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

Benford's Law --- http://en.wikipedia.org/wiki/Benford%27s_law 

Mathematical fraud detection, fraud mathematics, number theory

"I've Got Your Number How a mathematical phenomenon can help CPAs uncover fraud and other irregularities," 
Journal of Accountancy, May 1999, --- 
http://www.journalofaccountancy.com/Issues/1999/May/nigrini.htm 

EXECUTIVE SUMMARY BENFORD'S LAW PROVIDES A DATA analysis method that can help alert CPAs to possible errors, potential fraud, manipulative biases, costly processing inefficiencies or other irregularities. A PHYSICIST AT GE RESEARCH LABORATORIES in the 1920s, Frank Benford found that numbers with low first digits occurred more frequently in the world and calculated the expected frequencies of the digits in tabulated data. CPAs CAN USE BENFORD'S DISCOVERY in business applications ranging from accounts payable to Y2K problems. In addition, subset tests identify small lists of serious anomalies in large data sets, making an analysis more manageable. DIGITAL ANALYSIS IS WELL SUITED to finding errors and irregularities in large data sets when auditors need computer assisted technologies to direct their attention to anomalies.

"The Effective Use of Benford's Law to Assist in Detecting Fraud in Accounting Data," by Cindy Durtchsi, William Hillison, 
and Carl Pacini,
Journal of Forensic Accounting, Vol. 5, 2004, pp. 17-34
http://www.auditnet.org/articles/JFA-V-1-17-34.pdf 

Benford's Law Excel Add-in 
http://benford.softalizer.com/ 

Accounting Teachers About Cooking the Books Get Caught ... er ... Cooking the Books
The media and blogs are conveniently pinning the Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled into Huron.

What I find ironic below is that the Huron Consulting Group is itself a consulting group on technical accounting matters, internal controls, financial statement restatements, accounting fraud, rules compliance, and accounting education. If any outfit should've known better it was Huron Consulting Group ---

http://www.huronconsultinggroup.com/about.aspx

Huron Consulting Group was formed in May of 2003 in Chicago with a core set of 213 following the implosion of huge Arthur Andersen headquartered in Chicago. The timing is much more than mere coincidence since a lot of Andersen professionals were floating about looking for a new home in Chicago. In the past I've used the Huron Consulting Group published studies and statistics about financial statement revisions of other companies. I never anticipated that Huron Consulting itself would become one of those statistics. I guess Huron will now have more war stories to tell clients.

The media and blogs are conveniently pinning the Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled into Huron.
Big Four Blog, August 5, 2009 ---
http://www.blogcatalog.com/blog/life-after-big-four-big-four-alumni-blog/eae8a159803847f6a73af93c063058f9

"Can hobbled Huron Consulting survive this scandal?" by Steven R. Strahler, Chicago Business, August 4, 2009 ---
http://www.chicagobusiness.com/cgi-bin/news.pl?id=35019&seenIt=1

An accounting mess at Huron Consulting Group Inc. that led to the decapitation of top management and the collapse in its share price puts the survival of the Chicago-based firm in jeopardy.

Huron’s damaged reputation imperils its ability to provide credible expert witnesses during courtroom proceedings growing out of its bread-and-butter restructuring and disputes and investigations practices. Rivals are poised to capture marketshare.

“These types of firms have to be squeaky clean with no exceptions, and this was too big of an exception,” says Allan Koltin, a Chicago-based accounting industry consultant. “I respect the changes they made and the speed (with which) they made them. I’m not sure they can recover from this.”

Huron executives declined to comment.

Late Friday, Huron said it would restate results for the three years ended in 2008 and for the first quarter of 2009, resulting in a halving of its profits, to $63 million from $120 million, for the 39-month period. Revenue projections for 2009 were cut by more than 10%, to a range of $650 million to $680 million from $730 million to $770 million.

The company said its hand was forced by its recent discovery that holders of shares in acquired firms had an agreement among themselves to reallocate a portion of their earn-out payments to other Huron employees. The company said it had been unaware of the arrangement.

“The employee payments were not ‘kickbacks’ to Huron management,” the company said.

Whatever the description, the fallout promises to shake Huron to its core. The company’s stock plunged 70% Monday to about $14 per share, and law firms were preparing to mount class-action shareholder litigation.

“If the public doesn’t buy that the house is clean, my guess is some of the senior talent will start to move very quickly,” says William Brandt, president and CEO of Chicago-based restructuring firm Development Specialists Inc. “Client retention is all that matters here.”

Publicly traded competitors like Navigant Consulting Inc. are unlikely to make bids for Huron because of the potential for damage to their own stock. Private enterprises like Mesirow Financial stand as logical employers as Huron workers jump ship.

“There certainly is potential out there for clients and employees who may be looking at different options, but at this point in the process it’s a little early to tell what impact this will have,” says a Navigant spokesman.

Huron’s woes led to the resignation last week of Chairman and CEO Gary Holdren and Chief Financial Officer Gary Burge, both of whom will stay on with the firm for a time, and the immediate departure of Chief Accounting Officer Wayne Lipski.

Mr. Holdren, 59, has a certain amount of familiarity with turmoil.

He was among co-founders of Huron in 2002, when their previous employer, Andersen, folded along with its auditing client Enron Corp. He told the Chicago Tribune in 2007, “Initially, when we’d call on potential clients, they’d say, ‘Huron? Who are you? That sounds like Enron,’ or ‘Aren’t you guys supposed to be in jail? Why are you calling us?’ ”

This year, it’s been money issues dogging Huron. In the spring, shareholders twice rejected proposals to sweeten an employee stock compensation plan.

Mr. Holdren’s total compensation in 2008 was $6.5 million, according to Securities and Exchange Commission filings. Mr. Burge received $1.2 million.

A Huron unit in June sued five former consultants and their new employer, Sonnenschein Nath & Rosenthal LLP, alleging that the defendants were using trade secrets to lure Huron clients to the law firm. The defendants denied the charges. The case is pending in Cook County Circuit Court.

"3 executives at Huron Consulting Group resign over accounting missteps Consulting firm announces it will restate financial results for the past 3 fiscal years,"by Wailin Wong, Chicago Tribune, August 1, 2009 ---
http://archives.chicagotribune.com/2009/aug/01/business/chi-sat-huron-0801-aug01  

Chief Executive Gary Holdren and two other top executives are resigning from Chicago-based management consultancy Huron Consulting Group as the company announced Friday it is restating financial statements for three fiscal years.

Holdren’s resignation as CEO and chairman was effective Monday and he will leave Huron at the end of August, the company said in a statement. Chief Financial Officer Gary Burge is being replaced in that post but will serve as treasurer and stay through the end of the year. Chief Accounting Officer Wayne Lipski is also leaving the company. None of the departing executives will be paid severance, Huron said.

Huron will restate its financial results for 2006, 2007, 2008 and the first quarter of 2009. The accounting missteps relate to four businesses that Huron acquired between 2005 and 2007.

According to Huron’s statement and a filing with the Securities and Exchange Commission, the selling shareholders of the acquired businesses distributed some of their payments to Huron employees. They also redistributed portions of their earnings “in amounts that were not consistent with their ownership percentages” at the time of the acquisition, Huron said.

A Huron spokeswoman declined to give the number of shareholders and employees involved, saying the company was not commenting beyond its statement.

“I am greatly disappointed and saddened by the need to restate Huron’s earnings,” Holdren said in the statement. He acknowledged “incorrect” accounting.

Huron said the restatement’s total estimated impact on net income and earnings before interest, taxes, depreciation and amortization for the periods in question is $57 million.

“Because the issue arose on my watch, I believe that it is my responsibility and my obligation to step aside,” said Holdren.

Huron said the board’s audit committee had recently learned of an agreement between the selling shareholders to distribute some of their payments to a company employee. The committee then launched an inquiry into all of Huron’s prior acquisitions and discovered the involvement of more Huron employees.

Huron said it is reviewing its financial reporting procedures and expects to find “one or more material weaknesses” in the company’s internal controls. The amended financial statements will be filed “as soon as practicable,” Huron said.

James Roth, one of Huron’s founders, is replacing Holdren as CEO. Roth was previously vice president of Huron’s health and education consulting business, the company’s largest segment. George Massaro, Huron’s former chief operating officer who is the board of directors’ vice chairman, will succeed Holdren as chairman.

James Rojas, another Huron founder, is now the company’s CFO. Rojas was serving in a corporate development role. Huron did not announce a replacement for Lipski, the chief accounting officer.

The company’s shares sank more than 57 percent in after-hours trading. The stock had closed Friday at $44.35. Huron said it expects second-quarter revenues between $164 million and $166 million, up about 15 percent from the year-earlier quarter.

The company, founded by former partners at the Andersen accounting firm including Holdren, also said that it is conducting a separate inquiry into chargeable hours in response to an inquiry from the SEC.

Bob Jensen's threads on accounting firm frauds are at
http://www.trinity.edu/rjensen/fraud001.htm

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

December 3, 2009 reply from Francine McKenna [retheauditors@GMAIL.COM]

I, of course, blame Huron mostly on PwC.  That's my schtick.

http://retheauditors.com/2009/08/10/pwc-and-huron-consulting-goodwill-too-good-to-be-true/

But a little bit on the AA legacy.

http://retheauditors.com/2009/08/04/huron-consulting-go-on-take-the-money-and-run/

Francine

Jensen Comment

First, kudos to the Audit Committee (John McCartney, Dubose Ausley and James Edwards) for unearthing this issue and pursuing it fearlessly to its terrible end at Huron Consulting.

From The Wall Street Journal Weekly Accounting Review on August 6, 2009

Huron Takes Big Hit as Accounting Falls Short
by Gregory Zuckerman
Aug 05, 2009
Click here to view the full article on WSJ.com

TOPICS: Accounting Changes and Error Corrections, Advanced Financial Accounting, Mergers and Acquisitions

SUMMARY: Huron Consulting Group, Inc., was formed in May 2002 by partners from the now-defunct Arthur Andersen LLP. "Today, fewer than 10% of the company's employees came directly from Arthur Andersen." The firm provides "...financial and legal consulting services, including forensic-style investigative work...." The firm announced restatement of earnings for fiscal years 2006, 2007, and 2008 and the first quarter of 2009 due to inappropriate accounting for payments made to acquire four businesses between 2005 and 2007. The payments were made after the acquisitions for earn-outs: additional amounts of cash payments or stock issuances based on earning specific financial performance targets over a number of years following the business combinations. However, portions of these earn-out payments were redistributed to employees remaining with Huron after the acquisitions based on specific performance measures by these employees rather than being based on their relative ownership interests in the firms prior to acquisition by Huron. Consequently, those payments are deemed to be compensation expense. The amounts restated thus reduce net income for the periods of restatement and reduce future income amounts, but do not affect cash flows of the firm. Negative shareholder reaction to this announcement by a firm which provides consulting services in this area certainly is not surprising.

CLASSROOM APPLICATION: Accounting for allocation of a purchase price in a business combination is covered in this article.

QUESTIONS: 
1. (Introductory) In general, how do we account for assets acquired in business combinations? How are cash payments and stock issued to selling shareholders accounted for?

2. (Introductory) What are contingent payments in a business combination? What are the two main types of contingent payments and what are their accounting implications?

3. (Introductory) Which of the above 2 types of contingent payments were employed in the Huron acquisition agreements for businesses it acquired over the years 2005 to 2008?

4. (Advanced) Obtain the SEC 8_k filing by Huron for the restatement announcement, dated July 31, 2009, and the filing answering subsequent questions and answers as posted on its web site, dated August 3, 2009 available at http://www.sec.gov/Archives/edgar/data/1289848/000119312509160844/d8k.htm and http://www.sec.gov/Archives/edgar/data/1289848/000128984809000017/exh99-1.htm respectively. What was the problem which made the original acquisition accounting improper? What accounting standard establishes requirements for handling corrections of errors such as this? In your answer, explain why the company discloses that investors must not rely on the previously released financial statements.

5. (Advanced) Refer specifically to the August 3, 2009, filing obtained above. What were the ultimate journal entries made to correct these errors? Explain the components of these entries.

6. (Advanced) The author of this article writes that this error in reporting and subsequently required restatement "...suggests [that] a closer alliance between consulting and accounting isn't such a bad idea." What is the SEC requirement that divides consulting and accounting? Do you think this problem with reporting would have arisen had the firm been allowed to perform both auditing, accounting, and consulting services to its clients? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island

"Huron Takes Big Hit as Accounting Falls Short," by Gregory Zuckerman, The Wall Street Journal, August 5, 2009 ---
http://online.wsj.com/article/SB124943146672806361.html?mod=djem_jiewr_AC

Financial downturns often expose accounting problems at companies, but scandals have been noticeably absent in the recent turmoil. Not so anymore.

Late Friday, Huron Consulting Group Inc. said it would restate the last three years of financial results, withdraw its 2009 earnings guidance and lower its outlook for 2009 revenue. The accounting snafu, which has decimated the company's shares, was all the more surprising because Huron traces its roots to Arthur Andersen LLP, the accounting firm at the heart of the last wave of scandals.

A dose of added irony is that Huron makes its money providing financial and legal consulting services, including forensic-style investigative work, and tries to help clients avoid these types of mistakes.

"One of their businesses is forensic accounting -- they're experts in this," says Sean Jackson, an analyst at Avondale Partners in Nashville, Tenn., who dropped his rating to the equivalent of "hold" from "buy." "Investors are saying, 'These guys had to know what happened with the accounting, or they should have known.'"

Investors fear the accounting issues, which will reduce net income by $57 million for the periods in question, might damage the firm's credibility. Huron's shares fell 70% on Monday, well below the price of its initial public offering in 2004. On Tuesday, Huron shares rose four cents to $13.73.

Huron, based in Chicago, was started in May 2002 by refugees from Arthur Andersen who fled the firm after it was indicted for its role in the collapse of Enron Corp. At the time, the group said that it would specialize in bankruptcy and litigation work, as well as education and health-care consulting, and that it would work with more than 70 former clients of Arthur Andersen. Arthur Andersen's guilty verdict was later overturned, but it was too late to save the firm, which was dismantled. Today, fewer than 10% of the company's employees came directly from Andersen, according to a Huron spokeswoman.

Huron on Friday also announced preliminary second-quarter revenue that was shy of analyst expectations, along with the resignation of Gary Holdren, its board chairman and chief executive, along with the resignations of finance chief Gary Burge and chief accounting officer Wayne Lipski. "No severance expenses are expected to be incurred by the company as a result of these management changes," Huron's regulatory filing said.

After its founding by 25 Andersen partners and more than 200 employees, Huron grew rapidly. It soon had 600 employees and counted firms like Pfizer, International Business Machines and General Motors as clients. Growing scrutiny of accounting firms that also did consulting made Huron's consulting-only business look promising, and shares soared from below $20 five years ago to nearly $44 before the news on Friday.

That is when Huron dropped its bombshell -- one that suggests a closer alliance between consulting and accounting isn't always such a bad idea. Huron is restating financial statements to correct how it accounted for certain acquisition-related payments to employees of four businesses that Huron purchased since 2005.

Huron said the employees shared "earn-outs," or financial rewards based on the performance of acquired units after the transaction was completed, with junior employees at the units who weren't involved in the original sale. They also distributed some of the proceeds based on performance of employees who remained at Huron, not based on the ownership interests of those employees in the businesses that were sold.

The payments were legal. The problem was how Huron accounted for these payouts. The compensation should have been booked as a noncash operating expense of the company. Huron said the payments "were not kickbacks" to Huron management, but rather went to employees of the acquired businesses.

The method the company used to book the payments served to increase its profit. The adjustments reduced the company's net income, earnings per share and other measures, though it didn't affect its cash flow, assets or liabilities.

Part of investors' concern is that they aren't entirely sure what happened at Huron. The company's executives aren't speaking with analysts, some said on Tuesday.

Employees and big producers now might bolt from Huron, Avondale Partners' Mr. Jackson says.

"It's still unclear what happened, but it's almost irrelevant at this point," says Tim McHugh, an analyst at William Blair & Co., who has the equivalent of a "hold" on the stock, down from a "buy" last week. "The company's brand has been impaired and turnover of key employees is a significant risk."

"Shocking Accounting Scandal at Huron Consulting Group," The Big Four Blog, August 5, 2009 ---
http://bigfouralumni.blogspot.com/2009/08/shocking-accounting-scandal-at-huron.html

First, kudos to the Audit Committee (John McCartney, Dubose Ausley and James Edwards) for unearthing this issue and pursuing it fearlessly to its terrible end.

Second, shame on senior management to succumb to greed and not complying strictly with accounting standards

Third, shame also on the auditor, PricewaterhouseCoopers for failing to spot this issue, especially in 2008, when the amount of money kept in goodwill was $31 million, three times the true net income of Huron of only $10 million

Fourth, shame on Huron itself for providing accounting, internal audit, internal controls, Sarbanes, and similar advice to its corporate clients, while following shady accounting practices. Physician, heal thyself first.

Finally, our sympathies for all the hard working and honest Huron consultants who had nothing to do with acquisitions or their accounting, and are likely as mad as anyone that this could happen to them.

Continued in article

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

Bob Jensen's threads on earnings management and creative accounting are at http://www.trinity.edu/rjensen/theory01.htm#Manipulation

Bob Jensen's threads on audit professionalism ---
http://www.trinity.edu/rjensen/Fraud001c.htm

"Predicting Material Accounting Misstatements"
Patricia M. Dechow University of California, Berkeley - Haas School of Business
Weili Ge University of Washington - Michael G. Foster School of Business
Chad R. Larson Washington University, St. Louis
Richard G. Sloan Haas School of Business, UC Berkeley
SSRN, November 16, 2009
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=997483

Abstract:
We examine 2,190 SEC Accounting and Auditing Enforcement Releases (AAERs) issued between 1982 and 2005. We obtain 676 firms that are alleged to have misstated their quarterly or annual financial statements. We examine the characteristics of misstating firms along five dimensions: accrual quality; financial performance; non-financial measures; off-balance sheet activities; and market-based measures. We compare misstating firms to themselves during non-misstatement years and misstating firms to the broader population of all publicly listed firms. The results reveal that during misstatement years, accruals and cash and credit sales are unusually high, while return on assets and the number of employees are declining. In addition, misstating firms finance more of their assets through operating leases and have relatively less PP&E. We find that market pressures appear to affect incentives to misstate. Misstating firms are raising new financing, have higher market-to-book ratios, and strong prior stock price performance. We develop a model to predict accounting misstatements. The output of this model is a scaled logistic probability that we term the F-Score, where values greater than one suggest a greater likelihood of a misstatement.

Bob Jensen's threads on Quality of Earnings, Restatements, and Core Earnings are at
http://www.trinity.edu/rjensen/theory01.htm#CoreEarnings

Accounting Teachers About Cooking the Books Get Caught ... er ... Cooking the Books
The media and blogs are conveniently pinning the Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled into Huron.

What I find ironic below is that the Huron Consulting Group is itself a consulting group on technical accounting matters, internal controls, financial statement restatements, accounting fraud, rules compliance, and accounting education. If any outfit should've known better it was Huron Consulting Group ---
http://www.huronconsultinggroup.com/about.aspx

Huron Consulting Group was formed in May of 2003 in Chicago with a core set of 213 following the implosion of huge Arthur Andersen headquartered in Chicago. The timing is much more than mere coincidence since a lot of Andersen professionals were floating about looking for a new home in Chicago. In the past I've used the Huron Consulting Group published studies and statistics about financial statement revisions of other companies. I never anticipated that Huron Consulting itself would become one of those statistics. I guess Huron will now have more war stories to tell clients.

The media and blogs are conveniently pinning the Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled into Huron.
Big Four Blog, August 5, 2009 ---
http://www.blogcatalog.com/blog/life-after-big-four-big-four-alumni-blog/eae8a159803847f6a73af93c063058f9

"Can hobbled Huron Consulting survive this scandal?" by Steven R. Strahler, Chicago Business, August 4, 2009 ---
http://www.chicagobusiness.com/cgi-bin/news.pl?id=35019&seenIt=1

An accounting mess at Huron Consulting Group Inc. that led to the decapitation of top management and the collapse in its share price puts the survival of the Chicago-based firm in jeopardy.

Huron’s damaged reputation imperils its ability to provide credible expert witnesses during courtroom proceedings growing out of its bread-and-butter restructuring and disputes and investigations practices. Rivals are poised to capture marketshare.

“These types of firms have to be squeaky clean with no exceptions, and this was too big of an exception,” says Allan Koltin, a Chicago-based accounting industry consultant. “I respect the changes they made and the speed (with which) they made them. I’m not sure they can recover from this.”

Huron executives declined to comment.

Late Friday, Huron said it would restate results for the three years ended in 2008 and for the first quarter of 2009, resulting in a halving of its profits, to $63 million from $120 million, for the 39-month period. Revenue projections for 2009 were cut by more than 10%, to a range of $650 million to $680 million from $730 million to $770 million.

The company said its hand was forced by its recent discovery that holders of shares in acquired firms had an agreement among themselves to reallocate a portion of their earn-out payments to other Huron employees. The company said it had been unaware of the arrangement.

“The employee payments were not ‘kickbacks’ to Huron management,” the company said.

Whatever the description, the fallout promises to shake Huron to its core. The company’s stock plunged 70% Monday to about $14 per share, and law firms were preparing to mount class-action shareholder litigation.

“If the public doesn’t buy that the house is clean, my guess is some of the senior talent will start to move very quickly,” says William Brandt, president and CEO of Chicago-based restructuring firm Development Specialists Inc. “Client retention is all that matters here.”

Publicly traded competitors like Navigant Consulting Inc. are unlikely to make bids for Huron because of the potential for damage to their own stock. Private enterprises like Mesirow Financial stand as logical employers as Huron workers jump ship.

“There certainly is potential out there for clients and employees who may be looking at different options, but at this point in the process it’s a little early to tell what impact this will have,” says a Navigant spokesman.

Huron’s woes led to the resignation last week of Chairman and CEO Gary Holdren and Chief Financial Officer Gary Burge, both of whom will stay on with the firm for a time, and the immediate departure of Chief Accounting Officer Wayne Lipski.

Mr. Holdren, 59, has a certain amount of familiarity with turmoil.

He was among co-founders of Huron in 2002, when their previous employer, Andersen, folded along with its auditing client Enron Corp. He told the Chicago Tribune in 2007, “Initially, when we’d call on potential clients, they’d say, ‘Huron? Who are you? That sounds like Enron,’ or ‘Aren’t you guys supposed to be in jail? Why are you calling us?’ ”

This year, it’s been money issues dogging Huron. In the spring, shareholders twice rejected proposals to sweeten an employee stock compensation plan.

Mr. Holdren’s total compensation in 2008 was $6.5 million, according to Securities and Exchange Commission filings. Mr. Burge received $1.2 million.

A Huron unit in June sued five former consultants and their new employer, Sonnenschein Nath & Rosenthal LLP, alleging that the defendants were using trade secrets to lure Huron clients to the law firm. The defendants denied the charges. The case is pending in Cook County Circuit Court.

"3 executives at Huron Consulting Group resign over accounting missteps Consulting firm announces it will restate financial results for the past 3 fiscal years,"by Wailin Wong, Chicago Tribune, August 1, 2009 ---
http://archives.chicagotribune.com/2009/aug/01/business/chi-sat-huron-0801-aug01  

Chief Executive Gary Holdren and two other top executives are resigning from Chicago-based management consultancy Huron Consulting Group as the company announced Friday it is restating financial statements for three fiscal years.

Holdren’s resignation as CEO and chairman was effective Monday and he will leave Huron at the end of August, the company said in a statement. Chief Financial Officer Gary Burge is being replaced in that post but will serve as treasurer and stay through the end of the year. Chief Accounting Officer Wayne Lipski is also leaving the company. None of the departing executives will be paid severance, Huron said.

Huron will restate its financial results for 2006, 2007, 2008 and the first quarter of 2009. The accounting missteps relate to four businesses that Huron acquired between 2005 and 2007.

According to Huron’s statement and a filing with the Securities and Exchange Commission, the selling shareholders of the acquired businesses distributed some of their payments to Huron employees. They also redistributed portions of their earnings “in amounts that were not consistent with their ownership percentages” at the time of the acquisition, Huron said.

A Huron spokeswoman declined to give the number of shareholders and employees involved, saying the company was not commenting beyond its statement.

“I am greatly disappointed and saddened by the need to restate Huron’s earnings,” Holdren said in the statement. He acknowledged “incorrect” accounting.

Huron said the restatement’s total estimated impact on net income and earnings before interest, taxes, depreciation and amortization for the periods in question is $57 million.

“Because the issue arose on my watch, I believe that it is my responsibility and my obligation to step aside,” said Holdren.

Huron said the board’s audit committee had recently learned of an agreement between the selling shareholders to distribute some of their payments to a company employee. The committee then launched an inquiry into all of Huron’s prior acquisitions and discovered the involvement of more Huron employees.

Huron said it is reviewing its financial reporting procedures and expects to find “one or more material weaknesses” in the company’s internal controls. The amended financial statements will be filed “as soon as practicable,” Huron said.

James Roth, one of Huron’s founders, is replacing Holdren as CEO. Roth was previously vice president of Huron’s health and education consulting business, the company’s largest segment. George Massaro, Huron’s former chief operating officer who is the board of directors’ vice chairman, will succeed Holdren as chairman.

James Rojas, another Huron founder, is now the company’s CFO. Rojas was serving in a corporate development role. Huron did not announce a replacement for Lipski, the chief accounting officer.

The company’s shares sank more than 57 percent in after-hours trading. The stock had closed Friday at $44.35. Huron said it expects second-quarter revenues between $164 million and $166 million, up about 15 percent from the year-earlier quarter.

The company, founded by former partners at the Andersen accounting firm including Holdren, also said that it is conducting a separate inquiry into chargeable hours in response to an inquiry from the SEC.

Bob Jensen's threads on accounting firm frauds are at
http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.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

"Heads Up Play With David Einhorn," by Bess Levin, DealBreaker, December 21, 2010 --- Click Here
http://dealbreaker.com/2010/12/heads-up-play-with-david-einhorn-a-qa/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dealbreaker+%28Dealbreaker%29

If you’re going to commit financial fraud, you probably don’t want to find yourself sitting at a table across from David Einhorn, who will know what you’re up to and share it with the world. Similarly, if you’ve never played poker and have only ever had a 15 minute tutorial on the game, you probably should avoid playing with the Greenlight Capital founder, whose vastly superior skills will demonstrate just how much you suck. As I like to live on the edge, yesterday in an undisclosed location, I choose not to heed the wisdom of the latter. Over several hands, Einhorn and I discussed the new edition of his 2008 book, “Fooling Some Of The People, All Of The Time.”

The latest version includes an epilogue, and concludes the story of Allied and Einhorn’s years of trying to get other people to listen when he said something was up. As we now know, Allied’s shares collapsed, Greenlight collected $35 million, and the hedge fund made another big (and correct) call on a bank called Lehman Brothers, whose failure was, according to Einhorn, “the Allied story all over again,” just on a bigger scale, with more resounding consequences. Even after the last crisis, which should have been a wake-up call, Einhorn doesn’t think we’ve changed much and if anything, the reforms passed only “encourage poor behavior and will likely foster an even bigger crisis.” He and I chatted about that exciting event, Quantitative Easing, Steve Eisman’s illicit pleasure of choice and more, plus poker tips for people who really, really need them.

Continued in article

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.