12 Biggest Financial Scandals in US History

Published on December 7, 2023 at 11:35 am by Ty Haqqi in Lists, Market Movers, News

In this article, we will be taking a look at the 12 biggest financial scandals in U.S. history. To skip our detailed analysis, you can go directly to see the 5 biggest financial scandals in U.S. history.

There are few things as serious as a major financial scandal, which don’t just threaten the reputation and integrity of a company, but can also result in massive losses for investors. This is why the auditing industry was created, to manage oversight of companies’ accounting procedures and determine whether the information being provided was correct or not. However, there is a huge gap in what the general public expects auditors to carry out and what an auditor is actually required to. For example, auditors do not check each and every transaction of a company to ensure that they’re correct, but in fact, carry out sampling and test a subset of transaction. Additionally, auditors also use their own professional judgement and skepticism while performing audit procedures. However, it is important to remember that an auditor’s responsibilities include assessing the risk of material misstatement of financial statements due to fraud, with the SEC assessing that around 5% of revenue globally is lost to fraud every single year, amounting to nearly $4.7 trillion globally. Not following proper procedures significantly increases the risk of fraud, which is why audit firms racked up around $50 million in fines in just one year!

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Some of the biggest financial scandals in U.S. history, such as the Enron accounting scandal, led to the demise of one of the biggest audit firms of the time in Arthur Anderson. But a more recent scandal which gripped the world, and especially the cryptocurrency world recently, was the demise of FTX, a fraud which resulted in the loss of billions of dollars. Normally, when serious frauds are detected, especially financial frauds, the companies end up having to close down, which is why many of the biggest bankruptcies in American history happened as a result of fraud. Of course, that doesn’t mean that all bankruptcies happen due to fraud, as evidenced in the closure of three major banks earlier this year after a bank run led to the collapse of Silicon Valley Bank.

A study on Research Gate explored the impact on public confidence especially in the wake of some of the biggest financial scandals in U.S. history. The study considered the Enron accounting scandal, and concluded “Accounting scandals to a large extent reduces the confidence of the public in the financial reports and this confidence is so because they believe that the accountants/auditors should exercise integrity and professional skills in giving an opinion on the true and fair view of the financial statements audited; Hence, enhancing the level of public confidence in financial report rests with the auditors and directors who prepare the financial statements. This paper therefore recommends that company directors should have the interest of the stakeholders above personal interests and Professional bodies should constantly review and broaden existing professional, standards, guides and codes of ethics. The accounting and auditing professionals who are responsible for the preparation of financial statements need to adhere strictly to the codes of ethical accounting and auditing standards to produce reliable, relevant, timely, accurate, understandable and comprehensive financial statements in a true and fair view of the firm financial position and performance. This is because such financial statements and reports form the basis upon which the stakeholder should have confidence to make an informed decision.” The conclusion reemphasized the impact on public confidence being impacted negatively because of accounting scandals, and could even inform investment decisions in the future.

Of course, all scandals or frauds aren’t financial in nature, even if involving financial services companies in the world. One of the biggest consultancy firms in the world, PwC, has faced several scandals in recent years but perhaps the biggest came in 2023, after a former partner of the firm in Australia leaked confidential government tax plans to companies, in a bid to sign them up and earn new business. One-fifth of PwC Australia’s revenue was derived from governmental work, but in the wake of the disclosure of the scandal, the firm had to sell its government practice for the amount of $0.67. No, it is not in millions or billions, the total amount was exactly $0.67. Earlier in the year, PwC was embroiled in another issue after Brazilian retailer Americanas collapsed in January with $4 billion in accounting irregularities.

While some of the biggest financial scandals in U.S. history can have devastating consequences, bankruptcies can actually provide benefits to a company. For example, when Credit Suisse collapsed amid the aforementioned bank collapses involving Silicon Valley Bank and Signature Bank, it was bought by rival UBS Group AG (NYSE:UBS) for CHF 3 billion in the first half of 2023. Currently, UBS Group AG (NYSE:UBS) has seen its share price rise by more than 20% YTD 2023, and mentioned the integration of Credit Suisse in its Q3 2023 earnings call, stating “Lastly, we decided to fully integrate the Swiss business of Credit Suisse after a thorough strategic review. The thing I’m proudest about is that clients have rewarded our unwavering commitment with extended trust. Thanks to their restore belief in the combined firm, we were able to swiftly stabilize the current Swiss score, its Wealth, Asset Management and Swiss Bank franchises. We are happy to see markets recognizing our ongoing work. Our strategy is unchanged and the Credit Suisse acquisition will act as an accelerant to our plans.”

Bronte Amalthea Fund made the following comment about UBS Group AG (NYSE:UBS) in its first quarter 2023 investor letter:

“The biggest thing that happened in markets in the quarter was the collapse of three banks:—Credit Suisse, Silicon Valley Bank and Signature Bank. We have held short positions in each of these banks, but we traded them poorly and profits were smaller than they could have been.

We have also purchased the successor banks for two of them. We initiated positions in UBS Group AG (NYSE:UBS), which has purchased Credit Suisse under advantageous terms, and First Citizens Bank, which purchased much of Silicon Valley Bank on even more advantageous terms.

We will go through each of these banks in turn as they are (a) interesting in their own right and (b) have resulted in some changes in our portfolio.

Swiss banks were sharply weakened by the end of banking secrecy. Historically, Switzerland was a clean place to hide your dirty money and Swiss Banking was almost synonymous with tax avoidance.…” (Click here to read the full text)

Methodology

To determine the biggest financial scandals in U.S. history, we have considered the total impact of each scandal, which has formed the basis of their ranking. Of course, financial scams aren’t just occurring in the U.S. as evidenced by the Bank of Credit and Commerce International which engaged in money laundering and widespread fraud in the UK and globally, while Japanese company Olympus was hit by a $1.7 billion fraud in 2011.

12. Freddie Mac

Freddie Mac engaged in a multi-billion dollar accounting fraud from 1998 to 2002, resulting in the SEC filing suit against the company. In 2018, Freddie Mac was made to pay nearly $50 million to impacted investors after misreporting its income by at least 23% in 3 years.

11. The Kraft Heinz Company (NYSE:KHC)

The Kraft Heinz Company (NYSE:KHC) is one of the biggest food and beverage companies in the entire world, with some of its top brands including Cadbury, Kool-Aid, Jell-O and Philadelphia Cream Cheese, not to mention of course the namesake Kraft and Heinz brands. In 2021, the SEC announced that The Kraft Heinz Company (NYSE:KHC) would pay fines of $62 million “to settle charges related to inflated cost savings that caused it to restate several years of financial reporting”. Among the many accounting misrepresentations The Kraft Heinz Company (NYSE:KHC) engaged in was recognizing unearned discounts and maintaining false supplier accounts, making it part of the worst financial scandals in U.S. history.

10. Bristol-Myers Squibb Company (NYSE:BMY)

Bristol-Myers Squibb Company (NYSE:BMY) is one of the biggest pharmaceutical companies in the world. In 2004, Bristol-Myers Squibb Company (NYSE:BMY) was alleged to have sold around $1.5 billion in advance to its wholesalers in a bid to make analyst estimates. After charges brought by the SEC, Bristol-Myers Squibb Company (NYSE:BMY) agreed to pay $150 million to settle the fraud charges.

9. Wells Fargo & Company (NYSE:WFC)

Wells Fargo & Company (NYSE:WFC) is one of the biggest banks in the world, and currently has around $1.9 trillion in assets. It was the subject of a cross-selling fraud investigation where millions of fraudulent savings and checking accounts were created to falsely boost sales and Wells Fargo & Company (NYSE:WFC) was hit with a fine worth $186 million, though civil and criminal suits against the company were worth around $2.7 billion by the end of 2019.

8. American International Group, Inc. (NYSE:AIG)

Many of the biggest financial scandals in U.S. history have not resulted in the company’s demise and American International Group, Inc. (NYSE:AIG) is one such company. In 2005, accounting irregularities resulted in American International Group, Inc. (NYSE:AIG) having to restate its financial statements for four years and being hit with a fine of an astonishing $1.6 billion. Despite this, the company has continued to prosper, even during the 2008 recession when the Federal government bailed out American International Group, Inc. (NYSE:AIG) to the tune of $180 billion, which was repaid along with interest in 2012.

7. Theranos

Theranos was a classic example of the American Dream coming true, with Stanford dropout Elizabeth Holmes starting the company, which saw its market valuation increase at a massive pace, and was said to be worth $10 billion by 2014. Turns out, the entire thing was a sham, whose main selling point, the automated compact testing device, was proven to be unworkable by medical professionals, and now Elizabeth Holmes is in jail serving an 11 year sentence for fraud.

6. Lehman Brothers

The Lehman Brothers collapse is said to have brought about the onset of the 2008 global recession, and came about mainly because of the bank’s involvement in subprime mortgages. However, it also involved a fraud regarding repo 105 which was used for boosting its financial position ahead of the year end.

Click to continue reading and see 12 Biggest Financial Scandals in U.S. History.