NOWADAYS, it is quite common to hear stories of scandals and corporate failures such as those of Enron, Tyco, WorldCom, Lehman Brothers, Wirecard, and so on.
In 2001, Enron Corp., then the seventh highest-revenue-grossing company in America, crashed into bankruptcy. The collapse cost investors billions of dollars, and thousands of workers lost their jobs, the US Justice department said.
An initial investigation uncovered an elaborate conspiracy to deceive investors about the state of Enron's fiscal health. This allegedly included overstating the company's financial situation for over two years in an attempt to ensure that Enron's short-run stock price remained artificially high. The conspiracy worked to manipulate Enron's earnings to satisfy Wall Street's expectations.
Top Enron officials were key players in the unlawful scheme. A jury ultimately convicted Enron CEO Jeffrey K. Skilling of conspiracy, securities fraud, making false representations to auditors, and insider trading. Former CEO Kenneth Lay was also convicted of conspiracy, securities fraud, and wire fraud charges.
The recent case of FTX Trading Ltd., one of the largest cryptocurrency exchanges in the world with a valuation of $32 billion, is another example of how fraud, abuse and mismanagement can cause a company's collapse.
Headquartered in the Bahamas, FTX was founded by Samuel Bankman-Fried and Gary Wang. It collapsed in early November 2022 following a CoinDesk report highlighting potential leverage and solvency concerns involving FTX-affiliated Alameda Research LLC. CoinDesk reported that Alameda had $14.6 billion of assets as of June 30. Much of it comprised the FTT token issued by FTX, another Bankman-Fried company.
John J. Ray 3rd, the new CEO of FTX and former chairman of Enron Creditors Recovery Corp., a company tasked with recovering creditor funds from Enron, told the House Financial Services Committee: 'Nearly all of these situations share common characteristics, ranging from gross mismanagement, excessive leverage, failures of internal controls, failure of external checks as a result of audit firm failures, or insufficient board governance.'
'But never in my career have I seen such an utter failure of corporate controls at every level of an organization, from lack of financial statements to a complete failure of any internal controls or governance whatsoever,' he added.
Regarding the loss because of the bankruptcy, Ray said: 'We don't have exact numbers, but we know several billion dollars, you know, in excess of $7 billion.'
Based on the case filed by the US SEC, 'From at least May 2019 through November 2022, Samuel Bankman-Fried engaged in a scheme to defraud equity investors in FTX ... at the same time he was also defrauding the platform's customers. Bankman-Fried raised more than $1.8 billion from investors, including US investors, who bought an equity stake in FTX believing that FTX has appropriate controls and risk management measures.'
'Unbeknownst to those investors and to FTX's trading customers, Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform's customer funds for his personal benefit and to help grow his crypto empire ... [He] portrayed himself as a responsible leader of the crypto community. He touted the importance of regulation and accountability ... Customers around the world believed his lies and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform.
'But from the start, Bankman-Fried improperly diverted customer assets to his privately held crypto hedge fund, Alameda, and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.'
What lessons can be learned from these corporate collapses? Fraud, abuse and mismanagement combined is a sure-fire recipe for business disasters, if not corporate collapses and scandals.
According to ACFE's Occupational Fraud 2022: A Report to the Nations, organizations lose 5 percent of revenue to fraud each year, with corruption being the most common scheme. The percentage of cases involving corruption is also on the rise, from 33 percent in 2012 to 50 percent.
Fraud damages staff morale, raises questions regarding the competence and integrity of management, and damages business reputation. In the cases above, fraud became the direct threat to the longevity of those organizations, if not the cause of their collapse.
Robust corporate governance and proactively addressing fraud through a robust fraud risk management program not only help organizations protect their value, but also empower them to take advantage of unidentified opportunities for recovery and growth.
In partnership with ACFE, Grant Thornton developed the Anti-Fraud Playbook, which provides practical guidance for organizations looking to begin, advance, or benchmark their fraud risk management programs. The playbook is organized into five phases: fraud risk governance, fraud risk assessment, fraud control activities, fraud investigation and corrective action, and fraud risk management monitoring activities.
All said, a proactive approach to fraud risk management protects your organization and stakeholders from becoming victims to another Enron or FTX collapse.

Web Ebio is a senior managing consultant at P&A Grant Thornton, one of the leading audit, tax, advisory and outsourcing firms in the Philippines. Comments to this article can be directed to web.ebio@ph.gt.com.