabricated sales reports of up to $310 million.
Weber Shandwick Embezzlement Scheme
Case Overview
In December 2022, the world watched as one of the leading global public relations firms came under fire for falsifying accounting records. Former CFO, Frank Okanuk, was sentenced to 52 months in federal prison for using company funds to buy luxury boxes at sporting events and fund outside business ventures. In addition, Mr. Okanuk admitted to embezzling $16 million from the PR firm.
Chronology of Events
- 2011-2020 - Okanuk uses his position to remove funds and create false invoices to justify his purchases
- Summer 2020 - Okanuk leaves his position at Weber Shandwick
- Dec 2022 - Okanuk pleads guilty to one count of wire fraud and one count of falsification of the books
Throughout his embezzlement scheme, Mr. Okanuk used company funds for various shocking reasons, including a payment to his former university.
He falsified records to indicate that funds would be used to pay for an economic survey when, in fact, he was paying off a previous tuition bill of $20,000. Instead, Okanuk claimed a refund from the university and kept the money for personal use.
Constance Stobert - Embezzlement and Tax Fraud
Case Overview
Constance Stobert, a former controller for Mechanical Operations Company (MOC), embezzled at least $1,678,893 between January 2014 and July 2018. She used company funds for personal expenses such as credit card payments and ATM withdrawals at casinos. Additionally, she failed to report the stolen money on her tax returns, resulting in a tax loss to the government of $545,990.
Chronology of Events
- Stobert worked as a controller for MOC from 1994 to July 2021.
- Between January 2014 and July 2018, Stobert embezzled over $1.6 million from MOC.
- Stobert filed false tax returns from 2016 to 2019, omitting the embezzled funds.
- January 30, 2024: Stobert is sentenced to 51 months in prison and three years of supervised release for wire fraud and filing false tax returns.
Financial Implications
- Embezzled funds: Over $1.6 million
- Tax loss to the government: $545,990
Wells Fargo: A History of Regulatory Violations
Case Overview
Wells Fargo, a prominent financial institution, has been embroiled in multiple scandals over the past decade. These incidents highlight a pattern of unethical behavior, inadequate internal controls, and disregard for regulatory compliance.
Chronology of Events
- 2010-2015: Wells Fargo allowed a foreign bank to process $532 million in prohibited transactions through its Eximbills platform, leading to a $100 million fine in 2023.
- 2011-2016: The bank faced allegations of employees creating fake accounts without customer consent to meet aggressive sales targets. This resulted in a $3 billion fine in 2020.
- 2022: Wells Fargo was fined $2 billion in refunds and $1.7 billion in penalties for additional consumer financial law violations, including unauthorized fees and interest on auto and mortgage loans.
Financial Implications
- Over $6 billion in fines and penalties: The bank has incurred substantial financial penalties due to its misconduct.
- Reputational damage: The scandals have severely damaged Wells Fargo's reputation, leading to loss of customer trust and increased regulatory scrutiny.
- Legal costs: The bank has likely incurred significant legal expenses to defend itself against lawsuits and investigations.
Barbara Chalmers: Multi-Million Dollar Embezzlement Scheme
Case Overview
Barbara Chalmers, a Texas resident, was convicted of embezzling at least $29 million from her employer, a Dallas-based charitable foundation and affiliated companies. She exploited her position as bookkeeper to defraud the organization over a decade.
Chronology of Events
- 2012-2023: Chalmers embezzled at least $29 million by issuing fraudulent checks to herself.
- Ongoing: Chalmers concealed her crime by providing false financial information to tax preparers.
- 2023: Chalmers sentenced to 10 years in prison and ordered to pay $44,809,438 in restitution.
Financial Implications
- Loss of $29 million: The charitable foundation and affiliated companies suffered significant financial losses due to Chalmers' embezzlement.
- Restitution of $44,809,438: Chalmers was ordered to repay the full amount stolen, plus additional funds.
Additional Details
- Chalmers used the stolen funds to finance a construction business and pay off credit card debt.
- The IRS Criminal Investigation and FBI investigated the case.
- The U.S. Attorney's Office for the Eastern District of Texas prosecuted the case.
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Protecting Your Business Against Accounting Fraud
Regardless of your business size, there are several ways to protect yourself and your employees from accounting fraud. First, it is essential to remain open and honest about your financial reports and to put emphasis on training your employees to recognize when things look wrong. In addition, business owners should use internal methods and restrict user access to protect their accounts from fraudulent activity.
Employ a Trustworthy Accountant
There are various methods that fraudulent accountants will use to help a company appear more fruitful than in reality. However, a certified public accountant (CPA) with positive reviews and recommendations will abide by financial laws and regulations. You can check their license number with the IRS Return Preparer Office Directory.
A CPA can also offer financial advice throughout the year, alongside preparing and filing your return. They may assist you with finding a suitable bank account if you have a poor credit history, manage your debt, and support you in various ways.
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Understand Your Business Finances
You should never leave your finances solely in the hands of your accountant or finance teams. Your role as the business owner is also to monitor every cent that leaves and enters your accounts. Educate yourself and your staff on your state's financial laws and tax requirements.
Some simple ways to keep track of your accounts include the following:
- Monitor daily income and expenses
- Keep accurate records
- Include finances in your business plans
- Set up a record-keeping system
- Use stock control methods
You can protect your finances by monitoring your finances closely and making your employees aware of their responsibilities. Seek advice from your account immediately when financial issues arise to minimize the impact on your business.
Know Your Team
You must know your staff members and their role within your company. For example, employees with financial responsibilities should understand the consequences of submitting false financial documents or misrepresenting accounting information. Training and getting to know your team is an excellent fraud prevention method that business owners should not overlook.
Leverage Technology
- Expense management software: An expense management software can automate compliance and help prevent expense fraud through robust approval workflows, automated policy checks, and detailed reporting.
- Accounting software: Choose accounting software with advanced security features, such as role-based access controls and fraud detection alerts.
In Conclusion
In recent years, companies have become more aware of expense fraud and are taking steps to prevent it. While it is impossible to control human behavior, management can take steps to reduce the risk of fraud, such as implementing clear expense guidelines, establishing consequences for policy violations, and switching to an automated expense software.
