Introductory Quotations 

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

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

• Pipe Dreams: Greed, Ego, and the Death of Enron Robert Bryce, Molly Ivins
• Anatomy of Greed: The Unshredded Truth from an Enron Insider Brian Cruver
• Martha Inc.: The Incredible Story of Martha Stewart Living Omnimedia Christopher M. Byron
• Pigs at the Trough: How Corporate Greed and Political Corruption Are Undermining America Arianna Huffington

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 

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

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.

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.

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.

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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.