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The Anatomy of Corporate Fraud: A Comparative Analysis of High Profile American and European Corporate Scandals

Bahram Soltani

Received: 24 January 2012 / Accepted: 18 February 2013 / Published online: 2 March 2013

� Springer Science+Business Media Dordrecht 2013

Abstract This paper presents a comparative analysis of

three American (Enron, WorldCom and HealthSouth) and

three European (Parmalat, Royal Ahold and Vivendi Uni-

versal) corporate failures. The first part of the analysis is

based on a theoretical framework including six areas of

ethical climate; tone at the top; bubble economy and market

pressure; fraudulent financial reporting; accountability,

control, auditing, and governance; and management com-

pensation. The second and third parts consider the analysis

of these cases from fraud perspective and in terms of firm-

specific characteristics (ownership structure) and environ-

mental context (coverage in media and academic literature,

regulatory and corporate governance frameworks). The

research analyses shed light on the fact that, despite major

differences between Europe and U.S. in terms of political

institutions, laws and regulations as well as managerial

practices, there are significant similarities between six

groups. The analysis also demonstrates that, the ethical

dilemma has been coupled with ineffective boards, ineffi-

cient corporate governance and control mechanisms, dis-

torted incentive schemes, accounting irregularities, failure

of auditors, dominant CEOs, dysfunctional management

behavior and the lack of a sound ethical tone at the top.

Significant similarities were also observed in the analysis

from the fraud triangle perspective. However, there are

several major differences between the six corporate failure

cases particularly with regard to ownership structure, cov-

erage in media, and legal, regulatory and governance

frameworks. This research study may have several aca-

demic and practical contributions, particularly because of

multidisciplinary, international features, and comparative

analyses used in the paper.

Keywords Corporate fraud � Ethics � Europe/U.S. � Accounting � Control � Accountability � Financial scandals � Management compensation � Corporate governance � Management performance � Regulatory framework � Tone

at the top � Fraud triangle

Introduction

Following the series of corporate deviances that began to

surface from late 2001–2003, the financial market under-

went several high profile financial scandals, management

misconduct, frauds and scams as well as many cases of

fraudulent financial reporting and audit failure within

several large multinational groups around the world.

Although not numerous compared to the number of com-

panies publicly listed in the financial markets, they have

shaken the foundation of the capital market economy and

should have been considered as the warning signals for the

subsequent financial crises that the world economy is still

experiencing. Coupled with the bubble economy, ineffi-

cient control mechanisms, unethical behavior, the mis-

conduct of several managers and the ‘‘giant financial-

incentive bubble’’ (Desai 2012, p. 124), the consequences

of these financial scandals have significantly contributed to

a profound corporate malaise and a mistrusted capital

market economy. The recent financial crisis represents the

largest manifestation of many of these disruptive factors

affecting the smooth running of the financial market.

However, the ‘big scandals’ such as Enron and World-

Com did not only take place in the United States. Europe

has also had its share of corporate scandals and governance

B. Soltani (&)

Department of Management Studies, University of Paris 1

Sorbonne, 17 Rue de la Sorbonne, 75005 Paris, France

e-mail: [email protected]

123

J Bus Ethics (2014) 120:251–274

DOI 10.1007/s10551-013-1660-z

failures, which were quite comparable with those of the

U.S. in size and importance. In this respect, the strong

media coverage of the financial matters and the significant

size of the U.S. financial market have been the determinant

factors in providing an extensive public discussion on

financial scandals in the United States compared to Europe.

Evidently, the U.S. cases of financial corporate fraud have

been studied extensively in academic and professional

journals. However, little attention has been paid to similar

cases in other parts of the world including Europe. Indeed,

with regard to the known European corporate failure cases

there are serious deficiencies as far as academic publica-

tions and media coverage are concerned. Cohen et al.

(2010) in their study which provides evidence from the

press concerning the U.S. corporate frauds and manage-

ment behavior highlight the importance of the analysis of

the European cases of corporate fraud as a further research

(p. 289). This shortcoming has also been highlighted in

other papers and by regulatory bodies.

On the other hand, the debate in academic literature on

high profile fraud mainly concerns accounting misstate-

ments, management behavior, fraudulent financial report-

ing, and internal control. Rockness and Rockness (2005)

have suggested further research exploring the interactions

between and within corporate culture, internal control and

societal controls (p. 51). Indeed, corporate fraud goes on at

a deeper level within the company and the environment in

which it operates.

We approach corporate fraud issues from different

angle, our aim being to analyze several central topics in the

American and European contexts from a broad range of

multidisciplinary perspectives including ethics, control

environment, accountability, fraudulent financial reporting,

management compensation package and environmental

factors (bubble economy, law, and regulations). Overall,

the paper aims to provide a broad theoretical discussion on

high profile scandals in six large multinational groups

including three American (Enron, HealthSouth, and

WorldCom) and three European corporations (Parmalat,

Royal Ahold, and Vivendi Universal).

In line with this goal, this paper aims to respond, in two

specific ways, to the need for further research highlighted in

previous studies. First, we extend the analysis of corporate

fraud to a wide range of topics including, but not limited to

managerial behavior, accounting and auditing issues which

were mainly considered in previous papers. Second, the paper

analyzes also the European context, which compared to the

American corporate environment, has not been adequately

examined in academic literature. Thus, the study presents also

a comparative analysis of corporate fraud in the American and

European contexts to identify the common characteristics and

differences at corporate (six selected corporate scandals) and

environmental (US versus Europe) levels.

The specific characteristics highlighted above provide

potential contributions of this research in better under-

standing of the common causes of corporate fraud and

financial failure. In this regard, this research study may

have several academic and practical contributions, partic-

ularly because of multidisciplinary, international features,

and comparative analyses used in the paper.

The paper is organized as follows. After discussing the

research motivation and study’s contributions, we shall

begin with an introduction to our theoretical framework for

the study. This includes the literature review regarding the

main theoretical topics which will be discussed in the paper.

The third section presents research design, the procedure for

selecting and the analysis of the sample companies and

research questions. This section includes a brief presenta-

tion of six selected American and European corporate

scandals. Next we will present the results of our analyses by

referring to three research questions. Concluding remarks of

the study will be provided in the final section.

Research Motivation and Contribution

This paper aims to examine corporate fraud within a broad

theoretical framework by using a comparative analysis of

several multinational groups. The primary motivation of

the study is to analyze the major causes of financial cor-

porate failures. The paper focuses on a comparative anal-

ysis of three American (Enron, operating in energy,

WorldCom, a telecommunication group and HealthSouth,

operating in health care services) and three European cor-

porations (the Italian dairy and foods giant group of Par-

malat, the Dutch group of supermarket chain of Royal

Ahold and Vivendi Universal, the French media group). A

relatively large number of published papers in academic

and professional journals (e.g., Arnold and De Lange 2004;

Baker and Hayes 2004; Brody et al. 2003; Craig and

Amernic 2004; Cullinan 2004; Ferrell and Ferrell 2011;

Hogan et al. 2008; Morrison 2004; O’Connell 2004; Re-

zaee 2005; Reinstein and McMillan 2004; Reinstein and

Weirich 2002; Rockness and Rockness 2005; Unerman and

O’Dwyer, 2004) and several others mentioned in this paper

have discussed the corporate scandals, with special focus

on the American companies. Most of these analyses were

mainly based on fraudulent financial reporting, earnings

management, auditing issues and management misconduct.

However, it is believed that accounting, financial reporting

and auditing do not operate in a vacuum. They are part of

corporate control mechanisms and in that sense may be

subject to management choices.

The analyses presented in this paper go beyond the

financial reporting, auditing, and specific company char-

acteristics. They aim to provide a broad perspective of

252 B. Soltani

123

corporate issues such as ethical climate, leadership and

tone at the top, environmental factors (bubble economy and

market pressure), fraudulent financial reporting and earn-

ings management, control mechanisms and auditing,

managers’ compensation and their personal interests, cor-

porate governance, accountability and risk management

involving several American and European companies.

The second main feature of the study is to analyze the

six cases of corporate failures from the viewpoint of an

extended framework of fraud triangle that we present in

this paper. The fraud triangle is part of the auditing stan-

dards (AICPA, SAS 99 2002) and has been discussed in

auditing and forensic accounting literature (e.g., Littman

2010; Buchholz 2012). Some authors have tried to present

a new fraud triangle model (Wolfe and Hermanson 2004;

Dorminey et al. 2010) or to couple it with other theoretical

framework (e.g., Cohen et al. 2010). Using the six signif-

icant cases of corporate financial failures, we have ana-

lyzed the fraud triangle in a broader sense by taking into

consideration the environmental (e.g., bubble economy and

financial market) and regulatory context as well as the

ethical climate. This approach suggests a critical analysis

towards the fraud triangle and sheds light on its short-

comings as we believe that the current fraud triangle model

does not provide an adequate basis for corporate fraud

analysis.

The third motivation of the paper is to investigate cor-

porate fraud from the viewpoint of company-specific

characteristics and the environmental factors (ownership

structure, coverage in media and academic literature, legal

and regulatory framework and corporate governance

codes). Coffee (2005) studied the U.S. and the European

corporate frauds from the viewpoint of the level of public

and private enforcements and mainly with regard to the

dispersed ownership versus concentrated ownership sys-

tems. Our analysis goes beyond the system of corporate

ownership. It will aim to show the differences arising from

the environmental context and regulatory frameworks, the

topic which has not, to our knowledge, been studied in

previous research.

The aforementioned specific characteristics of this study

provide potential contributions in better understanding of

the root causes of corporate fraud and financial failure. In

summary, the contribution of the paper is threefold. First,

the paper provides an in-depth analysis of the common

characteristics of corporate debacles covering the areas of

ethics, management behavior, corporate fraud, accounting,

financial reporting and auditing, control mechanisms, tone

at the top and leadership, management incentives and

compensation package, corporate governance, account-

ability as well as considering the environmental factors.

This should have the practical implications for regulatory

bodies seeking to reinforce the oversight mechanisms in

the financial market. Second, the paper provides the

opportunity to undertake a comparative analysis of the

American and the European corporate failures considering

the firm-specific characteristics, the legal and regulatory

frameworks and fraud triangle. Above all, as this study

covers a large number of literature review regarding the

above topics, it contributes to the academic literature in

corporate ethics, forensic accounting and corporate finan-

cial scandals.

The Theoretical Framework: Corporate Fraud and Its

Possible Causes

In line with the objectives outlined in this paper and having

reviewed a wide range of published literature and based on

our conceptual analysis, we have identified several areas

which can be considered as the possible causes of corporate

financial scandals. We will first set up a theoretical

framework including a broad range of concepts. The latter

may be considered as the major causes of corporate failures

in general and particularly of those six corporations

selected for the purpose of this study. We have classified

these issues into the six following categories which will

then be discussed. There are certainly interrelationships

between these core areas which will be highlighted in the

discussion.

1. Corporate ethical climate and management misconduct

2. Tone at the top and executive leadership

3. Environmental factors including bubble economy and

market pressure

4. Accountability, control mechanisms, auditing, and

corporate governance

5. Executive personal interest, compensation package and

bonus

6. Fraud, fraudulent financial reporting and earnings

management

These six core concepts are presented in Fig. 1 which

shows our theoretical framework for the first and second

parts of our analyses regarding the common features of

high profile American and European corporate scandals as

well as their differences.

Ethical Climate

There has been concern about ethics of organizations and

ethical behavior in recent years in the capital market and

this issue becomes the main focus of the regulatory bodies

(Kaptein 2010). However, given the preponderance of

unethical behavior sweeping corporations, the concerns on

corporate behavior cannot be limited to fraudulent actions

committed by a few individuals. This issue should be

The Anatomy of Corporate Frauds 253

123

examined in broader terms and at an organizational level.

Rather than considering the managers as the economic

actors in the financial market, it is more appropriate to

examine their role in the light of the commitments that they

have towards their corporations and the parties involved in

the organization.

In this study, we aim to discuss the organizational eth-

ical climate and the Ethical Climate Theory (ECT) as one

of the main theoretical topics in discussing managers’

behavior and corporate wrongdoings. The concept of eth-

ical climate is a multidimensional construct which con-

cerns the ethical culture, tone at the top and ethical

leadership. Trevino and Weaver (2003) defined ethical

culture as those aspects that stimulate ethical conduct

whereas according to Brown et al. (2005) ethical leadership

is usually defined ‘‘as the demonstration of normatively

appropriate conduct through personal actions and inter-

personal relationships, and the promotion of such conduct

to followers through two-way communication, reinforce-

ment, and decision-making’’ (see Bédard 2011, p. 1226).

Climate in an organization is defined as perceptions of

organizational practices and procedures that are shared

among members (Schneider 1975). Martin and Cullen

(2006) stated that there are various types of climates in the

workplace and one of them is the ethical climate, which is

related to the established normative systems of organiza-

tion. Conceptually, ethical climate is a type of organiza-

tional work climate (p. 176) and in that sense, it is

understood as a group of prescriptive climates reflecting

the organizational procedures, polices, and practices with

moral consequences (p. 177).

The idea of ethical climate has been driven from the

theory of ethical work climate developed by Victor and

Cullen (1987, 1988). Victor and Cullen (1988) noted that

‘‘the prevailing perceptions of typical organizational

practices and procedures that have ethical content consti-

tute the ethical work climate.’’ (p. 101). Thus, from the

viewpoint of Victor and Cullen (1988), ethical climates

within organization identify the normative systems that

guide organizational decision-making and the systematic

responses to ethical dilemmas (p 123). As such, ethical

climate is one component of the organizational culture

(Cullen et al. 1989). The study of Victor and Cullen (1988)

is an innovative piece of literature as they tried to employ

both organization and economic theory to propose an ECT.

In their views, ‘‘ethical climate theory brings ethical con-

tent into the mainstream of organization theory’’ (p. 123).

ECT has been examined in several other studies (Arnaud

2006; Martin and Cullen 2006; Wimbush et al. 1997)

which provide evidence of the relationship between ethical

climate perceptions, individual ethical behavior, and indi-

vidual-level work outcome. Wimbush and Shepard (1994)

and Bulutlar and Öz (2009) attempted to show the con-

ceptual relationship between ethical climate and ethical (or

unethical) behavior in organizations particularly with

regard to supervisory influence and the behavior of

subordinates.

Several other research papers considered ethical climate

in relationship with topics relevant to this study. Murphy

et al. (2012) examined the role of ethical climate within

organizations when fraud is present. Using the appropriate

measures capturing motives, attitudes, and rationalization

Fig. 1 Theoretical framework indicating the possible major causes of corporate failures

254 B. Soltani

123

for fraud, they showed that ethical climate plays a signif-

icant role when fraud is present within an organization. It is

associated with motives such as pressure from bosses and

rationalizations such as ‘‘the organization is to blame for

my fraud’’ (p. 19). Shin (2012) conducted firm-level

analyses regarding the relationship between CEO ethical

leadership and ethical climate. The overall outcome of the

study showed that CEOs’ self-rated ethical leadership was

positively associated with employees’ aggregated percep-

tions of the ethical climate of the firm. Duh et al. (2010)

discussed the importance of core values, culture and ethical

climate in the context of family versus non-family busi-

nesses. The authors concluded that family as well as non-

family enterprises maintain positive attitudes towards the

core values with ethical content. However, with respect to

the type of enterprise culture, the results of this study

demonstrated a stronger presence of clan1 culture charac-

teristics in family than in non-family enterprises (e.g.,

Parmalat, Royal Ahold, and HealthSouth). In contrast, non-

family enterprises benefit from a stronger presence of

hierarchical and market culture characteristics compared to

family ownership. Brower and Shrader (2000) observed a

high degree of egoism in profit making companies.

Ethical culture within an organization may also have a

relationship with management perception and the way they

exercise their power. When power is used as the central

explanatory concept, it becomes both a means and an end

and this may lead to organizational deviance (Vaughan

1999). This may be a source of managerial misconduct.

Using a survey study, Kaptein (2010) raises that ques-

tion of whether the ethics of organizations has improved in

recent years. He claimed that the ethical culture of orga-

nizations improved in the period between 1999 and 2004.

Between 2004 and 2008, however, unethical behavior and

its consequences declined and the scope of ethics programs

expanded.

There is no single type of work climate or any clear-cut

criteria to evaluate the ethical climate. Ethical climate

affects a broad range of management decisions. At the

same time, CEO ethical leadership may be an important

factor affecting the ethical organizational climate and

ethical culture (Reed et al. 2011).

In our analyses of six American and European corporate

scandals, we will take an interest in the overall ethical

climate and the aggregated perceptions of organizational

conventions and organizational norms which have been

implemented within corporations in terms of ethics and

code of conduct, committee of ethics, management and

subordinate relationship, reward and control, working

conditions, the dysfunctional behavior of managers, the

moral behavior of managers and the moral atmosphere. To

what extent have normative systems of ethics been insti-

tutionalized in the organization?

Tone at the Top and Executive Leadership

‘Tone at the top’ is the manner in which the company’s

board of directors, senior management and CEO perceive

their responsibilities in setting the tone of an organization.

The organization in turn influences the control conscious-

ness of the employees. These topics are among the six

central themes that we analyze in this study. The CEOs set

by their words and deeds the ethical tone for the organi-

zations. All those who are involved in the firm look to the

top for guidance (Schwartz et al. 2005; Schroeder 2002).

According to Hambrick (2007) if we want to understand

why organizations do the things they do, or why they

perform the way they do, we must consider the biases and

dispositions of their most powerful actors—their top

executives. For this reason, the discussion on the concept

of the tone at the top can be directly relevant to ethical

climate and ethical behavior (Wimbush and Shepard 1994)

as well as executive leadership and CEO ethical leadership

(Reed et al. 2011; Shin 2012).

The tone at the top is established by upper management.

It reflects a supportive attitude towards the control of the

organization’s environment at all times, encompassing

independence, competence and leadership by implement-

ing an appropriate ethical code of conduct within an

organization. The commitment, the involvement and sup-

port of a company’s top management in setting the tone at

the top contribute to increasing a positive attitude among a

company’s personnel. It is essential for maintaining an

efficient internal control system. Management’s policies,

procedures and practices should promote orderly, ethical,

economical, efficient, and

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