Chapter 19

Creative Accounting and Accounting Scandals in the USA

Charles W. Mulford and Eugene E. Comiskey

19.1 INTRODUCTION

The list of US firms involved in accounting scandals in recent years is frighteningly long. The names of many roll off one’s tongue as readily as a list of professional athletes, musical artists or even movie stars. In contrast to athletes, musical artists and movie stars, however, these firms are famous for the wrong reasons. Consider names like Cendant Corp., Tyco International, Ltd or W.R. Grace & Co. These are names of firms that readers may not have heard had they not been involved in some form of accounting scandal. Others include HealthSouth Corp. and, of course, Enron Corp. and WorldCom, Inc. All of these companies and, unfortunately, many others are firms that became engulfed in the accounting maelstrom that developed in the USA in the 1990s and extended into the early part of this century.

A reasonable question that any informed reader should ask is: why were there so many accounting scandals in the USA during the 1990s and early 2000s? Many would say that reduced diligence and a decline in independence on the part of outside auditors were the primary contributing factors. Others would point to a set of accounting standards that was very rule-oriented with bright-line guides or strict dictums that were just begging to be thwarted by smart accountants. Consider too the history-making bull market for equities that developed in the late 1990s. It ...

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