|
Fraud Continues to Haunt Online Retail
Online fraud losses for 2001 were 19 times as high, dollar for dollar, as fraud
losses resulting from offline sales, GartnerG2 found. http://www.newmedia.com/default.asp?articleID=3427
"Fraud, by -- and With -- the
Numbers," by Tish Williams, TheStreet.com, February 21, 2001 --- http://www.thestreet.com/comment/tish/1313702.html
Forensic Accounting
--- http://www.bus.lsu.edu/accounting/faculty/lcrumbley/forensic.html
The Office of the Comptroller of the Currency has issued an alert to banks
asking them to warn their customers about a new fraud scheme that uses
fictitious IRS forms and bank correspondence in an attempt at identity theft. http://www.accountingweb.com/item/78966
The Office of the Comptroller of the Currency (OCC)
has issued an alert to banks, asking them to warn their customers about a
new fraud scheme that uses fictitious IRS forms and bank correspondence.
Under the scheme, bank customers receive a letter
outlining the procedures that need to be followed to protect the recipient
from unnecessary withholding taxes on their bank accounts and other
financial dealings. The letter instructs the recipient to fill in the
enclosed IRS Form W-9095 and return it within seven days. According to the
letter, anyone who doesn't file the form is subject to 31% withholding on
interest paid to them. A fax number is provided for the recipient's
convenience.
The growing number of financial
scandals and frauds in recent years have made forensic accounting one of the
fastest growing areas of accounting and one of the most secure career paths for
accountants. http://www.accountingweb.com/item/78110
"PwC Reveals Dramatic Rise in
Securities Litigation Cases More than half of cases filed against IPO
underwriters and recently public companies," --- http://accounting.smartpros.com/x30924.xml
From the AccountingWeb newsletter on January 11, 2002
Xerox Corporation served notice on Monday that it plans to dispute the
Securities and Exchange Commission's ruling of improper treatment of accounting
for leases. The SEC has been investigating Xerox for the past 18 months and has
concluded that the method Xerox uses for accounting for sales leases has
resulted in financial reporting that is not in accordance with generally
accepted accounting principles. http://www.accountingweb.com/item/68557
Melancon to Donate his $5 Million
Stake --- http://www.smartpros.com/x33605.xml
WASHINGTON, April
8, 2002 — Barry Melancon, chief of the American Institute of CPAs,
announced he will donate to a charitable organization his stake in CPA2Biz,
the AICPA's for-profit Web portal, according to The New York Times.
The donation is an
attempt to silence critics that have called his investment a conflict of
interest because he was using his position as head of a nonprofit
organization to profit from its commercial ventures. Additionally, critics
questioned his ability to exercise independent judgment with such
substantial potential for financial gain.
The New York Times
reported Melancon's original $100,000 investment is now worth more than $5
million.
The $2.25 billion e-rate fund has helped connect thousands of U.S. schools
and libraries to the Net. The fund is also subject to widespread fraud, abuse
and "honest" accounting mistakes --- http://www.wired.com/news/school/0,1383,57172,00.html
SEC Slaps $10 Million Fine on
Xerox --- http://www.smartpros.com/x33554.xml
April 2, 2002 (TheStreet.com)
— Xerox agreed Monday to pay a $10 million civil penalty and restate
earnings since 1997 to settle a looming Securities and Exchange Commission
suit over accounting practices.
Xerox said it
started settlement talks after the agency's enforcement arm made a
preliminary decision to recommend an enforcement action regarding the
company's 1997-2000 financial statements. Xerox said it would seek an
extension of up to 90 days to file its restatement and its 2001 10-K report.
The deal, which is
subject to the full commission's approval, would put to rest an
investigation the agency began in 2000 amid allegations that Xerox's Mexican
operations had overstated revenue by using improper lease accounting. The
SEC told Xerox its revenue-allocation methodology for certain contracts did
not comply with the Statement of Financial Accounting Standards No. 13.
Xerox said Monday that under the proposed settlement, the company
"would neither admit nor deny the allegations of the complaint, which
would include claims of civil violations of the antifraud, reporting and
other provisions of the securities laws."
Xerox said the
restatement could involve the "reallocation" of up to $2 billion
in equipment sales revenue and "adjustments that could be in excess of
$300 million" regarding certain reserves. But "the resulting
timing and allocation adjustments cannot be estimated until the restatement
process has been completed," Xerox said.
"Audit committees start feeling
the heat," by Greg Farrell and Matt Krantz, USA TODAY, August 21,
2001 --- http://www.usatoday.com/life/cyber/invest/2001-07-25-audit-committees.htm
Accountants to Pay Out $16 Million --- http://www.smartpros.com/x33700.xml
The national accounting firm BDO
Seidman LLP on Friday was charged and
agreed to the fine to avoid prosecution. The firm prepared tax returns for
Gibson and his former companies, SBU Inc., Flag Finance and Family Company
of America, through which he operated the failed National supermarket chain.
The accounting firm knew in October 1995 that
Gibson, formerly of Belleville, failed to purchase the promised U.S.
Treasury notes to fund 22 of SBU's clients' trust funds, according to a
statement of facts filed in court Friday. SBU was a company that was to make
safe investments that would provide income for people who won lawsuits or
insurance settlements after being injured.
In 1996, the accountants knew Gibson sold treasury
notes or failed to purchase them for SBU clients to purchase and operate his
23 National grocery stores. He bought the stores from Schnucks Markets Inc.
During a 1998 tax audit, the accounting firm
submitted tax returns to the Internal Revenue Service but failed to tell the
IRS about Gibson misusing the trust funds to prop up his grocery chain.
The accountants agreed to cooperate in the
government's case and pay a total of $16 million to SBU's former clients for
restitution. The fine is the amount Gibson looted from the trust accounts of
his clients between October 1994 and September 1996.
In exchange for the fine and accounting firm's
cooperation, federal prosecutors agreed to defer prosecution, with the
intention of dismissing charges after 18 months if the agreement is kept.
Continued at http://www.smartpros.com/x33700.xml
Arthur Andersen's Virtual CPE Course
on Fraud --- http://www.arthurandersen.com/website.nsf/content/ResourcesVirtualLearningNetworkProducts!OpenDocument
I suspect this is defunct.
CyberU courses on this topic --- http://www.cyberu.com/catalog/classes.asp?scope=3&dept_id=191
From CPAnet.com
Also See
SEC Cracking Down on Accounting Fraud --- http://www.cfo.com/article/1,4616,0%7C83%7CAD%7C4036,00.html
Kurzweil Fraud --- http://www.businessweek.com/1996/38/b3493123.htm
Aurora Foods --- http://www.electronicaccountant.com/news/090601_5.htm
Cendant --- http://realtytimes.com/rtnews/rtcpages/19980724_fallfromgrace.htm
Lernout & Hauspie Speech Products (How to Invent Sales) --- http://www.thestandard.com/article/0,1902,23408,00.html
Lucent Technologies --- http://www.zdnet.com/zdnn/stories/news/0,4586,2683970,00.html
Microsoft Financial Pyramid --- http://www.billparish.com/msftfraudfacts.html
Informix --- http://sanfrancisco.bcentral.com/sanfrancisco/stories/2000/01/10/daily12.html
In China: Xiangyang Automobile Bearing Implicated in Accounting Fraud --- http://www.ebearing.com/news/news306.htm
Random
Audit Exposes Accounting Fraud in Most Chinese State-Owned Enterprises
From the AccountingWeb on March 4, 2003 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=97235
AccountingWEB US - Mar-4-2003 -
The trend of suing accounting firms continues, this time in Switzerland. Aided
by the results of a year-long study performed by PricewaterhouseCoopers, the
Swiss state of Geneva has
demanded 3 billion Swiss francs (US$2.2 billion) from Big Four firm Ernst
& Young for damages from audits stemming from 1994 to the present.
According to the PwC report, E&Y used a method of
risk evaluation that was "outside legal norms" when issuing
statements concerning the merger of audit client Banque Cantonale de Geneve
with another bank.
Continued in the article.
From the Free Wall Street Journal
Educators' Reviews for December 13, 2001
TITLE: Former Auditor of Superior Bank Cites Grand-Jury Probe Into Collapse
of Thrift
REPORTER: Mark Maremont
DATE: Dec 12, 2001
PAGE: C16
LINK: http://interactive.wsj.com/archive/retrieve.cgi?id=SB1008126509354552200.djm
TOPICS: Accounting, Accounting Fraud, Accounting Irregularities, Auditing,
Auditing Services, Bad Debts, Banking, Loan Loss Allowance
SUMMARY: Ernst & Young LLP, former auditor of Superior Bank, is
cooperating with a grand-jury investigation. Superior Bank, which failed in
July, is one of the largest banking institutions to fail in recent years. A
representative from the Office of Thrift Supervision told Congress that Ernst
and Young permitted improper accounting. Ernst and Young contends that there
were no accounting mistakes.
QUESTIONS:
1.) What actions has Ernst and Young taken in cooperation with the grand-jury
investigation? Is Ernst and Young required to take these actions? Are they
violating client confidentiality by surrendering working papers to a third
party? Under what circumstances is it acceptable to share client work papers
with a third party?
2.) What factors does Ernst and Young contend contributed to the failure of
Superior Bank? If Ernst and Young had perfect foresight about these events, what
changes in the financial reporting would have been required? Is it reasonable to
expect auditors to anticipate changes in the economy? Why or why not?
3.) What factors does the Office of Thrift Supervision claim contributed to
the failure of Superior Bank? Discuss two financial reporting issues that should
have been considered by Ernst and Young. Do you think that Ernst and Young
allowed misleading financial reporting by Superior Bank? Why or why not?
Reviewed By: Judy Beckman, University of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University
"Equitable Life sues
E&Y," by James Moore, Times Online, April 15, 2002
EQUITABLE LIFE
yesterday heaped further misery on the auditing profession as it sought to
recover as much as £2.6 billion from Ernst & Young, its former auditor.
In a High Court
claim filed yesterday afternoon, the troubled life insurer said Ernst &
Young should not have signed off its accounts as a “true and fair” view.
The action alleges that E&Y should not have cleared the insurer’s
books, given the potentially huge liabilities Equitable faced to holders of
guaranteed pensions.
Equitable closed to
new business in 2000 after the High Court ruled it must meet the guarantees
in full at a cost of more than £1.5 billion.
Experts say that
actions against auditors usually realise between 10 and 30 per cent of the
original claim if successful. BDO Stoy Hayward, former auditor to Asil Nadir’s
Polly Peck International (PPI), paid an estimated £30 million to settle a
negligence claim brought by PPI’s administrators. They had been seeking
£250 million from Stoy, which always denied negligence.
Charles Thomson,
chief executive of Equitable, accepted that the insurer was unlikely to
receive the full amount.
Ernst & Young
said: “We are confident there is no basis for this claim. We note the
society’s intention ‘to resist opportunistic claims and those based on
hindsight’ and we believe that this claim falls into that category.”
Equitable also said
it was cutting policyholders’ bonuses because of the poor performance of
the stock market over the past year, despite having the lowest proportion of
equities of any of the big UK life insurance funds.
Critics attacked
the move, which comes just three months after policyholders backed a
compromise deal designed to stabilise Equitable’s finances. Holders of
guaranteed pensions gave up the guarantees for a 17.5 per cent bonus to
their policies. People without guarantees were given 2.5 per cent but can no
longer sue the society for mis-selling.
February 2003 Update
Ernst & Young breathed a sigh of relief this week as a judge
threw out two out of three of the claims made against it in a negligence
case brought against the Big Four firm by Equitable Life. Had it been
successful, the suit could have cost the accounting firm $4.5 billion in
damages. http://www.accountingweb.com/item/97126
TITLE: HealthSouth Corp.
Executives Had Hint of Billing Problems
REPORTER: Ann Carrns
DATE: Sep 05, 2002
PAGE: A2
LINK: http://online.wsj.com/article/0,,SB1031186453640899435.djm,00.html
TOPICS: Accounting Changes and Error Corrections, Advanced Financial
Accounting, Disclosure Requirements, Earning Announcements, Financial
Accounting
SUMMARY: HealthSouth Corp. is
being required by Medicare to reduce billings for certain physical
therapy services they provide. The change will have a substantial
impact on the company's profitability.
QUESTIONS:
1.) Describe HealthSouth Corp.'s operations as you understand them
from the article.
2.) Describe the nature of
the problem facing HealthSouth Corp.'s executives. What accounting
adjustment will result from resolving this matter? Specifically state
the journal entry that will have to be made. What accounting standard
governs this adjustment? How will this item be displayed and what
disclosures about it must be made in the financial statements?
3.) Why does the author title
this issue a "billing problem" rather than a revenue
recognition issue?
4.) The author questions
whether HealthSouth executives should have alerted investors to this
problem earlier than they did. Under what venue would they make this
disclosure? What standards or regulations govern the requirement to
disclose this information to investors?
5.) Management argues that
they would not have had to disclose this item to shareholders if it
were not material. What defines materiality? Could the issue be
material even in the amount affecting current year results is small
relative to the company's overall operations? Explain.
6.) Do you think the
discussion of Mr. Scrushy's executive stock options is relevant to the
issue at hand? Why do you think the author included this information?
Reviewed By: Judy Beckman,
University of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University
Accounti8ngWeb --- http://www.accountingweb.com/cgi-bin/item.cgi?id=87261&d=815&h=817&f=816&dateformat=%B%20%e,%20%Y
(Requires Subscription)
KPMG Gets Probation
For Bungling Orange County Audit
|
| AccountingWEB US - July
29, 2002 - International accounting firm KPMG has been
slapped with a $1.8 million fine and a year of probation after being
found guilty of gross negligence and unprofessional conduct for its
handling of the 1992 and 1993 audit and financial statements of Orange
County, California. The California Board of Accountancy also ordered
three years of probation and 100 hours community service for KPMG
partner Margaret Jean McBride and two years of probation each for former
KPMG accountants Joseph Horton Parker and Bradley J. Timon. All were
found guilty of gross negligence and unprofessional conduct.
The county declared bankruptcy in late 1994
after it lost $1.7 billion in its investment pool. County treasurer
Robert L. Citron oversaw the investment pool. Mr. Citron was convicted
of faking interest earnings and falsifying accounts. The Board claims
that KPMG, attempting to save money on what turned out to be an underbid
audit, cut corners by allowing junior staff members to conduct certain
areas of the audit and by not helping the county solve its problem of a
lack of internal controls with regard to the investment pool. KPMG
auditors did not speak with the county treasurer regarding the
investment pool, nor did they determine the true market value of the
highly leveraged and speculative investments. KPMG paid a settlement of
$75 million to Orange County in 1998.
KPMG refutes the claims and says
the accountancy board wasted millions of dollars with the goal of making
KPMG a scapegoat. "The claims by the board incorrectly challenge
how KPMG reached its conclusions rather than claim our conclusions were
wrong," said KPMG spokesman George Ledwith.
Continued at the AccountingWeb link shown
above.
|
A message from Roselyn Morris [rm13@BUSINESS.SWT.EDU]
Hello Roselyn,
We don't hear from you very often on the AECM, but when we do it is POW!
It's beginning to sound like we need to take a closer look at the
long-standing warnings from Abe Briloff on the melt down of professionalism in
public accounting.
Your experiences are entirely consistent with the pathetic auditors described
in a piece that Ed Sribner informed us about last December. The link is at http://www.computerworld.com/itresources/rcstory/0,4167,KEY73_STO66354,00.html
The above article describes how superficial and useless the auditors are in
face of computerized transactions.
If they are going to be so incompetent then they could at least be a little
more courteous.
Bob Jensen
-----Original Message-----
From: Roselyn Morris [mailto:rm13@BUSINESS.SWT.EDU]
Sent: Friday, January 11, 2002 1:45 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Oh No!
I am president of the Board of Directors of a higher
education authority, which provides secondary financing for student loans. By
nature of that position, I am chairman of the audit committee. From that
experience, I know that I do battle with the auditors annually. The auditors
did not see any reason to meet with the audit committee until they were
threatened with dismissal. I know that I have asked hard questions and do not
allow the auditors to take the easy way out. I am continuing being told by the
auditors that I am the only one asking these questions and that I am wasting
valuable time, especially for a small client. The quality of the audit from
the Big Five firm is of questionable quality. I continually find mistakes, and
for the last two of three years the audit report draft was completely wrong.
As I press hard, the auditors annually let me know that the audit is a small
audit ($100,000 annually for the authority, and $35,000 for a subsidiary) and
that there are more valuable and worthwhile jobs to be done. Why is the
authority using Big Five auditors then? Because is required by the bond
covenants. The Big Five have worked hard to get all the publicly traded and
SEC audit work, but want to make more money through the big audits or
consulting only.
In working with the audit committee, I have found
that real-world auditors don't know what the standards or the profession
require, only what that particular Big Five firm requires. The real-world
auditors do not want to know those things because most of those auditors are
putting in their time at the Big Five in order to get a bigger paying job.
As an academic, what can we do?
Roselyn E. Morris, PhD, CPA
Associate Dean College of Business Administration
Southwest Texas State University San Marcos, Texas 78666-4616 Phone
(512)245.2311 Fax (512)245.8375 e-mail: rm13@business.swt.edu
Corporate Governance is in
a Crisis
They Just Don't Get It
Chartered Jets, a Wedding At Versailles and Fast Cars To Help Forget Bad
Times.
As financial companies start to pay out big bonuses for
2003, lavish spending by Wall Streeters is showing signs of a comeback.
Chartered jets and hot wheels head a list of indulgences sparked by the recent
bull market.
Gregory Zuckerman and Cassell Bryan-Low, "With the Market Up,
Wall Street High Life Bounces Back, Too," The Wall Street Journal,
February 4, 2004 --- http://online.wsj.com/article/0,,SB107584886617919763,00.html?mod=home%5Fpage%5Fone%5Fus
Paychecks are now more politically correct, but CEO wallets won't shrink
overnight. See which executives nabbed the juiciest pay bonanzas last year.
"Here Comes Politically Correct Pay," The Wall Street Journal,
April 12, 2004 --- http://online.wsj.com/page/0,,2_1081,00.html?mod=home_in_depth_reports
Welcome
to the new world of politically correct pay,
where directors increasingly scrutinize their leader's compensation through
the eyes of irate shareholders, workers and regulators. That already means
some big changes are in the works. But nobody should weep for the CEO just
yet: Even the most sweeping moves won't shrink chief executives' bulging
wallets overnight.
"How Hazards for Investors Get Tolerated Year After Year." by Susan
Pulliam, Susanne Craig, and Randal Smith, The Wall Street Journal,
February 6, 2004 --- http://online.wsj.com/article/0,,SB107602114582722242,00.html?mod=home%5Fpage%5Fone%5Fus
Corporate Board Minutes Are Altered; Judgments In
Arbitration Go Unpaid
Tainted Wall Street research. IPO chicanery.
Mutual-fund trading abuses. Corrupt corporate accounting.
Investors have been hit with a wide array of scandals
over the past two years, tarnishing the reputations of some of the nation's
largest corporations and financial institutions. The facts have varied, but
the scandals share a common thread: bad behavior that had been tolerated for
years, often with regulators and industry insiders looking the other way.
Savvy investors long knew that some research analysts
were overly bullish in recommending shares of their firm's banking clients.
But regulators ignored complaints until Eliot Spitzer, the New York attorney
general, launched a probe leading to a $1.4 billion settlement with 10 top
securities firms last year. Ditto for Wall Street firms that doled out hot
initial public offerings of stock to corporate executives to get their
companies' financing business -- and in the process, shut out the little guy.
It also was no big secret that corporate boards
rubber-stamped management decisions, stomping shareholders in the process.
Abuses were left unchecked until a rash of accounting scandals led to sweeping
reforms in 2002 that redefined the duties of directors.
There are many more such "open secrets":
practices that raise eyebrows but persist on Wall Street and in corporate
boardrooms. Here are three open secrets -- regarding corporate-board minutes,
payment of arbitration awards and pricing of municipal bonds -- that exemplify
the hazards to investors.
Altered Minutes
One reason it has been so difficult to determine what
top management and directors knew about -- and did to cause -- the business
disasters of the late 1990s is the distortion of corporate-board minutes. All
too often, these critical records are altered or left incomplete. When fraud
comes to light, investigators struggle to assign blame, making it harder for
investors to recoup losses and less likely that misbehavior will be deterred
in the future.
"The attitude is that it's OK to lie by omission
in board minutes," says Charles Niemeier, a member of the Public Company
Accounting Oversight Board. "It's the way it gets done, and the problem
is that we have become accepting of this." The oversight board was set up
under the Sarbanes-Oxley Act, legislation Congress passed in 2002 to improve
corporate accountability. While the act addressed financial statements and
public filings, lawmakers didn't look closely at problems concerning internal
corporate documents.
Name a corporate blowup, and there is usually an
example of board minutes being altered or left incomplete. At Enron Corp.,
investigators traced the board's knowledge of one dubious off-balance-sheet
vehicle only through handwritten notes taken by the corporate secretary during
a board meeting in May 2000. The information from the scribbled notes
suggested that at least some Enron directors knew the arrangement was an
accounting maneuver, rather than something aimed at substantive economic
activity. But the formal board minutes from that meeting contained no
reference to the directors' knowledge on this point.
There aren't hard rules on how thorough board minutes
should be. As a result, some corporate lawyers routinely use bare-bones
minutes as a shield to protect companies from liability.
"There is a huge gulf between the two schools of
thought on board minutes," says Rodgin Cohen, a partner at the New York
law firm of Sullivan & Cromwell. "One is that they should be a full
recording. The other is that they should be limited. Most lawyers would
suggest that they should be quite limited," he says. "It's like
anything: The more words you put down, the greater exposure you have."
Mr. Cohen says that he advocates more extensive minutes.
Amy Goodman, a lawyer at Gibson, Dunn & Crutcher
who specializes in corporate-governance issues, says that after the recent
wave of scandals, many corporate attorneys and their clients are re-evaluating
whether they need to include more detail in minutes "to be able to show
that directors have acted with due care and in good faith."
In the WorldCom Inc. fiasco, a court-appointed
bankruptcy examiner has found that the company created
"fictionalized" board minutes in connection with its announcement in
November 2000 of plans to create a so-called tracking stock that would
correspond to the performance of its consumer business. The long-distance
telephone company, now known as MCI, said at the time that the board had
approved this move.
In fact, the board hadn't given its approval, the
bankruptcy examiner, Richard Thornburgh, a former U.S. attorney general,
concluded. The board had held only a "minimal" discussion of the
idea during a brief "informational" meeting on Oct. 31, 2000, Mr.
Thornburgh's report said. WorldCom management decided to transform records
from the October meeting into minutes of a formal board meeting, complete with
references to a discussion about the tracking stock that hadn't really taken
place, the report found.
One WorldCom lawyer said during the examiner's
investigation that transforming the Oct. 31 meeting into a "real meeting
was 'wrong' and made the transaction 'look nefarious' when that was not the
case," the report said. The examiner faulted former senior WorldCom
executives for the decision, although board members and WorldCom lawyers also
bear responsibility, the report said.
The practice highlighted the lack of oversight by
WorldCom's board, which contributed to the company's downfall and made it into
a "poster child" for poor corporate governance, Mr. Thornburgh has
said.
Bradford Burns, an MCI spokesman, says the company
has instituted reforms "to ensure what happened in the past will never
happen again."
Unpaid Judgments
On those occasions when investors catch their brokers
cheating and win an arbitration award -- no small feat -- the customer still
sometimes ends up losing.
IN PLAIN SIGHT
Here are three 'open secrets' known to regulators and
financial-industry insiders but still harmful to investors
• Corporate-board minutes are often manipulated,
with important facts changed or left out. That makes it difficult, once fraud
is discovered, to determine what directors and top managers knew and what they
did.
• Arbitration awards to investors who have been
cheated often go unpaid, as, for example, when suspect brokerage firms simply
shut down. Wall Street has opposed certain changes that would ease the
problem, such as requiring brokerage firms to have increased capital and more
liability insurance.
• Municipal bonds are difficult for individual
investors to price because of a lack of information, often resulting in their
paying too much. There have been improvements lately, but bond dealers are
opposing certain additional reforms that would give investors real-time bond
data.
Fabien Basabe says that in the late 1990s, his
brokerage firm recklessly traded away nearly $500,000 of his money. The
65-year-old Miami restaurateur filed an arbitration claim with the National
Association of Securities Dealers, as many investors do when they clash with
their brokers. In 2002, after a two-year fight, a state court in Florida
confirmed an NASD arbitration-panel award ordering J.W. Barclay & Co. to
pay Mr. Basabe more than $550,000, plus $150,000 in punitive damages.
The problem was that the small New Jersey securities
firm had closed its doors in early 2001, after it lost the initial round of
arbitration. Mr. Basabe has yet to see any money. "I went through all of
it for nothing," he says.
In the first quarter of 2003, the NASD imposed $99
million in damage awards against brokerage firms and brokers nationwide. What
the NASD doesn't trumpet is that investors haven't been able to collect $30
million -- or almost one-third -- of that amount during that period, the most
recent for which numbers are available. For 2001, the most recent full year
for which figures are available, 55% of the $100 million in arbitration awards
went uncollected.
The NASD can suspend the license of a broker or
securities firm that refuses to pay up. But many firms and brokers just walk
away rather than pay. Because of his disaster with Barclay & Co. (no
relation to the big British bank Barclays PLC), Mr. Basabe says he lost his
Italian restaurant, I Paparazzi, in the Breakwater Hotel in South Beach.
In 1987, the Supreme Court ruled that securities
firms may require customers to waive their right to sue in court as a
condition of opening a brokerage account. Since then, arbitration generally
has become the sole forum for customers to seek redress from Wall Street
firms. And Wall Street has resisted some steps that could protect investors
when firms fail to pay.
In 2000, the General Accounting Office, the
investigative arm of Congress, issued a report calling for improvements in
arbitration-award payouts. The NASD has responded by installing a system that
tracks unpaid awards and requiring firms to certify they have paid, among
other steps.
But securities firms have successfully lobbied
against two other potentially effective reforms. One would increase capital
requirements, so that firms would have cash on hand to pay awards. The other
would require firms to carry more liability insurance to cover awards. The
Securities and Exchange Commission, which oversees the NASD and has
jurisdiction on these issues, has reinforced this resistance in its own
comments to the GAO.
In reports released in 2000 and last year, the GAO
recounted arguments made by the SEC that increasing capital requirements could
force many brokerage firms out of business and potentially penalize
responsible firms. The SEC also has argued that stiffer insurance requirements
could raise investor costs. Securities-industry executives have told the GAO
that carrying more insurance to cover arbitration awards "could raise
costs on broker-dealers industrywide and ultimately on investors."
An SEC spokesman says the agency "continues to
explore ideas about how to improve investor recovery of losses from firms that
go out of business."
Investors' inability to collect arbitration awards
has broader ripple effects: "A lot of lawyers won't even touch these
cases because they know they have no hope of collecting money," says Mark
Raymond, Mr. Basabe's attorney.
The NASD arbitration panel found that the Barclays
broker who handled Mr. Basabe's account, Anton Brill, engaged in
"intentional misconduct" when he made unauthorized trades. Mr. Brill
now works at another securities firm in Florida. He has yet to pay the $6,000
in punitive damages levied against him, or any of the remainder of the
arbitration award, for which he is jointly liable.
In an interview, Mr. Brill said the case took place
"a long time ago," adding that the matter is "still under
negotiation." He declined to elaborate. After receiving questions about
the case from The Wall Street Journal, an NASD spokeswoman said that the
association had begun proceedings to suspend Mr. Brill's license.
Murky Municipals
In October 2002, John Macko bought $15,000 of
municipal bonds issued by a trust organized by the government of Puerto Rico.
The 57-year-old lawyer in Geneseo, N.Y., discovered after the fact that he had
paid $25 to $44 more per $1,000 bond than brokers paid for the same type of
bond during the same trading day. This information wasn't available to him at
the time he made his purchases. The muni-bond market, Mr. Macko says, "is
very opaque."
State and local governments issue municipal bonds to
raise money for public projects. The bonds typically are exempt from federal
taxes, and most are seen as relatively safe investments. Munis trade on an
open market, but there isn't a place small investors such as Mr. Macko can go
to figure out whether they are getting a fair price. (In contrast, stock
prices are reported minute-to-minute by exchanges, and mutual-fund prices are
set once a day. Treasury bonds and many corporate bonds are priced throughout
the day with a short delay.)
Bond dealers, with their superior knowledge of the
market, can make a legitimate profit on the difference between what they buy
bonds for and their sales prices. But dealers have gone a step further:
opposing full online dissemination of real-time muni-bond prices that would
help small investors. The dealers say that because many munis trade
infrequently, it's difficult to determine precise prices. Immediate disclosure
of some prices, they add, might increase volatility in the market and cause
some dealers to stop trading certain bonds.
Without fresh data on bond trading, individuals can
fall prey to brokers who tack on excessive "markups." An example:
Last May, the NASD alleged that Lee F. Murphy, a former broker at Morgan
Keegan & Co., charged too much in 35 bond sales, including deals in 2001
for bonds sold by St. James Parish, La., to raise money for solid-waste
disposal. Mr. Murphy obtained markups from investors ranging from 4.07% to
7.18%. There aren't specific limits on markups, but the industry rule of thumb
is that margins should be well below 5%, unless there are exceptional
circumstances, such as the strong possibility that a municipality will
default.
In the case involving the Morgan Keegan broker, the
bonds "were readily available in the marketplace, and Murphy offered no
special services justifying an increased markup," the NASD alleged. Mr.
Murphy, who settled the administrative charges without admitting or denying
wrongdoing, was suspended for 15 days and fined $6,000.
Thomas Snyder, a managing director at Morgan Keegan,
says the trades were part of a unique situation in which Mr. Murphy didn't
have full information about a volatile, unrated bond. Morgan Keegan officials
add that the firm hadn't been sanctioned and that it canceled the trades in
question and reimbursed investors. Mr. Murphy wasn't available at the New
Orleans office of his current employer, Sterne, Agee & Leach Inc.
Investors in theory can shop around, as they would
for a car. But as a practical matter, most individuals buy municipal bonds
through their regular broker and don't do much comparing. Securities laws hold
brokers to a higher standard of protecting customers' interests than is
applied to merchants such as car dealers.
Individual investors -- who directly own an estimated
$670 billion of the $1.9 trillion in outstanding munis -- are better off than
they were just a year ago. That's when the Municipal Securities Rulemaking
Board expanded the amount of muni-bond data available on a Web site called
Investinginbonds.com. The MSRB, a congressionally created self-regulatory
body, provides the price, size and time of each trade -- but typically with a
delay of up to 24 hours. The board plans to report same-day trade data for
many bonds beginning next year.
But Wall Street is resisting. Brokers are lobbying
the MSRB to delay the release of real-time data for some larger trades and
lower-quality bonds so that the impact of the disclosures can be examined.
These brokers point to the argument about increasing volatility, which, they
say, could heighten the risk of trading losses for both dealers and investors.
Regulatory actions such as the NASD's move against
Mr. Murphy have been relatively infrequent, but that may be changing. The SEC
and the NASD have launched separate probes of bond pricing, focusing on
whether brokers have choreographed transactions among themselves that drive
muni prices up or down, to the detriment of customers.
How to Fix Corporate Boards
"Yale Dean Suggests New Debate On How to Fix Corporate Boards,"
AccountingWEB, April 15, 2004 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=99028
One voice is missing from the mix of regulators,
attorneys, shareholder activists and business leaders who are trying to fix
corporate boards — psychologists.
Jeffrey Sonnenfeld, associate dean at the Yale School
of Management, suggests in Forbes.com that psychologists could add information
about the "litany of pathologies" on corporate boards, which he
lists as "groupthink, bystander apathy, diffusion of responsibility,
inconsistent incentives, obedience to authority, atrophy and the like."
Sonnenfeld says that now is the time to move the
governance debate away from new procedures and checklists and toward
"intelligent thinking about people and their character." With this
in mind, he offers advice on selecting directors:
- Seek knowledge, not names. Corporations have
hidden behind the impressive, marquee names of their board members, rather
than seeking directors who are knowledgeable in their field.
- Pay more attention to character than independence.
While the push for supermajorities of independent directors gains steam,
Sonnenfeld says "independent-mindedness is not the same thing as
independence." Directors who know the business can prevent the chief
executive from being the board’s sole source of inside knowledge.
- Purge those with commercial or social agendas.
Major conflicts are often political and personal, not financial.
- Find people with a passion for the business.
Overlook people who seek board posts for the vanity and power, but are
indifferent about the company they want to oversee, Sonnenfeld says.
- Avoid joiners. The Corporate Library estimates
that a single board post requires 15 to 20 days a year of preparation and
meetings. People who collect board memberships like trophies are spread
too thin.
- Beware false recipes by governance consultants.
It’s now fashionable, Sonnenfeld says, to avoid directors who worked
with troubled firms or those who are past retirement age. Some businesses
are wisely seeking energetic older leaders to sit on their boards.
How Not to Fix Corporate Boards
The planned
deal raised questions about whether the two investors slated to join the board
-- David Matlin of MatlinPatterson and Glenn Hutchins of Silver Lake -- had
received favorable treatment from MCI.
"MCI Rescinds Deal With Investors After Criticism," by Mitchell
Pacelle and Shawn Young, The Wall Street Journal, April 19, 2004 --- http://online.wsj.com/article/0,,SB108232471768285933,00.html?mod=technology_main_whats_news
MCI, the long-distance phone company
scheduled to emerge from bankruptcy this week, has canceled a confidential
arrangement it struck with two of its largest investors after other investors
called the deal unfair. A judge criticized the company's handling of the
arrangement with the two investors, who until last week were expected to join
the company's board.
The deal, which had been struck in
January, called for the two investment firms, MatlinPatterson Asset Management
and Silver Lake Partners, to swap all of their old MCI bonds for new MCI
bonds, instead of the mix of new stock and bonds that many other creditors
will receive. MCI said the arrangement was intended to preserve a tax benefit
for the company potentially valued at as much as $500 million.
But when other creditors learned of the
confidential arrangement, some of them objected, arguing that it would have
given the two large investors a richer deal than was available to other
investors holding the same defaulted bonds. In recent months, as questions
mounted about MCI's future, MCI's stock, which has been trading on a
when-issued basis, has fallen in value, while the bonds have held up.
Moreover, the bonds will be easier to sell in quantity than the new stock,
investors said.
The planned deal raised questions
about whether the two investors slated to join the board -- David Matlin of
MatlinPatterson and Glenn Hutchins of Silver Lake -- had received favorable
treatment from MCI. Because of the
objections, MCI agreed about one week ago to cancel the agreements with these
two investors, who will now be treated the same as other bondholders,
according to New York lawyer Marcia Goldstein, who represents MCI and helped
negotiate the agreements.
Continued in the article
"OVERCOMPENSATING In Fraud Cases Guilt Can Be Skin Deep," by Alex
Berenson, The New York Times, February 29, 2004 --- http://www.nytimes.com/2004/02/29/weekinreview/29bere.html
The new wave of corporate fraud trials was supposed
to be about systemic problems with the way American companies are run. The
trials were supposed to be about the collapse of accounting standards and the
way huge stock option grants can corrupt executives.
Instead prosecutors have spent a lot of courtroom
time talking about perks and obstruction of justice - about floral
arrangements and hotel bills run up by the indicted executives, as well as
whether they lied to prosecutors or federal investigators.
In the trial of L. Dennis Kozlowski, the former
chairman of Tyco International who is accused of looting his company,
prosecutors have repeatedly presented evidence of perks received by the
defendant, even when the benefits seem only tangentially related to the
charges at hand.
The trial of John J. Rigas, the founder of Adelphia
Communications, and his sons Timothy and Michael, which began last week,
appears set to follow a similar tack. Prosecutors are preparing to present
evidence about safari vacations and a $13 million golf course allegedly paid
for out of corporate funds.
Meanwhile, federal prosecutors investigating Computer
Associates, the Long Island software giant, have focused on alleged lies that
executives told to prosecutors, not the accounting chicanery that Computer
Associates allegedly used to inflate its profits.
Prosecutors have good tactical reasons for making
these trials more about executive greed or obstruction of justice than about
accounting or securities fraud, securities lawyers say. White-collar crime
cases are often difficult to prove, as prosecutors learned again Friday when
the judge in the Martha Stewart case dismissed a securities fraud charge
against Ms. Stewart that was at the core of the indictment against her.
So prosecutors look for every possible way to
simplify the cases for jurors - and to make defendants look bad.
Evidence of defendants' lavish lifestyles is often
used to provide a motive for fraud. Jurors sometimes wonder why an executive
making tens of millions of dollars would cheat to make even more. Evidence of
habitual gluttony helps provide the answer.
"You're trying to make the case that this
individual is greedy, should not be viewed as credible, is only out for
himself,'' said Joel Seligman, dean of the Washington University School of
Law. "It does have a kind of relevance.''
But prosecutors have other reasons for introducing
evidence of extravagant spending. Because the details of the fraud charges can
be so difficult to understand, jurors' decisions may ultimately turn on their
personal impressions of the indicted executives.
"It's a lot more interesting to show the tape of
Jimmy Buffett playing in the background and people walking around nude and
drunk than to show the dry accounting evidence,'' said James Cox, a professor
of corporate and securities law at Duke University, in reference to a
videotape played by prosecutors in the Tyco trial about a birthday party for
Mr. Kozlowski's wife, Karen. Tyco paid $1 million, about half the cost, for
the party.
"The trial is partly about what the rules are,
but a lot about what the defendant is,'' Mr. Cox said.
Continued in the article
"Where Are All the Poison
Pills?" by robin Sidel, The Wall Street Journal, March 2, 2004 ---
http://online.wsj.com/article/0,,SB107818176447743400,00.html?mod=home%5Fwhats%5Fnews%5Fus
The poison pill, one of the most
popular corporate-takeover defenses of the past two decades, is getting
tougher to swallow.
Faced with opposition from activist
shareholders and new pressures to clean up governance after corporate
scandals, companies are dismantling what has been one of the best known of the
antitakeover mechanisms. In the past month, Circuit
City Stores Inc., Goodyear
Tire & Rubber Co., FirstEnergy
Corp., PG&E
Corp., and Raytheon
Co., among others, all took steps toward eliminating their pills.
So far this year, a dozen companies
have taken steps to dismantle their pills, compared with 29 for all of 2003
and just 18 in 2002, according to TrueCourse Inc., which tracks
corporate-takeover defenses. Although such actions typically are heaviest just
ahead of the annual-meeting season in which shareholders air gripes, people
who follow corporate-governance issues say the trend is likely to continue
through the year.
Meanwhile, fewer companies are putting
the measure in place: The rate of new poison-pill adoptions fell to a 10-year
low in 2003, according to TrueCourse. About 99 companies adopted new plans in
2003, down 42% from the prior year.
While there may still be a net gain in
pills this year, the figures show the sharp decline in the rate of increase.
"In the current environment, there is an increasing desire by boards to
be viewed as following good governance and not be entrenched," says Alan
Miller, co-chairman of proxy-solicitation firm Innisfree M&A Inc.
"This is the flavor of the day, and it's going to accelerate."
Continued in the article
Question
What lawsuit is shaking up corporate governance at the moment?
Hint: It's a Mickey Mouse lawsuit.
Answer
It's Been Mickey Mouse Corporate Governance: Until Now
"Boards Beware! A lawsuit by Disney shareholders is shaking up much more
than the Mouse House. Thanks to a Delaware court ruling, less-than-conscientious
board members everywhere are running scared."
FORTUNE, October 27, 2003, by Marc Gunther --- http://www.fortune.com/fortune/ideas/articles/0,15114,526338,00.html
In fall 1996, Michael Eisner, the chairman and CEO of
Walt Disney Co., decided he had made a big mistake. Just a year earlier he had
hired Hollywood power broker Michael Ovitz as Disney's president. Ovitz had
flopped, badly. The men needed to find a way to disengage without unduly
embarrassing either of them.
In a three-page, handwritten letter dated Oct. 9,
1996, Eisner proposed an amicable separation to Ovitz, a friend who had
literally stood by him after his coronary-bypass surgery two years earlier.
"We must work together to assure a smooth transition and deal with the
public relations brilliantly," Eisner wrote. "I am committed to make
this a win-win situation, to keep our friendship intact, to be positive, to
say and write only glowing things. You still are the only one who came to my
hospital bed—and I do remember."
"This all can work out!"
It has not worked out—not even close. Ovitz, you
may recall, walked away with a severance package that was generous even by
entertainment-industry standards. For 15 months of labor, he got $38 million
in cash, plus stock options valued at $101 million. That package caused an
uproar and triggered a lawsuit by Disney shareholders, who want their money
back. Since then none of them—not Ovitz, not Eisner, not the company, not
shareholders—has fared very well. Ovitz's next venture failed, Eisner's
reputation soured, and Disney shares currently trade at about $22 each, the
same price as when Ovitz left in '96.
We revisit this unhappy moment in Hollywood history
seven years later not merely for its gossip value but because the shareholder
lawsuit that it provoked has, improbably, taken on enormous significance for
the boards of public companies. In a ruling issued in May that has become
must-reading in corporate boardrooms, Delaware judge William B. Chandler III
said that the suit can go to trial. His reason: The facts, as alleged,
indicate that Disney's directors failed to make a good-faith effort to do
their job when they approved Ovitz's contract and once again when they allowed
him such a lucrative going-away present. The $140 million package represented
nearly 10% of Disney's net income in 1996.
The Disney directors who are defendants—there are
18 in all, including Eisner, Ovitz, and such well-known figures as former
Senator George Mitchell, former Capital Cities CEO Thomas S. Murphy, and actor
Sidney Poitier—all have been subpoenaed to testify. So have Hollywood
bigwigs Sean Connery, Martin Scorsese, former Seagram chairman Edgar Bronfman,
Revolution Studios chief Joe Roth, and Ron Meyer, Ovitz's former partner at
Creative Artists Agency. Lawyers for the shareholders want the directors to
return the money that Ovitz was paid, plus interest, to Disney's coffers. They
also want Disney to radically shake up its board, stripping Eisner of his
chairmanship and getting rid of the directors who, the lawsuit alleges, failed
to do their jobs.
This is a big deal, and not just for Disney. Judge
Chandler's opinion has put directors of public companies on notice that the
courts in Delaware, where more than half of the FORTUNE 500 are incorporated,
are inclined to hold them to a higher standard of performance than has been
expected in the past. Boards have enjoyed virtually unlimited protection from
lawsuits, particularly on the issue of executive pay—until
now. Says Scott Spector, a partner in the
corporate group of the Silicon Valley law firm of Fenwick & West:
"This case has tremendous importance at a time when executive
compensation is under intense media and shareholder scrutiny."
To be sure, the Disney case will not by itself change
the way boards do business. But it's one more reason directors need to take
their jobs more seriously in the aftermath of Enron, WorldCom, and
Sarbanes-Oxley. Already directors are feeling multiple pressures:
Institutional investors are paying more attention to governance; insurance
companies are asking more questions before they write policies that protect
directors and officers of public companies from liability; shareholder
lawsuits are proliferating; and regulators want to give shareholders access to
proxy statements so that they can vote out the directors who are no more
essential than a sprig of parsley on a filet of sole.
To understand why the Disney case matters, you need
to know a little about Delaware. The economy of this tiny state—it's just 30
miles across and 100 miles long—consists largely of DuPont, banking,
beaches, and the business of corporate law. Companies choose to incorporate
there because since 1899 the state government has made it easy for them to do
so. Back then other states required a special act of the legislature to form a
corporation. Delaware asked only for a few forms and a small filing fee.
Question
What else is shaking up corporate governance?
Hint: Vanguard is one of the largest and most ethical mutual fund
companies on the planet.
Answer
Vanguard also is cracking down on companies that pay
their auditors less for their audit than for other services such as consulting.
"We want companies to spend more for their audit than for everything
else," says Glenn Booraem, who heads Vanguard's corporate-governance
effort. And
Vanguard voted against any directors that served on audit committees that didn't
meet the firm's standard on auditor pay.
"Vanguard Gives Corporate
Chiefs A Report Card," by Ken Brown, The Wall Street Journal,
November 10, 2003 --- http://online.wsj.com/article/0,,SB106842052936406500,00.html?mod=your%255Fmoney%255Finvestment%255Fhs
Vanguard Group, the nation's
second-biggest mutual-fund firm behind Fidelity Investments, is turning up the
heat on corporate CEOs.
In a letter sent last week to the chief
executive officers at several hundred of Vanguard
Group's top holdings, the fund firm said that while there has been
progress in corporate governance following the scandals of the past few years,
"there is much more change needed."
So, Vanguard is taking a much harder
line this year, going against the managements' wishes in hundreds of proxy
votes.
Vanguard's stance on three key proxy
issues highlights its new standards. In voting for corporate directors,
Vanguard approved just 29% of the full slates of directors proposed by
companies in which it invests. Last year, Vanguard approved 90% of the full
slates of directors.
In addition, Vanguard approved 79% of
its companies' auditors, down from 100% last year. And the firm voted in favor
of just 36% of employee-option plans, the same number as last year.
Votes like those by Vanguard are one
reason why a record number of proposals from shareholders were approved this
year. According to Institutional Shareholder Services Inc., which advises
mutual funds and pension funds on proxy voting, 164 shareholder resolutions on
everything from staggered boards to takeover defenses to executive
compensation earned majorities this year. The previous record was 106 for all
of last year. "It was a record year for activism any way you look at
it," says Patrick McGurn, senior vice president of ISS.
Corporate governance -- which is simply
how a board oversees management, makes sure the company is run well and that
shareholders are treated fairly -- has been a hot-button issue since the
collapse of Enron Corp., WorldCom Inc. (now MCI) and others. Since then,
investors have become increasingly skeptical that board members and
managements have their best interests at heart. Many have registered that
displeasure by voting against proposals favored by management in the
companies' annual proxy -- proposals that usually are approved with little
notice.
For example, companies need to nominate
some or all of their directors for re-election each year and shareholders get
to vote on the names. It's rare that these nominees are voted down. But
Vanguard approved only 29% of the full slates of board members nominated by
companies. (Vanguard says it has to vote for all of the directors on a slate
for it to count as approved.) Last year, it approved 90% of the full slates of
boards.
Why the switch? In a similar letter to
CEOs last year, Vanguard CEO and Chairman Jack Brennan warned that the firm
would tighten its standards in response to the scandals. Vanguard now votes
against directors who are on the board's audit, nominating or compensation
committees, if they aren't considered independent of management. The firm also
votes against board members if the committees they are on did things that
Vanguard didn't like.
For example," Mr. Brennan said in
an e-mail,"we now withhold votes for directors who serve on the
compensation committee if the company is proposing excessive annual option
grants or other compensation approaches that we are voting against." Vanguard
also is cracking down on companies that pay their auditors less for their
audit than for other services such as consulting. "We want companies to
spend more for their audit than for everything else," says Glenn Booraem,
who heads Vanguard's corporate-governance effort.
And Vanguard voted against any directors that
served on audit committees that didn't meet the firm's standard on auditor
pay.
Corporate-governance experts say that
while Vanguard has voted against management before, it never has made such a
show of it. That will change next year, when fund companies must disclose
their votes on individual company proxies. Vanguard opposed that shift, but
experts hope it will make funds even more willing to stand up to management.
"One of the thoughts behind
disclosure of voting was it would probably cause funds to vote more against
management now that the votes were out in the sunlight," says Peter
Clapman, chief counsel at TIAA-CREF, the big pension fund that has a history
of shareholder activism.
Continued in the article.
From Watson Wyatt Worldwide --- http://www.watsonwyatt.com/research/resrender.asp?id=W-584&page=1#
Corporate Governance in Crisis: Executive Pay/Stock Option Overhang 2003
Corporate America is
in crisis. Scandals, bankruptcies, questionable accounting and the like are
eroding public trust. Poorly timed or possibly even fraudulent stock sales by
key company executives are igniting legislative action. The overall economy is
struggling, the stock market is in a heightened state of volatility, and
investor confidence has plummeted so low that CEOs are now legally required to
sign a pledge of honesty.
As a result, all the
goodwill created by corporate America with the gains of the 1990s has
vanished. Executive pay is once again under heavy public scrutiny, and calls
to link pay with accurate measures of performance are louder than ever before.
Executive pay,
especially CEO pay, has become a lightning rod for this collapse in investor
confidence for a number of reasons. CEO pay levels in a few instances have
reached into the hundreds of millions of dollars for a single year, raising
the question of whether any employee is worth that type of money —
especially in cases of a company’s mediocre or even poor performance. There
also have been recent examples of overstated profits or outright fraud. Such
situations are compounded by the ability of executives to time the exercise of
their options and the sale of their stock, and by the fact that stock options
are accounted for differently from other forms of compensation.
We believe that the
executive pay situation offers a key window into the corporate governance
crisis facing America and, accordingly, provides a possible solution. The
companies with the pay governance processes that are most transparent and most
aligned will be the ones to inspire the most investor confidence.
Watson Wyatt research
clearly and consistently documents that a company’s executive pay levels are
directly and positively correlated with its financial performance. Companies
that give their executives a greater stock incentive opportunity outperform
companies with lower opportunity. We also have found that companies with high
levels of stock ownership at the executive and other employee levels
substantially outperform their low stock ownership counterparts. In fact, our
research has shown that stock ownership is more effective than stock options
in this regard.
The research in our
2003 Executive Pay/Stock Option Overhang study bears this out. In particular,
our findings show:
- Companies with
senior executives with high stock ownership financially outperform
companies with lower executive ownership. This performance is measured by
Total Returns to Shareholders (TRS), Return on Equity, Earnings Per Share
(EPS) growth and Tobin’s Q, among others.
- Companies with
high actual CEO pay have better historical financial performance, as
measured by TRS, than companies with low actual pay.
- Both cash
compensation and stock option profits are highly sensitive to shareholder
returns.
- Stock options
remain a positive factor in company and economic performance despite the
current economic uncertainty and the fact that fewer options are now being
exercised. However, our research also shows that companies with
excessively large amounts of stock option “overhang” have lower
returns to shareholders than companies with more moderate usage. In
addition, the optimal point in stock option overhang has gone down
dramatically for companies in the high-tech sector.
To better understand
some of the concerns of investors, we have investigated the impact of
executive pay and stock option overhang on financial performance. The world of
executive pay could change in unpredictable ways over the next few years. We
believe that our statistical research on pay, ownership and options could be
helpful in setting the future direction.
This report details
those findings. The first section focuses on executive pay; the second on
stock option overhang. It is interesting to note that, if the rules for
accounting of stock options change significantly (as we now think likely), it
is possible that stock option overhang will become a less important measure.
For now, however, these historically reliable gauges continue to offer
valuable insights.
Continued at http://www.watsonwyatt.com/research/resrender.asp?id=W-584&page=1#
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
FEI Video on Corporate Governance ---
http://www.fei.org/video/
U.S. Government Accountability (Governmental
Accounting)
Earlier this year the GAO was unable for a sixth
consecutive year to express an opinion as to whether the U.S. government’s
consolidated financial statements were fairly stated.
The bottom line is that, in my view, the federal
government’s current financial statements and annual reports do not give
policy makers and the American people an adequate picture of our government’s
overall performance and true financial condition. This is a serious issue. As
Thomas Jefferson noted, an informed electorate is the basis for a sound
democracy. But how can the American people and their elected officials make
sound decisions if they aren’t given timely, accurate and useful information?
The Honorable David M. Walker (U.S. Comptroller General), "Truth and
Transparency: The Federal Government's Financial Condition and Fiscal
Outlook, Journal of Accountancy, April 2004, pp. 26-31 --- http://www.aicpa.org/pubs/jofa/apr2004/walker.htm
Let me review the federal government’s current
financial condition; its fiscal 2002 annual financial report says a lot but
not enough. The good news is that as of September 30, 2002, we had about $1
trillion in reported assets. The bad news is that we had almost $8 trillion in
reported liabilities. That left us with about a $7 trillion accumulated
deficit, or a little more than $24,000 for every man, woman and child in the
United States. In fiscal year 2002, the federal government reported a net
operating deficit of $365 billion. Many of you may be more familiar with the
unified budget deficit number, which in fiscal year 2002 was $158 billion.
Irrespective of whether you focus on the accrual-based accounting numbers or
the cash-based budget numbers, the picture isn’t good and it’s getting
worse. For example, the Congressional Budget Office [CBO] projects that the
unified budget deficits in fiscal years 2003 and 2004 will be $401 billion and
$480 billion, respectively. These numbers are up significantly from fiscal
year 2002. Interestingly, CBO estimates that we will incur about $157 billion
in interest on publicly held federal debt in fiscal year 2003 even though
current interest rates are low on a relative basis. CBO also estimates that,
excluding Social Security surpluses, the total deficit for fiscal years 2003
and 2004 will be $562 billion and $644 billion, respectively. If all these
numbers are making your head spin, just remember that they are all big, and
they are all bad.
More important, although we know that we are in a
financial hole, we don’t really have a very good picture of how deep it is.
Several very significant items are not currently included as liabilities in
the federal government’s financial statements. These items include several
trillion dollars in nonmarketable government securities in the so-called “trust
funds.” In the case of the Social Security and Medicare trust funds, the
federal government took in taxpayer money, spent it on other items and
replaced it with an IOU. Given this fact, the amounts attributed to such
activities aren’t shown as a liability of the U.S. government. Does this
make sense, especially when the government continues to tell Social Security
and Medicare beneficiaries that they can count on the bonds in these “trust
funds?” Is the federal government trying to have its cake and eat it too?
The current liability figures for the U.S. government
also do not adequately consider veterans’ health care benefit costs provided
through the Department of Veterans Affairs, nor do they include the difference
between future promised and funded benefits from the Social Security and
Medicare programs. These additional amounts total tens of trillions of dollars
in discounted present value terms. Simply put they are likely to exceed
$100,000 in additional burden for every man, woman and child in America today,
and these amounts are growing every day. These items may or may not ultimately
be considered to be liabilities from an accounting perspective, but they do
represent significant commitments that will have to be addressed. The burden
of paying for these is not a very nice present for a child born today.
Personally, I’d prefer a savings bond rather than a bill.
In fairness the federal government’s financial
statements also exclude some assets and rights held by the government. For
example, the financial statements do not acknowledge the federal government’s
power to tax. The U.S. government owns and controls one out of every four
acres of the U.S. landmass. Yet the financial statements do not include any
asset value for so-called stewardship or heritage assets, such as public lands
and monuments, or national defense assets, such as missiles, tanks, ships and
planes. These items were acquired at a cost and have some value, but do we
really ever expect to sell them? For the most part, the answer is no.
Beyond financial information the federal government
as a whole and each federal department and agency need to be able to show the
results they have achieved with the resources and authorities they have been
given. I’m not talking about performance measurement in a narrow sense but
about whether agencies can show they are making a difference towards meeting
the needs of society. This type of performance information and related
cost/benefit analyses needs to become a standard part of federal reporting and
operations. Unfortunately, for the most part, this is not being done
adequately.
The bottom line is that, in my view, the federal
government’s current financial statements and annual reports do not give
policy makers and the American people an adequate picture of our government’s
overall performance and true financial condition. This is a serious issue. As
Thomas Jefferson noted, an informed electorate is the basis for a sound
democracy. But how can the American people and their elected officials make
sound decisions if they aren’t given timely, accurate and useful
information?
The recent accountability failures in the private
sector underscore the importance of proper accounting and reporting practices.
It is critically important that such failures not be allowed to occur in the
public sector. We at the GAO are dedicated to ensuring they don’t occur and
to furthering progress on these and other important transparency and
accountability issues. Earlier this year the GAO was unable for a sixth
consecutive year to express an opinion as to whether the U.S. government’s
consolidated financial statements were fairly stated. We were unable to
express an opinion primarily because of serious financial management problems
at the Defense Department, the government’s inability to adequately account
for intragovernmental transactions and the government’s inability to
properly prepare consolidated financial statements. Despite this track record
I believe that, as 21 of 24 major federal agencies do, the federal government
can and ultimately will receive an unqualified opinion on its financial
statements, it’s hoped well before my term ends in 2013. At the same time I
can assure you the U.S. government will not receive an opinion on its
financial statements from the GAO until it earns one.
Continued in the article
The GAO --- http://www.gao.gov/
The General
Accounting Office is the audit, evaluation, and investigative arm of
Congress. GAO exists to support the Congress in meeting its Constitutional
responsibilities and to help improve the performance and ensure the
accountability of the federal government for the American people. GAO examines
the use of public funds, evaluates federal programs and activities, and provides
analyses, options, recommendations, and other assistance to help the Congress
make effective oversight, policy, and funding decisions. In this context, GAO
works to continuously improve the economy, efficiency, and effectiveness of the
federal government through financial audits, program reviews and evaluations,
analyses, legal opinions, investigations, and other services. GAO's activities
are designed to ensure the executive branch's accountability to the Congress
under the Constitution and the government's accountability to the American
people. GAO is dedicated to good government through its commitment to the core
values of accountability,
integrity,
and reliability.
Advancing Governmental Accounting --- http://www.agacgfm.org/homepage.aspx
April 17, 2004 message from Wanda Wallace [wanda.wallace@business.wm.edu]
Dear Bob,
I thought I'd also pass along another piece of news.
I recently completed a writing project that in my mind's eye has among its
audiences the classroom. In particular, in the introductory undergraduate,
graduate, EMBA, and continuing education areas, I do not believe there has
been a short, easy-to-read, primer available on the rudiments of internal
control and auditing. In these times, everyone seems a bit more interested in
gaining such a foundation, and I have had the good fortune of working with the
AGA to bring the book to fruition. Since this is the first book that
association has published, I am taking the time to try to "get the word
out" with some individuals with whom I'm acquainted in academia. In any
case, should you have an interest in the site (which was posted just last
week), see ( http://www.agacgfm.org
) and ( http://www.agacgfm.org/publications/wallace_order.aspx
)
I hope all is well.
Regards,
Wanda
Wanda A. Wallace, Ph.D., CPA, CMA, CIA
Williamsburg, Virginia
Derivative Financial
Instruments Fraud
This module was moved to http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
Freddie Mac --- http://www.trinity.edu/rjensen/caseans/000index.htm
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