Financial scandal occurs when an individual or company engages in illegal or deceptive practices that exposes the firm to substantial losses and erodes trust. It encompasses any widespread event of fraud or unethical behavior that impacts financial markets and a company’s reputation, and may be caused by insider trading, securities violations, corruption, or tax evasion.
For example, in 2001, Enron was a well-known energy company that kept huge debts off its balance sheet by using off-the-book partnerships and accounting tricks. The scam ultimately collapsed, costing investors $74 billion and employees their jobs. The case prompted the collapse of Enron’s accounting firm Arthur Andersen and new regulations on corporate governance.
Journalists play a critical role in investigating and exposing financial scandals. By interviewing current and former employees, regulators, auditors, and industry experts, they can confirm suspicions and help readers understand the underlying issues. They can also investigate the legal framework, such as whether there is a breach of securities laws, money laundering regulations, or tax evasion.
A major financial scandal can damage a company’s reputation, lead to investor losses, and trigger economic crises. After such incidents, governments and regulatory bodies often rush to enact reforms to prevent similar scandals in the future, including stricter internal controls and better accounting standards. However, no system is foolproof, and sophisticated schemes can still evade detection for extended periods of time. This is particularly true in complex global financial markets, where regulatory arbitrage–exploiting differences between rules across jurisdictions–can occur.