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

 


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

 

Large Public Accounting Firm Lawsuits

Huron Consulting Group Book Cooking Scandal

Helpers for Courses on Fraud and Forensic Accounting

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

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

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

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

Business Ethics --- http://en.wikipedia.org/wiki/Business_ethics
Lots of Good Links

Introductory Quotations 

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

Forensic Accounting

Cooking the Books

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

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

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

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

The Andersen, Enron, and WorldCom Scandals 

The Saga of Auditor Professionalism and Independence 
http://www.trinity.edu/rjensen/Fraud001c.htm

How to Improve Audit Reports
http://www.trinity.edu/rjensen/Fraud001c.htm

Risk-Based Auditing Under Attack  
http://www.trinity.edu/rjensen/Fraud001c.htm 

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

Accounting Scandals
The funny thing is that I never looked up this item before now. Jim Mahar noted that it is a good link.

Accounting Scandals --- http://en.wikipedia.org/wiki/Accounting_scandals

Bob Jensen's threads on such scandals:

Bob Jensen's threads on audit firm litigation and negligence ---
http://www.trinity.edu/rjensen/Fraud001.htm

Current and past editions of my newsletter called Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's fraud conclusions ---
http://www.trinity.edu/rjensen/FraudConclusion.htm

 

Bob Jensen's threads on auditor professionalism and independence are at
http://www.trinity.edu/rjensen/Fraud001c.htm

 

Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance 

Bob Jensen's threads on accounting scandals are in various documents:

Accounting Firms --- http://www.trinity.edu/rjensen/Fraud001.htm

Fraud Conclusion --- http://www.trinity.edu/rjensen/FraudConclusion.htm

Enron --- http://www.trinity.edu/rjensen/FraudEnron.htm

Rotten to the Core --- http://www.trinity.edu/rjensen/FraudRotten.htm

Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

American History of Fraud --- http://www.trinity.edu/rjensen/FraudAmericanHistory.htm

Fraud in General --- http://www.trinity.edu/rjensen/Fraud.htm

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

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

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

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

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

The Saga of Auditor Professionalism and Independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm 

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

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

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

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

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

From the AICPA
Overview of Certified in Financial Forensics (CFF) Credential --- Click Here
http://www.aicpa.org/InterestAreas/ForensicAndValuation/Membership/Pages/Overview Certified in Financial Forensics Credential.aspx 

Accounting Professor Blogs
http://www.trinity.edu/rjensen/ListServRoles.htm 
Example
 FraudBytes (Mark Zimbelman) --- http://fraudbytes.blogspot.com/

 2011 PCAOB Standards and Related Rules
Published by the AICPA
http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/AuditAttest/Standards/PCAOBStandards/PRDOVR~PC-057207/PC-057207.jsp

Accounting Humor


"Corporate Filers Beware: New “RoboCop” Is On Patrol (detecting fraud)," by John Carney and Francesca Harker, BakerHostetler, Forbes, August 9, 2013 ---
http://www.forbes.com/sites/janetnovack/2013/08/09/how-secs-new-robocop-profiles-companies-for-accounting-fraud/

It may not be the superhuman robotic police officer who patrolled the lawless streets of Detroit in the 1987 sci-fi thriller, but corporate filers should be every bit as concerned about the Securities and Exchange Commission’s (“SEC”) new Accounting Quality Model (“AQM”), labeled not-so-affectionately by some in the financial industry as “RoboCop.” Broadly speaking, the AQM is an analytical tool which trawls corporate filings to flag high-risk activity for closer inspection by SEC enforcement teams. Use of the AQM, in conjunction with statements by recently-confirmed SEC Chairman Mary Jo White and the introduction of new initiatives announced July 2, 2013, indicates a renewed commitment by the SEC to seek out violations of financial reporting regulations. This pledge of substantial resources means it is more important than ever for corporate filers to understand SEC enforcement strategies, especially the AQM, in order to decrease the likelihood that their firm will be the subject of an expensive SEC audit.

The Crack Down on Fraud in Accounting and Financial Reporting

In his speech nominating Mary Jo White to take over as chairman of the SEC, President Obama issued a warning: “You don’t want to mess with Mary Jo.”  That statement now seems particularly true for corporate filers given the direction of the SEC under her command. Previously a hallmark of the SEC, cases of accounting and financial-disclosure fraud made up only 11% of enforcement actions brought by the Commission in 2012.  Since taking over as chairman, Ms. White has renewed the SEC’s commitment to the detection of fraud in accounting and financial disclosures.

“I think financial-statement fraud, accounting fraud has always been important to the SEC,” Ms. White said during a June interview “It’s certainly an area that I’m interested in and you’re going to see more targeted resources in that area going forward.” She has backed that statement up with a substantial commitment of resources. In July, the commission announced new initiatives which aim to crack down on financial reporting fraud through the use of technology and analytical capacity, including the Financial Reporting and Audit Task Force and the Center for Risk and Quantitative Analytics (“CRQA”).  These initiatives will put financial reports under the microscope through the use of technology-based tools, the most important of which is RoboCop.

RoboCop: Corporate Profiler

RoboCop’s objective – to identify earnings management – is not a novel one; rather, it is the model’s proficiency that should worry filers.  Existing models on earnings management detection generally attempt to estimate discretionary accrual amounts by regressing total accruals on factors that proxy for non-discretionary accruals.  The remaining undefined amount then serves as an estimate of discretionary accruals.  The fatal flaw in this approach is the inevitable high amount of “false-positives”, rendering it useless to SEC examiners.

The AQM extends this traditional approach by including discretionary accrual factors in its regression.  This additional level of analysis further classifies the discretionary accruals as either risk indicators or risk inducers. Risk indicators are factors that are directly associated with earnings management while risk inducers indicate situations where strong incentives for earnings management exist. Based on a comparison with the filings of companies in the filer’s industry peer group, the AQM produces a score for each filing, assessing the likelihood that fraudulent activities are occurring.

While the SEC will be keeping their factor-composition cards close to the chest, the “builder of RoboCop”, Craig Lewis, Chief Economist and Director of the Division of Risk, Strategy, and Financial Innovation (“RSFI”) at the SEC, has offered several clues about the types of information most likely to catch RoboCop’s attention (Is it just a coincidence that RoboCop’s movie partner was an Officer Lewis?).

“An accounting policy that could be considered a risk indicator (and consistently measured) would be an accounting policy that results in relatively high book earnings, even though firms simultaneously select alternative tax treatments that minimize taxable income,” said Mr. Lewis. “Another accounting policy risk indicator might be a high proportion of transactions structured as ‘off-balance sheet.’”

Frequent conflicts with independent auditors, changes in auditors, or filing delays could also be risk indicators.  Examples of risk inducers include decreasing market share or lower profitability margins. This factor-based analysis allows for model flexibility, meaning examiners are able to add or remove factors to customize the analysis to their specific needs. The SEC will be able to continually update the model to account for the moves filers are taking to conceal their frauds.

Next Generation RoboCop

One of the perceived weaknesses of RoboCop is its dependence on financial comparisons between filers within an industry peer group.  As Lewis points out, “most firms that are probably engaging in earnings management or manipulation aren’t doing it in a way that allows them to stand out from everybody else. They’re actually doing it so they blend in better with their peer group.”

To account for this, the SEC’s current endeavor is expanding the model’s capabilities to include a scan of the “Management Discussion & Analysis” (“MD&A”) sections of annual reports. Through a study of past fraudulent filings, analysts at RSFI have developed lists of words and phrasing choices which have been common amongst fraudulent filers in the past. These lists have been turned into factors and incorporated into the AQM

“We’re effectively going in and we’re saying: what are the word choices that filers make that maximize our ability to differentiate between fraudsters in the past and firms that haven’t had fraud action brought against them yet?” Mr. Lewis explained during a June conference in Ireland.

“So what we’re doing is taking the MDNA section, we’re comparing them to other firms in the same industry group, and we’re finding that in the past, fraudsters have tended to talk a lot about things that really don’t matter much and they under-report all the risks that all the other firms that aren’t having these same issues talk quite a bit about.”

Firms engaged in fraudulent activity have tended to overuse particular words and phrasing choices which are associated with relatively benign activities.  They have also tended to under-disclose risks which are prevalent among a peer group.  When a filer has engaged in similar behavior, RoboCop will flag these types of unusual choices for examiner review.

How the SEC Uses RoboCop

Although the SEC has cautioned that the AQM is not the “robot police coming out and busting the fraudsters,” filers would be wise to understand the power of this tool.  RoboCop is a fully automated system.  Within 24 hours from the time a filing is posted to EDGAR, it is processed by the AQM and the results are stored in a database.  The AQM outputs a risk score which informs SEC auditors of the likelihood that a filing is fraudulent.  The SEC then uses this score to prioritize its investigations and concentrate review efforts on portions of the report most likely to contain fraudulent information.

The results of RoboCop’s analysis will likely become the basis for enforcement scheduling and direction of resources in the near future.  A filing’s risk score will determine whether a filing is given a quick, unsuspecting review, or whether it is thoroughly dissected by an SEC exam team, possibly leading to an expensive audit.  The SEC has also said it plans to use the risk scores as a means of corroborating (or invalidating) the approximately 30,000 tips, complaints, and referrals submissions it estimates will be received each year through its Electronic Data Collection Systems or completed forms TCR.

Continued in article

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


I'm giving thanks for many things this Thanksgiving Day on November 22, 2012, including our good friends who invited us over to share in their family Thanksgiving dinner. Among the many things for which I'm grateful, I give thanks for accounting fraud. Otherwise there were be a whole lot less for me to study and write about at my Website ---


Question
Why is Francine fuming?

"Accountants Skirt Shareholder Lawsuits," by Jonathan D. Glater, The New York Times, December 27, 2012 ---
http://dealbook.nytimes.com/2012/12/27/accountants-skirt-shareholder-lawsuits/

The accountants who service publicly traded companies are likely to have something to be thankful for this year: shareholders are not filing federal securities fraud lawsuits against them.

Just 10 years ago, public company accountants were in the cross hairs of shareholders, regulators and prosecutors. A criminal indictment destroyed Enron’s auditor, Arthur Andersen. Congress created a new regulator, the Public Company Accounting Oversight Board, to oversee the profession. And in dozens of lawsuits in the years afterward, shareholders named accountants as co-defendants when alleging accounting fraud.

But things have changed. According to NERA Economic Consulting, which tracks shareholder litigation and reported on the decline in accounting firm defendants in its midyear report in July, not one accounting firm has been named a defendant so far this year. One of the study’s co-authors, Ron I. Miller, confirmed that the trend has continued at least through November.

That prompts the question, why don’t shareholders sue accountants anymore?

“To the extent that firms have been burned for a lot of money, they have some pretty strong incentives to try to behave,” Mr. Miller said. “That’s the hopeful side of the legal system: You hope that if you put in penalties, that those penalties change people’s actions.”

The less positive alternative, he added, is that public companies “have gotten better at hiding it.”

From 2005 to 2009, according to the NERA report, 12 percent of securities class action cases included accounting firm co-defendants. The range of federal securities fraud class action cases filed per year in that period was 132 to 244.

The absence of accounting firm defendants this year can probably be explained at least in part by court decisions; the Supreme Court has issued rulings, as in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. in 2008, making it more difficult to recover damages from third parties in fraud cases.

So perhaps more shareholder suits would take aim at accountants, if the plaintiffs believed that their claims would survive a defendant’s motion to dismiss. And it is possible that plaintiffs will add accounting firm as defendants to existing cases in the future, if claimants get information to support such claims.

Over all, fewer shareholder class action lawsuits are based on allegations of accounting fraud, as opposed to other types of fraud. The NERA midyear report found that in the first six months of 2012, about 25 percent of complaints in securities class action cases included allegations of accounting fraud, down from nearly 40 percent in all of 2011.

Perhaps the Sarbanes-Oxley Act, the legislative response to the accounting scandals of the early 2000s, actually worked, Mr. Miller said.

“There’s been a lot of complaining about SOX, and certainly the compliance costs are high for smaller publicly traded companies,” he said, but accounting fraud “is to a large extent what SOX was intended to stop.”

Public company accountants still have potential civil liability to worry about, said Joseph A. Grundfest, a former commissioner of the Securities and Exchange Commission who teaches at Stanford Law School. Regulators, he said, are investigating potential misconduct involving accounting firms.

Continued in article

Bob Jensen's threads on lawsuits where CPA firms have not been so lucky ---
http://www.trinity.edu/rjensen/Fraud001.htm

 

 


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

Investor Protection Trust --- http://www.investorprotection.org/
This site provides teaching materials.

The Investor Protection Trust provides independent, objective information to help consumers make informed investment decisions. Founded in 1993 as part of a multi-state settlement to resolve charges of misconduct, IPT serves as an independent source of non-commercial investor education materials. IPT operates programs under its own auspices and uses grants to underwrite important initiatives carried out by other organizations.

Bob Jensen's threads on fraud prevention and fraud reporting ---
http://www.trinity.edu/rjensen/FraudReporting.htm

Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


Question
Why is Francine fuming?

"Accountants Skirt Shareholder Lawsuits," by Jonathan D. Glater, The New York Times, December 27, 2012 ---
http://dealbook.nytimes.com/2012/12/27/accountants-skirt-shareholder-lawsuits/

The accountants who service publicly traded companies are likely to have something to be thankful for this year: shareholders are not filing federal securities fraud lawsuits against them.

Just 10 years ago, public company accountants were in the cross hairs of shareholders, regulators and prosecutors. A criminal indictment destroyed Enron’s auditor, Arthur Andersen. Congress created a new regulator, the Public Company Accounting Oversight Board, to oversee the profession. And in dozens of lawsuits in the years afterward, shareholders named accountants as co-defendants when alleging accounting fraud.

But things have changed. According to NERA Economic Consulting, which tracks shareholder litigation and reported on the decline in accounting firm defendants in its midyear report in July, not one accounting firm has been named a defendant so far this year. One of the study’s co-authors, Ron I. Miller, confirmed that the trend has continued at least through November.

That prompts the question, why don’t shareholders sue accountants anymore?

“To the extent that firms have been burned for a lot of money, they have some pretty strong incentives to try to behave,” Mr. Miller said. “That’s the hopeful side of the legal system: You hope that if you put in penalties, that those penalties change people’s actions.”

The less positive alternative, he added, is that public companies “have gotten better at hiding it.”

From 2005 to 2009, according to the NERA report, 12 percent of securities class action cases included accounting firm co-defendants. The range of federal securities fraud class action cases filed per year in that period was 132 to 244.

The absence of accounting firm defendants this year can probably be explained at least in part by court decisions; the Supreme Court has issued rulings, as in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. in 2008, making it more difficult to recover damages from third parties in fraud cases.

So perhaps more shareholder suits would take aim at accountants, if the plaintiffs believed that their claims would survive a defendant’s motion to dismiss. And it is possible that plaintiffs will add accounting firm as defendants to existing cases in the future, if claimants get information to support such claims.

Over all, fewer shareholder class action lawsuits are based on allegations of accounting fraud, as opposed to other types of fraud. The NERA midyear report found that in the first six months of 2012, about 25 percent of complaints in securities class action cases included allegations of accounting fraud, down from nearly 40 percent in all of 2011.

Perhaps the Sarbanes-Oxley Act, the legislative response to the accounting scandals of the early 2000s, actually worked, Mr. Miller said.

“There’s been a lot of complaining about SOX, and certainly the compliance costs are high for smaller publicly traded companies,” he said, but accounting fraud “is to a large extent what SOX was intended to stop.”

Public company accountants still have potential civil liability to worry about, said Joseph A. Grundfest, a former commissioner of the Securities and Exchange Commission who teaches at Stanford Law School. Regulators, he said, are investigating potential misconduct involving accounting firms.

Continued in article

Bob Jensen's threads on lawsuits where CPA firms have not been so lucky ---
http://www.trinity.edu/rjensen/Fraud001.htm

 

 

 


Legal Research References

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

March 13, 2010 message from David Albrecht [albrecht@PROFALBRECHT.COM]

I know that most Big4 lawsuits are settled out of court. Is there anyplace on the web a listing of Big 4 lawsuits?

Although it might be argued that settling is a business decision, I think a settlement is a symbolic defeat by the CPA firm.

David Albrecht

March 14, 2010 reply from Bob Jensen

Hi David,

 

Lawyers are going to use their very expensive legal research databases. A list of sources in the U.S. is provided in
http://en.wikipedia.org/wiki/Legal_Research

 

 

I know of no free Web reference that records all criminal and civil actions where a Big Four firm is a defendant.
Big Four lawsuits can arise in over 100 nations (recently one of the largest actions in history was filed in Hong Kong, where the Ernst & Young partner in charge was actually jailed) --- http://www.trinity.edu/rjensen/fraud001.htm#Ernst

 

 

The Audit Analytics database has a lot of the auditor lawsuits classified by year ---
http://www.auditanalytics.com/
Examples for 2006 are at http://www.trinity.edu/rjensen/AuditingFirmLitigationNov2006.pdf

 

In the U.S. there are both state and federal jurisdictions. And there can be individual or class action lawsuits brought by plaintiffs. One of the better sources for federal securities class action lawsuits is the Stanford University Law School Federal Class Action Clearinghouse ---
http://securities.stanford.edu/
But this by no means covers most of the lawsuits against large auditing firms. In fact, the database has surprisingly few hits for Big Four firms. Many of the SEC lawsuits are not in this database.

 

Keep in mind that auditors are usually secondary in lawsuits with their clients being the primary defendants. Most of the lawsuits are probably filed in the state where a corporate client is licensed as a corporation, which gives Delaware a lot of lawsuits.

 

For the past ten years I’ve tried to keep tidbits on the highly publicized lawsuits involving large auditing firms ---
http://www.trinity.edu/rjensen/fraud001.htm
Interestingly, auditing firms sometimes win in courts, as recently happened when Ernst & Young emerged as a winner.

 

For lawsuits dealing with derivative financial instruments I also have a tidbit timeline at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

 

Of course the lawyers are going to use their very expensive legal research databases. A list of sources in the U.S. is provided in
http://en.wikipedia.org/wiki/Legal_Research

 

I don’t have time at the moment, but it would be interesting to see how much PwC provides in the Comperio database. Since this database is heavily used by clients, my guess is that Comperio is not a good source for searching auditor lawsuits.

 

There are also instances where an auditing firm is a plaintiff, usually where it is suing a former client.

 

There can also be criminal cases like the recent case where the managing partner of PwC in England was charged with stealing money from PwC to pay for the luxurious tastes of his mistress ---
http://www.trinity.edu/rjensen/fraud001.htm#PwC

 

Bob Jensen

 March 14, 2010 reply from Orenstein, Edith [eorenstein@FINANCIALEXECUTIVES.ORG]

Some limited data regarding litigation for the six largest audit firms (U.S. data only, as of 2007) was provided by the Center for Audit Quality (CAQ) - an affiliate of the AICPA, in reports to the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP).

For example, among CAQ's  reports to ACAP, CAQ's Jan. 23, 2008 report to ACAP included a section on Litigation. A caveat in the CAQ report states:

"Information regarding litigation is highly sensitive, because of the risk that the data could be used

unfairly against a firm in litigation. For these reasons, the data presented in this report were gathered from the six audit firms and aggregated (the data relate only to claims against the six U.S. firms and do not include claims in U.S. courts against any non-U.S. firms that are members of the same networks). To prevent "reverse engineering" of the data to tie specific facts to a specific lawsuit or firm, the data have been grouped - for example, aggregating data from several different years. The litigation data discussed in this report do not include information relating to government inquiries, investigations, or enforcement actions.31"  [Footnote 31 in the CAQ report states: "2007 litigation data in this report reflect submissions by five firms of information as of December 20, 2007 and by one firm of information as of November 30, 2007."]


Additionally, CAQ's Second Supplement to ACAP (4/16/08) included data on private actions and shareholder class actions.

Treasury's ACAP published its final report  in 2008; here is related summary in FEI blog.

Edith Orenstein
Director of Accounting Policy Analysis and Communications
Financial Executives International (FEI)
1250 Headquarters Plaza, West Tower, 7th Floor
Morristown, NJ  07932
(973) 765-1046
eorenstein@financialexecutives.org
web: www.financialexecutives.org
blog: www.financialexecutives.blogspot.com
twitter: www.twitter.com/feiblog


 

March 14,2010 message from Francine McKenna [retheauditors@GMAIL.COM]

Dave,

I try to keep up as best I can on litigation against the auditors. It's not easy since I am not an attorney and do not have access to their databases.  I depend of the "kindness of lawyer strangers" to help me often.  

It's not easy since auditors are often one of many defendants in a class action lawsuit , for example. Often news reports or other blog posts do not include all the defendants if auditors are not the focus of the story.  Which they are often not.  Which is why my site is useful.

 I look at the lists compiled by Kevin LaCroix on his site DandODiary.com of securities litigation and class action suits, Francis Pileggi of DelawareLitigation.com also mentions suits against or by auditors (as in the Deloitte suit against their own Vice Chairman ) when they make it to Delaware Chancery Court. They both keep an eye out for me now and it was Frans=cis who alerted me to both the judgement against Deloitte's Flanagan and the recent "in pari delicto" case against pwC.

I also use a site called Justia to look for all other suits against the firms, often focused on suits in Federal Courts.  
http://dockets.justia.com/

The Stanford Law School database is also useful for getting the actual filings and documents. http://securities.stanford.edu/

Interestingly PwC does a great job tracking everyone else's 10b-5 litigation  - except their own.  You will never see auditor litigation broken out in their report. --- http://10b5.pwc.com/public/Default.aspx

Bob is right to say that there's a whole slew of suits, at times very large and important that are outside of the US, such as the ones in Hong Kong against EY.  For that I count on Google Alerts (and my blog readers) to alert me, sometimes at odd hours of the night, of new developments.

http://retheauditors.com/category/auditor-litigation/

http://retheauditors.com/2009/07/11/mckenna-on-auditor-litigation-securities-dockets-mid-year-update/

fm


Carl Olson's CPA Watch --- http://cpawatch.org/index.htm
What has gone wrong with CPA auditors? --- http://cpawatch.org/CPAsGoneWrong.htm


"Audit Flaws Revealed, at Long Last," by Floyd Norris, The New York Times, October 20, 2011 ---
http://www.nytimes.com/2011/10/21/business/deloittes-failings-revealed-but-only-after-3-years.html?_r=1
Thank you Beryl Simonson for the heads up.

With hindsight, we now know that auditors in 2007 should have been looking carefully at bank books.

They should have drilled into allowances for loan losses, and they should have been especially alert for signs that the banks were playing games when they sold loans. Auditors should have carefully reviewed how the banks were valuing their mortgage-backed securities and loans that they planned to sell.

It won’t surprise you to learn that in at least one case, the auditor seems to have done a pretty poor job.

What may be surprising is that the Public Company Accounting Oversight Board figured that out at the time, and was harshly critical of Deloitte & Touche, one of the Big Four audit firms, for not doing the work to check assumptions in those areas and for being overly reliant on whatever the bank’s management said was proper.

Those comments were made after the board’s inspectors reviewed Deloitte’s audit of a bank’s 2006 results, as part of the annual inspection of the firm. The inspection of 61 Deloitte audits concluded in November 2007.

Had the auditor taken the criticism to heart, it might have gone back in and checked more thoroughly.

But it did not.

The bank was not named in the report, even in the previously confidential part released this week.

I thought it might have been Washington Mutual, a Deloitte client that collapsed in September 2008, but Deloitte says that was not the case.

Deloitte, in its response to the board, stated that at the bank, “the audit procedures performed, the conclusions reached and the related documentation were appropriate in the circumstances.”

In other words, Deloitte concluded the board simply did not understand what it was talking about.

All that became public in early 2008, when the censored version of the board’s report became public. But it was little remarked on at the time. Now we have seen the rest of the report, and it is even more critical.

The report said its inspections indicated “a firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations.”

Deloitte responded by denying almost everything. It did not like the “second guessing” shown by the regulators. It said “we strongly take exception” to the observation about its culture, which it said was simply wrong.

In any case, the firm concluded, “there were only a limited number of instances,” not nearly enough to justify questioning Deloitte’s quality controls.

The board inspectors found problems in 27 of the 61 Deloitte audits.

The Sarbanes-Oxley law that established the board included provisions to protect the public images of audit firms. If a board inspection found problems with the quality control systems, that was to be kept confidential unless the firm did not move to fix the problems over the following year. Then the release could be delayed while the firm tried to persuade the board to keep the information private. If that effort failed, the firm could appeal to the Securities and Exchange Commission.

Only then could the report be made public. So in this case, it took 41 months from the issuance of the report — more than three years — for Deloitte’s clients to learn of the problem.

The board also has the authority to file enforcement actions against auditors, but those, too, are private until the S.E.C. rules on an appeal. It is as if charges of robbery had to be kept confidential until all appeals had been completed. There is no way to know if the accounting board has taken action against anyone. An auditor that the board deems to be in violation of rules may keep working for years while secret proceedings continue.

Continued in article

Jensen Comment
Norris is not telling us subscribers on the AECM anything we've not already stated before. But it's important for the world to know more about the warts of CPA auditors.

I myself have repeatedly hit the failure of audit firms to properly insist on realistic loan losses in my threads at
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
My archives of CPA lawsuits on these issues are at
http://www.trinity.edu/rjensen/Fraud001.htm

My all-time heroes Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is an exercise in writing fiction: Watch the video! (a bit slow loading) Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets" "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 --- http://makemarketsbemarkets.org/modals/report_off.php 

Recently I wrote the following tidbit about audit reform:
 

If audit reform swaggered into a Luckenbach, Texas saloon, it would be "all hat and no horse"
The ladies of the night would die laughing at that "itty-bitty thang" that walked in
And it would need a ladder to peek over the top of the spittoon


How much voting power lies in shareholder hands?
Teaching Case from The Wall Street Journal Accounting Weekly Review on April 27, 2012

Memo to Citi Directors: Wake Up on Pay
by: Francesco Guerrera
Apr 24, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Executive Compensation, SEC, Securities and Exchange Commission

SUMMARY: At Citigroup's annual meeting on April 17, 2012, shareholders voted not to support the company's executive compensation plan. The article is written by Francesco Guerrera, the WSJ's Money & Investing editor; this piece is an opinion item and students are asked to identify that fact. The related video specifically identifies the Citigroup executive pay proposal on which shareholders voted as bad "corporate governance" both for proposing that top management be given bonuses based on a low threshold of performance and for poorly explaining the reason behind that pay. Questions ask the students to access SEC filings of both the proxy statement filed prior to the annual meeting and the report of the results of the meeting.

CLASSROOM APPLICATION: The article is useful in any class covering executive compensation and SEC disclosure in undergraduate or graduate financial accounting or auditing classes.

QUESTIONS: 
1. (Advanced) Access the Citigroup filing of its proxy statement for this annual meeting on Schedule 14a on March 8, 2012, available at http://www.sec.gov/Archives/edgar/data/831001/000119312512104047/0001193125-12-104047-index.htm. By reviewing the Table of Contents, identify the items that were planned for consideration at the annual meeting.

2. (Advanced) Access the Citigroup filing with the SEC on Form 8-K on April 25, 2012 describing the outcome of its shareholder meeting on. http://www.sec.gov/Archives/edgar/data/831001/000114420412022937/v310009_8k.htm. What outcomes were reported to the SEC?

3. (Introductory) Based on the discussion in the article, what was the most significant outcome of the Citigroup annual meeting?

4. (Advanced) How does the result of this shareholder vote impact what Citigroup may pay its top executives? In your answer, define the term "corporate governance."

5. (Introductory) Who is the author of this article? Do you feel that the author's opinion on this matter is expressed in the article? Support your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Memo to Citi Directors: Wake Up on Pay," by: Francesco Guerrera, The Wall Street Journal, April 24, 2012 ---
http://online.wsj.com/article/SB10001424052702303592404577361762087563238.html?mod=djem_jiewr_AC_domainid

Citigroup Inc.'s C +0.59% shareholders have spoken but is anybody listening?

The rejection of Citi's compensation plan at last week's annual investor meeting is more than a stinging rebuke for its board and management.

Citigroup Inc.'s C +0.59% shareholders have spoken but is anybody listening?

The rejection of Citi's compensation plan at last week's annual investor meeting is more than a stinging rebuke for its board and management.

Citigroup Inc.'s C +0.59% shareholders have spoken but is anybody listening?

The rejection of Citi's compensation plan at last week's annual investor meeting is more than a stinging rebuke for its board and management.

Sure, Mr. Pandit can share with Uncle Sam the credit for pulling Citi back from the brink.

But Citi's shares are down more than 88% since he took over. The stock has underperformed not just healthier banks like J.P. Morgan Chase JPM +1.46% & Co. and Wells Fargo WFC +1.45% & Co. but also fellow problem child Bank of America Corp. BAC +0.12% And dividend increases and share buybacks for Citi have been halted by regulators, leaving shareholders with little to celebrate.

This is no time for lucrative victory laps.

If the pay bump is to compensate Mr. Pandit for two lean years, let's remember that the decision to take $1 in salary was his. And that he received at least $165 million in 2007 when Citigroup bought his hedge fund—only to wind it down 11 months later amid mediocre returns.

The second argument is that, with the profit-sharing arrangement, Citigroup's directors sought to provide Mr. Pandit with "a financial incentive to remain as CEO."

That's what Citi's blog says. What it really means is that, after years during which some regulators, directors and shareholders privately questioned Mr. Pandit's leadership of the company, the board of directors wanted to back him unequivocally.

That's understandable but if directors are so confident in his ability, they should set much more demanding performance targets.

Not once has the board explained how it arrived at the $12 billion figure or how it has calculated the profit shares of each executive.

Mr. Parsons and fellow directors are at fault on this: They should have dealt with shareholders' concerns long before last week's embarrassing vote. Michael O'Neill, the banking veteran who replaced Mr. Parsons, will have to pick up the pieces.

Mr. O'Neill, who will also head the board's compensation committee, should review the performance targets, discuss them with shareholders and then change them.

My suggestion: Set relative metrics that compare Citigroup's profits to its peers; have more than one target, so different levels of performance are compensated differently; and make sure that the CEO's bonus is tied to more-demanding hurdles than his underlings.

Continued in article

Bob Jensen's threads on corporate governance ---
http://www.trinity.edu/rjensen/Fraud001.htm#Governance  

Years of Creative Accounting by CitiGroup
My all-time heroes Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is an exercise in writing fiction: Watch the video! (a bit slow loading) Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets" "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 --- http://makemarketsbemarkets.org/modals/report_off.php 

Bob Jensen's threads on outrageous executive compensation ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

 

 


"Recent Comments On European and U.S. Audit Reform," by Francine McKenna, re:TheAuditors, October 4, 2011 ---
http://retheauditors.com/2011/10/04/recent-comments-on-european-and-u-s-audit-reform/

The topic of audit industry reform is hot again. OK, that’s relative to where you stand on what’s hot. But in the world of legal and regulatory compliance and auditors the only thing hotter would be a significant development in the New York Attorney General’s case against Ernst & Young.

Here in the U.S. the PCAOB has been busy.  I’ll give them – mostly Chairman James Doty and the Investor Advisory Group led by Board Member Steve Harris – credit for that.  The Investor Advisory Group – rather, the boldest amongst them – recently sent a letter to the PCAOB to provide comments on the PCAOB’s June 21, 2011 Concept Release entitled Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements and Related Amendments to PCAOB Standards.

It is worth noting that a number of other parties agree that the current form of the auditor’s report fails to meet the legitimate needs of investors.  First, the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP) called for the PCAOB to undertake a standard-setting initiative to consider improvements to the standard audit report.  The ACAP members support “… improving the content of the auditor’s report beyond the current pass/fail model to include a more relevant discussion about the audit of the financial statements.”

Second, surveys conducted by the CFA Institute in 2008 and 2010 indicate that research analysts want auditors to communicate more information in their reports.

Finally, even leaders of the accounting profession have acknowledged that the audit report needs to become more relevant.  In testimony before ACAP, Dennis Nally, Chairman of PwC International stated, “It’s not difficult to imagine a world where the … trend to fair value measurement — lead one to consider whether it is necessary to change the content of the auditor’s report to be more relevant to the capital markets and its various stakeholders.”

Finally, leaders of the accounting profession have previously stated that changes to the audit report should reflect investor preferences.  In their 2006 White Paper, the CEOs of the six largest accounting firms stated, “The new (reporting) model should be driven by the wants of investors and other users of company information …” (their emphasis).

Before we turn to a discussion of the IAG investor survey, we believe it is important to underscore the fundamental but often overlooked fact that the issuer’s investors, not its audit committee or management team or the company itself, are the auditor’s client. It is therefore not only appropriate, but essential, that investors’ views and preferences take center stage as the PCAOB considers possible changes to the format and content of the audit report.

In the meantime, I’ve written two articles about the proposals on auditor regulation before the European Commission.

In Forbes, I told you not to count on Europe to reform the audit model or auditors, in general.

The audit industry is reportedly under siege in Europe and on the verge of being broken up, restrained, and rotated until all the good profit is spun out.

This is neither a foregone conclusion nor highly likely.

The European Commission’s internal markets commissioner Michel Barnier is talking tough, but the rhetoric should be no surprise to those who have been following the European response to the financial crisis closely…

Please read the rest at Forbes.com, “Don’t Count On Europe To Reform Auditors And Accounting”.

In American Banker, I focused on the impact of auditor reforms on financial services.  Why is the European Commission taking such strong action now? Why is the U.S. lagging so far behind?

The clamor for accountability from the auditors for financial crisis failures and losses has been much louder, much stronger, and going on much longer in the U.K. and Europe, than in the United States. Barnier’s most dramatic proposals are viewed by most commenters as a reaction to the bank failures. “Auditors play an essential role in financial markets: financial actors need to be able to trust their statements,” Barnier told the Financial Times. “There are weaknesses in the way the audit sector works today. The crisis highlighted them.”

There’s is a concern on both sides of the Atlantic over long-standing auditor relationships.

The average auditor tenure for the largest 100 U.S. companies by market cap is 28 years. The U.S. accounting regulator, the PCAOB, highlighted the auditor tenure trap in its recent Concept Release on Auditor Independence and Auditor Rotation. According to The Independent, quoting a recent House of Lords report, only one of the FTSE 100 index’s members uses a non-Big Four firm and the average relationship lasts 48 years. Some of the U.S. bailout recipients — General Motors, AIG, Goldman Sachs, Citigroup — and crisis failure Lehman had as long or longer relationships with their auditors…

Please read the rest at American Banker, “Bank Debacles Drive Europe to Raise the Bar on Audits”.

Continued in article

Bob Jensen's threads on auditor professionalism and independence are at
http://www.trinity.edu/rjensen/Fraud001c.htm


 

 


College Business Officers Hear a Fraud Detective's Cautionary Tales of True Crime," by Scott Carlson, Chronicle of Higher Education, June 12, 2011 ---
http://chronicle.com/article/College-Business-Officers-Hear/128205/

It's not often that a conference session feels like a true-crime show. And yet Angela Morelock, a forensic accountant with the accounting firm BKD, delivered material like that and more in a talk here that detailed the bad, the really bad, and the mind-bogglingly bad in the fraud and embezzlement cases that her firm has investigated.

Her presentation was designed to educate administrators, gathered here at the annual meeting of the National Association of College and University Business Officers, about common fraud scams and patterns that might indicate something is wrong.

But before going into the statistics, she posted on a screen a ditty, scribbled out by, and found in the office of, a fraud perpetrator in the accounting office of a pharmacy chain: "Oh, what a tangled web we weave when first we practice to deceive. But once we've practiced for a while, oh my, how we've improved our style!"

"Fraud cases, every single time, are hindsight 20/20," she said. "It's a little bit amazing to me—the subtle clues, the small things, that we will miss. Tell me how this hangs in the cubicle of someone in an accounting department for an extended period of time without someone asking about it."

That was one of the big takeaways from Ms. Morelock's talk: Fraud perpetrators will leave lifestyle clues that they are up to no good. In her experience, criminals tend to follow recognizable patterns. They like to give gifts, and they are compulsive shoppers. Gambling problems are common among them.

They tend to be long-term employees, who start small and rationalize their thefts over time. They can be male or female, but statistics say that the big losses usually happen with more-educated, high-ranking employees. That is in part because there are all sorts of checks and controls on the financial transactions handled by low-level employees, whom some assume to be more prone to fraud and theft. However, the supervisors of those employees are often not subjected to the same controls and scrutiny, opening a window for abuse. Ms. Morelock told of a supervisor at one business who collected the cash drawers from various clerks, and took one home every day for 10 years, until she had collected $1.3-million.

And then there are the things that just don't add up, Ms. Morelock said, and she related another of her many war stories: A bookkeeper at a church organization went on vacation, and a diamond certificate in her name arrived at her work, which set off alarm bells. Right off the bat, Ms. Morelock found that the employee, who was making $45,000 a year, had purchased a $390,000 house, which her co-workers knew about.

The employee had paid for the house in cash, skimmed off of the organization. And she bought a lot more, like big-screen TV's, video games, and appliances. "These lifestyle clues are the best early warning signs," Ms. Morelock said. Schemes Involving Vendors

One common oversight, where fraud dwells, is where employees choose vendors. "That power, to be the one who chooses the vendor, is a significant power that we often don't focus on enough," Ms. Morelock said. "That is where fake vendors, conflicts of interests, kickback schemes, and straw-vendor schemes originate."

Here is how a straw-vendor scheme works, based on another real case: A graphic designer can pick a printer for his work with an organization. He sets up his friend, who is not a printer, as the vendor and places printing orders through the friend. The friend goes out and finds a real printer to handle the actual printing. The friend gets the job printed and bills the organization at an inflated price, and the organization pays. Then the graphic designer and his friend pay the printer's lower cost, and split the profits.

For Ms. Morelock, the case proves that you can find fraud in the most unlikely corners of an organization. "Most of us would look a graphic designer and think, What kind of fraud risk could that person possibly be?" she said. In the case Ms. Morelock uncovered, the graphic designer and his friend netted $600,000 in their five-year scam.

Fraud cases in higher education tend to be lower than in other organizations, she pointed out, but certain parts of higher education have been more troublesome. "We have seen a lot of athletic-department scams recently, that go everywhere from travel expenses and ATM cards to misuse of booster funds," she said. "Although many organizations consider booster funds to be separate from the college or university, guess whose name hits the front page of the paper when there is a problem?" she said. She also alluded to a ticket-scalping scandal that has plagued the University of Kansas.

Continued in this article

Jensen Comment

Frauds and thefts can take place even where we least expect ti.

Church and School Embezzlement --- http://churchembezzlement.blogspot.com/

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

 


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

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


COSO Releases Latest Fraud Study. May 21, 2010 ---
http://financialexecutives.blogspot.com/2010/05/sec-fasb-pcaob-testimony-posted-for.html

Yesterday, COSO announced the release of a new research study, Fraudulent Financial Reporting: 1998-2007, that examines 347 alleged accounting fraud cases identified by a review of U.S. Securities and Exchange Commission (SEC) Accounting and Auditing Enforcement Releases (AAER's) issued over a ten-year period ending December 31, 2007.

The COSO Fraud Study updates COSO's previous 10-year study of fraud and was led by the same core academic research team as COSO's previous Fraud Study.

COSO's Fraud Study provides an in-depth analysis of the nature, extent and characteristics of accounting frauds occurring throughout the ten years, and provides helpful insights regarding new and ongoing issues needing to be addressed.

COSO is more formally known as The Committee of Sponsoring Organizations of the Treadway Commission, and the five sponsoring organizations are the
AAA, AICPA, FEI, IIA, and IMA. More COSO info is available on their website, www.coso.org.
 

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

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


University of Illinois at Chicago Report on Massive Political Corruption in Chicago
"Chicago Is a 'Dark Pool Of Political Corruption'," Judicial Watch, February 22, 2010 ---
http://www.judicialwatch.org/blog/2010/feb/dark-pool-political-corruption-chicago

A major U.S. city long known as a hotbed of pay-to-play politics infested with clout and patronage has seen nearly 150 employees, politicians and contractors get convicted of corruption in the last five decades.

Chicago has long been distinguished for its pandemic of public corruption, but actual cumulative figures have never been offered like this. The astounding information is featured in a lengthy report published by one of Illinois’s biggest public universities.

Cook County, the nation’s second largest, has been a “dark pool of political corruption” for more than a century, according to the informative study conducted by the University of Illinois at Chicago, the city’s largest public college. The report offers a detailed history of corruption in the Windy City beginning in 1869 when county commissioners were imprisoned for rigging a contract to paint City Hall.

It’s downhill from there, with a plethora of political scandals that include 31 Chicago alderman convicted of crimes in the last 36 years and more than 140 convicted since 1970. The scams involve bribes, payoffs, padded contracts, ghost employees and whole sale subversion of the judicial system, according to the report. 

Elected officials at the highest levels of city, county and state government—including prominent judges—were the perpetrators and they worked in various government locales, including the assessor’s office, the county sheriff, treasurer and the President’s Office of Employment and Training. The last to fall was renowned political bully Isaac Carothers, who just a few weeks ago pleaded guilty to federal bribery and tax charges.

In the last few years alone several dozen officials have been convicted and more than 30 indicted for taking bribes, shaking down companies for political contributions and rigging hiring. Among the convictions were fraud, violating court orders against using politics as a basis for hiring city workers and the disappearance of 840 truckloads of asphalt earmarked for city jobs. 

A few months ago the city’s largest newspaper revealed that Chicago aldermen keep a secret, taxpayer-funded pot of cash (about $1.3 million) to pay family members, campaign workers and political allies for a variety of questionable jobs. The covert account has been utilized for decades by Chicago lawmakers but has escaped public scrutiny because it’s kept under wraps. 

Judicial Watch has extensively investigated Chicago corruption, most recently the conflicted ties of top White House officials to the city, including Barack and Michelle Obama as well as top administration officials like Chief of Staff Rahm Emanual and Senior Advisor David Axelrod. In November Judicial Watch sued Chicago Mayor Richard Daley's office to obtain records related to the president’s failed bid to bring the Olympics to the city.

Bob Jensen's threads on the sad state of governmental accounting are at
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

Bob Jensen's threads on political corruption are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

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

 

 


Forensic Accounting Course Materials

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

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

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

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

Any suggestions would be helpful -

Thank you,
Eileen

November 3, 2009 reply from Bob Jensen

Hi Eileen,

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

I also look for real world cases and illustrations.

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

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

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

Accounting and Auditing

Computers and Technology

Criminology and Ethics

Fraud Investigation

Fraud Schemes

Interviewing and Reporting

Legal Elements of Fraud

Spanish Titles

Bob Jensen

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

    This article has been revised to reflect the following correction:

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

  •  


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

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

    FRAUD / FORENSIC ACCOUNTING

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

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

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

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

     


     

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

    Corporate Fraud Reporting


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

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

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

    Figure 1. Demands for bribery, by region 3

    Table 1. Countries most affected by bribery 4

    Figure 2. Experience of bribery worldwide, selected services 5

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

    Figure 3. Experience with bribery, by service 6

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

    Figure 5. Comparing Bribery: 2006 and 2007 8

    CORRUPTION IN KEY INSTITUTIONS: POLITICAL PARTIES AND THE

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

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

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

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

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

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

    Figure 9. Corruption will get worse, worldwide 11

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

    PUBLIC SCEPTICISM OF GOVERNMENT EFFORTS TO FIGHT CORRUPTION IN

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

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

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

    APPENDIX 1: THE GLOBAL CORRUPTION BAROMETER 2007 QUESTIONNAIRE15

    APPENDIX 2: THE GLOBAL CORRUPTION BAROMETER – ABOUT THE SURVEY17

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

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

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

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

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

    Table 4.3: Views of corruption in the future 23

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

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

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

     


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

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

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

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

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

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

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

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

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

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

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


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

    Dear Bob,

    Here is an item for your website.

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

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

    Regards

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

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

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

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

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

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

     


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

    Labor Unions Resist Efforts to Require Truthful Financial Disclosures  

    Tax Fraud and Scams 

    How Technology Can Be Used to Reduce Fraud  

    Health Care and Medical Billing Fraud  

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

    Corporate Governance is in a Crisis 

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

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

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

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

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

    Are Women More Ethical and Moral?  

    Example from the Stanford Law School Database

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

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

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

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

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

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

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

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

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

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

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


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

     

    Selected Scandals in the Largest Remaining Public Accounting Firms

    The Sad State of Professional Discipline in Public Accountancy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Large Public Accounting Firm Lawsuits

     

     

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

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

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

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

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

     

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

    •  

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

    Bob Jensen's threads on professionalism and independence are at --- http://www.trinity.edu/rjensen/Fraud001c.htm 

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

    The Saga of Auditor Professionalism and Independence ---
    http://www.trinity.edu/rjensen/Fraud001c.htm

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

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

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

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

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

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

     


     

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

     

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

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

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

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

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

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

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

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

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


    Introductory Quotations 

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

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


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

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

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

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

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

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

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

    Continued in article


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


     

     

    Selected works of FRANK PARTNOY
    Bob Jensen at Trinity University

     

    1.  Who is Frank Partnoy?

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

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

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

     

    What did I learn most from Partnoy?

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

    Page #173

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

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

     

    He later introduces Chapter 7 of Infectious Greed as follows:

    Pages 187-188

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

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

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

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

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

     

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

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

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

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

     

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

     

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

    2.  What really happened at Enron?


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

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

     

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

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

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


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


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


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


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

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

     

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

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

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

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

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

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

    Preface

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

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

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

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

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

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

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

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

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

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

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

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

     

     


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

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

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

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

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

    Quotations

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


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


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

    Question
    Why is there so much investment fraud?

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

    As Far as Regulations Go

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

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

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

     

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


    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


    Andersen Partners in the Aftermath of Enron:  Protiviti and Huron in Particular

    Some Andersen partners stayed on at the Andersen firm (that is no longer an auditing firm) and some continued to make their living at Andersen's training facility in St. Charles, Illinois. In 2005, the U.S. Supreme Court overturned Andersen's conviction for obstruction of justice ---
    http://en.wikipedia.org/wiki/Arthur_Andersen_LLP_v._United_States

    The U.S. Supreme Court overturned the conviction of the Arthur Andersen accounting firm for destroying documents related to its Enron account before the energy giant's collapse. The ruling is not based upon guilt or innocence. It is based only on a technicality in the judge's instructions to the jury. The ruling will not lead to a revival of this once great firm that in the years preceding its collapse became known for some terrible audits of firms like Waste Management, Enron, Worldcom and other clients.  For details see http://news.bbc.co.uk/2/hi/business/4596949.stm
    Also see http://accounting.smartpros.com/x48441.xml

    Former Andersen partners who formed two consulting firms are not fairing so well at the moment. But the things at Protivii are a bit more rosy than things at Huron.

    First there's the huge book cooking (creative accounting) scandal at Huron Consulting that has now sucked in PwC as well ---
     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.
    See the module above.

    Protiviti was formed largely of Andersen's former internal auditing consultants and has a history outlined below.

    "Protiviti Responds to Tough Financial Crisis, Now More Bullish," The Big Four Blog, February 8, 2010 ---
    http://www.bigfouralumni.blogspot.com/

    Protiviti, as many will recall, was principally Andersen’s internal audit service line, and these professionals joined the multi-billion dollar organization Robert Half International ($RHI) in 2002 to form their own division, separate from the staffing units for which RHI is better known for – Accountemps, Office Team and Management Resources. Starting with just over 700 employees in 25 locations, Protiviti has certainly grown in size and scope, and now is a global business consulting and internal audit firm providing risk, advisory, and transaction services; with 2,500 professionals in 62 locations in 17 countries worldwide. The Protiviti division accounts for 13% of total parent company RHI revenues; and within Protiviti itself, international operations were 30% of total Protiviti revenues.

    All the senior management at Protiviti continue to be Andersen alumni:

    Joseph A. Tarantino, President and Chief Executive Officer, ex-head of Arthur Andersen’s Financial Services Assurance practice for metropolitan New York
    Carol M. Beaumier, Executive Vice President, Global Industry Programs, ex-partner in Arthur Andersen’s Regulatory Risk Services practice
    Robert B. Hirth Jr., Executive Vice President, Global Internal Audit, ex-partner with Arthur Andersen
    James Pajakowski, Executive Vice President, Global Risk Solutions, ex-partner with Arthur Andersen
    Gary Peterson, Executive Vice President, International Operations, ex-partner at Arthur Andersen

    We haven’t focused on Protiviti for the longest time, but our attention was brought back after seeing RHI’s full year 2009 results. We were quite surprised to see that despite its size, Protiviti had a full year 2009 loss. Yes, a loss of $30 million for the entire year on revenues of $384 million.

    To dig deeper into this situation, we had to go back all the way to 2007, analyze a whole series of quarterly earnings and read through multiple earnings transcripts (courtesy: SeekingAlpha.com).

    An interesting picture emerges from our analysis, vividly demonstrating the intensity and rapidity of the global slowdown, and consequent management efforts to cope with business shrinkage.

    In 2007, Protiviti had revenues of $552 million, gross margin of $175 million (32% of revenues), and operating income of $21 million (4% of revenues). In 2008, revenues held reasonably flat at $547 million, but gross margin had decreased by $20 million to $155 million (28% of revenues), and operating income fell by $14 million, a full 66% to $7 million (1% of revenues). In 2009, the situation had rapidly deteriorated, with revenues falling 30% to $384 million, gross margin plunging by $75 million to $80 million (21% of revenues), and operating income declining precipitously by $38 million to a net loss figure of $(31) million (negative 8% of revenues). In a matter of just 24 months, Protiviti’s top line had eroded by 30% and its operations had gone from a healthy profit to a huge loss.

    A deeper look at the quarterly earnings for two full years, 2008 and 2009, reveals the full extent of the situation.

    In 2007, Protiviti had good operating results, with 3,300 employees, up a whopping 16% from 2006, as management hired talent in sync with increased demand for its services.

    From Q1-2008 to Q3-2008, in the first three quarters of 2008, revenues continued at the 2007 quarterly run-rate of about $140 million, but total costs, principally direct compensation costs from all the increased staff levels were up 4%, increasing from 68% of revenues in 2007 to 72% of revenues in the first three quarters of 2008. Things were still on a decent footing at that time, operating income was a few million dollars profit on the average each quarter, not at 2007 levels, but certainly not at losses either. The expected increase in 2008 revenues had not been seen, and the increased cost line continued to pressure Protiviti’s profits. A review of the Q3-2008 quarterly earnings call shows that management was cautiously optimistic about Protiviti’s performance and prospects, and there were initial efforts to bring costs in line with flat revenues. Given that RHI had not ever managed Protiviti through a downturn, senior management could not provide decent guidance on revenues for the upcoming fourth quarter.

    Then, with the collapse of Lehman Brothers in September 2008, the financial crisis became really severe in Q4-2008.

    In Q4-2008, Protiviti’s revenues fell to $125 million, $15 million below the run rate seen in the last three quarters, but Protiviti had already started moving to reducing its cost base. Both direct costs and SG&A costs were quickly reined in, and the cost base in Q4-2008 was reduced by $12 million in comparison to Q3-2008, to almost offset the $15 million loss in revenue. Overall, operating income for Q4-2008 decreased to $1 million from $4 million in Q3-2009.

    At the end of 2008, Protiviti had seen flat revenues to 2007, but a sharp drop in profits. The firm had 3,200 employees, 100 lower than the 3,300 at the end of 2007, through some initial layoffs. Its likely no-one imagined how 2009 would turn out.

    In Q1-2009, Protiviti’s revenue fell to $100 million, $25 million below Q4-2008 (some of this was attributed to seasonally slow first quarters), but this is when Protiviti really started to manage its employee base. It took an $8 million extraordinary charge in the quarter for severance costs, with an intent to manage its employee compensation costs in line with falling revenues. There was also a contemporaneous reduction in SG&A, but the quarter still ended with a $11 million operating loss, as total costs in the quarter could not come down far enough with the rapid decline in revenue.

    In Q2-2009, quarterly revenues had fallen another $10 million to $90 million, however, the cost base also fell by $10 million from the previous quarter and the operating loss position of $11 million held steady from the prior quarter. Protiviti took an additional $2 million employee severance restructuring charge in the quarter. By this time, management had recognized the severity of the issue and were taking active steps to manage costs in line with declining revenues. Management said that US operations had better profitability than international operations, which were being scrutinized in detail. Also, the division was taking steps to diversify away purely from Internal Audit and Sarbox type work into IT audit and co-sourcing to create a larger set of non-correlated service lines.

    By Q3-2009, the positive cost impact of the reductions in staff were showing on the bottom line. Q3-2009 revenues were $96 million, a good $6 million better than the $90 million in Q2-2009 in terms of revenue, with the third quarter being sequentially generally better than the second quarter. Costs in Q3-2009 were also $7 million better than Q2-2009, with the net result that operating profit increased by $12 million from Q2-2009 to Q3-2009. Q3-2009 turned in a small operating income of $1 million. Q3-2009 gross margin% matched what were historical levels in the first half of 2008.

    In Q4-2009, the operating situation was quite similar to Q3-2009, as revenues and costs generally held steady and flat. Revenue was $96 million, staff utilization improved and operating income was essentially zero.

    Protiviti ended 2009 with $384 million in revenue, 30% lower than 2008, and with an operating loss of $21 million (net of restructuring charges) compared with $7 million of operating profit in 2008. The big change in 2009 was the employee base, the year ended with 2,500 employees, 700 employees lower than the end of the previous year. This was a gut-wrenching 22% reduction in staff, in that 1 out of every 5 professionals with Protiviti who was working at the end of 2008 was no longer at the firm in 2009.

    As we turn into 2010, management appears much more bullish about Protiviti’s 2010 prospects and indicated generally that the division will aim to generate positive operating profit for this year. The problem seems to lie in Protiviti’s operations outside the US, which are offsetting a higher level of US profitability, and there seems to be serious effort to turn that around. It indicates that operating costs levels have now been sized to a $400 million revenue business; and anecdotal evidence at Protiviti consultants indicates there is growing confidence that there will higher levels of business in this year.

    Anyone who has passed through this crisis will recall with clarity how difficult the last quarter of 2008 and the first half of 2009 really was. This is a case study on Protiviti, but likely representative of all consulting and accounting firms, who faced and continue to face a crisis unprecedented in modern times. The decline in Protiviti (a Big 4 firm spin off) is in line with the decreases in Advisory service lines at the Big Four firms, however the magnitude of the fall is much higher at Protiviti, much to its smaller size and smaller footprint in higher-growth emerging countries of the world.

    While we have been able only to tell the story from the public financials, we do recognize there is a deep human cost, in terms of lost jobs, continued unemployment, potentially poor morale, and tough disengagement and working conditions. We invite Protiviti alumni to join the Big4 LinkedIn group, which has a robust discussion and job board to extend their network and keep abreast of developments. And if any of our readers have first-hand or deeper knowledge of this situation, we welcome your comments.

    February 9, 2010 reply from Francine McKenna [retheauditors@GMAIL.COM]

    Another Andersen legacy partners firm is FRA. it consists of only 6 or so partners who do SEC/GAAP/IFRS consulting, no audit. Scott Taub of SEC fame is part of the team, based in Chicago.
    http://www.finra.com/scott.html 

    An interview I did with Scott Taub at the Compliance Week Annual Conference in June 2009 is a big portion of this piece for Accountancy Magazine in the UK.
    http://retheauditors.com/2009/07/07/mckenna-in-accountancy-magazine/ 

    fm

     


    "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

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


    "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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

    Dr. Jensen,

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

    best wishes

    neil glass

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


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


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


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

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

    The bottom line:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    . . .

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

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

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

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

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

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

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

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

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

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

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

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


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

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

    All too often, it's you.

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

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

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

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

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

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

    Continued in the article


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


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

    International Standards Needed, Volcker Says

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

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

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

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

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

     


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

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

    Dave Albrecht

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Bruce Lubich

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

    Suggested Additions to Summer Book List:

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

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

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

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

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

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

     


    Book Recommendation from The AccountingWeb on April 25, 2003

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


    Question
    What is COSO?

    Answer --- http://www.coso.org/ 

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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


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


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


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


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


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

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

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

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

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

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

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

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

     

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

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

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

    Two Books on Financial Statement Fraud

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

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

    One New Book on Accounting Professionalism and Public Trust

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

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

     

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

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

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

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

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

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

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

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

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

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

     

    Other Shared and Unshared Course Material

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

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

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

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

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

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

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

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

     

     

    List of Securities Fraud Class Actions
    SORTED BY COMPANY NAME


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


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

     


    Example from the Stanford Law School Database

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

    Take-Two Interactive CASE INFORMATION 

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

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

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

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

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

    TOTAL NUMBER OF PLAINTIFF FIRMS: 3

    February 28, 2002 message from Allen Plyler

    Bob,

    Take-Two Interactive just restated their last restatement.

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


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

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

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

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

     


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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


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


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

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

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


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


    A message from Andrew Priest on February 34. 2002

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

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

    Thanks 
    Andrew Priest

    The auditor is PricewaterhouseCoopers (PwC)


    "Convicted former CFO seeks $60 million from Tyco," by Karen Freifeld, Reuters, May 7, 2012 ---
    http://www.chicagotribune.com/business/sns-rt-us-tyco-swartzbre84617r-20120507,0,3939041.story

    Former Tyco International Chief Financial Officer Mark Swartz, who is serving a prison sentence for looting the company, has sued for $60 million in retirement and other money he says he is owed.

    The lawsuit, which was made public on Monday, accuses Tyco of breach of contract and unjust enrichment for not paying him some $48 million from an executive retirement agreement, $9 million in reimbursement for New York taxes, and other money.

    "We know of no basis on which Swartz could recover from the company," Tyco spokesman Paul Fitzhenry said in an email, although the company had not yet been served with the complaint.

    Swartz was convicted of grand larceny and securities fraud in 2005, along with former Chief Executive Dennis Kozlowski. They are each serving sentences of 8-1/3 to 25 years.

    In his lawsuit, filed in New York state Supreme Court, Swartz charges the company knew the Manhattan District Attorney intended to bring criminal charges against him when it approved the main contract at issue in the lawsuit.

    "The directors and management of Tyco approved the subject agreement with actual knowledge that he was shortly to be indicted," the lawsuit said.

    Tyco has a separate suit against Swartz pending in U.S. District Court in the Southern District of New York. That case, to fix the amount Swartz must pay Tyco, is scheduled for trial in September, Fitzhenry said.

    Tyco also brought a similar suit in federal court against Kozlowski. In that case, the judge dismissed Kozlowski's counterclaims for pay and benefits after 1995. The remaining issues are scheduled for trial in August, Fitzhenry said.

    Swartz was chief financial officer of the industrial conglomerate from 1995 through 2002. He was indicted in September 2002 and convicted in June 2005. Besides the prison sentence, he paid $72 million in court-ordered restitution and fines.

    Since September, Swartz has been assigned to Lincoln Correctional Facility in New York city, a minimum-security facility where Kozlowski also is based, according to the state Department of Corrections.

    Swartz is on a furlough schedule where he can leave on Wednesdays and return on Monday. He is scheduled to appear before the Parole Board in September 2013.

    Kozlowski, whose purchase of a $6,000 shower curtain made him a symbol of corporate greed, was denied parole in April.

    Continued in article

    Bob Jensen's threads on Tyco are at
    http://www.trinity.edu/rjensen/Fraud001.htm
    Search for Tyco at the above site.
    Unlike many companies that failed after their top executives went to prison, Tyco was and remained financially very sound because of successful acquisitions engineered by the top executives that went to prison for criminal activities along the way, including stealing from the company.

     

     


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


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

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

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


    From Double Entries on July 5, 2002

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


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

    WSJ Interactive Questions on July 12, 2001

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

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

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

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

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


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

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


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

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

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


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

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

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

    QUESTIONS:

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

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

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

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

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

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


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

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


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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

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

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

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

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

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

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

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

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

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

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

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


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

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


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

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

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


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


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

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


    PricewaterhouseCoopers accused of lax audits of Gazprom

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

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

     

    EUROPEAN BUSINESS

    Gazprom: Russia's Enron?

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

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

    NEWS ANALYSIS

    Can UBS Tame Enron's Wild Traders?

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Last month, software maker AremisSoft Corp. announced it was cooperating with a SEC probe into unaccounted-for revenues. The company claimed $7.1 million in sales to the Bulgarian government last year, but auditors have confirmed receipt of only $1.7 million.

    The SEC has become increasingly aggressive in its crackdown against alleged offenders. About 260 investigations now under way, a substantial jump from years past.  Lawmakers are also expressing concern about accounting fraud. Rep. Richard Baker, R-La., chairman of a House subcommittee on capital markets, said last month that he may call hearings on the issue.  There's also been a rise in the number of shareholder lawsuits. A recent study by the audit and consulting firm PricewaterhouseCoopers found that of the 201 class-action federal and state lawsuits filed against corporations in 2000, some 53 percent contained accounting allegations. That's up from less than 40 percent in 1995.

    "The spectrum of lawsuits goes across all industries, and all sizes of business" said Harvey Kelly, partner in the corporate investigations practice at PricewaterhouseCoopers. "It shows that no one is immune to these kind of challenges."  Faraone joined a class-action lawsuit against Centennial, never expecting to see any of his losses returned. A settlement of the case in 1998 got him 666 shares back, then valued at about 50 cents each, and he sold them immediately.  The company, however, was bought this year by Solectron Corp. for $108 million. Centennial stockholders collected $13.79 for every share they owned. If Faraone had waited, he could have recovered nearly $9,200.  He, however, has no regrets about selling the stock.

    "This company did me wrong in a sneaky way," he said. "I wasn't willing to take any more chances."


     

    Ernst & Young (EY)

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

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


    Ernst & Young --- http://en.wikipedia.org/wiki/Ernst_%26_Young

    "Ernst & Young's PCAOB Inspection Report Results Managed to Get Much Worse," by Caleb Newquist, Going Concern, August 6, 2013 ---
    http://goingconcern.com/post/ernst-youngs-pcaob-inspection-report-results-managed-get-much-worse-0

    "Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
    http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
    Note this has a good explanation of how the inspection process works.

    PCAOB Inspection Report Database ---
    http://pcaobus.org/inspections/reports/pages/default.aspx

    "PCAOB to consider proposing new auditor’s reporting model," by Ken Tysiac, Journal of Accountancy, August 8, 2013 ---
    http://journalofaccountancy.com/News/20138496.htm

    Bob Jensen's threads on professionalism and independence in auditing and financial reporting ---
    http://www.trinity.edu/rjensen/Fraud001c.htm

    "E&Y fined and reprimanded over audit work (in England)". by Kevin Reed, Accountancy Age, March 13, 2012 ---
    http://www.accountancyage.com/aa/news/2159027/-fined-reprimanded-audit

    E&Y had similar reprimands by the PCAOB in the U.S. only the fines were bigger ---
    See below


    "Ernst & Young Settles Over Audits of Sino-Forest, Second Chinese Company:   E&Y to Pay $7.2 Million to Settle Allegations By the Ontario Securities Commission," by Ben Dummett, The Wall Street Journal, September 30, 2014 ---
    http://online.wsj.com/articles/ernst-young-settles-over-audits-of-sino-forest-another-company-1412101002

    TORONTO—Ernst & Young LLP agreed to pay 8 million Canadian dollars ($7.2 million) to settle allegations by Canada's biggest securities regulator that it didn't adequately audit the financial statements of Sino-Forest Corp. and another Chinese company.

    The accounting firm admitted no wrongdoing in the settlement, which came after it and the Ontario Securities Commission reached a tentative agreement earlier this month.

    The E&Y-Sino-Forest case, the higher-profile of the two cases, was related to the collapse in 2012 of what was then one of the largest publicly traded forest-products companies in Canada following allegations the company inflated the value of its timber assets.

    The OSC alleged late in 2012 that E&Y breached provincial securities laws by failing "to perform sufficient audit work to verify the ownership and existence of Sino-Forest's most significant assets" in China between 2007 and 2010. It also alleged in 2013 that E&Y didn't follow accounting rules for its auditing of Zungui Haixi Corp.'s financial statements, ahead of the Chinese shoe maker's 2009 initial public offering and subsequent stock listing on the junior Canadian TSX Venture Exchange.

    "We believe that this settlement…is in the best interests of all parties" and "enables us to put this matter behind us," a spokeswoman for Ernst & Young said in an email.

    The regulator had planned to hold administrative hearings for both cases, but decided a settlement agreement was a more efficient way to handle the cases.

    The settlement "will avoid two complex and lengthy hearings dealing with the interpretation and application of auditing standards in connection with audits of financial statements of reporting issuers, the exercise of professional judgment and the conflicting reports of multiple expert witnesses," according to the settlement agreement.

    Continued in article


    Question
    When can an auditor having sex with the Chief Accounting Officer (CAO) be an appropriate application of "detail testing?"

    Possibility
    It may beat statistical sampling and analytical review combined. Maybe it should not ipso facto get a bad rap. But it does become more difficult to remain independent.

    Yeah it probably should get a bad rap for the same reason teachers should not assign grades to students with whom they are "sleeping."

    "Ventas Fires EY as Auditor Over Independence Violation," by Adrienne Gonzalez, Going Concern, July 10, 2014 ---
    http://goingconcern.com/post/ventas-fires-ey-auditor-over-independence-violation

    And sent out a press release, no less:

    Ventas, Inc. (NYSE: VTR) (“Ventas” or the “Company”) today announced that the Company has dismissed Ernst & Young (“E&Y”) as its public accounting firm, effective July 5, 2014, due to E&Y’s determination that it was not independent solely as a result of an inappropriate personal relationship between an E&Y partner and Ventas’s former Chief Accounting Officer and Controller. Ventas also announced that, following such dismissal, its Audit Committee has engaged KPMG LLP (“KPMG”) as the Company's independent public accounting firm.

    E&Y has advised the Company that, solely due to the inappropriate personal relationship, it determined that it was not independent of the Company during the periods in question. As a result of such determination, E&Y stated that it was obligated under applicable law and professional standards to withdraw (and it has withdrawn) its audit reports on the Company’s financial statements for the years ended December 31, 2012 and 2013, and its review of the Company’s results for the quarter ended March 31, 2014. E&Y’s decision to withdraw such audit reports and review was made exclusively due to the personal relationship in question, and not for any reason related to Ventas’s financial statements, its accounting practices, the integrity of Ventas’s controls or for any other reason.

    The crony in question, one Robert J. Brehl, has "separated himself" from his duties as Chief Accounting Officer and Controller.

    Continued in article

    Added Jensen comment?
    Are the working papers on this audit X-rated?

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

     

     


    "Ernst & Young Sued Over Georg Schaeffler Tax Probe," by Patricia Hurtado, Bloomberg Businessweek, February 26, 2014 ---
    http://www.bloomberg.com/news/2014-02-25/ernst-young-sued-over-georg-schaeffler-tax-probe.html 

    Ernst & Young LLP was accused by the U.S. of failing to comply with an Internal Revenue Service request for documents in an investigation of the tax liability of the billionaire chairman of industrial-bearing maker Schaeffler AG.

    The agency had asked for testimony and “books, records and other data” tied to a probe of Georg F. W. Schaeffler, the office of Manhattan U.S. Attorney Preet Bharara said in a lawsuit filed yesterday.

    The company, jointly owned by Schaeffler and his mother, Maria-Elisabeth Schaeffler, is struggling to reduce debt from an attempt spearheaded by former Chief Executive Officer Juergen Geissinger to buy a limited stake in car-component maker Continental AG that backfired amid the global recession of 2008.

    Schaeffler, 49, has a net worth of $7.8 billion, according to the Bloomberg Billionaires Index, and he ranks 168th on the index. He owns 80 percent of Schaeffler, which is based in Herzogenaurach, Germany, and is the world’s second-largest maker of automotive, aerospace and industrial roller bearings.

    The probe is tied to Schaeffler’s personal tax liabilities dating back to 2004, according to a declaration by Paul Doerr, an IRS agent investigating the case. The investigation also covers 2005, 2009 and 2010, Doerr said in the declaration filed in a Manhattan federal court lawsuit brought by Schaeffler last year against the IRS.

    Tax Liability

    Doerr said he previously conducted an investigation into Schaeffler’s tax liabilities for 2007 and 2008.

    The agency previously investigated “the valuation of assets related to the restructuring and refinancing transactions that occurred in 2009 and 2010, after the acquisition of Continental AG,” Doerr said.

    Continued in article

     


    Follow the Herd:  "All the Firms are Doing It"
    "EY Bets The Farm On Advisory With Vision 2020," by Mark O’Connor as Guest Post on Frnacine's blog re:TheAuditors, June 30, 2013 ---
    http://retheauditors.com/2013/06/30/ey-bets-the-farm-on-advisory-with-vision-2020-a-guest-post-from-mark-oconnor/

    Francine sked Mark O’Connor, CEO and Co-founder of Monadnock Research, to comment on the Going Concern post about Ernst & Young’s “Vision 2020″ announcement.

    Caleb Newquist at GoingConcern.com thinks Ernst & Young’s goals are a bit ambitious.

    One of our sources at EY thought so [too] and told us there are a few key things that would have to happen for the firm to come even remotely close to achieving it:
    1) A rapidly expanding advisory business
    2) More acquisitions and
    3) A lot more Partners, Principals, and Executive Directors.

    Caleb also mentions the “I” word.

    As the advisory business expands, the more potential there will be for conflicts with the firm’s audit clients. Since EY and the rest of the Big 4 want to be known as trusted business advisors rather than simply auditors or tax preparers, the advisory business gravy train will continue to be a priority and circumventing independence will become an ongoing exercise. We’ve already seen EY cross the line in this area with the revelation that it was lobbying on behalf of audit clients, so it stands to reason they can make make arguments in other cases for the sake of expanding business lines that expand their influence can command larger fees while the audit business gets pushed into the background.
    Really, the timing of all this is perfect for EY because all the firms are doing it and they don’t give a damn if people think they’re less independent. The advisory businesses have momentum and since independence is in the eye of the beholder, it’s easy for any firm to say, “That’s just, like, your opinion, man.”

    The reality is the consulting practices of the Big Four audit firms – and of their lesser competitors – exist in a regulatory no-man’s land. The PCAOB legally can only address audit quality and SEC won’t touch it unless there’s an independence issue with consulting to audit clients. The SEC’s enforcement actions for independence violations have, since Sarbanes-Oxley initiated the additional nine prohibitions against consulting to audit clients, been few and far between. That’s in spite of numerous examples that independence violations are still occurring and occurring in a big way.

    It’s up to renegade regulators like Ben Lawsky and private plaintiffs to keep the consulting side of the audit firms honest.

    Here are Mark O’Connor’s comments on Ernst & Young’s Vision 2020 strategy.

    One important aspect of Ernst & Young’s “Vision 2020” is a global strategic initiative to reach $50 billion in revenues by 2020. That’s a very aggressive goal, and there are a few important reasons why that might be both out of reach and bad for global business.

    Lofty goals like EY’s Vision 2020 serve a promotional purpose to attract top talent, and create the rationalization for promises of vast internal opportunities to keep top performers engaged. Beyond that, it allows current “EY” partners to move from the global advisory leadership sidelines to join principals at other Big Four firms reaping the rewards of higher-margin consulting work. But it is on this point that unintended consequences would likely foreclose any real possibility that the $50 billion aspect of EY’s 2020 strategic plan could be executed as currently conceived.

    Big Four firms tend move in lock-step without huge percentage year-over-year gains relative to one another in any line of business without large M&A transactions – buying or selling. Unless the firm’s strategy was to lower its quality or margin expectations in an attempt to go after the audit business of other Big Four firms and large auditors around the world, almost all of EY’s proposed growth will need to come from advisory. Otherwise, such dramatic growth in assurance would come at the expense of lower margins across a sector that already has very low margins. Anything far beyond the current Big Four average audit growth rate of 3.4% is unlikely, so any EY scenario with $50 billion in revenues by 2020 based primarily on assurance practice growth has a probability close to zero.”

    Given this, virtually all of EY’s extraordinary growth would need to come from advisory. EY had around $13.5 billion in non-assurance revenues in fiscal 2012, so it would need to grow that by around 266% to reach that goal. That would require an 11. 5% compound annual growth rate (CAGR) coming out of our “great global recession”, assuming that the assurance revenues independently grow at a 3.5% annual rate. EY’s 2012 advisory non-assurance non-tax growth was close to 13%, so in isolation an 11.5% sustained advisory CAGR might seem aggressive, but reasonable.

    Continued in article

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

     


    Tom Selling takes on what he claims is a "self-serving" Ernst & Young
    "Do Survey Results Mean that External Audits Don’t Protect Against Earnings Manipulation? (What a Surprise!)," by Tom Selling, The Accounting Onion, May 10, 2013 --- Click Here
    http://accountingonion.com/2013/05/do-survey-results-mean-that-external-audits-dont-protect-against-earnings-manipulation-what-a-surprise.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

    Jensen Comment
    This time I think Tom is on to something. It would be great if E&Y would reply to his blog post, but I doubt that this is going to happen. The usual reply is that external auditors are not paid to detect fraud unless the fraud is material to the audited financial statement outcomes. It would seem that the survey results in this instance would mostly affect financial statements in great gobs.

    Bob Jensen's threads on creative accounting ---
    http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


    "Ontario court approves $117M settlement between Ernst & Young, Sino-Forest:  It’s believed to be one of the largest settlements involving an auditor in Canadian history," The Star, March 20, 2013 ---
    http://www.thestar.com/business/2013/03/20/ontario_court_approves_117m_settlement_between_ernst_young_sinoforest.html

    The Ontario Superior Court has approved a $117-million class-action settlement involving Sino-Forest Corp. and its former auditor, Ernst &amp; Young.

    The agreed deal will see the accounting firm pay toward a fund to compensate shareholders of the troubled Chinese-Canadian company, which has been accused of fraudulently overstating its assets.

    It’s believed to be one of the largest settlements involving an auditor in Canadian history.

    The class-action had alleged that directors, officers, auditors and underwriters at timber trader misled investors with its accounting.

    Several shareholders had originally objected to the settlement.

    The company was first accused in 2011 of being a Ponzi scheme by Muddy Waters Research, prompting investigations by the Ontario regulator and the RCMP.

    Continued in article

    "Manhattan U.S. Attorney Announces Agreement With Ernst & Young LLP To Pay $123 Million To Resolve Federal Tax Shelter Fraud Investigation," New York State's Attorney's Office, March 1, 2013 ---
    http://www.justice.gov/usao/nys/pressreleases/March13/EYNPAPR.php

    Bob Jensen's threads on the legal  troubles of Ernst & Young ---
    http://www.trinity.edu/rjensen/Fraud001.htm

     

     


    Was Ernst & Young a corporate spy?
    From the CFO Morning Ledger newsletter on February 19, 2013

    Express Scripts sues E&Y. Express Scripts has filed a lawsuit against Ernst & Young and a former employee for allegedly stealing at least 20,000 pages containing confidential information and trade secrets, the WSJ’s Jon Kamp and Michael Rapoport report. Express Scripts hired E&Y to provide consulting services while combining its business with Medco Health Solutions. The pharmacy-benefit company accused E&Y of taking “competitively sensitive cost and pricing information” and “highly proprietary” documents involving business and integration strategies, projections and performance metrics. E&Y confirmed there was a violation of company policies, and that the individual “at the center of these allegations”–who the Express Scripts lawsuit said was a Health Care IT Partner named Donald Gravlin–”is no longer with the firm.” But E&Y also said it will “vigorously contest the claims” in the lawsuit.

    Teaching Case from The Wall Street Journal Accounting Weekly Review on February 23, 2013

    Express Scripts Sues Ernst & Young Alleging Document Theft
    by: Jon Kamp and Michael Rapoport
    Feb 19, 2013
    Click here to view the full article on WSJ.com
     

    TOPICS: Auditing, Big Four Firms, Consulting, Ernst & Young, Litigation, Trade Secrets, Accounting

    SUMMARY: Pharmacy-benefit giant Express Scripts Holding Co. has filed a lawsuit against accounting firm Ernst & Young LLP and a former employee for allegedly stealing at least 20,000 pages of data containing confidential information and trade secrets. St. Louis-based Express Scripts hired E&Y to provide consulting services while combining its business with Medco Health Solutions. The lawsuit seeks "substantial punitive damages," and to stop E&Y from using or disclosing the information at issue. E&Y confirmed there was a violation of company policies, and that the individual "at the center of these allegations is no longer with the firm." But E&Y also said it will "vigorously contest the claims" in the lawsuit. The accounting firm noted it "immediately took all necessary steps" to secure the data at issue once it became aware of the matter, and that it's not aware of any instance where the data was used inappropriately or transmitted to a third party. Express Scripts uses PricewaterhouseCoopers for auditing work and Deloitte for tax accounting.

    CLASSROOM APPLICATION: This is an interesting peak into the Big 4 world. This case shows an accounting firm's potential for liability for employee actions. It also mentions that the client, Express Scripts, employs three Big 4 accounting firms for three different types of work provided by those firms: auditing, tax, and consulting.

    QUESTIONS: 
    1. (Introductory) What are the facts of this lawsuit? Who is the plaintiff and who are the defendants? What is the issue in the case?

    2. (Advanced) What is a "Big Four" accounting firm? What firms are in the Big Four? What are all the various services offered by Big Four accounting firms? How are Big Four firms different from other accounting firms? How are they similar?

    3. (Advanced) How can companies protect themselves from accountants and consultants stealing confidential information and using it for other purposes? In what ways can accountants and accounting firms be sanctioned for such behavior?

    4. (Advanced) The article states that Express Scripts uses three different firms to do auditing work, tax, and consulting. Why would a company use different CPA firms for different tasks? On the other hand, why would a company use one firm for several tasks? With these factors in mind, how should firms market their array of services?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

     

    "Express Scripts Sues Ernst & Young Alleging Document Theft," by Jon Kamp and Michael Rapoport, The Wall Street Journal, February 19, 2013 ---
    http://professional.wsj.com/article/SB10001424127887324616604578306650614568108.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

    Pharmacy-benefit giant Express Scripts Holding Co. ESRX -1.14% has filed a lawsuit against accounting firm Ernst & Young LLP and a former employee for allegedly stealing at least 20,000 pages of data containing confidential information and trade secrets.

    St. Louis-based Express Scripts hired E&Y to provide consulting services while combining its business with Medco Health Solutions. Express Scripts bought Medco last year to form the largest pharmacy-benefit manager by prescriptions handled.

    These firms, known as PBMs, managed drug benefits for health plans and corporate clients, using their buying clout to secure rebates from drug manufacturers. Express Scripts said in the lawsuit that its investigation did not show E&Y's actions affecting any patient or protected health information.

    “Express Scripts hired Ernst to provide consulting services in last year's Medco deal.”

    But Express Scripts did accuse the big-four accounting giant of taking "competitively sensitive cost and pricing information" and "highly proprietary" documents involving business and integration strategies, projections and performance metrics.

    Express Scripts didn't have a comment on the matter beyond the content of the court filing, which seeks "substantial punitive damages," and to stop E&Y from using or disclosing the information at issue. The lawsuit was filed Thursday in the Circuit Court in St. Louis County, Mo., and reviewed by Dow Jones Newswires.

    E&Y in a statement Friday confirmed there was a violation of company policies, and that the individual "at the center of these allegations"--who the Express Scripts lawsuit said was a Health Care IT Partner named Donald Gravlin--"is no longer with the firm."

    But E&Y also said it will "vigorously contest the claims" in the lawsuit. The accounting firm noted it "immediately took all necessary steps" to secure the data at issue once it became aware of the matter, and that it's not aware of any instance where the data was used inappropriately or transmitted to a third party.

    According to Express Scripts' allegations, an investigation launched last August determined Mr. Gravlin was sending confidential information from another E&Y employee's Express Scripts email account to an outside email account. The company accused him of "sneaking into Express Scripts' headquarters and stealing confidential and proprietary information" for months.

    The PBM also alleged that E&Y was motivated to facilitate this activity because it stood to gain from the confidential information, which could be used to grow and develop additional business both with Express Scripts and competitors.

    Continued in article

     


    "Tax Pays: HP Pays Ernst & Young Two Million To Testify," by Francine McKenna, re:TheAuditors, February 18, 2013 ---
    http://retheauditors.com/2013/02/18/tax-pays-hp-pays-ernst-young-two-million-to-testify/

    The issue of tax avoidance by corporations is a hot one. In the US and in the UK, legislators and pundits seeking “tax justice” have changed the discussion from one of tax breaks that stimulate “jobs and growth” to one of tax fairness to provide much needed funds for public works and public commitments in time of economic hardship.

    In December 2012, I wrote in the UK publication Accountancy on the subject of offshore profit shifting by corporations such as Starbucks, Google, Amazon, and other US multinationals. The UK is mad as hell and not going to take it anymore. It seems US multinationals move profits out of the UK via circuitous supply chain routes leaving no profits, no tax liability and, therefore, no tax revenue there, for all their hoopla here about success abroad.

    Shifting

    Multinationals are under increasing scrutiny for income shifting and offshoring profits. Francine McKenna reports

    US corporations with activities in relatively high tax UK avoid tax on profits by moving income to tax havens. Loopholes in the US tax code allow corporations to do this with impunity. Governments continue to prioritise a ‘competitive tax environment for business’ in the hope corporations will convert profits into economic growth and jobs. Tax justice and a fair spread of the deficit reduction burden have been ignored.

    Multinationals headquartered in the US often reduce income taxes by shifting profits offshore. Profit shifting erodes the corporate tax base and reduces overall tax revenues. Lower revenues are squeezing governments all over the world trying to provide services during a prolonged period of economic uncertainty and high sovereign debt. There are now significant differences in the tax burden among corporate taxpayers and an overall unequal burden on all taxpayers in the US and in the UK.

    Here’s the PDF of that article from the December 2012 issue of Accountancy.

    So it was quite a shock for me to learn that, when the debate landed in the US, HP paid Ernst & Young, probably the preeminent tax advisor of the Big Four accounting firms at least for US multinationals, for testimony before the Senate Subcommittee on Investigations in September.

    Maybe it doesn’t seem strange to you to see $2 million in “Other” fees to the auditor show up on the HP proxy. Maybe you weren’t aware Ernst & Young is already being investigated by the SEC for independence violations related to tax lobbying. According to Reuters, Ernst & Young provided tax lobbying services to audit clients.

    The last time we had a big Big Four independence rules crackdown, it was 2004. It was Ernst & Young again, sanctioned for its systems integrator relationship with PeopleSoft, an audit client. Ernst & Young was suspended from accepting new public company audit clients for six months.

    I bet you can’t tell me about an SEC or PCAOB enforcement order for a similar firm-level independence offense since. But they do occur with some regularity, in my observation. There was one in Australia against KPMG that resulted in an enforcement order. It was suspiciously similar to what I reported regarding tax services provided by  KPMG to audit client GE. The KPMG GE issue went away quietly.

    And I reported over the holidays about PwC’s systems integration relationship with audit client Thomson Reuters, an inappropriate business alliance that’s very similar to the PeopleSoft case. An SEC inquiry of the potential independence was inadvertently confirmed by PwC, to my editors at Forbes, when a PwC spokesman complained to them about my recent reporting. PwC told Forbes editors the SEC had called them about it even though I had “not given them much time that morning to respond to the story.”  PwC did not request a retraction or a correction to the story, only a chance to talk me and Forbes out of it.

    That’s not going to happen.

    Here’s what Ernst & Young did for HP – and Microsoft – in September of 2012. Microsoft was also called by Senator Carl Levin to testify. Microsoft is a tax lobbying client of Ernst & Young.

    Let’s hope EY didn’t charge Microsoft for the same appearance.

    Continued in artilce.

     


    "Labor group asks Hewlett-Packard to replace auditor E&Y,"by Dena Aubin Reuters, January 18, 2013 ---
    http://www.reuters.com/article/2013/01/18/us-usa-audit-hewlett-ernst-idUSBRE90H19N20130118

    A U.S. investor activist group affiliated with large labor unions is asking Hewlett-Packard Co to replace its auditor, Ernst & Young, over the technology giant's troubled acquisition of UK software company Autonomy.

    Change to Win Investment Group (CtW), based in Washington, D.C., also is seeking a revamp of HP's audit committee, which is responsible for overseeing Ernst & Young's long-standing relationship as the auditor that reviews HP's books.

    Spokesmen for HP and Ernst & Young declined to comment.

    Labor union pension funds own large stakes in many U.S. companies and often use them as platforms to push for changes in how those corporations are managed. Union pension funds tied to CtW invest more than $200 billion in stocks, including shares in HP, said CtW in a letter to an HP board member on Thursday.

    CtW questioned why Ernst & Young did not spot problems at Autonomy. "HP is clearly a company facing serious challenges," CtW said in its letter. "Unfortunately, the highly conflicted, decade-long relationship between Ernst & Young and HP cannot provide shareholders with the reassurance they need."

    Auditors are outside accounting firms retained by corporations to vet their books regularly and offer an opinion on the validity of financial results. The four firms that dominate auditing worldwide - Ernst & Young, KPMG, Deloitte and PricewaterhouseCoopers - are faced with ever-rising scrutiny of their role in investor losses and accounting lapses.

    The CtW letter was addressed to Rajiv Gupta, chairman of the corporate governance committee of HP's board. It was signed by William Patterson, executive director of CtW Investment Group.

    Gupta could not be reached for comment.

    HP, AUTONOMY CLASH

    HP said in November that it overpaid for Autonomy in 2011. HP accused Autonomy of serious accounting improprieties. Autonomy has rejected the allegations and said HP was looking for "scapegoats."

    CtW urged HP to name an independent special master to investigate and report to shareholders on the Autonomy deal, as well as on an earlier acquisition of Electronic Data Systems Corp (EDS), which CtW said was "equally disastrous."

    HP has said it is deferring to U.S. and UK regulators to investigate the allegations it has made against Autonomy.

    HP in August swung to an $8.9 billion quarterly loss as it swallowed a write-down linked to its $13.9 billion purchase of EDS. That was followed in November by an $8.8 billion writedown on Autonomy's value, which HP blamed largely on improper accounting at the software company.

    Ernst & Young was not Autonomy's auditor. But according to CtW, the accounting firm had an opportunity to spot Autonomy's problems when it reviewed the goodwill, or intangible value, that HP recorded for its acquisition of Autonomy.

    However, one risk expert said CtW was putting the blame in the wrong place. A separate due diligence team, not the auditor, was responsible for determining the value of Autonomy, said Peter Bible, chief risk officer at EisnerAmper, an accounting and consulting firm.

    "The auditors didn't buy the company, HP did. And the people inside HP ought to be the ones held accountable for the purchase price that was paid," Bible said.

    CtW questioned whether Ernst & Young was independent enough to audit HP because of the large amount of non-audit services Ernst provided to HP, including tax consulting and lobbying.

    Washington Council, a tax lobbying firm acquired by Ernst in 2000, lobbied for HP from 2000 to 2004, CtW said.

    AUDITING, LOBBYING EYED

    Government lobbying records and U.S. Securities and Exchange Commission filings show that Ernst & Young was HP's auditor while Washington Council was registered as a lobbyist for HP.

    Reuters reported last week that the SEC was investigating whether Ernst violated auditor rules by letting its lobbying unit perform work for some major audit clients.

    Ernst has said all of its services for audit clients undergo considerable scrutiny to be sure they are within the rules.

    U.S. independence rules bar auditors from serving in an "advocacy role" for audit clients. The goal of this rule is to ensure that auditors are objective regarding companies they audit so that they can serve as watchdogs for investors.

    It is not clear what type of lobbying activities would be barred under the prohibition against advocacy.

    The 2002 Sarbanes-Oxley Act restricted the type of non-audit services that audit firms can provide, but broad exceptions were granted for tax consulting services.

    CtW said that HP was out of step with its peers in using Ernst for significant services other than audit work. The other fees paid to Ernst are much higher than those paid by Dell Inc and Apple Inc to their audit firms, CtW said.

    Continued in article

    Bob Jensen's threads on Ernst & Young ---
    http://www.trinity.edu/rjensen/Fraud001.htm

     


    "Exclusive: SEC probes Ernst & Young over audit client lobbying," by Sarah N. Lynch and Dena Aubin, Chicago Tribune, January 7, 2013 ---
    http://www.chicagotribune.com/business/sns-rt-us-usa-accounting-ernst-secbre9060vx-20130107,0,5471559.story

    The Securities and Exchange Commission is investigating whether auditing company Ernst & Young violated auditor rules by letting its lobbying unit perform work for several major audit clients, people familiar with the matter told Reuters.

    The SEC inquiry began shortly after Reuters reported in March 2012 that Washington Council Ernst & Young, the E&Y unit, was registered as a lobbyist for several corporate audit clients including Amgen Inc, CVS Caremark Corp and Verizon Communications Inc [ID:nL2E8DL649], according to one of the sources.

    The SEC's enforcement division and its Office of the Chief Accountant are looking in to the issue, according to the two sources, who spoke in recent days and who could not be named because the investigation is not public.

    It is unclear how far along the probe is, or whether it could result in the SEC filing civil charges against Ernst & Young, one of the world's largest audit and accounting firms.

    An SEC spokesman declined to comment.

    Ernst & Young spokeswoman Amy Call Well declined to comment on whether the company was being investigated. "All of our services for audit clients undergo considerable scrutiny to confirm they are consistent with applicable rules," she said.

    U.S. independence rules bar auditors from serving in an "advocacy role" for audit clients. The goal is to allow auditors to maintain some degree of objectivity regarding the companies they audit, based on the idea that auditors are watchdogs for investors and should not be promoting management's interests.

    The SEC's rule does not definitively say whether lobbying could compromise an auditor's independence. It is more focused on barring legal advocacy, such as expert witness testimony.

    In interviews last year, former SEC Chief Accountant Jim Kroeker told Reuters that certain lobbying activities could potentially be covered under the general prohibition on advocacy. Kroeker is now an executive at Deloitte, a rival of Ernst & Young.

    'ABUNDANTLY CLEAR' LINE

    Harvard Business School Professor Max Bazerman said on Monday that it was "abundantly clear" that a firm that is lobbying for a company is no longer capable of independently auditing that company.

    Ernst & Young has previously said it complied with independence rules. It also said that it did not act in an advocacy role and that the work performed by its lobbying unit was limited to tax issues.

    Tax consulting is a permissible activity under auditor independence rules if it does not involve public advocacy.

    About two months after publication of the Reuters story, federal records showed Washington Council Ernst & Young was no longer registered as a lobbyist for Amgen, CVS Caremark or Verizon Communications.

    A spokesman for Amgen did not immediately respond to calls seeking comment. Verizon and CVS spokesmen declined to comment.

    Ernst & Young also terminated a lobbying relationship with a fourth company, Nomura Holdings Inc, which also used an E&Y affiliate for auditing services.

    Obtaining an independent view on the books is the main reason companies are required to hire outside auditors, said Richard Kaplan, law professor at the University of Illinois.

    Continued in article

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm

    Bob Jensen's threads on audit firm professionalism and independence are at
    http://www.trinity.edu/rjensen/Fraud001c.htm

     

     


    "Ernst & Young 'covered up judge bribe case’," by Jonathan Russell, London Telegraph, June 30, 2012 ---
    http://www.telegraph.co.uk/finance/financial-crime/9367075/Ernst-and-Young-covered-up-judge-bribe-case.html

    A senior partner closed an investigation into a £100,000 “bribe” despite colleagues suspecting the money had been paid to a judge overseeing a multi-million-pound tax case the company was fighting.

    The allegations were disclosed by former E&Y partner and whistle-blower Cathal Lyons, who is suing the accountant for $6m for breach of contract.

    He claims medical insurance he was relying on to treat injuries sustained in a car accident was withdrawn after he raised the issue of the alleged bribe with the accountant’s global head office in London.

    Mr Lyons was a partner with E&Y’s Russian practice when the alleged wrongdoing came to light. It was originally investigated by James Mandel, E&Y’s general counsel in Moscow. In a witness statement supplied in support of Mr Lyons’s case, Mr Mandel said he suspected the payment may have been corrupt and wrote a report to that effect.

    “I had the suspicion that this payment was not a proper payment for legal fees, but was an illegal payment possibly made to facilitate a positive outcome of a tax case,” he claimed in his witness statement.

    He suspected that the €120,000 payment via a Russian law firm was made to influence a 390m rouble (£8.4m) court case brought by Russian tax authorities investigating a tax avoidance scheme E&Y was using to pay its Russian partners. E&Y was later cleared of liability in the case.

    The accountant has admitted there was an investigation into allegations of bribery, but said the case was closed by Herve Labaude, a senior partner, in January 2010.

    Mr Lyons claims that after he reported his concerns about the case to E&Y’s global head office, his medical insurance was withdrawn and he was dismissed.

    In his writ he says the dismissal flowed from “personal animosity against him rising from a discussion in late 2010 between the claimant and Maz Krupski [E&Y’s director of global tax and statutory] regarding alleged corruption by the practice.”

    Mr Lyons relied on his medical insurance to cover the cost of treatment flowing from a serious car accident he suffered in 2006. The accident left him with permanent disabilities and partial amputation. It is estimated medical cover in his current condition would cost $300,000 per year. He is suing for 20 years’ cover, or $6m.

    Continued in article

     


    "Ernst & Young dismissed from IndyMac shareholder case," by Amanda Bronstad, Law.com, June 8, 2012 ---
    http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202558691320&Ernst__Young_dismissed_from_IndyMac_shareholder_case&slreturn=1

    Jensen Comments
    The courts have been very kind to large auditing firms that allowed clients to grossly underestimate bad debt reserves and failed to detect (or at least report) insider frauds and going concern questions for nearly 2,000 clients that went bankrupt after 2007. This particular IndyMac case judge was also not a bit sympathetic with the SEC's case in general.


    "An (Almost) Unnoticed $497 Million Accounting Error," by Jonathon Weil, Bloomberg, May 2, 2012 ---
    http://www.bloomberg.com/news/2012-05-02/an-almost-unnoticed-497-million-accounting-error.html

    One telltale sign of a bull market is that investors don't care as much about dodgy corporate accounting practices. A case in point: the public reaction -- or lack thereof -- to a financial restatement disclosed late yesterday afternoon by Williams Cos., the natural-gas producer.

    Williams didn't issue a press release about the restatement. As far as I can tell, there have been no news reports about the company's accounting errors, which Williams divulged in a filing with the Securities and Exchange Commission. They aren't a small matter, though.

    As a result of the restatement, Williams said its shareholder equity fell $497 million, or 28 percent, to $1.3 billion as of Dec. 31. Additionally, the company said it had "identified a material weakness in internal control over financial reporting," which is never a good sign. Net income wasn't affected.

    Shares of Williams were trading for $33.65 this afternoon, down 73 cents, after setting a 52-week high yesterday. The stock is up 88 percent since Oct. 4.

    Williams, which is audited by Ernst & Young, said the restatement was necessary to correct errors in deferred tax liabilities related to its investment in Williams Partners LP, a publicly traded master limited partnership in which it owns a 68 percent stake. A Williams spokesman, Jeff Pounds, declined to comment when asked why the company didn't issue a press release flagging the restatement.

    The answer seems obvious, though: The company didn't want anyone to write about it. Oh well.

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm

     


    "Audit Watchdog Fines Ernst & Young $2 Million," by Michael Rapoport, The Wall Street Journal, February 8, 2012 ---
    http://online.wsj.com/article/SB10001424052970204136404577211384224280516.html

    Ernst & Young LLP agreed to pay $2 million to settle allegations by the government's auditing regulator that the firm wasn't skeptical enough in assessing how a client, Medicis Pharmaceutical Corp., accounted for a reserve covering product returns.

    The Public Company Accounting Oversight Board also sanctioned four current or former partners of the Big Four accounting firm, including two whom it barred from the public-accounting field. Ernst & Young and the four partners settled the allegations without admitting or denying the board's findings.

    The $2 million fine is the largest monetary penalty imposed to date by the board, which inspects accounting firms and writes and enforces the rules governing the auditing of public companies.

    The board said Ernst & Young and its partners didn't properly evaluate Medicis's sales-returns reserve for the years 2005 through 2007. The firm accepted the company's practice of imposing the reserve for product returns based on the cost of replacing the product, instead of at gross sales price, when the auditors knew or should have known that wasn't supported by the audit evidence, the board said.

    Medicis later revised its accounting for the reserve and restated its financial statements as a result.

    Continued in article

     


    From The Wall Street Journal Accounting Weekly Review on January 27, 2012 ---
    http://online.wsj.com/article/SB10001424052970204301404577171531838421366.html?mod=djemEditorialPage_t

    Ernst Chief Seeks Balance as Industry's Woes Add Up
    by: Leslie Kwoh
    Jan 24, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Accounting, Audit Firms, Audit Quality, Auditing, Auditing Services, Fraudulent Financial Reporting, PCAOB, Sarbanes-Oxley Act

    SUMMARY: The article covers an interview with Ernst & Young CEO James Turley. He comments on the change in the accounting profession from being self-regulated to highly regulated, E&Y's performance in regulatory reviews, the performance of the accounting profession following the financial crisis stemming from the burst housing bubble, and the situation E&Y faces through its client Olympus which has admitted to presenting fraudulent financial statements.

    CLASSROOM APPLICATION: The article is useful in auditing classes or other classes covering ethics and prevention of fraudulent financial reporting.

    QUESTIONS: 
    1. (Introductory) What are the accounting "industry's woes" indicated in the title of this article? Base your answer on the article, the related article, and other knowledge you have.

    2. (Introductory) Who regulates the accounting profession? Describe the process of regulatory review of the accounting and auditing profession as you understand it. What have been the recent findings from those reviews at E&Y?

    3. (Advanced) The interviewer asks whether "...accounting firms are scapegoats when clients get into trouble for irresponsible financial practices." Why do you think accounting firms could be considered "scapegoats" in these situations?

    4. (Advanced) Consider Mr. Turley's response to the question above. Why do auditors have a responsibility to "lift confidence in financial reporting"?

    5. (Advanced) In the related video, Mr. Turley states that few companies had to restate financial statements following the financial crises in contrast to the time period around the Enron collapse and resulting crisis. When are companies required to restate financial statements? How does this fact indicate that the accounting profession has functioned well within the time frame of the financial crisis following the burst housing bubble?
     

    SMALL GROUP ASSIGNMENT: 
    E&Y CEO James Turley states that during the 35 years he has worked in accounting, the profession has gone from being self-regulated to being highly regulated. Prepare a timeline of that progress in the accounting profession. Properly cite your sources for this information. (Hint: begin at the web site of the Public Company Accounting Oversight Board (PCAOB) on the web at http://pcaobus.org/About/Pages/default.aspx)

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Olympus Casts Spotlight on Accounting
    by Kana Inagaki
    Nov 08, 2011
    Online Exclusive

    "Ernst Chief Seeks Balance as Industry's Woes Add Up," by: Leslie Kwoh, The Wall Street Journal, January 24, 2012 ---
    http://online.wsj.com/article/SB10001424052970203750404577173373289374952.html?mod=djem_jiewr_AC_domainid

    Ernst & Young LLP and its fellow auditors have spent some uncomfortable time in the spotlight.

    The company has been under scrutiny since October for its role in the $1.7 billion accounting scandal at Olympus Corp. A panel appointed by Olympus cleared Ernst & Young and KPMG Azsa LLC of any wrongdoing last week, but Japanese regulators continue to investigate the matter.

    Meanwhile, a U.S. watchdog said in December it found deficiencies in one-fifth of the audits it inspected at Ernst & Young as part of a broader inspection that found flaws at all the Big Four audit firms. The privately held company is also still fighting a 2010 lawsuit filed by the New York attorney general's office alleging it helped Lehman Brothers Holdings Inc. hide its financial woes before the bank's 2008 collapse.

    Chairman and Chief Executive James Turley remains optimistic about Ernst & Young's global prospects. Last year, Mr. Turley steered the firm toward growth across its tax, assurance and advisory services, with strong results in Brazil, India, Africa and China. Global revenues for the privately owned partnership rose to $22.9 billion for the 2011 fiscal year ending last June, from $21.3 billion a year earlier.

    It is a bittersweet end to a decade-long run for Mr. Turley, who plans to retire in June 2013 after joining the company 35 years ago as a fresh graduate of Rice University. He will be succeeded by Mark Weinberger, who runs Ernst & Young's global tax practice.

    The 56-year-old CEO recently talked to The Wall Street Journal about the responsibility of accounting firms and what should be done to regulate the profession. Edited excerpts:

    WSJ: Has the nature of the accounting profession changed in the last few years?

    Mr. Turley: I've been in the profession some 35 years now, and it's changed a lot during those times, from capital market requirements, to the responsibility we have to investors, to how we work with independent audit committees. When I started, this was a self-regulated profession. Today, we're highly regulated.

    WSJ: In December, the government's auditing-oversight board said it found 13 deficiencies in 63 audits at Ernst & Young, and identified flaws at all Big Four firms. Was this a matter of oversight?

    Mr. Turley: This was a matter of execution. It's a matter of us now analyzing the root causes of [flawed audits] and figuring out how we continue to improve our performance in delivery of audits. It's a matter we take extraordinarily seriously and work closely with our regulator in this country, the PCAOB [Public Company Accounting Oversight Board], to continue to improve.

    WSJ: Ernst & Young's Japanese arm, Ernst & Young ShinNihon LLC, is still being investigated over its role as an auditor in the Olympus accounting scandal. What's the latest?

    Mr. Turley: I can't say much about a matter that's in the process of being analyzed. But you should understand that in this two-decades-long issue at Olympus, we arrived on the scene about a year ago. So we came in pretty late in the game.

    WSJ: Ernst & Young has been caught up in a string of litigation involving clients including HealthSouth and Lehman Brothers. How do you maintain stability?

    Mr. Turley: We're in a very litigious world, and inevitably, when a company of any type fails or has any problems, one of the Big Four accounting firms typically has been delivering that work. So we, like all our competitors, have matters of litigation. Our people understand that.

    WSJ: Do you think accounting firms are scapegoats when clients get into trouble for irresponsible financial practices?

    Mr. Turley: We have a responsibility to do everything we can to lift confidence in financial reporting. That doesn't mean we get it right every time. But in any kind of a crisis, like the world has gone through, they're trying to point fingers. We all wish—we in this profession, we in society—we could have seen around the corner and seen that housing prices were going to tumble, liquidity challenges were going to come. Unfortunately, no one saw that, and we couldn't see around the corner any better than anyone else.

    WSJ: What else can be done to improve the quality and transparency of accounting?

    Mr. Turley: More trend information, more qualitative information, more key performance indicators from companies. Right now, we're essentially asked to give an on-off switch on how we feel about a set of financial statements. Are there different ways to communicate with investors that would be more informative?

    WSJ: Ernst & Young is now in more than 140 countries. In which markets do you see the most promise and growth?

    Mr. Turley: Last year or so, our fastest-growing market was Brazil. We continue to see great growth in both China and Southeast Asia. India and Eastern Europe, especially Russia, continue to perform very well. We're seeing strong growth in actually all of our businesses now, and in most of our geographies. Europe is the most challenged, because of the aftermath of the ongoing crisis that you read about every day.

    WSJ: What do you plan to do after you retire?

    Mr. Turley: I haven't any idea at this point. Most people I talk with who are retired would say don't make any decisions too fast.

    Continued in article

     


    "Dismissed' partner accuses Ernst & Young of corruption:  Accountant Ernst & Young is facing an allegation of corruption at one of its global headquarters as part of a whistleblowing case brought by one of its ex-managing partners," by Jonathan Russell, The Telegraph, December 4, 2011 ---
    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8933219/Dismissed-partner-accuses-Ernst-and-Young-of-corruption.html

    The allegation is made in a High Court case brought against the Big Four accountant by former employee Cathal Lyons. The ex-E&Y partner claims he was dismissed from the company and had hundreds of thousands of pounds worth of medical cover withdrawn after he reported the alleged corruption to the practice’s director of global tax.

    Mr Lyons’ claim in the High Court relates to his employment by E&Y’s Russian practice.

    In 2006 he suffered a serious road accident resulting in permanent disabilities and partial amputation. Despite suffering serious medical complications Mr Lyons continued to work for Ernst & Young, albeit in a reduced capacity, until he claims he was dismissed in 2010.

    Following his dismissal, the medical insurance cover provided by Ernst & Young was withdrawn. Mr Lyons claims this was in direct breach of an agreement he had reached with E&Y that he would be covered by the medical insurance for life.

    His dismissal and the subsequent removal of his medical insurance were a direct result of him reporting his concerns about corruption, he claims.

    Continued in article

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm


    Remember The New Yorker Cartoon with the CEO saying to the Chief Accounting Officer:
    "The only thing that can save us now Digby is an accounting miracle."

    "CAN A NEW ACCOUNTING CHIEF SAVE GROUPON’S ACCOUNTING," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, September 11, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/769

    Monday September 10 Groupon named a new Chief Accounting Officer, Brian Stevens, formerly a partner with KPMG.  The question, of course, is whether this move is enough to save face with the investment community, after the many fiascos we have discussed, such as our “Still Accounting Challenged andFirst 10-K.”

    So, in a move to provide some constructive advice, we offer Mr. Stevens a few simple suggestions.  First, do not merely mouth “transparency” as some sort of mantra, but embrace financial reporting transparency, believe it, live it, and report transactions and events as if your economic life depended on it.  That means no more gross/net revenue games, no more peculiar or low quality gains, as investment gains can be, and no more disclosures about inventory management systems when there is no inventory account on the balance sheet.

    Continued in article


    "Groupon Revisited: New Mission, New Reporting Issues," Anthony H. Catanach, Jr., Grumpy Old Accountants, March 29, 2013 ---
    http://grumpyoldaccountants.com/blog/2013/3/29/groupon-revisited-new-mission-new-reporting-issues

    Bob Jensen's threads on Groupon ---
    http://www.trinity.edu/rjensen/Fraud001.htm
    Do a word search for Groupon


    Teaching Case from The Wall Street Journal Weekly Accounting Review on August 17, 2012

    Digging Into Online Coupon Firms' Dealings
    by: Rolfe Winkler
    Aug 12, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Revenue Recognition

    SUMMARY: Groupon, Inc reported its second quarter earnings after the close of the market on Monday, August 13, 2012. This article, written in advance of that earnings announcement, cautions investors "to dig deeply into the results....Last fall, Groupon started...to sell discounted products, in addition to its core daily deals for restaurants, spas, and [other] such [services]....Notable is how the accounting treatment of this business inflates net revenue growth...[When] Groupon takes the products into inventory [as in 75% of the first-quarter Groupon Goods deals, the company] accounts for sales on a gross basis, not a net basis....As Groupon Goods accounts for more net revenue growth, it could be masking weakness in the core daily deals business." The related article discusses the actual quarterly results that were reported and the video also was prepared after the quarterly filing.

    CLASSROOM APPLICATION: The article may be used to introduce topics in revenue recognition, particularly between sales of goods as a principal and offering services as an agent.

    QUESTIONS: 
    1. (Introductory) From your own knowledge and use of the service or from another source, describe Groupon's business model. Cite any sources you use other than your own knowledge of the business.

    2. (Introductory) What new business has Groupon recently launched?

    3. (Introductory) As described in the article, compare the accounting treatment for Groupon's newly launched business with its original one.

    4. (Advanced) In your opinion, should this difference in accounting treatment exist? Support your answer.

    5. (Advanced) Why does the author conclude that "Groupon is making it tough [for investors and other financial statement users] to understand its business"?

    6. (Introductory) Refer to the related article. What results shown in the actual financial statement filing are related to the issues discussed in the main article?

    7. (Introductory) Refer to the related video prepared after the quarterly financial statement filing. According to the interviewee--Mr. George Stahl, Dow Jones Newswires Deputy Managing Editor--what is "confusing" about the company's revenue?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    The New Deal at Groupon Isn't Enough
    by Rolfe Winkler
    Aug 14, 2012
    Page: C8

    "Digging Into Online Coupon Firms' Dealings," by: Rolfe Winkler, The Wall Street Journal, August 12, 2012 ---
    http://professional.wsj.com/article/SB10000872396390444900304577581660314854018.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

    Not every dollar of Groupon's GRPN -6.40% revenue is created equal anymore. Will investors get a full explanation when the Internet coupon company reports second-quarter earnings Monday?

    Groupon reported a surprising acceleration in its North American business in the first quarter, with net revenue rising 33% from the previous quarter. That was up from the fourth quarter's 11% increase. That improvement, said Chief Executive Andrew Mason, was due to technology that targets customers with coupons they are more likely to buy. That may give investors comfort, because it suggests Groupon isn't relying just on a huge marketing budget to drive growth. Trouble is, it doesn't appear to be the whole story. Related Reading

    Groupon Staff Feel the Heat Ahead of Groupon Earnings, Investors Bet on a Big Move

    Investors will want to dig deeply into the results, which are expected to show net revenue increased 2% quarter over quarter to $573 million and earnings stayed flat at minus two cents a share. Last fall, Groupon started a business called Groupon Goods to sell discounted products, in addition to its core daily deals for restaurants, spas and such. That business took off in the first quarter, driving roughly 10% of North American gross billings, data provider Yipit says. Notable is how the accounting treatment of this business inflates net revenue growth overall. About 75% of first-quarter Groupon Goods deals were so-called first party deals, Yipit estimates. For these, Groupon takes the products into inventory and accounts for sales on a gross basis, not a net basis.

    That contrasts with regular Internet coupons in which net revenue reflects only Groupon's share of what a customer pays, typically about 40%. Analyst Ken Sena of Evercore Partners estimates that Groupon Goods accounted for a bit more than half of first-quarter net revenue growth. As Groupon Goods accounts for more net revenue growth, it could be masking weakness in the core daily deals business. Yipit data suggest Groupon's North American gross billings declined 2% in the second quarter from the first. Considering Europe's slowdown, Groupon's international business—about 60% of the total— may have slowed even more.

    Continued in article

    "GROUPON’S FEEBLE TAX ASSETS: WE TOLD YOU SO…AGAIN!" by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accoutants Bllog, June 11, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/685

    Bob Jensen's threads on Groupon
    Search for "Groupon" at
    http://www.trinity.edu/rjensen/Fraud001.htm

    Multiple Teaching Cases About Accounting at Groupon

    Teaching Case on Groupon
    From The Wall Street Journal Accounting Weekly Review on April 6, 2012

    SEC Probes Groupon
    by: Shayndi Raice and Jean Eaglesham
    Apr 03, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Cash Flow, Contingent Liabilities, Internal Controls, Reserves, Restatement

    SUMMARY: As described by Colin Barr in the related video, "One month after they came out with their fourth quarter numbers, '[Groupon] said--guess what-- "Oh, those were wrong..." The company reissued is report for the quarter and year ended December 31, 2011 because they had not booked a sufficient reserve for customer refunds. In the first quarter of 2012, customer refunds under the company's policy exceeded the amount that management had expected because the company faces higher refund rates when selling Groupons for higher priced goods.

    CLASSROOM APPLICATION: The article is useful in a financial reporting class to cover corrections of errors, restatements, accruals for contingent liabilities, and the difference between earnings and cash flows. The article conveys a sense of the need for confidence in financial reporting in order for investors and others to have confidence in management's abilities. Also mentioned in the article is the firm's auditor, Ernst & Young, stating that this event clearly represents a material weakness in internal control.

    QUESTIONS: 
    1. (Introductory) Based on the information in the article and the related video, what problem is Groupon now having to correct?

    2. (Advanced) Access the press release announcing the revised fourth quarter and full year 2011 results, available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000110465912022869/a12-8401_3ex99d1.htm. What accounts are affected by the revision? What was the nature of the accounting problem?

    3. (Advanced) Why does first quarter 2012 activity result in accounting changes to fourth quarter 2011 results of operations?

    4. (Advanced) What accounting standards require reissuing Groupon's financial statements as the company has done under these circumstances? What disclosures must be made in these circumstances? Provide references to authoritative accounting standards for these requirements.

    5. (Advanced) As noted in the press release, there was no change to the company's previously reported operating cash flows. Why not?

    6. (Introductory) What sense is portrayed in the article and the video about Groupon's operations and the maturity of its leadership in handling a public company? How does this viewpoint stem from the accounting problems that they have faced in the first quarter of operating as a public company?

    7. (Advanced) How has the company's stock price reacted to this announcement?

    8. (Advanced) (Refer to the related article) What is a material weakness in internal control?

    9. (Advanced) (Refer to the related article) Do you think that Groupon's auditor Ernst & Young needed to perform any systems testing to make the statement about internal control that was quoted in the article? Explain your answer.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Groupon Forced to Revise Results
    by Shayndi Raice and John Letzing
    Mar 31, 2012
    Page: A1

     

    "SEC Probes Groupon," by: Shayndi Raice and Jean Eaglesham, The Wall Street Journal, April 3, 2012 ---
    http://online.wsj.com/article/SB10001424052702303816504577319870715221322.html?mod=djem_jiewr_AC_domainid

    The Securities and Exchange Commission is examining Groupon Inc.'s GRPN -2.48% revision of its first set of financial results as a public company, according to a person familiar with the situation.

    The regulator's probe into the popular online-coupon company is at a preliminary stage and the SEC hasn't yet decided whether to launch a formal investigation into the matter, the person said.

    The SEC decision to examine the circumstances surrounding Groupon's surprise revision is the start-up's latest run-in with the regulator. Groupon twice revised its finances before its November IPO. An SEC spokesperson declined to comment, as did a spokesman for Groupon.

    Groupon shares plunged Monday, ending the day down nearly 17% at $15.27, far below its $20 IPO price. The selloff came despite damage control efforts by Groupon's top two executives, Chief Executive Andrew Mason and finance chief Jason Child.

    The Chicago company also closed ranks around Mr. Child, even as accounting experts and investors criticized his performance. People familiar with the situation said Mr. Child, who joined Groupon from Amazon.com Inc. in December 2010, continues to have the support of Mr. Mason and others at the company.

    Groupon said Friday it was revising its results for the fourth quarter after discovering executives had failed to set aside enough money for customer refunds. The company had reported a loss of $37 million for its fourth quarter. The accounting changes reduced the company's revenue for the quarter by $14.3 million and widened its loss by $22.6 million.

    The revision came after an unsettling discovery in late February. That's when Groupon's chief accounting officer told Messrs. Mason and Child that many customers had returned their coupons in January, said a person familiar with the matter. Read More

    Heard: Disclosure Could Aid Groupon Therapy Deal Journal: Analysts Question Groupon Model After Groupon, Critics Wary of JOBS Act Groupon Forced to Revise Results 3/31/12

    What's worse: the four-year-old company didn't have enough money set aside in its reserves to cover those refunds, according to this person.

    The duo questioned whether this meant people weren't interested in buying daily deals anymore, according to this person: "It made [the executives] think there's got to be something [they] don't understand. A business just doesn't go sideways and go in another direction overnight." Related Video

    Groupon shares slid Monday as several Wall Street analysts questioned the stability of the company's business following a revision of its fourth-quarter results, Dan Gallagher reports on digits. Photo: AP.

    Ultimately both men got comfortable after an internal analysis found only certain types of coupons were being returned, this person said.

    The moment of crisis illustrates how deep the growing pains are at Groupon as it comes to grips with its status as a newly public Web company. In addition to revising its quarterly results, the company on Friday revealed a "material weakness in its internal controls." Insight from CFO Journal

    Investor Outreach Having Big Effect on Say-on-Pay Results Lufthansa Convertibles Monetize JetBlue Stake Multiemployer Pension Plans May Be in Hot Water

    According to people familiar with the situation, Groupon expects to address the material weakness by the time it reports its first-quarter earnings on May 14.

    Groupon has also hired a second accounting firm, KPMG, in addition to its current accountant Ernst & Young. KPMG's role is to make Groupon compliant with Sarbanes-Oxley, federal regulations around accounting and disclosures of public companies. In addition, Groupon plans to hire more accounting and finance staff, said a person familiar with the matter.

    The revision threw open the question of "whether there is any real corporate governance at Groupon whatsoever," wrote professors Anthony Catanach of Villanova University and Ed Ketz of Penn State University on their Grumpy Old Accountants blog.

    Others fingered Groupon's fast growth—its revenue was $1.62 billion last year, up from $14.5 million in 2009—as the culprit for its recent mishaps. Groupon previously had to change its accounting twice before its IPO in response to SEC concerns.

    "I view this as growing pains," said one Groupon investor who declined to be named. "This is like a high school kid who is a five-foot sophomore and becomes seven feet by the time he's a senior."

    At the heart of Groupon's most recent problem is something known as the "Groupon Promise" which allows customers to return one of its coupons. The company has no plans to change its policy, said a person familiar with the matter, since it uses it to compete with rivals like LivingSocial Inc.

    But that policy led to a meeting in late February between Mr. Child and his chief accounting officer Joe Del Preto, just a few weeks after Groupon had reported its first earnings report as a public company.

    For the month of January, Mr. Del Preto told Mr. Child the number of refunds had exceeded all previous models Groupon had built to predict its customers' behavior, said a person familiar with the matter.

    Continued in article

     

    "Groupon: You Must Have Fallen From The Sky," by Francine McKenna, re:TheAuditors, April 7, 2012 ---
    http://retheauditors.com/2012/04/07/groupon-you-must-have-fallen-from-the-sky/

     

    Multiple Teaching Cases About Accounting at Groupon

    Teaching Case on Groupon
    From The Wall Street Journal Accounting Weekly Review on April 6, 2012

    SEC Probes Groupon
    by: Shayndi Raice and Jean Eaglesham
    Apr 03, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Cash Flow, Contingent Liabilities, Internal Controls, Reserves, Restatement

    SUMMARY: As described by Colin Barr in the related video, "One month after they came out with their fourth quarter numbers, '[Groupon] said--guess what-- "Oh, those were wrong..." The company reissued is report for the quarter and year ended December 31, 2011 because they had not booked a sufficient reserve for customer refunds. In the first quarter of 2012, customer refunds under the company's policy exceeded the amount that management had expected because the company faces higher refund rates when selling Groupons for higher priced goods.

    CLASSROOM APPLICATION: The article is useful in a financial reporting class to cover corrections of errors, restatements, accruals for contingent liabilities, and the difference between earnings and cash flows. The article conveys a sense of the need for confidence in financial reporting in order for investors and others to have confidence in management's abilities. Also mentioned in the article is the firm's auditor, Ernst & Young, stating that this event clearly represents a material weakness in internal control.

    QUESTIONS: 
    1. (Introductory) Based on the information in the article and the related video, what problem is Groupon now having to correct?

    2. (Advanced) Access the press release announcing the revised fourth quarter and full year 2011 results, available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000110465912022869/a12-8401_3ex99d1.htm. What accounts are affected by the revision? What was the nature of the accounting problem?

    3. (Advanced) Why does first quarter 2012 activity result in accounting changes to fourth quarter 2011 results of operations?

    4. (Advanced) What accounting standards require reissuing Groupon's financial statements as the company has done under these circumstances? What disclosures must be made in these circumstances? Provide references to authoritative accounting standards for these requirements.

    5. (Advanced) As noted in the press release, there was no change to the company's previously reported operating cash flows. Why not?

    6. (Introductory) What sense is portrayed in the article and the video about Groupon's operations and the maturity of its leadership in handling a public company? How does this viewpoint stem from the accounting problems that they have faced in the first quarter of operating as a public company?

    7. (Advanced) How has the company's stock price reacted to this announcement?

    8. (Advanced) (Refer to the related article) What is a material weakness in internal control?

    9. (Advanced) (Refer to the related article) Do you think that Groupon's auditor Ernst & Young needed to perform any systems testing to make the statement about internal control that was quoted in the article? Explain your answer.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Groupon Forced to Revise Results
    by Shayndi Raice and John Letzing
    Mar 31, 2012
    Page: A1

     

    "SEC Probes Groupon," by: Shayndi Raice and Jean Eaglesham, The Wall Street Journal, April 3, 2012 ---
    http://online.wsj.com/article/SB10001424052702303816504577319870715221322.html?mod=djem_jiewr_AC_domainid

    The Securities and Exchange Commission is examining Groupon Inc.'s GRPN -2.48% revision of its first set of financial results as a public company, according to a person familiar with the situation.

    The regulator's probe into the popular online-coupon company is at a preliminary stage and the SEC hasn't yet decided whether to launch a formal investigation into the matter, the person said.

    The SEC decision to examine the circumstances surrounding Groupon's surprise revision is the start-up's latest run-in with the regulator. Groupon twice revised its finances before its November IPO. An SEC spokesperson declined to comment, as did a spokesman for Groupon.

    Groupon shares plunged Monday, ending the day down nearly 17% at $15.27, far below its $20 IPO price. The selloff came despite damage control efforts by Groupon's top two executives, Chief Executive Andrew Mason and finance chief Jason Child.

    The Chicago company also closed ranks around Mr. Child, even as accounting experts and investors criticized his performance. People familiar with the situation said Mr. Child, who joined Groupon from Amazon.com Inc. in December 2010, continues to have the support of Mr. Mason and others at the company.

    Groupon said Friday it was revising its results for the fourth quarter after discovering executives had failed to set aside enough money for customer refunds. The company had reported a loss of $37 million for its fourth quarter. The accounting changes reduced the company's revenue for the quarter by $14.3 million and widened its loss by $22.6 million.

    The revision came after an unsettling discovery in late February. That's when Groupon's chief accounting officer told Messrs. Mason and Child that many customers had returned their coupons in January, said a person familiar with the matter. Read More

    Heard: Disclosure Could Aid Groupon Therapy Deal Journal: Analysts Question Groupon Model After Groupon, Critics Wary of JOBS Act Groupon Forced to Revise Results 3/31/12

    What's worse: the four-year-old company didn't have enough money set aside in its reserves to cover those refunds, according to this person.

    The duo questioned whether this meant people weren't interested in buying daily deals anymore, according to this person: "It made [the executives] think there's got to be something [they] don't understand. A business just doesn't go sideways and go in another direction overnight." Related Video

    Groupon shares slid Monday as several Wall Street analysts questioned the stability of the company's business following a revision of its fourth-quarter results, Dan Gallagher reports on digits. Photo: AP.

    Ultimately both men got comfortable after an internal analysis found only certain types of coupons were being returned, this person said.

    The moment of crisis illustrates how deep the growing pains are at Groupon as it comes to grips with its status as a newly public Web company. In addition to revising its quarterly results, the company on Friday revealed a "material weakness in its internal controls." Insight from CFO Journal

    Investor Outreach Having Big Effect on Say-on-Pay Results Lufthansa Convertibles Monetize JetBlue Stake Multiemployer Pension Plans May Be in Hot Water

    According to people familiar with the situation, Groupon expects to address the material weakness by the time it reports its first-quarter earnings on May 14.

    Groupon has also hired a second accounting firm, KPMG, in addition to its current accountant Ernst & Young. KPMG's role is to make Groupon compliant with Sarbanes-Oxley, federal regulations around accounting and disclosures of public companies. In addition, Groupon plans to hire more accounting and finance staff, said a person familiar with the matter.

    The revision threw open the question of "whether there is any real corporate governance at Groupon whatsoever," wrote professors Anthony Catanach of Villanova University and Ed Ketz of Penn State University on their Grumpy Old Accountants blog.

    Others fingered Groupon's fast growth—its revenue was $1.62 billion last year, up from $14.5 million in 2009—as the culprit for its recent mishaps. Groupon previously had to change its accounting twice before its IPO in response to SEC concerns.

    "I view this as growing pains," said one Groupon investor who declined to be named. "This is like a high school kid who is a five-foot sophomore and becomes seven feet by the time he's a senior."

    At the heart of Groupon's most recent problem is something known as the "Groupon Promise" which allows customers to return one of its coupons. The company has no plans to change its policy, said a person familiar with the matter, since it uses it to compete with rivals like LivingSocial Inc.

    But that policy led to a meeting in late February between Mr. Child and his chief accounting officer Joe Del Preto, just a few weeks after Groupon had reported its first earnings report as a public company.

    For the month of January, Mr. Del Preto told Mr. Child the number of refunds had exceeded all previous models Groupon had built to predict its customers' behavior, said a person familiar with the matter.

    Continued in article


    From The Wall Street Journal Accounting Weekly Review in February 4, 2012

    Groupon and Its 'Weird' CEO
    by: Shayndi Raice
    Jan 31, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Cash Flow, Financial Reporting, Financial Statement Analysis, SEC, Securities and Exchange Commission, Segment Analysis

    SUMMARY: The article quotes excerpts from Groupon, Inc. CEO Andrew Mason's comments in an interview with the WSJ. The related video shows Mr. Mason's responses to written questions flashed on screen. Accounting topics addressed in the interview are two topics with which the SEC was concerned during the company's IPO process: (1) the company's use of "Adjusted Consolidated Segment Operating Income, which showed the company's revenue minus certain marketing costs" and (2) Mr. Mason's writing of a memo about the firm to employees which was then leaked to the press during a quiet period imposed by SEC just prior to the IPO. The stock is now trading at $21.49 as of the date of this writing, slightly above the $20/share IPO price.

    CLASSROOM APPLICATION: The article is useful in discussing segment reporting requirements, handling of marketing costs, and the overall IPO process.

    QUESTIONS: 
    1. (Introductory) What two accounting and financial reporting issues impacted Groupon during its process of becoming a publicly traded company?

    2. (Introductory) What is Groupon CEO Andrew Mason's assessment of having used an unusual accounting metric in the company's first filing for its initial public offering (IPO)?

    3. (Advanced) Refer to the related article. What was the unusual accounting metric? How is this metric justified in Mr. Mason's current interview with TWSJ?

    4. (Advanced) Consider the requirements for segment reporting. How may operating income as reported by business segment differ from total consolidated operating income presented on the income statement? State your source for accounting requirements that allow this treatment.

    5. (Introductory) What is an S-1 registration statement and what is a "quiet period"? How and why did Mr. Mason violate this requirement for a quiet period?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Groupon's Accounting Lingo Gets Scrutiny
    by Shayndi Raice and Nick Wingfield
    Jul 28, 2011
    Page: A1

     

    "Groupon and Its 'Weird' CEO," by: Shayndi Raice, The Wall Street Journal,  Jan 31, 2012,---
    http://online.wsj.com/article/SB10001424052970203920204577193181377853716.html?mod=djem_jiewr_AC_domainid

    Groupon Inc. Chief Executive Andrew Mason wants to prove his company is worth the fuss after its roller-coaster ride to an initial public offering last year.

    The 31-year-old founder took his Chicago-based daily deals site public in November at a valuation of $13 billion, well below the $15 billion to $20 billion price tag Groupon once thought it could command. The IPO also brought on questions about another bubble in the Internet sector and the viability of the daily-deals business model.

    Critics pointed out that Groupon was unprofitable and was spending heavily to acquire new subscribers amid a flood of competition from daily-deal clones. The company also raised eyebrows at the Securities and Exchange Commission over an unusual accounting metric called Adjusted Consolidated Segment Operating Income, which showed the company's revenue minus certain marketing costs.

    Groupon's stock soared 31% above its $20 IPO price on its first day of trading, but withered in following weeks. Shares closed at $19.63, down 2.1%, in 4 p.m. trading Monday. The company is set to report its first quarterly results as a public company next week.

    Mr. Mason, who sometimes posts online videos of himself in his underwear doing yoga or dancing, sat down for a recent interview in his Chicago office to discuss challenges facing the company and his ability to handle them. Edited excerpts:

    WSJ: Do you think you're mature enough to be the CEO of a multi-billion dollar company?

    Mr. Mason: I got the company this far. To the degree I was weird, I was weird before we were a public company and managed to get it worth whatever it's worth. I'm going to continue doing my thing and work my butt off to add value for shareholders and as long as they and the board see fit to keep me in this role, I feel enormously privileged to serve.

    WSJ: Groupon has been criticized by analysts and investors for not being profitable. How important is profitability?

    Mr. Mason: We believe that the most important thing for us to be focused on is growing the business, building something that our consumers and our merchant partners love. And when you focus on those inputs, revenue and profitability is the output and it follows naturally.

    WSJ: Some critics say the daily deal model is too easy to replicate.

    Mr. Mason: There's proof. There are over 2,000 direct clones of the Groupon business model. However, there's an equal amount of proof that the barriers to success are enormous. In spite of all those competitors, only a handful are remotely relevant.

    WSJ: Why?

    Mr. Mason: People overlook the operational complexity. We have 10,000 employees across 46 countries. We have thousands of salespeople talking to tens of thousands of merchants every single day. It's not an easy thing to build.

    WSJ: You had a rough IPO. What was the hardest part?

    Mr. Mason: After filing the S-1, we entered a quiet period that greatly restricted our ability to have a conversation with the public. It was frustrating to not be able to directly address many of the concerns that people raised about the business.

    WSJ: Including discussing "Adjusted Consolidated Segment Operating Income?" You were accused by critics of trying to hide your high marketing costs from investors.

    Mr. Mason: Groupon spends money on marketing in a way that's different from traditional Internet and e-commerce companies. Our marketing spend is designed to drive subscribers to our daily mailing list. A traditional e-commerce company is driving transactions. Our own proprietary advertising network can continually advertise to our customers at virtually no additional cost. There's an upfront investment that we know pays off over the long-term.

    WSJ: Was it a mistake to include that metric?

    Mr. Mason: In retrospect, I think it was naive, and I wouldn't have included it. The list of companies that have added their own financial metrics is not a savory group. It created a distraction that wasn't worth the benefit.

    WSJ: The SEC also took issue with a memo you wrote to employees during the quiet period that was leaked to the press.

    Mr. Mason: I wrote the memo because 23-year-olds were coming into my office and asking how they should respond to their parents when they ask if Groupon is about to go bankrupt. The risks of not communicating to my employees were greater than the risks of doing otherwise.

    If I knew it was going to leak, I would have been less bizarre, and I wouldn't have made a joke about my now-wife. She was upset. (He joked that his then-girlfriend asked him why he never said anything nice about her.)

    WSJ: Groupon's stock price is trading below its IPO price of $20. Why?

    Mr. Mason: Luckily there are people smarter than me in this world that know the answers to those kinds of questions. I leave that to the financial community.

    Continued in article


    "Groupon: You Must Have Fallen From The Sky," by Francine McKenna, re:TheAuditors, April 7, 2012 ---
    http://retheauditors.com/2012/04/07/groupon-you-must-have-fallen-from-the-sky/

    Last week was Groupon’s big week, although not in a good way. What happened? Well, the premier source of daily deal dish got knocked down a few more pegs after announcing a revision to 4th quarter earnings and the announcement by management that there was a material weakness in internal controls over financial reporting that was causing their disclosure controls to be ineffective. Groupon went public just a few months ago, last November, and the annual report was the company’s first filing as a public company.

    Here’s one of the few journalists who got the details right, Jonathan Weil of Bloomberg, explaining why, in this case, the news was especially bad:

    Didn’t Groupon know before its initial public offering that its controls were weak? A company spokesman, Paul Taaffe, declined to comment. Let’s assume for the moment, though, that its executives did know. Even then, they wouldn’t have had to tell investors beforehand.

    That’s because there is no requirement to disclose a control weakness in a company’s IPO prospectus. Groupon would have had no obligation to disclose the problem until it filed its first quarterly or annual report as a public company — which is what it did. Sandbagging IPO investors in this manner is perfectly legal, it turns out.

    The reason lies with a gaping hole in the Sarbanes-Oxley Act, which Congress passed in 2002 in response to the accounting scandals at Enron Corp. and WorldCom Inc. That statute had two main sections related to companies’ internal controls, which are the systems and processes that companies are supposed to have in place to ensure the information they report is accurate. Those provisions apply only to companies that are public already, not ones that have registered for IPOs.

    One section, called 302, requires public companies’ top executives to evaluate each quarter whether their disclosure controls and procedures are effective. The other section, known as 404, is better known. It requires public companies in their annual reports to include assessments by management and outside auditors about the effectiveness of their internal controls over financial reporting. Congress left it to the Securities and Exchange Commission to write the rules implementing those provisions.

    Here’s where it gets tricky. Groupon reported the weakness in its financial-reporting controls through a Section 302 disclosure, not a Section 404 report. In other words, the problem was serious enough that it amounted to a shortcoming in the company’s overall disclosure controls.

    Groupon won’t have to comply with Section 404’s requirements until its second annual report, due next year, under an exemption the SEC passed in 2006 for newly public companies. Likewise, Groupon’s auditor, Ernst & Young LLP, to date has expressed no opinion on the company’s internal controls in its audit reports.

    From the moment Groupon announced the revision on March 30, there were two important facts that almost all major media financial journalists got wrong:

    1) The announcement of lower revenue and lower income for the fourth quarter was a revision of an earnings release, not a restatement. Groupon never filed a 10Q so there was no SEC filing to restate. Fessing up to the right numbers in the annual report was the first time the company was bound to report those numbers and, at that time, they corrected previously announced earnings for the 4th Quarter.

    2) Management made the assessment of the material weakness in internal controls over financial reporting that caused disclosure controls to be ineffective, not auditor Ernst & Young. Ernst & Young deserves no credit for the announcement, nor any blame, just yet, for the fact that the weaknesses had to be finally admitted. There is no transparency regarding the auditor’s agreement or disagreement previously with Groupon, any public documentation of their discussions or any reason to believe Ernst & Young either encouraged or discouraged Groupon to get their act together sooner.

    We just don’t know.

    Continued in article

    Various Teaching Cases Featuring Groupon ---
    http://www.trinity.edu/rjensen/Fraud001.htm

    Search on the word "Groupon"

    "THE “BEAUTY” OF INTERNET COMPANY ACCOUNTING," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, April 9, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/604#more-604

    And the same can be said for financial reporting as practiced by internet companies given their “new business models” that require “new accounting.”  Internet company financial statements seem to mean different things to different people, not unlike a piece of artwork.  Unfortunately, some of this accounting “artwork” is junk, as we have recently reported in the case of Groupon (First 10K: April Fool’s!).  At times like this beauty rests in the I of the artist.

    How can management and directors and auditors see one thing, when the complete opposite reflects reality?  And why do internet IPOs seem particularly vulnerable? Well, we think the problem is with the accounting “standards” (and we use that term loosely) that apply to these companies.  As we stated in an earlier post:

    Internet company accounting is suspect given all the unsupported assertions and assumptions that must be made to comply with generally accepted accounting principles…

    Think about it.  The internet company balance sheet is generally dominated by intangible assets whose values are based on assumptions that are works of art themselves.  And then there’s revenue recognition in these companies with management making all kinds of assumptions about primary obligors, selling price hierarchies, and virtual sales.  Yes, what makes internet company accounting “special” is that so many of the applicable accounting rules require major assumptions, many of which could be better characterized as “giant leaps of faith.”  Clearly, the accounting rules used for internet companies should not be called “standards,” as their many judgments make any meaningful comparison an impossibility!  Enough pontificating…

    Given Groupon’s recent accounting struggles we thought it might be interesting to see if there were any other internet company accounting issues lurking within today’s “hot” internet companies.  So, we looked at the most recent 10K filings of Demand Media, Facebook, Groupon, Linked In, and Zynga, focusing primarily on revenue and expense recognition, “unusual” accounting issues, and of course some of our favorites: intangible assets, cash flows, and non-GAAP financial metrics.  Here is what we found.

     

    Revenue

    Two of the five companies (Demand Media and Facebook) generate a significant amount of their revenue from advertising. The way these companies record revenue appears to be relatively straight-forward.  Generally, ad revenue is recognized either when the ad content is delivered, or for click-based ads, when a user clicks on an ad.  Nothing very interesting or complicated here.

    Linked In, on the other hand, has a much more subjective revenue recognition method for its hiring and marketing solutions.  Most of the Company’s contractual arrangements include multiple deliverables, i.e., several products packaged together which Linked In swears can’t be pulled apart to record revenue separately.  Gee, if the Company’s cost accounting system keeps track of product and service costs separately, why can’t revenue be estimated separately? Interesting question, huh?  Anyway, Linked In uses convoluted GAAP criteria to record revenue, the relative selling price method, based on a selling price hierarchy.  In short, management decides what revenue will be based on vendor specific evidence, third party evidence, or management’s best estimate of selling price, in that order of priority.  Which one do you thing management likely favors?

    Then, there’s our poster child for bad internet company accounting, Groupon.  As you may recall, the Company was busted by the SEC for improper revenue recognition last September. SeeGroupon Finally Restates Its Numbers.”  Basically, Groupon ignored accounting guidance (that’s a much better word than “standard”) in Emerging Issues Task Force (EITF) 99-19, as well as SEC Staff Accounting Bulletin 101 (question 10), and recorded the gross amounts it received on Groupon sales as revenues. Since being forced to restate its financial statements, the Company now records revenue at the net amount retained from the sale of Groupons (gross collections less an agreed upon percentage of the purchase price due to the featured merchant excluding any applicable taxes), since it is acting as the merchant’s agent in the transaction.

    It should be noted that Demand Media also faces the “gross vs. net” revenue issue discussed in EITF 99-19.  For revenue sharing arrangements in which the Company is considered the primary obligor, it reports revenue on a gross basis.  But for those situations where it distributes its content on third-party websites and the customer acts as the primary obligor, it records revenue on a net basis.

    And last, but not least, there is Zynga with its consumable or durable virtual goods! For the sale of consumable virtual goods (goods consumed by player game actions), revenue is recognized as the goods are consumed. On the other hand, revenue from the sale of durable virtual goods (goods accessible to a player over an extended period of time) is recognized ratably over the estimated average playing period of paying players for the applicable game.  Confused yet?  Basically, we have to rely on Zynga to provide us with a best estimate of the lives of both consumable and virtual goods to book revenue. As we indicated in “Zynga’s First 10K: Zestful Zephyrs,” by merely changing the game’s rules, the Company can change what it books as revenue! This is all too arbitrary. Are we really surprised?

    So, when it comes to recording revenue, it appears that booking advertising income is relatively easy, compared to the management estimates needed for multiple deliverables (Linked In) and virtual good sales (Zynga), or deciding who the “primary obligor” is (Demand Media and Groupon).  We would not be surprised if some internet companies don’t intentionally complicate their product offerings to make revenue recognition a function of management guesstimates!

     

    Cost Capitalization

    Given that several of these companies are struggling to achieve or maintain profitability, it is not surprising that they would try to record as an asset what really is an expense.  And sure enough, we find several instances of this.  For example, Demand Media capitalizes many different types of costs including content costs, registration and acquisition costs for undeveloped websites and internally developed software, as well as intangible assets acquired in acquisitions.  How significant is this?  Over 72 percent of the Company’s $590.1 million in total assets are intangible in nature!  Now that takes cost capitalization to a new height…we’d probably try that too if we were losing as much money every year as they are (2011’s net loss was $18.5 million).

    Linked In also plays this “game,” but with a new twist.  The Company does do something quite interesting…it defers expensing $13.6 million in commissions already paid on non-cancelable subscription contracts, presumably to match the commission costs with the related revenue streams.  Why stop there?  Couldn’t you make the same argument for a whole host of other expenses as well?  Maybe they did, but Deloitte didn’t buy it.

    Groupon and Zynga also have played a slightly different version of the cost capitalization game, by recording tax assets that presumably will lower future tax liabilities.  In recording these tax assets, the companies reduce income tax expense in the income statement, thus improving the bottom line.  The only problem is that a company must have future taxable income in order to use these alleged tax assets!  Well, if the companies did this to mitigate their operating losses, the game has ended for Zynga, and soon will end for Groupon.

    In 2011 Zynga recorded a $113.4 million allowance against its deferred tax assets, almost fully reserving these assets, and effectively wiping them off the books.  This suggests that the Company may have had a reality check as to its future prospects, given that it no longer projects a future that includes profitability, more specifically taxable income.

    As for Groupon, we highlighted this same tax issue earlier in Groupon’s First 10K: Looking Under the HoodIn 2011, the Company increased its valuation reserve for deferred tax assets by $72.3 million reducing reported deferred tax assets to $65.3 million.  Although Groupon gave no reason for the increased reserve, it likely was forced to record it for the same reason as Zynga, i.e., little likelihood of generating taxable income in the foreseeable future against which deferred tax assets could be used.  So, who would have thought…the income tax note might actually shed some light on what a company really thinks its profit forecast is (as opposed to the press release)!

     

    Other Accounting Issues

    Our internet company reviews also turned up a couple of interesting points, which give us insight into managements’ attitude toward financial reporting transparency…and believe it or not, Groupon is NOT involved!

    The first involves cash, naturally, and how Demand Media “defines” cash.  You may recall that we first reported on the increasing trend of companies to manipulate reported cash balances in What’s Up With Cash Balances?”  And, yes, Demand Media is overstating its balance sheet cash by including accounts receivable as cash even though it has yet to receive the monies.  Here is what the Company’s accounting policy note says:

    Continued in article

    Jensen Comment
    In the 1990s tech boom, startup companies in particular were not making any profits and had cash shortage problems. These companies tried to shift the focus to revenues and devised all sort of (mostly fraudulent) schemes to record non-cash revenue. The EITF worked overtime trying to plug the dikes against new revenue reporting schemes ---
    http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 

    Various Teaching Cases Featuring Groupon ---
    http://www.trinity.edu/rjensen/Fraud001.htm

    Search on the word "Groupon"

     

     


    Question
    How can a company that's "technically insolvent" have any sort of IPO success?

    "GROUPON IS TECHNICALLY INSOLVENT," by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants, October 21, 2011 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362

    Two Update Teaching Cases on Groupon:  IPO, Working Capital, and Cash Flow

    From The Wall Street Journal Weekly Accounting Review on November 11, 2011

    Case 1
    Exclusive Deal Floats Groupon
    by: Rolfe Winkler
    Nov 05, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: business combinations, Financial Analysis, Goodwill, Impairment

    SUMMARY: Groupon filed its initial public offering (IPO) on Friday, November 4, 2011, selling only a total of 6.4% of the company's total shares. The IPO proceeds brought in $805 million, the third smallest total for all IPOs since 1995, only larger than the IPOs of Vonage Holdings and Orbitz in total proceeds. In terms of the percent of outstanding shares sold, only Palm has sold a smaller percentage in that same time frame. Quoting from the related article, "Silicon Valley and Wall Street took Groupon's stock market debut as a sign that investors are still willing to make risky bets on fast-growing but unprofitable young Internet companies....Groupon shares rose from their IPO price of $20 by 40% in early trading, and ended at the 4 p.m. market close at $26.11, up 31%. The closing price valued Groupon at $16.6 billion...."

    CLASSROOM APPLICATION: Questions focus on measuring the implied fair value of an entire business from the value of only a portion. The concept is used in accounting for business combinations and in goodwill impairment testing.

    QUESTIONS: 
    1. (Introductory) Summarize the Groupon initial public offering (IPO). How many shares were sold? At what price?

    2. (Introductory) Describe the market activity of the stock on its first day of trading. How does that activity show that "investors are...willing to make risky bets on...young Internet companies"?

    3. (Advanced) How has the Groupon stock fared to the date you write your answer to this question?

    4. (Advanced) Define the term "implied fair value". How did sale of only 6.3% of the shares outstanding translate into an overall firm valuation of $12.8 billion? Show your calculation.

    5. (Advanced) Given the range of trading reported in the article and your answer to question 3 above, what is the range of total firm value shown during this short time of public trading of Groupon stock? Again, show your calculations. How does the small percentage of shares contribute to the size of this range?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Groupon IPO Cheers Valley
    by Shayndi Raice and Randall Smith
    Nov 05, 2011
    Page: B3

     

    "Exclusive Deal Floats Groupon," by: Rolfe Winkler, The Wall Street Journal, November 5, 2011 ---
    http://online.wsj.com/article/SB10001424052970203716204577017892088810560.html?mod=djem_jiewr_AC_domainid

    Even by dot-com standards, Groupon's initial public offering is puny in terms of the number of shares it actually sold to the public. According to Dealogic, dating back to 1995 just three U.S. tech companies floated a smaller percentage of their shares in their IPOs. Palm sold 4.7% of its shares in a $1 billion offering; Portal Software sold 6.2% in a tiny $64 million offering, and Ciena sold 6.2% in a $132 million offering. Then comes Groupon, which sold 6.3% this week as part of its $805 million offering.

    That is well below the median of 21% for the 50 largest technology IPOs dating back to 1995, according to Dealogic.

    Groupon's limited float strategy isn't new. Two of this year's other big Internet IPOs, LinkedIn and Pandora Media also sold a limited number of shares, just 9.4% of the total outstanding for both companies. Those deals were also led by Morgan Stanley.

    Considering doubts about Groupon's business model, in order to ensure a strong first day's trading, the underwriters not only limited the free-float, but they also scaled back their original valuation target.

    At Friday's close of trading, Groupon shares were at $26.11 apiece, 31% above the IPO price. That puts Groupon's market capitalization at about $17 billion, or roughly eight times next year's likely revenue. That is steep, considering that the daily-deals Internet company is still unprofitable and that growth appears to be slowing quickly.

     

    Case 2
    Groupon Holds Cash Tight
    by: Sarah E. Needleman and Shayndi Raice
    Nov 10, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Cash Flow, Cash Management, Financial Statement Analysis

    SUMMARY: Groupon finally completed its IPO on Friday, November 4, 2011, and interest in the company is therefore naturally high. Competitors to Groupon attempt to obtain market share from the newly public company by offering quicker payment terms to the small business which provide the merchant benefits offered by Groupon. Small businesses need their working capital as fast as possible and therefore some complain about the Groupon terms. Groupon argues that its terms are designed to ensure that merchant suppliers cannot use Groupon for a quick infusion of cash just prior to closing operations.

    CLASSROOM APPLICATION: Questions ask students to analyze Groupon's financial statements-particularly its working capital components-to assess the issues with the company's payment terms.

    QUESTIONS: 
    1. (Introductory) What are Groupon's payment terms? How do those terms help Groupon's customers, the buyers of its electronic coupons?

    2. (Introductory) How do Groupon's payment terms help Groupon's own financial position and operating results? In your answer, define the financial concepts of cash flow and working capital mentioned in the article.

    3. (Advanced) Groupon issued its initial public offering of stock (IPO) on Friday, November 4, 2011. Access the S-1 registration statement filed with the SEC for this offering on June 2, 2011. It is available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm Click on the link to the Table of Contents, then on Index to Consolidated Financial Statements, then on Consolidated Balance Sheets. As of December 31, 2010, how much working capital did the company have? Did this amount improve through the quarter ended March 31, 2011?

    4. (Advanced) Given your measurement of Groupon's working capital, how easy do you think it would be for Groupon to address its competition by changing its payment terms? Support your answer.

    5. (Advanced) Continue working with the Groupon audited consolidated financial statements as of December 31, 2010 and the unaudited quarterly statements. What items comprise Groupon's Accounts Receivable? How collectible are these amounts?

    6. (Advanced) What items comprise Groupon's Accounts Payable, accrued Merchants Payable, and Accrued Expenses? Given your knowledge of Groupon's payment terms, can you identify how soon each of these payments must be made?

    7. (Advanced) Consider how you would schedule a detailed estimate of the timing of Groupon's cash flows for the three current liabilities discussed above.
     

    Reviewed By: Judy Beckman, University of Rhode Island

    "Groupon Holds Cash Tight by: Sarah E. Needleman and Shayndi Raice, The Wall Street Journal, November 10, 2011 ---
    http://online.wsj.com/article/SB10001424052970204358004577027992169046500.html?mod=djem_jiewr_AC_domainid

    Rivals of Groupon Inc. are threatening the daily deal site leader by offering quicker payment to merchants, possibly jeopardizing a key part of Groupon's business model.

    Groupon keeps itself in cash by collecting money immediately when it sells its daily coupons to consumers while extending payments to the merchants over 60 days. For instance, a hair salon might run a deal offering $100 of services for just $50 on Groupon's website, which then keeps as much as half of the total collected and sends the remainder to the salon in three installments about 25 to 30 days apart.

    "The payment timing is so erratic you can't count on any of that money helping to pay your bills," says Mark Grohman, owner of Meridian Restaurant in Winston-Salem, N.C.

    After running three Groupon promotions this year and last, Mr. Grohman says he won't use the service again in part because it puts too big a strain on his cash flow. "With smaller margins in restaurants, you need that capital in the bank as fast as possible," he says.

    Heissam Jebailey, co-owner of two Menchie's frozen-yogurt franchises in Winter Park, Fla., says he also has begun to view Groupon's installment payments as too slow.

    Enlarge Image SBGROUPON SBGROUPON

    "You want to get paid in full as quickly as possible," says Mr. Jebailey, who has run deals with both Groupon and its rival LivingSocial Inc. offering customers $10 of frozen yogurt for $5. He says both promotions were successful but that he'd only use Groupon again if the service promises to pay faster. "We're the ones that have to cover the cost of goods for giving away everything at half price," he says. "I will not do another deal with Groupon unless they agree to my terms."

    Groupon executives have no plans to change payments terms, said a person familiar with the matter. Because Groupon has a backlog of 49,000 merchants in line to offer a deal with the site, executives feel confident that they don't need to make any changes to payment terms, said another person.

    While Groupon pays merchants in installments of 33% over a period of 60 days, LivingSocial and Amazon.com Inc.'s Amazon Local pay merchants their full share in 15 days. Google Inc.'s Google Offers promises 80% of the merchant's cut within four days, and the remainder over 90 days.

    Groupon pays in installments for a reason, according to a person familiar with the matter: It has seen some merchants try to use Groupon to get a quick infusion of cash before going out of business, leaving customers with vouchers that can't be redeemed.

    The Chicago-based start-up has a policy of offering refunds to customers who aren't satisfied, and as a result it is cautious about doing deals with merchants who may not carry through on their end, says the person familiar with the matter.

    Groupon also says it pays merchants before they provide services to customers and will accelerate payments if merchants experience unusually fast consumer redemption.

    "We believe Groupon's payment terms are fair to merchants and important to protect consumers," says Julie Mossler, director of communications for Groupon.

    It also is in Groupon's best interest to stretch out payments to its customers for as long as possible, says John Hanson, a certified public accountant and executive director at Artifice Forensic Financial Services LLC in Washington, D.C. "It makes their cash position look stronger on their books."

    Steady cash flow has helped fuel the valuation of Groupon, which first sold shares to the public last week. Groupon's stock was down nearly 4% Wednesday, bringing its share price of $23.98 closer to the company's IPO price of $20 a share. Based on the 5.5% of shares that trade, the company has a valuation of about $15 billion. But its working-capital deficit has ballooned to $301.1 million as of Sept. 30, and the amount it owes its merchants is also way up.

    Groupon's "accrued merchant payable" balance increased to $465.6 million as of Sept. 30, from $4.3 million at year-end 2009, its filings say. This merchant payable balance exceeded Groupon's cash and contributed to the company's working capital deficit, according to the company's filing.

    Offering merchants faster payment terms could hurt its cash flow and force it to raise funds to cover its day-to-day cash needs, Groupon said in a recent securities filing. In international markets, the company pays merchants only once a coupon has been redeemed.

    Every one-day reduction in Groupon's merchant payables represents a risk of about $14 million in free cash flow, according to estimates by Herman Leung, a Susquehanna analyst. "It's a key driver of cash flow dollars and a key assumption in the Groupon model," he says of the 60-day payment period. "It's highly sensitive."

    To be sure, Groupon has faced waves of competition for more than a year, and many of those challengers already have come and gone.

    Continued in article

    Teaching cases on the accounting scandals at Groupon (especially overstatement of revenues) and its auditor (Ernst & Young) ---
    See Below


    "GROUPON’S FIRST 10-K: APRIL FOOL’S!," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, April 1, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/593

    What’s all the hoopla about Groupon’s latest “revision” to its financial reports and lack of internal controls?  Why is everyone acting so surprised?  You should have known something was up when the Groupon’s 10K was so long in coming after earnings were originally released on February 8th.  Moreover, we warned you all in “Trust No One, Particularly Not Groupon’s Accountants,” that this day would soon come.  Remember this?

     It is absolutely ludicrous to think that Groupon is anywhere close to having an effective set of internal controls over financial reporting having done 17 acquisitions in a little over a year.  When a company expands to 45 countries, grows merchants from 212 to 78,466, and expands its employee base from 37 to 9,625 in only two years, there is little doubt that internal controls are not working somewhere.  Any M&A expert will agree.  And don’t forget that Groupon admitted to having an inexperienced accounting and reporting staff.

    We just can’t resist: TOLD YOU SO!  We just wonder what took E&Y so long to figure this out…after all, as Groupon’s auditors, they get to see the Company’s books and records, and we don’t.  Maybe it’s just a case of not being able to see the forest for all of the trees.  That’s not very comforting is it?

    And could it be any more appropriate that this latest “revision” release comes so close to April Fool’s Day?

    For those of you that have real lives and may have missed it, here’s what happened:

    • On February 8, 2012, Groupon issued a press release reporting revenues of $506.5 million, free cash flows of $155.1 million, and operating profits of $15.0 million (among other things). See the Company’s 8K filed on this date for more details.
    • Then, this past Friday after the markets’ close, the Company announced a “revision” to its original earnings press release.  2011 revenues and operating profits were both revised downward, revenues down to $492.2 million and operating profits flipping to a loss of $15 million.  See Groupon’s 8K filed on March 30, 2012 for more details.
    • But the biggest “surprise,” or confirmation of trouble, can be found in Item 9A of the Company’s 2011 10K, also filed on March 30, where Groupon admits to having a material weakness in internal control over financial reporting.  The following Company admissions are particularly damning:

     We did not maintain financial close process and procedures that were adequately designed, documented and executed to support the accurate and timely reporting of our financial results.

     We did not maintain effective controls to provide reasonable assurance that accounts were complete and accurate and agreed to detailed support, and that account reconciliations were properly performed, reviewed and approved.

     We did not have adequate policies and procedures in place to ensure the timely, effective review of estimates, assumptions and related reconciliations and analyses, including those related to customer refund reserves. As noted previously, our original estimate disclosed on February 8 of the reserve for customer refunds proved to be inadequate after we performed additional analysis.

    So, what should all this mean for investors and market regulators?  Well, first of all, the Groupon’s earnings revision which was prompted by an increased reserve requirement for customer refunds, highlights the subjectivity and uncertainty associated with any accounting assumptions (or judgments) made by relatively “new” companies, operating in “new” industries, with inexperienced management: yes, internet companies!  In short, internet company accounting is suspect given all the unsupported assertions and assumptions that must be made to comply with generally accepted accounting principles, not to mention the likely internal control weakness issue.

    Next, we question whether there is any real corporate governance at Groupon whatsoever.  Usually, when material weaknesses surface, heads roll…not at Groupon!  Instead, the board of directors rewarded the Company’s chief financial officer with a salary increase and bonus.  According to a Groupon 8K filed on March 19, 2012:

    Mr. Child’s base salary was increased from $350,000 to $380,000 per year. This increase will be effective on April 1, 2012…Mr. Child’s annual bonus guarantee of $350,000 will remain in place for 2012, and he will receive half of the guaranteed bonus in June 2012. The remainder of the guarantee plus any additional bonus earned under the plan will be paid in the first quarter of 2013.

    Absolutely unbelievable!  Not only does the guy who is responsible for the aforementioned system of internal control bust get to keep his job, but he gets a raise and a bonus!  Need we say more?

    Finally, do you really believe that this material weakness in internal control (and related refund issue) mysteriously appeared in the fourth quarter of 2011?  Of course not, but by assigning it to the fourth quarter of 2011, Groupon and E&Y can avoid the embarrassment of admitting that the financial statements included in the Company’s IPO filing were incorrect.  This is probably not a bad strategy from their perspective given the impending securities litigation that is now lurking.

    Continued in article

    Bob Jensen's threads on Groupon are at
    http://www.trinity.edu/rjensen/Fraud001.htm
    Search on the word "Groupon"

     

     

     

     


    "GROUPON IS TECHNICALLY INSOLVENT," by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants, October 21, 2011 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362

    Today (October 21) Groupon issued amendment Number 6 to its S-1 filingThe most interesting data are on page 9 of the report, which we repeat below.

    What stands out to us is that stockholders’ equity on September 30 is negative—the firm has become technically insolvent!  Our prediction that Groupon has a high probability of failure remains intact.

    Continued in article

    Jensen Comment
    This illustrates that on occasion insolvent firms may have value depending upon the net value of all the things that don't get posted to the balance sheet under GAAP. Common examples include contingency assets/liabilities that are not yet booked, intangibles such as the value of employees, and a boatload of other items that accountants just cannot measure with enough confidence and stability to put into the general ledger.

    One of the best examples is the early years of Amazon.com that every year incurred relatively large losses in the income statement but managed to continue to sell equity shares because investors sniffed out huge value in the air surrounding the net assets.

    Groupon of course is another matter, Catenach and Ketz, the grumps, have never liked the stench surrounding the air over Groupon as if it was a pile of something that smells very bad.

     

    Trust No one, Particularly Not Groupon's Accountants and Auditors (Ernst & Young)

    From The Wall Street Journal Weekly Accounting Review on September 30, 2011

    Groupon Unsure on IPO Time
    by: Shayndi Raice and Randall Smith
    Sep 26, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Accounting Changes and Error Corrections, Audit Report, Auditing, Disclosure, Disclosure Requirements, Financial Accounting, Financial Reporting, SEC, Securities and Exchange Commission

    SUMMARY: This article presents financial reporting and auditing issues stemming from the Groupon planned IPO. Groupon originally filed for an initial public offering in June 2011. At the time, the filing contained a measure Adjusted Consolidated Segment Operating Income that is a non-GAAP measure of performance. The SEC at the time required the company to change its filing to use GAAP-based measures of performance. The SEC has continued to scrutinize the Groupon financial statements and has required the company to report revenue based only on the net receipts to the company from sales of its coupons after sharing proceeds with the businesses for which it makes the coupon offers.

    CLASSROOM APPLICATION: The article is useful in financial accounting and auditing classes. Instructors of financial accounting classes may use the article to discuss reporting of the change in measuring revenues and related costs. Instructors of auditing classes may use the article to discuss non-standard audit reports. Links to SEC filings are included in the questions. The video is long; discussion of Groupon's issues stops at 5:30.

    QUESTIONS: 
    1. (Introductory) According to the article, what accounting and disclosure issues have delayed the initial public offering of shares of Groupon, Inc.? What overall economic and financial factors are also affecting this timing?

    2. (Introductory) What was the problem with Groupon CEO Andrew Mason's letter to Groupon employees? Do you think Mr. Mason intended for this letter to be made public outside of Groupon? Should he have reasonably expected that to happen?

    3. (Advanced) What accounting change forced restatement of the financial statements included in the Groupon IPO filing documents? You may access information about this restatement directly at the live link included in the online version of the article. http://online.wsj.com/public/resources/documents/grouponrestatement20110923.pdf

    4. (Introductory) According to the article, by how much was revenue reduced due to this accounting change?

    5. (Introductory) Access the full filing of the IPO documents on the SEC's web site at http://sec.gov/Archives/edgar/data/1490281/000104746911008207/a2205238zs-1a.htm Proceed to the Consolidated Statements of Operations on page F-5. How are these comparative statements presented to alert readers about the revenue measurement issue?

    6. (Advanced) Move back to examine the consolidated balance sheets on page F-4. Do you think this accounting change for revenue measurement affected net income as previously reported? Support your answer.

    7. (Advanced) Proceed to footnote 2 on p. F-8. Does the disclosure confirm your answer? Summarize the overall impact of these accounting changes as described in this footnote.

    8. (Advanced) What type of audit report has been issued on the Groupon financial statements in this IPO filing? Explain the wording and dating of the report that is required to fulfill requirements resulting from the circumstances of these financial statements.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     


     

    Groupon's Fast-growing Business Faces a Churning Point
    by: Rolfe Winkler
    Sep 26, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Cost Accounting, Cost Management, Disclosure, Financial Statement Analysis, Managerial Accounting

    SUMMARY: This article focuses on financial statement analysis of the Groupon IPO filing documents including some references to cost measures. "Forget the snappy 'adjusted consolidated segment operating income.' That profit measure...was rightly rejected by regulators. It is the complete absence of details on subscriber churn that is more problematic. How often are folks unsubscribing from Groupon's daily emails?...The issue is important since...the cost of adding new subscribers has increased quickly."

    CLASSROOM APPLICATION: The article may be used in a financial statement analysis or managerial accounting class.

    QUESTIONS: 
    1. (Introductory) What is the overall concern about Groupon's business condition that is expressed in this article?

    2. (Advanced) The author states that the cost of adding new subscribers has increased. How was this cost determined? How does this calculation make the cost assessment comparable from one period to the next?

    3. (Advanced) What does Groupon CEO Andrew Mason say about the company's cost of acquiring customers? What income statement expense item shows this cost? How does the increasing unit cost discussed in answer to question 2 above bring the CEO's assertion into question?

    4. (Advanced) In general, how does the author of this assess the quality of the filing by Groupon for its initial public offering? Why should that assessment impact the thoughts of an investor considering buying the Groupon stock when it is offered?
     

    Reviewed By: Judy Beckman, University of Rhode Island

     

    "Groupon: Comedy or Drama?"  by Grumpy Old Accountants  Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros, July 2011 ---
    http://accounting.smartpros.com/x72233.xml 

    "Trust No one, Particularly Not Groupon's Accountants," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, August 24, 2011 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/ 

    "Is Groupon "Cooking Its Books?"  by Grumpy Old Accountants  Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros, September  2011 ---
    http://accounting.smartpros.com/x72233.xml 

     

    Teaching Case
    When Rosie Scenario waved goodbye "Adjusted Consolidated Segment Operating Income"

    From The Wall Street Journal Weekly Accounting Review on August 19, 2011

    Groupon Bows to Pressure
    by: Shayndi Raice and Lynn Cowan
    Aug 11, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Advanced Financial Accounting, SEC, Securities and Exchange Commission, Segment Analysis

    SUMMARY: In filing its prospectus for its initial public offering (IPO), Groupon has removed from its documents "...an unconventional accounting measurement that had attracted scrutiny from securities regulators [adjusted consolidated segment operating income]. The unusual measure, which the e-commerce had invented, paints a more robust picture of its performance. Removal of the measure was in response to pressure from the Securities and Exchange Commission...."

    CLASSROOM APPLICATION: The article is useful to introduce segment reporting and the weaknesses of the required management reporting approach.

    QUESTIONS: 
    1. (Introductory) What is Groupon's business model? How does it generate revenues? What are its costs? Hint, to answer this question you may access the Groupon, Inc. Form S-1 Registration Statement filed on June 2, 011 available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm

    2. (Advanced) Summarize the reporting that must be provided for any business's operating segments. In your answer, provide a reference to authoritative accounting literature.

    3. (Advanced) Why must the amounts disclosed by operating segments be reconciled to consolidated totals shown on the primary financial statements for an entire company?

    4. (Advanced) Access the Groupon, Inc. Form S-1 Registration Statement filed on June 2, 011 and proceed to the company's financial statements, available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm#dm79801_selected_consolidated_financial_and_other_data Alternatively, proceed from the registration statement, then click on Table of Contents, then Selected Consolidated Financial and Other Data. Explain what Groupon calls "adjusted consolidated segment operating income" (ACSOI). What operating segments does Groupon, Inc., show?

    5. (Introductory) Why is Groupon's "ACSOI" considered to be a "non-GAAP financial measure"?

    6. (Advanced) How is it possible that this measure of operating performance could be considered to comply with U.S. GAAP requirements? Base your answer on your understanding of the need to reconcile amounts disclosed by operating segments to the company's consolidated totals. If it is accessible to you, the second related article in CFO Journal may help answer this question.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Groupon's Accounting Lingo Gets Scrutiny
    by Shayndi Raice and Nick Wingfield
    Jul 28, 2011
    Page: A1

    CFO Report: Operating Segments Remain Accounting Gray Area
    by Emily Chasan
    Aug 15, 2011
    Page: CFO

     

    "Groupon Bows to Pressure," by: Shayndi Raice and Lynn Cowan, The Wall Street Journal, August 11, 2011 ---
    https://mail.google.com/mail/?shva=1#inbox/131e06c48071898b

    Groupon Inc. removed from its initial public offering documents an unconventional accounting measurement that had attracted scrutiny from securities regulators.

    The unusual measure, which the e-commerce had invented, paints a more robust picture of its performance. Removal of the measure was in response to pressure from the Securities and Exchange Commission, a person familiar with the matter said.

    In revised documents filed Wednesday with the SEC, the company removed the controversial measure, which had been highlighted in the first three pages of its previous filing. But Groupon's chief executive defended the term Wednesday. [GROUPON] Getty Images

    Groupon, headquarters above, expects to raise about $750 million.

    Groupon had highlighted something it called "adjusted consolidated segment operating income", or ACSOI. The measurement, which doesn't include subscriber-acquisitions expenses such as marketing costs, doesn't conform to generally accepted accounting principles.

    Investors and analysts have said ACSOI draws attention away from Groupon's marketing spending, which is causing big net losses.

    The company also disclosed Wednesday that its loss more than doubled in the second quarter from a year ago, even as revenue increased more than ten times.

    By leaving ACSOI out of its income statements, the company hopes to avoid further scrutiny from the SEC, the person familiar with the matter said. The commission declined comment.

    Groupon in June reported ACSOI of $60.6 million for last year and $81.6 million for the first quarter of 2011. Under generally accepted accounting principles, the company generated operating losses of $420.3 million and $117.1 million during those periods.

    Wednesday's filing included a letter from Groupon Chief Executive Andrew Mason defending ACSOI. The company excludes marketing expenses related to subscriber acquisition because "they are an up-front investment to acquire new subscribers that we expect to end when this period of rapid expansion in our subscriber base concludes and we determine that the returns on such investment are no longer attractive," the letter said.

    There was no mention of when that expansion will end, but the person familiar with the matter said the company reevaluates the figures weekly.

    Groupon said it spent $345.1 million on online marketing initiatives to acquire subscribers in the first half and that it expects "to continue to expend significant amounts to acquire additional subscribers."

    The latest SEC filing also contains new financial data. Groupon on Wednesday reported second-quarter revenue of $878 million, up 36% from the first quarter. While the company's growth is still rapid, the pace has slowed. Groupon's revenue jumped 63% in the first quarter from the fourth.

    The company's second-quarter loss was $102.7 million, flat sequentially and wider than the year-earlier loss of $35.9 million.

    Groupon expects to raise about $750 million in a mid-September IPO that could value the company at $20 billion.

    The path to going public hasn't been easy. The company had to file an amendment to its original SEC filing after a Groupon executive told Bloomberg News the company would be "wildly profitable" just three days after its IPO filing. Speaking publicly about the financial projections of a company that has filed to go public is barred by SEC regulations. Groupon said the comments weren't intended for publication.

    Continued in article

    "Groupon, Zynga and Krugman's Frothy Valuations," by Jeff Carter, Townhall, September 2011 ---
    http://finance.townhall.com/columnists/jeffcarter/2011/09/13/groupon,_zynga_and_krugmans_frothy_valuations

    Jensen Comment
    In the 1990s, high tech companies resorted to various accounting gimmicks to increase the price and demand for their equity shares ---
    http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

    Bob Jensen's threads about cooking the books ---
    http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

     

     


    Teaching Case on How to Overstate Revenues
    Auditor Ernst & Young is also named in the $7 billion lawsuit

    Jensen Comment
    I don't know what it is about The Wall Street Journal, but it is very common for me to be forced to go elsewhere to find the names of the audit firms included in client lawsuits. It's like the WSJ tries to protect audit firms.

    From The Wall Street Journal Accounting Weekly Review on September 2, 2011

    Sino-Forest CEO Gives Up Position
    by: Isabella Steger
    Aug 29, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Audit Quality, Auditing, Ethics, Financial Accounting, Financial Statement Analysis, Financial Statement Fraud, Fraud, Fraudulent Financial Reporting

    SUMMARY: Sino-Forest Corp. is traded on the Toronto Stock Exchange (TSX) with the symbol TRE. The exchange suspended trading in the company's shares for 15 days beginning Friday, August 26. TSX also ordered the chief executive and other key managing executives to resign on Friday, though that order was then delayed to allow for a hearing first. The current article indicates the executives "resigned voluntarily" over the weekend of August 27 to 28 after "Canadian regulators said the company may have committed fraud." These proceedings began based on "allegations...published by short seller Muddy Waters LLC" (see the related article). This short-selling analyst alleged the company may have overstated revenues and timber holdings; the Ontario Securities Commission also said that the company "'appears to have engaged in significant non-arm's length transactions which may have been contrary to Ontario securities laws and the public interest.'"

    CLASSROOM APPLICATION: The article is second in this week's coverage of accounting and auditing issues at Chinese companies traded on North American exchanges. This case involves accounting for revenues and natural resources-timber reserves-and highlights potential issues from non-arm's-length transactions conducted through subsidiaries. Questions on accounting and auditing these areas are posed, but the auditing questions may be deleted for instructors wishing to focus on only the accounting-related issues.

    QUESTIONS: 
    1. (Introductory) What steps has Sino-Forest undertaken in response to allegations that the company may have committed fraud? List all that you find described in the main and related articles.

    2. (Introductory) What areas of accounting are specifically of concern at Sino-Forest Corp.?

    3. (Advanced) Name some audit steps that are designed to detect potential accounting problems in these areas of specific concern at Sino-Forest. In your answer, state the audit objectives you would try to achieve by conducting these tests and identify whether they are transaction-related audit objectives or balance-related audit objectives.

    4. (Advanced) If Sino-Forest and its management have committed fraud as alleged by analysts and Canadian regulators, are these audit steps that you list above designed to detect this fraud with absolute certainty? Explain your answer.

    5. (Advanced) What is a "non-arm's-length transaction"? What is a subsidiary? What potential accounting measurement concerns arise if Sino-Forest has undertaken this type of transaction? Why does conducting the actions through a subsidiary potentially exacerbate these accounting measurement concerns?

    6. (Advanced) Name some audit steps that are designed to detect these potential accounting measurement problems stemming from non-arm's-length transactions. In your answer, state the audit objectives you would try to achieve by conducting these tests and identify whether they are transaction-related audit objectives or balance-related audit objectives.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Regulator Challenges Sino-Forest Claims
    by Caroline Van Hasselt
    Aug 27, 2011
    Online Exclusive

    Special Report: The "Shorts" Who Popped a China Bubble
    by Daniel Bases, Ryan Vlastelica, and Clare Bal of the International Business Times
    Aug 05, 2011
    Online Exclusive

    "Sino-Forest CEO Gives Up Position," by: Isabella Steger, The Wall Street Journal, August 29, 2011 ---
    http://professional.wsj.com/article/SB10001424053111904199404576536154293011240.html?mod=djem_jiewr_AC_domainid

    HONG KONG—Sino-Forest Corp. said its chairman and chief executive resigned and three employees have been temporarily suspended, after Canadian regulators said the company may have committed fraud.

    The forestry company said Sunday that Allen Chan voluntarily stepped down as chairman and CEO pending completion of the company's review of fraud allegations published two months ago by short seller Muddy Waters LLC.

    Mr. Chan will assume the title of founding chairman emeritus of the Chinese-operated company, shares of which are listed in Toronto. He wasn't available for comment.

    William Ardell, lead director and chairman of Sino-Forest's independent committee conducting the investigation, will succeed Mr. Chan as chairman. Sino-Forest Vice Chairman Judson Martin, an executive director, will become chief executive. Mr. Martin also is chief executive of Sino-Forest's Greenheart Group Ltd. unit, shares of which are listed in Hong Kong.

    Sino-Forest said Mr. Chan would continue to assist the company's internal investigation and that he had planned to resign before the Ontario Securities Commission on Friday ordered a 15-day trading halt for the company's shares.

    The commission issued the order after saying regulators had found that the company may have "misrepresented some of its revenue and/or exaggerated some of its timber holdings." The commission said the company, through its subsidiaries, also "appears to have engaged in significant non-arm's-length transactions which may have been contrary to Ontario securities laws and the public interest."

    The commission on Friday ordered executives to resign but revoked the order the same day, saying it would require a hearing.

    Sino-Forest's stock is down 72% for the year. The shares took a beating in June when Muddy Waters published its allegations of questionable accounting. The shares closed Thursday at 4.81 Canadian dollars (US$4.90), down 5.7%.

    Continued in article

    "Beleaguered Sino-Forest facing $7-billion lawsuit," Pulp & Paper Canada, September 1, 2011 ---
    http://www.pulpandpapercanada.com/news/beleaguered-sino-forest-facing-7-billion-lawsuit/1000550204/

    .. . .

    The lawsuit seeks money for those who bought Sino-Forest shares on the stock market and through the company's public offering.

    The claim names several Sino-Forest executives, including former CEO Allen Chan, auditor Ernst & Young, and financial institutions that acted as underwriters for the company's 2009 prospectus offering. They include TD Securities, Dundee Securities, RBC Securities, Scotia Capital, and CIBC World Markets.

    The lead plaintiffs in the suit are the Labourers' Pension Fund of Central and Eastern Canada and the International Union of Operating Engineers Local 793 pension plan.

    If the suit is granted class-action status, any judgements or settlements would be available to all members of the class.

    The allegations against Sino-Forest have not been proven in court.

    Continued in Article

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm

     


    From The Wall Street Journal Accounting Weekly Review on August 4, 2011

    Ex-E&Y Auditors Barred by PCAOB
    by: Michael Rapoport
    Aug 02, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Audit Firms, Audit Quality, Auditing, PCAOB, Public Accounting, Public Accounting Firms

    SUMMARY: The Public Company Accounting Oversight Board (PCAOB) barred two former Ernst & Young LLP employees, Peter C. O'Toole and Darrin G. Estella, "...from auditing public companies, alleging they provided misleading documents to inspectors who were evaluating the accounting firm's work... [The men also have been barred] from associating with public accounting firms for at least three years and at least two years, respectively."

    CLASSROOM APPLICATION: The article is useful to cover ethics, the function of the PCAOB, and the reputational foundation for the public accounting profession-typical topics in an opening chapter of an auditing text.

    QUESTIONS: 
    1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)? What are the organization's responsibilities?

    2. (Introductory) According to the PCAOB, what did Peter C. O'Toole and Darrin G. Estella do to some audit workpapers?

    3. (Advanced) What options for action are available to the PCAOB when finding something such as Messrs. O'Toole and Estella did? What actions did the PCAOB take and what has been the result?

    4. (Advanced) An attorney for Mr. O'Toole "...noted that the PCAOB didn't allege any deficiencies in the audit, nor...[that] the men were trying to hid any audit failure or lie about the work that was actually done...." Then how has the announcement of these men's actions by the PCAOB harmed the accounting and auditing profession?

    5. (Advanced) Do you think what Messrs. O'Toole and Estella did was ethically acceptable? Support your answer.
     

    SMALL GROUP ASSIGNMENT: 
    Question for small group discussion: Suppose you are asked by a superior to introduce an audit workpaper or alter an audit workpaper after completing an audit engagement. What would you do? What impact will your decision have on your immediate future? On your potential long term future?

    Reviewed By: Judy Beckman, University of Rhode Island

    "Ex-E&Y Auditors Barred by PCAOB," by: Michael Rapoport, The Wall Street Journal, August 2, 25011 ---
    http://professional.wsj.com/article/SB20001424053111904292504576482550957477580.html?mod=djem_jiewr_AC_domainid

    The government's audit overseer barred two former Ernst & Young LLP employees from auditing public companies, alleging they provided misleading documents to inspectors who were evaluating the accounting firm's work.

    The Public Company Accounting Oversight Board barred Peter C. O'Toole and Darrin G. Estella, a former partner and former senior manager in E&Y's Boston office, from associating with public accounting firms for at least three years and at least two years, respectively. Mr. O'Toole also was fined $50,000.

    The PCAOB said Mr. O'Toole's three-year bar was the longest it had ever imposed on a partner of a Big Four accounting firm. The two men agreed to settlements with the PCAOB but didn't admit or deny the board's findings. Mr. O'Toole and Mr. Estella may apply to remove their bars after three and two years, respectively.

    The PCAOB said that shortly before its inspectors were to scrutinize an E&Y audit of an unidentified company in 2010 as part of its regular inspections of the firm, Mr. O'Toole and Mr. Estella created, backdated and placed in the audit file a document concerning the valuation of one of the audit client's investments, the most important issue in the audit. Mr. O'Toole also allegedly authorized other members of the audit team to alter other working papers in advance of the inspection. The changes weren't disclosed to the PCAOB, the board said.

    Ernst & Young said in a statement that it had "separated" both men from the firm after it determined that its policy prohibiting supplementing or changing audit documents had been violated. E&Y said it cooperated fully with the PCAOB's investigation, and that Mr. O'Toole's and Mr. Estella's conduct had no impact on the client's financial statements or on E&Y's audit conclusions.

    Continued in article


    Win Some and Lose Some:  Some Good News for Ernst & Young
    "High Court Denies Suit Against E&Y Over Time-AOL Deal," by Samuel Howard, Law360.com, June 13, 2011 ---
    http://www.law360.com/topnews/articles/250918/high-court-denies-suit-against-e-y-over-time-aol-deal
    Thank you Caleb Newquist for the heads up!

    The U.S. Supreme Court on Monday declined to hear an appeal brought by an AOL Inc. investor alleging that Ernst & Young LLP approved tainted financial statements related to Time Warner Inc.'s merger with AOL.

    In rejecting the petition for certiorari, the high court dashed AOL investor Dominic Amorosa and co-petitioner attorney Christopher Gray’s claims that the Second Circuit failed to properly apply the Securities Litigation Uniform Standards Act of 1998 when it dismissed the fraud suit in February.

    The decision brings an end to 2003 suit claiming that Ernst & Young, the independent auditor for AOL, Time Warner and the merged company, engaged in fraud and abetted the companies' fraud when it issued audited financial statements approving the companies' allegedly faulty accounting.

    "My client and I believe that the certiorari petition raised significant and unsettled questions of law concerning an 'opt-out' securities plaintiff’s right to pursue individual claims under the Securities Exchange Act and state law," petitioner Christopher Gray said. "While we are disappointed with the denial of certioriari, obviously not every case can be heard by the U.S. Supreme Court on the merits and we look forward to moving on to other matters."

    The Second Circuit found that Amorosa had failed to state a claim for loss causation because none of the events he identified as corrective disclosures addressed AOL’s accounting practices or in any way implicated Ernst & Young’s June 1999 audit opinion.

    The petitioners argued that the high court previously established that a corrective disclosure explicitly reflecting the alleged false statement is not required state such a claim.

    Amorosa and Gray also challenged the Second Circuit's finding in its Feb. 2 dismissal that SLUSA preempted Amorosa's state law claims.

    SLUSA defines cases that are to be considered preempted as covered class actions — cases that seek damages for more than 50 people and that are joined, consolidated or otherwise proceed as a single action — but it does not preempt state law claims in individual securities lawsuits like Amorosa's, the petitioners argued.

    Continued in article

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm

     

     


    "Video:  Ernst & Young Fined Over Equitable Life," by Emma Hunt, Accountancy Age, June 11, 2010 --- http://www.accountancyage.com/accountancyage/video/2264616/video-ernst-young-fined

     


    "Ernst & Young must face class action over Broadcom's option backdating," by Carol J. Williams, Los Angeles Times, April 14, 2011 ---
    http://latimesblogs.latimes.com/money_co/2011/04/ernst-young-broadcom-options-backdating-scheme-class-action-appeals-court.html

    A federal appeals court Thursday reinstated a class-action lawsuit filed by Broadcom Corp. investors against Ernst & Young, saying the auditors should have known about an option-backdating scheme at the Irvine tech company.

    A lower-court judge had dismissed the case against Ernst & Young after concluding the plaintiffs hadn’t shown that the auditors knew that the value of Broadcom’s stock was probably inflated by the company’s manipulation of its financial statements.

    Thursday’s ruling by the U.S. 9th Circuit Court of Appeals in San Francisco reversed that dismissal and scolded Ernst & Young for not acting to stop the $2.2-billion backdating scheme.

    Ernst & Young "apparently accepted management at its word, never received requested documentation and issued an unqualified opinion on the accuracy of Broadcom’s financial statements," the 9th Circuit panel ruled in overturning the lawsuit’s dismissal by U.S. District Judge Manuel L. Real in Los Angeles.

    Ernst & Young’s audit "amounted to no audit at all," the appeals court said.

    A spokesman for Ernst & Young declined to comment on the ruling, saying the firm was still reviewing it.

    Continued in article


    Recall that Lehman opted to record sales of poisoned securities in a questionable arms length sale to former employees in what was literally a situation where 100% of the sold securities would be returned at 5% or 8% higher prices.


    As Lehman auditors, Ernst & Young is now contending in a lawsuit that they had no choice to account for these as sales under FAS 140 even though that accounting was deceptive for investors and hid financial risks.


    The Lehman Bankruptcy Judge stomped down heavily upon Ernst & Young. Links to this report and other media quotations regarding the repo sales disgrace can be found at
    http://www.trinity.edu/rjensen/Fraud001.htm#Ernst


    A lawsuit against Ernst & Young was brought by the Attorney General of New York and is not pending in court. The SEC ducked this one like a miserable coward.

     


     
    Ernst & Young
    AccountingLink
    AccountingLink Alerts


     
    29 April 2011


    To the Point: Repo accounting amendments finalized

    The Financial Accounting Standards Board (FASB) today amended its guidance on accounting for repurchase agreements. The amendments simplify the accounting by eliminating the requirement that the transferor demonstrate it has adequate collateral to fund substantially all the cost of purchasing replacement assets. As a result, more arrangements could be accounted for as secured borrowings rather than sales.

    The attached To the Point summarizes what you need to know about the new guidance. It is also available online.

    It's about time!
    When I suggested this in a meeting and later in an email message a couple of years ago a FASB board member gave me the brush off.

    "FASB WILL TAKE ANOTHER LOOK AT REPO ACCOUNTING," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, March 22, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/585

    The FASB announced yesterday that it will take a look at repo accounting.  Again.  As we don’t expect much improvement, we wonder why it bothers.

    Michael Rapoport of The Wall Street Journal reports, “The Financial Accounting Standards Board agreed Wednesday to look at further revisions to how companies must account for their use of repurchase agreements, or ‘repos,’ a form of financing for securities-trading firms, following a previous revision last year. In particular, the board will look at ‘repos to maturity,’ a potentially risky variant that contributed to MF Global’s collapse last year.”

    The Lehman Brothers collapse led to some small, insignificant changes in the repo rules.  With the collapse of MF Global, the board thinks it desirable to consider some incremental but insignificant amendments.  As last year’s revision was impotent, we expect more of the same from any revision this year.

    What the board should have done a decade or two ago was to focus on the economic substance of the transaction, and the substance of a repurchase agreement is that it is a secured borrowing.  Pure and simple.  Thus, all repurchase agreements should be accounted for as secured borrowings.

    The FASB’s statement yesterday says more about it than it does repo accounting.  The board is incredibly slow and, with old age, is slowing down even further.  The board is reactive instead of proactive; apparently, it cannot think about an issue unless there is some type of financial crisis.  The board cannot think simple; instead, it seems to complexify whatever issue is at hand.  Finally, the board seems beholden to banks and has been for some time.  It appears to carry water for bankers, whether the topic is special purpose entities, derivatives, fair value accounting, or repurchase agreements.

    Forget reforming repo accounting.  Let’s reform FASB instead. (so say Catanach and Ketz)

    Jensen Comment

    Question
    Where did the missing MF Global $1+ billion end up?

    Hint:
    The the word "repo" sound familiar?
    http://en.wikipedia.org/wiki/Repurchase_agreement

    "MF Global and the great Wall St re-hypothecation scandal," by Chrisopher Elias, Reuters, December 7, 2011 ---
    http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/


    "Who Is The PwC Partner Responsible For MF Global? Someone With A Lot of Baggage," by Francine McKenna, re:TheAuditors, June 14, 2013 --- Click Here
    http://retheauditors.com/2013/06/14/who-is-the-pwc-partner-responsible-for-mf-global-someone-with-a-lot-of-baggage/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ReTheAuditors+%28re%3A+The+Auditors%29


    I respectfully decline to answer based on my constitutional rights.
    Edith O'Brien taking the Fifth

    MF Global
    "A Year Later, All Eyes Still on 'Edie'
    ," by Aaron Lucchettl, Julie Steinberg, and Mike Spector, The Wall Street Journal, October 30, 2012 ---
    http://professional.wsj.com/article/SB10001424052970204789304578088892963139264.html?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno-wsj

    Who broke the law by raiding customer accounts at MF Global Holdings MFGLQ 0.00% Ltd.?

    Investigators seem no closer to the answer than they were when the New York brokerage firm filed for bankruptcy exactly a year ago Wednesday, owing thousands of farmers and ranchers, hedge funds and other investors an estimated $1.6 billion. Their money was supposed to be stashed safely at MF Global, but company officials used much of it for margin calls and other obligations.

    The last, best hope for a breakthrough in the probe is Edith O'Brien, the former assistant treasurer at MF Global. Working in the company's Chicago office, she was the go-to person for emergency money transfers as MF Global flailed for its life.

    "She really kept the place running," says Matthew Gopin, MF Global's former head of internal audit for North America, referring to her everyday duties approving money transfers.

    One transfer in particular has drawn outsize attention.

    Ms. O'Brien hasn't budged from her refusal to cooperate with investigators unless she is shielded from prosecution, and in March she cited her constitutional right against self-incrimination in refusing to testify before a congressional panel.

    Earlier this year, her lawyers told the government what she would testify to in exchange for an immunity deal. Those talks didn't go anywhere, and prosecutors subsequently signaled that she isn't a target of the criminal probe, according to a person involved in the case. She still could face civil charges from regulators.

    It isn't clear if Ms. O'Brien knew that the transfers she approved in MF Global's final days violated U.S. rules on the use of customer funds or deepened a deficit in customer accounts. In some cases, Ms. O'Brien has told friends, she relied on calculations prepared by other MF Global employees that turned out to be wrong. In others, employees bungled transactions that she approved.

    Friends say she has been worried about becoming the "fall guy" in the probe, especially since former MF Global Chief Executive Jon S. Corzine told lawmakers in December that she assured him the $175 million transfer was proper.

    In private conversations, Ms. O'Brien has bristled at and disagreed with Mr. Corzine's comments. "They may have thought they had a chump, but they've got the wrong chump," she told several friends while drinking Chardonnay at a bar in Chicago, according to someone who was there.

    One email from Ms. O'Brien reviewed by the Journal shows her informing Mr. Corzine of an MF Global account the money came from, as opposed to providing explicit assurances that the transfer was proper. The email didn't note, however, that the funds originated from a customer account.

    Mr. Corzine declined to comment. Bankruptcy lawyers winding down the company have since found money to cover most of the estimated $1.6 billion customers couldn't get.

    Continued in article

    MF Global Was Another Repo Scandal
    "FASB WILL TAKE ANOTHER LOOK AT REPO ACCOUNTING," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, March 22, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/585
    The FASB subsequently decided that most repos are to be booked as secured borrowings rather than repo sales.

    "MF Global Mystery: The Beginning of the End or the End of The Beginning?" by Francine McKenna, re:TheAuditors, January 10, 2011 ---
    http://retheauditors.com/2012/01/10/mf-global-mystery-the-beginning-of-the-end-or-the-end-of-the-beginning/

     

    Bob Jensen's threads on the MF Global scandal ---
    http://www.trinity.edu/rjensen/Fraud001.htm

    Search on the phrase "MF Global"

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

     


    The FAS 140 Lifeboat Leaked

    "$99 Million Buys EY Ticket Out Of Private Lehman Litigation, Finally," by Francine McKenna, re:TheAuditors, October 21. 2013 ---
    http://retheauditors.com/2013/10/21/99-million-buys-ey-ticket-out-of-private-lehman-litigation-finally/

    Last defendant standing. Not an enviable place for EY in the case, In re Lehman Brothers Securities and Erisa Litigation.

    Everyone else had folded their tent, paid the price to cross this dog off the list. Lehman underwriters agreed in 2011 to a $426.2 million settlement. UBS, one of the underwriters, held out and settled last August for another $120 million. Even before the UBS and EY settlements, Bernstein Litowitz Berger & Grossmann, attorneys for the plaintiffs, claimed the combined recovery of $516,218,000 is the third largest recovery to date in a case arising from the financial crisis.

    The $99 million EY will pay is more than Lehman’s officers and directors, who settled for $90 million. That’s a big deal considering the executives typically say, “The auditors said it was ok,” and the auditors say, “Management duped us.” But it’s not that much considering that EY agreed to pay C$117 million ($117.6 million) last December to settle claims in a Canadian class action suit against Sino-Forest Corp, a Chinese reverse merger fraud. That settlement is the largest by an auditor in Canadian history, according to the the law firms.

    And it’s not as much as some thought EY would pay for Lehman. In fact, many thought Lehman would finish off EY for good.

    John Carney, now of CNBC, writing for Business Insider at the time:

    “The Examiner concludes that sufficient evidence exists to support colorable  claims against Ernst & Young LLP (“Ernst & Young”) for professional malpractice arising from Ernst & Young’s failure to follow professional standards of care with respect to communications with Lehman’s Audit Committee, investigation of a whistleblower claim, and audits and reviews of Lehman’s public filings.”

    That may not sound like a mortal threat against Ernst & Young. But the damages here could be enormous. A successful lawsuit against E&Y could result in a court finding that the failure to properly advise the audit committee prevented Lehman from taking genuine steps to substantially reduce its leverage, which may have saved the firm from bankruptcy. Which is to say, E&Y could find itself blamed for all the losses to Lehman shareholders. That would be a stretch—such a claim would be speculative—but it still should be scaring the heck out of the partners.

    When the bankruptcy examiner’s report on Enron came out, the language about Arthur Andersen was quite mild. It merely noted there was “sufficient evidence from which a fact-finder could conclude that Andersen: (1) committed professional negligence in the rendering of accounting services to Enron…” It went on to note that Andersen likely had a strong defense against liability since so many Enron executives were implicated.

    “Enron brought down Arthur Andersen,” Felix Salmon notes. “Will Lehman do the same for E&Y?”

    In July of 2011, New York Federal Court Judge Lewis Kaplan decided to allow substantially all of the allegations against Lehman executives and at least one of the allegations against Ernst & Young to move forward to discovery and trial. One month later Lehman Brothers executives, including its former chief executive Richard S. Fuld Jr., agreed to pay $90 million to settle. Insurance proceeds paid for their settlement.

    What was the remaining allegation against Ernst & Young? That the auditor had reason to know Lehman’s 2Q 2008 financial statements could be materially misstated because of the extensive use of Repo 105 transactions.

    Continued in article

    Bob Jensen's threads on Ernst & Young ---
    http://www.trinity.edu/rjensen/Fraud001.htm

     


    "Auditors Face Fraud Charge:  New York Set to Allege Ernst & Young Stood By as Lehman Cooked Its Books," by Liz Rappaport and Michel Rapoport, The Wall Street Journal, December 20, 2010 ---
    http://online.wsj.com/article/SB10001424052748704138604576029991727769366.html?mod=djemalertNEWS 

    New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.

    State Attorney General Andrew Cuomo is close to filing the case, which would mark the first time a major accounting firm was targeted for its role in the financial crisis. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.

    Lehman Brothers was long one of Ernst & Young's biggest clients, and the accounting firm earned approximately $100 million in fees for its auditing work from 2001 through 2008, say people familiar with the matter.

    The suit, led by Mr. Cuomo, New York's governor-elect, could come as early as this week. It is part of a broader investigation into whether some banks misled investors by removing debt from their balance sheets before they reported their financial results to mask their true levels of risk-taking, a person familiar with the case said. The state may seek to impose fines and other penalties.

    Mr. Cuomo's office has sought documents and information from several firms, including Bank of America Corp., which earlier this year disclosed six transactions that were wrongly classified. Jerry Dubrowski, a Bank of America spokesman, said the bank's practice is to cooperate with any inquiry from regulators.

    It is possible that Ernst & Young will try to settle before any suit is filed. The firm declined to comment. A spokesman for the Lehman Brothers estate also declined to comment.

    The transactions in question, known as "window dressing," involve repurchase agreements, or repos, a form of short-term borrowing that allows banks to take bigger trading risks. Some banks have systematically lowered their repo debt at the ends of fiscal quarters, making it appear they were less risk-burdened than they actually were most of the time.

    Lehman Brothers dubbed transactions of this type "Repo 105." The maneuver came to light in March, when the bankruptcy examiner investigating the firm's collapse more than two years ago found that it moved some $50 billion in assets off its balance sheet. Lehman labeled those transactions as securities sales instead of loans, which led investors to believe the firm was financially healthier than it really was.

    The bankruptcy examiner's report and the attorney general's investigation found that Lehman Brothers carried out the Repo 105 transactions on a quarterly basis in 2007 and 2008 without telling investors. Mr. Cuomo's investigation found that Repo 105 transactions started as far back as 2001, said the person familiar with the probe.

    The attorney general's investigation, which began after the bankruptcy examiner's report, found that Ernst & Young specifically approved of Lehman's use of Repo 105 transactions and provided the investment bank with a complete audit opinion from 2001 through 2007, said the person.

    Mr. Cuomo's office has also been investigating suspected window-dressing transactions at other banks, said the person, and is probing whether they similarly misled investors.

    An analysis earlier this year by The Wall Street Journal found that other banks were reducing their level of debt at quarter-end.

    The attorney general's office has sought documents and information from several firms, including Bank of America Corp., which earlier this year disclosed six transactions that were wrongly classified. The Journal's analysis found that Bank of America was among the most active banks in reducing its debt at reporting time.

    The state's investigations into other firms' window dressing are less advanced than its Ernst & Young probe, said a person familiar with the probes.

    Other regulators have said they are looking into window dressing as well. The Securities and Exchange Commission's investigation into Lehman's collapse is focusing on Repo 105 transactions, said people familiar with the matter. It has proposed new types of disclosures to help investors identify when banks are window dressing. But the SEC has said it hasn't found any widespread inappropriate practices in that area.

    Britain's Financial Reporting Council, which oversees corporate reporting rules, is also investigating Ernst & Young's role in the Lehman collapse.

    The Lehman bankruptcy examiner's report also stated that there may be evidence to support negligence and malpractice claims against Ernst & Young regarding Lehman's audits and its lack of response to a whistle-blower at Lehman who raised red flags about the repo trades.

    The whistle-blower was Matthew Lee, a Lehman Brothers senior vice president. He had complained to his boss, and eventually wrote a letter in May 2008 to senior Lehman executives expressing concern that the Repo 105 transactions violated Lehman's ethics code by misleading investors and regulators about the true value of the firm's assets. Days later, Mr. Lee was ousted from the firm.

    According to the Lehman bankruptcy examiner's report, Ernst & Young auditors saw the letter, and later interviewed Mr. Lee after he was let go from Lehman. Ernst & Young previously said in a statement that Lehman management determined Mr. Lee's "allegations were unfounded." Mr. Lee couldn't be reached for comment.

    Continued in article

    "Ernst & Young — Cuomo Initiates Settlement Talks With Filing," by Walter Pavlo, Forbes, December 24, 2010 ---
    http://blogs.forbes.com/walterpavlo/2010/12/24/ernst-young-cuomo-initiates-settlement-talks-with-filing/?boxes=financechannelforbes
    Thanks to David Albrecht for the heads up.

    Andrew Cuomo, New York’s attorney general, filed a civil complaint again Ernst & Young claiming that the accounting firm helped Lehman Brothers mislead investors by using transactions called Repo 105s (aka Cooking The Books).  Anyone who thinks that E&Y and the state of New York are going to make it to a courtroom to settle this in front of a jury has got to be kidding.  Last time I checked, there were four major accounting firms (The Big 4) and there have been numerous calls that a fifth is needed to take the place of the ill-fated Arthur Andersen.  A guilty verdict for E&Y would mean we would have “The Big 3” (look how well that number worked out for the automotive industry).  A settlement is imminent.

    We have all seen this type of theater play out before.  A prosecutor calls out a company for some “massive wrongdoing” then settles within a year for a new record dollar figure (Goldman Sachs, Bank of America, AIG, etc.).  This filing by Cuomo simply gets the negotiations started with E&Y.  But are these types of settlements effective?

    Corporate Counsel’s Sue Reisinger did an in-depth piece as to whether these large settlements work in deterring future bad behavior.  Her conclusion…THEY DON’T.  A look at BP alone provides plenty of evidence of this.  Back in 2005, a BP facility was cited for over 300 safety violations at a plant that had an explosion killing 15 and injuring 270.  To correct this bad behavior, BP got a $21 million fine as a deterrent.  This past April that same BP facility released thousands of pounds of cancer-causing chemicals into the air for 40 days…another fine.  Then the BP oil spill in the Gulf of Mexico, killing 11 and impacting lives all along America’s Gulf Coast.  So how do you punish the company to correct the behavior?  My son was even perplexed when we bought gas at the local BP station, “should we purchase gas elsewhere to protest the oil spill or purchase it here to help pay for the cleanup?”  I didn’t have an answer, but I do know this, put someone in jail that was responsible and these questions go away.

    So what should be done?  Start locking people up and here’s why:

    1)    We need people as examples, not companies.  Shareholders are shouldering most of the financial penalty, not the individuals responsible.

    2)    Prison is effective punishment.  While I will argue that prison sentences for some are too long, the experience does get your mind right.  White-Collar recidivism is negligible for a reason….the punishment works.

    3)    Hold People Accountable.  I would rather see the CEO of a company go to jail saying he was sorry, than see one more commercial about how sorry the company is about the wrong they did (a la BP).

    4)    Arresting one person will lead you to the real person responsible.  Once someone is arrested they will start talking, and so on, and so on.

    The corporate veil has a place in business but it should not protect those that are guilty of crimes…and it seems to me that more than a few bad guys have gotten away.  Civil litigation has become too easy for both the prosecutors and the defense, so let’s up the game and put some butts on the line.  I’m speaking from experience, prison hurts, is a great deterrent and will go a long way to clean things up in corporate wrongdoing.

    Bob Jensen's threads on white collar crime are at
    http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


    "Ernst & Young defends its Lehman work in letter to clients," AccountingWeb, March 31, 2010 ---
    http://www.accountingweb.com/topic/firm-news/ernst-young-defends-its-lehman-work-letter-clients
    Also see
    http://www.reuters.com/article/2010/03/22/lehman-ernstyoung-idUSN2221089720100322

    "Ernst & Young's defense in the Lehman fraud case is nonsense," by Jonathan Weil, Bloomberg, December 26, 2010 ---
    http://www.tampabay.com/news/ernst-amp-youngs-defense-in-the-lehman-fraud-case-is-nonsense/1141848


    Lehman Repo 105/109 Scandal Involving Ernst & Young --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo

    "Lehman Troubles Not Over For Ernst & Young," by Francine McKenna, Forbes, December 13, 2012 ---
    http://www.forbes.com/sites/francinemckenna/2012/12/13/lehman-troubles-not-over-for-ernst-young/

    Ernst & Young chalked up one small victory in New York State Supreme Court this week over claims by the New York Attorney General that the firm committed fraud leading to the failure of Lehman Brothers in 2008. Justice Jeffrey Oing said the New York Attorney General cannot claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings from 2001-2008, when the firm filed bankruptcy.

    Attorney David Ellenhorn of the NYAG claimed the fees represented “disgorgement” of “ill gotten gains” since the Attorney General says Ernst & Young repeatedly committed “fraudulent acts” as auditor of Lehman Brothers all those years. When Ellenhorn tried to explain this to the judge, Oing told Ellenhorn he had the wrong remedy.

    Not good when you have to explain too much to the judge.

    Fortunately for the New York Attorney General, the fees disgorgement strategy is Plan B. (It’s literally “Letter B” in the list of remedies the NYAG seeks for Ernst & Young’s alleged fraudulent acts.)  The New York Attorney General can still pursue its request that Ernst & Young “pay restitution, disgorgement and damages caused, directly or indirectly, by the fraudulent and deceptive acts and repeated fraudulent acts and persistent illegality complained of herein plus applicable pre-judgment interest.”

    The New York Attorney General, you may recall from my previous reports, has the powerful Martin Act on its side. Back in December of 2010, The Wall Street Journal’s Ashby Jones at the Law Blog explained just how powerful this law is.

    In the lawsuit filed against accounting firm Ernst & Young, Andrew Cuomo brought four claims, three of them under New York’s Martin Act, one of the most powerful prosecutorial tools in the country. Technically speaking, the Martin Act allows New York’s top law enforcer to go after wrongdoing connected to the sale or purchase of securities. Nothing too noteworthy there.

    But what is noteworthy is the power the act confers upon its user. It enables him to subpoena any document from anyone doing business in New York and, if he so desires, keep an investigation entirely secret. People subpoenaed in Martin Act cases aren’t afforded a right to counsel or the right against self-incrimination. “Combined, the act’s powers exceed those given any regulator in any other state,” wrote Nicholas Thompson in this 2004 Legal Affairs article.

    And we haven’t even gotten to the kicker. Courts in civil Martin Act cases have held that “fraud” under the Martin Act “includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or mislead the public, whether or not the product of scienter or intent to defraud.” In other words, in order to prove a Martin Act violation, the attorney general is not required to prove that the defendant intended to defraud anyone, only that a defrauding act was committed…

    Mr. Ellenhorn, however, is all, “We’ll never make it…”, like Glum in Gulliver’s Travels. He worried aloud to the judge, according to Reuters, that the private class action litigation still facing Ernst & Young over Lehman will beat him to the punch in claiming compensation for investor losses.

    In July of 2011New York Federal Court Judge Lewis Kaplan decided to allow substantially all of the allegations against Lehman executives and at least one of the allegations against Ernst & Young to move forward to discovery and trial. That case is proceeding.

    The remaining allegation in the class action litigation against Ernst & Young? That Ernst & Young had reason to know that Lehman’s 2Q 2008 financial statements could be materially misstated because of the extensive use of Repo 105 transactions.

    Ellenhorn is worried because the NYAG’s remaining remedy is for investors’ damages. Investors, however, have their own ongoing lawsuits against Ernst & Young to recover the same damages. If the investors are successful first in their lawsuits, the state cannot pursue a double recovery for the same damages.

    Ernst & Young claimed victory at the time of Judge Kaplan’s decision, too. To me, however, the threat of a trial is formidable. It’s costing Ernst & Young a lot of time and money to address.

    Continued in article

    Bob Jensen's threads on the Repo 105/109 scandal ---
     http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo 

     

     


    Ketz Me if Can
    "NY v. Ernst & Young:  Did Lehman Bros. Follow GAAP?" by: J. Edward Ketz, SmartPros, January 2011 ---
    http://accounting.smartpros.com/x71206.xml

    Jensen Comment
    I don't much care whether Lehman and Ernst abided by the letter of FAS 140 rules. To me there's an overriding auditing principle that says if a contract is designed to both follow the letter of the law under GAAP and to deceive investors, creditors, and regulators then exception should be taken to deliberate attempts by the client to deceive.

    From all I know about Lehman's Repo 105/108 contracts the primary intent was deception.

    When confronted with a choice of protecting the client versus protecting investors, I think the auditors in this case dredged up a rather obscure section of GAAP to protect the client and deceive the investors. It's like dredging up some statute written in 1798 justifying whipping your wife with a leather strap.

    Ketz Me If You Can (and it was Tom Selling who coined "Betz from Ketz")
    "NY v. Ernst & Young (Part II): Who Cares Whether Lehman Bros. Followed GAAP?" by J. Edward Ketz, SmartPros, February 2011 ---
    http://accounting.smartpros.com/x71245.xml

    The major result of this case is that the courts do not rely exclusively on whether the external auditors attest to an entity’s application of generally accepted accounting principles. Instead, the standard is fairness. This is the proper outcome, for managers cannot be allowed to loot corporations and cover it up with transactions that abide by generally accepted accounting rules (also known as cleverly rigged accounting ploys or CRAP).

    A. A. Sommer, former commissioner at the SEC put this case into perspective as follows:

    Judge Friendly … said in effect that the first law for accountants was not compliance with generally accepted accounting principles, but rather full and fair disclosure, fair presentation, and if the principles did not produce this brand of disclosure, accountants could not hide behind the principles but had to go beyond them and make whatever additional disclosures were necessary for full disclosure. In a word, “present fairly” was a concept separate from “generally accepted accounting principles,” and the latter did not necessarily result in the former.

    While the FASB and the SEC and the accounting firms have shied away from the concept of “fairness,” the courts have embraced it. Interestingly, the courts ended up in a place quite similar to that in Statement of Financial Concepts No.1 The court said that corporate managers should report assets and liabilities and stockholders’ equity and revenues and expenses as fairly as possible and then to communicate these results fairly to the firm’s investors and potential investors.

    Notice the similarities between the cases. Both Lehman Brothers and Continental Vending wanted to manage their financial leverage. They both accomplished this by reducing assets and liabilities by some number; while keeping the equity the same, the leverage ratios shrunk materially. Both Lehman Brothers and Continental Vending relied on GAAP to obtain the desired hiding of liabilities. And both Lehman Brothers and Continental Vending supplied deficient, uninformative disclosures on these transactions.

    E&Y finds itself in a position similar to Lybrand, Ross Brothers, and Montgomery. It appears that E&Y will defend itself based on accounting rules, just as Lybrand, Ross Brothers, and Montgomery said it followed GAAP. The ultimate question is whether the judge of jury will find this sufficient. Is it a reasonable defense to follow the rules or is a professional auditor responsible for attesting that the financial statements as a whole fairly present the financial position and the results of operations?


    "Making Sense of the Ernst & Young Defense," by Caleb Newquist, Going Concern, December 23, 2010 ---
    http://goingconcern.com/2010/12/making-sense-of-the-ernst-young-defense/ 

    Over at Bloomberg, Jonathan Weil (who has the tendency to let the dust settle before chiming in) takes Ernst & Young to task for their lack of willingness to take responsibility for the Lehman Brothers bankruptcy and digs up a bunch of old bodies in the process.

    E&Y had established itself as a repeat offender long before Governor-Elect Cuomo filed his suit. In recent years we’ve seen four former E&Y partners sentenced to prison for selling illegal tax shelters, while other partners have been disciplined by the SEC for blessing fraudulent financial statements at a variety of companies, including Cendant Corp. and Bally Total Fitness Holding Corp.

    In the Bally case, E&Y last year paid an $8.5 million fine, without admitting or denying the SEC’s professional-misconduct claims. The SEC also has imposed sanctions against E&Y three times since 2004 for violating its auditor-independence rules.

    After that friendly reminder (which certainly makes some people wince), JW takes a look at the E&Y’s response to the suit, specifically the part where they more or less say that Cuomo is off his rocker, “There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP).”

    Weil says E&Y is missing the point entirely:

    That isn’t an accurate depiction of the claims Cuomo brought, though. Cuomo’s suit unambiguously took the position that Lehman violated GAAP. What’s more, it’s not credible for E&Y to say that Lehman didn’t. (An E&Y spokesman, Charles Perkins, said he “can’t comment beyond our statement.”)

    In the footnotes to its audited financial statements, Lehman said it accounted for all its repurchase agreements as financings. This was false, because Lehman accounted for its Repo 105 transactions as sales, a point the Valukas report chronicled in exhaustive detail.

    The question is, of course, if this all adds up to fraud on E&Y’s part. Cuomo says it does. Weil says that E&Y needs to come up with a better story. Colin Barr, on the other hand, writes that E&Y could easily turn the tables:

    The Ernst & Young statement suggests the firm will argue that it can’t be prosecuted under the Martin Act because Lehman, not E&Y, was the outfit actually producing the financial reports, and because it was Lehman, not E&Y, that was peddling billions of dollars of securities just months before its implosion.

    In this view, E&Y was just a gatekeeper hired to vouch for Lehman’s books, something it will claim it did well within the confines of the law. This strikes lawyers who are familiar with the law as an eminently reasonable approach, if not exactly a surefire recipe for success.

    “If I were Ernst & Young, I would assert I was not a primary actor,” said Margaret Bancroft, a partner at Dechert LLP and author of a 2004 memo that explained the Martin Act soon after Spitzer began brandishing it against Wall Street. “You can say that with more than a straight face.”

    “Just gatekeepers,” and not “fraudsters,” is obviously the preferred view but the catch is, E&Y would be admitting that they are really shitty gatekeepers.

    Also see
    "The Case Against Ernst & Young: NY AG Cuomo Sues Over Lehman," by Francine McKenna, re:TheAuditors, December 22, 2010 ---
    http://retheauditors.com/2010/12/22/the-case-against-ernst-young-ny-ag-cuomo-sues-over-lehman/

    The State of New York's filing against Ernst & Young ---
    http://goingconcern.com/2010/12/lunchtime-reading-the-complaint-against-ernst-young/#more-23070

    Professor Mark Zimbelman and his son (accounting PhD student at Illinois) don't think the State of NY has much of a case against Ernst & Young ---
    http://fraudbytes.blogspot.com/2010/12/more-on-ernst-and-young-and-lehman.htm

    Francine on the other hand
    "Fraud Happened. The No-Account Accountants Stood By," by Francine McKenna, re: The Auditors, April 18, 2010 ---
    http://retheauditors.com/2010/04/18/fraud-happened-the-no-account-accountants-stood-by/

     

     

    The State of New York's filing against Ernst & Young ---
    http://goingconcern.com/2010/12/lunchtime-reading-the-complaint-against-ernst-young/#more-23070


    Good News:  Ernst & Young Dodges Another Bullet
    "Suit Versus Lehman Ex-Officers Can Go On," by Michael Rapoport, The Wall Street Journal, July 28, 2011 ---
    http://professional.wsj.com/article/SB10001424053111904888304576472412264685494.html

    A lawsuit contending that Lehman Brothers Holdings Inc.'s former officials, underwriters and auditors are responsible for investor losses should go forward for the most part, a federal judge ruled Wednesday.

    The investors who filed the lawsuit have "adequately alleged" that the former Lehman executives, including ex-Chief Executive Richard Fuld and ex-finance chief Erin Callan, and other defendants misled them about Lehman's financial health, leverage, risk management and exposure to dicey mortgage and real-estate assets, ruled Judge Lewis A. Kaplan of the U.S. District Court in Manhattan.

    The investors—pension funds, companies and individuals who bought $31 billion in Lehman debt and stock—say the defendants made misleading statements and omissions that caused them losses when Lehman collapsed into bankruptcy in 2008. Specifically, they contend, Lehman's use of "Repo 105" transactions—repurchase agreements that allowed Lehman to lower its leverage temporarily—falsely allowed the bank to present itself as financially stronger than it really was. The plaintiffs are seeking class-action status for the suit.

    Judge Kaplan rejected the defendants' attempt to dismiss the entire case, but he threw out some claims, particularly some of those against Ernst & Young LLP, Lehman's independent auditor. The judge did allow a claim to continue alleging that E&Y made misstatements in July 2008 about Lehman's compliance with accounting rules when in fact E&Y was aware of the bank's use of Repo 105s, which "cast into doubt" whether its balance sheet was consistent with generally accepted accounting principles.

    Steve Singer, an attorney for the plaintiffs, said he was pleased with the ruling. The "vast majority" of the case will go forward, he said, including the core allegations, and all of the defendants remain in the case.

    Michael Chepiga, an attorney for Christopher O'Meara and Joseph Gregory, two former Lehman executives who are defendants, said the judge's ruling was "a long, complicated opinion with a lot of issues. We're studying it closely."

    Ernst & Young said in a statement that it was "pleased that Judge Kaplan's ruling dismisses most of the claims against us in this matter, and we strongly believe that we will ultimately prevail on the remaining claim." Adam Wasserman, an attorney for Lehman's independent directors, said he was "confident" that the evidence "will demonstrate that the independent directors acted diligently and appropriately."

    Robert Cleary, an attorney for Ms. Callan, declined to comment. A spokeswoman for UBS AG, one of Lehman's underwriters, also declined to comment. Attorneys for other defendants, including Mr. Fuld, couldn't be reached. Lehman itself isn't a defendant in the case.

    A 2010 report by a bankruptcy-court examiner, exposing Lehman's use of Repo 105s, raised questions about whether its executives and auditors should face any regulatory action or other sanctions. To date, however, the only case that has been brought is a civil fraud lawsuit by the New York attorney general's office against Ernst & Young, which has denied any wrongdoing.

    In other Lehman developments Wednesday:

    • The U.K.'s Supreme Court ruled in investors' favor against units of Lehman and Bank of New York Mellon Corp. in a battle over complex derivatives transactions. The ruling upholds a "flip clause" in credit derivatives contracts that allowed the investors to move ahead of Lehman to grab assets backing the derivatives deals. The ruling clashes with a U.S. court ruling that the flip clauses violate U.S. bankruptcy law.

    Continued in article

    It's good news that most the charges against E&Y were dropped by Judge Kaplan.
    Here's the part of the Kaplan's finding that Ernst & Young doesn't: like.

    Whistle Blower:  Too Much "Lee" Way

    "Dick Fuld and E&Y fail to dismiss Repo 105 case," by John McDermott, Financial Times, July 27, 2011 ---
    http://ftalphaville.ft.com/blog/2011/07/27/636281/dick-fuld-and-ey-fail-to-dismiss-repo-105-case/

    . . .

     

    Moving on to the discussion of the allegations against Ernst & Young. We found this section (pages 67-77)  especially interesting. Kaplan dismisses the majority of the specific allegations against the auditors but writes that one particular incident means that the case against them cannot be thrown out. Here’s the section where Kaplan judges that the plaintiffs fail to present convincing evidence of false or misleading material statements

    Plaintiffs’ allegations respecting “red flags” therefore bear not only on whether 303 E&Y violated the pertinent GAAS requirements, but also on whether it did so with the requisite state of mind. For the reasons discussed above, the true sale opinion and netting grid were not red flags, the disregard of which could be called highly reckless. And while E&Y’s alleged failure to follow up on the Lee interview arguably would have been a departure from GAAS, the only subsequent E&Y statement at issue is the report on the interim financials in the 2Q08, which contained no statement of a GAAS-compliant audit. Accordingly, the TAC fails to allege that E&Y made any false or misleading statements with respect to GAAS compliance either in the 2007 10-K or in any of the subsequent 10-Q’s, much less that it did so with scienter.

    … but he stops to ask another question on Repo 105:

    In other words, have plaintiffs sufficiently alleged that E&Y knew enough about Lehman’s use of Repo 105s to “window-dress” its period-end balance sheets to permit a finding that E&Y had no reasonable basis for believing that those balance sheets fairly presented the financial condition of Lehman?

    The answer: yes, in one case.

    Plaintiffs rely for this purpose on precisely the same alleged red flags discussed previously in connection with E&Y’s GAAS opinion – the “true sale” opinion, the netting grid, and the Lee interview. The first two are no stronger in this context than in that. The Lee interview, however, is a different matter.

    The “Lee interview” pertains to warnings allegedly made by Matthew Lee, Lehman’s SVP for Global Balance Sheet and Legal Entity Accounting, that Ernst & Young were told of a $50bn repo 105 move in June 2008 but did not pass on the full information to Lehman’s board. Thus, it failed to fulfill GAAP requirements as part of its Q2 2008 auditing.

    Here’s Kaplan again:

    The TAC alleges that Lee told E&Y in June 2008 “that Lehman moved $50 billion of inventory off its balance sheet at quarter-end through Repo 105 transactions and that these assets returned to the balance sheet about a week later.” Assuming that is so, E&Y arguably was on 308 notice by June 2008 that Lehman had used Repo 105s to portray its net leverage more favorably than its financial position warranted, a circumstance that could well have resulted in the published balance sheet for that quarter being inconsistent with GAAP’s overall requirement of fair presentation. Accordingly, the TAC adequately alleges that E&Y misrepresented in the 2Q08 that it was “not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles” notwithstanding Lee’s disclosure to it.

    It’ll be interesting to see whether this drives the parties to a settlement — and how it affects the civil fraud case brought by former Attorney General (now Governor) Cuomo.

    Continued in article


    From the CFO Journal's Morning Ledger on September 12, 2013

    Where is Dick Fuld now? 
    Almost five years ago, Lehman Brothers went into the largest bankruptcy in U.S. history, the fission bomb trigger to the thermonuclear event we now call the financial crisis. Since then, many former Lehman executives have found employment on Wall Street. Not so former CEO Dick Fuld, a character so outsize—even for a Wall Street filled with such types—that peers called him “the Gorilla” for his “brutish manner and aggressiveness.” Post-Lehman, Mr. Fuld might as well be called “the Dodo” because he has disappeared from his native habitat, the big money Wall Street scene. Mr. Fuld has sold off real-estate properties and art from his wife’s collection to pay for lawsuits filed by those organizations that lost heavily when Lehman’s $40 billion real-estate business went bust.  True, he has pitched deals to Blackstone and BlackRock, among others, but to no success Wall Street insiders tell Businessweek’s Joshua Green. Mr. Fuld and his wife are now major investors in a tiny Phoenix-based chemical company that grew out a holding company for a San Francisco strip club. “His real problem is that he’s forever associated with the Lehman bankruptcy, and anyone who hires him, or even speaks up for him, risks having this connection rub off on them,” writes Green. “Fuld has become Wall Street’s Hester Prynne, forever branded.”

    Jensen Comment
    If the SEC had any guts this gorilla should be looking out through bars.

    Bob Jensen's threads on Dick Fuld's wrong doings aided and abetted by a Big Four auditing firm are at
    http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
    Scroll down to the Lehman Bros. fraudulent reporting.

     

     


    "There Are More Than a Few Texans Who Aren’t Impressed with Ernst & Young’s Auditing Abilities," by Caleb Newquist, Going Concern, August 26, 2010 ---
    http://goingconcern.com/2010/08/there-are-more-than-a-few-texans-who-arent-impressed-with-ernst-youngs-auditing-abilities/ 

    Attorneys from Houston’s Ahmad, Zavitsanos & Anaipakos are representing a group of investors in a lawsuit filed against hedge fund auditors Ernst & Young after the group lost more than $17 million following the collapse of a Plano, Texas-based hedge fund that promised low-risk investments.

    The lawsuit focuses on two funds sold by Plano’s Parkcentral Global and was filed on behalf of Houston financial consultant Gus H. Comiskey and four Tucson, Ariz.-based entities, including the Thomas R. Brown Family Private Foundation. The now-defunct Parkcentral Global was operated by affiliates of billionaire and former presidential candidate H. Ross Perot before closing its doors after losing a total of more than $2.6 billion.

    “Our clients were told that an investment in Parkcentral was designed to preserve capital. Instead, they lost every penny in record time. E&Y was supposed to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral’s investors of their impending doom,” says attorney Demetrios Anaipakos, who will try the case with Amir H. Alavi.

    Continued on article

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm


    Just a brief follow-up on the manager who received the disciplinary action handed down by the PCAOB  ---
    http://goingconcern.com/2010/12/update-on-censured-ernst-young-manager/

    We attempted to reach Jacqueline Higgins late yesterday at her office number in Boston, however we discovered that when we were transferred to her extension we simply bounced back to reception, who needless to say, was very confused about that phenomenon. After attempting to page Ms. Higgins, only then did the receptionist learn and then relay to us that Ms. Higgins was no longer with the firm.

    We checked with Ernst & Young spokesman Charlie Perkins on this development and he confirmed that Ms. Higgins “will be leaving the firm at the end of the year.”

    And lest there still be any confusion due to the carefully worded E&Y statement, the partner and senior manager in question have been dismissed from the firm.

    We’ll keep you updated if we hear more from inside at the firm or if further action is taken by the PCAOB.

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm


     

    On the Dark Side 


    For nearly two decades I've updated a Web document called "The Dark Side" in which I post things that worry me about advances in education and communication technology --- http://www.trinity.edu/rjensen/000aaa/theworry.htm

    Business Week now has a very long cover story that fits right into "The Dark Side." I don't consider myself a prude or a religious nut. But this trend in networking most certainly discourages me about how technology sometimes eats away at morality and good name of technology. This is yet another dark side tidbit on the evils of technology that goes along with ID theft, malware spreading, Internet frauds, porn, plagiarism, malicious hacking, and the like. I was a bit surprised to find this article in Business Week rather than Newsweek or Time Magazine.
    .
    The infidelity economy may be "alive, well, and profitable." But so is porn!

    Those of you teaching about advances in social networking should also cover the emerging dark sides of social networking.

    "Cheating, Incorporated:  At Ashley Madison's website for "dating," the infidelity economy is alive, well, and profitable," by Sheelah Kolhatkar , Business Week, February 10, 2011 ---
    http://www.businessweek.com/magazine/content/11_08/b4216060281516.htm?link_position=link2

    Do you want to have an affair?

    After hearing an ad on Howard Stern's radio show or seeing a schlocky commercial on late-night TV, you might find yourself on AshleyMadison.com—the premier "dating" website for aspiring adulterers. Type in the URL, and as the page loads a gauzy violet backdrop appears with a fuzzy image of a half-dressed couple going at it beyond a hotel doorway. "Join FREE & change your life today. Guaranteed!"

    Setting up a profile costs nothing and takes about 12 seconds. First you check off your availability status: "attached male seeking females," "attached female seeking males," or, even though the concept of the site is that all users are in relationships and therefore equally invested in secrecy, "single female seeking males." Next you're asked for location, date of birth, height and weight, and whether you're looking for something "short term," "long term," "Cyber affair/Erotic Chat," "Whatever Excites Me," and so on. If you're like me, you choose a handle based on the cupcake you most recently ate—"redvelvet2"—and then shave a few years and pounds off your numbers.

    Once you provide an e-mail address that your spouse would presumably never have access to, you're thrust into Ashley Madison's low-tech pink and purple interface. And then, if you're a woman, the onslaught begins.

    Continued in article

    February 12, 2011 reply from Francine McKenna

    Bob,
     
    Maybe you forgot it was that terrible Ashley Madison.com site, the one that advertises on CNBC and wanted to advertise on the Superbowl that lured the poor Ernst & Young partner into a debauched life of inside trading and illicit love triangles.

     
    Bad, bad internets...

     

    http://nymag.com/daily/intel/2009/07/insider_trading_as_common_as_f.html

    In the fall of 2004, a fortysomething investment banker named Donna Murdoch logged into Ashley Madison, the discreet dating website married people visit "when divorce is not an option," and introduced herself to James Gansman, a partner at Ernst & Young in New York. The two struck up a relationship, meeting occasionally in hotels in Philly, New York, and California, and talking on the phone about their lives: James told Donna about how he was kicking ass at work, Donna told James about how she was struggling with her subprime mortgage.

    Eventually the two settled into a comfortable day-to-day routine in their respective offices in New York and Philadelphia, staring at the same Yahoo Finance screen.


    Sweet. Bill and Melinda Gates used to do kind of the same thing when they were long-distance dating. They'd see the same movies in different places and then talk about them on the phone. We just though we'd mention that, because that's the kind of information we have trapped inside our brains, and we hope that by releasing it we can make room for other things. Anyway, Donna and James's relationship did not go the way of Bill and Melinda's.

    Eventually, their conversations about business grew more specific.

    Mr. Gansman led Ms. Murdoch in a guessing game about which deals he was working on, she said. "The game was that I wouldn't be looking and he would give me hints: The market cap of two billion or market cap of 400 billion, and here's what they do, and he'd read it to me, and ultimately make sure I guessed," Ms. Murdoch testified. Before long, the guessing game fell away. Mr. Gansman told her more directly about upcoming deals of Ernst clients, she said.


    She made $400, 000 off the deal, and the SEC noticed. He made nothing, and now he's going to jail. The end.

    Insider Affair: An SEC Trial of the Heart [WSJ via Business Insider]

    Francine McKenna
    Managing Editor
    @ReTheAuditors on Twitter
    312-730-4884

     

    February 12, 2011 reply from Jagdish Gangolly

    Bob, Steve,

    The forensic practices at the Big 4 are WAY ahead of the accounting academia in using the technology to cover the dark side of social networking in e-discovery. We in the accounting academia have been too busy regressing to take note.

    I know of at least two who used it extensively in fraud examination as far back as 2008. They demonstrated its use to me while I was designing our fraud examination course.

    One commercial product that is popular is attenex. See http://www.jurinnov.com/attenex.asp 

    Jagdish

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

    Bob Jensen's threads on The Dark Side ---
    http://www.trinity.edu/rjensen/000aaa/theworry.htm

    Bob Jensen's threads on Education Technology ---
    http://www.trinity.edu/rjensen/000aaa/0000start.htm

     


    "Auditors Face Fraud Charge:  New York Set to Allege Ernst & Young Stood By as Lehman Cooked Its Books," by Liz Rappaport and Michel Rapoport, The Wall Street Journal, December 20, 2010 ---
    http://online.wsj.com/article/SB10001424052748704138604576029991727769366.html?mod=djemalertNEWS 

    New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.

    State Attorney General Andrew Cuomo is close to filing the case, which would mark the first time a major accounting firm was targeted for its role in the financial crisis. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.

    Lehman Brothers was long one of Ernst & Young's biggest clients, and the accounting firm earned approximately $100 million in fees for its auditing work from 2001 through 2008, say people familiar with the matter.

    The suit, led by Mr. Cuomo, New York's governor-elect, could come as early as this week. It is part of a broader investigation into whether some banks misled investors by removing debt from their balance sheets before they reported their financial results to mask their true levels of risk-taking, a person familiar with the case said. The state may seek to impose fines and other penalties.

    Mr. Cuomo's office has sought documents and information from several firms, including Bank of America Corp., which earlier this year disclosed six transactions that were wrongly classified. Jerry Dubrowski, a Bank of America spokesman, said the bank's practice is to cooperate with any inquiry from regulators.

    It is possible that Ernst & Young will try to settle before any suit is filed. The firm declined to comment. A spokesman for the Lehman Brothers estate also declined to comment.

    The transactions in question, known as "window dressing," involve repurchase agreements, or repos, a form of short-term borrowing that allows banks to take bigger trading risks. Some banks have systematically lowered their repo debt at the ends of fiscal quarters, making it appear they were less risk-burdened than they actually were most of the time.

    Lehman Brothers dubbed transactions of this type "Repo 105." The maneuver came to light in March, when the bankruptcy examiner investigating the firm's collapse more than two years ago found that it moved some $50 billion in assets off its balance sheet. Lehman labeled those transactions as securities sales instead of loans, which led investors to believe the firm was financially healthier than it really was.

    The bankruptcy examiner's report and the attorney general's investigation found that Lehman Brothers carried out the Repo 105 transactions on a quarterly basis in 2007 and 2008 without telling investors. Mr. Cuomo's investigation found that Repo 105 transactions started as far back as 2001, said the person familiar with the probe.

    The attorney general's investigation, which began after the bankruptcy examiner's report, found that Ernst & Young specifically approved of Lehman's use of Repo 105 transactions and provided the investment bank with a complete audit opinion from 2001 through 2007, said the person.

    Mr. Cuomo's office has also been investigating suspected window-dressing transactions at other banks, said the person, and is probing whether they similarly misled investors.

    An analysis earlier this year by The Wall Street Journal found that other banks were reducing their level of debt at quarter-end.

    The attorney general's office has sought documents and information from several firms, including Bank of America Corp., which earlier this year disclosed six transactions that were wrongly classified. The Journal's analysis found that Bank of America was among the most active banks in reducing its debt at reporting time.

    The state's investigations into other firms' window dressing are less advanced than its Ernst & Young probe, said a person familiar with the probes.

    Other regulators have said they are looking into window dressing as well. The Securities and Exchange Commission's investigation into Lehman's collapse is focusing on Repo 105 transactions, said people familiar with the matter. It has proposed new types of disclosures to help investors identify when banks are window dressing. But the SEC has said it hasn't found any widespread inappropriate practices in that area.

    Britain's Financial Reporting Council, which oversees corporate reporting rules, is also investigating Ernst & Young's role in the Lehman collapse.

    The Lehman bankruptcy examiner's report also stated that there may be evidence to support negligence and malpractice claims against Ernst & Young regarding Lehman's audits and its lack of response to a whistle-blower at Lehman who raised red flags about the repo trades.

    The whistle-blower was Matthew Lee, a Lehman Brothers senior vice president. He had complained to his boss, and eventually wrote a letter in May 2008 to senior Lehman executives expressing concern that the Repo 105 transactions violated Lehman's ethics code by misleading investors and regulators about the true value of the firm's assets. Days later, Mr. Lee was ousted from the firm.

    According to the Lehman bankruptcy examiner's report, Ernst & Young auditors saw the letter, and later interviewed Mr. Lee after he was let go from Lehman. Ernst & Young previously said in a statement that Lehman management determined Mr. Lee's "allegations were unfounded." Mr. Lee couldn't be reached for comment.

    Continued in article

    Bob Jensen's threads on Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm

     

     

     

     


    Hi Richard,

    In the Forbes video E&Y’s Chairman  says “nobody challenges our repo (for Repo 5 and Repo 8)  accounting” for Lehman’s “sales” that were certain to be returned (in total) in a matter of days.
    http://money.cnn.com/video/fortune/2010/09/14/f_cs_ernst_accounting.fortune/

    It’s obvious that he’s not been informed of both the academic challenges and the challenges of some of the best accounting reporters in the media ---
    http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

    The bottom line is that it was bad enough that E&Y approved Lehman’s deceptive repo accounting. But their ex post continued defense, at the highest level in the firm, of this deception is destroying the credibility of E&Y. What is being destroyed is our faith that the large auditing firms place their public responsibility ahead of the deceptive dictates of their auditing clients.

    E&Y is trying to shift the blame for bad repo accounting onto the FASB. But this won’t fly because the FASB has no jurisdiction elsewhere in the world. In particular, E&Y is using an FAS 140 defense in the U.K. where FAS 140 has no jurisdiction.

     

    -----Original Message-----
    From: Jensen, Robert [mailto:rjensen@trinity.edu]
    Sent: Thursday, April 08, 2010 9:18 AM
    To: Jim Fuehrmeyer
    Subject: RE: AT&T $1 billion write-down, Repo 105 and other dumb questions

    Yes, but can the FAS 140 defense be used in the British Courts when British investors sue the failed London office of Lehman and the London office of E&Y?

    I assumed that branch investment banks in England are subject to UK accounting/auditing standards. Or can investment banks avoid local accounting/auditing standards by having headquarters in other nations?

    Bob Jensen

    -----Original Message-----
    From: Jim Fuehrmeyer [mailto:jfuehrme@nd.edu]
    Sent: Thursday, April 08, 2010 11:51 AM
    To: Jensen, Robert
    Subject: RE: AT&T $1 billion write-down, Repo 105 and other dumb questions

    I guess that depends on what their basis is for suing.  I'm not a lawyer, of course.  I expect the local Lehman office filed statutory reports in the UK, whether they were regulated or not, and those would have been done using IFRS.  The Repo 105 would not qualify as a sale under IFRS - the fixed price repurchase arrangement would take care of that (IFRS No. 39R, AG40) - so I expect this would have shown as a secured borrowing on those financials.  I'm quite sure UK companies file financial statements, even wholly-owned subsidiaries of US companies. Assuming the Lehman entities did that, the financials may even be available to the public/press and someone's likely already pouring over them.  So it's not clear to me that a UK plaintiff would be relying on the US GAAP financials nor is it clear to me what damages there are in the UK related to the Lehman subsidiaries.  The plaintiffs I guess would be creditors, lenders and so on, and you're correct, they would not have been using the consolidated Lehman 10K as a basis for their credit decisions if they had local financials to go on - and I bet that would be the case here.

    The requirement to file local financials is typical all around the world - except in the US of course. A US subsidiary of a foreign company doesn't have to do separate financials.  And that's among the reasons the big US multinationals want to be on IFRS.  Their subsidiaries all around the world already have to prepare local, statutory financials and most places are now using IFRS so they have to convert all those subs to US GAAP for purposes of reporting here. They could actually save a lot of time and effort if the US piece went to IFRS.

    Jim

     

    In particular, he’s not been informed of the Wharton (University of Pennsylvania) challenge to the way Lehman accounted for repo sales:
    Best Explanation to Date:
    "Lehman's Demise and Repo 105: No Accounting for Deception," Knowledge@Wharton, March 31, 2010 ---
    http://knowledge.wharton.upenn.edu/article.cfm?articleid=2464

    The collapse of Lehman Brothers in September 2008 is widely seen as the trigger for the financial crisis, spreading panic that brought lending to a halt. Now a 2,200-page report says that prior to the collapse -- the largest bankruptcy in U.S. history -- the investment bank's executives went to extraordinary lengths to conceal the risks they had taken. A new term describing how Lehman converted securities and other assets into cash has entered the financial vocabulary: "Repo 105."

    While Lehman's huge indebtedness and other mistakes have been well documented, the $30 million study by Anton Valukas, assigned by the bankruptcy court, contains a number of surprises and new insights, several Wharton faculty members say.

    Among the report's most disturbing revelations, according to Wharton finance professor Richard J. Herring, is the picture of Lehman's accountants at Ernst & Young. "Their main role was to help the firm misrepresent its actual position to the public," Herring says, noting that reforms after the Enron collapse of 2001 have apparently failed to make accountants the watchdogs they should be.

    "It was clearly a dodge.... to circumvent the rules, to try to move things off the balance sheet," says Wharton accounting professor professor Brian J. Bushee, referring to Lehman's Repo 105 transactions. "Usually, in these kinds of situations I try to find some silver lining for the company, to say that there are some legitimate reasons to do this.... But it clearly was to get assets off the balance sheet."

    The use of outside entities to remove risks from a company's books is common and can be perfectly legal. And, as Wharton finance professor Jeremy J. Siegel points out, "window dressing" to make the books look better for a quarterly or annual report is a widespread practice that also can be perfectly legal. Companies, for example, often rush to lay off workers or get rid of poor-performing units or investments, so they won't mar the next financial report. "That's been going on for 50 years," Siegel says. Bushee notes, however, that Lehman's maneuvers were more extreme than any he has seen since the Enron collapse.

    Wharton finance professor professor Franklin Allen suggests that the other firms participating in Lehman's Repo 105 transactions must have known the whole purpose was to deceive. "I thought Repo 105 was absolutely remarkable – that Ernst & Young signed off on that. All of this was simply an artifice, to deceive people." According to Siegel, the report confirms earlier evidence that Lehman's chief problem was excessive borrowing, or over-leverage. He argues that it strengthens the case for tougher restrictions on borrowing.

    A Twist on a Standard Financing Method

    In his report, Valukas, chairman of the law firm Jenner & Block, says that Lehman disregarded its own risk controls "on a regular basis," even as troubles in the real estate and credit markets put the firm in an increasingly perilous situation. The report slams Ernst & Young for failing to alert the board of directors, despite a warning of accounting irregularities from a Lehman vice president. The auditing firm has denied doing anything wrong, blaming Lehman's problems on market conditions.

    Much of Lehman's problem involved huge holdings of securities based on subprime mortgages and other risky debt. As the market for these securities deteriorated in 2008, Lehman began to suffer huge losses and a plunging stock price. Ratings firms downgraded many of its holdings, and other firms like JPMorgan Chase and Citigroup demande