GREAT CORPORATE SCANDALS: NARRATIONS OF

FRAUDULENT CONTEXT AND HARMFUL PRODUCTS

Author:
Zoulkifli Salle ABDOUL FATAHI
Institute of Social Sciences, Istanbul University (MSc Finance Program)

Abstract:

The fate of most multinational and even local companies in different

geographical locations in the world in the last centuries, thanks to
globalization, are to a greater extent interrelated and determined on one
hand by regional economic trends (i.e. trends in the financial and product
markets) and on the other hand by the actions of the individuals within
the organization (Pozner & al., 2010). In an attempt to narrate by
illustrating some cases of great corporate frauds and harmful product
scandals, we identified among the causes, some organization-related and
some person-related. While corporate culture, values, strategic gearing,
pay-schemes and to a lesser extend external spread accounted for the
main organization-related causes, peer pressure, rationality, strain and
greed appeared to be the main person-related causes. The consequences
of such negative corporate behavior or misconduct were of economic,
political and social nature ranging from unemployment through lawsuits to
loss of lives. We furnished our work with some illustrative examples of
great corporate scandals that occurred over the last century. Our
approach was mainly narrative and to a small extend generalizing,
focusing on some behavioral theories from literature to explain the causes
of corporate misconduct. This results in a great deal of assumptions. An
empirical work could be done to verify the relevance of most of these
theories in actually explaining the causes of misconduct.
Great Corporate Scandals: Narrations of Fraudulent Context and Harmful Products

Contents
Abstract: 1
Contents 2
Introduction 2
Meaning of Scandal 4
What are the causes of Misconduct? 4
1. Individual-Level Causes 5
a. Rationality 5
b. Peer Pressure 6
c. Accidents 6
d. Reward Schemes and Plans 7
2. Organisational Causes 8
a. Reputation 8
b. Strain 8
c. Organisational Culture and Values 9
d. Spread Effect 10
Great Corporate Scandals Illustrated 11
1. Accounting and Reporting Scandals 11
AIGs over greed 12
SHELL: Overstatement of Oil and Gas reserves (source CIMA Magazine) 13
2. Product Scandals 15
DANONE: The Activia Yogurt Scandal 15
Firestone and the Ford tyre controversy 16
3. Financial Scams 17
FlowTex 17
Bernard L. Madoff Investment Securities LLC: Ponzy Scheme 18
4. Environmental Scandals 19
Exxon Valdez Oil Spill 19
Consequences of Corporate scandals 20
1. Economic Consequences 20
2. Social Consequences 20
3. Political Consequences 21
Conclusion 21
References 22

Introduction

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Technological development in the 20th and 21st centuries have enhanced

the development of financial markets, eased globalisation and enhanced
entrepreneurship. It has equally witnessed so many Mergers and
Acquisitions, Conglomeration of successful companies and Leveraged
Buyouts of unsuccessful companies. By unsuccessful companies we mean
liquidated companies with or without bankruptcy.

The fate of most multinational and even local companies in different

geographical locations in the world in the last centuries, thanks to
globalisation, are to a greater extent interrelated and determined on one
hand by regional economic trends (i.e. trends in the financial and product
markets) and on the other hand by the actions of the individuals within
the organisation (Pozner & al., 2010). This assertion has been backed by
the global effects of a regional economic or financial crises like the case of
the Asian Crisis in 1997, the great US recessions 1929 1933 and 2007
2009, the Russian crises in 1998, 2008 2009 and from 2014 till date (IMF
Economic Outlook Data Base).

In our attempt of a narration of great corporate scandals, we shall, in

consideration to the two factors determining the fate of organisations
stated above, begin our analysis with a definition of corporate scandal and
misconduct, the causes of these scandals, the consequences of these
scandals and finally the remedies and preventive measures taken to avoid
diffusion to other companies.

Our analysis of the causes shall be done at an organisational level

(corporate level) based on five main organisational-level theories of
rational choice, strain, culture, network and accidents (Pozner & al., 2010).
Within each of these theories collected from an extensive review of
literature, we shall of course outline the individual-level theory on which it
is constructed since an organisation is simply an interaction of individual-
level processes and outcomes in a defined alignment. In the next section
we provide a collection of cases under four main categories; financial
reporting and decision-making scandals, product scandals, scams and
corruption and environmental scandals. The last section of our work
consists of a collection of attempts to remedy consequential situations,

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structural, social and economic reforms undertaken to prevent diffusion of

such misconducts to other organisations.

Meaning of Scandal

Merriam-Webster online dictionary defines scandal as a circumstance or

action that offends propriety or established moral conceptions or
disgraces those associated with it and in another definition indignation,
chagrin, or bewilderment brought about by a flagrant violation of morality,
propriety, or religious opinion. This said, a scandal is generally associated
or followed by disgrace upon the authors, shock on the part of the society
and reprehensive action from social control agents.

Nonetheless, a scandal is simply a public manifestation of a misconduct

(Hoffman 1999). As such, it will be beneficial to define the term
misconduct, which as from this moment shall be used in place of scandal.
Our preference to use misconduct doesnt change the subject of our
discussion nor does it means that the two terms are interchangeable. It is
simply to ease analysis at the organisational and individual-level of what
will later spring out to be a scandal.

As such, from a point of view of sociology, (H.S. Becker, 1963; R. Collins,

1975; Coser, 1967; Lemert, 1951; Schur, 1971), Pozner, Greve and Palmer
2010, define organisational misconduct as behaviour in or by an
organization that a social-control agent judges to transgress a line
separating right from wrong; where such a line can separate legal, ethical,
and socially responsible behaviour from their antitheses. They in return
define social-control agent as an actor that represents a collectivity and
that can impose sanctions on that collectivitys behalf. Judgment by a
social-control agent is the crucial link in this definition, because it allows
for examination of when a line separating right from wrong is invoked and
how transgression of such a line is judged to have occurred (Pozner et al.,
2010).

Thus what determines a conduct to be wrong or right and therefore

develop into a scandal is the judgment of control agents based on
established social norms, ethical principles and sets of laws. The

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relevance of this judgement enables enactment of punishments, sanctions

and fines towards misconduct with the aim of preventing diffusion.

What are the causes of Misconduct?

There exist both organisational and individual theories attempting to

explain the causes of misconduct (See Pozner et Al.). At the organisational
level, Pozner and al. examine five major theories that explain the major
causes of misconduct. Considering the role played by individuals in the
organisation, individual-level theories of misconduct is equally of great
relevance in analysing these theories.

1. Individual-Level Causes

a. Rationality

Rest (1986) introduced a model that assumes that people progress

through four stages when making ethical decisions: awareness that a
decision has ethical implications, judgement regarding an ethical course
of action, formation of an intention to act, and action. An important
assumption of this model is that rationality guides a persons progression
through these four steps. Ethical-decision theorists argue in return
questioning first, the extent to which organizational participants
deliberate in a rational fashion when confronted with ethical decisions.
And secondly, the extent to which organizational participants deliberate at
all when confronted with ethical decisions (Damasio, 1994). Focusing their
argument on the role that unconscious motivations, intuition, and emotion
play in ethical decision making.

Agency, contract, and reputation theories in economics address the issue

of social control of individually rational actors (Wilson 1982). Berle and
Means (1932) claim that managers had distinct interests and an ability to
control the firm that led corporations to different goals than those
intended by their owners. Behavioural scientist expanded this field to
areas of managerial behaviour such as risk-taking, accountability and
outright fraud, relating this to misconduct and scandals (Pozner, 2007).

Finally, Rational-action modelling (Arrow, 1963) assumes self-interested

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actors who need to be controlled in order not to choose actions that would
be beneficial for them and harmful for transaction partners and or third
parties. This modelling implies that some level of misconduct will occur
because optimal control mechanisms make a trade-off between control
costs and misconduct costs, which is usually not reached by eliminating
misconduct. Thus these models can involve rational misconduct, actions
that are chosen because their benefits exceeds the expected sanctions for
the individual, and optimal misconduct, actions that occur at a level
where the marginal costs of added control exceed the marginal benefits to
society (G.S. Becker, 1968). As such, misconduct is termed scandal and
sanctioned only when it goes beyond the limits of the "normal" expected
misconduct.

b. Peer Pressure

This is discussed by network theories of organisational misconduct as an

intermediate position between individual-level theories and
organisational-level theories. The misconduct leading to a scandal here is
the collective action of a group of individuals or organisations
interconnected either by social ties (Pozner et al., 2010). Theoretical
accounts for the network effect on misconduct come in two variants,
which can be labelled the influence account and the secrecy account.

According to the influence account, social networks facilitate observation

and communication among actors, and tend to align opinions among
closely connected individuals, which are an important precondition for
misconduct because it can result in local nonconformity to broader norms
of conduct (Pozner et al., 2010). The influence account predicts both
opinions and behaviour by imitation (Rogers, 1995).

The secrecy account on the other hand treats network effects on

misconduct as an intended consequence of the need for secrecy. Social
networks can be designed to exclude others from observation of the
actions and communications of a set of co-conspirators, and work on the
organization of illicit activities shows that they take place in networks that
fit the theoretical requirements for concealment (Selznick, 1952). It
assumes a much greater intentionality than the influence account

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because it is a theory of individuals setting up the structural conditions for

committing misconduct undetected.

c. Accidents

Scandals can be a result of natural or consequential accidents.

Consequential accidents can be described as those arising from
unintended wrong practices or mistakes and errors in treatments and
processes. March and Simon (1958) characterized organizational
participants as bondedly rational, and organizational task environments as
complex, and bounded rationality in the context of complexity can lead to
accidents. Vaughan (1999) describes that, accidents may occur either
when organizational participants intend to carry out one behaviour but
unintentionally perpetrate another, or when organizational participants
who intend to carry out one behaviour planning to produce one set of
consequences successfully perpetrate that behaviour but produce
unintended consequences. The redline here is drawn based on the
judgement of the social-control agent who may establish either the action
itself or its consequential result as being misconduct depending on several
factors principally the degree of transgression of certain natural or
established social norms.

d. Reward Schemes and Plans

Following Holmstrom (1979), principal-agent models assume that one

actor (the agent) generates observable outcomes for another (the
principal), but the outcomes are influenced by a combination of
environmental influences and the agents unobservable actions. This
creates a situation he describes as the moral-hazard dilemma wherein
the agent is not willing to make full effort when the principal cannot
distinguish effort from luck, and thus is unable to fully reward the effort. A
common form of managerial misconduct caused by paying for
performance is misreporting of earnings, as in the large literature on
upward earnings management and earnings smoothing (Harris &
Bromiley, 2007). Misreporting of earnings is illegal, but difficult to detect.

Principal-Agent models have been developed from the popular agency

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theory, which promotes a set of practices that are aimed at reducing

managerial pursuit of own interests at the expense of owners, to formal
principal-agent models based on unrealistic narrow range of actions to
agents, thus predicting on how the popular theory is bound to fail
(Holmstrom, 1992). Although in a further analysis, Milgrom & Roberts
(1988) argue that principal-agent models where the agent can divide
effort between influencing their actual performance and a signal that
influences outsiders estimate of their performance, however, show that
the agent will rationally spend effort influencing the signal.

2. Organisational Causes

These relate to scandals arising from misconduct of the organisation

against peers; i.e. business partners and or third parties. Organizational
misconduct relative to a transaction partner is instead treated in contract
theory, which looks at the problem of providing goods and services with
some unobservable characteristics, as when there is variation in product
quality and safety that cannot be assessed immediately by the customer
(Akerlof, 1970). Unobservable product quality leads to a broad range of
misconduct at various levels of illegality and enforceability, with the car
salesperson and the financial advisor being frequent examples of
organizational actors who have an informational advantage over their
transaction partners (Pozner et al., 2010).

a. Reputation

Rational-choice theorists have developed these into two types of

reputation models (Pozner et al., 2010). One in which the reputation is
seen as a capital stock that adds to the value of the product offered by a
firm but can be depreciated by failing to perform to the required standards
(Klein & Leffler, 1981). Reputation models generally predict rigid
behaviours on the part of firms because they assume penalties for a
downward deviation such as misconduct, and an absence of rewards from
upward deviations such as higher than expected quality. They also specify
when misconduct is likely: low-reputation firms are more likely to commit
misconduct because they have less to lose, and firms that experience

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adverse conditions such as unexpected increases in costs are more likely

to commit misconduct because they now have a mismatch between the
cost structure and the optimal behaviour (Lott, 1996).

b. Strain

Strain theory is a sociological extension of rational-choice theory. Merton

(1938) formulated strain theory to explain why the lower classes of
society were more likely to engage in illegal activity. Agnew, Piquero, &
Cullen (2009) provide considerable evidence that strain caused by the gap
between goals and actual achievement leads to misconduct at all levels of
society. Strain theory holds that actors resort to misconduct when they are
unable to achieve their goals through legitimate means. Moreover, the
achievement gaps that drive individual misconduct the inability to meet
desired goals, the actual or potential loss of valued outcomes, and the
actual or potential acceptance of negatively valenced outcomes (Agnew
et al., 2009) may also drive organizational misconduct when individuals
engage in misconduct in and on behalf of organizations.

Misconduct may arise from strain stemming from organization-level goals,

rather than individual-level ones. Organizational misconduct may have
little to do with an individual employees needs but a lot to do with
organizational contingencies, priorities and needs. That is, when the
organization is under strain, individuals who internalize the achievement
gap may be motivated to engage in misconduct (Simpson, 2002).
According to Vaughan (1999), misconduct can result from the strain
associated with power and status contests. Loss of existing status and
inability to achieve status goals (Wheeler, 1992), declines in social
positioning or standing (Wilmot & Hocker, 2001), and retaliation for
perceived injustice (Andreoli & Lefkowitz, 2009), may also promote
organizational misconduct. This might explain why high-growth firms are
more likely to engage in misconduct than their less successful peers
(Clinard & Yeager, 1980), and that moderate to very good performance is
more closely associated with misconduct than poor performance
(MacLean, 2008).

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c. Organisational Culture and Values

Cultural theories of misconduct have been posed at multiple levels of

analysis, including occupations, professions, organizations, industries,
societal sectors, and societies. Culture consist of assumptions about the
nature of the world (e.g., the extent to which human nature is
fundamentally competitive as opposed to cooperative), as well as norms,
values, and beliefs about the kinds of attitudes and behaviours that are
appropriate and good (e.g., the degree of truthfulness that employees
should exhibit). (Pozner et al., 2010).

Organizational cultures are conveyed through a variety of forms, such as

language, rewards and punishments, and leader behaviour (Ashkanasy,
Windsor, & Trevino, 2006). While organizational cultures may condemn
certain types of misconduct, they provide support for others (MacLean
2008).

Pozner et al., argue that organizational cultures can provide normative

support for misconducting three ways; first, by endorsement with varying
degrees of explicitness, (Ashkanasy et al., 2006) from least explicit (focus
members of a community on achieving ends without simultaneously
providing guidance about the means with which ends should be achieved)
to more explicit (Kulik, 2005) (focus members of a community on
achieving ends while simultaneously conveying sometimes subtly a
lack of concern about the moral character of the means with which ends
should be achieved) or even more explicit (convey acceptance and
appreciation of actions that break rules and violate norms, particularly
those that value risk taking) (Vaughan, 1999).

Second, organizational cultures can permit misconduct under certain

extenuating circumstances. Sykes and Matza (1957) describe this as
techniques of neutralization, that assuage the guilt that organizational
participants might otherwise feel when engaging in misconduct, including:
denial of victim, denial of injury, denial of responsibility, social weighting,
appeal to a higher authority, and balancing the ledger.

Finally, organizational cultures can give rise to other conditions that, in

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turn, facilitate misconduct. This is most obviously the case when cultures
place a high value on achieving extraordinary performance.

d. Spread Effect

A scandal may be result of a spread of misconduct either within an

organisation or between related organisations (Pozner et al., 2010).

Brief et al. (2001) and Ashforth and Anand (2003), taken together,
elaborate a process model of collective corruption that explains how
misconduct perpetrated by one or a few individuals can become an
organizational phenomenon. They propose that individual or group
misconduct permeates an organization in four stages: initiation (top
managers embark on a wrongful course of action, his behaviour being
assumed to either be the results of a cost-benefit approach or normative
assessment), proliferation (top managers explicitly or implicitly direct
employees further down the hierarchy to implement the misconduct by
either fostering a corresponding organisational culture or formal
authority), institutionalization (misconduct becomes embedded in
organizational memory and solidified in routines and organizational
structures thanks to social learning and other mechanisms of process
diffusion Walsh & Ungson, 1991) and socialization (new organizational
participants are exposed to the techniques and attitudes that support the
wrongful course of behaviour).

The spread of misconduct among organisations on the other hand may at

first appear to be identical to that within. There is currently little research
that examines the proliferation of practices that meet the strict definition
of misconduct that we embrace. There is, however, research on the
spread of borderline practices, which most would consider unethical and
that some would consider counter-normative. This work locates the causes
of the proliferation of misconduct in the interplay between
institutionalization in the organizational field and localized pockets of
deviance (Pozner et al., 2010, Westphal and Zajac, 1994). However,
imitation and network theories explained above could equally be used to
explain the spread effect.

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Great Corporate Scandals Illustrated

The last three decades have witnessed several cases of corporate

scandals in all forms and from all causes. From accidental natural to
intended scams and product hazards. It is beyond the scope of our work to
retrace the history of each of these scandals considering our time and
limited expertise in certain areas of competence such as technology. But,
we shall, by grouping these scandals under four major headings;
accounting and reporting, products, financial scams and environmental
scandals, consider a case study of one famous and wide scope scandal.

1. Accounting and Reporting Scandals

Conflicting interests forwarded by proponents of agency theory, rationality

described by rational-theorists, spread, culture and even accidents make
up the basis for such scandals. We shall analyse the cases of AIG
insurance giant and Shell Oil and Gas, German petroleum giant. We
deliberately left-out the ENRON Corporation case because much has been
said about it already in almost every literature review about corporate
scandals.

AIGs over greed

The once-mighty AIG, envied in the insurance world for its consistently
big increases in premium income and profit, it was one of only two major
players to enjoy a coveted AAA rating. AIG grew with breath-taking speed
to become the worlds largest insurance group, reaching a peak market
capitalisation of $213bn in 2001.

At the end of the third quarter 2007, AIGs consolidated assets were
$1.072trn and shareholders equity was $104.07bn; in early 2008, it was
the 18th largest public company in the world. Less than a year later it had
notched up annual losses of nearly $100bn and was rescued by the US
government with a lending facility of $182.5bn, meaning that it had
effectively been nationalised.

Among the many people to lose their jobs and reputations were the
legendary chairman Hank Greenberg and Joseph Cassano, who headed up

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its financial products subsidiary AIGFP. AIGs weaknesses stemmed in

large measure from risk blindness and the over-riding need to grow the
company and its profits by 15 per cent pa in an often extremely
competitive environment.

It started to go wrong when the New York attorney-general Eliot Spitzer

accused the company of bid-rigging with insurance brokers. Nothing was
ever proven against AIG, but another more serious allegation was
substantiated: that it had produced misleading accounts and used
spurious reinsurance policies to inflate profits.

One executive went to jail, the company paid out $1.6bn to settle civil
charges and Greenberg paid $15m to settle charges from the Securities
and Exchange Commission (SEC), the US regulator, for having altered
AIGs records to boost results between 2000 and 2005. The resulting fall in
share price and, above all, reduced security ratings were a body blow to
the companys financial products operation in London.

When the AAA rating disappeared it became more expensive for the
company to post cash collateral for its derivative products, destroying
profit. And worse was to follow. The really devastating news came in the
shape of the sub-prime crisis, which destroyed AIGs credit default swap
portfolio. An apparently risk-free source of wealth turned almost overnight
into a liability of unimaginable proportions. This is a classic example of
risk blindness caused by a desire to pursue profit at almost any cost.

SHELL: Overstatement of Oil and Gas reserves (source CIMA Magazine)

Shell is a long-established FTSE 100 company. It is one of the largest

international energy companies, operating in at least 90 countries. Royal
Dutch Petroleum owned a 60 per cent interest in the group and Shell
Transport and Trading UK had a 40 per cent interest. The group had an
unwieldy dual board structure and was listed on the New York, London and
Amsterdam stock exchanges.

A major part of the value creation of an oil company is the location of new
oil and gas reserves to replace those it extracts. These reserves, still in
the ground, represent many billions of dollars, but investors cannot easily

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verify the amounts of oil and gas they contain. This uncertainty prompted
the SEC1 (US regulator of exchange) to implement rules for the calculation
and reporting of proven and unproven reserves. Proven reserves are
those where there is a high certainty as to the quantity of oil and gas in
the ground, and how much can be extracted. Unproven reserves are those
where there is less certainty over volume or how much can be extracted.
The latter have significantly less value for investors.

For a number of years prior to 2004, Shell used a different basis to

calculate reserves than that of the SEC. After the implementation of the
rules, the SEC and the Financial Services Authority (FSA), the UK regulator,
examined stated reserves more closely. They became uneasy about Shell
and in 2001 gave the company indications that they felt the figures were
incorrect, followed by stronger warnings in 2002 and 2003. Shells senior
management appeared to have rejected these concerns.

On 9 January 2004, Shell announced that its proven reserves were 20

per cent less than it had reported. It revised the figure three more times
(on 18 March, 9 April and 24 May) before admitting it had overstated its
reserves by around 23 per cent. This amounted to tens of billions of
dollars (depending on the future price of oil). It had to make a further
restatement on 3 February 2005. This led to record fines, director
resignations and a radical restructuring involving a reduction of Shells
independence.

Shell also twice restated its financial results for 2001 and 2002, and once
for 2003. Shells audit committee commissioned an independent review
by US law firm Davis, Polk & Wardwell. In April 2004 the review severely
censored the chairman who had previously been Shells head of
exploration and responsible for the reserve figures, and his successor as
head of exploration. They were obliged to step down, and were followed
by the finance director. Particularly damaging was the disclosure of a
series of internal emails, including one dated 9 November 2003 in which
the head of exploration said he was sick and tired of lying about the
extent of our reserves issues.

1 Securities and Exchange Commission

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The January 2004 revision caused Shells share price to fall by more than
nine per cent. It trailed the FTSE Oil & Gas Producers sector thereafter as
shown in the chart. In July 2004, the SEC fined Shell a record $120m after
an inquiry found that the company had violated record-keeping and anti-
trust rules in relation to the reporting of proven reserve. The company also
had to pay an FSA fine of 17m in relation to the same matter.

Three senior directors resigned. Over the next two years, the chairman
fought to clear his name. The FSA (2005) and the SEC (2006) decided not
to take action against him. He had maintained from the beginning that he
had acted in good faith. It should be noted that under new SEC rules on oil
and gas reporting, Shell reported a significant increase in proven oil and
gas reserves for 2009 that may go some way towards supporting the
previous chairmans views.

The replacement chairman, Jeroen van der Veer, was brought in to restore
the companys credibility. He scrapped bonus schemes linked to oil
reserves as he believed they provided an incentive to exaggerate such
reserves. Indeed, The Wall Street Journal reported that internal auditors
had mentioned this, together with systemic problems with the companys
reserves reporting procedures, to the external auditors as early as 2002.

2. Product Scandals

Harmful, defective, low quality and misinformed products make up the

different forms of corporate product scandals. Famous examples of
Dannons activia yogurt false ad campaign and Firestone and Ford Tyres
will be the subject of our discussion.

DANONE: The Activia Yogurt Scandal

Over 75 years ago, the worlds leading yogurt producing company was
created: DANONE. Activia is a brand of yogurt, branching from DANONE,
which carry a wide variety of yogurt flavors and style selections, ranging
over 200 types.

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The seemingly healthy activia yogurt was founded in 2005. Lasting a little
over two years, the company falsely advertised exaggerated nutrition
information on their labels, claiming their yogurt to be a scientifically
proven product that regulates your digestion and boosts its consumers
immune system. However, in 2010, a study was done that discredited the
products alleged dietary benefits. As a result, they were faced with a
lawsuit.

Dannon's troubles first began two years ago after Trish Wiener, a Los
Angeles caterer, filed a federal law suit, charging the company claims
were false and duped the public into buying yogurt that was more
expensive, but no better than the others on the shelf. The L.A. court case
ended when DANONE paid a $35 million settlement alleging that the
company had knowingly misled consumers in its Activia marketing
activities. Following their loss at the Federal Court in 2010, DANONE was
forced to remove the words scientifically, clinically, and immunity,
to discontinue misleading their customers. They must also include a
qualifier to the claim the yogurt "helps strengthen your body's defenses"
or "helps support the immune system.

Firestone and the Ford tyre controversy

This is a story of unusually high tyre failures on the Ford Explorer and
related vehicles equipped with Firestone tyres. The Ford Motor Company
had a historically strong relationship with Firestone since its inception,
with Henry Ford and Harvey Samuel Firestone being personal friends and
even the two families being linked in marriage with their respective
grandchildren, William Clay Ford, Sr. and Martha Parke Firestone being
married in 1947.

In May 2000, the U.S. National Highway Traffic Safety Administration

(NHTSA) contacted Ford and Firestone about the high incidence of tire
failure on Ford Explorers, Mercury Mountaineers, and Mazda Navajos fitted
with Firestone tires. Ford investigated and found that several models of
15-inch Firestone tires (ATX, ATX II, and Wilderness AT) had very high
failure rates, especially those made at Firestone's Decatur, Illinois plant.
This was one of the leading factors to the closing of the Decatur plant. The

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president of the public advocacy group Public Citizen and previously an

Administrator of the NHTSA, stated before the Transportation
Subcommittee United States Senate Committee on Appropriations on
September 6, 2000, that, "there was a documented cover-up by Ford and
Firestone of the 500 defect".

The main reason for this scandal was based on the design of the tyres.
Ford, which sets the specifications for the manufacture of its tires, decided
to remove air from the tires, lowering the recommended pressure to 26
psi. Low air pressure leads to increased heat; heat can damage the tire.
The failures all involved tread separation the tread peeling off followed
often by tire disintegration.

Over 240 deaths resulted from these failures. Not every single death
occurred in the Ford Explorer/Firestone tire combination. It is estimated
that 3,000 catastrophic injuries also resulted from this issue. A large
number of lawsuits have been filed against both Ford and Firestone, some
unsuccessful, some settled out of court, and a few successful. Lawyers for
the plaintiffs have argued that both Ford and Firestone knew of the
dangers but did nothing, and that specifically Ford knew that the Explorer
was highly prone to rollovers. Ford denies these allegations. Firestone
ultimately recalled millions of tires including 2.8 million Firestone
Wilderness AT tires.

3. Financial Scams

The greatest and most amazing financial scams in recent history include
Bernard Madoffs Ponzy scheme and the German FlowTex.

FlowTex

During the mid-1980s the company FlowTex was established by Mandred

Schmider and Klaus Kleiser, two businessmen based in the South-Western
state of Baden-Wuerttemberg, with the purpose of constructing and
operating machines for horizontal drilling. The business idea was
profitable and successful as it allowed for the installation of cables and

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pipes without the need to dig up roads, which would have caused
considerable traffic chaos and noise pollution. By the year 2000, the two
men had sold more than 3,000 machines at around 1.5 million Deutsche
Marks.

What started as a legal business with a viable model soon turned into
large-scale fraud; in reality, FlowTex had only produced 181 machines that
were sold multiple times, with the certificates and identification plates
manipulated according to the scam. At one point, the same machine was
paraded at various different fake construction sites to potential investors
during the same inspection; it later emerged that they had moved the
machine from one location to another during lunch breaks. Over a period
of ten years or so, they secured loans worth more than two billion Euros
for non-existent drilling systems and the scam is widely tipped as
Germanys largest ever case of white-collar crime.

The scam was aided by a network of co-conspirators that included family,

friends and employees of the firm, but ultimately it was Schmider and
Kleiser who paid the largest price for their crimes; they were both arrested
in February 2000 on suspicion of fraud and tax evasion, four years after
the authorities were allegedly first tipped off about the fraudulent
business practices.

Bernard L. Madoff Investment Securities LLC: Ponzy Scheme

The Madoff Investment Scandal broke in December 2008, when former

NASDAQ Chairman Bernard Madoff and founder of the Wall Street firm
Bernard L. Madoff Investment Securities LLC, admitted that the wealth
management arm of his business was an elaborate Ponzi scheme.

Madoff founded the Wall Street firm Bernard L. Madoff Investment

Securities LLC in 1960, and was its Chairman until his arrest. The firm
employed Madoff's brother Peter as Senior Managing Director and Chief
Compliance Officer, Peter's daughter Shana Madoff as rules and
compliance officer and attorney, and Madoff's sons Andrew and Mark.
Peter has since been sentenced to 10 years in prison, and Mark
committed suicide by hanging exactly two years after his father's arrest.

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Madoff's sales pitch was an investment strategy consisting of purchasing

blue-chip stocks and taking options contracts on them, sometimes called a
split-strike conversion or a collar. "Typically, a position will consist of the
ownership of 3035 S&P 100 stocks, most correlated to that index, the
sale of out-of-the-money 'calls' on the index and the purchase of out-of-
the-money 'puts' on the index. The sale of the 'calls' is designed to
increase the rate of return, while allowing upward movement of the stock
portfolio to the strike price of the 'calls'. The 'puts', funded in large part by
the sales of the 'calls', limit the portfolio's downside."

Madoff offered modest but steady returns to an exclusive clientele. The

investment method was marketed as "too complicated for outsiders to
understand." He was secretive about the firms business, and kept his
financial statements closely guarded

Alerted by his sons, federal authorities arrested Madoff on December 11,

2008. On March 12, 2009, Madoff pleaded guilty to 11 federal crimes and
admitted to operating the largest private Ponzi scheme in history. On June
29, 2009, he was sentenced to 150 years in prison with restitution of $170
billion. According to the original federal charges, Madoff said that his firm
had "liabilities of approximately US$50 billion". Prosecutors estimated the
size of the fraud to be $64.8 billion, based on the amounts in the accounts
of Madoff's 4,800 clients as of November 30, 2008. Ignoring opportunity
costs and taxes paid on fictitious profits, half of Madoff's direct investors
lost no money. It is also the largest accounting fraud in American history.

Investigators have determined others were involved in the scheme. The

U.S. Securities and Exchange Commission (SEC) has also come under fire
for not investigating Madoff more thoroughly; questions about his firm had
been raised as early as 1999. Madoff's business, in the process of
liquidation, was one of the top market makers on Wall Street and in 2008,
the sixth-largest.

4. Environmental Scandals

Destruction of natural ecosystems and pollution are the main forms of

environmental scandals. The most devastating being damp overflows and

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oil spills. We shall look into the case of the Exxon Valdez Oil spill.

Exxon Valdez Oil Spill

The Exxon Valdez oil spill occurred in Prince William Sound, Alaska, on
March 24, 1989, when Exxon Valdez, an oil tanker bound for Long Beach,
California, struck Prince William Sound's Bligh Reef at 12:04 am local time
and spilled 11 to 38 million US gallons (260,000 to 900,000 bbl. 42,000 to
144,000 m3) of crude oil over the next few days. It is considered to be one
of the most devastating human-caused environmental disasters. The
Valdez spill was the largest in US waters until the 2010 Deepwater Horizon
oil spill, in terms of volume released. However, Prince William Sound's
remote location, accessible only by helicopter, plane, or boat, made
government and industry response efforts difficult and severely taxed
existing plans for response. The region is a habitat for salmon, sea otters,
seals and seabirds. The oil, originally extracted at the Prudhoe Bay oil
field, eventually covered 1,300 miles (2,100 km) of coastline, and 11,000
square miles (28,000 km2) of ocean.

Among other causes;

Exxon Shipping Company failed to supervise the master and provide

a rested and sufficient crew for Exxon Valdez. The NTSB found this
was widespread throughout the industry, prompting a safety
recommendation to Exxon and to the industry.

The third mate failed to properly manoeuver the vessel, possibly

due to fatigue or excessive workload.

Exxon Shipping Company failed to properly maintain

the Raytheon Collision Avoidance System (RAYCAS) radar, which, if
functional, would have indicated to the third mate an impending
collision with the Bligh Reef by detecting the "radar reflector",
placed on the next rock inland from Bligh Reef for the purpose of
keeping ships on course. This cause has only been identified
by Greg Palast (without evidentiary support) and is not present in
the official accident report.

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Captain Joseph Hazelwood, who was widely reported to have been

drinking heavily that night, was not at the controls when the ship struck
the reef. However, as the senior officer, he was in command of the ship
even though he was asleep in his bunk. In light of the other findings,
investigative reporter Greg Palast stated in 2008, "Forget the drunken
skipper fable. As to Captain Joe Hazelwood, he was below decks, sleeping
off his bender. At the helm, the third mate never would have collided with
Bligh Reef had he looked at his RAYCAS radar. But the radar was not
turned on. In fact, the tanker's radar was left broken and disabled for more
than a year before the disaster, and Exxon management knew it. It was [in
Exxon's view] just too expensive to fix and operate. Exxon blamed
Captain Hazelwood for the grounding of the tanker.

Consequences of Corporate scandals

Most corporate scandals have far reaching economic, social and even
political consequences.

1. Economic Consequences

Among the economic consequences we have:

- Unemployment, especially in the case of employees who lose their

jobs.

- Government intervention in the case of bailing out bankrupt

companies affects government spending on other social facilities to
the expense of these companies.

2. Social Consequences

- The numerous lawsuits and criminal cases against authors of these

scandals raise shame and disgrace towards families and even
several generations.

- Lost lives as a result of accidents caused by faulty products left

orphans and widows in many cases.

3. Political Consequences

- Government bail-out schemes may raise political instability from

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opposing parties;

- Lawsuits against top executives or networks may in some cases

implicate high political figures.

Conclusion

Since the history of the first scandals in the 1400s, institutional social-
control agents have been constantly undertaking reforms in order to
anticipate or prevent scandalous attitudes. To some extend this has been
fruitful especially with the harmonisation of reporting practices which
require organisations to adopt a set framework of processes and
techniques in reporting. Although we think and are certain that more is
still to be done, so long as the permanence of method remains one of
the harmonised and generally accepted principles of bookkeeping.

Furthermore, Organisational-level solutions are not yet totally binding to

individual-level, whereas the individual is the main actor in the
organisation. This prompts us to conclude that organisational scandals
although may be to some extend termed accidental, are to a greater
extend intended.

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