Accounting Scandal Updates and Other Fraud on March 31, 2005
Bob Jensen at Trinity University

Many of the scandals are documented at http://www.trinity.edu/rjensen/fraud.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 

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

Updates on the leading books on the business and accounting scandals --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

I love Infectious Greed by Frank Partnoy ---  http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

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

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

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

FTC Annual Fraud Report
The FTC of the US has released its Annual Fraud Report, in which, among other things, it reports an increase in identity theft, amounting to losses of as much as $548 million in the US alone.
FTC: Identity theft, online scams rose in '04 - Computerworld
Gerald Trite's Business Blog, February 17, 2005 --- http://www.zorba.ca/blog.html 

United Nations (read that United Nepotism)
The Biggest Scam in History
The U.N. Oil-for-Food scandal is the biggest scam in the history of humanitarian aid. And it's Kofi Annan's fault. 
Claudia Rosett, "Blame Game, The New Republic, February 16, 2005 --- https://ssl.tnr.com/p/docsub.mhtml?i=20050221&s=rosett022105 

What a complicated web we weave:  Proud Canada Company Linked to U.N. Oil for Food Scandal
But the Fox News story wasn’t prompted by an announcement from Power of some billion-dollar takeover or the appointment of a new senior executive. It was something altogether different: the revelation that the man handpicked by the UN secretary general last April to probe the UN’s scandalized Oil-for-Food program, Paul Volcker, had not disclosed to the UN that he was a paid adviser to Power Corp., a story which had originally been broken by a small, independent Toronto newspaper, the Canada Free Press. Why did the highest-rated cable channel in the U.S. care? Because the more that Americans came to know about Oil-for-Food, which has been called the largest corruption scandal in history, the more the name of this little-known Montreal firm kept popping up. And the more links that seemed to emerge between Power Corp. and individuals or organizations involved in the Oil-for-Food scandal, the more Fox News and other news outlets sniffing around this story began to ask questions about who, exactly, this Power Corp. is. And, they wanted to know, what, if anything, did Power have to do with a scandal in which companies around the world took bribes to help a murderous dictator scam billions of dollars in humanitarian aid out of the UN while his people suffered and starved?
Kevin Steel, "How Montreal's Power Corp. found itself caught up in the biggest fiasco in UN history," Canada Free Press, March 5, 2005 --- http://www.canadafreepress.com/2005/cover030505.htm 

Fraudulent Health Clinics and Doctors:  What happened to ethics?
A group of health clinics and doctors paid thousands of people across the U.S. to undergo unnecessary surgery so they could defraud insurers out of tens of millions of dollars, a lawsuit alleges.  Twelve Blue Cross and Blue Shield health-insurance plans sued a group of Southern California health-care clinics, physicians and others they say are involved in the elaborate scheme.  The scope of the alleged fraud is vast. The insurers claim the clinics paid recruiters to enlist patients in 47 states, then transported the people to California where they underwent unnecessary and sometimes dangerous outpatient procedures.
"Blue Cross Groups Sue Clinics, Doctors, Claiming Insurance Fraud," The Wall Street Journal, March 14, 2005; Page B4 --- http://online.wsj.com/article/0,,SB111076460482378314,00.html?mod=todays_us_marketplace 
Bob Jensen's threads on medical and drug company frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm#PhysiciansAndDrugCompanies 

Amazon Pays $27.5 Million To Settle Securities Suit
Amazon.com Inc. disclosed Friday it has agreed to pay $27.5 million to settle an investor lawsuit alleging securities violations by its officers and directors.  According to its annual report filed with the Securities and Exchange Commission, the Seattle-based Internet retailer said it reached a settlement with plaintiffs lawyers in March. The company expects most, if not all, of the settlement will funded by its insurers.  The complaint was filed by stock and bond holders in August 2003. It alleges that Amazon officers and directors made false or misleading statements from Oct. 29, 1998, through Oct. 23, 2001, about the company's business, financial condition and future prospects, among other things.
"Amazon Pays $27.5 Million To Settle Securities Suit," The Wall Street Journal, March 14, 2005, Page B9 --- http://online.wsj.com/article/0,,SB111054778856777083,00.html?mod=todays_us_marketplace 

Profiteers Heading Legitimate Charities
Charity executives haul home the lion's share striking disparity between what nonprofit fat cats make and industry norms — hundreds of thousands of dollars in many cases — illustrates a troubling lack of city oversight, officials say.  A whopping 200 executives at organizations that provide services for the city's have-nots take home in excess of $150,000 a year. That's more than the salaries of City Council members, the public advocate and all the city's district attorneys.  Another 12 nonprofiteers make more than the top nonprofit earners in the entire state based on the budget size of their groups, according to a survey of 2002 salaries by the nonprofit watchdog Guidestar.org.
"$WEET CHARITY FOR EXECS AT NONPROFITS," New York Post, March 13, 2005 --- http://www.nypost.com/news/regionalnews/42413.htm 
Bob Jensen's threads on charity frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm#CharityFrauds 

It must be nice to get paid nearly $20 million for cheating
Bank of America Corp., which has paid more than $1 billion during the past year in scandal-related settlements and penalties while absorbing a huge acquisition, paid its chairman and chief executive, Kenneth Lewis, a total of $19.3 million in compensation, according to a proxy filing with the Securities and Exchange Commission. The 57-year-old Mr. Lewis, in his fourth year of running the Charlotte, N.C., company, which ranks third in assets among U.S. banks, received a salary of $1.5 million, unchanged from 2003. His bonus rose 6% to $5.7 million from $5.4 million a year earlier.
Betsy McKay, "Bank of America Pays Its CEO $19.3 Million Amid Penalties:  Total for Lewis Followed $1 Billion in Settlements, Absorption of Acquisition," The Wall Street Journal, March 29, 2005; Page A6 --- http://online.wsj.com/article/0,,SB111205640746091429,00.html?mod=todays_us_page_one
Bob Jensen's "Rotten to the Core" threads on banking are at http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

It pays to be an accounting cheat because you don't have to return your bonus that you got by cheating
Hundreds of companies have restated earnings in recent years - 414 in 2004 alone, according to a recent study by the Huron Consulting Group. And in many cases, the revisions came in the wake of discoveries of questionable accounting or other possible wrongdoing that meant the numbers leading to bonuses were inaccurate. But a review of restatements by large corporations shows that companies very, very rarely - as in almost never - get that money back. The list of restatements was compiled for Sunday Business by Glass Lewis & Company, a research firm based in San Francisco.
Jonathan D. Glater, "Sorry, I'm Keeping the Bonus Anyway," The New York Times, March 13, 2005 --- http://www.nytimes.com/2005/03/13/business/yourmoney/13restate.html? 
Bob Jensen's threads on white collar crime are at http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays 

CEOs gain from poor performance of share prices
Limiting severance pay for chief executives has been an increasingly popular idea among investors. Shareholder proposals like Mr. Chevedden's went to a vote at 21 companies last year and received an average of 51 percent of the votes.  But AMR was not going to let its shareholders vote on the matter just because it may have seemed to be what investors wanted. No, AMR officials first wanted to make sure that Mr. Chevedden was still eligible to put something on the ballot. So it checked to see how much his shares were worth.  As it turned out, AMR has performed so poorly in the last few years - the price of its stock has fallen about 70 percent since mid-2001 - that Mr. Chevedden's 100 shares are now worth just $900. And that is well below the $2,000 minimum stake the S.E.C. says a shareholder must have if he or she wants to make a proxy proposal.  AMR asked the regulators for permission to exclude Mr. Chevedden's suggestion for that reason. The company even provided evidence of how weak its stock has been lately.  Last month, Mr. Chevedden complained to regulators that AMR was "implicitly bragging about the declining price" of its stock, and he appealed to their sense of fairness. He asked them not to use the ownership requirements to "disenfranchise long-term continuous shareholders" simply because "the company stock price has sunk."  But rules are rules, so the commission sided with AMR. An AMR spokesman said that the company had no choice but to disqualify Mr. Chevedden.
Patrick McGeehan, "The Fine Print Keeps Small Investors Silent," The New York Times, March 13, 2005 --- http://www.nytimes.com/2005/03/13/business/yourmoney/13agenda.html 
Bob Jensen's threads on white collar crime are at http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays 

They weren't working solely in their clients' best interest.
The study was instigated by Steven D. Levitt, a self-described "rogue economist" who has applied the analytical tools of his trade to everything from sumo wrestlers to drug-dealing gangs; his work is cataloged in the forthcoming book "Freakonomics," written with Stephen J. Dubner.  Professor Levitt had fixed up and sold several houses in Oak Park, Ill., a suburb of Chicago. When working with real estate agents, he said, "I got the impression they weren't working solely in their clients' best interest."
Daniel Gross, "Why a Real Estate Agent May Skip the Extra Mile," The New York Times, February 20, 2005 --- http://www.nytimes.com/2005/02/20/business/yourmoney/20view.html 
Jensen Comment:  Steven Levitt is a terrific economics professor at the University of Chicago.  You can get a list of his publications at http://www.src.uchicago.edu/users/levit/ 
Over the course of the history of America, real estate fraud has been the most prevalent kind of fraud.  See Bob Jensen's history of fraud in America at http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm 

The question is why?  The answer was not caught on film!
Eastman Kodak Co. said it will restate its previously reported results for 2004 and 2003, lowering earnings, because of accounting errors in pensions, income taxes and other areas.  Kodak said it expects to report results by March 31 and has applied for an automatic extension of time to file the results, which were due yesterday. Kodak said its auditor, PricewaterhouseCoopers, will, as expected, give an adverse opinion on its internal financial-reporting controls. Kodak said it has concluded it has a "material weakness" involving its accounting for retirement benefits as well as for income taxes.
William M. Bulkeley, "Kodak to Restate Results for '03, '04," The Wall Street Journal, March 17, 2005; Page A6 --- http://online.wsj.com/article/0,,SB111101010575381521,00.html?mod=todays_us_page_one 
Jensen Comment:  The external independent auditor for Kodak is PricewaterhouseCoopers (PwC)

Eastman Kodak Co. released preliminary fourth-quarter results in line with expectations, but said its auditors are expected to issue an "adverse opinion" citing "material weaknesses" in its internal financial controls for 2004.Kodak joins a growing list of corporations reporting such problems under new Sarbanes-Oxley rules that went into effect in November. Earlier this month, SunTrust Banks Inc., Atlanta, said it will disclose a material weakness in its annual report. Last month Toys "R" Us Inc. disclosed that it was working to resolve unspecified internal-control issues.
"Kodak to Get Auditors' Adverse View," by William M. Bulkeley and Robert Tomsho, The Wall Street Journal, January 27, 2005, Page A# --- http://online.wsj.com/article/0,,SB110674149783836535,00.html  

Judge tells the jury that Morgan Stanley did it
The judge in a high-profile lawsuit brought by financier Ron Perelman said she regarded Morgan Stanley's failure to produce documents as "offensive" and would instruct the jury that the Wall Street firm helped to defraud Mr. Perelman.  In what legal experts called a highly unusual ruling, Florida Judge Elizabeth Maass wrote that she will tell the jury that Morgan Stanley had a role in helping appliance maker Sunbeam Corp. conceal accounting woes that reduced the value of Mr. Perelman's investment in Sunbeam. The ruling increases the possibility that a jury will find against Morgan Stanley and force the firm to pay Mr. Perelman some or all of the $680 million he says he lost on the investment. In addition he is seeking $2 billion in punitive damages
Suzanne Craig and Kara Scannell, "Judge's Fraud Ruling Puts Heat On Morgan Stanley, Law Firm," The Wall Street Journal, L March 24, 2005; Page A1 ---
http://online.wsj.com/article/0,,SB111162256208888176,00.html?mod=home_whats_news_us
Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

Between a Rock and a Hard Place
Should a CEO whose company is rumored to be in trouble admit publicly that things haven't gone as expected and own up to mistakes? Carol Hymowitz explores a dilemma many executives face.
Carol Hymowitz, "Should CEOs Tell Truth About Being in Trouble, Or Is That Foolhardy?" The Wall Street Journal, February 15, 2005; Page B1--- http://online.wsj.com/article/0,,SB110841983585154468,00.html?mod=todays_us_marketplace 

Bye bye Hank!
At the helm of American International Group Inc., Maurice Greenberg was under mounting pressure. Regulators were applying increasing heat over a transaction AIG did with a unit of Warren Buffett's Berkshire Hathaway Inc., a deal they considered possibly misleading to AIG investors.  Mr. Greenberg, known as Hank, resisted the pressure with the same tenacity he displayed in nearly four decades running what has become the world's largest insurer. But then, in the past week, came the tipping point. The regulators -- relying on nearly 1,000 pages of e-mails and phone-call records -- gave AIG's independent directors an analysis providing new details of the deal and Mr. Greenberg's role in it. And some of that was in conflict with or missing from his statements on the matter.
Monica Langley and Theo Francis, "How Investigations of AIG Led To Retirement of Longtime CEO:  Spitzer's and SEC's Close Look At Big Trove of Documents Put Pressure on the Chief Greenberg: 'I'll Get Going Now'," The Wall Street Journal,  March 15, 2005; Page A1 --- http://online.wsj.com/article/0,,SB111084108330679173,00.html?mod=todays_us_page_one

Bye bye again Hank!
Maurice R. "Hank" Greenberg, the insurance industry's most powerful figure for decades, decided to retire as nonexecutive chairman of American International Group Inc., succumbing to mounting law-enforcement scrutiny of the company he built.
Deborah Solomon and Ian McDonald, "Finally, an AIG Without Hank:  Retirement Ends Last Top Role At the Company Greenberg Built And Comes Amid Investigations, The Wall Street Journal, March 29, 2005; Page C1 --- http://online.wsj.com/article/0,,SB111206560939091696,00.html?mod=home_whats_news_us
Bob Jensen's threads on "rotten to the core" insurance rackets can be found at http://www.trinity.edu/rjensen/fraudrotten.htm#MutualFunds 

Income smoothing makes it not so smooth for A.I.G.'s former CEO
Mr. Greenberg's fall from grace may seem to have been dizzyingly swift, but according to people who have worked for him, analyzed his business and dealt with him as either customer or competitor, the seeds of his ouster were probably sown earlier in his long tenure. Paradoxically, these people say, Mr. Greenberg's ability to produce smooth and steady results in a hugely volatile and complex business was also responsible for his downfall.  Dozens of other A.I.G. transactions are now under scrutiny by investigators, though little is known about them. In a board meeting last Thursday, A.I.G. directors were advised that reversing questionable deals uncovered by the company could force it to restate results by approximately $1 billion, according to a person briefed on the meeting, though the figure could change as the internal review continues.
Gretchen Morgenson, "The Deal That Toppled A.I.G.'s Boss," The New York Times, March 27, 2005 --- 

How did AIG use insurance contracts to sell accounting fraud?
Steven Gluckstern and Michael Palm figured out how to minimize insurers' risk and give customers an accounting edge and a tax break: Multiyear contracts in which the premiums covered most if not all of the potential losses -- but refunded much of the unclaimed money at the end of the contract.  Buyers loved the policies because they could offset losses with loan-like proceeds without disclosing liabilities that would muddy their bottom lines. And the premiums were tax deductible.  Such policies became among the industry's hottest products. Now, two decades later, they are the focus of multiple state and federal investigations into companies suspected of using them to manipulate earnings. And this week, those probes helped topple Mr. Greenberg as chief executive, although he will remain chairman. His company sold one policy later declared a sham by federal authorities and itself bought another -- now the focus of intense scrutiny -- from Berkshire Hathaway Inc., where Messrs. Gluckstern and Palm got their start.  "If used improperly, these contracts can enable a company to conceal the bottom-line impact of a loss and thus misrepresent its financial results," says the Securities and Exchange Commission's Mark Schonfeld, who is overseeing the agency's probe of such policies as the head of its Northeast office.
Ianthe Jeanne Dugan and Theo Francis, "How a Hot Insurance Product Burned AIG:  An Unlikely Duo's New Approach Called 'Finite Risk Insurance' Was a Hit -- Until Inquiries Began," The Wall Street Journal,  March 15, 2005; Page C1 --- http://online.wsj.com/article/0,,SB111084339061279243,00.html?mod=todays_us_money_and_investing 
Bob Jensen's threads on "rotten to the core" insurance rackets can be found at http://www.trinity.edu/rjensen/fraudrotten.htm#MutualFunds 

Regulators are examining whether the American International Group has in recent years burnished its results by striking deals with offshore insurers that appear to be independent companies but that may in fact be affiliates of A.I.G. If these companies are indeed A.I.G.'s affiliates, the transactions between them may not involve a true transfer of risk and may run afoul of insurance accounting rules.
Lynnley Browning, "Investigation of A.I.G.'s Deals Moves Offshore," The Wall Street Journal,  March 23, 2005 --- http://www.nytimes.com/2005/03/23/business/23insure.html?

Earnings Management Deception
The 1999 bulletin also said that if accounting practices were intentionally misleading "to impart a sense of increased earnings power, a form of earnings management, then by definition amounts involved would be considered material." AIG hinted some errors may have been intentional, saying that certain transactions "appear to have been structured for the sole or primary purpose of accomplishing a desired accounting result."
Jonathan Weil, "AIG's Admission Puts the Spotlight On Auditor PWC," The Wall Street Journal, April 1, 2005 --- http://online.wsj.com/article/0,,SB111231915138095083,00.html?mod=home_whats_news_us
Bob Jensen's threads on earnings management are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Manipulation
Bob Jensen's threads on the AIG mess are at http://www.trinity.edu/rjensen/fraudRotten.htm#MutualFunds

A billion here and a billion there, pretty soon it begins to look like real money
Insurance giant American International Group Inc., under regulatory scrutiny, is considering a move to clean up suspected accounting mistakes that may total as much as $3 billion from as many as 30 insurance transactions, according to people familiar with the matter.  The potentially problematic accounting now being examined is far broader than was believed just a week ago, said people familiar with the situation.
Monica Langley and Ian McDonald, "AIG's Concerns Over Accounting Grow Broader:  Insurer Reviews Transactions That Could Total $3 Billion; A Change in Compensation?" The Wall Street Journal,  March 25, 2005; Page A1 --- http://online.wsj.com/article/0,,SB111170837700789265,00.html?mod=home_whats_news_us 
Bob Jensen's threads on AIG's woes are at http://online.wsj.com/article/0,,SB111170837700789265,00.html?mod=home_whats_news_us 

The latest huge Enron-type scandal:  Where was the external auditor, PwC, when all this was going on?
Among AIG's admissions: It used insurers in Bermuda and Barbados that were secretly under its control to bolster its financial results, including shifting some liabilities off its books. Amid the wave of financial scandals that have toppled corporate executives in recent years, AIG's woes stand out. Unlike Enron, WorldCom and HealthSouth -- all highfliers that rose to prominence in the 1990s -- AIG has been a solid blue-chip for decades. Its stock is in the Dow Jones Industrial Average, and its longtime chief, Maurice R. "Hank" Greenberg, was a globe-trotting icon of American business. Civil and criminal probes already have forced the departure of the 79-year-old Mr. Greenberg after nearly four decades at AIG's helm. Investigators are closely examining the actions of Mr. Greenberg and several other top AIG officials who have quit or been ousted in recent days, including its former chief financial officer; the architect of its offshore operations in Bermuda; and its reinsurance operations chief. In addition, the Securities and Exchange Commission could eventually bring civil-fraud charges against the company or executives.
Ian McDonald, Theo Francis, and Deborah Solomon, "AIG Admits 'Improper' Accounting :  Broad Range of Problems Could Cut $1.77 Billion Of Insurer's Net Worth A Widening Criminal Probe," The Wall Street Journal, March 31, 2005; Page A1--- http://online.wsj.com/article/0,,SB111218569681893050,00.html?mod=todays_us_page_one

Underwriting losses: AIG said it improperly characterized losses on insurance policies -- known as underwriting losses -- as another type of loss, through a series of transactions with Capco Reinsurance Co. of Barbados. It said Capco should have been treated as a subsidiary of AIG, a change that will force AIG to restate $200 million of the other losses as underwriting losses from its auto-warranty business. AIG long has prided itself on having among the lowest underwriting losses in the industry -- a closely watched figure.

• Investment income: Through a string of transactions with unnamed outside companies, AIG said it booked a total of $300 million in gains on its bond portfolio from 2001 through 2003 without actually selling the bonds. If it had waited to book the income until it sold the bonds, the income would have come later and been counted as "realized capital gains." That category of income is sometimes treated suspiciously by investors because insurance companies have considerable discretion over when they sell securities in their portfolio.

• Bad debts: The company suggested that money owed to AIG by other companies for property-casualty insurance policies might not be collectible. The company said that could result in an after-tax charge of $300 million.

• Commission costs: Potential problems with AIG's accounting for the up-front commissions it pays to insurance agents and similar items might force it to take an after-tax charge of up to $370 million, the company said.

• Compensation costs: AIG also will begin recording an expense on its books for compensation paid to its employees by Starr International, the private company run by current and former executives. Starr has spent tens of millions of dollars on a deferred-compensation program for a hand-picked group of AIG employees in recent years.

The probe that spurred the AIG admissions stemmed from a broader investigation of "nontraditional insurance," an industry niche that had grown rapidly in the 1990s. In particular, regulators have been concerned about a product called "finite-risk reinsurance."

Reinsurance is a decades-old business that sells insurance to insurance companies to cover bigger-than-expected claims, thereby spreading the losses for policies they sell to individuals and companies. Finite-risk reinsurance blends elements of insurance and loans.

Regulators had become concerned that some insurers were using the policies to improperly bolster their financial results. Their concern: For a contract to count as insurance, it has to transfer risk to the insurer selling the policy. Some finite-risk policies appeared to be more akin to loans than insurance policies -- yet the buyers used favorable insurance accounting.

In December, the SEC opened a broad probe into at least 12 insurance and reinsurance companies, including General Re, ACE Ltd., Chubb Corp. and Swiss Reinsurance Co. All four companies have said they are cooperating with the inquiry.

Key to the inquiry is how the finite-risk transactions were structured and treated on the financial statements of the companies or their clients, these people said. Following the SEC request for information, General Re lawyers combed through their finite-risk insurance deals and turned up roughly a dozen transactions where it wasn't clear that enough risk had been transferred to treat them as insurance. Among those deals was the AIG deal. General Re lawyers quickly alerted the SEC and the New York attorney general's office, which resulted in the current probe.

The catalogue of problems AIG unveiled yesterday was detailed to law-enforcement and regulatory authorities in meetings with the company's outside lawyers in recent days. The company also has fired three senior executives for refusing to cooperate with investigators, including former chief financial officer Howard I. Smith and Michael Murphy, a Bermuda-based AIG executive.

Given its level of cooperation so far, the company almost certainly will be able to reach a civil settlement with authorities, people familiar with the probes said. One of these people compared AIG's cooperation to the approach taken by Michael Cherkasky, the chief executive of Marsh & McLennan Cos. After Mr. Spitzer accused Marsh's insurance brokerage of bid-rigging, its board forced out then-CEO Jeffrey Greenberg, Mr. Greenberg's son and a former AIG executive. Mr. Cherkasky, the head of Marsh's investigative unit, became the new chief.

When he came in, a criminal indictment of the company remained a possibility. But Mr. Cherkasky cleaned house among the company's high ranks, then made sure the firm's internal investigation and cooperation with regulators were the top priority. He often personally participated in talks with regulators.

Bob Jensen's threads on insurance company scandals are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Bob Jensen's threads on PwC woes are at http://www.trinity.edu/rjensen/fraud001.htm#PwC

An investing balloon that will one day burst
The numbers are mind-boggling: 15 years ago, hedge funds managed less than $40 billion. Today, the figure is approaching $1 trillion. By contrast, assets in mutual funds grew at an impressive but much slower rate, to $8.1 trillion from $1 trillion, during the same period. The number of hedge fund firms has also grown - to 3,307 last year, up 74 percent from 1,903 in 1999. During the same period, the number of funds created - a manager can start more than one fund at a time - has surged 209 percent, with 1,406 funds introduced in 2004, according to Hedge Fund Research, based in Chicago.
Jenny Anderson and Riva D. Atlas, "If I Only Had a Hedge Fund," The New York Times, The New York Times, March 27, 2005 --- http://www.nytimes.com/2005/03/27/business/yourmoney/27hedge.html 
Jensen Comment:  The name "hedge fund" seems to imply that risk is hedged.  Nothing could be further from the case.  Hedge funds do not have to hedge risks,  Hedge funds should instead be called private investment clubs.  If structured in a certain way they can avoid SEC oversight.  
See "Hedge Fund" at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#H-Terms 

Remember how the Russian space program worked in the 1960s? The only flights that got publicized were the successful ones.  Hedge funds are like that. The ones asking for your money have terrific records. You don't hear about the ones that blew up. That fact should strongly color your view of hedge funds with terrific records.
Forbes, January 13, 2005 --- http://snipurl.com/ForbesJan_13 

Actions speak louder than words
When the Taiwanese President, Chen Shui-bian, visited the Solomon Islands last week, he held a media conference in which he denied that his nation used "chequebook diplomacy" to gain recognition in the region. Then the local journalists attending were handed gifts of watches and MP3 music players.
"Questions of corruption in the search for Pacific allies," Sydney Morning Herald, February 7, 2005 --- http://www.smh.com.au/text/articles/2005/02/06/1107625061638.html 

Corruption Scandal in France
Senior allies of President Jacques Chirac -- including four former ministers -- were among nearly 50 people who appeared in court in Paris at the start of one of France's biggest ever political corruption trials.  A total of 47 defendants -- including politicians, party officials, and representatives of some of France's biggest building companies -- are accused of fixing public works contracts in the Paris region in order to obtain illegal party funding.  One of several financial scandals to come to light from Chirac's long tenure to 1995 as mayor of Paris, the affair centres on kickbacks worth more than 70 million euros (93 million dollars) allegedly paid by the building firms in order to secure bids to renovate secondary schools around the capital.  Under a secret arrangement that lasted from 1989 to 1997, companies funnelled back two percent of the money paid by the regional Ile-de-France council, with 1.2 percent going to Chirac's Rally for the Republic (RPR) and its ally the Republican party (PR), and 0.8 percent going to the Socialists (PS), according to the prosecution.
"Chirac allies among 47 accused in major French corruption trial," AFP, March 21, 2005 --- http://story.news.yahoo.com/news?tmpl=story&cid=1511&e=5&u=/afp/20050321/wl_afp/francejusticepolitics_050321142150 

Ebbers Found Guilty
Former WorldCom Chief Executive Bernard J. Ebbers was convicted of participating in the largest accounting fraud in U.S. history, handing the government a landmark victory in its prosecution of an unprecedented spate of corporate scandals.  After eight days of deliberation, the jury found Mr. Ebbers guilty of all nine counts against him, including conspiracy and securities fraud, related to an $11 billion accounting fraud at the onetime highflying telecommunications giant.  Mr. Ebbers, 63 years old, now faces the prospect of spending many years in jail. He is expected to appeal.
"Ebbers Is Convicted In Massive Fraud:  WorldCom Jurors Say CEO Had to Have Known; Unconvinced by Sullivan," The Wall Street Journal, March 16, 2005; Page A1 --- http://online.wsj.com/article/0,,SB111090709921580016,00.html?mod=home_whats_news_us 
Bob Jensen's threads on WorldCom are at http://www.trinity.edu/rjensen/FraudEnron.htm#WorldcomFraud 

Finding the auditors in the wreckage of a crashed airline
“The jury is going to hear a tale of a very strange, intimate relationship" between Tower and Ernst & Young, said attorney Robert Weltchek of Weiner & Weltchek, arguing on behalf of the creditors in a hearing last week. An Ernst & Young spokesman said, "These charges have no merit, and we will vigorously defend ourselves in court."  Court papers say that Ernst & Young's accounting failures led Tower Air to report a pretax profit of $4.6 million in 1998, when it actually lost about $17 million. And Tower Air's reported $3.9 million loss in 1997 was actually at least $41 million larger, the suit states. It goes on to say that the firm never reconciled Tower Air's payroll account, failed to disclose that Tower Air owed $9 million in back excise taxes, and failed to book $2.75 million of travel agents' commissions as an expense.  Ernst & Young became the airline's independent auditor in 1993. The airline was founded 10 years earlier to fly international routes for government and military officers, but went public in 1993. Ernst & Young had done accounting work for the firm and president Morris Nachtomi since the airline's inception and performed lucrative financial advisory work for the firm since the late 1990s, the suit says.
"Bankrupt Airline Sues Ernst & Young for Accounting Fraud," AccountingWeb, March 16, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=100673 
You can read more about the legal woes of Ernst & Young at http://www.trinity.edu/rjensen/fraud001.htm#Ernst 

Power goes round and round
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 

Three Bank of America Corp. brokerage units agreed to pay $375 million to settle market timing charges, the U.S. Securities and Exchange Commission said Wednesday. The SEC charged that Banc of America Capital Management LLC, BACAP Distributors LLC, and Banc of America Securities LLC entered into "improper and undisclosed agreements" that let favored large investors engage in rapid short-term, market timing and late trading in Nations Funds mutual funds.  Separately, Bank of America's Fleet mutual fund unit agreed to pay $140 million to settle market timing charges, while five former executives were individually charged with market timing violations, the SEC said.
"Bank of America to Settle Mutual Fund Charges," The New York Times, February 9, 2005 --- http://www.nytimes.com/2005/02/09/business/09WIRE-BOFA.html 
Bob Jensen's threads on mutual fund scandals are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds 

Masters of the Universe
In the late 1990s, CEOs Bernie Ebbers of WorldCom, Dennis Kozlowski of Tyco International, and Richard Scrushy of HealthSouth were what novelist Tom Wolfe called “masters of the universe.” Charismatic, driven and fabulously wealthy, they sat atop giant companies largely of their own making. They didn't so much manage these corporations as reign over them.  But now that their trials for securities fraud are about to begin, they want to let the world in on a little secret: They actually weren't very good at what they did. They were unaware of what was going on around them and were incapable of demanding accountability from their aides. Like the hapless Sgt. Schultz in the old television program Hogan's Heroes, they know nothing, they see nothing.
"The clueless CEO defense," USA Today, January 25, 2005, Page 12A --- http://www.usatoday.com/printedition/news/20050125/edtwo25.art.htm 

Investment Clubs in Action
Hedge funds have long flown under the radar of securities regulators. But with hedge funds managing about $1 trillion, up from about $400 billion just four years ago, and playing a bigger role in the market, regulators have begun to home in.
Gregory Zuckerman and Ian McDonald, "The Wild West Of Hedge Funds Becomes Tamer," The Wall Street Journal, January 24, 2005, Page C1 --- http://online.wsj.com/article/0,,SB110652077260433536,00.html?mod=todays_us_money_and_investing 

Bad Ones Lay Buried In Siberian Snow
Remember how the Russian space program worked in the 1960s? The only flights that got publicized were the successful ones.  Hedge funds are like that. The ones asking for your money have terrific records. You don't hear about the ones that blew up. That fact should strongly color your view of hedge funds with terrific records.
Forbes, January 13, 2005 --- http://snipurl.com/ForbesJan_13 
Bob Jensen's threads on hedge funds can be found by scrolling down at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#H-Terms 

He's still learning how to dance with the devil
SEC Chairman William Donaldson has quietly made it known to the White House that he would like to remain the nation's top securities cop, but the business lobby would like nothing more than to see him gone.
"Bush's Donaldson Dilemma," by Deborah Solomon and John D. McKinnon, The Wall Street Journal, December 20, 2004, Page A4 --- http://online.wsj.com/article/0,,SB110350099382804351,00.html?mod=home_whats_news_us 
Will Bush be able to stand up to the most powerful people on the planet? --- http://www.trinity.edu/rjensen/fraudRotten.htm#InvestmentBanking 

Business Groups Begin Quiet Campaign to Oust SEC's Donaldson 
AccountingWeb, December 16, 2004 --- http://www.accountingweb.com/item/100230 

Just another day on the fraud beat
The Securities and Exchange Commission slapped Time Warner Inc. with a $300 million fine, its second-biggest fine in history, and issued a stinging rebuke of the company's conduct, capping a three-year investigation into accounting practices at the media titan . . . The SEC yesterday filed a complaint against Time Warner, at the same time it announced the settlement, that charged Time Warner with overstating online advertising revenue and the number of AOL's Internet subscribers, as well as aiding and abetting three other securities frauds. It also charged Time Warner with violating a cease-and-desist order against the America Online division issued in 2000.  "Some of the misconduct occurred while the ink on a prior commission cease-and-desist order was barely dry," said SEC Director of Enforcement Stephen M. Cutler in a statement. "Such an institutional failure calls for strong sanctions."
Julia Angwin, "SEC Fines Time Warner $300 Million," The Wall Street Journal, March 22, 2005; Page A3 --- http://online.wsj.com/article/0,,SB111142076929485150,00.html?mod=todays_us_page_one

SOX Up Boss
A majority of financial executives (57 percent) say Sarbanes-Oxley (SOX) compliance was a good investment for stockholders, according to a report released this month by Oversight Systems, the 2004 Oversight Systems Financial Executive Report On Sarbanes-Oxley Compliance, a nationwide survey of 222 financial executives.
"Financial Execs Call SOX 'Good Investment'," SmartPros, December 22, 2004 --- http://www.smartpros.com/x46291.xml 

In God, but not our financial advisor, we trust!
Declining trust has spurred some 25% of the affluent investors surveyed to move a portion of their assets out of their financial-services firms in the past two years, according to a study by Spectrem Group, a Chicago research and consulting firm. A litany of complaints, including poor investment performance, conflicts of interest, hidden fees and financial scandals, prompted wealthy investors to move their business elsewhere.
Rachel Emma Silverman, "Wealthy Lose Trust in Advisers," The Wall Street Journal, February 2, 2005, Page D2 --- http://online.wsj.com/article/0,,SB110730662305243216,00.html?mod=todays_us_personal_journal 

Ernst & Young's Chairman and CEO Jim Turley notes in a Wall Street Journal article that Section 404 of the US Sarbanes Oxley Act is a critical step in enhancing investor confidence. He adds that the law entails a major risk in its first year "that the opinions on internal controls provided by management and independent auditors may be misinterpreted by the market." But the bottom line is, "investors will derive significant benefits from the implementation of Section 404. And the markets, in turn, will benefit from the enhanced investor confidence."
E&Y Faculty Connection --- http://www.ey.com/global/content.nsf/International/Home

Lawyers lie?  Can't possibly be true.
Your graph showing that malpractice awards account for only 2% of medical costs is a gross underestimate. The amount juries award to plaintiffs doesn't begin to address the additional tests ordered, extra days in hospitals, extra visits to emergency rooms, or extra meetings -- all performed in the name of reducing litigation. The threat of malpractice, whether legitimate or not, has removed judgment from the practice of millions of physicians. Judgment has been replaced by making sure that no possibility -- no matter how remote -- hasn't been ruled out, requiring billions of dollars of imaging and laboratory tests. Reducing the threat of malpractice to physicians would produce a significant reduction in medical expenditures.  
Jonathan D. Reich, M.D. Assistant Clinical Professor University of Florida School of Medicine Lakeland, Fla. (Dr. Reich is a fellow of American Academy of Pediatrics and a fellow of the American College of Cardiology.)
As quoted from Letters to the Editor, The Wall Street Journal, December 29, 2004, Page A9 --- http://online.wsj.com/article/0,,SB110427584995511487,00.html?mod=todays_us_opinion 

As George Wallace once said:  Avoid pointy-headed professors
The rules that the statute imposes for selection of the members of the committee give no guarantee that the right people will be found to serve onit. Indeed, many eminent professors of accounting cannot serve on audit committees because they do not have the requisite level of practical experience.
Richard Epstein, "In Defence of theCorporation," December 2004 ---  http://www.nzbr.org.nz/documents/publications/publications-2004/in_defence.pdf 
Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/fraud001.htm#Governance 

J.P. Morgan is facing scrutiny for helping finance hedge fund Canary Capital Partners' improper trading in mutual-fund shares
"SEC Probes J.P. Morgan Role In Canary's Improper Trades," by Tom Lauricella, The Wall Street Journal, December 30, 2004, Page C1 --- http://online.wsj.com/article/0,,SB110435632010212266,00.html?mod=todays_us_money_and_investing 
Bob Jensen's threads on investment banking and mutual fund scandals are at http://www.trinity.edu/rjensen/fraudRotten.htm 
Bob Jensen's threads on derivative financial instruments frauds are at http://www.trinity.edu/rjensen/fraudRotten.htm#DerivativesFrauds 

Please try to understand this math
Investors who are content to pay the average fee for their mutual fund might be surprised to learn that most investors are actually paying quite a bit less.  The average annual fee, expressed as a percentage of fund assets, for the 10,585 open-end stock funds tracked by Lipper Inc. is 1.573%. But the dollar-weighted average fee -- or what the average investor is actually paying -- is a mere 0.936%, according to Lipper.  There is a significant difference because the vast majority of mutual funds aren't the multibillion-dollar portfolios that dominate media coverage, but smaller portfolios that generally have higher so-called expense ratios.
Daisy Maxey, "How to Look at Mutual-Fund Fees," The Wall Street Journal, February 7, 2005, Page R1 --- http://online.wsj.com/article/0,,SB110773891359147341,00.html?mod=todays_us_the_journal_report 

The green Grasso grows all around, all around
Dick Grasso's perks as head of the New York Stock Exchange included a $240,000-a-year secretary, two $130,000-a-year drivers, club memberships and access to a private plane, says a newly released report that paints the Big Board's overseers as oblivious to how much Mr. Grasso earned during his eight-year reign.  The report gives the most detailed public accounting to date of how much Mr. Grasso pocketed during the years in which he was chairman and chief executive, 1995 to 2003 -- about $193 million in annual pay, early pension payouts and estimated interest earned on those payouts.  Relying on compensation experts, the report said that represented upward of $100 million in "excessive" pay. Those figures don't include $48 million in previously accrued benefits that would be due Mr. Grasso under the terms of his last contract.
Aaron Lucchetti and Susanne Craig, "NYSE Report Shows Excesses Under Grasso," The Wall Street Journal, February 3, 2005, Page C1 --- http://online.wsj.com/article/0,,SB110735608008643629,00.html?mod=todays_us_money_and_investing 

Buzzards fatten up on carrion
Professional Fees in Enron Bankruptcy Top $780 million --- http://www.accountingweb.com/item/100263 
Guess who pays the next time you pay your power bill?
Bob Jensen's threads on the Enron scandal are at http://www.trinity.edu/rjensen/fraudenron.htm#EnronLinks 

The rules that the statute imposes for selection of the members of the committee give no guarantee that the right people will be found to serve onit. Indeed, many eminent professors of accounting cannot serve on audit committees because they do not have the requisite level of practical experience.
Richard Epstein, "In Defence of theCorporation," December 2004 ---  http://www.nzbr.org.nz/documents/publications/publications-2004/in_defence.pdf

Standards for Audit Committees of SEC Registrants --- http://www.hhlaw.com/articles/674_SEC030116_Standards.pdf  Applies to unlisted companies with public debt.

Sarbanes impact on Not-for-Profit organizations --- 
http://snipurl.com/AuditCommitteeRules 
Also see http://www.jaeckle.com/docs/NFP%20Survey%20Report.pdf 

Make Day Traders Act Rationally Rather Than Regulate Hedge Funds 
A groundbreaking study by Stefan Nagel, assistant professor of finance at the Stanford GSB, finds that hedge funds not only failed to create a stabilizing force during the technology bubble of 1998-2000 but instead profitably rode the bubble --- http://www.gsb.stanford.edu/news/research/finance_hedgefunds_techbubble.shtml 
Bob Jensen's threads on hedge fund scandals are at http://www.trinity.edu/rjensen/fraudRotten.htm 

A penny a day
Thom Calandra, a former columnist for CBS MarketWatch.com, will pay more than $540,000 to settle federal regulators' charges that he used an investment newsletter to pump up the price of penny stocks he owned before selling them.
Eric Dash, "Ex-Columnist Fined in Stock Trading Scheme," The New York Times, January 11, 2005 --- http://www.nytimes.com/2005/01/11/business/media/11tout.html 

It's in their best interest
Some companies are taking weeks to deposit workers' 401(k) contributions, earning interest on the money that should rightfully go to employees. According to MarketWatch, depositing 401(k) deposits can take as long as seven weeks, enough time for employers to earn short-term interest on the period between the deduction and deposit. 
AccountingWeb, January 25, 2005 --- http://www.accountingweb.com/item/100422 

Class Action Securities Fraud Lawsuits up in 2004
While the number of federal securities fraud class actions filed in 2004 increased only moderately from 2003 levels, rising to 212 companies sued from 181, the decline in stock market capitalization corresponding to these actions increased dramatically, according to a report released today by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research.  The total decline in the market capitalization of the defendant firms from the trading day just before the end of the class period to the trading day immediately after the end of the class period, or the "Disclosure Dollar Loss (DDL)," nearly tripled from $58 billion in 2003 to $169 billion for cases filed in 2004. This 192 percent increase in the DDL index is attributable entirely to eight filings, in which each defendant firm experienced disclosure dollar losses in excess of $5 billion. In sharp contrast, there was only one filing with losses that large in all of 2003.
AccountingWeb, January 6, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=100321 

Inside Job
Authorities in China have arrested dozens of government officials and bankers accused in a scheme to steal nearly $900 million from the Industrial & Commercial Bank of China, Chinese state media reported.
Andrew Browne, "Arrests Made in ICBC Scandal," The Wall Street Journal, January 18, 2005, Page A6 --- http://online.wsj.com/article/0,,SB110597211289927835,00.html?mod=todays_us_page_one 

Contingent Payment Schemes in the Insurance Industry
A new study found widespread uses of so-called contingent payments to insurance agents for steering customers to certain insurers or for selling policies that generate lower levels of claims.  A new study found widespread use of payments to insurance agents who steer customers to certain home and auto insurers, generating the same potential conflicts as those alleged by New York Attorney General Eliot Spitzer in the commercial-insurance arena.
Judith Burns, "Insurance Agents Steer Consumers To Favored Companies, Study Says," The Wall Street Journal, January 27, 2005, Page D1 --- http://online.wsj.com/article/0,,SB110678244395337299,00.html?mod=todays_us_personal_journal 
Bob Jensen's threads on insurance fraud are at http://www.trinity.edu/rjensen/fraudRotten.htm#MutualFunds 

Putnaming it on the line
Improper share trading at Putnam shortchanged investors by over $100 million, about 10 times a prior estimate, a consultant found.
John Hechinger, "Putnam May Owe $100 Million:  Independent Consultant Finds Improper Trading Cost Investors More Than Previously Believed," The Wall Street Journal, February 2, 2005 --- http://online.wsj.com/article/0,,SB110728870444542645,00.html?mod=home_whats_news_us 
Bob Jensen's threads on mutual fund frauds are at http://www.trinity.edu/rjensen/fraudRotten.htm#MutualFunds 

United Nations (read that United Nepotism)
The UN oil-for-food program chief, under scrutiny for alleged corruption and mismanagement, blocked a proposed audit of his office around the same time he is accused of soliciting lucrative oil deals from Iraq, investigators said. A UN auditing team, which was severely understaffed, said running the $64 billion oil-for-food program was ''a high-risk activity" and a priority for review. But Benon Sevan denied the auditors' request to hire a consultant to examine his office in May 2001.
"Oil-for-food chief said to block audit," Boston Globe, February 13, 2005 --- http://www.boston.com/news/world/articles/2005/02/13/oil_for_food_chief_said_to_block_audit/ 

Fakes!
The global counterfeit business is out of control, targeting everything from computer chips to life-saving medicines. It's so bad that even China may need to crack down
"Fakes," Business Week, February 7, 2005 --- http://snipurl.com/FakesJan_29
Bob Jensen's threads on Fraud Reporting are at http://www.trinity.edu/rjensen/FraudReporting.htm 

More than 230 civilians have been killed while working on U.S.-funded projects in Iraq, and U.S. officials did not properly keep track of $8.8 billion of Iraq's money, according to an inspector general's report released Sunday (January 30).
USA Today, January 31, 2005 --- http://www.usatoday.com/printedition/news/20050131/a_civilians31.art.htm 
I might add that over 300 Iraqi college educators have also been executed, including many who did not necessarily support U.S. presence in Iraq.  Some were killed simply because they were intellectuals who also did not support Islamic fundamentalism and continued suppression of educating women.

Biovail Corp. said the U.S. Securities and Exchange Commission has launched a formal investigation of the Canadian pharmaceutical company's accounting and financial-disclosure practices, upgrading the regulator's informal inquiry started in late 2003.  This company has so many warts," including complex accounting and poor disclosure in recent years and a business model that focuses heavily on one product, depression treatment Wellbutrin XL, said Anthony Scilipoti, executive vice president of Toronto-based Veritas Investment Research. Reports by Mr. Scilipoti and others have in the past criticized Biovail for focusing on earnings excluding various items, capitalizing costs related to acquired products not yet approved for sale, and hard-to-follow acquisitions and product transactions.
Mark Heinzl, "SEC Begins Formal Accounting Probe of Biovail," The Wall Street Journal, March 7, 2005 --- http://online.wsj.com/article/0,,SB111014883344371591,00.html?mod=todays_us_marketplace 
The independent auditor for Biovail is Ernst & Young.

Auto-parts maker Delphi Corp. disclosed multiple accounting irregularities dating back to 1999, including a period when it reported healthy results despite cutbacks in the auto industry, and said a committee of outside directors is investigating the way it accounted for a $237 million payment in 2000 to former parent General Motors Corp., among other transactions. Delphi said it has ousted two executives, including its vice chairman and chief financial officer, Alan S. Dawes, and demoted a third in connection with the board's investigation. Mr. Dawes couldn't be reached to comment.
Karen Lundegaard, "Delphi Discloses Accounting Problems," The Wall Street Journal, March 7, 2005 --- http://online.wsj.com/article/0,,SB110994509329670632,00.html?mod=todays_us_page_one 
The independent auditor for Delphi is Deloitte and Touche.

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

Some of the most notorious white collar criminals in recent history: 
See History of Fraud in America --- http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

February 18, 2005 message from Joanne Tweed [ibridges@san.rr.com]

America's seniors are being cheated of their life's savings by securities Broker/Dealers.
SENIORS AGAINST SECURITIES FRAUD http://seniorsagainstsecuritiesfraud.com  offers supportive educational links and solutions. Please consider linking.

Most Sincerely,
Joanne Tweed

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

I’m certain that most of you were overjoyed that you no longer have to pay to track your credit ratings and your FICO scores.  In the past few weeks I’ve stressed the bad things credit card companies are doing with FICO scores and the misleading advertising funded by credit card companies.

This is Important

From PBS:  Things a Credit Card Holder Should Know (including online tests for students)

Secret History of the Credit Card --- http://www.pbs.org/wgbh/pages/frontline/shows/credit/ 

You can watch the entire Frontline video from the link on the above site.

Should you get a Capital One credit card?

The point is that credit card companies don't care how rich you are or even your liquidity.  It's your payment practice on all your accounts payable that really counts.  Payment history is the main ingredient of a FICO score, but the actual FICO formula is very complex --- http://www.consumeraffairs.com/finance/fico.html

You're a grade C credit card user if you zero out all your accounts payable in less than 20 days.  Good guys don't get an A or a F grade as credit card customers.  Of course the credit card companies still get a percentage of your purchase prices from the vendors who sold you the goods.  Credit card companies always get something (usually around 6% of the price), but vendors can negotiate the rate they pay on their customers' purchases.  Credit card companies don't care as much for C grade customers because they are limited to the what the product vendors pay one time on each purchase.

You're a Grade B card user if you don't (or can't) pay off your entire monthly balances.  A Grade B customer always pays the minimum balance due on each credit card, but never in his lifetime pays off an entire balance due.   That way the credit card companies collect forever (actually only about 35 years if you don't add to your account) from you in addition to what the product vendor initially paid to them for your purchase.

You're a Grade A customer for Visa if you miss one payment on your Discover card but keep on making all minimum payments on your Visa.  That way Visa can jack up your interest rate from 8.9% to 29.9% APR for the rest of your life because your FICO score increased due to one missed payment on any one of your credit cards or other accounts.  The Frontline show has a segment on how one guy's perfect six-year perfect record of making minimum payments did not prevent his interest rate from jumping up by 20% when it was discovered by the FICO folks that he missed one payment on an account six years in the past.  This is funny (sad?) because this guy’s credit card company’s CEO phoned the guy after the Frontline TV show aired and lowered his rate back down to 8.9%.

It's the indexing of your changing interest rates to your increased FICO score that's the biggest "secret" credit card companies don't want consumers to understand.  The Frontline show ("Secret History of the Credit Card") stresses that most consumers don't even know what a FICO score is let alone how it affects their future interest rates on all their credit card unpaid balances.  See http://www.pbs.org/wgbh/pages/frontline/shows/credit/eight/

The main page for downloading details and the free video of the entire Frontline PBS show is at http://www.pbs.org/wgbh/pages/frontline/shows/credit/ 

How can you beat this scam?
Never pay less than the minimum amount due, control your credit addiction, and try to zero out every credit card balance in less than 20 days or whatever the payment cycle is on your card.  If this fails I would not necessarily advise getting a Capital One card.

Capital One now advertises that the bank has changed its ways and doesn’t change credit card  rates in the same way that other credit card companies are bilking the public ---
http://www.washingtonpost.com/wp-dyn/articles/A8200-2005Jan13.html
I would still advise reading the small print even if it’s a Capital One card.

The Minnesota state attorney general’s office has sued one of the nation's largest credit card issuers (Capital One), claiming it is misleading consumers with promises of “fixed“ interest rates, then hiking their rates as much as 400 percent.
Bob Sullivan, MSNBC, "Capital One Sued Over Marketing Practices," January 3, 2005 --- http://www.msnbc.msn.com/id/6781155/  

January 18, 2004 reply from Linda Kidwell [lak@NIAGARA.EDU]

I have another, totally unrelated reason for not getting a Capital One card. I must say, this story has given me great meat for class discussion in auditing!

When I applied for a mortgage 8 years ago, my credit report contained a three-year-old written-off Capital One card to the tune of $8,000. I had never heard of this card, and it had been issued in my maiden name!

Just think of all the failures of internal controls my case included. At the time the card was issued, they used a marketing list at least three years old to solicit the account. A basic credit check would have revealed that I no longer went by that name, and that in fact I had taken out a mortgage in the past year at a different address. They allowed the perpetrator to run up over $6,000 of charges without having made a single payment. They made no effort to contact me to collect the money, or they'd have discovered the fraud two years earlier. Finally, after I submitted an affadavit to disclaim the account and after they had my credit cleared, they started calling me to collect the debt. Unbelievable!

So will I ever get a Capital One account? NEVER!!!

Linda Kidwell

January 18, 2005 reply from Barbara Scofield [scofield@GSM.UDALLAS.EDU] 

What do you tell college students about getting store credit cards in order to get the initial 15% discount on merchandise? My daughter gets every credit card Express, Old Navy etc. will give her in order to get the discount and then she cancels the card after the first bill. She feels that she is getting the benefit of the marketing system and none of the costs of having open credit lines count against her (or tempt her).

Barbara W. Scofield, PhD, CPA 
Associate Professor of Accounting 
University of Dallas 
1845 E. Northgate Irving, TX 75062
scofield@gsm.udallas.edu 

January 18, 2005 reply from Richard J. Campbell [campbell@RIO.EDU]

Barbara: She should be concerned about her FICO score. The more inquiries made by department stores, the lower her FICO score will be. The FICO scoring secret algorithms view frequent credit applications a sign of desperation, even if the application is successful.

Q. What are some common missteps that bring down your score?

A. Balance transfers on your credit cards, for one thing. It may seem smart to load all your debt onto one low-rate card. But if you max out on a high-limit card, your credit score takes a big hit. Even if you aren't applying for more credit, your current credit-card companies may raise your interest rates because your credit score dropped.

The whole instant-credit thing also hurts your credit, like when you're at the Gap and they say you get 10 percent off if you apply for a credit card and buy this thing using your new credit card.

You have the combined effect of an "inquiry for new credit" and a small credit limit on the store card, which you already filled up. Both are bad.

The other thing you have to watch out for are collections, the leading type of which is medical collection. Many of those are mistakes -- often an insurance company is responsible for a co-payment, but the doctor bills it to the patient and it ends up becoming a collection.

Richard J. Campbell
School of Business
University of Rio Grande
Rio Grande, OH 45674

January 18, 2004 reply from Roberts, John [JohnRoberts@SJRCC.EDU]

Barbara,

If she lives in Texas she should request her free credit report from all three agencies starting in June. This can be done at http://www.annualcreditreport.com  If she doesn't live in Texas, that site will also tell her when they will be available for her location. She will notice that all of those credit cards are on her report, whether they have a balance or not, whether they are closed or not.

She should then get her FICO score. She will have to pay a small amount for this but it will tell her the score AND what she can do to make it higher. The higher it is the better interest rates you receive on loans from cars to mortgages. If she has been doing what you say, it will most likely report that there have been too many inquiries (like Richard said) and they are lowering her score. It may still be over 700, which seems to be the demarcation line for quick loan acceptance with decent rates but the next inquiry (which she might need for something really important) might drop it below 700 and that would cost her big money (much more than she saved on those department store discounts), especially if it means the difference of a half-point or more on a 30 year mortgage.

College students tend to be very short sighted so this will probably be a big sale on your part -- as you well know. I have two daughters myself which are both out of college now, but still, the only time they listen to ole dad is when they already agree with him and tells them what they want to hear:-)

John C. Roberts, Jr.
Saint Johns River Community College
283 College Drive Orange Park, FL 32065

January 19, 2005 message (re-written by Bob Jensen) from a former high level university administrator

Questions 
Is your university getting credit card kickbacks on student and alumni use of credit cards? 
Did you know that many universities send names, addresses, and social security numbers of students and alumni to a company that solicits them to use a credit card? 

Answer
Many, if not most, colleges and universities are doing this. The reason: every time a credit card is used for any purchase, the university gets a percentage (often ten percent) from the credit card company "as a gift." This kind of income is generally not recognized as a gift by the rules of the college and university auditors/business managers (see NACUBO). Why should the university provide any of this information? In addition to not informing people that this information is being "sold," this practice encourages college students and alumni to go into more debt.

A recent academic study compared ratings by Moody's with those of Egan-Jones. William H. Beaver, professor of accounting at Stanford's graduate school of business, Catherine Shakespeare, assistant professor at the University of Michigan Business School and Mark T. Soliman, also at Stanford, analyzed ratings on some 800 companies made by both services from 1997 to 2002.  The academics found that Egan-Jones's ratings changes were more timely than those of Moody's, coming up to six months sooner. The study also found much higher stock returns after rating changes by Egan-Jones than by those of Moody's.  "Using several tests we find that the noncertified firm, EJR is more responsive and closely associated with investors," the study noted.
"Wanted: Credit Ratings. Objective Ones, Please," by Gretchen Morgenson, The New York Times, February 6, 2005 --- http://www.nytimes.com/2005/02/06/business/yourmoney/06gret.html?oref=login  

For years, the nation's credit rating agencies have thrived, booking mouth-watering profits from operations that are riddled with conflicts and shielded from competition.

Soon, however, that may finally change. And investors should be better off for it.

Within the next two months, the Securities and Exchange Commission will press a new regulatory framework for the industry to ensure that debt ratings published by the big three - Standard & Poor's, Moody's Investors Service and Fitch Ratings - are a result of thorough analysis, not a desire for fatter profits.

"I think it's fair to say that the oversight of the industry is insufficient," said Annette L. Nazareth, director of market regulation at the Securities and Exchange Commission. "We want the firms to commit to meet certain standards with respect to policies and procedures on conflicts of interest and solicitation of ratings. Right now we don't have that at all."

Now that would be an upgrade, long overdue. Indeed, given how regulators have attacked conflicts of interest among Wall Street firms, insurance companies and other financial services concerns, it's astounding that the ratings agencies have been allowed to go on this way for so long.

Rating agencies play an enormous role in a huge market. After all, far more debt is issued than stock; last year, corporations issued $1.2 trillion in straight debt versus $146 billion raised in common stock, according to Thomson First Call. An additional $1.4 trillion was issued last year in mortgage debt and asset-backed securities.

All that paper needed a rating before it could be sold to the public. As such, the financial markets rely heavily on the companies that rate them.

Since 1931, for example, the Federal Reserve Board, the Comptroller of the Currency and federal and state laws have regulated the debt held by banks and other financial institutions, using credit ratings assigned to the debt. Pension funds, banks and money market funds are barred from buying debt issues that carry ratings below a certain level.

But not just any rating agency's rating, mind you. In 1975, the S.E.C. ruled that the laws relating to debt carried by banks and financial institutions refer only to ratings provided by agencies that it recognizes. Right now, these are the big three and a much smaller fourth, Dominion Bond Rating Service of Canada.

What you have, in other words, is an oligopoly.

Even more troubling, this oligopoly earns its keep from fees charged to the companies whose debt it rates. This conflicted business model means that the paying customers for these agencies are the corporations they analyze, not the investors who look to the ratings for help in assessing a company's creditworthiness.

Other industry practices also lend themselves to producing less-than-rigorous analysis. For example, rating agencies typically receive the largest fees when they analyze an initial bond issue. After that a nominal fee is levied, providing something of a disincentive to do in-depth, time-consuming work.

And because the nation's courts have ruled that the work of these agencies is opinion and therefore protected by the First Amendment, the big three are protected from lawsuits from investors contending defective analysis. Such lawsuits could act as policing mechanisms.

To make matters worse, these companies have recently begun to expand the services they offer to corporations, leading regulators to fear that ratings could be swayed by revenues earned on other products.

These problems are on the agenda for Tuesday, when Senator Richard C. Shelby, the Alabama Republican who is chairman of the Banking, Housing and Urban Affairs Committee, will hold hearings on the state of the rating agencies. Executives from the big three are scheduled to testify.

This is not the first time that Standard & Poor's, Moody's and Fitch have been in the hot seat. When Enron and WorldCom failed, investors were stunned by how long it had taken the agencies to recognize the companies' declining fortunes. For example, all three agencies had rated Enron an investment-grade company until four days before it filed for bankruptcy. They had rated WorldCom similarly until a few months before it collapsed.

The rating agencies stress that they analyze debt issuers' financial positions to try to predict for investors an entity's ability to pay off its debt. They are not in place to audit auditors, they say, and cannot root out fraud. Their mandate is to provide transparency to the financial market.

IN an interview on Friday, Raymond W. McDaniel, Jr., president of the Moody's Corporation, acknowledged the industry's conflicts but said his company manages them effectively. "We do not link analyst compensation, including bonus compensation, to the ratings they have on the companies they follow or to the amount of fees they receive from those companies," he said. "Beyond that, we have a collection of business conduct policies and codes of practice and behavior which the entire Moody's population is required to adhere to." Top executives at Standard & Poor's, a division of the McGraw-Hill Companies, and Fitch, a unit of Fimalac, were not available for comment, but both companies said they were aware of the potential for conflicts and careful to prevent them.

Increased competition would certainly help investors who are troubled by the conflicts. Unfortunately, companies hoping to break into the ratings game must first earn the all-important designation from the S.E.C. Such nods do not come often.

One upstart concern that has applied unsuccessfully to the S.E.C. is Egan-Jones Ratings, of Philadelphia. It rates approximately 800 companies and had warned of problems at WorldCom, Enron and Global Crossing well before other agencies. Egan-Jones does not accept payment from companies it rates; investors who use its services pay the freight.

A recent academic study compared ratings by Moody's with those of Egan-Jones. William H. Beaver, professor of accounting at Stanford's graduate school of business, Catherine Shakespeare, assistant professor at the University of Michigan Business School and Mark T. Soliman, also at Stanford, analyzed ratings on some 800 companies made by both services from 1997 to 2002.

The academics found that Egan-Jones's ratings changes were more timely than those of Moody's, coming up to six months sooner. The study also found much higher stock returns after rating changes by Egan-Jones than by those of Moody's.

"Using several tests we find that the noncertified firm, EJR is more responsive and closely associated with investors," the study noted.

There is no evidence, of course, that Moody's tardiness is a result of a conflicted business model. And Mr. McDaniel maintains that ratings stability and accuracy are what customers want. "The market has become extremely intolerant of false positives or false negatives, and encouraged the ratings to only be moved when there is not a likelihood that they would be reversed," he said.

But Sean J. Egan, managing director of Egan-Jones, said: "Timely, accurate credit ratings are critical for robust capital markets. Investors, issuers, workers and pensioners will continue to be hurt by the flawed credit rating industry until someone addresses the basic industry problems."

Maybe, just maybe, that process has begun.

February 6, 2005 message from Tom Lechner [lechner@oswego.edu] 

Thanks for another insightful post.

I assume you mean if your credit score FALLS that Capital One will increase your rate.

Incidentally, MBNA more than doubled my interest rate, even though my score was rising and I never missed a payment.

You say your credit report and score are free. A free credit report is currently only available for those in the west. Those of us in the east have to wait until fall. I do not know of any source of free credit scores. Do you?

Tom Lechner

Dr. Thomas A. Lechner
Dept. Accounting, Finance & Law 
SUNY - Oswego Oswego, NY 13126

You can read more about conflicts of interests in credit rating agencies at http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies 

Bob Jensen's threads on the dirty secrets of credit card companies are at http://www.trinity.edu/rjensen/FraudReporting.htm#FICO 

February 17, 2005 message from David Coy [dcoy@adrian.edu] 

Bob:

Here's a link to an article on identity theft and fraud from today's Washington Post.

David Coy 
Adrian College

*******************************

The message is ready to be sent with the following file or link attachments: Shortcut to: http://www.washingtonpost.com/wp-dyn/articles/A30897-2005Feb16.html?referrer=email 

"Few companies have to tell when identity thieves strike:  Consumers don't learn they're in danger — until the bills arrive," USA Today, February 28, 2005 --- http://www.usatoday.com/printedition/news/20050228/edit28x.art.htm 

The Federal Trade Commission (FTC) received 246,570 identity theft complaints last year, and the problem actually is much worse: 9.9 million people (about one in every 30 Americans) were victims of identity theft in a one-year period starting in spring 2002, according to an FTC survey. Thieves use the data to get credit cards, pilfer bank accounts and take over identities for future thefts.

Several factors give them the upper hand:

•Companies hide break-ins. Many companies react as ChoicePoint did initially. They keep quiet after computers are hacked, fearing lawsuits and damaged reputations.

•Police are busy elsewhere. Local police are often reluctant to pursue cases. The amounts, while large to an individual, seem small compared with other monetary crimes. Often the consumer lives in one state, the thief in another. Federal authorities can act, but only about 1 in 700 cases of identity theft resulted in a federal arrest in 2002, according to Avivah Litan, a cybercrime expert with the Gartner research firm.

•Oversight is weak. Identity theft is a relatively new crime and, outside of California, governments haven't yet geared up to address it. The rising industry of data brokers has little oversight, and rules for financial institutions aren't up to the task.

The good news is that the ChoicePoint breach is prompting several states, including Georgia, New Hampshire, New York and Texas, to consider bills patterned on the California notification law. Several U.S. senators are pushing a federal law.

Continued in article

Bob Jensen's threads on phishing are at http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection 

Bob Jensen's threads on Identity Theft --- http://www.trinity.edu/rjensen/FraudReporting.htm#IdentityTheft

"MBIA Announces Plan To Restate Its Earnings:  Big Insurer's Move Is Tied To Avoidance of Losses; Second Firm to Take a Hit," by Theo Francis, The Wall Street Journal,  March 9, 2005; Page C3 --- http://online.wsj.com/article/0,,SB111030063373073552,00.html?mod=home_whats_news_us 

MBIA Inc. will restate more than six years of its financial statements in a move acknowledging that it wrongly used a complex insurance transaction in 1998 to reduce losses on bonds it insured, the company said.

The announcement makes MBIA the second major insurer this year to announce a restatement tied to faulty accounting for complex insurance products they themselves used, following in the heels of Bermuda-based RenaissanceRe Holdings Ltd.

Bob Jensen's threads on insurance company frauds are at http://www.trinity.edu/rjensen/fraudrotten.htm 
MBIA is audited by PricewaterhouseCoopers LLP.  You can read more about PwC's woes at http://www.trinity.edu/rjensen/fraud001.htm#PwC 

Accounting usually gets them in the end
Remember the SCO mouse that roared when suing IBM and Linux
SCO says it missed the filing deadline over issues relating to the accounting of its common stock and equity compensation plan. As a result of adjustments to its accounting, SCO will be restating its earnings for the first three quarters of 2004, BusinessWeek has learned. While the restatements won't change its net loss or cash balance for that year, they are likely to reduce its cash position by $500,000 or more in fiscal year 2005, says an insider. . . What once looked like a mortal threat to Linux appears to be fading. As a result, the suit has become a nonfactor in corporate buying decisions. "I can't imagine how this will go anywhere," says Alex Dietz, chief information officer at Acxiom, a Little Rock consumer-data-analysis company that uses Linux.
"A Linux Nemesis on the Rocks SCO's lawsuit is floundering -- and now the struggling software company faces regulators' scrutiny and questions about its management," Business Week, March 3, 2005 --- http://www.businessweek.com/technology/content/mar2005/tc2005033_4497_tc119.htm 
Jensen Comments
The independent auditor for SCO is KPMG.
A SCO Versus IBM Website is at http://sco.iwethey.org/ 

From The Wall Street Journal Weekly Accounting Review on March 4, 2005

TITLE: Little Campus Lab Shakes Big Firms 
REPORTER: Diya Gullapalli 
DATE: Mar 01, 2005 
PAGE: C3 
LINK: http://online.wsj.com/article/0,,SB110964409606666696,00.html  
TOPICS: Cash Flow, Financial Accounting

SUMMARY: The Georgia Institute of Technology's Financial Analysis Lab issued a report "chastising dozens of companies...for treating customer-related loans as an 'investing' activity rather than an 'operating' one" in their statements of cash flows. Based on this report, the SEC sent letters to "about a dozen companies" requiring them to correct this classification for 2004 and two previous years in order to present comparable data on the face of the financial statements. The SEC as well requires disclosing the impact of the change and to explicitly state that the SEC required the companies to undertake the correction.

QUESTIONS: 

1.) Define the terms operating cash flows, investing cash flows, and financing cash flows, on the basis of the items that should be included in each of these sections of the statement of cash flows.

2.) Define at least one use of the amount of operating cash flow in ratios used for financial statement analysis.

3.) Is the subtotal for operating cash flows more important than the sub-total for investing cash flows? Why or why not?

4.) What is the nature of the items that were misclassified by Ford Motor Company and General Motors Corp.? How could these companies have argued that their treatment was appropriate?

5.) Is it likely that transferring these items into the operating cash flow section of the statement of cash flows will continue to have a negative impact on the amount of these companies' operating cash flow into the foreseeable future? Why or why not?

Reviewed By: Judy Beckman, University of Rhode Island

This is Auditing 101:  Where were the auditors?

"SEC Uncovers Wide-Scale Lease Accounting Errors," AccountingWeb, March 1, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=100600 

Where were the auditors? That is the question being asked as more than 60 companies face the prospect of restating their earnings after apparently incorrectly dealing with their lease accounting, Dow Jones reported.

Companies in the retail, restaurant and wireless-tower industries are among those affected in what is being called the most sweeping bookkeeping correction in such a short time period since the late 1990s.

Among the companies on the list are Ann Taylor, Target and Domino's Pizza. You can view a full listing of the affected companies.

"It's always disturbing when our accounting is not followed," Don Nicolaisen, chief accountant at the Securities and Exchange Commission, said last week during an interview. He published a letter on Feb. 7 urging companies to follow accounting standards that have been on the books for many years, Dow Jones reported.

Based on the charges and restatement announcements that have come in the wake of the SEC letter it seems companies have failed for years to follow what regulators see as cut-and-dried lease-accounting rules. The SEC has yet to go so far as to accuse companies of wrongdoing, but it has led people to wonder why auditors hired to keep company books clean could have missed so many instances of failure to comply with the rule.

"Where were the auditors?" J. Edward Ketz, an accounting professor at Pennsylvania State University, said to Dow Jones. "Where were the people approving these things? This doesn't seem like something that really requires new discussion. If we have to go back and revisit every single rule because companies and their professional advisers aren't going to follow the rules, then I think we're in very serious trouble in this country."

Tom Fitzgerald, a spokesman for auditing firm KPMG, declined to comment. Representatives for Deloitte & Touche LLP, PricewaterhouseCoopers LLC, and Ernst & Young LLP, didn't return several phone calls, Dow Jones reported.

The crux of the issue is that companies are supposed to book these "leasehold improvements" as assets on their balance sheets and then depreciate those assets, incurring an expense on their income statements, over the duration of the lease. Instead, companies such as Pep Boys-Manny Moe & Jack had been spreading those expenses out over the projected useful life of the property, which is usually a longer time period, Dow Jones reported.

As a result, expenses were deferred and income was added to the current period. McDonald's Corp. took a charge of $139.1 million, or 8 cents a share, in its fourth quarter to correct a lease-accounting strategy that it says had been in place for 25 years, Dow Jones reported, adding that Pep Boys said it would book a charge of 80 cents a share, or $52 million, for the nine months through Oct. 30, 2004.

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

Bob Jensen's threads on bad auditing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits 

"PwC, Partners Hit with Class-Action Pension Suit," AccountingWeb, March 1, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=100599 

A former PricewaterhouseCoopers LLC employee has instigated a class-action suit against the Big Four firm claiming unfair pension practices, Pension and Investments reported.

In the suit filed in federal district court in East St. Louis was amended on Jan. 28 and charges PwC and its partners with coming up with “a brazen, unlawful scheme ... to game the tax and pension laws in order to improperly pad the partners' retirement benefits and take-home pay at the expense of both rank-and-file PwC employees and the public,” Pension and Investments reported.

The suit was brought by former employee Timothy D. Laurent and contends that the firm, which has been known for it's creative cash-balance pension funds, intentionally broke age- and income-discrimination provisions of federal law.

By “engaging in multiple layers of deception,” the suit alleges, PwC and its partners reduced “benefits to the paid rank-and-file employees down to the bare minimum thought need(ed) to keep the shelter afloat.”

While federal pension law shields employers from liability for the investment performance of participants' 401(k) plan options, it does not apply to defined benefit plans, Pension and Investments reported, meaning that a ruling in favor of Laurent and other participants could cost the firm hundreds of millions of dollars.

Continued in article

Bob Jensen's threads on PwC legal woes are at http://www.trinity.edu/rjensen/fraud001.htm#PwC 

"Nonprofit that Collapsed Amid Scandal Sues Accounting Firm," AccountingWeb, February 23, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=100569 

A San Francisco nonprofit that went out of business after failing to account for $19 million in donations is suing its auditor.

The suit, filed by PipeVine's court-appointed receiver, seeks unspecified damages as a "result of the acts, omissions and breach of duty by defendant Grant Thornton,” according to the San Francisco Business Times. The complaint go on to say that "in its oral and/or written reports or statements, defendant Grant Thornton made untrue and/or misleadingly incomplete representations or failed to state material facts." PipeVine was a spinoff organization of United Way of the Bay Area, which was audited by Grant Thornton. It became a stand-alone organization in 2000 and annually processed more than $100 million in donations. It closed operations in 2003 after it was discovered that some donations directed to charities actually went to PipeVine's day-to-day operations.

Grant Thornton, in an e-mail to the San Francisco Business Times, said the suit “is without merit and will be vigorously fought.” The firm argues that it recommended that PipeVine's management investigate the fact that PipeVine was overspending donations collected for charities. That was in January 2003. The firm later suspended audit work after meeting with the bo