November 16, 2015

By Pete Miller, CPA|CFE, and Mike Nurse, CPA|CFE|CGMA

Has cheating and fraud always been a part of human history? According to Andrew Beattie in his article “The Pioneers of Financial Fraud,” evidence of fraud stretches all the way back to 300 B.C. when a Greek merchant named Hegestratos orchestrated a loan fraud that ultimately ended in his demise. In modern times, stories of financial fraud and corporate scandals have become ubiquitous in daily news feeds, providing a critical call to action for anyone involved in business.

For National Fraud Awareness week, we are highlighting five of the largest accounting scandals in U.S. history. Each day, we will bring you a short description of a prolific fraud in the hopes that raised awareness will ultimately help us to understand and mitigate fraud risk. In doing so, we can help to ensure ethical and sound business practices, which will benefit society as a whole.

“Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not. What successful economies do is keep it to a minimum. No one has ever eliminated any of that stuff.”  – Alan Greenspan, former Chairman of the Federal Reserve

If you have ever bought a home or needed a home mortgage, you are probably familiar with a company called Freddie Mac. Short for Federal Home Loan Mortgage Corporation, Freddie Mac is a federally backed mortgage financing giant. Founded in 1970 by Congress, its mission was to “stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing.”

An accounting scandal erupted at Freddie Mac in June 2003 that was discovered through an SEC investigation. The company had intentionally understated $5 billion in earnings. The main players – President and COO David Glenn, Chairman/CEO Leland Brendsel, and ex-CFO Vaughn Clarke -were forced to pay heavy civil fines and restitution, and the company itself was forced to pay a $50 million fine.

SEC Enforcement Director Linda Thomsen said in a statement, “Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings at any cost.”

Freddie Mac would go on to be involved in another heavily publicized scandal related to the sub-prime mortgage crisis in the late 2000s.

Takeaway:  This scandal speaks to having a proper tone at the top. Company culture drives a lot of behavior. While a positive culture won’t stop a fraud from starting, it is easier to picture a fraud taking place in a poor cultural environment than a positive one.

Co-author Mike Nurse is a manager in the Accounting and Consulting Group at Clark Nuber PS. Reach him at mnurse@clarknuber.com.

© Clark Nuber PS and Focus on Fraud, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.