A financial scandal is a serious breach of trust in the finance industry that undermines investors’ confidence and threatens the integrity of global markets. It involves fraudulent activities such as Ponzi schemes, insider trading, and bribery, with perpetrators exploiting loopholes in accounting regulations and vulnerabilities within the financial system. Financial fraud and scandal cost businesses, investors, and philanthropies billions of dollars each year and can have wider implications for the economy and society.
The most famous example is probably Enron’s collapse in 2001, which led to the loss of $72 billion by shareholders and millions of lost pensions and salaries for employees. The scandal prompted many new measures to improve corporate governance, including increased oversight of company boards and stricter auditing. It also highlighted the crucial role played by whistleblowers in exposing accounting irregularities.
Other major examples include the Satyam scandal of 2009, when an Indian IT services firm’s founder was revealed to have overstated profits for several years. The company was forced to restate its books and the scandal eroded investor confidence in Indian companies. Another example is the failure of Lehman Brothers in 2008, when it was revealed that the investment bank had held a lot of mortgage-backed securities that lost value when housing prices declined.
More recent examples include the Kraft Heinz Company expense fraud in 2021 and the German payment processor Wirecard’s scandal of 2020, where it emerged that the firm had inflated its profits by hiding line costs. The latter incident highlights how even established and trusted firms can become embroiled in scandal if managers exhibit managerial opportunism.