A Little Bit of History of Huge Accounting Fraud

Or, why your O2C team asks you annoying questions

If you’re in Sales or a Finance role there will almost certainly come a time when your accounting department, the Revenue team, or the Order to Cash team; basically, the boffins who book revenue or raise invoices for you, will come back and ask really annoying questions. And you’re sitting there thinking:

Don’t they trust me? Or;

But the deal’s been done. Why are they making a fuss?

Here's two situations, and a nice, juicy piece of history with each, to explain why.

1.??? They ask for evidence behind the value you want to accrue, or recognise. Specifically, proof from a third party.

2001, ENRON – the biggest bankruptcy in history when it happened. Now there were lots of reasons why Enron collapsed. But here’s a really important one you should remember. At the time Enron was in business, there was a form of revenue recognition (I know, I know, accounting speak. But bear with me) called Mark-to-Market which, very simply, allowed a company to recognise 100% of the value of a contract upfront, with no proof. And oh yeah, Management could decide not only when to recognise, but also the value of the contract, especially if the contract was “complicated.” And when the deals didn’t deliver what had already been recognised, Enron just kept making up bigger numbers on new contracts to fill the hole. No shock really, that one day it all came tumbling down.

So, when your accounting or revenue team asks you how you came up with that value, and you say, “It’s what we forecast,” don’t be surprised when they beat you over the head with their keyboard.

By the way, the scandal also triggered the bankruptcy of its auditors – Arthur Andersen. So that’s a lesson too!

2.??? When they ask you for proof of an actual agreement or contract before they raise an invoice. Even if your VP has told you that you need to raise an invoice, so why are they disputing this?

2020, WIRECARD – once a star of the fintech world, it was found to have a €1.9 Billion hole in their accounts when it went bankrupt. Basically, they created fake invoices to companies that didn’t exist. It’s really that simple. So, when you send an email to your revenue team asking them to raise an invoice to some random customer, and you don’t have a contract, or an email from the customer agreeing to the terms, and they reply with, “I’m sorry. What did you just say?” You’ll understand why.

In another shameful moment in accounting history, the German financial regulatory authority kept defending Wirecard, whilst threatening action against short-selling investors and journalists, until it all became way too obvious for them to ignore.

There are lots of other way fraud happens, many of which are so clever that most of us would never see it coming. But these are two really simple stories behind really big cases. And fraud can start at small levels, so don’t make excuses saying it’s not material.

Basically: Don’t book revenue unless you can prove it, and don’t raise an invoice (even to deferred income, or a balance sheet account, all of you who are thinking you’re super-clever), unless there is an agreement.

You’re not sure what an “agreement” is? Ok, that’s for tomorrow.

The author has worked in Order to Cash and Finance Transformation for more than twenty years, with experience in the licensing, media, music and advertising worlds. With a past academic background in Consumer Behaviour he loves to hear from all sorts of people, their stories, challenges, and interesting insight they have, that can help others and make us think.