A financial scandal involves illegal, unethical or deceptive practices in finance or corporations that result in significant losses for investors and damage to market trust. While financial fraud involving individuals can occur on a smaller scale, most examples of financial scandal involve large companies and extensive manipulation of financial data.
In the early 2000s, for example, telecommunications company WorldCom committed accounting fraud to inflate earnings. This resulted in billions of dollars in investor losses. The scandal was uncovered in part due to an internal whistleblower, Sherron Watkins, who reported fictitious transactions to authorities. Forensic accounting specialists were able to uncover the deception and reveal the truth about the company’s financial state. The CEO and CFO of the company were arrested and charged with securities fraud, and the firm was forced to restate years of financial reports.
In the aftermath of the 2000s accounting scandals, Congress passed the Sarbanes-Oxley Act to protect investors from fraudulent financial reporting by corporations and impose stricter penalties for those found guilty. However, regulatory arbitrage (exploiting differences in regulations across jurisdictions) and the human factor of greed and disregard for ethics remain major obstacles to achieving full financial transparency and mitigating risky practices.