Audit Frauds: Intention and Negligence in Five Major Corporate Scandals

Abstract

This study has been carried out to examine the five most prominent corporate scandals involving Enron, WorldCom, Shell, Lehman Brothers, and Barings Bank by focusing on the main issues of negligence, or potential intentions in contributing to corporate misdoings of the auditors. This study also probes the details of each case. Wherein, the fraudulent accounting practices found in the Enron case set the ground for understanding how auditors failed to detect and prevent manipulative financial reporting. Similarly, Royal Dutch Shell case sheds light on issues of transparency and corporate governance, questioning the efficacy of auditing processes in revealing mismanagement. Lehman Brothers bankruptcy, a decisive event in the financial crisis, examines auditors’ oversight in evaluating financial instruments and risk management strategies. On the other hand, the case of WorldCom focuses on the role of auditors in where they were potentially involved in financial frauds. As far as the Barings Bank scandal is concerned, it depicts the blatant failure of the top management in identifying risk. Though, a lot of research has been done on the adequacy of auditing standards, ethical considerations, and the overall effectiveness of external oversight and modified regulations have been offered to lessen the lapses in audit and to foster a robust system of corporate oversight and accountability. However, most of the studies have focused on the systems and practices, and not many studies have explored the human side of these scandals, or more specifically, the mental side viz. mens rea or the guilty mind of the main players in all these scandals. Therefore, this study tried to find out whether the fault lies only in the systems or whether the people involved in the scandals intended to defeat the systems. Initially, these analyses reveal that the audit staff out of five companies, two were committing crimes intentionally, whereas, two were potentially negligent in the accounting procedure follow up and one had both traits.

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