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The Anatomy of Corporate Fraud: A Comparative Analysis of High Profile American and European Corporate Scandals

Abstract

This paper presents a comparative analysis of three American (Enron, WorldCom and HealthSouth) and three European (Parmalat, Royal Ahold and Vivendi Universal) corporate failures. The first part of the analysis is based on a theoretical framework including six areas of ethical climate; tone at the top; bubble economy and market pressure; fraudulent financial reporting; accountability, control, auditing, and governance; and management compensation. The second and third parts consider the analysis of these cases from fraud perspective and in terms of firm-specific characteristics (ownership structure) and environmental context (coverage in media and academic literature, regulatory and corporate governance frameworks). The research analyses shed light on the fact that, despite major differences between Europe and U.S. in terms of political institutions, laws and regulations as well as managerial practices, there are significant similarities between six groups. The analysis also demonstrates that, the ethical dilemma has been coupled with ineffective boards, inefficient corporate governance and control mechanisms, distorted incentive schemes, accounting irregularities, failure of auditors, dominant CEOs, dysfunctional management behavior and the lack of a sound ethical tone at the top. Significant similarities were also observed in the analysis from the fraud triangle perspective. However, there are several major differences between the six corporate failure cases particularly with regard to ownership structure, coverage in media, and legal, regulatory and governance frameworks. This research study may have several academic and practical contributions, particularly because of multidisciplinary, international features, and comparative analyses used in the paper.

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Notes

  1. Emphases are ours.

  2. Ibid.

  3. Reported earnings include all charges except those related to discontinued operations, the impact of cumulative accounting changes, and extraordinary items, as defined by accounting standards.

  4. The measure of operating earnings focuses on the earnings from a company’s principal operations, with the goal of making the numbers comparable across different time periods. The use of this measure seems to come from internal management controls used when a business unit manager is not responsible for managing corporate level costs.

  5. Berle and Means were the first to raise this issue, relating it to the shift from an economy based on relatively small enterprises, owned and managed by individuals or small groups of individuals, to one dominated by large, multi-unit enterprises whose shareholdings are widely dispersed and whose shareholders are no longer likely to be in control. According to this approach, company owners, by surrendering control and responsibility over their properties, have surrendered the right to have the corporation operated in their sole interest.

  6. See Soltani (2007) for discussion on ISA 240 of IFAC, 2007 and PCAOB-AU Section 316 and these three conditions including several examples of each one.

  7. A major part of the information regarding the historical background of these groups was extracted from their annual reports and company’s press releases.

  8. The Caymans, in the Caribbean, has become very famous with the Parmalat case, but the Cayman Islands is one of the ‘tax havens’ the most used by international companies.

  9. Euronext is the joint market between Paris, Amsterdam, Brussels and Lisbon Stock Exchanges. This was created in the wake of the implementation of European financial market.

  10. Major part of the information was extracted from the annual reports and Form 20 F.

  11. In the Fair Funds provisions of the SOX Act of 2002, Congress gave the SEC increased authority to distribute ill-gotten gains and civil money penalties to harmed investors. The Commission has returned more than $4 billion to investors for the period 2002-august 2008 (SEC 2008).

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Acknowledgments

The author would like to thank Professor Alex Michalos, editor-in chief of the Journal for his careful follow up and feedback. I would like to express my special appreciation to reviewer 1 for providing valuable recommendations and advice during the review process. The helpful assistance provided by the Springer’s staff is very much appreciated.

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Soltani, B. The Anatomy of Corporate Fraud: A Comparative Analysis of High Profile American and European Corporate Scandals. J Bus Ethics 120, 251–274 (2014). https://doi.org/10.1007/s10551-013-1660-z

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Keywords

  • Corporate fraud
  • Ethics
  • Europe/U.S.
  • Accounting
  • Control
  • Accountability
  • Financial scandals
  • Management compensation
  • Corporate governance
  • Management performance
  • Regulatory framework
  • Tone at the top
  • Fraud triangle