Bob Jensen's Threads on Accounting Fraud
Bob Jensen at Trinity University
 

 

Table of Contents
FBI Corporate Fraud Hotline (Toll Free) 888-622-0177

Large Public Accounting Firm Lawsuits

Helpers for Courses on Fraud and Forensic Accounting

The Fate of the Large Auditing Firms After the 2008 Banking Meltdown  

The Enron, Andersen, and Worldcom Scandal Modules Have Been Moved to  --- http://www.trinity.edu/rjensen/FraudEnron.htm  

Bob Jensen's Enron Quiz (and answers) --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Daily News Sites for Accountancy, Tax, Fraud, IFRS, XBRL, Accounting History, and More ---
http://www.trinity.edu/rjensen/AccountingNews.htm

Introductory Quotations 

Creative Earnings Management, Agency Theory, and Accounting Manipulations to Cook the Books ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation

Forensic Accounting

Cooking the Books

Fraud Updates and Other Updates to the Accounting and Finance Scandals --- 
http://www.trinity.edu/rjensen/FraudUpdates.htm
 

Commercial Scholarly Journals and Monopoly Publishers Are Ripping Off Libraries and Scholars 

Rotten to the Core:  Mutual Fund, Media, Investment Banking Scandals, and Security Analysis Frauds --- 
http://www.trinity.edu/rjensen/FraudRotten.htm 

Media Coverage is Very, Very Good and Very, Very Bad
From Enron to Earnings Reports, How Reliable is the Media's Coverage?
   http://www.trinity.edu/rjensen/FraudRotten.htm#Media

The Andersen, Enron, and WorldCom Scandals 

The Saga of Auditor Professionalism and Independence 

Risk-Based Auditing Under Attack   

What's Right and What's Wrong With (SPEs), SPVs, and VIEs --- 
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing

Fraud Detection and Reporting --- http://www.trinity.edu/rjensen/FraudReporting.htm

American History of Fraud ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Daily News Sites for Accountancy, Tax, Fraud, IFRS, XBRL, Accounting History, and More ---
http://www.trinity.edu/rjensen/AccountingNews.htm

Bob Jensen's threads on ethics and accounting education are at 
http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation

The Saga of Auditor Professionalism and Independence ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
 

Bob Jensen's threads on great minds in management are at http://www.trinity.edu/rjensen/theory/00overview/GreatMinds.htm

Incompetent and Corrupt Audits are Routine ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

Computer Fraud Casebook: The Bytes that Bite ---
http://www.journalofaccountancy.com/Issues/2009/Sep/BookshelfReview3.htm

Richard Campbell notes a nice white collar crime blog edited by some law professors ---
http://lawprofessors.typepad.com/whitecollarcrime_blog/ 

Lexis Nexis Fraud Prevention Site ---  http://risk.lexisnexis.com/prevent-fraud

Accounting Humor

Selected Scandals in the Largest Remaining Public Accounting Firms

Large Public Accounting Firm Lawsuits

Although somewhat dated, Corporate Scandal provides a nice summary of many of the recent scandals --- 
http://www.econstats.com/scandal.htm
 


Federal securities class action lawsuits increased 19 percent in 2008, with almost half involving firms in the financial services sector according to the annual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research --- http://securities.stanford.edu/scac_press/20080106_YIR08_Press_Release.pdf

Especially note the 2008 Year in Review link at http://securities.stanford.edu/clearinghouse_research/2008_YIR/20080106.pdf


Forensic Accounting Course Materials

November 3, 2009 message from Eileen Taylor [eileen_taylor@NCSU.EDU]

Need advice on choosing a textbook for an MBA class on fraud (to be taken mostly by Master of Accounting students).

I am deciding between Albrecht's Fraud Examination and Hopwood's Forensic Accounting. I also plan to have students read Cynthia Cooper's book, Journey of a Corporate Whistleblower.

I will be teaching a three-week version of the course this summer as a study abroad, but also will be converting it into a 16 week semester-long 3 hour course.

Any suggestions would be helpful -

Thank you,
Eileen

November 3, 2009 reply from Bob Jensen

Hi Eileen,

I'm really not able to give you an opinion on either choice for a textbook. But before making a decision I always compared the end-of-chapter material and the solutions manual to accompany that material. If the publisher did not pay for good end-of-chapter material I always view the textbook to be a cheap shot. The end-of-chapter material is much harder to write than the chapter material itself.

I also look for real world cases and illustrations.

Don't forget the wealth of material, some free, at the site of the Association of Certified Fraud Examiners --- http://www.acfe.com/
I would most certainly consider using some of this material on homework and examinations.

Instead of a textbook you might use the ACFE online self-study materials ($79)  ---
Click Here

There is a wonderful range of topics covered ---
http://snipurl.com/acleselfstudy      [eweb_acfe_com]

Accounting and Auditing

Computers and Technology

Criminology and Ethics

Fraud Investigation

Fraud Schemes

Interviewing and Reporting

Legal Elements of Fraud

Spanish Titles

Bob Jensen

"A Model Curriculum for Education in Fraud and Forensic Accounting," by Mary-Jo Kranacher, Bonnie W. Morris, Timothy A. Pearson, and Richard A. Riley, Jr., Issues in Accounting Education, November 2008. pp. 505-518  (Not Free) --- Click Here

There are other articles on fraud and forensic accounting in this November edition of IAE:

Incorporating Forensic Accounting and Litigation Advisory Services Into the Classroom Lester E. Heitger and Dan L. Heitger, Issues in Accounting Education 23(4), 561 (2008) (12 pages)]

West Virginia University: Forensic Accounting and Fraud Investigation (FAFI) A. Scott Fleming, Timothy A. Pearson, and Richard A. Riley, Jr., Issues in Accounting Education 23(4), 573 (2008) (8 pages)

The Model Curriculum in Fraud and Forensic Accounting and Economic Crime Programs at Utica College George E. Curtis, Issues in Accounting Education 23(4), 581 (2008) (12 pages)

Forensic Accounting and FAU: An Executive Graduate Program George R. Young, Issues in Accounting Education 23(4), 593 (2008) (7 pages)

The Saint Xavier University Graduate Program in Financial Fraud Examination and Management William J. Kresse, Issues in Accounting Education 23(4), 601 (2008) (8 pages)

Also see
"Strain, Differential Association, and Coercion: Insights from the Criminology Literature on Causes of Accountant's Misconduct," by James J. Donegan and Michele W. Ganon, Accounting and the Public Interest 8(1), 1 (2008) (20 pages)

Bob Jensen's Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's threads on fraud --- http://www.trinity.edu/rjensen/Fraud.htm

FBI Corporate Fraud Chart in August 2008 --- http://www.aicpa.org/pubs/jofa/aug2008/ataglance.htm#Chart1.htm

A great blog on securities and accounting fraud --- http://lawprofessors.typepad.com/securities/

Bob Jensen's threads on fraud and forensic accounting ---
http://www.trinity.edu/rjensen/Fraud.htm


Business schools, eager to impart ethics, are paying white-collar felons to recite the error of their ways

"Using Ex-Cons to Scare MBAs Straight," by Porter, Business Week, April 24, 2008 --- Click Here

Bob Jensen's threads on white collar crime include the following links:

http://www.trinity.edu/rjensen/FraudRotten.htm

http://www.trinity.edu/rjensen/Fraud.htm

http://www.trinity.edu/rjensen/FraudUpdates.htm


"Study Tallies Corporations Not Paying Income Tax," by Lynley Browning, The New York Times, August 12, 2008 --- http://www.nytimes.com/2008/08/13/business/13tax.html?_r=1&dbk

  • Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress.

    The study, which is likely to add to a growing debate among politicians and policy experts over the contribution of businesses to Treasury coffers, did not identify the corporations or analyze why they had paid no taxes. It also did not say whether they had been operating properly within the tax code or illegally evading it.

    The study covers 1.3 million corporations of all sizes, most of them small, with a collective $2.5 trillion in sales. It includes foreign corporations that do business in the United States.

    Among foreign corporations, a slightly higher percentage, 68 percent, did not pay taxes during the period covered — compared with 66 percent for United States corporations. Even with these numbers, corporate tax receipts have risen sharply as a percentage of federal revenue in recent years.

    The G.A.O. study was done at the request of two Democratic senators, Carl Levin of Michigan and Byron L. Dorgan of North Dakota. In recent years, Senator Levin has held investigations on tax evasion and urged officials and regulators to examine whether corporations were abusing tax laws by shifting income earned in higher-tax jurisdictions, like the United States, to overseas subsidiaries in low-tax jurisdictions.

    Senator Levin said in written remarks on Tuesday that “this report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

    But the G.A.O. said that it did not have enough data to address the role of what some policy experts say is a crucial factor in profits sent overseas.

    That factor, known as transfer pricing, involves corporations’ charging their overseas subsidiaries lower prices for goods and services, a common move that lowers a corporation’s tax bill. A number of corporations are in transfer-pricing disputes with the Internal Revenue Service.

    Either way, the nearly 1,000 largest United States corporations were more likely than smaller ones to pay taxes.

    In 2005, one in four large United States corporations paid no taxes on revenue of $1.1 trillion, compared with 66 percent in the overall pool. Large corporations are those with at least $250 million in assets or annual sales of at least $50 million.

    Joshua Barro, a staff economist at the Tax Foundation, a conservative research group, said that the largest corporations represented only 1 percent of the total number of corporations but more than 90 percent of all corporate assets.

    The vast majority of the large corporations that did not pay taxes had net losses, he said, and thus no income on which to pay taxes. “The notion that there is a large pool of untaxed corporate profits is incorrect.”

    In 2004, a G.A.O. study said that 7 in 10 of all foreign corporations doing business in the United States, or foreign-controlled corporations, paid no taxes from 1996 through 2000, compared with 6 in 10 United States corporations.

    This article has been revised to reflect the following correction:

    Correction: August 14, 2008
    An article on Wednesday about a Government Accountability Office study reporting on the percentage of corporations that paid no federal income taxes from 1998 through 2005 gave an incorrect figure for the estimated tax liability of the 1.3 million companies covered by the study. It is not $875 billion. The correct amount cannot be calculated because it would be based on the companies’ paying the standard rate of 35 percent on their net income, a figure that is not available. (The incorrect figure of $875 billion was based on the companies’ paying the standard rate on their $2.5 trillion in gross sales.)

  •  


    FBI Corporate Fraud Chart in August 2008 --- http://www.aicpa.org/pubs/jofa/aug2008/ataglance.htm#Chart1.htm

    From Smart Stops of the Web, Journal of accountancy, October 2008 ---

    FRAUD / FORENSIC ACCOUNTING

    HAVE FRAUD FEARS?
    http://fvs.aicpa.org/Resources/Antifraud+Forensic+Accounting
    Search no further than the AICPA’s offering of antifraud and forensic accounting resources. Click “Tools and Aids” to download Managing the Business Risk of Fraud: A Practical Guide, which outlines principles for establishing effective fraud risk management. The paper was released jointly by the AICPA, the Association of Certified Fraud Examiners and The Institute of Internal Auditors (see “Highlights,” page 16). The site also offers fraud detection and prevention tips, including an “Indicia of Fraud” checklist and case studies. There’s also information on the newly created Certified in Financial Forensics (CFF) credential (see “News Digest,” Aug. 08, page 30) and upcoming Web seminars.

    BE CRIME SMART
    www.fbi.gov/whitecollarcrime.htm
    Think of the most outrageous business fraud scheme you’ve ever heard of— you’re likely to find it, plus hundreds of other white-collar crime cases—at this site from the FBI. Look under “Don’t Be Cheated” for a fraud awareness test or click on “Know Your Frauds” for access to the FBI’s analysis of common fraud schemes, including the prime bank note scheme, telemarketing fraud and up-and-coming Internet scams. CPAs and financial professionals can access details on options backdating, securities scams and investment fraud under “Interesting Cases” or learn about the FBI’s major programs involving corporate, hedge fund and bankruptcy fraud.

    SURF THE FRAUD NET
    www.auditnet.org/fraudnet.htm
    Jim Kaplan, a government auditor and author of The Auditor’s Guide to Internet Resources, 2nd Edition, hosts this Internet portal for auditors, which provides fraud policies, procedures, codes of ethics and articles on a range of topics, including internal auditing, fraud risk mitigation and preventing embezzlement. The site also features a newsfeed, piping in daily fraud news from around the world..

    Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/fraud.htm

     


     

    Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation 

    Corporate Fraud Reporting


    Report on the Transparency International Global Corruption Barometer 2007 ---
    http://www.transparency.org/content/download/27256/410704/file/GCB_2007_report_en_02-12-2007.pdf

    EXECUTIVE SUMMARY – GLOBAL CORRUPTION BAROMETER 2007...................2

    PAYING BRIBES AROUND THE WORLD CONTINUES TO BE ALL TOO COMMON ......3

    Figure 1. Demands for bribery, by region 3

    Table 1. Countries most affected by bribery 4

    Figure 2. Experience of bribery worldwide, selected services 5

    Table 2. Percentage of respondents reporting that they paid a bribe to obtain a service 5

    Figure 3. Experience with bribery, by service 6

    Figure 4. Selected Services: Percentage of respondents who paid a bribe, by region 7

    Figure 5. Comparing Bribery: 2006 and 2007 8

    CORRUPTION IN KEY INSTITUTIONS: POLITICAL PARTIES AND THE

    LEGISLATURE VIEWED AS MOST CORRUPT............................................................8

    Figure 6. Perceived levels of corruption in key institutions, worldwide 9

    Figure 7. Perceived levels of corruption in key institutions, comparing 2004 and 2007 10

    EXPERIENCE V. PERCEPTIONS OF CORRUPTION DO THEY ALIGN?...................10

    Figure 8. Corruption Perceptions Index v. citizens’ experience with bribery 11

    LEVELS OF CORRUPTION EXPECTED TO RISE OVER THE NEXT THREE YEARS....11

    Figure 9. Corruption will get worse, worldwide 11

    Figure 10. Expectations about the future: Comparing 2003 and 2007 12

    PUBLIC SCEPTICISM OF GOVERNMENT EFFORTS TO FIGHT CORRUPTION IN

    MOST PLACES .......................................................................................................13

    Table 3. How effectively is government fighting corruption? The country view 13

    CONCLUSIONS ......................................................................................................13

    APPENDIX 1: THE GLOBAL CORRUPTION BAROMETER 2007 QUESTIONNAIRE15

    APPENDIX 2: THE GLOBAL CORRUPTION BAROMETER – ABOUT THE SURVEY17

    APPENDIX 3: REGIONAL GROUPINGS..................................................................20

    GLOBAL CORRUPTION BAROMETER 2007..........................................................20

    APPENDIX 4: COUNTRY TABLES..........................................................................21

    Table 4.1: Respondents who paid a bribe to obtain services 21

    Table 4.2: Corruption’s impact on different sectors and institutions 22

    Table 4.3: Views of corruption in the future 23

    Table 4.4: Respondents' evaluation of their government's efforts to fight corruption 24

    Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

    Bob Jensen's Rotten to the Core threads are at --- http://www.trinity.edu/rjensen/FraudRotten.htm

     


    The FEI has a new 16-page fraud checklist that can be downloaded for $50. Access to an online database is $129 --- Click Here

    "New research provides resources on fraud prevention and financial reporting," AccountingWeb, January 18, 2008 ---
    http://www.accountingweb.com/cgi-bin/item.cgi?id=104443

    Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI), has announced the release of two important new pieces of research designed to aid public company management and corporate boards in the efficient evaluation of their assessment of reporting issues and internal controls. A new FERF Study, entitled "What's New in Financial Reporting: Financial Statement Notes from Annual Reports," examines disclosures from 2006 annual reports for the 100 largest publicly-traded companies which used particularly innovative techniques to clearly address difficult accounting issues. The study identifies and analyzes recent reporting trends and common practices in financial statements.

    The report illustrates how companies addressed specific accounting issues recently promulgated by the Financial Accounting Standards Board (FASB), and by the Securities and Exchange Commission (SEC), and in doing so, uncovered a number of trends, which included:
    • Most of the disclosures selected appear to have been developed specifically for a company's own operations and industry standards, rather than "boilerplate" disclosures.
    • Four accounting areas identified with a considerable variation in disclosures. The examples cited in these areas used innovative techniques to clearly address difficult accounting issues.
       
      1. Commitments and contingencies
         
      2. Derivatives and financial instruments
         
      3. Goodwill and intangibles
         
      4. Revenue recognition
  • Twenty-five out of 100 filers in the 2006 reporting season reported tangible asset impairments as a critical accounting policy.
     
  • Many companies report condensed consolidating cash flows statements as part of their segment disclosures, although not required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.
  •  

    To further facilitate use of this report as a reference tool, all of the financial statement footnotes gathered for the study are available to members on the Financial Executives International Web site.

    "FERF undertook this study to provide our members with an illustration of how companies have used innovative techniques to clearly address difficult accounting concerns," said Cheryl Graziano, vice president, research and operations for FERF. "Recent accounting issues publicized by the FASB and the SEC have had a direct impact on members of the financial community, and the report shows that many companies are taking action."

    "We hope that all financial executives can utilize the report as both a quick update to summarize recent trends in the most annual reporting season, as well as a reference to address common accounting issues. The convenience of the online database will provide executives with a readily handy tool when drafting their own annual reports," said Graziano.

    A second piece of research by FEI, entitled the "FERF Fraud Risk Checklist," provides boards of directors and management with a series of questions to help in assessing the potential risk factors associated with fraudulent financial reporting and the misappropriation of assets. These questions were developed from a number of key sources on financial fraud and offer executives a single framework in which to evaluate their company's reporting, while providing a sample structure for management to use in documenting its thought process and conclusions.

    "Making improvements to compliance with Sarbanes Oxley is a daily practice for financial executives, and the first step in efficient evaluation of internal controls is the proper assessment of potential exposures or risks associated with fraud," said Michael Cangemi, president and CEO, Financial Executives International. "Through conversations with members of the financial community, we learned that, while this type of risk assessment is a routine skill for auditors, many members of management are not always familiar with this concept. This checklist combines knowledge from the leading resources on fraud to help financial management take a proactive step in evaluating their company's practices and identifying areas for improvement."

    The annual report study, including the full report and access to the online database, and the fraud checklist, are available for purchase on the FEI Web site

    Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm


    January 29, 2008 message from Sikka, Prem N [prems@essex.ac.uk]

    Dear Bob,

    Here is an item for your website.

    I have been writing regular blogs for The Guardian, a UK national newspaper. The articles are available at http://commentisfree.guardian.co.uk/prem_sikka/index.html and offer a critical commentary on business and accountancy matters. For three days after each article the website takes readers' comments and colleagues are welcome to add comments, critical or otherwise. The most recent article appeared on 29 January 2008.

    There is now also an extensive database of corporate and accountancy misdemeanours on the AABA website ( http://www.aabaglobal.org <https://exchange5.essex.ac.uk/exchweb/bin/redir.asp?URL=http://www.aabaglobal.org/> ) and may interest scholars, students, journalists and citizens concerned about the abuse of power.

    Regards

    Prem Sikka
    Professor of Accounting
    University of Essex
    Colchester, Essex CO4 3SQ
    UK
    Office Tel: +44(0)1206 873773
    Office Fax: +44 (01206) 873429

    Jensen Comment
    I added Professor Sikka's message to the following sites:

    http://www.trinity.edu/rjensen/FraudUpdates.htm

    http://www.trinity.edu/rjensen/Fraud.htm

    http://www.trinity.edu/rjensen/Fraud001.htm

    http://www.trinity.edu/rjensen/FraudRotten.htm

     


    The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm 

    Labor Unions Resist Efforts to Require Truthful Financial Disclosures  

    Tax Fraud and Scams 

    How Technology Can Be Used to Reduce Fraud  

    Health Care and Medical Billing Fraud  

    Online (Internet) Frauds, Consumer Frauds, and Credit Card Scams

    Corporate Governance is in a Crisis 

    Government Subsidies, Pork Barrels, and Accountability --- http://www.trinity.edu/rjensen/fraudRotten.htm#Government 

    The Professions of Investment Banking and Security Analysis are Rotten to the Core   This module was moved to http://www.trinity.edu/rjensen/FraudRotten.htm 

    Derivative Financial Instruments Fraud --- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds 

    FAS 133 Trips of Freddie Mac --- http://www.trinity.edu/rjensen/caseans/000index.htm#FreddieMac 

    What is initial public offering (IPO) spinning and why is it illegal?  

    Are Women More Ethical and Moral?  

    Example from the Stanford Law School Database

    Future CPA --- http://www.trinity.edu/rjensen/cpaaway.htm 

    Also see http://www.trinity.edu/rjensen/damages.htm 

    You might enjoy "The AICPA's Prosecution of Dr. Abraham Briloff: Some Observations," by Dwight M. Owsen --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm  
    I think Briloff was trying to save the profession from what it is now going through in the wake of the Enron scandal.

    Bob Jensen's threads on ecommerce and revenue reporting tricks and frauds --- http://www.trinity.edu/rjensen/ecommerce.htm 
    For revenue reporting frauds --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 

    Bob Jensen's threads on accounting theory --- 
    http://www.trinity.edu/rjensen/theory.htm
     

    Resources to prevent and discover fraud from the Association of Fraud Examiners --- http://www.cfenet.com/resources/resources.asp 

    Self-study training for a career in fraud examination --- http://marketplace.cfenet.com/products/products.asp

    Fraud Detection and Reporting --- http://www.trinity.edu/rjensen/FraudReporting.htm

    Source for United Kingdom reporting on financial scandals and other news --- http://www.financialdirector.co.uk

    International Corruption Surveys and Indices --- http://www.transparency.org/cpi/ 

    • TI Bribe Payers Survey 
    • TI Corruption Perceptions Index 
    • TI-Kenya Urban Bribery Index 
    • TI-Mexicana Encuestra Nacional de Corrupcion y Buen Gobierno 
    • National Survey on corruption and Governance (NSCG) (in Spanish)
    • Transparência Brasil Survey


    The Enron, Andersen, and Worldcom Scandal Modules Are At --- http://www.trinity.edu/rjensen/Fraud.htm 

     

    Selected Scandals in the Largest Remaining Public Accounting Firms

    The Sad State of Professional Discipline in Public Accountancy

    Big 4 Securities Class Action Litigation- Citing Auditor as Defendants --- http://www.trinity.edu/rjensen/AuditingFirmLitigationNov2006.pdf

    "SEC Accountant Fines Largely Go Unpaid," SmartPros, June 7, 2006 --- http://accounting.smartpros.com/x53399.xml

    The Securities and Exchange Commission has taken disciplinary action against more than 50 accountants in 2005 and 2006 for misconduct in scandals big and small. But few have paid a dime to compensate shareholders for their varying levels of neglect or complicity.

    It also turns out that nearly half of them continue to hold valid state licenses to hang out their shingles as certified public accountants, based on an examination of public records by The Associated Press.

    So while the SEC has forbidden these CPAs from preparing, auditing or reviewing financial statements for a public company, they remain free to perform those very same services for private companies and other organizations that may be unaware of their professional misdeeds.

    Some would say the accounting profession has taken its fair share of lumps, particularly with the abrupt annihilation of Arthur Andersen LLP and the jobs of thousands of auditors who had nothing to do with the firm's Enron Corp. account. Meantime, the big auditing firms are paying hundreds of millions of dollars in damages - without admitting or denying wrongdoing - to settle assorted charges of professional malpractice.

    Individual penance is another matter, however, and here the accountants aren't being held so accountable.

    Part of the trouble is that there doesn't appear to be an established system of communication by which the SEC automatically notifies state accounting regulators of federal disciplinary actions. In several instances, state accounting boards were unaware a licensee had been disciplined by the SEC until it was brought to their attention in the reporting for this column. The SEC says it refers all disciplinary actions to the relevant state boards, so the cause of any breakdowns in these communications is unclear.

    Another obstacle may be that some state boards do not have ample resources to tackle the sudden swell of financial scandals. It's not as if, for example, the Texas State Board of Public Accountancy had ever before dealt with an accounting fraud as vast as that perpetrated at Houston-based Enron.

    "We don't have the staff on board to manage the extra workload that the profession has been confronted with over the last few years," said William Treacy, executive director of the Texas board. "So we contracted with the attorney general's office to provide extra prosecutorial power."

    Treacy said his office is usually notified of SEC actions concerning Texas-licensed CPAs, but the process isn't automatic.

    With other states, communications from the SEC appear less certain. If nothing else, many boards rely upon license renewals to learn about SEC actions, but that only works if the applicants respond truthfully to questions about whether they've been disciplined by any federal or state agency. A spokeswoman for Georgia's board said one CPA recently disciplined by the SEC had renewed his license online without disclosing it.

    Ransom Jones, CPA-Investigator for the Mississippi State Board of Public Accountancy, said most of his leads come from other accountants, media reports and annual registrations.

    "The SEC doesn't necessarily notify the board," said Jones, whose agency revoked the licenses of key players in the scandal at Mississippi-based WorldCom.

    Some state boards appear more vigilant than others in policing their membership. The boards in California and Ohio have punished most of their licensees who have been disciplined by the SEC since the start of 2005.

    New York regulators haven't yet penalized any locals targeted by the SEC in that timeframe, though they have taken action against two disciplined by the SEC's new Public Company Accounting Oversight Board. It is conceivable that cases are underway but not yet disclosed, or that some individuals have been cleared despite the SEC's findings. A spokesman for the New York State Education Department said all SEC referrals are probed, but not all forms of misconduct are punishable under local statute. New rules now under consideration would strengthen those disciplinary powers, he said.

    Meanwhile, although the SEC deserves credit for de-penciling those CPAs who've breached their duties as gatekeepers of financial integrity, barely any of those individuals have been asked to make amends financially.

    No doubt, except for those elevated to CEO or CFO, most accountants are not paid as handsomely as the corporate elite. That said, partners from top accounting firms are were [sic] paid well enough to cough up more than the SEC has sought, which in most cases has been zero.

    Earlier this year, in what the SEC crowed about as a landmark settlement, three partners for KPMG LLP agreed to pay a combined $400,000 in fines regarding a $1.2 billion fraud at Xerox Corp. One of those fined still holds his license in New York.

    "The SEC has never sought serious money from errant CPAs," said David Nolte of Fulcrum Financial Inquiry LLP. "Unfortunately, the small fines in the Xerox case set a record of the amount paid, so everyone else has also gotten off easy."

    It's not that the CPAs found culpable in scandals don't deserve a right to redemption, or just to earn a living. Most of the bans against practicing before the SEC are temporary, spanning anywhere from a year to 10 years.

    But the presumed deterrent of SEC action is weakened if federal and state regulators don't work together on a consistent message so bad actors don't get a free pass at the local level.

    Large Public Accounting Firm Lawsuits

     

     

    Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation 

    The SEC will not tolerate a pattern of growing restatements, audit failures, corporate failures and massive investor losses," Pitt said in a news conference. "Somehow we have got to put a stop to the vicious cycle that has now been in evidence for far too many years."

    Suggested Reforms
    Suggested Reforms (Including those of Warren Buffet and the Andersen Accounting Firm)    
    http://www.trinity.edu/rjensen/FraudProposedReforms.htm

    Major New Law in the Wake of the Accounting and Finance Scandals
    SARBANES-OXLEY ACT OF 2002 --- http://www.trinity.edu/rjensen/fraud082002.htm 

    Bottom-Line Commentary of Bob Jensen
    Bottom-Line Commentary of Bob Jensen:  Systemic Problems That Won't Go Away  
    http://www.trinity.edu/rjensen/FraudConclusion.htm

     

    Links Related to Andersen, Enron, Worldcom, and Other Frauds
    The Enron, Andersen, and Worldcom Scandal Modules --- http://www.trinity.edu/rjensen/Fraud.htm 

    •  

    Background Links on Accounting and Business Fraud
    Main Document on the accounting, finance, and business scandals --- http://www.trinity.edu/rjensen/Fraud.htm 

    Bob Jensen's threads on professionalism and independence are at http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

    Bob Jensen's threads on ethics and accounting education are at 
    http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation

    The Saga of Auditor Professionalism and Independence ---
    http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
     

    Incompetent and Corrupt Audits are Routine ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

    Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm 

    Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing

    Bob Jensen's threads on pro forma frauds are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma 

    Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm 

    Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing

     


     

    The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm 

     

    Association of Certified Fraud Examiners --- http://www.acfe.com/home.asp
    In particular note the Code of Business Ethics and Conduct ---  http://www.acfe.com/documents/code_of_business_ethics.pdf
    Fraud Resources Center --- http://www.acfe.com/fraud/fraud.asp
    Fraud Prevention Check-Up --- http://www.acfe.com/fraud/check.asp
    Fraud Prevention CD-ROM --- http://www.acfe.com/fraud/cd.asp
    How to Prevent Small Business Fraud --- http://www.acfe.com/documents/smallbusinessfraudexcerpt.pdf
    Other Downloads --- http://www.acfe.com/fraud/downloads.asp

    Also note the explosion of salaries of Certified Fraud Examiners ---
    http://www.acfe.com/documents/2005comp-guide.pdf

    PricewaterhouseCoopers - Global Economic Crime Survey 2003 --- http://www.acfe.com/documents/2003_PwC_CrimeReport.pdf

    FraudNet the Government Accountability Office (GAO) --- http://www.gao.gov/fraudnet/fraudnet.htm 

    The Institute of Internal Auditors --- http://www.theiia.org/

    AICPA's Business Valuation and Forensic & Litigation Services Center (not free to the public) --- http://bvfls.aicpa.org/

    Fraud Position Statement of the Institute of Internal Auditors of the UK and Ireland --- http://www.blindtiger.co.uk/IIA/uploads/48dc2e62-f2a7bd939a--7c26/2003FraudPositionStatement.pdf
    I snipped this link to http://snipurl.com/IIAFraudStatementUK

    The Fraud Detectives Consultant Network --- http://www.frauddetectives.com/ 
    This is a helpful site, although I might add that accountants, attorneys, and others can list themselves free at this site with no filtering with regard to skills and experience.

    Some fraud links from B2B Today --- http://snipurl.com/B2BfraudLinks 


    Introductory Quotations 

    Quotations for the Enron/Andersen scandals were moved to http://www.trinity.edu/rjensen/FraudEnron.htm#Quotations

    Turning to business, the board rapidly approved a series of transactions, according to the minutes and a report later commissioned by Hollinger. The board awarded a private company, controlled by Lord Black, $38 million in "management fees" as part of a move by Lord Black's team to essentially outsource the company's management to itself. It agreed to sell two profitable community newspapers to another private company controlled by Lord Black and Hollinger executives for $1 apiece. The board also gave Lord Black and his colleagues a cut of profits from a Hollinger Internet unit.  Finally, the directors gave themselves a raise. The meeting lasted about an hour and a half, according to the minutes and two directors who were present.
    Robert Frank and Elena Cheney --- Click here to read part of their article


    "Real Accounting Fraud," by Thomas J. DiLorenzo, The Free Market, April 2002 --- http://www.mises.org/freemarket_detail.asp?control=395&sortorder=articledate

    If the Enron bankruptcy proves anything, it is that there are sinners in all walks of life, and that the market economy provides mechanisms for rooting out and punishing systematic liars. Those who clamor for Congress to “do something” to assure that this kind of thing will never happen again are delusional if they think Congress has the ability to legislate away sin or otherwise improve on the market system of profit and loss. Such delusions are a testament to the successful brainwashing of generations of public school students who have been taught to worship the “god” of the state and to look to it to solve all of life’s problems.

    Accounting fraud at Enron is such a big story because it is so exceptional; only once in a blue moon does a major corporation destroy itself in this way. In contrast, “accounting” fraud is an inherent feature of government.

    There is no such thing as real accounting in government, of course, since there are no profit-and-loss statements, only budgets. Consequently, there is no way of ever knowing, in an accounting sense, whether government is adding value or destroying it. All we know is that the budget grew by a certain amount, for some ostensible purpose. And government is constantly lying to the public about how much of the public’s money is being spent and what it is being spent on.

    As Gene Epstein has reported in Barron’s, during the Clinton administration, vast sums were transferred from the Social Security and Federal Highway Trust Funds to the budget so that Clinton and the Republican Congress could take “credit” for balancing the budget. Any corporate CEO who raided his employees’ pension fund and put the money in the company coffers so that the bottom line would look good and he could earn himself a fat bonus would end up in prison.

    The federal government practices what it calls “baseline budgeting,” whereby federal agencies announce that they wish to increase their budgets by, say, 10 percent a year, and if they only increase them by 5 percent that is called a 5 percent budget “cut.” There can be no better example of accounting fraud than calling a budget increase a cut.

    The General Accounting Office, Congressional Budget Office, and other federal agencies also use “static analysis” when analyzing and reporting to the public on tax policy changes. That is, they assume that taxation has no effect whatsoever on economic behavior. So, if we have a $10 trillion economy, and impose a flat 75-percent income tax, these “authoritative” sources will announce that the IRS expects to collect $7.5 trillion in revenues, each year, ignoring several hundred years of economic theory and practice.

    Continued in article


    Clinton's famously crude remark
    And I hope that comes through in the book (see below for references to the book Infectious Greed).  I am very critical of the tax law changes that created the incentives for companies to pay executives with stock options, which were made at the beginning of the Clinton Administration to appease populist anti-corporation forces among his supporters by appearing to do something about what, even then, was alleged to be execessive pay for corporate executives.  Not to mention his Administration's hands-off approach to Wall Street (when Arthur Levitt headed the SEC).  There's that great story --- perhaps apocoryphal --- that I recount in the book about Clinton's famously crude remark when he discovered that voters cared much more about whether the stocks were going up than his economic program.
    Frank Partnoy, Partnoy's Solutions, welling@weeden, October 21, 2005


     

     

    Selected works of FRANK PARTNOY
    Bob Jensen at Trinity University

     

    1.  Who is Frank Partnoy?

    Cheryl Dunn requested that I do a review of my favorites among the “books that have influenced [my] work.”   Immediately the succession of FIASCO books by Frank Partnoy came to mind.  These particular books are not the best among related books by Wall Street whistle blowers such as Liar's Poker: Playing the Money Markets by Michael Lewis in 1999 and Monkey Business: Swinging Through the Wall Street Jungle by John Rolfe and Peter Troob in 2002.  But in1997.  Frank Partnoy was the first writer to open my eyes to the enormous gap between our assumed efficient and fair capital markets versus the “infectious greed” (Alan Greenspan’s term) that had overtaken these markets.

    Partnoy’s succession of FIASCO books, like those of Lewis and Rolfe/Troob are reality books written from the perspective of inside whistle blowers.  They are somewhat repetitive and anecdotal mainly from the perspective of what each author saw and interpreted. 

    My favorite among the capital market fraud books is Frank Partnoy’s latest book Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Henry Holt & Company, Incorporated, 2003, ISBN: 080507510-0- 477 pages).  This is the most scholarly of the books available on business and gatekeeper degeneracy.  Rather than relying mostly upon his own experiences, this book drawn from Partnoy’s interviews of over 150 capital markets insiders of one type or another.  It is more scholarly because it demonstrates Partnoy’s evolution of learning about extremely complex structured financing packages that were the instruments of crime by banks, investment banks, brokers, and securities dealers in the most venerable firms in the U.S. and other parts of the world.  The book is brilliant and has a detailed and helpful index.

     

    What did I learn most from Partnoy?

    I learned about the failures and complicity of what he terms “gatekeepers” whose fiduciary responsibility was to inoculate against “infectious greed.”  These gatekeepers instead manipulated their professions and their governments to aid and abet the criminals.  On Page 173 of Infectious Greed, he writes the following: 

    Page #173

    When Republicans captured the House of Representatives in November 1994--for the first time since the Eisenhower era--securities-litigation reform was assured.  In a January 1995 speech, Levitt outlined the limits on securities regulation that Congress later would support: limiting the statute-of-limitations period for filing lawsuits, restricting legal fees paid to lead plaintiffs, eliminating punitive-damages provisions from securities lawsuits, requiring plaintiffs to allege more clearly that a defendant acted with reckless intent, and exempting "forward looking statements"--essentially, projections about a company's future--from legal liability.

    The Private Securities Litigation Reform Act of 1995 passed easily, and Congress even overrode the veto of President Clinton, who either had a fleeting change of heart about financial markets or decided that trial lawyers were an even more important constituency than Wall Street.  In any event, Clinton and Levitt disagreed about the issue, although it wasn't fatal to Levitt, who would remain SEC chair for another five years.

     

    He later introduces Chapter 7 of Infectious Greed as follows:

    Pages 187-188

    The regulatory changes of 1994-95 sent three messages to corporate CEOs.  First, you are not likely to be punished for "massaging" your firm's accounting numbers.  Prosecutors rarely go after financial fraud and, even when they do, the typical punishment is a small fine; almost no one goes to prison.  Moreover, even a fraudulent scheme could be recast as mere earnings management--the practice of smoothing a company's earnings--which most executives did, and regarded as perfectly legal.

    Second, you should use new financial instruments--including options, swaps, and other derivatives--to increase your own pay and to avoid costly regulation.  If complex derivatives are too much for you to handle--as they were for many CEOs during the years immediately following the 1994 losses--you should at least pay yourself in stock options, which don't need to be disclosed as an expense and have a greater upside than cash bonuses or stock.

    Third, you don't need to worry about whether accountants or securities analysts will tell investors about any hidden losses or excessive options pay.  Now that Congress and the Supreme Court have insulated accounting firms and investment banks from liability--with the Central Bank decision and the Private Securities Litigation Reform Act--they will be much more willing to look the other way.  If you pay them enough in fees, they might even be willing to help.

    Of course, not every corporate executive heeded these messages.  For example, Warren Buffett argued that managers should ensure that their companies' share prices were accurate, not try to inflate prices artificially, and he criticized the use of stock options as compensation.  Having been a major shareholder of Salomon Brothers, Buffett also criticized accounting and securities firms for conflicts of interest.

    But for every Warren Buffett, there were many less scrupulous CEOs.  This chapter considers four of them: Walter Forbes of CUC International, Dean Buntrock of Waste Management, Al Dunlap of Sunbeam, and Martin Grass of Rite Aid.  They are not all well-known among investors, but their stories capture the changes in CEO behavior during the mid-1990s.  Unlike the "rocket scientists" at Bankers Trust, First Boston, and Salomon Brothers, these four had undistinguished backgrounds and little training in mathematics or finance.  Instead, they were hardworking, hard-driving men who ran companies that met basic consumer needs: they sold clothes, barbecue grills, and prescription medicine, and cleaned up garbage.  They certainly didn't buy swaps linked to LIBOR-squared.

     

    The book Infectious Greed has chapters on other capital markets and corporate scandals.  It is the best account that I’ve ever read about Bankers Trust the Bankers Trust scandals, including how one trader named Andy Krieger almost destroyed the entire money supply of New Zealand.  Chapter 10 is devoted to Enron and follows up on Frank Partnoy’s invited testimony before the United States Senate Committee on Governmental Affairs, January 24, 2002 --- http://www.senate.gov/~gov_affairs/012402partnoy.htm

    The controversial writings of Frank Partnoy have had an enormous impact on my teaching and my research.  Although subsequent writers wrote somewhat more entertaining exposes, he was the one who first opened my eyes to what goes on behind the scenes in capital markets and investment banking.  Through his early writings, I discovered that there is an enormous gap between the efficient financial world that we assume in agency theory worshipped in academe versus the dark side of modern reality where you find the cleverest crooks out to steal money from widows and orphans in sophisticated ways where it is virtually impossible to get caught.  Because I read his 1997  book early on, the ensuing succession of enormous scandals in finance, accounting, and corporate governance weren’t really much of a surprise to me.

    From his insider perspective he reveals a world where our most respected firms in banking, market exchanges, and related financial institutions no longer care anything about fiduciary responsibility and professionalism in disgusting contrast to the honorable founders of those same firms motivated to serve rather than steal.

    Young men and women from top universities of the world abandoned almost all ethical principles while working in investment banks and other financial institutions in order to become not only rich but filthy rich at the expense of countless pension holders and small investors.  Partnoy opened my eyes to how easy it is to get around auditors and corporate boards by creating structured financial contracts that are incomprehensible and serve virtually no purpose other than to steal billions upon billions of dollars.

     

    Most importantly, Frank Partnoy opened my eyes to the psychology of greed.  Greed is rooted in opportunity and cultural relativism.  He graduated from college with a high sense of right and wrong.  But his standards and values sank to the criminal level of those when he entered the criminal world of investment banking.  The only difference between him and the crooks he worked with is that he could not quell his conscience while stealing from widows and orphans.

     

    Frank Partnoy has a rare combination of scholarship and experience in law, investment banking, and accounting.  He is sometimes criticized for not really understanding the complexities of some of the deals he described, but he rather freely admits that he was new to the game of complex deceptions in international structured financing crime.

    2.  What really happened at Enron?


    I begin with the following document the best thing I ever read explaining fraud at Enron.
    Testimony of Frank Partnoy Professor of Law, University of San Diego School of Law Hearings before the United States Senate Committee on Governmental Affairs, January 24, 2002 --- http://www.senate.gov/~gov_affairs/012402partnoy.htm 

    The following selected quotations from his Senate testimony speak for themselves:

     

    • Quote:  In other words, OTC derivatives markets, which for the most part did not exist twenty (or, in some cases, even ten) years ago, now comprise about 90 percent of the aggregate derivatives market, with trillions of dollars at risk every day.  By those measures, OTC derivatives markets are bigger than the markets for U.S. stocks. Enron may have been just an energy company when it was created in 1985, but by the end it had become a full-blown OTC derivatives trading firm.  Its OTC derivatives-related assets and liabilities increased more than five-fold during 2000 alone.

       
    • Quote: And, let me repeat, the OTC derivatives markets are largely unregulated.  Enron’s trading operations were not regulated, or even recently audited, by U.S. securities regulators, and the OTC derivatives it traded are not deemed securities.  OTC derivatives trading is beyond the purview of organized, regulated exchanges.  Thus, Enron – like many firms that trade OTC derivatives – fell into a regulatory black hole.

       
    • Quote:  Specifically, Enron used derivatives and special purpose vehicles to manipulate its financial statements in three ways.  First, it hid speculator losses it suffered on technology stocks.  Second, it hid huge debts incurred to finance unprofitable new businesses, including retail energy services for new customers.  Third, it inflated the value of other troubled businesses, including its new ventures in fiber-optic bandwidth.  Although Enron was founded as an energy company, many of these derivatives transactions did not involve energy at all.


       
    • Quote:  Moreover, a thorough inquiry into these dealings also should include the major financial market “gatekeepers” involved with Enron: accounting firms, banks, law firms, and credit rating agencies.  Employees of these firms are likely to have knowledge of these transactions.  Moreover, these firms have a responsibility to come forward with information relevant to these transactions.  They benefit directly and indirectly from the existence of U.S. securities regulation, which in many instances both forces companies to use the services of gatekeepers and protects gatekeepers from liability.


       
    • Quote Recent cases against accounting firms – including Arthur Andersen – are eroding that protection, but the other gatekeepers remain well insulated.  Gatekeepers are kept honest – at least in theory – by the threat of legal liability, which is virtually non-existent for some gatekeepers.  The capital markets would be more efficient if companies were not required by law to use particular gatekeepers (which only gives those firms market power), and if gatekeepers were subject to a credible threat of liability for their involvement in fraudulent transactions.  Congress should consider expanding the scope of securities fraud liability by making it clear that these gatekeepers will be liable for assisting companies in transactions designed to distort the economic reality of financial statements.


       
    • QuoteIn a nutshell, it appears that some Enron employees used dummy accounts and rigged valuation methodologies to create false profit and loss entries for the derivatives Enron traded.  These false entries were systematic and occurred over several years, beginning as early as 1997.  They included not only the more esoteric financial instruments Enron began trading recently – such as fiber-optic bandwidth and weather derivatives – but also Enron’s very profitable trading operations in natural gas derivatives.


       
    • Quote:  The difficult question is what to do about the gatekeepers.  They occupy a special place in securities regulation, and receive great benefits as a result.  Employees at gatekeeper firms are among the most highly-paid people in the world.  They have access to superior information and supposedly have greater expertise than average investors at deciphering that information.  Yet, with respect to Enron, the gatekeepers clearly did not do their job.

    3.  What are some of Frank Partnoy’s best-known books?

     

    Frank Partnoy, FIASCO: Blood in the Water on Wall Street (W. W. Norton & Company, 1997, ISBN 0393046222, 252 pages). 

    This is the first of a somewhat repetitive succession of Partnoy’s “FIASCO” books that influenced my life.  The most important revelation from his insider’s perspective is that the most trusted firms on Wall Street and financial centers in other major cities in the U.S., that were once highly professional and trustworthy, excoriated the guts of integrity leaving a façade behind which crooks less violent than the Mafia but far more greedy took control in the roaring 1990s. 

    After selling a succession of phony derivatives deals while at Morgan Stanley, Partnoy blew the whistle in this book about a number of his employer’s shady and outright fraudulent deals sold in rigged markets using bait and switch tactics.  Customers, many of them pension fund investors for schools and municipal employees, were duped into complex and enormously risky deals that were billed as safe as the U.S. Treasury.

    His books have received mixed reviews, but I question some of the integrity of the reviewers from the investment banking industry who in some instances tried to whitewash some of the deals described by Partnoy.  His books have received a bit less praise than the book Liars Poker by Michael Lewis, but critics of Partnoy fail to give credit that Partnoy’s exposes preceded those of Lewis. 

    Frank Partnoy, FIASCO: Guns, Booze and Bloodlust: the Truth About High Finance (Profile Books, 1998, 305 Pages)

    Like his earlier books, some investment bankers and literary dilettantes who reviewed this book were critical of Partnoy and claimed that he misrepresented some legitimate structured financings.  However, my reading of the reviewers is that they were trying to lend credence to highly questionable offshore deals documented by Partnoy.  Be that as it may, it would have helped if Partnoy had been a bit more explicit in some of his illustrations.

    Preface

    1. A Better Opportunity
    2. The House of Cards
    3. Playing Dice
    4. A Mexican Bank Fiesta
    5.
    F.I.A.S.C.O.
    6. The Queen of RAVs
    7. Don't Cry for Me, Argentina
    8. The Odd Couple
    9. The Tequila Effect
    10. MX
    11. Sayonara

    Frank Partnoy, FIASCO: The Inside Story of a Wall Street Trader (Penguin, 1999, ISBN 0140278796, 283 pages). 

    This is a blistering indictment of the unregulated OTC market for derivative financial instruments and the devious million and billion dollar deals conceived by drunken sexual deviates in investment banking.  Among other things, Partnoy describes Morgan Stanley’s annual drunken skeet-shooting competition. 

    This is also one of the best accounts of the “fiasco” caused by Merrill Lynch in which Orange Counting lost over a billion dollars and was forced into bankruptcy.

    Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Henry Holt & Company, Incorporated, 2003, ISBN: 080507510-0, 477 pages)

    Partnoy shows how corporations gradually increased financial risk and lost control over overly complex structured financing deals that obscured the losses and disguised frauds  pushed corporate officers and their boards into successive and ingenious deceptions." Major corporations such as Enron, Global Crossing, and WorldCom entered into enormous illegal corporate finance and accounting.  Partnoy documents the spread of this epidemic stage and provides some suggestions for restraining the disease.

    4.  What are examples of related books that are somewhat more entertaining than Partnoy’s early books?

    Michael Lewis, Liar's Poker: Playing the Money Markets (Coronet, 1999, ISBN 0340767006)

    Lewis writes in Partnoy’s earlier whistleblower style with somewhat more intense and comic portrayals of the major players in describing the double dealing and break down of integrity on the trading floor of Salomon Brothers.

    John Rolfe and Peter Troob, Monkey Business: Swinging Through the Wall Street Jungle (Warner Books, Incorporated, 2002, ISBN: 0446676950, 288 Pages)

    This is a hilarious tongue-in-cheek account by Wharton and Harvard MBAs who thought they were starting out as stock brokers for $200,000 a year until they realized that they were on the phones in a bucket shop selling sleazy IPOs to unsuspecting institutional investors who in turn passed them along to widows and orphans.  They write. "It took us another six months after that to realize that we were, in fact, selling crappy public offerings to investors."

    There are other books along a similar vein that may be more revealing and entertaining than the early books of Frank Partnoy, but he was one of the first, if not the first, in the roaring 1990s to reveal the high crime taking place behind the concrete and glass of Wall Street.  He was the first to anticipate many of the scandals that soon followed.  And his testimony before the U.S. Senate is the best concise account of the crime that transpired at Enron.  He lays the blame clearly at the feet of government officials (read that Wendy Gramm) who sold the farm when they deregulated the energy markets and opened the doors to unregulated OTC derivatives trading in energy.  That is when Enron really began bilking the public.

     

     


    If the Big Four shrinks to the Big Three, some clients will continuously employ all three firms.  Accounting Firm 1 hired for audits is not allowed to perform tax services or information system consulting.  Accounting Firm 2 hired for tax services runs a liability risk if it also designs the information system feeding the tax information.  Accounting Firm 3 hired for information systems consulting is not allowed to perform audits and probably should not perform tax services. 

    It will be very confusing unless something is done to distinguish the external accountants in the client's offices. I suggest color codes.

    What will the colors be,
    after there are but three?

    I wonder if the Big Three will adopt distinct colors.  As I recall Andersen employees preferred orange shirts when demonstrating outside the Justice Department (in a pouring rain) around the time Andersen was being tried for obstruction of justice in the destruction of Enron’s audit files.  White has been pretty well taken up by medical services.  Black has always been the most popular auditor color --- when I worked for Ernst, I was required to have a black fedora to match my black suits.  But undertakers also prefer black.  Traders in the commodity pits wear bright colors.  Why can’t accountants do the same?

    Seriously, I always thought Andersen's choice of orange was rather ironic. This is too close to prison-orange for a firm that is trying to fend off a criminal conviction.

    Quotations

    At a time when U.S. firms are more reliant than ever on quality accounting and auditing services, the influential Business Roundtable is supporting liability caps for auditors. The Roundtable is worried that the Big Four accounting firms could soon shrink to three or fewer firms if Congress doesn't act to stem the liabilities the firms face when things go wrong. 
    "Business Roundtable Supports Auditor Liability Cap," AccountingWeb, January 18, 2005 --- http://www.accountingweb.com/item/100390 


    Discontent is rightfully rising over CEO pay versus performance
    In fact, the boss enjoyed a hefty raise last year. The chief executives at 179 large companies that had filed proxies by last Tuesday - and had not changed leaders since last year - were paid about $9.84 million, on average, up 12 percent from 2003, according to Pearl Meyer & Partners, the compensation consultants. Surely, chief executives must have done something spectacular to justify all that, right? Well, that's not so clear. The link between rising pay and performance remained muddy - at best. Profits and stock prices are up, but at many companies they seem to reflect an improving economy rather than managerial expertise. Regardless, the better numbers set off sizable incentive payouts for bosses. With investors still smarting from the bursting of the tech bubble, the swift rebound in executive pay is touching some nerves. "The disconnect between pay and performance keeps getting worse," said Christianna Wood, senior investment officer for global equity at Calpers, the California pension fund. "Investors were really mad when pay did not come down during the three-year bear market, and we are not happy now, when companies reward executives when the stock goes up $2."
    Claudia H. Deutsch, "My Big Fat C.E.O. Paycheck," The New York Times, April 3, 2005 --- http://www.nytimes.com/2005/04/03/business/yourmoney/03pay.html?
    Bob Jensen's threads on corporate fraud are at http://www.trinity.edu/rjensen/fraud.htm
    Bob Jensen's updates on fraud are at http://www.trinity.edu/rjensen/fraudUpdates.htm


    Steve Albrecht (former American Accounting Association President and Professor of Accounting at Brigham Young University) conducted interviews when Barry Minkow was still in prison.  You can read Steve's account of the ZZZZ Best Fraud at http://www.swcollege.com/vircomm/stice_survey/sts/sts04.html 

    Question
    Why is there so much investment fraud?

    Answer
    What we have is a perfect fraud storm. In places across the country with an appreciating housing market, low interest rates, and consumers dissatisfied with Wall Street returns, you'll find people ripe for [perpetrators].
    "Ten Questions for Barry Minkow," CFO Staff, by CFO Magazine, January 2005, Page 20 --- http://www.cfo.com/article.cfm/3516399/c_3516777?f=magazine_alsoinside 

    The current head of the Fraud Discovery Institute, Barry Minkow, also served more than seven years in prison for the infamous ZZZZ Best scam.

    Barry Minkow says he plans to be remembered for more than the ZZZZ Best Co. fraud. The 38-year-old Minkow served more than seven years in prison for the infamous 1980s scam. But he hopes that his current efforts as head of the Fraud Discovery Institute and as pastor of The Community Bible Church in San Diego will supersede his activities as CEO of the carpet-cleaning company. This month his new book, Cleaning Up (Nelson Current), debuts.

    1. Currently, you are fighting the very crime you were convicted of. Isn't that ironic?
    No one failed worse than I did at such a young age. Sure, you can adjust the dollar amounts and say it was $10 billion with Bernie Ebbers at WorldCom, but it doesn't matter. I was CEO of a public company and I failed. [ZZZZ Best] was a fully reporting public company with a stock that went from $12 to $80. And at 21, I got a 25-year sentence and a $26 million restitution order, and that's [since been] turned into $1 billion in fraud uncoverings.

    2. What can other white-collar criminals glean from your mistakes?
    Jeff Skilling's and Andy Fastow's best days are ahead of them...if they admit they did wrong, do whatever they can to pay back their victims, and use the same talents they used to defraud people to help them.

    3. When you speak to executives about fraud, what's your main message?
    When I speak to executives, I wear my orange prison jumpsuit. It's gimmicky... [but] the best way to stop fraud is to talk people out of perpetrating it in the first place by doing two things: increasing the perception of detection and increasing the perception of prosecution.

    4. Are you surprised that the fraud techniques you used are still out there?
    It doesn't surprise me at all. Long before Enron was touring people on phony trading floors, ZZZZ Best was touring people on buildings for restoration jobs that we never did. Now the variation on a theme is always there, but here's what we do: we lie about what we owe and we lie about what we earn.

    5. On what do you blame the rash of corporate fraud in recent years?
    It's a mentality called right equals forward motion and wrong is anyone who gets in my way. You see, we used to endorse character and integrity, but today the business ethic that reigns is achievement. And whenever you establish the worth of someone based on what they can do and not on who they are, you have created the environment for fraud.

    6. Are you skeptical of efforts, such as Sarbanes-Oxley, to legislate ethics?
    Let me tell you why this legislation is brilliant. Sarbox hit at a common denominator of corporate fraud: bypassing systems of internal controls. I would not have been able to perpetrate the ZZZZ Best fraud if I had not been able to bypass the system of internal controls. And you know who are heroes now — the internal auditors and the Public Company Accounting Oversight Board. Unless you're a perpetrator, you don't know how good these moves are.

    7. Should the sentencing guidelines for white-collar criminals be overhauled?
    Yes, and judges should have more discretion. My judge is the one who said that I had no conscience. Two years ago, he dismissed my $26 million restitution order, dismissed me from probation three years early, and told me to go out and fight corporate fraud. [But] I don't care if anyone goes to jail. The number-one thing white-collar criminals need to do is give the money back to those hurt the most.

    8. When will you be satisfied that you've repaid your debt to society?
    I won't be. Union Bank had a $7 million loan [against ZZZZ Best], and I have a long way to go. But I haven't missed a payment in nine years. They've gotten over $100,000 this year alone.

    9. Why is there so much investment fraud?
    What we have is a perfect fraud storm. In places across the country with an appreciating housing market, low interest rates, and consumers dissatisfied with Wall Street returns, you'll find people ripe for [perpetrators].

    10. What do you say to those who doubt your conversion to the straight and narrow?
    There's this great phrase in the Bible: "When the man's ways please the Lord, he makes even his enemies be at peace with him." The biggest critics of Barry Minkow should be law enforcement. They absolutely know if someone is a fake or real. But they've been my biggest supporters.


    Instead of adding more regulating agencies, I think we should simply make the FBI tougher on crime and the IRS tougher on cheats

    Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
    One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

    CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
    The title of the video is “The Man Who Would Be King.”

    Between 2002 and 2008 Harry Markopolos repeatedly told (with indisputable proof) the Securities and Exchange Commission that Bernie Madoff's investment fund was a fraud. Markopolos was ignored and, as a result, investors lost more and more billions of dollars. Steve Kroft reports.

    Markoplos makes the SEC look truly incompetent or outright conspiratorial in fraud.

    I'm really surprised that the SEC survived after Chris Cox messed it up so many things so badly.

    As Far as Regulations Go

    An annual report issued by the Competitive Enterprise Institute (CEI) shows that the U.S. government imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the $1.2 trillion generated by individual income taxes, and amounts to $3,849 for every American citizen. According the 2009 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, the government issued 3,830 new rules last year, and The Federal Register, where such rules are listed, ballooned to a record 79,435 pages. “The costs of federal regulations too often exceed the benefits, yet these regulations receive little official scrutiny from Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report. “The U.S. economy lost value in 2008 for the first time since 1990,” Crews said. “Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on Americans beyond the $3 trillion officially budgeted” through the regulations.
     
    Adam Brickley, "Government Implemented Thousands of New Regulations Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---
    http://www.cnsnews.com/public/content/article.aspx?RsrcID=49487

    Jensen Comment
    I’m a long-time believer that industries being regulated end up controlling the regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur Levitt to Chris Cox do absolutely nothing to change my belief ---
    http://www.trinity.edu/rjensen/FraudRotten.htm

    How do industries leverage the regulatory agencies?
    The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

     

    Forensic Accounting
    There’s a rather nice module on Forensic Accounting at http://en.wikipedia.org/wiki/Forensic_Accounting
    This includes links to a journal and career opportunities.

    The link to the following article was forwarded by Charles Wankel [wankelc@VERIZON.NET]

    "Account for more than hill of beans," The Bay City Times Via The Saginaw News, December 16, 2007 --- Click Here

    When Kojo Quartey went to college to learn accounting 25 years ago, many considered the job a steady, unexciting career.

    But financial scandals in recent years at Enron, WorldCom and other companies have transformed the field, says Quartey, dean of Davenport University's Donald W. Maine School of Business.

    ''When I was an accounting student, we were all number crunchers. In this day and age, it's a much more exciting field,'' he said.

    Many accountants today are seeking specialized training to work as detectives who can sniff out financial fraud. They call themselves forensic accountants.

    Davenport, a Grand Rapids-based university with branches at 5300 Bay in Kochville Township and at 3930 Traxler Court in Bay County's Monitor Township, has two online offerings in the growing field. One is a new bachelor's degree in business administration in accounting fraud investigation and the other is a forensic accounting examiner certificate available to postgraduates.

    Forensic accountants undergo training to mind the books while keeping an eye out for crime.

    Demand for accountants who have such training is skyrocketing, Quartey told a group of Bay and Arenac county high school counselors.

    In addition to traditional accounting, forensic accountants may learn from law enforcement experts about how to detect fraud, and from psychologists about how to interview people to detect lying, Quartey said.

    Irene Bembenista teaches classes at Davenport required for the forensic examiner certificate.

    ''It's not just how to do an audit, but what are some of the clues that would indicate something more is going on? And ideas about where to further investigate,'' said Bembenista, Davenport's associate business school dean.

    Bembenista said 10 years ago, people did not generally recognize forensic accounting as a college career path.

    A federal law enacted in 2002 to reform accounting has brought the investigation field into its own. It's also created job opportunities because it requires accountants at public entities to maintain a separation of duties, Bembenista said.

    ''Accountants aren't allowed to do double duties, like taxes and audit the company at the same time,'' she said.

    ''And businesses are very interested in accountants with a fraud (detection) background, because they are looking out for the well-being of the organization.''

    The starting salary for an accounting fraud investigator is $48,000 to $60,000 a year, and certified forensic examiners can earn more than $100,000 a year, Davenport says compensation studies indicate.

    Davenport has about two dozen students enrolled in the forensic accounting certificate curriculum, Quartey said. The next term begins in January, and more information is available on the Internet at www.davenport.edu

    Bob Jensen's threads on forensic accounting are at http://www.trinity.edu/rjensen/fraud.htm

    Bob Jensen's threads on accountancy careers are at http://www.trinity.edu/rjensen/fraud.htm

     
     
     

    Cooking the Books

     

    Before reading this, you may want to read about creative accounting and earnings management at http://en.wikipedia.org/wiki/Earnings_management

    From Jim Mahar's blog on November 5, 2007 --- http://financeprofessorblog.blogspot.com/
    Does short-term debt lead to more "earnings management"?

     
    In another paper from the FMAs, Gupta and Fields look at whether more short term debt leads to more "earnings management."

    Does short-term debt lead to more "earnings management"?

    Short answer: YES.

    Longer answer:

    Intuitively the idea behind the paper is that if a firm has to go back to the capital markets, they do not want to do so when times are bad. Of course, sometimes times are bad. In those times, management may be tempted to "manage" earnings so that things do not appear as bad as they may be.

    The findings? Sure enough, managers seemingly manage their firm's earnings more when the firm has more short term debt.

    A few look-ins:

    From the Abstract (this is the best summary of the entire paper):
     
    "...results indicate that (i) firms with more current debt are more susceptible to managing earnings, (ii) this relation is stronger for firms facing debt market constraints (those without investment grade debt) and (iii) auditor characteristics such as auditor quality and tenure help diminish this relation...."
     

    Which fits intuition. Why?
    * The more the constraints, the more incentive the management has to manage earnings since if they do not, they may not be able to refinance.
    * Auditors would frown upon this behavior and the stronger the auditor, the less likely it is that the manager would manage earnings.

    How does this "earnings management" manifest itself? The most common way (although not the only way) that managers manipulate earnings is through the use of accruals . Thus, the authors examine this and find:
     
    "A one standard-deviation increase in short-term debt (total current liabilities) increases discretionary accruals by 1.69% and increase total accruals by 2.28%. Our evidence supports the idea that debt maturity significantly impacts the tendency of firms to manage earnings."
     
    Which is a really interesting finding!

    Sharing Site of Note --- http://www.dartmouth.edu/~msimmons/ 
    Thank you Mark Simmons at Dartmouth for sharing internal auditing and fraud investigation resources.

    Web Site of Mark R. Simmons, CIA CFE

     

    This site focuses on topics that deal with Internal Auditing and Fraud Investigation with certain links to other associated and relevant sources. It is dedicated to sharing information.

    Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.  It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. (Institute of Internal Auditors)

    Fraud Investigation consists of the multitude of steps necessary to resolve allegations of fraud — interviewing witnesses, assembling evidence, writing reports, and dealing with prosecutors and the courts. (Association of Certified Fraud Examiners)

    Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/fraud.htm 

    Bob Jensen's threads on fraud detection and reporting are at http://www.trinity.edu/rjensen/FraudReporting.htm 

    "Rash of Restatements Rattles," by K.C. Swanson, TheStreet.com, March 17, 2004 http://www.thestreet.com/tech/kcswanson/10149112.html 

    Confession season is upon us, but the problem so far isn't companies owing up to earnings shortfalls. Instead, they're admitting past financial results were simply wrong.

    Unnerved by a sterner accounting culture, companies have been increasingly reaching back years to ratchet down reported profits by tens or even hundreds of millions of dollars. Eyeing the March 15 filing deadline for calendar 2003 annual reports, Bristol-Myers Squibb (BMY:NYSE) , P.F. Chang's (PFCB:Nasdaq) , Veritas (VRTS:Nasdaq) and Nortel (NT :Nasdaq) this week joined a fast-growing string of public companies to say prior financial reports inflated real business trends.

    The number of restated audited annual financial statements hit a record high of 206 last year, according to Chicago-based Huron Consulting Group. Observers say 2004 is already shaping up as a banner year for revisions.

    "There are certainly more high-profile restatements and you're hearing about them more" compared to past years, said Jeff Brotman, an accounting professor at the University of Pennsylvania.

    For Bristol-Myers Squibb, Nortel and Network Associates (NET:NYSE) , recent restatements came on top of prior restatements, much to the irritation of investors. In at least two cases, the embarrassing double restatements prompted internal shifts; Nortel put two of its financial executives on leave as part of a bookkeeping probe. Network Associates fired PricewaterhouseCoopers, according to various news reports, after the auditor cited "material weakness" in its internal controls in the company's annual report.

    Probably the biggest reason for the wave of honesty is a host of new corporate governance and accounting rules in the wake of the corporate reform legislation known as Sarbanes-Oxley, which went into effect a year and a half ago. Also, accounting firms have grown far more cautious, cowed by the collapse of auditor Arthur Andersen in 2002 after massive fraud at its client Enron.

    The upshot is that both managers and auditors are now more likely to err on the side of conservative accounting.

    "A lot of things in accounting are judgment calls, gray areas," said Peter Ehrenberg, chair of the corporate finance practice group at Lowenstein & Sandler, a Roseland, N.J.-based law firm. "If there are issues in any given company and we were in 2000, a person acting in good faith might easily say, 'We can pass on that.' But that same person looking at the same facts today might say, 'There's too much risk.'

    "Certainly regulators in general are more credible because they're much less likely to give the benefit of the doubt in this environment," he added. "The auditors know that and they're [therefore] less likely to stick their necks out."

    Case in point: Last week Gateway (GTW:NYSE) said longtime auditor PricewaterhouseCoopers won't work for it anymore. PwC did the books back in 2000 and 2001 -- an era of aggressive accounting that still haunts Gateway, though it's now under different management.

    From Executive Suite to Cell Block

    Tougher law enforcement against corporate offenders is also fueling more prudent behavior. The long-underfunded Securities and Exchange Commission, which is now required to review the financial statements of public companies every three years, has finally been given more dollars to hire staff. In 2003, the SEC's workforce was 11% higher than in 2001. This year, the agency's budget allocation should allow it to expand its payroll an additional 9%, to nearly 3,600 employees.

    On the corporate side, CEOs and CFOs have had to certify their financial reports since August 2002, also as a result of Sarbanes-Oxley. "I think Sarbanes-Oxley makes executives ask the hard questions they should have always asked," said Jeffrey Herrmann, a securities litigator and partner in the Saddle Brook, N.J.-based law firm of Cohn Lifland Pearlman Herrmann & Knopf. "Maybe today an executive says to his accounting firm: 'I'm not going to regret anything here about how we handled goodwill or reserves, am I? It isn't coming back to haunt us, is it?' "

    Recent government prosecutions against high-level executives such as Tyco's Dennis Kozlowski, Worldcom's Bernie Ebbers, and Enron's Andrew Fastow and Jeffrey Skilling starkly underscore the penalties managers may face for playing fast-and-loose with accounting.

    Meanwhile, auditing firms are starting to rotate staff, bringing in newcomers to take a fresh look at clients' accounting. Also, new rules handed down by the Financial Accounting Standards Board have prompted reassessments of past accounting methods, which can lead to earnings revisions reaching back five years (the period for which financial data is included in annual reports).

    Another level of checks and balances on accounting shenanigans arrived last April when the SEC ruled that corporate audit committees must be composed entirely of members independent from the company itself. "Audit committees are getting more active and making sure that when they learn of problems, they're going to be dealt with," said Curtis Verschoor, an accounting professor at DePaul University.

    In this environment of heightened scrutiny, however, the notion that a restatement was tantamount to a financial kiss of death has faded, too.

    "We have now seen companies that issued restatements that have lived to do business another day," said Brotman. "The stock hasn't crashed; nobody's been fired or gone to jail; they haven't lost access to the capital markets; there haven't been any more shareholder lawsuits than there would have already been. If a company does a restatement early, fully and explains exactly what it is and why, it's not a lethal injection."

    Meanwhile, corporate reform rules are being put in place that could lead to yet more accounting cleanups down the road. One provision will make companies find a way for whistleblowers to confidentially report possible wrongdoings, noted Verschoor.

    Still, "the pendulum swings both ways," said Herrmann. "If the government continues to prosecute people in high-level positions, maybe that will last for a while. It probably will send a message and the fear of God will spread. But my guess is that politics being what it is, somewhere down the line the spotlight will be off and there will be fewer prosecutions."

     

    A Round-Up of Recent Earnings Restatements
    Some firms are no stranger to the restatement dance
    Company Financial Scoop Number of restatements in past year
    Bristol-Myers Squibb (BMY:NYSE) Restating fourth-quarter and full-year results for 2003 due to accounting errors. Follows an earlier restatement of earnings between 1999 and 2002, as of early 2003 Twice
    P.F. Chang's China Bistro (PFCB:Nasdaq) Will delay filing its 10K; plans to restate earnings for prior years, including for calendar year 2003 Once
    Veritas (VRTS:Nasdaq) Will restate earnings for 2001 through 2003 Once
    Nortel (NT:NYSE) Will restate earnings for 2003 and earlier periods; Nortel already restated earnings for the past three years in October 2003 Twice
    Metris (MXT:NYSE) Restated its financial results for 1998 through 2002 and for the first three quarters of 2003 following an SEC inquiry Once
    Quovadx (QVDX:Nasdaq) Restating results for 2003 Once
    WorldCom Restated pretax profits from 2000 and 2001; this month former CEO Bernie Ebbers indicted on fraud charges in accounting scandal that led to 2002 corporate bankruptcy Once
    Service Corp. International (SRV:NYSE) Restating results for 2000 through 2003 Once
    Flowserve (FLS:NYSE) Restating results for 1999 through 2003 Once
    OM Group (OMG:NYSE) Restating results for 1999 through 2003 Once
    IDX Systems (IDXC:Nasdaq) Restated results for 2003 Once
    Network Associates (NET:NYSE) Restated results for 2003 this month; restated earnings for periods from 1998 to 2003 after investigations by the SEC and Justice Department Twice
    Take-Two (TTWO:Nasdaq) In February, restated results from 1999 to 2003 following investigation by the SEC Once
    Sipex (SIPX:Nasdaq) In February, restated results from 2003, marking the second revision of third-quarter '03 results Twice
    Source: SEC filings, media reports.

    March 1, 2004 message from Mike Groomer

    Bob,

    Do you have any idea about who coined the phrase “Cooking the Books? What is the lineage of these magic words?

    Mike

    Hi Mike,

    The phrase "cooking the books" appears to have a long history. Several friends on the AECM found some interesting facts and legends.

    However, there may be a little urban legend in some of this.

    I suspect that the phrase may have origins that will never be determined much like double entry bookkeeping itself with unknown origins. And I'm not sure were the term "books" first appeared although I suspect it goes back to when ledgers were bound into "books."

    Bob Jensen

    March 1 messages from David Albrecht [albrecht@PROFALBRECHT.COM

    -----Original Message----- 
    From: David Albrecht 
    Sent: Monday, March 01, 2004 9:56 PM 
    Subject: Acct 321: Cooking the books

    The phrase "Cooking the Books" has been part of our linguistic heritage for over two hundred years. Here is a discussion of the origination of the phrase. Enjoy! Dr. Albrecht

     http://www.wordwizard.com/clubhouse/founddiscuss1.asp?Num=3093 


    Just found another page.

    from http://www.wordwizard.com/clubhouse/founddiscuss1.asp?Num=3093 


    I'm doing a google search. Interesting links so far:

    Cost to society of cooking the books - from Brookings Institute http://www.brookings.edu/comm/policybriefs/pb106.htm

    Cookie jar accounting - http://www.investorwords.com/1121/cookie_jar_accounting.html

    The bubbling corporate ethics scandal and recipes for avoiding future stews. - http://research.moore.sc.edu/Publications/B&EReview/B&E49/Be49_3/cooking.htm

    Andersen cartoon - http://www.claybennett.com/pages/andersen.html

    Cooking the Books with Mike - http://www.moneytalks.net/book.asp

    Cartoons - http://www.cartoonstock.com/directory/c/cooking_the_books.asp

    Cooking the books, an old recipe - http://www.accountantsworld.com/DesktopDefault.aspx?tabid=2&faid=290 --> "No one knows for sure when all the ingredients in the phrase 'cooking the books' were first put together. Shakespeare was the first to refer to "books" as a business ledger (King Lear, Act III, Scene iv, "Keep...thy pen from lenders books"). The American Heritage Dictionary of Idioms cites 1636 as the first time the word 'cook' was used to mean falsify (but it didn't also include the word 'books'). Combining 'cook' and 'books' may be a 20th century innovation. Even the origin of "cooking the books" is controversial.

    This is all I have time to search,

    David Albrecht

    March 1, 2004 reply from Roy Regel [Roy.Regel@BUSINESS.UMT.EDU

    A related term is "cookbooking," as used in Gleim's 'Careers in Accounting: How to Study for Success.' Per Gleim ". . .cookbooking is copying from the chapter illustration, step-by-step. Barely more than rote memorization is required to achieve false success. Do not cookbook!"

    Isn't English wonderful? :)

    Roy Regel

    March 1, 2004 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU

    According to http://www.businessballs.com/clichesorigins.htm , the phrase dates back to the 18th century, to an (unattributed) report that used the phrase "the books have been cooked." The report dealt with the conduct of George Hudson and the accounts of the Eastern Counties Railways.

    Richard Sansing

    Following up on Richard Sansing's lead, Mike answered his own question --- http://www.businessballs.com/clichesorigins.htm 

    Bob Jensen

    Original Message----- 
    From: Groomer, S. Michael [mailto:groomer@indiana.edu]  
    Sent: Tuesday, March 02, 2004 9:40 AM 
    To: Jensen, Robert Subject: RE: Acct 321: Cooking the books

    Hi Bob,

    Yes… very interesting… See below… Thanks for your efforts.

    Best regards, Mike

    cook the books - falsify business accounts - according to 18th century Brewer, 'cook the books' originally appeared as the past tense 'the books have been cooked' in a report (he didn't name the writer unfortunately) referring to the conduct George Hudson (1700-71), 'the railway king', under whose chairmanship the accounts of Eastern Counties Railways were falsified. Brewer says then (1870) that the term specifically describes the tampering of ledger and other trade books in order to show a balance in favour of the bankrupt. Brewer also says the allusion is to preparing meat for the table. These days the term has a wider meaning, extending to any kind of creative accounting. Historical records bear this out, and date the first recorded use quite accurately: Hudson made a fortune speculating in railway shares, and then in 1845, which began the period 1845-47 known as 'railway mania' in Britain, he was exposed as a fraudster and sent to jail. Other cliche references suggest earlier usage, even 17th century, but there appears to be no real evidence of this. There is an argument for Brewer being generally pretty reliable when it comes to first recorded/published use, because simply he lived far closer to the date of origin than reference writers of today. If you read Brewer's Dictionary of Phrase and Fable you'll see it does have an extremely credible and prudent style. The word 'book' incidentally comes from old German 'buche' for beech wood, the bark of which was used in Europe before paper became readily available. The verb 'cook' is from Latin 'coquere'

    Risk-Based Auditing Under Attack   


    Selling New Equity to Pay Dividends:  Reminds Me About the South Sea Bubble of 1720 ---
    http://en.wikipedia.org/wiki/South_Sea_bubble

    "Fooling Some People All the Time"

    "Melting into Air:  Before the financial system went bust, it went postmodern," by John Lanchester, The New Yorker, November 10, 2008 --- http://www.newyorker.com/arts/critics/atlarge/2008/11/10/081110crat_atlarge_lanchester

    This is also why the financial masters of the universe tend not to write books. If you have been proved—proved—right, why bother? If you need to tell it, you can’t truly know it. The story of David Einhorn and Allied Capital is an example of a moneyman who believed, with absolute certainty, that he was in the right, who said so, and who then watched the world fail to react to his irrefutable demonstration of his own rightness. This drove him so crazy that he did what was, for a hedge-fund manager, a bizarre thing: he wrote a book about it.

    The story began on May 15, 2002, when Einhorn, who runs a hedge fund called Greenlight Capital, made a speech for a children’s-cancer charity in Hackensack, New Jersey. The charity holds an annual fund-raiser at which investment luminaries give advice on specific shares. Einhorn was one of eleven speakers that day, but his speech had a twist: he recommended shorting—betting against—a firm called Allied Capital. Allied is a “business development company,” which invests in companies in their early stages. Einhorn found things not to like in Allied’s accounting practices—in particular, its way of assessing the value of its investments. The mark-to-market accounting that Einhorn favored is based on the price an asset would fetch if it were sold today, but many of Allied’s investments were in small startups that had, in effect, no market to which they could be marked. In Einhorn’s view, Allied’s way of pricing its holdings amounted to “the you-have-got-to-be-kidding-me method of accounting.” At the same time, Allied was issuing new equity, and, according to Einhorn, the revenue from this could be used to fund the dividend payments that were keeping Allied’s investors happy. To Einhorn, this looked like a potential Ponzi scheme.

    The next day, Allied’s stock dipped more than twenty per cent, and a storm of controversy and counter-accusations began to rage. “Those engaging in the current misinformation campaign against Allied Capital are cynically trying to take advantage of the current post-Enron environment by tarring a great and honest company like Allied Capital with the broad brush of a Big Lie,” Allied’s C.E.O. said. Einhorn would be the first to admit that he wanted Allied’s stock to drop, which might make his motives seem impure to the general reader, but not to him. The function of hedge funds is, by his account, to expose faulty companies and make money in the process. Joseph Schumpeter described capitalism as “creative destruction”: hedge funds are destructive agents, predators targeting the weak and infirm. As Einhorn might see it, people like him are especially necessary because so many others have been asleep at the wheel. His book about his five-year battle with Allied, “Fooling Some of the People All of the Time” (Wiley; $29.95), depicts analysts, financial journalists, and the S.E.C. as being culpably complacent. The S.E.C. spent three years investigating Allied. It found that Allied violated accounting guidelines, but noted that the company had since made improvements. There were no penalties. Einhorn calls the S.E.C. judgment “the lightest of taps on the wrist with the softest of feathers.” He deeply minds this, not least because the complacency of the watchdogs prevents him from being proved right on a reasonable schedule: if they had seen things his way, Allied’s stock price would have promptly collapsed and his short selling would be hugely profitable. As it was, Greenlight shorted Allied at $26.25, only to spend the next years watching the stock drift sideways and upward; eventually, in January of 2007, it hit thirty-three dollars.

    All this has a great deal of resonance now, because, on May 21st of this year, at the same charity event, Einhorn announced that Greenlight had shorted another stock, on the ground of the company’s exposure to financial derivatives based on dangerous subprime loans. The company was Lehman Brothers. There was little delay in Einhorn’s being proved right about that one: the toppling company shook the entire financial system. A global cascade of bank implosions ensued—Wachovia, Washington Mutual, and the Icelandic banking system being merely some of the highlights to date—and a global bailout of the entire system had to be put in train. The short sellers were proved right, and also came to be seen as culprits; so was mark-to-market accounting, since it caused sudden, cataclysmic drops in the book value of companies whose holdings had become illiquid. It is therefore the perfect moment for a short-selling advocate of marking to market to publish his account. One can only speculate whether Einhorn would have written his book if he had known what was going to happen next. (One of the things that have happened is that, on September 30th, Ciena Capital, an Allied portfolio company to whose fraudulent lending Einhorn dedicates many pages, went into bankruptcy; this coincided with a collapse in the value of Allied stock—finally!—to a price of around six dollars a share.) Given the esteem with which Einhorn’s profession is regarded these days, it’s a little as if the assassin of Archduke Franz Ferdinand had taken the outbreak of the First World War as the timely moment to publish a book advocating bomb-throwing—and the book had turned out to be unexpectedly persuasive.

    Heavy Insider Trading --- http://investing.businessweek.com/research/stocks/ownership/ownership.asp?symbol=ALD

    Allied's independent auditor is KPMG
    KPMG has a lot of problems with litigation --- http://www.trinity.edu/rjensen/fraud001.htm

    Bob Jensen's threads on the collapse of the Banking System are at http://www.trinity.edu/rjensen/2008Bailout.htm

    Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm
    Also see Fraud Rotten at http://www.trinity.edu/rjensen/FraudRotten.htm

    Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory01.htm
    Also see the theory of fair value accounting at http://www.trinity.edu/rjensen/theory01.htm#FairValue

    History of Fraud in America ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

     


    How to Pass Price Risk Along to Uncle Sam
    Agribusiness Lobby Reaps the Biggest Harvest in Washington DC

    A farmer can sell his crop early at a high price, say, in a futures contract, and still collect a subsidy check after the harvest from the government if prices are down over all. The money is not tied to what the farmer actually received for his crop. The farmer does not even have to sell the crop to get the check, only prove that the market has dropped below a certain set rate.
    "Big Farms Reap Two Harvests With Subsidies a Bumper Crop," by Timothy Egan, The New York Times, December 26, 2005 --- http://www.nytimes.com/2004/12/26/national/26farm.html?oref=login  

    The roadside sign welcoming people into this state reads: "Nebraska, the Good Life." And for farmers closing out their books at the end of a year when they earned more money than at any time in the history of American agriculture, it certainly looks like happy days.

    But at a time when big harvests and record farm income should mean that Champagne corks are popping across the prairie, the prosperity has brought with it the kind of nervousness seen in headlines like the one that ran in The Omaha World-Herald in early December: "Income boom has farmers on edge."

    For despite the fact that farm income has doubled in two years, federal subsidies have also gone up nearly 40 percent over the same period - projected at $15.7 billion this year, and $130 billion over the last nine years. And that bounty is drawing fire from people who say that at this moment of farm prosperity, the nation's subsidy system has never made less sense.

    Even those deeply steeped in the system acknowledge it seems counterintuitive. "I struggle with the same question: how the hell can you have such high government payments if farmers had such a great year?" said Keith Collins, the chief economist for the Agriculture Department.

    The answer lies in the quirks of the federal farm subsidy system as well as in the way savvy farmers sell their crops. Mr. Collins said farmers use the peculiar world of agriculture market timing to get both high commodity prices and high subsidies.

    "The biggest reason is with record crops, prices have fallen," he said. "And farmers are taking advantage of that."

    A farmer can sell his crop early at a high price, say, in a futures contract, and still collect a subsidy check after the harvest from the government if prices are down over all. The money is not tied to what the farmer actually received for his crop. The farmer does not even have to sell the crop to get the check, only prove that the market has dropped below a certain set rate.

    Continued in article

    Bob Jensen's threads on futures contracts and other derivative financial instruments are at http://www.trinity.edu/rjensen/caseans/000index.htm 


    References

    Risk-Based Auditing Under Attack   

    From Smart Stops on the Web, Journal of Accountancy, January 2004, Page 27 --- 

    Accountability Resources Here
    www.thecorporatelibrary.com
    CPAs can read about corporate governance in the real world in articles such as “Alliance Ousts Two Executives” and “Mutual Fund Directors Avert Eyes as Consumers Get Stung” at this Web site. Other resources here include related news items from wire services and newspapers, details on specific shareholder action campaigns and links to other corporate governance Web stops. And on the lighter side, visitors can view a slide show of topical cartoons.

    Cartoon archives --- http://www.thecorporatelibrary.com/cartoons/tcl_cartoons.htm

    Cartoon 1:  Two kids competing on the blackboard.  One writes 2+2=4 and the other kid writes 2+2=40,000.  Which kid as the best prospects for an accounting career?

    Cartoon 36:  Where the Grasso is greener (Also see Cartoon 37)

     

    Show-and-Tell
    www.encycogov.com
    This e-stop, while filled with information on corporate governance, also features detailed flowcharts and tables on bankruptcy, information retrieval and monitoring systems, as well as capital, creditor and ownership structures. Practitioners will find six definitions of the term corporate governance and a long list of references to books, papers and periodicals about the topic.

    Investors, Do Your Homework
    www.irrc.org
    At this Web site CPAs will find the electronic version of the Investor Responsibility Research Center’s IRRC Social Issues Reporter, with articles such as “Mutual Funds Seldom Support Social Proposals.” Advisers also can read proposals from the Shareholder Action Network and the IRRC’s review of NYSE and Sarbanes-Oxley Act reforms, as well as use a glossary of industry terms to help explain to their clients concepts such as acceleration, binding shareholder proposal and cumulative voting.

     

    SARBANES-OXLEY SITES

    Get Information Online
    www.sarbanes-oxley.com
    CPAs looking for links to recent developments on the Sarbanes-Oxley Act of 2002 can come here to review current SEC rules and regulations with cross-references to specific sections of the act. Visitors also can find the articles “Congress Eyes Mutual Fund Reform” and “FBI and AICPA Join Forces to Help CPAs Ferret Out Fraud.” Tech-minded CPAs will find the list of links to Sarbanes-Oxley compliance software useful as well.

    Direct From the Source
    www.sec.gov/spotlight/sarbanes-oxley.htm
    To trace the history of the SEC’s rule-making policies for the Sarbanes-Oxley Act, CPAs can go right to the source at this Web site and follow links to press releases pertaining to the commission’s involvement since the act’s creation. Visitors also can navigate to the frequently asked questions (FAQ) section about the act from the SEC’s Division of Corporation Finance.

    PCAOB Online
    www.pcaobus.org
    The Public Company Accounting Oversight Board e-stop offers CPAs timely articles such as “Board Approves Registration of 598 Accounting Firms” and the full text of the Sarbanes-Oxley rules. Users can research proposed standards on accounting support fees and audit documentation and enforcement. Accounting firms not yet registered with the PCAOB can do so here and check out the FAQ section about the registration process.


    Where are some great resources (hard copy and electronic) for teaching ethics?

    "An Inventory of Support Materials for Teaching Ethics in the Post-Enron Era,” by C. William Thomas, Issues in Accounting Education, February 2004, pp. 27-52 --- http://aaahq.org/ic/browse.htm

    ABSTRACT: This paper presents a "Post-Enron" annotated bibliography of resources for accounting professors who wish to either design a stand-alone course in accounting ethics or who wish to integrate a significant component of ethics into traditional courses across the curriculum.  Many of the resources listed are recent, but some are classics that have withstood the test of time and still contain valuable information.  The resources listed include texts and reference works, commercial books, academic and professional articles, and electronic resources such as film and Internet websites.  Resources are listed by subject matter, to the extent possible, to permit topical access.  Some observations about course design, curriculum content, and instructional methodology are made as well.

    Bob Jensen's threads on resources for accounting educators are at http://www.trinity.edu/rjensen/000aaa/newfaculty.htm#Resources 


    "Kmart officials as purposely violating accounting principles with the knowledge of the company's auditors, PricewaterhouseCoopers."

    "Jury in Michigan Sides with SEC in Kmart Case," SmartPros, June 1, 2009 ---
    http://accounting.smartpros.com/x66692.xml

    The former head of Kmart Corp., who told jurors he was hired to save the venerable retailer, was found liable Monday for misleading investors about company finances before a bankruptcy filing in 2002.

    The verdict in the civil fraud trial followed 10 days of testimony in federal court in Ann Arbor. The case was a fresh look at Charles Conaway's brief tenure and the desperate scramble to keep Kmart afloat before one of the largest bankruptcies in retail history.

    The Securities and Exchange Commission accused him of failing to disclose that the retailer was delaying payments to suppliers to save cash. The trial centered on a conference call with analysts and Kmart's quarterly report to regulators, both in November 2001.

    "It was a clean sweep," SEC trial lawyer Alan Lieberman said of the verdict.

    "It is never enough for the numbers to be right. For the average investor, the numbers being right do not tell the whole story," he said. "They need to know the material information that management knows. The foundation of the markets is full and honest disclosure."

    The SEC blamed Conaway for not sharing details in the report's management-analysis section. He testified that he didn't write it, didn't read it and relied on his chief financial officer and others.

    During a call with Wall Street analysts, Conaway said sales were poor - and the stock took a 15 percent hit - but he didn't talk about the vendor strategy or an ill-timed purchase of $800 million in merchandise.

    He testified that Kmart had $1 billion in cash and credit when the call was made and the quarterly report was filed. Conaway said it "never" crossed his mind that he was withholding critical news.

    The jury, however, found that he acted "with intent to defraud or with reckless disregard for the truth."

    Despite Conaway's testimony, the jury found that delaying payments to vendors was a "material liquidity deficiency" affecting Kmart's finances and should have been publicly reported.

    Conaway's lawyer, Scott Lassar, said they were disappointed with the verdict and would pursue an appeal.

    U.S. Magistrate Judge Steven Pepe will handle the penalty phase. Conaway, 48, could be fined and banned from serving as an executive or director at a public company.

    He had a successful career in the drugstore industry when he agreed in 2000 to try to turn around Kmart, which was no match for discount rivals Wal-Mart Stores Inc. and Target Corp. Conaway was gone less than two years later.

    Kmart emerged from Chapter 11 bankruptcy as a smaller company and now is part of Sears Holdings Corp., based in Hoffman Estates, Ill.

    The lawsuit against Conaway and his former CFO, John McDonald Jr., was filed in 2005, three years after the bankruptcy.

    Ronald Kiima, formerly an assistant chief accountant at the SEC, said when a company fails "there's a lot of `What did you know and when did you know it?'"

    "If you don't give the sausage-making of what happened during a quarter, that could be an issue," Kiima said in an interview. "For a CEO to say he didn't lay eyes on the report is pretty damning."

    Continued in article

    Jensen Comment
    Discount retailer Kmart came under investigation for irregular accounting practices in 2002. In January an anonymous letter initiated an internal probe of the company's accounting practices. The Detroit News obtained a copy of the letter that contains allegations pointing to senior Kmart officials as purposely violating accounting principles with the knowledge of the company's auditors, PricewaterhouseCoopers. http://www.accountingweb.com/item/82286 

    Bankrupt retailer Kmart explained the impact of accounting irregularities and said employees involved in questionable accounting practices are no longer with the company. http://www.accountingweb.com/item/90935 

    Kmart's CFO Steps up to Accounting Questions

     
    AccountingWEB US - Sep-19-2002 -  Bankrupt retailer Kmart explained the impact of accounting irregularities in a Form 10-Q filed with the U.S. Securities and Exchange Commission (SEC) this week. Chief Financial Officer Al Koch said several employees involved in questionable accounting practices are no longer with the company.

    Speaking to the concerns about vendor allowances recently raised in anonymous letters from in-house accountants, Mr. Koch said, "It was not hugely widespread, but neither was it one or two people."

    The Kmart whistleblowers who wrote the letters said they were being asked to record transactions in obvious violation of generally accepted accounting principles. They also said "resident auditors from PricewaterhouseCoopers are hesitant to pursue these issues or even question obvious changes in revenue and expense patterns."

    In response to the letters, the company admitted it had erroneously accounted for certain vendor transactions as up-front consideration, instead of deferring appropriate amounts and recognizing them over the life of the contract. It also said it decided to change its accounting method. Starting with fourth quarter 2001, Kmart's policy is to recognize a cost recovery from vendors only when a formal agreement has been obtained and the underlying activity has been performed.

    According to this week's Form 10-Q, early recognition of vendor allowances resulted in understatement of the company's fiscal year 2000 net loss by approximately $26 million and overstatement of its fiscal year 2001 net loss by approximately $78 million, both net of taxes. The 10-Q also said the company has been looking at historical patterns of markdowns and markdown reserves and their relation to earnings.

    Kmart is under investigation by the SEC and the Justice Department. The Federal Bureau of Investigation, which is handling the investigation for the U.S. Attorney, said its investigation could result in criminal charges. In the months before Kmart's bankruptcy filing, top executives took home approximately $29 million in retention loans and severance packages. A spokesperson for PwC said the firm is cooperating with the investigations.
     


    24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America, by John R. Emshiller and Rebecca Smith (Haper Collins, 2003, ISBN: 0060520736) 

    Here's a powerful Enron Scandal book in the words of the lead whistle blower herself:
    Power Failure: The Inside Story of the Collapse of Enron
    by Mimi Swartz, Sherron Watkins

    ISBN: 0385507879
    Format: Hardcover, 400pp
    Pub. Date: March 2003
    Publisher: Doubleday & Company, Incorporated
    Edition Description: 1ST

    “They’re still trying to hide the weenie,” thought Sherron Watkins as she read a newspaper clipping about Enron two weeks before Christmas, 2001. . . It quoted [CFO] Jeff McMahon addressing the company’s creditors and cautioning them against a rash judgment....


    Related Books


    Chronicling the inner workings of Andersen at the height of its success, Toffler reveals "the making of an Android," the peculiar process of employee indoctrination into the Andersen culture; how Androids - both accountants and consultants--lived the mantra "keep the client happy"; and how internal infighting and "billing your brains out" rather than quality work became the all-important goals. Final Accounting should be required reading in every business school, beginning with the dean and the faculty that set the tone and culture." - Paul Volker, former Chairman of the Federal Reserve Board.
    The AccountingWeb, March 25, 2003.

    Barbara Ley Toffler is the former Andersen was the partner-in-charge of 
    Andersen's Ethics & Responsible Business Practices Consulting Services.

    Title:  Final Accounting: Ambition, Greed and the Fall of Arthur Andersen 
    Authors:  Barbara Ley Toffler, Jennifer Reingold
    ISBN: 0767913825 
    Format: Hardcover, 288pp Pub. 
    Date: March 2003 
    Publisher: Broadway Books

    Book Review from http://www.amazon.com/exec/obidos/tg/stores/detail/-/books/0767913825/reviews/002-8190976-4846465#07679138253200 

    Book Description A withering exposé of the unethical practices that triggered the indictment and collapse of the legendary accounting firm.

    Arthur Andersen's conviction on obstruction of justice charges related to the Enron debacle spelled the abrupt end of the 88-year-old accounting firm. Until recently, the venerable firm had been regarded as the accounting profession's conscience. In Final Accounting, Barbara Ley Toffler, former Andersen partner-in-charge of Andersen's Ethics & Responsible Business Practices consulting services, reveals that the symptoms of Andersen's fatal disease were evident long before Enron. Drawing on her expertise as a social scientist and her experience as an Andersen insider, Toffler chronicles how a culture of arrogance and greed infected her company and led to enormous lapses in judgment among her peers. Final Accounting exposes the slow deterioration of values that led not only to Enron but also to the earlier financial scandals of other Andersen clients, including Sunbeam and Waste Management, and illustrates the practices that paved the way for the accounting fiascos at WorldCom and other major companies.

    Chronicling the inner workings of Andersen at the height of its success, Toffler reveals "the making of an Android," the peculiar process of employee indoctrination into the Andersen culture; how Androids—both accountants and consultants--lived the mantra "keep the client happy"; and how internal infighting and "billing your brains out" rather than quality work became the all-important goals. Toffler was in a position to know when something was wrong. In her earlier role as ethics consultant, she worked with over 60 major companies and was an internationally renowned expert at spotting and correcting ethical lapses. Toffler traces the roots of Andersen's ethical missteps, and shows the gradual decay of a once-proud culture.

    Uniquely qualified to discuss the personalities and principles behind one of the greatest shake-ups in United States history, Toffler delivers a chilling report with important ramifications for CEOs and individual investors alike.

    From the Back Cover "The sad demise of the once proud and disciplined firm of Arthur Andersen is an object lesson in how 'infectious greed' and conflicts of interest can bring down the best. Final Accounting should be required reading in every business school, beginning with the dean and the faculty that set the tone and culture.” -Paul Volker, former Chairman of the Federal Reserve Board

    “This exciting tale chronicles how greed and competitive frenzy destroyed Arthur Andersen--a firm long recognized for independence and integrity. It details a culture that, in the 1990s, led to unethical and anti-social behavior by executives of many of America's most respected companies. The lessons of this book are important for everyone, particularly for a new breed of corporate leaders anxious to restore public confidence.” -Arthur Levitt, Jr., former chairman of the Securities and Exchange Commission

    “This may be the most important analysis coming out of the corporate disasters of 2001 and 2002. Barbara Toffler is trained to understand corporate ‘cultures’ and ‘business ethics’ (not an oxymoron). She clearly lays out how a high performance, manically driven and once most respected auditing firm was corrupted by the excesses of consulting and an arrogant culture. One can hope that the leaders of all professional service firms, and indeed all corporate leaders, will read and reflect on the meaning of this book.” -John H. Biggs, Former Chairman and Chief Executive Officer of TIAA CREF

    “The book exposes the pervasive hypocrisy that drives many professional service firms to put profits above professionalism. Greed and hubris molded Arthur Andersen into a modern-day corporate junkie ... a monster whose self-destructive behavior resulted in its own demise." -Tom Rodenhauser, founder and president of Consulting Information Services, LLC

    "An intriguing tale that adds another important dimension to the now pervasive national corporate governance conversation. -Charles M. Elson, Edgar S. Woolard, Jr., Professor of Corporate Governance, University of Delaware

    “You could not ask for a better guide to the fall of Arthur Andersen than an expert on organizational behavior and business ethics who actually worked there. Sympathetic but resolutely objective, Toffler was enough of an insider to see what went on but enough of an outsider to keep her perspective clear. This is a tragic tale of epic proportions that shows that even institutions founded on integrity and transparency will lose everything unless they have internal controls that require everyone in the organization to work together, challenge unethical practices, and commit only to profitability that is sustainable over the long term. One way to begin is by reading this book. –Nell Minow, Editor, The Corporate Library

    About the Author Formerly the Partner-in-Charge of Ethics and Responsible Business Practices consulting services for Arthur Andersen, BARBARA LEY TOFFLER was on the faculty of the Harvard Business School and now teaches at Columbia University's Business School. She is considered one of the nation's leading experts on management ethics, and has written extensively on the subject and has consulted to over sixty Fortune 500 companies. She lives in the New York area. Winner of a Deadline Club award for Best Business Reporting, JENNIFER REINGOLD has served as management editor at Business Week and senior writer at Fast Company. She writes for national publications such as The New York Times, Inc and Worth and co-authored the Business Week Guide to the Best Business Schools (McGraw-Hill, 1999).

    Also see the review at  http://www.nytimes.com/2003/02/23/business/yourmoney/23VALU.html 


    March 8, 2004 message from neil glass [neil.glass@get2net.dk
    Note that you can download the first chapter of his book for free.  The book may be purchased as an eBook or hard copy.

    Dr. Jensen,

    I just came across your website and was pleased to find you talk about some of the frauds and other problems I reveal in my latest book. If you had a moment, you might be amused to look at my website only-on-the-net.com where I am trying to attract some attention to my book Rip-Off: The scandalous inside story of the Management Consulting Money Machine.

    best wishes

    neil glass

    The link is http://www.only-on-the-net.com/ 


    The AICPA's Prosecution of Dr. Abraham Briloff, Some Observations --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm 


    Art Wyatt admitted:
    "ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" ---
    http://aaahq.org/AM2003/WyattSpeech.pdf 


    Here is some earlier related material you can find at http://www.trinity.edu/rjensen/fraudVirginia.htm 

    Lessons Learned From Paul Volker:  
    The Culture of Greed Sucked the Blood Out of Professionalism
    In an effort to save Andersen's reputation and life, the top executive officer, Joe Berardino, in Andersen was replaced by the former Chairman of the Federal Reserve Board, Paul Volcker.  This great man, Volcker, really tried to instantly change the culture of greed that overtook professionalism in  Andersen and other public accounting firms, but it was too little too late --- at least for Andersen.

    The bottom line:

    I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably will be shaded. 
    Paul Volcker (See below)

    "Volcker says "new Andersen" no longer possible," by Kevin Drawbaugh, CPAnet, May 17, 2002 --- http://www.cpanet.com/up/s0205.asp?ID=0572

    WASHINGTON, May 17 (Reuters) - Former Federal Reserve Board Chairman Paul Volcker, who took charge of a rescue team at embattled accounting firm Andersen (ANDR), said on Friday that creating "a new Andersen" was no longer possible.

    In a letter to Sen. Paul Sarbanes, Volcker said he supports the Maryland Democrat's proposals for reforming the U.S. financial system to prevent future corporate disasters such as the collapse of Enron Corp. (ENRNQ).

    "The sheer number and magnitude of breakdowns that have increasingly become the daily fare of the business press pose a clear and present danger to the effectiveness and efficiency of capital markets," Volcker said in the letter released to Reuters.

    "FINALLY, A TIME FOR AUDITING REFORM" 
    REMARKS BY PAUL A. VOLCKER  
    AT THE CONFERENCE ON CREDIBLE FINANCIAL DISCLOSURES 
    KELLOGG SCHOOL OF MANAGEMENT 
    NORTHWESTERN UNIVERSITY 
    EVANSTON, ILLINOIS 
    JUNE 25, 2002
    http://www.fei.org/download/Volker_Kellogg_Speech_6-25-02.pdf 

    How ironic that we are meeting near Arthur Andersen Hall with the leadership of the Leonard Spacek Professor of Accounting. From all I have learned, the Andersen firm in general, and Leonard Spacek in particular, once represented the best in auditing. Literally emerging from the Northwestern faculty, Arthur Andersen represented rigor and discipline, focused on the central mission of attesting to the fairness and accuracy of the financial reports of its clients. 

    The sad demise of that once great firm is, I think we must now all realize, not an idiosyncratic, one-off, event. The Enron affair is plainly symptomatic of a larger, systemic problem. The state of the accounting and auditing systems which we have so confidently set out as a standard for all the world is, in fact, deeply troubled.

    The concerns extend far beyond the profession of auditing itself. There are important questions of corporate governance, which you will address in this conference, but which I can touch upon only tangentially in my comments. More fundamentally, I think we are seeing the bitter fruit of broader erosion of standards of business and market conduct related to the financial boom and bubble of the 1990’s. 

    From one angle, we in the United States have been in a remarkable era of creative destruction, in one sense rough and tumble capitalism at its best bringing about productivity-transforming innovation in electronic technology and molecular biology. Optimistic visions of a new economic era set the stage for an explosion in financial values. The creation of paper wealth exceeded, so far as I can determine, anything before in human history in relative and absolute terms. 

    Encouraged by ever imaginative investment bankers yearning for extraordinary fees, companies were bought and sold with great abandon at values largely accounted for as “intangible” or “good will”. Some of the best mathematical minds of the new generation turned to the sophisticated new profession of financial engineering, designing ever more complicated financial instruments. The rationale was risk management and exploiting market imperfections. But more and more it has become a game of circumventing accounting conventions and IRS regulations. 

    Inadvertently or not, the result has been to load balance sheets and income statements with hard to understand and analyze numbers, or worse yet, to take risks off the balance sheet entirely. In the process, too often the rising stock market valuations were interpreted as evidence of special wisdom or competence, justifying executive compensation packages way beyond any earlier norms and relationships. 

    It was an environment in which incentives for business management to keep reported revenues and earnings growing to meet expectations were amplified. What is now clear, is that insidiously, almost subconsciously, too many companies yielded to the temptation to stretch accounting rules to achieve that result.

    I state all that to emphasize the pressures placed on the auditors in their basic function of attesting to financial statements. Moreover, accounting firms themselves were caught up in the environment – - to generate revenues, to participate in the new economy, to stretch their range of services. More and more they saw their future in consulting, where, in the spirit of the time, they felt their partners could “better leverage” their talent and raise their income. 

    I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably

    Continued at http://www.fei.org/download/Volker_Kellogg_Speech_6-25-02.pdf 

    "We're The Front Line For Shareholders,"  by Phil Livingston (President of Financial Executives International), January/February 2002 --- http://www.fei.org/magazine/articles/1-2-2002_president.cfm 

    At FEI's recent financial reporting conference in New York, Paul Volcker gave the keynote address and declared that the accounting and auditing profession were in a "state of crisis." Earlier that morning, over breakfast, he lamented the daily bombardment of financial reporting failures in the press.

    I agree with his assessment. The causes and contributing factors are numerous, but one thing is clear: We as financial executives need to do better, be stronger and take the lead in restoring the credibility of financial reporting and preserving the capital markets.

    If you didn't already know it and believe it deeply, recent cases prove the value of a financial management team that is ethical, credible and clear in its communications. A loss of confidence in that team can be a fatal blow, not just to the individuals, but to the company or institution that entrusts its assets to their stewardship. I think the FEI Code of Ethical Conduct says it best, and it is worth reprinting the opening section here. The full code (signed by all FEI members) can be found here.

    . . .

    So how did the profession reach the state Volcker describes as a crisis?

    • The market pressure for corporate performance has increased dramatically over the last 10 years. That pressure has produced better results for shareholders, but also a higher fatality rate as management teams pressed too hard at the margin.
    • The standard-setters floundered in the issue de jour quagmire, writing hugely complicated standards that were unintelligible and irrelevant to the bigger problems.
    • The SEC fiddled while the dot-com bubble burst. Deriding and undermining management teams and the auditors, the past administration made a joke of financial restatements.
    • We've had no vision for the future of financial reporting. Annual reports, 10Ks and 10Qs are obsolete. Bloomberg and Yahoo! Finance have replaced the horse-and-buggy vehicles with summary financial information linked to breaking news.
    • We've had no vision for the future of accounting. Today's mixed model is criticized one day for recognizing unrealized fair value contractual gains and alternatively for not recognizing the fair value of financial instruments.
    • The auditors dropped their required skeptical attitude and embraced business partnering philosophies. Adding value and justifying the audit fees became the mandate. Management teams and audit committees promoted this, too.
    • Audit committees have not kept up with the challenges of the assignment. True financial reporting experts are needed on these committees, not the general management expertise required by the stock exchange rules.

    Beta Gamma Sigma honor society --- http://cba.unomaha.edu/bg/ 

    I’ve been a member of BGS for 40 years, but somehow I’ve managed to overlook B-Zine

    From Beta Gamma Sigma BZine Electronic Magazine --- http://cba.unomaha.edu/bg/ 

    CEOs may need to speak up
    by Tim Weatherby, Beta Gamma Sigma
    As more Fortune 500 companies and their executives are sucked into the current crisis, it may be time for the good guys to put their two cents in. The 2002 Beta Gamma Sigma International Honoree did just that in April.
    http://www.betagammasigma.org/news/bzine/august02feature.html

    How Tyco's CEO Enriched Himself
    by Mark Maremont and Laurie P. Cohen, The Wall Street Journal
    The latest story of corporate abuse surrounds the former Tyco CEO. This story provides a vivid example of the abuses that are leading many to question current business practices.
    http://www.msnbc.com/news/790996.asp

    A Lucrative Life at the Top
    by MSNBC.com
    Highlights pay and incentive packages of several former corporate executives currently under investigation.
    http://www.msnbc.com/news/783953.asp

    A To-Do List for Tyco's CEO
    by William C. Symonds, BusinessWeek online
    The new CEO of Tyco has a tough job ahead of him cleaning up the mess left behind.
    http://www.businessweek.com/magazine/content/02_32/b3795050.htm

    Implausible Deniability: The SEC Turns Up CEO Heat
    by Diane Hess, TheStreet.com
    The SEC's edict requires written statements, under oath, from senior officers of the 1,000 largest public companies attesting to the accuracy of their financial statements.
    http://www.thestreet.com/markets/taleofthetape/10029865.html

    Corporate Reform: Any Idea in a Storm?
    by BusinessWeek online
    Lawmakers eager to appease voters are trying all kinds of things.
    http://www.businessweek.com/magazine/content/02_32/b3795045.htm

    Sealing Off the Bermuda Triangle
    by Howard Gleckman, BusinessWeek online
    Too many corporate tax dollars are disappearing because of headquarters relocations, and Congress looks ready to act.
    http://www.businessweek.com/bwdaily/dnflash/jun2002/nf20020625_2167.htm 


    "Adding Insult to Injury: Firms Pay Wrongdoers' Legal Fees," by Laurie P. Cohen, The Wall Street Journal, February 17, 2004 --- http://online.wsj.com/article/0,,SB107697515164830882,00.html?mod=home%5Fwhats%5Fnews%5Fus 

    You buy shares in a company. The government charges one of the company's executives with fraud. Who foots the legal bill?

    All too often, it's you.

    Consider the case of a former Rite Aid Corp. executive. Four days before he was set to go to trial last June, Frank Bergonzi pleaded guilty to participating in a criminal conspiracy to defraud Rite Aid while he was the company's chief financial officer. "I was aggressive and I pressured others to be aggressive," he told a federal judge in Harrisburg, Pa., at the time.

    Little more than a month later, Mr. Bergonzi sued his former employer in Delaware Chancery Court, seeking to force the company to pay more than $5 million in unpaid legal and accounting fees he racked up in connection with his defense in criminal and civil proceedings. That was in addition to the $4 million that Rite Aid had already advanced for Mr. Bergonzi's defense in civil, administrative and criminal proceedings.

    In October, the Delaware court sided with Mr. Bergonzi. It ruled that Rite Aid was required to advance Mr. Bergonzi's defense fees until a "final disposition" of his legal case. The court interpreted that moment as sentencing, a time that could be months -- or even years -- away. Mr. Bergonzi has agreed to testify against former colleagues at coming trials before he is sentenced for his crimes.

    Rite Aid's insurance, in what is known as a directors-and-officers liability policy, already has been depleted by a host of class-action suits filed against the company in the wake of a federal investigation into possible fraud that began in late 1999. "The shareholders are footing the bill" because of the "precedent-setting" Delaware ruling, laments Alan J. Davis, a Philadelphia attorney who unsuccessfully defended Rite Aid against Mr. Bergonzi.

    Rite Aid eventually settled with Mr. Bergonzi for an amount it won't disclose. While it is entitled to recover the fees it has paid from Mr. Bergonzi after he is sentenced, the 58-year-old defendant has testified he has few remaining assets. "We have no reason to believe he'll repay" Rite Aid, Mr. Davis says.

    Rite Aid has lots of company. In recent government cases involving Cendant Corp.; WorldCom Inc., now known as MCI; Enron Corp.; and Qwest Communications International Inc., among others, companies are paying the legal costs of former executives defending themselves against fraud allegations. The amount of money being paid out isn't known, as companies typically don't specify defense costs. But it totals hundreds of millions, or even billions of dollars. A company's average cost of defending against shareholder suits last year was $2.2 million, according to Tillinghast-Towers Perrin. "These costs are likely to climb much higher, due to a lot of claims for more than a billion dollars each that haven't been settled," says James Swanke, an executive at the actuarial consulting firm.

    Continued in the article


    Corporate Accountability: A Toolkit for Social Activists
    The Stakeholder Alliance (ala our friend Ralph Estes and well-meaning social accountant) --- http://www.stakeholderalliance.org/


    From the Chicago Tribune, February 19, 2002  --- http://www.smartpros.com/x33006.xml 

    International Standards Needed, Volcker Says

    WASHINGTON, Feb. 19, 2002 (Knight-Ridder / Tribune News Service) — Enron Corp.'s collapse was a symptom of a financial recklessness that spread during the 1990s economic boom as investors and corporate executives pursued profits at all costs, former Federal Reserve Chairman Paul Volcker told a Senate committee Thursday.

    Volcker -- chairman of the new oversight panel created by Enron's auditor, the Andersen accounting firm, to examine its role in the financial disaster -- told the Senate Banking Committee he hoped the debacle would accelerate current efforts to achieve international accounting standards. Such standards could reassure investors around the world that publicly traded companies met certain standards regardless of where such companies were based, he said.

    "In the midst of the great prosperity and boom of the 1990s, there has been a certain erosion of professional, managerial and ethical standards and safeguards," Volcker said.

    "The pressure on management to meet market expectations, to keep earnings rising quarter by quarter or year by year, to measure success by one 'bottom line' has led, consciously or not, to compromises at the expense of the public interest in full, accurate and timely financial reporting," he added.

    But the 74-year-old economist also blamed the new complexity of corporate finance for contributing the problem. "The fact is," Volcker said "the accounting profession has been hard-pressed to keep up with the growing complexity of business and finance, with its mind-bending complications of abstruse derivatives, seemingly endless varieties of securitizations and multiplying, off-balance-sheet entities. (Continued in the article.)

     


    May 15, 2003 message from Dave Albrecht [albrecht@PROFALBRECHT.COM

    I've been teaching Intermediate Financial Accounting for several years. Recently, I've been thinking about having students read a supplemental book . Given the current upheaval, there are several possibilities for additional reading. Can anyone make a recommendation? BTW, these books would make great summer reading.

    Dave Albrecht

    Benston et. al. (2003). Following the Money: The Enron Failure and the State of Corporate Disclosure.

    Berenson, Alex. (2003). The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.

    Brewster, Mike. (2003). Unaccountable: How the Accounting Profession Forfeited an Public Trust.

    Brice & Ivins. (2002.) Pipe Dreams: Greed, Ego and the Death of Enron.

    DiPiazza & Eccles. (2002). Building Public Trust: The Future of Corporate Reporting.

    Fox, Loren. (2002). Enron, the Rise and Fall.

    Jeter, Lynne W. (2003). Disconnected: Deceit and Betrayal at WorldCom.

    Mills, D. Quinn. (2003). Wheel, Deal and Steal: Deceptive Accounting, Deceitful CEOs, and Ineffective Reforms.

    Mulford & Comiskey. (2002). The Financial Numbers Game: Detecting Creative Accounting Practices.

    Nofsinger & Kim. (2003). Infectious Greed: Restoring Confidence in America's Companies.

    Squires, Susan. (2003). Inside Arthur Andersen: Shifting Values, Unexpected Consequences.

    Swartz & Watkins. (2003). Power Failure: The Inside Story of the Collapse of Enron.

    Toffler, Barbara. (2003). Final Accounting: Ambition, Greed and the Fall of Arthur Andersen

    May 15, 2003 reply from Bruce Lubich [blubich@UMUC.EDU

    I would add Schilit, Howard. (2002) Financial Shenanigans.

    Bruce Lubich

    May 15, 2003 reply from Neal Hannon [nhannon@COX.NET

    Suggested Additions to Summer Book List:

    Financial Shenanigans : How to Detect Accounting Gimmicks & Fraud in Financial Reports by Howard Schilit (McGraw-Hill Trade; 2nd edition (March 1, 2002))

    How Companies Lie: Why Enron Is Just the Tip of the Iceberg by Richard J. Schroth, A. Larry Elliott

    Quality Financial Reporting by Paul B. W. Miller, Paul R. Bahnson

    Take On the Street: What Wall Street and Corporate America Don't Want You to Know by Arthur Levitt, Paula Dwyer (Contributor)

    And for fun: Who Moved My Cheese? An Amazing Way to Deal with Change in Your Work and in Your Life by Spencer, M.D. Johnson, Kenneth H. Blanchard

    Neal J. Hannon, CMA Chair, I.T. Committee, Institute of Management Accountants Member, XBRL_US Steering Committee University of Hartford (860) 768-5810 (401) 769-3802 (Home Office)

     


    Book Recommendation from The AccountingWeb on April 25, 2003

    The professional service accounting firm is being threatened by a variety of factors: new technology, intense competition, consolidation, an inability to incorporate new services into a business strategy, and the erosion of public trust, just to name a few. There is relief. And promise. And hope. In The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services, confronts the tired, conventional wisdom that continues to fail its adherents, and present bold, proven strategies for restoring vitality and dynamism to the professional service firm. http://www.amazon.com/exec/obidos/ASIN/0471264245/accountingweb 


    Question
    What is COSO?

    Answer --- http://www.coso.org/ 

    COSO is a voluntary private sector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls, and corporate governance. COSO was originally formed in 1985 to sponsor the National Commission on Fraudulent Financial Reporting, an independent private sector initiative which studied the causal factors that can lead to fraudulent financial reporting and developed recommendations for public companies and their independent auditors, for the SEC and other regulators, and for educational institutions.

    The National Commission was jointly sponsored by the five major financial professional associations in the United States, the American Accounting Association, the American Institute of Certified Public Accountants, the Financial Executives Institute, the Institute of Internal Auditors, and the National Association of Accountants (now the Institute of Management Accountants). The Commission was wholly independent of each of the sponsoring organizations, and contained representatives from industry, public accounting, investment firms, and the New York Stock Exchange.

    The Chairman of the National Commission was James C. Treadway, Jr., Executive Vice President and General Counsel, Paine Webber Incorporated and a former Commissioner of the U.S. Securities and Exchange Commission. (Hence, the popular name "Treadway Commission"). Currently, the COSO Chairman is John Flaherty, Chairman, Retired Vice President and General Auditor for PepsiCo Inc.


    Title:  ENRON: A Professional's Guide to the Events, Ethical Issues, and Proposed Reforms 
    Authur: L. Berkowitz, CPA
    ISBN: 0-8080-0825-0
    Publisher:  CCH --- http://tax.cchgroup.com/Store/Products/CCE-CCH-1959.htm?cookie%5Ftest=1 
    Pub. Date:  July 2002

    Title:  Take On the Street: What Wall Street and Corporate America Don't Want You to Know
    Authors:  Arthur Levitt and Paula Dwyer (Arthor Levitt is the highly controversial former Chairman of the SEC)
    Format: Hardcover, 288pp.  This is also available as a MS Reader eBook --- http://search.barnesandnoble.com/booksearch/ISBNinquiry.asp?userid=16UOF6F2PF&isbn=0375422358 
    ISBN: 0375421785
    Publisher: Pantheon Books
    Pub. Date: October  2002
    See http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0375421785 

    This is Levitt's no-holds-barred memoir of his turbulent tenure as chief overseer of the nation's financial markets. As working Americans poured billions into stocks and mutual funds, corporate America devised increasingly opaque strategies for hoarding most of the proceeds. Levitt reveals their tactics in plain language, then spells out how to intelligently invest in mutual funds and the stock market. With integrity and authority, Levitt gives us a bracing primer on the collapse of the system for overseeing our capital markets, and sage, essential advice on a discipline we often ignore to our peril - how not to lose money. http://www.amazon.com/exec/obidos/ASIN/0375421785/accountingweb 

    Don Ramsey called my attention to the following audio interview:
    For a one-hour audio archive of Diane Rehm's recent interview with Arthur Levitt, go to this URL:   http://www.wamu.org/ram/2002/r2021015.ram

    A free video from Yale University and the AICPA (with an introduction by Professor Rick Antle and Senior Associate Dean from Yale).  This video can be downloaded to your computer with a single click on a button at http://www.aicpa.org/video/ 
    It might be noted that Barry Melancon is in the midst of controversy with ground swell of CPAs and academics demanding his resignation vis-a-vis continued support he receives from top management of large accounting firms and business corporations.

    A New Accounting Culture
    Address by Barry C. Melancon
    President and CEO, American Institute of CPAs
    September 4, 2002
    Yale Club - New York City
    Taped immediately upon completion

    From The Conference Board
    Corporate Citizenship in the New Century: Accountability, Transparency, and Global Stakeholder Engagement
    Publication Date:  July 2002
    Report Number:  R-1314-02-RR --- http://www.conference-board.org/publications/describe.cfm?id=574 

    My new and updated documents the recent accounting and investment scandals are at the following sites:

    Bob Jensen's threads on the Enron/Andersen scandals are at  http://www.trinity.edu/rjensen/fraud.htm  
    Bob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm  
    Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm  

    Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

    Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm 

    The Virginia Tech Overview:  What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm 


    Disconnected: Deceit and Betrayal at WorldCom, by Lynne W. Jeter


    Inside Arthur Andersen: Shifting Values, Unexpected Consequences by Lorna McDougall, Cynthia Smith, Susan E. Squires, William R. Yeack.


    Final Accounting: Ambition, Greed and the Fall of Arthur Andersen by Barbara Ley Toffler and Jennifer Reingold


    Bisk CPEasy's "Accounting Profession Reform: Restoring Confidence in the System" --- http://www.cpeasy.com/ 


    "The fall of Andersen," Chicago Tribune --- http://www.chicagotribune.com/business/showcase/chi-andersen.special 

    Chicago's Andersen accounting firm must stop auditing publicly traded companies following the firm's conviction for obstructing justice during the federal investigation into the downfall of Enron Corp. For decades, Andersen was a fixture in Chicago's business community and, at one time, the gold standard of the accounting industry. How did this legendary firm disappear?

    Civil war splits Andersen
    September 2, 2002.  Second of four parts

    The fall of Andersen
    September 1, 2002.  This series was reported by Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts and E.A. Torriero. It was written by McRoberts.

    Greed tarnished golden reputation
    September 1, 2002.  First of four parts

    'Merchant or Samurai?'
    September 1, 2002.  Dick Measelle, then-chief executive of Andersen's worldwide audit and tax practice, explores a corporate cultural divide in an April 1995 newsletter essay to Andersen partners.

    What will the U.S. accounting business look like when the dust settles on Arthur Andersen? http://www.trinity.edu/rjensen/fraud041202.htm#Future 
    Also see http://www.trinity.edu/rjensen/FraudConclusion.htm 

    The Washington Post put together a terrific Corporate Scandal Primer that includes reviews and pictures of the "players," "articles,", and an "overview" of each major accounting and finance scandal of the Year 2002 --- http://www.washingtonpost.com/wp-srv/business/scandals/primer/index.html 
    I added this link to my own reviews at http://www.trinity.edu/rjensen/fraud.htm#Governance

     

    The AccountingWeb recommends a number of books on accounting fraud --- http://www.amazon.com/exec/obidos/ASIN/0471353787/accountingweb/103-6121868-8139853 

    • The Fraud Identification Handbook by George B. Allen (Preface)
    • Financial Investigation and Forensic Accounting by George A. Manning
    • Business Fraud by James A. Blanco, Dave Evans
    • Document Fraud and Other Crimes of Deception by Jesse M. Greenwald, Holly K. Tuttle (Illustrator)
    • Fraud Auditing and Forensic Accounting by Jack Bologna, et al
    • The Financial Numbers Game by Charles W. Mulford, Eugene E. Comiskey
    • How to Reduce Business Losses from Employee Theft and Customer Fraud by Alfred N. Weiner
    • Financial Statement Fraud by Zabihollah Rezaee, Joseph T. Wells
    • Transnational Criminal Organizations, Cybercrime, and Money Laundering by James R. Richards

    The three books below are reviewed in the December 2002 issue of the Journal of Accountancy, pp. 88-90 --- http://www.aicpa.org/pubs/jofa/dec2002/person.htm 

    Two Books on Financial Statement Fraud

    Financial Statement Fraud:  Prevention and Detection
    by Zabihollah Razaee (Certified Fraud Examiner and Accounting Professor at the University of Memphis)
    Format: Hardcover, 336pp.
    ISBN: 0471092169
    Publisher: Wiley, John & Sons, Incorporated
    Pub. Date: March  2002 
    http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0471092169  

    The Financial Numbers Game:  Detecting Creative Accounting Practices
    by Charles W. Mulford and Eugene Comiskey (good old boys from the Georgia Institute of Technology)
    Format: Paperback, 408pp.
    ISBN: 0471370088
    Publisher: Wiley, John & Sons, Incorporated
    Pub. Date: February  2002 
    http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0471370088
     

    One New Book on Accounting Professionalism and Public Trust

    Building Public Trust:  The Future of Corporate Reporting
    by Samuel A. DiPiazza, Jr (CEO of PricewaterhouseCoopers (PwC))
    and Robert G. Eccies (President of Advisory Capital Partners)
    Format: Hardcover, 1st ed., 192pp.
    ISBN: 0471261513
    Publisher: Wiley, John & Sons, Incorporated
    Pub. Date: June  2002 
    http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0471261513
     

    Books on Fraud --- Enter the word "fraud" in the search box at http://www.bn.com/ 

     

    Yahoo's choices for top fraud sites --- http://dir.yahoo.com/Society_and_Culture/Crime/Types_of_Crime/Fraud/Finance_and_Investment/ 

    You might enjoy "The AICPA's Prosecution of Dr. Abraham Briloff: Some Observations," by Dwight M. Owsen --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm  
    I think Briloff was trying to save the profession from what it is now going through in the wake of the Enron scandal.

    My Interview With The Baltimore Sun --- http://www.trinity.edu/rjensen/fraudBaltimoreSun.htm 

    My Philadelphia Inquirer Interview 1 --- http://www.trinity.edu/rjensen/philadelphia_inquirer.htm 

    My Philadelphia Inquirer Interview 2 ---  http://www.trinity.edu/rjensen/FraudPhiladelphiaInquirere022402.htm 

    My Interview With National Public Radio --- http://www.trinity.edu/rjensen/fraudNPRfeb7.htm 

    Articles on Internal Auditing and Fraud Investigation 
    Web Site of Mark R. Simmons, CIA CFE 
    http://www.dartmouth.edu/~msimmons/
     

    Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.  It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. (Institute of Internal Auditors)

    Fraud Investigation consists of the multitude of steps necessary to resolve allegations of fraud - interviewing witnesses, assembling evidence, writing reports, and dealing with prosecutors and the courts. (Association of Certified Fraud Examiners)

    This site focuses on topics that deal with Internal Auditing and Fraud Investigation with certain hyper-links to other associated and relevant sources. It is dedicated to sharing information.

     

    Other Shared and Unshared Course Material

    You might find some useful material at http://www.indiana.edu/~aisdept/newsletter/current/forensic%20accounting.html

    I have two cases and some links to John Howland's course materials at http://www.trinity.edu/rjensen/acct5342/262wp/262case1.htm

    You might find some materials of interest at http://www.trinity.edu/rjensen/ecommerce/assurance.htm

    Also see http://www.networkcomputing.com/1304/1304ws2.html

    Micromash has a bunch of courses, but I don't think they share materials for free --- http://www.cyberu.com/classes.asp

    Important Database  --- From the Scout Report on February 1, 2001

    LLRX.com: Business Filings Databases http://www.llrx.com/columns/roundup19.htm 

    This column from Law Library Resource Xchange (LLRX) (last mentioned in the September 7, 2001 Scout Report) by Kathy Biehl becomes more interesting with every revelation of misleading corporate accounting practices. This is a straightforward listing of state government's efforts to provide easy access to required disclosure filings of businesses within each state. Each entry is clearly annotated, describing services offered and any required fees (most services here are free). The range of information and services varies considerably from very basic (i.e. "name availability") to complete access to corporate filings. The noteworthy exception here is tax filings. Most states do not currently include access to filings with taxing authorities.

     

     

    List of Securities Fraud Class Actions
    SORTED BY COMPANY NAME


    Number Litigation Name Exchange & Ticker Date Court
    1     ABS Industries NASD ABSI  01/19/1996   N.D. OH 
    2     Alliance Semi. NASD ALSC  03/04/1996   N.D. CA 
    3     AmSouth Bancorp. NYSE ASO  08/12/1996   M.D. FL 
    4     AnnTaylor Stores NYSE ANN  04/24/1996   S.D. NY 
    5     Autodesk, Inc. (96) NASD ADSK  06/13/1996   D. MA 
    6     Bennett Funding Grp. - PRIVATE  04/11/1996   S.D. NY 
    7     BHP Copper, Inc. - MCU  06/13/1996   D. AZ 
    8     Biocontrol Technology OTC BICO  04/30/1996   W.D. PA 
    9     Bollinger Industries OTC BOLL.OB  03/22/1996   N.D. TX 
    10     Brauvin Partnerships - PRIVATE  09/18/1996   N.D. IL 
    11     Buenos Aires Embot. NYSE BAE  09/30/1996   S.D. NY 
    12     CAI Wireless Systems NYSE CAWS  11/22/1996   N.D. NY 
    13     Cedar Group NYSE CGMV  10/07/1996   E.D. PA 
    14     Cellstar Corporation NASD CLST  05/14/1996   N.D. TX 
    15     Cephalon NYSE CEPH  10/18/1996   E.D. PA 
    16     Chantal Pharmaceutical Corp. NYSE CHTL  02/07/1996   C.D. CA 
    17     Chemical Invest. Services - PRIVATE  11/06/1996   S.D. NY 
    18     Comm. and Entert. - BTF  12/24/1996   S.D. NY 
    19     CompuServe NYSE CSRV  07/22/1996   S.D. OH 
    20     Computron Software AMEX CFW  04/25/1996   D. NJ 
    21     Comshare NASD CSRE  08/09/1996   E.D. MI 
    22     Cree Research NASD CREE  10/25/1996   M.D. NC 
    23     Daka International NASD DKAI  10/18/1996   D. MA 
    24     Dean Witter Discover NYSE DWD  03/26/1996   M.D. FL 
    25     Diamond Multimedia NASD DIMD  07/24/1996   N.D. CA 
    26     Digital Link NASD DLNK  10/17/1996   N.D. CA 
    27     Donaldson Lufkin Jenrette - PRIVATE  01/25/1996   S.D. NY 
    28     DonnKenny NASD DNKY  11/20/1996   S.D. NY 
    29     Eagle Finance NASD EFCW  04/19/1996   N.D. IL 
    30     Ernst Home Center OTC ERNSQ  07/16/1996   W.D. WA 
    31     Fleming Companies NYSE FLM  04/04/1996   W.D. OK 
    32     FMR Corp.      07/17/1996   M.D. FL 
    33     Foxmeyer Health NYSE FOX  08/12/1996   N.D. TX 
    34     Fritz Companies, Inc. NASD FRTZ  07/31/1996   N.D. CA 
    35     FTP Software NASD FTPS  03/14/1996   D. MA 
    36     Gaming Lottery - GLCCF  06/14/1996   S.D. NY 
    37     General Nutrition NYSE GNCI  08/02/1996   W.D. PA 
    38     Glenayre Tech. NYSE GEMS  11/01/1996   S.D. NY 
    39     Grand Casinos NYSE GND  09/09/1996   D. MN 
    40     Great Western Finan. NYSE GWF  06/18/1996   M.D. FL 
    41     Hall Kinion and Associates NASD HAKI  06/16/1996   N.D. CA 
    42     Hallwood Energy NASD HECO  11/15/1996   D. CO 
    43     Happiness Express NASD HAPY  05/22/1996   E.D. NY 
    44     Health Management, Inc. NASD HMIS  02/28/1996   E.D. NY 
    45     Highwaymaster Commun. NASD HWYM  02/23/1996   S.D. NY 
    46     Home Link Corp. OTC HMLM  10/21/1996   S.D. FL 
    47     Horizon/CMS Healthcare NYSE HHC  04/02/1996   D. NM 
    48     Housecall Medical Resourc. NASD HSCL  08/30/1996   N.D. GA 
    49     Identix AMEX IDX  10/08/1996   N.D. CA 
    50     IMP NASD IMPX  10/01/1996   N.D. CA 
    51     Int. Automated Systems OTC IAUS.OB  07/03/1996   D. UT 
    52     Integrated Comm. - IntegCo  07/24/1996   S.D. FL 
    53     Italian Oven NASD OVEN  07/02/1996   W.D. PA 
    54     Ivax Corporation AMEX IVX  07/03/1996   S.D. FL 
    55     Konover Propoerty Trust Inc. NYSE KPT  07/19/1996   E.D. NC 
    56     Lincoln National Bank - Lincoln  10/08/1996   N.D. IL 
    57     Livent NASD LVNTF  08/11/1996   S.D. NY 
    58     Madge Networks NASD MADGE  08/13/1996   N.D. CA 
    59     Manhattan Bagel Comp., Inc. NASD BGLS  07/02/1996   D. NJ 
    60     Medaphis Corporation NASD MEDA  08/29/1996   N.D. GA 
    61     Metal Recovery Tech. OTC MXAL.OB  10/31/1996   D. DE 
    62     Metal Recovery Tech. - MRTI  10/31/1996   D. DE 
    63     Micrion Corporation NASD MICN  08/02/1996   D. MA 
    64     Micro Warehouse Inc. NASD MWHS  10/01/1996   D. CT 
    65     Midcom Communications - MCCI  04/19/1996   W.D. WA 
    66     Minnie Keller NASD VISTE  04/16/1996   N.D. GA 
    67     Mobilemedia NASD MBLM  10/04/1996   D. NJ 
    68     Mustang Development Corp. - PRIVATE  02/01/1996   C.D. CA 
    69     Net.Computing Devices NASD NCDI  04/11/1996   N.D. CA 
    70     Netmanage, Inc. NASD NETM  02/23/1996   N.D. CA 
    71     Network Express NASD NETK  10/07/1996   E.D. MI 
    72     New York Life Insurance - D.NZG  03/18/1996   S.D. FL 
    73     NewEdge Corp. NASD NEWZ  11/13/1996   D. MA 
    74     Northstar Health Services NYSE NSTRE  04/15/1996   W.D. PA 
    75     Novell NASD NOVL  04/02/1996   D. UT 
    76     Number Nine Visual Tech. NASD NINE  06/11/1996   D. MA 
    77     NuMed Home Health Care NASD NUMD  02/01/1996   M.D. FL 
    78     Nutrition for Life NASD NFLI  08/15/1996   S.D. TX 
    79     Open Environment Corp. - OPEN  12/19/1996   D. MA 
    80     Orthologic Corporation NASD OLGC  06/24/1996   D. AZ 
    81     Pacific Scientific Company NYSE PSX  10/18/1996   C.D. CA 
    82     Paracelsus Healthcare NYSE PLS  10/15/1996   S.D. TX 
    83     Pepsi Cola Puerto Rico NYSE PPO  08/14/1996   E.D. NY 
    84     Performance Nutrition OTC PNII  10/17/1996   N.D. TX 
    85     Pinnacle Micro NYSE PNCL  03/15/1996   C.D. CA 
    86     Presstek NASD PRST  06/28/1996   D. NH 
    87     Prins Recycling Corporation - PRNS  05/29/1996   D. NJ 
    88     ProNet NASD PNET  06/27/1996   N.D. TX 
    89     Proxima Corporation NYSE PRXM  08/16/1996   S.D. CA 
    90     Putnam Convertible Oppor. NASD PCV  06/25/1996   S.D. NY 
    91     Pyramid Breweries NASD PMID  06/14/1996   S.D. CA 
    92     Quantum Corporation NYSE DSS  08/30/1996   N.D. CA 
    93     Riscorp NASD RISC  11/20/1996   M.D. FL 
    94     Rockefeller Center Prop. NYSE RCP  11/15/1996   D. DE 
    95     Silicon Graphics NYSE SGI  01/29/1996   N.D. CA 
    96     Solv-Ex Corporation NASD SOLV  10/04/1996   S.D. NY 
    97     Sterling Foster - PRIVATE  10/15/1996   E.D. NY 
    98     Stratosphere Corporation OTC STTC.OB  08/05/1996   D. NV 
    99     Summit Technology NASD BEAM  08/21/1996   D. MA 
    100     SyQuest Technology NASD SYQT  04/02/1996   N.D. CA 
    101     Teletek, Inc. - TLTK  12/02/1996   D. NV 
    102     Touchstone Software OTC TSSW  01/26/1996   C.D. CA 
    103     Tower Semiconductor NASD TSEMF  06/21/1996   E.D. NY 
    104     Unitech Industries NASD UTIIQ  01/10/1996   D. AZ 
    105     United Healthcare NYSE UNH  08/09/1996   D. MN 
    106     US Oncology, Inc. NASD USON  09/18/1996   N.D. TX 
    107     ValuJet Airlines NASD VJET  10/18/1996   N.D. GA 
    108     Wellcare Mgmt. Group OTC WELL  03/29/1996   N.D. NY 
    109     Wheatley Ventures - PRIVATE  08/15/1996   N.D. CA 
    110     Wonderware Corporation NASD WNDR  11/26/1996   E.D. PA 


    IMPORTANT NOTE:
    If another district or date than the one for which you searched appears in the "Court" column, the explanation may be that the district/date for which you searched is related to this case but is not singled out as our "First Identified District". This list may be considered inclusive.

     


    Example from the Stanford Law School Database

    From the Stanford Law School Securities Fraud Database --- http://securities.stanford.edu/1022/TTWO01-01/ 

    Take-Two Interactive CASE INFORMATION 

    Summary: According to a Press Release dated December 21, 2001, the complaint alleges that during the Class Period defendants materially misrepresented Take-Two's financial results and performance for each of the quarters of and full year of fiscal 2000, ended October 31, 2000, and each of the first three quarters of fiscal 2001, ended January 31, 2001, April 30, 2001 and July 31, 2001, respectively, by improperly recognizing revenue on sales to distributors. On August 24, 2001, the truth about the Company's financial condition began to emerge when the effects of defendants' scheme began to negatively impact the Company's financial results. It was not until December 14, 2001 and December 17, 2001, however, that the market began to learn that defendants had caused the Company to improperly recognize revenue for products shipped to distributors, where the distributors did not have a binding commitment to pay for the products, in direct contravention of GAAP. Significantly, defendants' unlawful accounting practices enabled defendants to portray Take-Two as a financially strong company that was experiencing dramatic revenue growth, and which was poised for future success when, in fact, the Company's purported success was the result of improper accounting practices. On December 14, 2001, following rumors of a possible restatement of Take-Two's financial results, Take-Two's common stock fell 31% --$4.72 a share to $10.33 per share. During the Class Period, Take-Two shares traded as high as $24.50 per share. Defendants were motivated to misrepresent the Company's financial results, by among other things, their desire to sell approximately 900,000 shares of Take-Two common stock during the Class Period at artificially inflated prices for proceeds of over $15 million.

    INDUSTRY CLASSIFICATION: SIC Code: 7372 Sector: Technology Industry: Software & Programming

    NAME OF COMPANY SUED: Take-Two Interactive Software Inc. 

    COMPANY TICKER: TTWO COMPANY WEBSITE: http://www.take2games.com 

    FIRST IDENTIFIED COMPLAINT IN THE DATABASE Fischbein, et al. v. Take-Two Interactive Software Inc., et al. COURT: S.D. New York DOCKET NUMBER: JUDGE NAME: DATE FILED: 12/18/2001 SOURCE: Business Wires CLASS PERIOD START: 02/24/2000 CLASS PERIOD END: 12/17/2001 TYPE OF COMPLAINT: Unamended/Unconsolidated PLAINTIFF FIRMS IN THIS OR SIMILAR CASE: Milberg Weiss Bershad Hynes & Lerach, LLP (New York, NY) One Pennsylvania Plaza, New York, NY, 10119-1065 (voice) 212.594.5300, (fax) , Rabin & Peckel LLP 275 Madison Avenue, New York, NY, 10016 (voice) 212.682.1818, (fax) , email@rabinlaw.com Schiffrin & Barroway, LLP 3 Bala Plaza E, Bala Cynwyd, PA, 19004 (voice) 610.667.7706, (fax) 610.667.7056, info@sbclasslaw.com 

    TOTAL NUMBER OF PLAINTIFF FIRMS: 3

    February 28, 2002 message from Allen Plyler

    Bob,

    Take-Two Interactive just restated their last restatement.

    Allen Plyler
    Keller Graduate School of Management, Chicago, Illinois.


    Important Database --- From the Scout Report on February 1, 2001

    LLRX.com: Business Filings Databases http://www.llrx.com/columns/roundup19.htm 

    This column from Law Library Resource Xchange (LLRX) (last mentioned in the September 7, 2001 Scout Report) by Kathy Biehl becomes more interesting with every revelation of misleading corporate accounting practices. This is a straightforward listing of state government's efforts to provide easy access to required disclosure filings of businesses within each state. Each entry is clearly annotated, describing services offered and any required fees (most services here are free). The range of information and services varies considerably from very basic (i.e. "name availability") to complete access to corporate filings. The noteworthy exception here is tax filings. Most states do not currently include access to filings with taxing authorities.

    I added the above to my evolving monster on accounting and securities fraud at http://www.trinity.edu/rjensen/fraud.htm 

     


    From The Wall Street Journal Accounting Educators' Review on May 23, 2002

    TITLE: SEC Broadens Investigation Into Revenue-Boosting Tricks; Fearing Bogus Numbers Are Widespread, Agency Probes Lucent and Others 
    REPORTER: Susan Pulliam and Rebecca Blumenstein 
    DATE: May 16, 2002 
    PAGE: A1 
    LINK: http://online.wsj.com/article/0,,SB1021510491566948760.djm,00.html  
    TOPICS: Financial Accounting, Financial Statement Analysis

    SUMMARY: "Securities and Exchange Commission officials, concerned about an explosion of transactions that falsely created the impression of booming business across many industries, are conducting a sweeping investigation into a host of practices that pump up revenue."

    QUESTIONS: 
    1.) "Probing revenue promises to be a much broader inquiry than the earlier investigations of Enron and other companies accused of using accounting tricks to boost their profits." What is the difference between inflating profits vs. revenues?

    2.) What are the ways in which accounting information is used (both in general and in ways specifically cited in this article)? What are the concerns about using accounting information that has been manipulated to increase revenues? To increase profits?

    3.) Describe the specific techniques that may be used to inflate revenues that are enumerated in this article and the related one. Why would a practice of inflating revenues be of particular concern during the ".com boom"?

    4.) "[L90 Inc.] L90 lopped $8.3 million, or just over 10%, off revenue previously reported for 2000 and 2001, while booking the $250,000 [net difference in the amount of wire transfers that had been used in one of these transactions] as 'other income' rather than revenue." What is the difference between revenues and other income? Where might these items be found in a multi-step income statement? In a single-step income statement?

    5.) What are "vendor allowances"? How might these allowances be used to inflate revenues? Consider the case of Lucent Technologies described in the article. Might their techniques also have been used to boost profits?

    Reviewed By: Judy Beckman, University of Rhode Island 
    Reviewed By: Benson Wier, Virginia Commonwealth University 
    Reviewed By: Kimberly Dunn, Florida Atlantic University

    --- RELATED ARTICLES --- 
    TITLE: CMS Energy Admits Questionable Trades Inflated Its Volume 
    REPORTER: Chip Cummins and Jonathan Friedland 
    PAGE: A1 
    ISSUE: May 16, 2002 
    LINK: http://online.wsj.com/article/0,,SB1021494984503313400.djm,00.html 

    From The Wall Street Journal Accounting Educators' Review on May 27, 2004

    TITLE: SEC Gets Tough With Settlement in Lucent Case 
    REPORTER: Deborah Solomon and Dennis K. Berman 
    DATE: May 17, 2004 
    PAGE: A1 
    LINK: http://online.wsj.com/article/0,,SB108474447102812763,00.html  
    TOPICS: Criminal Procedure, Financial Accounting, Legal Liability, Revenue Recognition, Securities and Exchange Commission, Accounting

    SUMMARY: After a lengthy investigation into the accounting practices of Lucent Technologies Inc., the Securities and Exchange Commission is expected to file civil charges and impose a $25 million fine against the company. Questions focus on the role of the SEC in financial reporting.

    QUESTIONS: 
    1.) What is the Securities and Exchange Commission (SEC)? When was the SEC established? Why was the SEC established? Does the SEC have the responsibility of establishing financial reporting guidelines?

    2.) What role does the SEC currently play in the financial reporting process? What power does the SEC have to sanction companies that violate financial reporting guidelines?

    3.) What is the difference between a civil and a criminal charge? What is the difference between a class-action suit by investors and a civil charge by the SEC?

    4.) What personal liability do individuals have for improper accounting? Why does the SEC object to companies indemnifying individuals for consequences associated with improper accounting?

    Reviewed By: Judy Beckman, University of Rhode Island 
    Reviewed By: Benson Wier, Virginia Commonwealth University 
    Reviewed By: Kimberly Dunn, Florida Atlantic University

    Bob Jensen's threads on revenue accounting are at http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 

    Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm 


    One-time Internet booster Henry Blodget, who recently left Merrill Lynch, is reportedly one of several stock analysts being probed for alleged conflicts of interest --- http://www.wired.com/news/politics/0,1283,48992,00.html 


    From The Wall Street Journal's Accounting Educator Reviews on January 24, 2002

    TITLE: Ex-Official at Leslie Fay Gets Nine-Year Sentence for Accounting Fraud 
    REPORTER: Staff Reporter DATE: Jan 21, 2002 
    PAGE: B2 
    LINK: http://interactive.wsj.com/archive/retrieve.cgi?id=SB1011571420328020280.djm  
    TOPICS: Accounting, Accounting Fraud, Accounting Law, Fraudulent Financial Reporting, Legal Liability, Negligent Misrepresentation

    SUMMARY: Paul F. Polishan, the former chief financial officer and senior vice president of Leslie Fay, was convicted of 18 felony counts for his role in overstating the earnings of Leslie Fay between 1989 and 1993. Mr. Polishan was sentenced to serve nine years in prison. Questions deal with accountants' liability and consequences of fraudulent financial reporting.

    QUESTIONS: 
    1.) In what situations is overstating earnings a crime? What other penalties could result from overstating earnings? Do you think overstating earnings should result in a prison sentence? Support your answer.

    2.) Were Leslie Fay's financial statements audited? What responsibility does the auditor bear concerning the earnings overstatement?

    3.) In what situations would an independent auditor be liable under common law for overstated earnings? What defenses are available to the auditor?

    4.) In what situations would an independent auditor be liable under civil law for overstated earnings? What defenses are available to the auditor?

    5.) In what situations would an independent auditor be liable under criminal law for overstated earnings? What defenses are available to the auditor?

    6.) Who is harmed by overstated earnings? How are each of these groups harmed?

    Reviewed By: Judy Beckman, University of Rhode Island 
    Reviewed By: Benson Wier, Virginia Commonwealth University 
    Reviewed By: Kimberly Dunn, Florida Atlantic University


    In particular, it has raised awareness of “hollow swaps”, where two telecoms companies exchange identical amounts of network capacity, then book the purchase cost as capital expense and the sale as revenue. Although C&W says it does not use hollow swaps, it has recently admitted to using another controversial accounting method to book the sale of “indefeasible right of use” (IRU) contracts. C&W booked the contracts, which give access to its telecoms network, as upfront revenue even though they were spread over periods of up to 15 years. Such deals — which were outlawed in 1999 by regulators in America — boosted C&W’s revenues by £373 million in 2001.
    Chris Ayres and Clive Mathieson, London Times Online, March 1, 2002 --- http://www.thetimes.co.uk/article/0,,5-222235,00.html 


    Association of Certified Fraud Examiners --- http://www.cfenet.com/home.asp 

    The Association of Certified Fraud Examiners is an international, 25,000-member professional organization dedicated to fighting fraud and white-collar crime. With offices in North America and chapters around the globe, the Association is networked to respond to the needs of anti-fraud professionals everywhere.

    In the April 2002 issue of Journal of Accountancy, Joseph Wells, chairman of the Association of Certified Fraud Examiners (CFE), reviews the results of a survey by CFE and discusses the implications for CPAs. http://www.accountingweb.com/item/77418 


    In Congressional testimony on February 14, James G. Castellano, the chairman of the American Institute of CPAs said the Institute plans to release a draft of a new standard by the end of February. The objective of the new standard is to help auditors detect new types of management fraud. http://www.accountingweb.com/item/72560 


    A message from Andrew Priest on February 34. 2002

    Yahoo! is carrying this news story in respect of Tyco International. Apparently the firm spent $US8 billion in its past three fiscal years on more than 700 acquisitions that were never announced to the public. The story is at http://au.news.yahoo.com/020205/2/3vlo.html  .

    Is this another Andersen client? :-) Seriously does anyone know who the auditor is on this one?

    Thanks 
    Andrew Priest

    The auditor is PricewaterhouseCoopers (PwC)


    SEC News, Regulations, and Litigation Summaries --- http://www.sec.gov/ 


    On May 20, 2002 the Securities and Exchange Commission announced proceedings against Big Five firm Ernst & Young. The case reaches back to the years before E&Y's consulting practice was sold to Cap Gemini. It involves alleged independence violations due to product sales and consulting fees related to PeopleSoft software, while PeopleSoft was an E&Y audit client. http://www.accountingweb.com/item/81348 

    Update on June 1, 2002 --- http://www.as411.com/AcctSoftware.nsf/00/prDBD2F8AEEF51127686256BEC00167F9F 

    In a ruling Tuesday, Brenda Murray, the chief administrative law judge at the SEC, granted Ernst & Young's motion for summary judgment and dismissed the case without prejudice. Ms. Murray agreed with Ernst & Young that more than one SEC commissioner needed to approve the action for it to be valid.


    From Double Entries on July 5, 2002

    In the first-ever auditor independence case against a foreign audit firm, the Securities and Exchange Commission has brought a settled enforcement action against Moret Ernst & Young Accountants (Moret), a Dutch accounting firm now known as Ernst & Young Accountants. The case arises from Moret's joint business relationships with an audit client. In today's order, the SEC censured Moret for engaging in "improper professional conduct" within the meaning of Rule 102(e) of the SEC's Rules of Practice, and ordered Moret to comply with certain remedial undertakings, including the payment of a $400,000 civil penalty. This is the first time that the SEC has ordered any audit firm to pay a civil penalty for an auditor independence violation. Moret consented to the order without admitting or denying the SEC's findings. Full details from the SEC in our full article. Just click on through


    "SEC List of Accounting-Fraud Probes Grows, Stretching Agencies Resources," The Wall Street Journal, July 6, 2001 --- http://interactive.wsj.com/archive/retrieve.cgi?id=SB994366683510250066.djm 

    WSJ Interactive Questions on July 12, 2001

    1.) "The most visible indicator of improper accounting-and source of new investigations-is the growing number of restated financial reports." Based on your knowledge of APB Opinion 23, why is this statement true? What other sources of information does the SEC use to trigger investigations?

    2.) Why would the SEC want to "ferret out" questionable accounting practices before "word of a company's accounting problems has leaked and battered its stock price"? How does this goal relate to the SEC's responsibilities? What steps are they undertaking to accomplish this goal?

    3.) What is fraudulent financial reporting (as opposed to an accounting error)? Why might the current economic circumstances lead to greater incidences of fraudulent financial reporting?

    4.) Read the summary of a research study entitled "Fraudulent Financial Reporting: 1987-1997: An Analysis of U.S. Public Companies" at the AICPA web site http://www.aicpa.org/news/p032699b.htm  How do the factors identified in this study provide a basis for helping the SEC to detect questionable accounting practices earlier than is now the norm?

    5.) How are executives' compensation packages tied to share prices? What are the benefits of such compensation arrangements? Why do current market conditions enhance the risk that executives may be willing to undertake earnings management practices to enhance their own salaries? What market reactions to earnings announcements exacerbate these incentives to manage earnings?


    American Institute of Certified Public Accountants --- http://www.aicpa.org/index.htm 
    There are many articles on fraud in the back issues of the Journal of Accountancy --- http://www.aicpa.org/pubs/jofa/joahome.htm 

    AICPA Issues Proposed Standard On Fraud Detection
    On February 28, 2002, the American Institute of CPAs (AICPA) released a draft of a revised audit standard on Consideration of Fraud in a Financial Statement Audit. If adopted, this updated standard will replace the current standard with the same name, (Statement on Auditing Standards No. 82). http://www.accountingweb.com/item/73718 


    From the Journal of Accountancy in July 2002 --- http://www.aicpa.org/pubs/jofa/jul2002/index.htm

    Risk Management/Internal Audit
    BEYOND TRADITIONAL AUDIT TECHNIQUES
    Paul E. Lindow and Jill D. Race
    Instead of just reviewing required controls, internal auditors can broaden their approach both within and outside the audit process to identify areas for risk management improvements. Here’s a case study on how the internal audit group at California Federal Bank redefined its role to add more value and become key advisers to the company.

    Risk Management/Litigation Services
    FIVE TIPS TO STEER CLEAR OF THE COURTHOUSE
    Paul Sweeney
    As litigation costs continue to mount, businesses want to develop efficient strategies to identify and monitor vulnerabilities and avoid lawsuits. CPAs have the expertise to offer clients solutions to several corporate risk management problems.


    From The Wall Street Journal Accounting Educators' Review on March 7, 2002

    TITLE: Auditing Standard for Detecting Fraud Is Posed
    REPORTER: Dow Jones Newswires
    DATE: Mar 01, 200
    PAGE: A4
    LINK: http://online.wsj.com/article/0,,BT_CO_20020228_009080.djm,00.html
    TOPICS: Auditing

    SUMMARY: The article implies that a new auditing standard on fraud actually has been issued, but the actual document issued was an exposure draft of a proposed standard.

    QUESTIONS:

    1.) Access the AICPA web site to read the actual document issued by the Auditing Standards Board at http://www.aicpa.org/members/div/auditstd/consideration_of_fraud.htm 

    The article begins with the statement that "the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants issued expanded fraud guidance for U.S. auditors..."  Is this statement correct?

    2.) In the second paragraph of the article, the author states, "The guidance comes at a time when questionable accounting practices have surfaced in the wake of bankruptcy-law filings by...Enron Corp. and Global Crossing Ltd."  Were these recent scandals the reason behind the new auditing standard proposal?  If not, what were the ASB's reasons for proposing the new standard?  (Hint:  again see the actual document at the AICPA's web site.)

    3.) The proposed new standard would mandate specific requirements to search for fictitious entries and perform other tests to search for fraud under certain circumstances.  Compare and contrast this proposal to current auditing requirements to search for fraud.

    SMALL GROUP ASSIGNMENT: The proposed auditing standard requests feedback from respondents to assess each of the major areas of the new standard  (e.g., classification of risk factors for fraud, identification of revenue recognition as the major area for risk of fraud, consideration of the risk of management override of fraud, inquiry of audit committees about fraud, and the attitude of professional skepticism).  Divide the class into small groups and assign one section to each group to draft a response to the questions posed in the exposure draft.

    Reviewed By: Judy Beckman, University of Rhode Island
    Reviewed By: Benson Wier, Virginia Commonwealth University
    Reviewed By: Kimberly Dunn, Florida Atlantic University


    Institute of Internal Auditors (IIA) --- http://www.theiia.org/ 

    Can Internal Auditors truly be independent while being employed by the entity and seen as working for the management to achieve organizational goals? In theory, External Auditors are more likely to be perceived as independent, but is it not the case that Internal Auditors appear to have little or no independence? http://www.accountingweb.com/item/65704 


    Articles on Internal Auditing and Fraud Investigation 
    Web Site of Mark R. Simmons, CIA CFE 
    http://www.dartmouth.edu/~msimmons/
     

    Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.  It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. (Institute of Internal Auditors)

    Fraud Investigation consists of the multitude of steps necessary to resolve allegations of fraud - interviewing witnesses, assembling evidence, writing reports, and dealing with prosecutors and the courts. (Association of Certified Fraud Examiners)

    This site focuses on topics that deal with Internal Auditing and Fraud Investigation with certain hyper-links to other associated and relevant sources. It is dedicated to sharing information.


    Certified Forensic Investigators in Canada --- FAQs --- http://www.homewoodave.com/frequently%20asked%20question.htm 


    "Regulators Check the New Economy's Books," by Karl Schoenberger, The New York Times, August 19, 2001 --- http://college2.nytimes.com/guests/articles/2001/08/19/864842.xml 

    Responding to widespread concerns that investors were not always given reliable financial information in that time of frantic revenue growth, regional offices of the S.E.C., the Federal Bureau of Investigation and the United States attorney's office here are cooperating in a legal crackdown on accounting violations.

    A tough law-enforcement response to accounting irregularities, of course, is not new. In the past year, federal investigators have pursued cases of irregularities at companies like Waste Management (news/quote), Cendant (news/quote) and Sunbeam. But now the government is turning up the heat in Silicon Valley, home to a preponderance of questionable accounting, particularly among software companies, during the Internet boom.

    Over the last four years, nearly one in five accounting restatements — red flags for potential misconduct — have been by companies in California, according to a study by Arthur Andersen, the accounting firm. (Arthur Andersen was itself the recent subject of an S.E.C. civil sanction for the way it audited the books of Waste Management, the trash-disposal company, and agreed to a settlement without admitting or denying civil fraud allegations.) In the same four- year period, the total number of restatements for all industries has nearly doubled, Arthur Andersen's report said.

    So far in the technology sector, federal investigators and prosecutors here have set their sights on relatively small companies, where a high proportion of problems center on what accountants call improper "revenue recognition" — the recording of revenue that does not exist. It could be, for example, from a pending sale that is misclassified as completed, or a service contract in which money has not yet changed hands.

    The Arthur Andersen study of accounting restatements from 1997 to 2000 showed that 27 percent of the restatements nationwide had been filed in the software and computer industries. About 62 percent of the software companies involved had annual gross revenue of less than $100 million.

    The rise of accounting fraud investigations, specifically related to overstatement of revenue, reflects a serious white-collar crime trend in the high-technology sector in recent years, said Leslie B. Caldwell, chief of the securities fraud section for the United States attorney's office here.

    "The pressure to do this in the technology industry was intense because the expectation for growth was so high, and it wasn't sustainable," she said, without commenting on specific cases.

    The inquiry at Indus International focused on revenue for the third quarter of 1999. According to the shareholder lawsuits against the company and former executives, the revenue total included sales derived from "irregular contracts," money that was not received during the quarter in question. Last October, Indus International agreed to settle the suits for $4.3 million without admitting or denying wrongdoing.

    Previously, Ms. Caldwell said, her office waited for the S.E.C. to refer cases for criminal investigation. But now, "we're taking the bull in our own hands," she said.

    "There are a number of matters under investigation of corporations that cooked their books to meet Wall Street's expectations — expectations that the companies themselves created," she added.

    Harris Miller, president of the Information Technology Association of America, a trade group, said accounting problems in the software industry had arisen because of what he called vague rules covering sales of licensing agreements, which resulted in many companies claiming revenue that they expected to receive.

    "The rules for revenue recognition were a bit cloudy, not just for software companies but for any company that delivers services over time," Mr. Miller said. His organization, he said, was not making excuses for executives who intentionally violated regulations. "Yes, there was pressure to drive the top line," he said. "But you can never justify misconduct."

    Ms. Caldwell's unit of seven lawyers, responsible for expediting complicated and paper-intensive securities investigations, was created in February 2000 by Robert S. Mueller, United States attorney for the Northern District of California, whom President Bush chose to serve as director of the F.B.I.

    Matthew J. Jacobs, a spokesman for the United States attorney's office here, said Mr. Mueller had made the prosecution of accounting fraud a major objective because of its prevalence in both economic booms and declines. Mr. Mueller was not available for comment, the United States attorney's office said on Friday.

    In its most prominent case to date, Ms. Caldwell's team obtained indictments last September against two former executives at McKesson, the pharmaceutical and medical technology company based here. The defendants were charged with accounting fraud related to the 1999 merger of McKesson and HBO & Company, a software company based in Atlanta. Prosecutors said $9 billion in shareholder losses resulted. The defendants pleaded not guilty to the charges, and the case is in the pretrial phase.

     

    The F.B.I. and federal prosecutors here are investigating about 50 cases of possible criminal securities fraud in the district, more than a dozen of them focusing on companies suspected of accounting fraud.

    In addition to Indus International, at least six small and medium-size software companies in Northern California are under federal criminal and civil investigation, according to officials. Among them is Critical Path, a San Francisco company that sells e-mail messaging technology to other businesses and reported $135.7 million in sales last year. In February, after an internal investigation that led to the departure of its chief executive and two other executives, Critical Path restated revenue for the third and fourth quarters of 2000, subtracting a total of $19.4 million from what it had claimed. The company's share price plummeted and class-action suits were filed, contending deception and fraud. Critical Path has said it is cooperating with investigators.

    In another case, the S.E.C. filed a civil complaint last September in Federal District Court here against three former executives of the Cylink Corporation (news/quote), a Santa Clara company that makes cryptographic software for computer network security, accusing them of violating accounting rules by recognizing spurious transactions as sales in quarterly earnings statements. The complaint said Cylink recognized more than $900,000 in revenue in the second quarter of fiscal 1998 for sales in which some customers were given a three-month window to cancel their orders.

    "When senior officers are involved in this kind of conduct we're going to hold them responsible," Robert L. Mitchell, head of the S.E.C.'s enforcement office in San Francisco, said when the complaint was issued. "Companies only act through individuals." The S.E.C. settled a separate administrative "cease and desist" proceeding with the corporation. In the civil litigation against three former Cylink executives, each was accused of securities fraud, circumvention of Cylink's internal controls and falsification of records.

    In July, according to court records, one of the former Cylink executives, Thomas Butler, who had been vice president for sales, signed a consent decree, without admitting or denying the charges, agreeing to pay a $100,000 fine and forfeit a $25,000 bonus he had been awarded by Cylink for his sales performance. Litigation against the two other defendants is still pending. Robert Fougner, Cylink's general counsel, said that he and other company executives could not comment on the case.

    In cases in which criminal charges are brought against company executives, potential penalties can be harsh. In addition to fines imposed by the S.E.C., a conviction of an executive on a criminal securities fraud charge can result in a prison sentence of up to 10 years and a fine as high as $1 million. Conviction on a lesser charge, like wire fraud or conspiracy, carries a maximum five- year sentence and $250,000 fine.

    Until recently, the pace of these investigations had been plodding, owing to their complexity and a shortage of resources. For example, Scorpion Technologies, a software company that was based in Los Gatos, Calif., and is now defunct, was accused of fraudulently claiming as much as $3.6 million of its $12.4 million in reported 1991 revenue. The S.E.C. filed civil charges and federal prosecutors indicted company executives on securities fraud charges in 1996. The last of the Scorpion defendants, John T. Dawson, was indicted in 1999. Last November, he pleaded guilty to charges that he had helped create offshore companies that masqueraded as buyers of Scorpion software products. Mr. Dawson's sentencing hearing is set for Oct. 2.

    The Justice Department has a high threshold for criminal prosecution in these cases, with a distinction being made between misleading accounting practices and criminal fraud, Ms. Caldwell said. A suspicious accounting trick, by itself, cannot be the basis for seeking an indictment without other facts establishing deliberate fraud, she said.

    Some major technology companies, including Lucent Technologies (news/quote), have been subject to recent class- action suits contending irregularities in the way the companies accounted for their growing revenue before their businesses weakened. The S.E.C. started examining Lucent's books last November, after the company had disclosed an accounting problem, fired an employee and filed a restatement lowering its revenue for its fiscal year 2000 by $679 million.

    Lucent, however, seems an exception. For now, at least, it appears to be the smaller technology companies that are receiving the most scrutiny.

    Continued at  http://college2.nytimes.com/guests/articles/2001/08/19/864842.xml  


    The Securities and Exchange Commission has filed suit against the founder and five other former top officers of Waste Management Inc. for massive fraud. The complaint charges the defendants with inflating profits to meet earnings targets. http://www.accountingweb.com/item/76329 

    Note that Waste Management just announced that it was changing auditors.  The auditor up to now was (guess?) Arthur Andersen.


    "Channel stuffing" refers to the practice of building inventories in distribution channels. On July 11, 2002 Bristol-Myers Squibb, one of the world's largest pharmaceutical companies, confirmed that the Securities and Exchange Commission (SEC) has launched an "informal inquiry" into its sales practices. http://www.accountingweb.com/item/85930 

    Channel stuffing was (is?) common in the tobacco industry where companies load up sales revenues on deliveries that they know they will have to take back after the freshness dates on packages expire.  More cartons were (are?) sent to customers than can ever be sold before expiration dates.

    You can read about more revenue reporting tricks at http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 


    Lurking in the shadows behind the public spotlight on Andersen and Enron has been a criminal case against BDO Seidman for failing to report that a client had misappropriated investor funds. Legal steps this week follow a settlement in April with a goal of removing all criminal charges against the firm. http://www.accountingweb.com/item/84264/ee2eE47/3825 


    BDO Seidman snags guilty verdict
    National CPA firm BDO Seidman LLP has been found grossly negligent by a Florida jury for failing to find fraud in an audit that resulted in costing a Portuguese Bank $170 million. The verdict opens up the opportunity for the bank to pursue punitive damages that could exceed $500 million.
    "BDO Seidman snags guilty verdict," AccountingWeb, June 26, 2007 ---
    http://www.accountingweb.com/cgi-bin/item.cgi?id=103667

    Bob Jensen's fraud updates are at
    http://www.accountingweb.com/cgi-bin/item.cgi?id=103667


    PricewaterhouseCoopers accused of lax audits of Gazprom

    Welcome to the first issue of BusinessWeek Online's European Insider. This weekly newsletter contains highlights of news, analysis, commentary, and regular columns that cover Europe specifically, as well as other stories with wide international impact.

    **If you would like to keep receiving this free newsletter, please subscribe at http://www.clickaction.net/ClickAction?c=1&p=14109&i=14&func=S_survey . **

     

    EUROPEAN BUSINESS

    Gazprom: Russia's Enron?

    Angry investors are accusing PricewaterhouseCoopers of lax audits of Gazprom. Did the accounting firm ignore the energy giant's insider dealing and shady asset transfers?

    http://www.businessweek.com/magazine/content/02_07/b3770079.htm?c=bweuropefeb13&n=link1&t=email 

    NEWS ANALYSIS

    Can UBS Tame Enron's Wild Traders?

    That's the key question facing the Swiss bank as it prepares to take over the Texas company's energy-trading business

    http://www.businessweek.com/bwdaily/dnflash/feb2002/nf2002026_4221.htm?c=bweuropefeb13&n=link2&t=email 


    "Economic slowdown brings rise in accounting trickery," by Rachel Beck, The Detroit News, August 18, 2001 --- http://detnews.com/2001/business/0108/20/business-272230.htm 

    There are growing concerns that the nation's economic downturn is compelling companies to aggressively seek out ways to make their financial statements look better than they really are.

     Just this year, dozens of companies have been caught in the act. Among them:

       -- Xerox Corp. restated earnings after admitting that it did not properly follow certain accounting rules at a Mexican division.
       -- ConAgra Foods Inc. reduced earnings by more than $100 million after discovering fictitious sales and earnings at one of its subsidiaries.
       -- Kroger Co., the giant supermarket chain, revised down its earnings for 1998-2000, saying executives at its Ralphs Grocery subsidiary conspired to hide cash from auditors and senior management.

    Accounting manipulation has become so prevalent that lawmakers in Washington are considering hearings on the issue, while the Securities and Exchange Commission has seen a sharp rise in the number of companies under investigation.

     "There is a big question looming out there: Why is there such a massive deterioration in accounting practices and can it be stopped?" said Joseph Carcello, an accounting professor at the University of Tennessee.

    Last year there were 156 financial restatements, up from 150 in 1999 and 91 in 1998. The restatements in the last three years add up to more than the combined total for the previous eight years, according to the Financial Executives International, a Morristown, N.J.-based group representing senior corporate financial officers.

    About $31.2 billion in market value was wiped out following restatements, as investors sold stock in such companies, according to FEI.

    Many companies claim restatements don't mean they have broken any rules, saying that accounting standards are open to interpretation. Often courts are left to decide whether laws were violated.  Most problems stem from how revenue is counted. Corporations can falsely boost sales figures by recording revenue before delivering products or asking customers to receive goods before they need them. Sometimes they will claim sales before the goods are sold at all.

    "There is not a "one-shoe-fits-all" mentality that works in accounting," said Mary Ellen Carter, assistant professor of accounting at Columbia University's Graduate School of Business. "Management is in the best position to know what accounting choices capture their business ... but they also know what accounting choices don't."

    Companies hire outside auditors to verify their financial statements, mainly to check if accounting standards are met. Yet accounting firms are known to overlook irregularities, sometimes in an attempt to hold on to their audit contracts and more lucrative consulting services for the same companies.

    In June, accounting titan Arthur Andersen LLP agreed to pay a $7 million civil fine to settle federal allegations that it issued false and misleading audit reports for Waste Management Inc. from 1993 to 1996 that inflated the trash hauler's profits by more than $1 billion. Andersen neither acknowledged nor denied the allegations.

    "There is supposed to be checks in the system that prevent management from being able to do such things, but it is clear that the checks have eroded," said Michael Lange, a partner in Berman DeValerio Pease Tabacco Burt & Pucillo, a Boston law firm that handles investor lawsuits.  At Centennial Technologies, top executives fabricated sales of "Flash 98," a nonexistent product, to friends of former CEO Emmanuel Pinez. The company also created false sales records by shipping fruit baskets to Pinez' friends and recording the shipments as $2 million in revenues.   The maneuvers made it look like Centennial made a profit of $12 million in 1996, when in reality the company lost $28 million.  Based on the earnings reports, shares of Centennial increased 450 percent in 1996 to $55.50 a share. Faraone managed to get in at $46 a share, but after the fraud was uncovered in early 1997, the stock plunged to $3.

    Last year, Pinez was convicted in federal court, and sentenced to five years in prison and a $150 million fine.  Other companies -- blue-chips and startups -- have employed similar schemes.  Sunbeam Corp. and its former CEO Albert Dunlap are accused of creating the illusion of a speedy turnaround after he arrived at the company in 1996. An SEC lawsuit filed in May alleges that the company shifted revenues to inflate losses under the old management and added the sales back to inflate income under Dunlap.  The lawsuit also charges that Sunbeam offered discounts to customers that stocked up on merchandise months ahead of schedule, but failed to disclose that such revenue would hurt future results. Dunlap has denied the allegations.

    Xerox, the troubled business machine maker, restated earnings from 1998 to 2000 in May after acknowledging that its Mexican subsidiary improperly booked sales and hid bad debts. Questions over its accounting practices helped push its stock down more than 60 percent in the last year.

    ConAgra, whose brands include Bumble Bee tuna and Butterball turkeys, said in May that falsified sales at its United Agri Products Cos. subsidiary would force it to lower earnings from 1998 to 2000 by about $123 million. The company and the SEC are informally investigating the accounting practices.