ROUND TWO: REAL WORLD ACCOUNTING SCANDALS

Enron is one of the most famous accounting scandals of this century. But what did they actually do wrong:

• They recognised income on future sales before it was received to enhance the reported profit figure

• Used accounting loopholes to hide billions of dollars of bad debt whilst simultaneously inflating the company’s earnings

• They issued convertible debt without recognising it as a liability on the balance sheet – that is, they expected investors to convert debt into equity, the investors did not do so and Enron was not able to pay back the money

• They did not file any accounting statements for two years and so broke many regulations in US accounting practice

In 2012, “comedian” Jimmy Carr said he had made “a terrible error of judgement.” Assuming this was to do with his accounting returns and not about his decision to pursue being a comedian as a career, what was it:

• He omitted a “zero” from his tax return and made the error of declaring income as £300,000 rather than £3,000,000

•   He declared that most of his income had gone into a pension scheme and so was exempt from tax until the point the pension was drawn down. When HMRC investigated, he had made no such provision.

• He overestimated his expenses and expensed items such as his weekly shopping and his pet dog (a thoroughbred that cost over £5,000) through his tax statement

• He sheltered £3.3 million and only paid 1% tax using a scheme which channelled the salaries of beneficiaries in the UK through Jersey-based shell corporations

Gary Barlow, who “sings” in a band called Take That, took part in an aggressive tax avoidance scheme that led to calls for him to be stripped of his OBE. What was his excuse for this:

• “I pay someone, a lot of people, a lot of money to take care of these things and keep me out of trouble. I guess they didn’t do their jobs.”

•   “I thought, since I was residing between the Channel Islands and the Virgin Islands at the time, that UK tax laws did not apply to me.”

• “I was told that other people had used this scheme for years and that it allowed me to make more by way of charitable donations that were tax deductible as far as I was concerned.”

• “My accountant, it is now clear to me, was embezzling funds from me.”

Why was Wesley Snipes jailed in 2011:

•      He refused to pay tax on shares he sold that made him $3 million

•       He assumed that all investment into his own film company was tax deductible and so had said he put all his earnings into the film company

•     He had not filed a tax return for at least a decade despite having earned at least $38m

• No real reason, it was just that his films were awful!

Tesco overstated its profits by £263 million in 2014. How did it do this?

•    It assumed most of its Clubcard users would not use their points and did not anticipate having to pay out when the users cashed in

• It mistakenly booked the results of the last quarter of 2013 into the results for 2014

• It overestimated revenues to be paid to it by suppliers

• It was due to a computer error which falsely recognised the costs of the supplies bought and significantly undervalued them. The same computer system was at the bottom of the Post Office scandal.

This may take you back and be “before your time” but what misdemeanour (of a financial nature!) was Robert Maxwell found, after his death, to have committed:

• He used hundreds of millions of pounds from his companies' pension funds to shore up the shares of the Mirror Group in order to save his companies from bankruptcy

• He had transferred all assets into his children’s names and had no income – and therefore paid no tax – for the last five years of his life

• He falsely claimed £6 million worth of expenses as tax deductible

• He was found to be at the heart of a football betting scandal with three players from Liverpool FC

What is a whistle-blower?

• A slightly tongue in cheek term used to describe a company’s non-executive directors

• Someone who reports wrong-doing in an organisation

• A colloquial term for the head of a Human Resources (HR) department

•   A company’s auditors

Simon York was the Director of HMRC’s Fraud Investigation service. What do you think he said one of his biggest successes of 2016 was:

• Ensuring that 5 large companies, including amazon, had to pay £320million more in tax than they anticipated

• He discovered where the financial proceeds of the Brinks-Matt gold bullion robbery in 1983 had gone and was in a position to make 7 arrests for tax evasion on undeclared income. This was expected to bring in £25million in tax to HMRC.

• Winning a case in court that a Jaffa Cake was to be definitively declared a cake and therefore subject to VAT.

• Jailing a group of film producers, accountants, financial advisers and investment bankers a total of 36 years for their part in a £2.2 million film tax scheme fraud

As part of the Pandora papers investigation, it was discovered that Bono, the “singer” in U2, owns which of the following rather unusual things (though we would stress that this is not fraudulent or scandalous, lest he sue us!):

• A llama in the south of France

• A small elephant colony in Africa

• A shopping centre in Lithuania

• A second-hand car business in southern Nigeria

In 2022, Ernst & Young, one of the world’s largest auditing firms, agreed to pay a $100 million fine after U.S. securities regulators found that hundreds of its auditors had been found guilty of what:

• Cheating in ethics exams

• Taking money from clients as bribes

• Watching Wesley Snipes’ films when they should have been working!

• Falsifying audit records to save on the amount of work they had to do.