Accounting Scandal Updates and Other Fraud Between January 1 and March 31, 2008
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- 

Bob Jensen's Enron Quiz (and answers) ---

Bob Jensen's Enron Updates are at --- 

Other Documents

Many of the scandals are documented at 

Resources to prevent and discover fraud from the Association of Fraud Examiners --- 

Self-study training for a career in fraud examination --- 

Source for United Kingdom reporting on financial scandals and other news --- 

Updates on the leading books on the business and accounting scandals --- 

I love Infectious Greed by Frank Partnoy --- 

Bob Jensen's American History of Fraud ---

Future of Auditing --- 

"What’s Your Fraud IQ?  Think you know enough about corruption to spot it in any of its myriad forms? Then rev up your fraud detection radar and take this (deceptively) simple test." by Joseph T. Wells, Journal of Accountancy, July 2006 ---

What Accountants Need to Know ---

Global Corruption (in legal systems) Report 2007 ---

Tax Fraud Alerts from the IRS ---,,id=121259,00.html

White Collar Fraud Site ---
Note the column of links on the left.

Bob Jensen's threads on fraud are at

  • Accounting and finance professors should use this video every semester in class!
    The best explanation ever of the sub-prime (meaning lending to borrowers with much less than prime credit ratings) mortgage greed and fraud.
    The best explanation ever about securitized financial instruments and worldwide banding frauds using such instruments.
    The best explanation ever about how greedy employees will cheat on their employers and their customers.

    "House Of Cards: The Mortgage Mess Steve Kroft Reports How The Mortgage Meltdown Is Shaking Markets Worldwide," Sixty Minutes Television on CBS, January 27, 2008 ---
    For a few days the video may be available free.
    The transcript will probably be available for a longer period of time.

    Bob Jensen's "Rotten to the Core" threads are at

    Richard "Dickie" Scruggs, a founding father of the modern mega-tort class-action industry, pleaded guilty yesterday to trying to bribe a judge. It is notable but perhaps unsurprising in this particular week, when we have already seen one famous figure, New York Governor Eliot Spitzer, brought down by his own sense of invulnerability to the law or common sense. In the 1990s, Mr. Scruggs famously got corporate defendants, and whole industries, to make mammoth settlements in lieu of fighting the thousands of plaintiffs the Mississippi tort lawyer had gathered into a class-action lawsuit. Mr. Scruggs was a legal entrepreneur, who figured out that the combined weight of endless plaintiffs and bad publicity would force even the richest corporations to plead for a settlement. It was his further insight that his percentage of the take, aka contingency fees, would make him and his associates rich as Croesus. The trappings of wealth that attended the class-action plaintiffs bar are the stuff of legend.
    "Dickie's Plea," The Wall Street Journal, March 15, 2008; Page A10 ---

    "Former Banker Convicted of Insider Trading," by Michael J. de la Merced, The New York Times, February 5, 2008 ---

    A former Credit Suisse banker accused of leaking confidential information about several major deals, including the $45 billion buyout of TXU, as part of a $7.5 million insider trading scheme was convicted Monday in Federal District Court in Manhattan

    After three days of deliberation, the jury found the former banker, Hafiz Muhammad Zubair Naseem, 37, guilty of one count of conspiracy and 28 counts of insider trading for relaying insider information to Ajaz Rahim, a high-level banker in Pakistan and once Mr. Naseem’s boss.

    From the beginning, the case against Mr. Naseem was notable for its scope and the way it coincided with a two-year boom in mergers. In the last two years, prosecutors have filed insider trading cases, some involving broad schemes, involving bankers at nearly all the top securities firms.

    But none roped in financiers as high-ranking as Mr. Rahim, the former head of investment banking at Faysal Bank in Karachi and one of the most successful traders in Pakistan. And few involved deals as big as the acquisition of TXU, the Texas power giant that was bought by Kohlberg Kravis Roberts and TPG Capital.

    “We respectfully disagree with the jury’s verdict,” a lawyer for Mr. Naseem, Michael F. Bachner, said Monday, adding that Mr. Naseem would file an appeal.

    Mr. Naseem came to the United States in 2002 to earn a business degree at New York University. He worked briefly at JPMorgan Chase before moving to Credit Suisse’s energy group in March 2006.

    Prosecutors said that Mr. Naseem used his position as a banker almost immediately to feed information about deals to Mr. Rahim, who traded on the tips before the mergers were announced. They offered as evidence scores of phone calls Mr. Naseem made and e-mail messages he sent from his office, including one message that read, “Let the fun begin.”

    Beginning in the fall of 2006, regulators at the New York Stock Exchange were tracking suspicious trading in the options of Trammell Crow before its purchase by the CB Richard Ellis Group. The investigation eventually widened to nine deals, including the TXU buyout and Express Scripts’ failed bid for Caremark Rx. Credit Suisse was an adviser on all nine deals.

    Lawyers for Mr. Naseem have derided prosecutors’ evidence as circumstantial at best.

    Mr. Rahim, who also faces charges, remains in Pakistan. But Mr. Naseem has borne the brunt of the government’s case. He was initially denied bail after prosecutors deemed him a flight risk. Mr. Naseem later posted a $1 million bond but was mostly confined to his home in Rye Brook, N.Y.

    Continued in article

    Bob Jensen's "Rotten to the Core" threads are at

    The Justice Racer Cannot Beat a Snail:  Andersen's David Duncan Finally Has Closure

    "Andersen Figure Settles Charges: Former Head of Enron Team Barred From Some Professional Duties," by Kristen Hays, SmartPros, January 29, 2008 --- 

    The former head of one-time Big Five auditing firm Arthur Andersen's Enron accounting team has settled civil charges that he recklessly failed to recognize that the risky yet lucrative client cooked its books.

    David Duncan, who testified against his former employer after Andersen cast him aside as a rogue accountant, didn't admit or deny wrongdoing in a settlement with the Securities and Exchange Commission announced Monday.

    The SEC said in the settlement that he violated securities laws and barred him from ever practicing as an accountant in a role that involves signing a public company's financial statements, such as a chief accounting officer. But he could be a company director or another kind of officer and was not assessed any fines or otherwise sanctioned.

    Three other former partners at the firm have been temporarily prohibited from acting as accountants before the SEC in separate settlements unveiled Monday.

    Andersen crumbled amid the Enron scandal after the accounting firm was indicted, tried and found guilty -- a conviction that eventually was overturned on appeal.

    The settlements came six years after Andersen came under fire for approving fudged financial statements while collecting tens of millions of dollars in fees from Enron each year.

    Greg Faragasso, an assistant director of enforcement for the SEC, said Monday that the agency focused on wrongdoers at Enron first and moved on to gatekeepers accused of allowing fraud to thrive at the company.

    "When auditors of public companies fail to do their jobs properly, investors can get hurt, as happened quite dramatically in the Enron matter," he said.

    Barry Flynn, Duncan's longtime lawyer, said his client has made "every effort" to cooperate with authorities and take responsibility for his role as Andersen's head Enron auditor.

    That included pleading guilty to obstruction of justice in April 2002, testifying against his former employer and waiting for years to be sentenced until he withdrew his plea with no opposition from prosecutors.

    "After six years of government investigations and assertions, surrounding his and Andersen's activities, it was decided that it was time to get these matters behind him," Flynn said.

    Duncan, 48, has worked as a consultant in recent years.

    He was a chief target in the early days of the government's Enron investigation as head of a team of 100 auditors who oversaw Enron's books. In the fall of 2001, he and his staff shredded and destroyed tons of Enron-related paper and electronic audit documents as the SEC began asking questions about Enron's finances.

    Andersen fired Duncan in January 2002, saying he led "an expedited effort to destroy documents" after learning that the SEC had asked Enron for information about financial accounting and reporting.

    The firm also disciplined several other partners, including the three at the center of the other settlements announced Monday. They are Thomas Bauer, 54, who oversaw the books of Enron's trading franchise; Michael Odom, 65, former practice director of the Gulf region for Andersen; and Michael Lowther, 51, the former partner in charge of Andersen's energy audit division.

    Their settlement agreements said that they weren't skeptical enough of risky Enron transactions that skirted accounting rules. Odom and Lowther were barred from accounting before the SEC for two years, and Bauer for three years. None was fined.

    Their lawyer, Jim Farrell, declined to comment Monday.

    Duncan's firing and the other disciplinary moves were part of Andersen's failed effort to avoid prosecution. But the firm was indicted on charges of obstruction of justice in March 2002, and Duncan later pleaded guilty to the same charge.

    In Andersen's trial, Duncan recalled how he advised his staff to follow a little-known company policy that required retention of final audit documents and destruction of drafts and other extraneous paper.

    That meeting came 11 days after Nancy Temple, a former in-house lawyer for Andersen, had sent an e-mail to Odom advising that "it would be helpful" that the staff be reminded of the policy.

    Duncan testified that he didn't believe their actions were illegal at the time, but after months of meetings with investigators, he decided he had committed a crime.

    Bauer and Temple invoked their 5th Amendment rights not to testify in the Andersen trial. However, Bauer testified against former Enron Chairman Ken Lay and CEO Jeff Skilling in their 2006 fraud and conspiracy trial.

    Andersen insisted that the document destruction took place as required by policy and wasn't criminal, but the firm was convicted in June 2002.

    Three years later the U.S. Supreme Court unanimously overturned the conviction because U.S. District Judge Melinda Harmon in Houston gave jurors an instruction that allowed them to convict without having to find that the firm had criminal intent.

    That ruling paved the way for Duncan -- the only individual at Andersen charged with a crime -- to withdraw his guilty plea in December 2005.

    In his plea, he said he instructed his staff to comply with Andersen's document policy, knowing the destroyed documents would be unavailable to the SEC. But he didn't say he knew he was acting wrongfully.

    I draw some conclusions about David Duncan (they're not pretty) at

    My Enron timeline is at

    My thread on the Enron/Worldcom scandals are at

    What to do if you suspect identity theft ---

    Identity Theft Resource Center ---

    Why doesn't some of the information below appear prominently on Hannaford's Website?
    Fortunately, there are no Hannaford stores close to where I live.
    Hannaford cut corners when protecting customer privacy information.

    Hannaford is a large New England-based supermarket chain with a good reputation until now.
    Recently, Hannaford compromised credit card information on 4.2 million customers at all 165 stores in the eastern United States.
    When over 1,800 of customers started having fraudulent charges appearing on credit card statements, the security breach at Hannaford was discovered.
    Hannaford made a press announcement, although the Hannaford Website is seems to overlook this breach entirely ---
    My opinion of Hannaford dropped to zero because there is no help on the company's Website for customers having ID thefts from Hannaford.
    I can't find any 800 number to call for customer help directly from Hannaford (even recorded messages might help)

    Hannaford's is going to belatedly get a firewall and improve encryption of networked credit card information (the company remains tight lipped regarding whether it followed encryption rules up to now) --- 

    And when the Vice President of Marketing gets quoted in the press talking about the security breach, it means that there is no CIO (Chief Information Officer) at the company.  It means their network was designed haphazardly with only a minimal thought to security.  What, they couldn’t get a quote from the President of Marketing?  How does the dairy stocker in store 413 feel about the breach?  He probably knows as much about network security as the Marketing VP.

    All of this means that as the days go on, you will see more and more headlines talking about this breach being much worse than originally thought. The number of fraud cases will climb precipitously… and no one will be fired from Hannaford.

    If you shop there and have used a credit card, get a copy of your credit report ASAP.

    By law, you get one free credit report per year. You can contact them below.

    Equifax: 800-685-1111;

    Experian: 888-EXPERIAN (888-397-3742);

    TransUnion: 800-916-8800;

    Also see

    Bob Jensen's threads on computing and networking security are at

    What to do if you suspect identity theft ---

    Identity Theft Resource Center ---

    I'm sorry," Reyes said. "There is much that I regret. If I could turn back the clock, I would."
    As pointed out in the Opinion Journal, January 18, 2008 Reyes' choice of words is truly ironic since he was convicted of options "backdating." When he committed the fraud he truly did turn the clock back. Now he would like to turn it back again since he got caught.

    From The Wall Street Journal Accounting Weekly Review, January 18, 2008

    Brocade Ex-CEO Gets 21 Months in Prison
    by Justin Scheck and Steve Stecklow
    The Wall Street Journal

    Jan 17, 2008
    Page: A3
    Click here to view the full article on ---

    TOPICS: Accounting, Financial Accounting, Financial Reporting, Stock Options

    SUMMARY: Gregory Reyes, the former chief executive of Brocade Communications Systems Inc. was the first to go on trial and be convicted over the improper dating of stock-option awards. The backdating scandal came to light from academic accounting research that was brought to the attention of the WSJ. Executives committing this fraudulent activity were awarded stock options that were backdated to a point at which the companies' stock prices were lower, often the lowest of the year or quarter. The related article describes the practice as "illegal if not accounted for properly." Mr. Reyes had faced a potential 20 year sentence, but that "...was reduced late last year when Judge Breyer ruled there was no quantifiable loss of money to the company."

    CLASSROOM APPLICATION: Accounting for stock options and related disclosures

    1.) Summarize the accounting and disclosure requirements for stock options. Refer to authoritative accounting literature and include a description of dates associated with stock option grants sufficient to discuss the issues in the article.

    2.) What does it mean to "back date" a stock option award?

    3.) The related article describes the practice of backdating stock options as "illegal if not accounted for properly." What accounting would have been appropriate? You may refer to your answer to question 1 as necessary.

    4.) The potential sentence and fine to Mr. Reyes was reduced by the judge in the case because he "ruled there was no quantifiable loss of money to the company." What are the costs of stock option to the issuing company? To its shareholders? Support your answer.

    Reviewed By: Judy Beckman, University of Rhode Island

    Brocade Ex-CEO Seeks To Overturn Conviction
    by Justin Scheck
    Dec 13, 2007
    Page: A15

    Bob Jensen's threads on backdating frauds are at

    SEC reaches settlement with Monster's McKelvey for stock options backdating
    McKelvey caused Monster to misrepresent in its periodic filings and proxy statements filed with the Commission that all stock options were granted at the fair market value of the stock on the date of the award, when that was not the case. McKelvey also caused Monster to file materially misstated financial statements with the Commission in its Forms 10-K and 10-Q that did not recognize compensation expense for the company's stock option grants, as required by generally accepted accounting principles. As a result, Monster overstated its aggregate pretax operating income by approximately $339.5 million, for fiscal years 1997 through 2005. Although McKelvey did not receive backdated options, he benefited from the scheme by granting backdated options to four individuals that he personally employed, including three pilots and a mechanic. Under the settlement, McKelvey will be permanently enjoined from violating Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(b)(5) and 14(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13a-14, 13b2-1, 13b2-2 and 14a-9, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Additionally, McKelvey will pay $275,989.72 in disgorgement and prejudgment interest, and will be barred from serving as an officer or director of a public company. The settlement does not include a civil penalty due to overriding personal circumstances related to McKelvey. McKelvey agreed to the settlement without admitting or denying the allegations in the complaint.
    AccountingWeb, January 29, 2008 ---

    Bob Jensen's threads on options backdating are at

    "My Life in Crime: Chronicles of a Forensic Accountant," by William C. Barrett III, SmartPros, January 2008 ---

    The profession of forensic accounting is like any other industry niche: You evolve to a plateau where track record and honed skills permit you to "hold out" as a professional. Then, like any other business, you starve a lot before you become an overnight sensation -- in demand and truly at the top of your practice in providing value -- both on scene and in the courtroom.

    Here are a few of the cases I have directed to give you an idea of how well-developed professional skepticism prevails to reveal the fraudster -- usually a well-educated, respected member of the community, quite adept at concealing and perpetuating fraud by bending others to his or her will.

    Continued in article at

    Once again, the power of pork to sustain incumbents gets its best demonstration in the person of John Murtha (D-PA). The acknowledged king of earmarks in the House gains the attention of the New York Times editorial board today, which notes the cozy and lucrative relationship between more than two dozen contractors in Murtha's district and the hundreds of millions of dollars in pork he provided them. It also highlights what roughly amounts to a commission on the sale of Murtha's power as an appropriator: Mr. Murtha led all House members this year, securing $162 million in district favors, according to the watchdog group Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to create the National Defense Center for Environmental Excellence in Johnstown to develop anti-pollution technology for the military. Since then, it has garnered more than $670 million in contracts and earmarks. Meanwhile it is managed by another contractor Mr. Murtha helped create, Concurrent Technologies, a research operation that somehow was allowed to be set up as a tax-exempt charity, according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed; the annual salary for its top three executives averages $462,000.
    Edward Morrissey, Captain's Quarters, January 14, 2008 ---

    Just when it appeared House Republicans had turned the corner on earmark reform, party leaders did the unthinkable. They picked pork-loving Rep. Jo Bonner (R-Ala.) for the vacant seat on the Appropriations Committee, bypassing conservatives such as Reps. Jeff Flake (R-Ariz.) and Marilyn Musgrave (R-Colo.). In doing so, the Republicans missed a golden opportunity to show they were committed to real reform.Bonner may talk a good game when it comes to earmark reform. His record, however, is abysmal. The three-term Republican scored just 2% on the Club for Growth’s 2007 RePORK Card, meaning he voted for just one of the 50 anti-pork amendments offered by conservatives. That’s the same score as liberal Reps. Steny Hoyer (D-Md.), Bill Jefferson (D-La.) and Jim Moran (D-Va.). Musgrave, meanwhile, notched a score of 94%. And Flake not only supported all 50 amendments, he introduced many of them.
    Robert Bluey, "Backtracking on Earmark Reform," Townhall, February 17, 2008 --- Click Here

    The former treasurer of a Republican Congressional fund-raising committee may have stolen hundreds of thousands of dollars by submitting elaborately forged audit reports for five years using the letterhead of a legitimate auditing firm, a lawyer for the committee said Thursday. Robert K. Kelner, a lawyer with Covington & Burling, who was brought in by the National Republican Congressional Committee to investigate accounting irregularities, said a new audit showed that the committee had $740,000 less on hand than it believed. Mr. Kelner said it was unclear whether that amount represented money siphoned off by the former treasurer, Christopher J. Ward. Mr. Ward, who is under investigation by the Federal Bureau of Investigation, had the authority to make transfers of committee money on his own, Mr. Kelner said . . . Mr. Kelner lamented the fact that the finances of the Republican committee had been set up to allow Mr. Ward to authorize wire transfers of money unilaterally.
    Neal A. Lewis, "Sham Audits May Have Hid Theft by G.O.P. Committee Treasurer, Lawyer Says," The New York Times, March 14, 2008 ---

    Jensen Comment
    The first line of defense against fraud is internal control. This committee had no such control.

    This is some of the best material ever for legal-writer John Grisham ---
    But will he have the courage to venture into this ethical snakepit?

    "Lawsuit, Inc.," The Wall Street Journal, February 25, 2008; Page A14 ---

    Should state Attorneys General be able to outsource their legal work to for-profit tort lawyers, who then funnel a share of their winnings back to the AGs? That's become a sleazy practice in many states, and it is finally coming under scrutiny -- notably in Mississippi, home of Dickie Scruggs, Attorney General Jim Hood, and other legal pillars.

    The Mississippi Senate recently passed a bill requiring Mr. Hood to pursue competitive bidding before signing contracts of more than $500,000 with private lawyers. The legislation also requires a review board to examine contracts, and limits contingency fees to $1 million. Mr. Hood is trying to block the law in the state House, and no wonder considering how sweet this business has been for him and his legal pals.

    We've recently examined documents from the AG's office detailing which law firms he has retained. We then cross-referenced those names with campaign finance records. The results show that some of Mr. Hood's largest campaign donors are the very firms to which he's awarded the most lucrative state contracts.

    The documents show Mr. Hood has retained at least 27 firms as outside counsel to pursue at least 20 state lawsuits over five years. The law firms are thus able to employ the full power of the state on their behalf, while Mr. Hood can multiply the number of targets.

    Those targets are invariably deep corporate pockets: Eli Lilly, State Farm, Coca-Cola, Merck, Boston Scientific, Vioxx and others. The vast majority of the legal contracts were awarded on a contingency fee basis, meaning the law firm is entitled to a big percentage of any money that it can wring from defendants. The amounts can be rich, such as the $14 million payout that lawyer Joey Langston shared with the Lundy, Davis firm in an MCI/WorldCom settlement.

    These firms are only too happy to return the favor to Mr. Hood via campaign contributions. Campaign finance records show that these 27 law firms -- or partners in those firms -- made $543,000 in itemized campaign contributions to Mr. Hood over the past two election cycles.

    The firm of Pittman, Germany, Roberts & Welsh was hired by Mr. Hood on a contingency basis to prosecute State Farm. According to finance documents, partner Crymes Pittman donated $68,570 to Mr. Hood's campaign, and other Pittman partners chipped in $33,500 more.

    Partners in the Langston Law Firm gave more than $130,000 to elect Mr. Hood, having been retained to sue Eli Lilly. Lead partner Joey Langston has separately pleaded guilty to conspiracy to corruptly influence a judge.

    Among others: The Wolf Popper firm from New York was retained to pursue Sonus Networks, a telecommunications firm; Wolf Popper and its partners gave $27,500 to Mr. Hood's campaign. Bernstein, Litowitz sued at least four different companies for the AG, and the firm and its partners chipped in $41,500. Partners at Schiffren, Barroway went after Coca-Cola and Viacom, and donated $37,500.

    Then there are the law firms that have piggybacked their class action suits on Mr. Hood's state prosecutions. Mr. Scruggs and his Katrina litigation partners realized a nearly $80 million windfall after Mr. Hood used his powers to pressure State Farm into settling both the state and Scruggs suits. Mr. Scruggs gave $33,000 to Mr. Hood in the 2007 election cycle. (Mr. Scruggs and his son Zach have been indicted in an unrelated bribery case, and claim to be innocent.) David Nutt, a partner in Mr. Scruggs's Katrina litigation, also gave $25,500 to Mr. Hood's campaign last year.

    The Mississippi AG has also benefited from the national network of trial lawyers and its ability to funnel money into the state. We've examined finance records of the Democratic Attorneys General Association, a so-called 527 group that helps elect liberal prosecutors. In 2007, law firms that have benefited from Mr. Hood gave the organization $572,000, and in turn the group wrote campaign checks in 2007 to Mr. Hood for $550,000. Guess who supplied no less than $400,000 to the group? Messrs. Scruggs and Langston.

    Add all of this up, and in 2007 alone Mr. Hood received some $790,000 from partners and law firms that have benefited financially from his office. That is more than half of all of Mr. Hood's itemized contributions for 2007.

    This kind of quid pro quo is legal in Mississippi and most other states. However, if this kind of sweetheart arrangement existed between a public official and business interests, you can bet Mr. Hood would be screaming about corruption. Yet Mr. Hood and his trial bar partners are fighting even Mississippi's modest attempt to require more transparency in their contracts. The AG says it's all part of a plot to undermine his attempts to "recoup the taxpayers' money from corporate wrongdoers."

    The real issue is the way this AG-tort bar mutual financial interest creates perverse incentives that skew the cause of justice. A decision to prosecute is an awesome power, and it ought to be motivated by evidence and the law, not by the profit motives of private tort lawyers and the campaign needs of an ambitious Attorney General. Government is supposed to act on behalf of the public interest, not for the personal profit of trial lawyers. The tort bar-AG cabal deserves to be exposed nationwide.

    The Most Criminal Class Writes the Laws ---

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

    "New research provides resources on fraud prevention and financial reporting," AccountingWeb, January 18, 2008 ---

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

    The report illustrates how companies addressed specific accounting issues recently promulgated by the Financial Accounting Standards Board (FASB), and by the Securities and Exchange Commission (SEC), and in doing so, uncovered a number of trends, which included:
  • Twenty-five out of 100 filers in the 2006 reporting season reported tangible asset impairments as a critical accounting policy.
  • Many companies report condensed consolidating cash flows statements as part of their segment disclosures, although not required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

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

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

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

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

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

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

    Bob Jensen's threads on fraud are at

    From Jim Mahar's blog on January 25, 2008 ---

    Saturday, January 26, 2008

    Kerviel joins ranks of master rogue traders:
    "In being identified as the lone wolf behind French investment bank Société Générale's staggering $7.1-billion loss Thursday, Jérôme Kerviel joined the ranks of a rare and elite handful of rogue traders whose audacious transactions have single-handedly brought some of the world's financial powerhouses to their knees.

    This notorious company includes Nick Leeson, who brought down Britain's Barings Bank in 1995 by blowing $1.4-billion, Yasuo Hamanaka, who squandered $2.6-billion on fraudulent copper deals for Sumitomo Corp. of Japan in 1998, John Rusnak, who frittered away $750-million through unauthorized currency trading for Allied Irish Bank in 2002 and Brian Hunter of Calgary, who oversaw the loss of $6-billion on hedge fund bets at Amaranth Advisors in 2006.


    Report on the Transparency International Global Corruption Barometer 2007 ---



    Figure 1. Demands for bribery, by region 3

    Table 1. Countries most affected by bribery 4

    Figure 2. Experience of bribery worldwide, selected services 5

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

    Figure 3. Experience with bribery, by service 6

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

    Figure 5. Comparing Bribery: 2006 and 2007 8


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

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

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


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


    Figure 9. Corruption will get worse, worldwide 11

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


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

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

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



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

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

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

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

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

    Table 4.3: Views of corruption in the future 23

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


    Bob Jensen's Rotten to the Core threads are at ---

    "In Lawsuit, College Board Accuses Company of Circulating Copyright-Protected SAT Questions,"  by Elizabeth R. Farrell,  Chronicle of Higher Education, February 25, 2008 --- Click Here

    A test-preparation company in Texas is being sued by the College Board for what it calls "one of the largest cases of a security breach in our company's history," according to Edna Johnson, a senior vice president of the nonprofit group, which owns the SAT.

    In a lawsuit filed last week in U.S. District Court in Dallas, the College Board is seeking unspecified damages against the company, Karen Dillard's College Prep LP, which it says illegally obtained copies of SAT and PSAT tests before they were available to the public. The lawsuit also accuses the company of violating copyright-protection laws by circulating and selling materials that included test questions owned by the College Board.

    The lawsuit arose after a former employee of the test-preparation company reported information to the College Board. Karen Dillard, the owner of the company, said the employee was disgruntled but would not elaborate on why.

    Ms. Dillard did not deny that one of her employees obtained a copy of the SAT that was administered in November 2006 before the test was given. But Ms. Dillard said her company did not use any questions from that test in preparatory materials it provided to clients.

    The lawsuit states that the employee got the test from his brother, the principal of a high school in Plano, Tex. The principal has been put on paid leave while the Plano school district investigates the matter, according to the Associated Press.

    Copyright Confusion

    In reference to the copyright allegations in the lawsuit, Ms. Dillard said in an interview on Friday that she had believed she was lawfully allowed to use materials she had purchased from the College Board before 2005.

    Part of the confusion may stem from a shift in the College Board's policies regarding circulation of previous test materials. Until 2005, the company would sell copies of previously given SAT's to companies. After the SAT was revamped that year, the College Board no longer sold those materials. At that time, the company also began to offer its own online test-preparation course to students, which now costs $69.95.

    "We believe part of the motivation of the College Board in bringing this lawsuit," Ms. Dillard said, "is to drive test-preparation companies like ours out of business so they can dominate the industry with their own test-preparation materials, which are for sale."

    Ms. Dillard said she also thinks that the College Board is going to great efforts to publicize the lawsuit to make an example out of her company. To support that point, she said that Justin Pope, a higher-education reporter for the Associated Press, received a copy of the lawsuit and contacted her for comment before it was filed.

    When contacted by The Chronicle, Mr. Pope said he could not confirm how or when he received the lawsuit, and could not comment further about the matter.

    The lawsuit is the culmination of a four-month investigation by lawyers for the College Board. Two lawyers from the firm Wilmer Cutler Pickering Hale and Dorr LLP, along with a representative for the Educational Testing Service, which administers the SAT, visited Ms. Dillard's office several months ago.

    Ms. Dillard said that, at that time, her company fully cooperated with all requests for information and interviews with employees, and that she also provided personal financial records to the lawyers.

    Ms. Dillard also said that her company offered to settle the matter for $300,000, but that lawyers for the College Board made a counteroffer of $1.25-million, a sum her company could not afford.

    Ms. Johnson, of the College Board, said she could not comment on any offers made in settlement negotiations.

    Continued in article

    Bob Jensen's threads on cheating are at

    Fraud Alert on Purchasing/Selling Carbon Offsets

    "Carbon Offsets: Government Warns of Fraud Risk," by Christopher Joyce, NPR, January 3, 2008 ---

    There is something new to feel guilty about: carbon.

    This new form of remorse is found among people who think that their lifestyle — driving, plane trips or maybe just leaf-blowing — adds too much climate-warming carbon dioxide to the air.

    The guilty can now buy something called a "carbon offset." Essentially, you pay someone else to reduce or "offset" carbon emissions equal to your own.

    It's a booming new trade, but the federal government is worried that consumers are getting ripped off. The Federal Trade Commission has announced it will investigate the offset business.

    For the consumer, buying an offset is pretty straightforward. You go to a broker and pay a few bucks for every ton of CO2 you want to offset. The average amount each American adds to the air is about 20 tons annually.

    The broker promises that your money will pay for a project somewhere that will reduce carbon emissions, say, by growing trees that soak up that CO2 or building a solar energy plant.

    Pankaj Bhatia of the World Resources Institute, an environmental think tank, says the business is hot. In fact, trade in this offset market is figured to be about $100 million a year and growing fast.

    Bhatia's job is to assess carbon footprints — how much carbon you or your business emits. He says he's been very busy.

    "Today, I got a phone call from a group that is managing concerts," he says, "and they wanted to know how they could quantify emissions from the transportation by helicopters of their equipment." The concert promoters wanted to buy offsets to neutralize the CO2 their concert produced.

    How Much and For What?

    But how do people know they are getting what they are paying for? After all, this is a market that trades in a gas, or more accurately, units of a gas that are not produced.

    In the United States, the trading is voluntary and nobody is in charge. That worries people whose job it is to protect consumers.

    "Our concern is that because these claims are very hard to substantiate and consumers can't easily tell they're getting what they pay for, there is the real possibility of fraud in this market," says Jim Kohm of the FTC's enforcement division.

    Kohm says he does not know yet if there is much fraudulent carbon trading. But he is suspicious. "There's been an explosion in green marketing," he says. "There are claims that we didn't see in the market 10 years ago. Carbon offsets are one of those new claims."

    There is a raft of new "carbon-neutral" products. For instance, there are potato chips and rock concerts that are advertised as "clean" because their makers or sponsors have bought offsets to counterbalance their emissions.

    What the FTC Is Looking For

    One of the things the FTC will investigate is "double selling," Kohm says. "So, for example, if I have solar panels on top of my store and then I sell somebody else the right to claim that carbon scrubbing, I can't then claim the carbon scrubbing for myself, as well."

    "And if somebody were selling that two or three times, then that would be a deceptive practice that the FTC would need to take action on."

    Another hangup is whether the carbon savings you are buying would have happened anyway. For example, what if a company cuts back on the electricity it uses simply to save money? Can that company then claim it has created an offset and then sell it? Climate experts say no. The offset market, they say, is meant to pay for carbon reductions that would not have happened otherwise.

    Some environmental groups say that instead of buying carbon offsets, Americans should do the hard work themselves: use less electricity, switch from coal to wind power, drive less.

    Continued in article

    Why shouldn't you trust the bond raters assigning letter grades to credit risk?

    "Triple-A Trouble," by Justin Fox, Time Magazine, March 24, 2008, Page 32 ---,9171,1722275,00.html

    The People at Moody's and Standard & Poor's are used to catching flak when debt markets blow up. Why didn't they see the bankruptcy of California's Orange County coming in 1994? Why did they fail to account for the currency risks brewing in Thailand and Indonesia and South Korea in 1997? And how was it that they were still rating Enron's debt as investment grade four days before the company went belly-up in 2001?

    The furor over such missteps usually fades quickly. After a congressional hearing or two, the ratings agencies have always been allowed to go their merry and profitable way. And why not? Inability to see into the future isn't a crime, plus there has usually been someone else available to take the fall--like Arthur Andersen in the Enron case.

    This time around, though, the ratings agencies didn't just fail to see a financial calamity coming. They helped cause it. Why did collateralized debt obligations (CDOs) based partly on risky subprime mortgages lead to so much trouble? Because Moody's and S&P awarded them dubiously generous letter grades. It's the same story for the mostly incomprehensible tizzy over bond insurance.

    What can we do about this? There's actually a simple answer: just declare our independence from bond ratings.

    The practice of giving letter grades to bonds to reflect their riskiness was pioneered by John Moody in 1909. But the industry took its current form only in the early 1970s. That's when Moody's and its competitors switched from selling research to investors to charging bond issuers to rate their goods. This approach wasn't unheard of: you have to advertise in Good Housekeeping to get the Good Housekeeping Seal of Approval. What made it problematic was that at about the same time, the Securities and Exchange Commission (SEC) exalted the status of the ratings by writing them into the rules governing securities firms' capital holdings. Since then, the use of bond ratings in regulation has only grown. Many institutional investors are banned from owning non-investment-grade bonds. Bank-capital requirements--the cash and equivalents banks need to keep on hand--give more weight to highly graded securities. And this is increasingly the case not just in the U.S. but around the world.

    What all this amounts to, argues Frank Partnoy, a derivatives salesman turned University of San Diego law professor, who is one of the sharpest critics of the ratings status quo, is a "regulatory license" for the ratings agencies. It's certainly a license to print money. Moody's, the lone ratings firm for which data are available, made $702 million in after-tax profit last year, up from $289 million just five years before. Its operating profit margin was a stunning 50% of revenue. By comparison, Google's was 30%.

    To keep that profit machine going, Moody's and S&P have to keep finding new things to rate. And they're under intense pressure from issuers and investors alike to get as many securities as possible into the top ratings categories. The result is grade inflation, especially in new products like CDOs. That's how banks and investors around the world ended up owning billions of dollars in triple-A mortgage junk. It also helps explain the growth of bond insurers, companies that used their own triple-A ratings to bump ever more bond issues into the top categories--even as their businesses ceased to be triple-A safe.

    One way to combat these tendencies would be to subject the raters to tight regulation by the sec. But that understaffed agency is unlikely to be up to the task, especially since it's not clear what exactly the task would be.

    Which leaves the alternative suggested by Partnoy and several economists: cleansing the federal code of its reliance on bond ratings. Among the simplest fixes would be removing the ban on pension funds' holding debt securities rated lower than BBB. The funds can make far riskier investments in stocks and hedge funds, after all. Bank-capital requirements do have to take into account the quality of securities, but there are market-based measures that could at least partly replace ratings.

    "The experiment we ran with government relying on the ratings agencies to do its job has failed," Partnoy says. Time for a new experiment.

    Bob Jensen's threads on dubious bond raters are at

    Did the Motion Picture Association of America Lie on Purpose?

    A week ago today, the Motion Picture Association of America (MPAA) issued what had to be a hugely embarrassing news release acknowledging that an aggressively promoted and widely cited research report commissioned by the MPAA in 2005 significantly overstated the Internet-based peer-to-peer piracy of college students: “The 2005 study had incorrectly concluded that 44 percent of the motion picture industry’s domestic losses were attributable to piracy by college students. The 2007 study will report that number to be approximately 15 percent.” The MPAA release attributes the bad data to an “isolated error,” adding that it takes the error seriously and plans to hire an independent reviewer “to validate” the numbers in a forthcoming edition of an updated report. We should applaud the MPAA for going public with a painful press release about what some have tagged the “300 percent error.” Unfortunately, the MPAA has yet to release the actual reports that generated either the 44 percent or 15 percent claims about the role of college students in digital piracy; the public data are limited to PowerPoint graphics in PDF format on the association’s web site. Perhaps as part of its efforts to validate the numbers in the new report the MPAA will also make public the complete document, not just the summary graphics. (Academics do know something about peer review.)
    Kenneth C. Greene, "The Movie Industry’s 300% Error," Inside Higher Ed, January 29, 2008 ---

    Federal Audit Finds Fault With Fafsa Oversight
    An audit released last week by the U.S. Department of Education has found that more than $1.51-billion in federal student aid was distributed in 2004-5 to students whose loan applications were questionable or erroneous. That figure, however, may overestimate the number of students affected.The audit checked common error codes that could be generated on the Free Application for Federal Student Aid form. The errors include not being registered with Selective Service, answering “yes” to a drug-conviction question, or being unable to verify U.S. citizenship.
    JJ Hermes, Chronicle of Higher Education, January 15, 2008 --- Click Here

    Complicated Math by Design:  Derivative Instruments Fraud in the 1990s and Executive Compensation in the 21st Century

    Before derivative financial instruments were well understood by buyers, sellers of such instruments like Merrill Lynch and many other top investment banking firms on Wall Street became fraudulent bucket shops selling derivatives packages that were so needlessly mathematical and complicated that they intentionally deceived buyers like pension and trust fund managers, When buyers commenced to lose millions upon millions of dollars, the SEC commenced to investigate one of the more serious set of scandals to ever hit wall street ---
    If you want to cry and laugh at the same time watch this expert (John Grant) try to understand a derivatives contract sold by Merrill Lynch to Orange County in California that eventually cost the County over a billion dollars (and forced it into bankruptcy.

    The video is an excerpt from a CBS Sixty Minute 1990sprogram (slow loading) ---\FAS133/SIXTY01.avi

    The point is that the investment banking firms in those days built in complicated mathematics to deceive investors regarding the risk in the investments these bankers were trying to sell in the 1990s. And it worked! Investors lost millions.

    In a similar manner in the 21st Century executives are trying to circumvent the SEC's new compensation disclosure rules by making the compensation contracts so complicated that nobody could comprehend what is being disclosed.

    "(New Math) x (SEC Rules) + Proxy=Confusion Firms Disclose Formulas Behind Executive Pay, Leaving Many Baffled," by Phred Dvorak, The Wall Street Journal, March 21, 2008; Page A1 ---
    (but not quite as complicated as the investment banking formulas for fraud in derivatives instruments selling)

    The latest proxy statement from Applied Materials Inc. tells exactly how the company set 2007 bonuses for top executives:

    "Base Salary x Individual Target Percentage x (Weighted Score + Total Stockholder Return Adder, if Achieved)."

    Of some help may be Applied's definition of weighted score:

    "(Performance Measure 1 x Weight as Percentage) + (Performance Measure 2 x Weight as Percentage)."

    And so on.

    As a maker of semiconductor equipment, Applied Materials belongs to an industry of mathematical whizzes. Yet the complexity of its proxy this year reflects a trend that extends far beyond Silicon Valley. Even Deere & Co., the maker of tractors, has produced a proxy that uses three formulas, four tables and a graph to illustrate the calculation of executive bonuses.

    This explosion of mathematics was sparked by the Securities and Exchange Commission, which in 2006 began requiring more information about how companies calculate executive pay. After the first batch of proxies using the new rules arrived last year, the SEC told 350 companies they hadn't been specific enough.

    Among those companies was Applied Materials. So this year, it expanded by 76% the word count of its proxy's compensation section. In all, the compensation section contains 16,245 words -- twice the length of the U.S. Constitution and its 27 Amendments -- along with 10 formulas, 10 tables and 155 percent signs.

    The result, according to some experts, is unfathomable. "Can even the executives figure out what they have to do to get these awards?" asks Carol Bowie, head of corporate-governance research at RiskMetrics Group Inc., which helps investors sort through such filings.

    The SEC has said that it wants disclosure to be clear and concise, as well as comprehensive. But striking that balance is difficult, companies say. So, many are erring on the side of detail.

    "Bonus multiple x target bonus x base salary earnings = payout," explains the new proxy from drug maker Eli Lilly & Co., which last year received a letter from the SEC calling its executive-pay disclosure inadequate. Just in case that term "bonus multiple" isn't clear, the proxy explains that it is "(0.25 x sales multiple) + (0.75 x adjusted EPS multiple)." To find the sales and EPS multiples, investors must consult graphs.

    Some firms may be throwing up their hands and deluging the public with figures. "I know a couple of companies where the frustration level with the SEC was so large that they said, 'Just put it all in,'" says John A. Hill, a trustee at mutual-fund giant Putnam Funds. Mr. Hill often chats about pay practices with officials of companies whose stock Putnam investors own.

    An SEC spokesman says it's too early to comment on 2008 proxies.

    Even activist investors who pushed for more disclosure on executive pay are scratching their heads. "There have been some proxies when I've gone through and said, 'Wow, I have no idea what I just read,'" says Scott Zdrazil, director of corporate governance at union-owned Amalgamated Bank, which manages around $12 billion in pension-fund assets.

    The Smell Test

    Mr. Zdrazil says he uses a "smell test" to judge whether companies are trying to obscure poor pay practices with lots of detail, or just being wonky. "If you can clearly understand the algebra involved, it passes," he says.

    One that doesn't pass his test is software maker Novell Inc. Its proxy tosses around such terms as "assigned weighted quantitative performance objective achievement percentage," and describes a two-step process for calculating executive bonuses:

    First: "Bonus Funding Percentage x Weighted Quantitative Performance Objectives Achievement x Qualitative Performance Factor = Performance Factor."

    Then: "Performance Factor x Target Bonus Percentage x Base Salary = Recommended Bonus Amount."

    Mr. Zdrazil says Novell fails to explain how difficult it is for executives to achieve performance targets.

    Asked about the formulas, Novell says it gave more detail in response to the SEC's push and that its proxy statement complies with SEC rules.

    At first glance, the bonus formula at software maker Adobe Systems Inc. seems straightforward: "Target Bonus x Unit Multiplier x Individual Results."

    But then comes the definition of unit multiplier. Adobe says it is:

    "Derived from aggregating the target bonus of all participants in the Executive Bonus Plan multiplied by the funding level determined under the funding matrix, and allocating a portion of the funding level to each business or functional unit of Adobe based on that unit's relative contribution to Adobe's success, and then dividing the allocated funding level by the aggregate target bonuses of participants working within each such unit." Got that?

    After all that calculating, Adobe's top five executives somehow received the exact same unit multiplier -- 200%. Adobe says that was the highest possible percentage and that it reflects how well the company performed.

    Degree of Transparency

    Adobe also says it "strives for a high degree of transparency" in financial reporting, and that it added detail this year on executive compensation "in that spirit, and in response to new SEC requirements."

    Applied's bonus formula was created a decade ago by an employee who majored in math, but the company hadn't previously included it in its filings. General Counsel Joe Sweeney says the new compensation discussion has won praise from investors and lawyers. Proxy adviser Glass Lewis & Co., which says it has no financial relationship with Applied, called the company's proxy "clear and concise."

    But Applied shareholder Robert Friedman, a retired computer programmer, isn't so sure. "This is too much," he says, munching on a cookie and flipping through a proxy moments before the company's March 11 annual meeting. "I own about a dozen companies, and if I did this for every company..."

    For all its length, Applied's proxy doesn't reveal some crucial information, such as the target to which the company would like to see its market share increase. That number -- key to calculating the CEO's bonus according to the formula -- must be kept from rivals, Mr. Sweeney, the general counsel, says. For the same reason, the document also excludes some information about other executives' performance goals. "I hate to think how long the [compensation section] would have been if we had included all the factors for all the individuals," says Mr. Sweeney.

    So if some important factors remain secret, what's the point of all the math? Mr. Sweeney says it is meant to give shareholders a taste of the decision-making process.

    Bob Jensen's threads on outrageous executive compensation are at

    Allegations of Conflict of Interest for Top Business School Admissions Officers
    Three senior admissions officials of prominent American universities sit on an advisory board of a Japanese company that helps applicants in Japan get into top M.B.A. programs in the United States — including programs at their universities. The officials confirmed their involvement and that they receive a free annual trip to meetings in Japan for their services, which are boasted about on the Japanese company’s Web site. One of the officials said that there is also pay involved, but declined to say how much. One official said he couldn’t answer questions about his pay. And one official denied being paid except for the free trip to Japan.
    Scott Jaschik, "New Conflict of Interest Allegations," Inside Higher Ed, January 30, 2008 ---

    "Questions, Not Answers, on Conflicts of Interest," by Doug Lederman, Inside Higher Ed, January 28, 2008 --- 

    College leaders have been criticized in some quarters for not taking conflicts of interest seriously. The largest association representing higher education took a first pass at remedying that Friday with a working paper aimed at helping campus administrators deal with real and perceived financial conflicts.

    But the document from the American Council on Education, which generally shuns strong stands in favor of laying out questions campus officials should ask in contemplating their own situations — avoiding, for example, the list of do’s and don’ts contained in the code of conduct adopted under pressure last year by the National Association of Student Financial Aid Administrators — is unlikely to satisfy those who were hoping for a full-throated statement of principle.

    The “Working Paper on Conflict of Interest” was prepared by a panel of college presidents, association heads and lawyers assembled by ACE after a September meeting on conflicts of interest. The council had gathered higher education officials to discuss whether and how they should respond, broadly, to the perception that conflicts of interest were rife or spreading in higher education. The conversation and the intensified attention to financial conflicts were prompted largely by 2007’s various inquiries into the student loan industry, and by the perception that some of the same conflicts of interest inherent in the financial aid world exist in other college and university operations.

    After the September meeting, David Ward, the departing president of the American Council on Education, said he expected the working group he appointed to create not a list of things to do and not to do, but a list of “diagnostic questions” about potential conflicts, framed in such a way that “if the answer to [the questions] was no, that’s an indication that you might have a problem” with a particular situation. ACE’s desire, he said, was to give campus officials a document to “illuminate principles” that should guide them as they confront arrangements that might seem to fall into a gray area.

    The document released just before 5 p.m. on Friday, which was produced by an eight-member panel whose members are listed below, hews closely to that approach. Because colleges have such diverse structures, cultures and missions, the panel writes in its introduction, “[t]here is thus likely no one conflict of interest policy that would fit all of the institutions. Accordingly, the purpose of this statement is not to prescribe a single approach to conflicts management. Rather, this statement aims to provide tools that each institution may use to inform its own thinking about these issues.”

    The paper starts from the premise that colleges must, to meet their many needs while remaining financially viable, engage in partnerships and financial arrangements with outside entities, including businesses, that may create real or perceived conflicts of interest. And it notes that the environment in which the legality and, importantly, the morality of those arrangements will be judged can change over time, as some financial aid officials believe they did in the student loan world over the last few years.

    “Transactions once deemed acceptable may now be the subject of questions about whether, for example, they are at arm’s length,” the panel writes.

    While the paper generally avoids dictating what colleges should and should not do in specific instances, it does lay out a set of “basic precepts that are universal or nearly universal among higher education institutions” to “form a baseline for management of conflict of interest.” Foremost among these precepts is the idea that a faculty or staff member or trustee must disclose “known significant financial interests” in an outside organization with which the institution is affiliated, and that institutional officials should review those disclosures and have “procedures to address identified conflicts.”

    That is as far as the committee went in laying out a common view of how colleges and universities should approach conflicts of interest; the rest of the paper lays out a long set of questions that institutions might ask in reviewing various situations, including their relationships with vendors ("Under what circumstances, if any, is it appropriate for an administrator, faculty member, or trustee to own stock or have another financial interest in a vendor?"); their conflicts policies ("Under what circumstances should institutional policy give the persons disclosing conflicts of interest discretion to decide whether a particular interest needs to be disclosed?"); and institutional conflicts involving commercial arrangements ("Does the transaction entail the actuality or perception that the institution is profiting to the detriment of students or other constituents?")

    Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, said he found it “more than a little surprising that the paper doesn’t clearly enough recommend avoidance of actual or apparent conflicts where that is at all practicable, and appears to view disclosure — even of avoidable and more appropriately avoided conflicts — as meeting an adequate threshold of ethical conduct.”

    Continued in article

    Bob Jensen's threads on accountability in higher education are at

    "Minnesota Accountancy Is Sued in Sentinel Chap. 11," by Stephen Taub, CFO Magazine, March 24, 2008 ---

    Seeking $550m, a trustee for the money-manager names McGladrey & Pullen for "participating in wrongdoing," and cites a partner, too. Stephen Taub | US March 24, 2008 The Bloomington, Minn.-based accounting firm of McGladrey & Pullen, along with the partner in charge of now-defunct Sentinel Management Group Inc.'s audit, were sued for $550 million by a Chapter 11 trustee for Sentinel. The trustee charged that accountancy "itself participated in the wrongdoing committed by a Sentinel insider," who wasn't named.

    The trustee for Northbrook, Ill.-based money manager Sentinel — which itself had been accused of fraud — filed the suit in U.S. Bankruptcy Court in Chicago. In addition to McGladrey & Pullen, the suit named G. Victor Johnson, who had been the partner in charge, according to a Bloomberg News report.

    A representative for the accountancy and Johnson didn't return a call from seeking comment.

    Last August, Sentinel froze client withdrawals from its $1.5-billion short-term investment fund, and company officials claimed in a letter to clients that because of subprime mortgage crisis and resulting credit crunch "fear has overtaken reason," according to an Associated Press report at the time. Sentinel reportedly told clients that it could not meet their requests to withdraw cash.

    The following week, the Securities and Exchange Commission filed an emergency action against Sentinel seeking to halt any improper commingling, misappropriating, and leveraging of client securities without client consent. The SEC's complaint alleged that for at least several months Sentinel's advisory clients suffered undisclosed losses and risks of losses as a result of several unauthorized practices. The commission said Sentinel placed at least $460 million of client securities belonging in segregated customer accounts in Sentinel's house proprietary account.

    According to the AP, the trustee, Frederick Grede, accused the firm, which audited Sentinel's 2006 financial statements, of certifying false financial statements and creating some of the accounting entries that led to Sentinel's financial misstatements. According to Bloomberg, Grede said McGladrey & Pullen "ignored blatant violations of federal law" and "failed to satisfy the most basic standards of the accounting and auditing profession."

    The trustee said the firm "assisted in the creation of a fictitious management agreement" used to siphon $1 million out of Sentinel when it knew no management services were being provided, according to the wire service. Rather than giving Sentinel an unqualified opinion for 2006, the trustee said that the firm should have disclosed violations of law, according to Bloomberg.

    "M&P's failure to either ensure that Sentinel's financial statements accurately reflected the facts or refuse to certify materially misstated financial statements, as well as its failure to report these violations in its audit report and to authorities, reflects a deliberate disregard of M&P's obligations as an auditor," Grede reportedly said.

    Bob Jensen's threads on lawsuits against CPA firms are at

    We hang the petty thieves and appoint the great ones to public office.

    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

    "Holding back the banks:  Predatory banking practices are likely to continue while political parties are too close to corporations and regulators lack teeth," by Prem Sikka, The Guardian (in the U.K.), February 15, 2008 ---

    Politicians and regulators have been slow to wake up to the destructive impact of banks on the rest of society. Their lust for profits and financial engineering has brought us the sub-prime crisis and possibly a recession. Billions of pounds have been wiped off the value of people's savings, pensions and investments.

    Despite this, banks are set to make record profits (in the U.K.) and their executives will be collecting bumper salaries and bonuses. These profits are boosted by preying on customers in debt, making exorbitant charges and failing to pass on the benefit of cuts in interest rates. Banks indulge in insider trading, exploit charity laws and have sold suspect payment protection insurance policies. As usual, the annual financial reports published by banks will be opaque and will provide no clues to their antisocial practices.

    Some governments are now also waking up to the involvement of banks in organised tax avoidance and evasion. Banks have long been at the heart of the tax avoidance industry. In 2003, the US Senate Permanent Subcommittee on Investigations concluded (pdf) that the development and sale of potentially abusive and illegal tax shelters have become a lucrative business for accounting firms, banks, investment advisory firms and law firms. Banks use clever avoidance schemes, transfer pricing schemes and offshore (pdf) entities, not only to avoid their own taxes but also to help their rich clients do the same.

    The role of banks in enabling Enron, the disgraced US energy giant, to avoid taxes worldwide, is well documented (pdf) by the US Senate joint committee on taxation. Enron used complex corporate structures and transactions to avoid taxes in the US and many other countries. The Senate Committee noted (see pages 10 and 107) that some of the complex schemes were devised by Bankers Trust, Chase Manhattan and Deutsche Bank, among others. Another Senate report (pdf) found that resources were also provided by the Salomon Smith Barney unit of Citigroup and JP Morgan Chase & Co.

    The involvement of banks is essential as they can front corporate structures and have the resources - actually our savings and pension contributions - to provide finance for the complex layering of transactions. After examining the scale of tax evasion schemes by KPMG, the US Senate committee concluded (pdf) that complex tax avoidance schemes could not have been executed without the active and willing participation of banks. It noted (page 9) that "major banks, such as Deutsche Bank, HVB, UBS, and NatWest, provided purported loans for tens of millions of dollars essential to the orchestrated transactions," and a subsequent report (pdf) (page111) added "which the banks knew were tax motivated, involved little or no credit risk, and facilitated potentially abusive or illegal tax shelters".

    The Senate report (pdf) noted (page 112) that Deutsche Bank provided some $10.8bn of credit lines, HVB Bank $2.5bn and UBS provided several billion Swiss francs, to operationalise complex avoidance schemes. NatWest was also a key player and provided about $1bn (see page 72 [pdf]) of credit lines.

    Deutsche Bank has been the subject of a US criminal investigation and in 2007 it reached an out-of-court settlement with several wealthy investors, who had been sold aggressive US tax shelters.

    Some predatory practices have also been identified in other countries. In 2004, after a six-year investigation, the National Irish Bank was fined £42m for tax evasion. The bank's personnel promoted offshore investment policies as a secure destination for funds that had not been declared to the revenue commissioners. A government report found that almost the entire former senior management at the bank played some role in tax evasion scams. The external auditors, KPMG, and the bank's own audit committee were also found to have played a role in allowing tax evasion.

    In the UK, successive governments have shown little interest in mounting an investigation into the role of banks in tax avoidance though some banks have been persuaded to inform authorities of the offshore accounts held by private individuals. No questions have been asked about how banks avoid their taxes and how they lubricate the giant and destructive tax avoidance industry. When asked "if he will commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use," the chancellor of the exchequer replied: "There are no plans to commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use."

    Continued in article

    "Bringing banks to book Financial institutions are not going to voluntarily embrace honesty and social responsibility - there is little evidence they do so now," by Prem Sikka, The Guardian, February 27, 2008 ---

    Anyone visiting the websites of banks or browsing through their annual reports will find no shortage of claims of "corporate social responsibility". Yet their practices rarely come anywhere near their claims.

    In pursuit of higher profits and bumper executive rewards, banks have inflicted both the credit crunch and sub-prime crisis on us. Their sub-prime activities may also be steeped in fraud and mis-selling of mortgage securities. They have developed onshore and offshore structures and practices to engage in insider trading, corruption, sham tax-avoidance transactions and tax evasion. Money laundering is another money-spinner.

    Worldwide over $2tn are estimated to be laundered each year. The laundered amounts fund private armies, terrorism, narcotics, smuggling, corruption, tax evasion and criminal activity and generally threaten quality of life. Large amounts of money cannot be laundered without the involvement of accountants, lawyers, financial advisers and banks.

    The US is the world's biggest laundry and European countries are not far behind. Banks are required to have internal controls and systems to monitor suspicious transactions and report them to regulators. As with any form of regulation, corporations enjoy considerable discretion about what they record and report. Profits come above everything else.

    A US government report (see page 31) noted that "the New York branch of ABN AMRO, a banking institution, did not have anti-money laundering program and had failed to monitor approximately $3.2 billion - involving accounts of US shell companies and institutions in Russian and other former republics of the Soviet Union".

    A US Senate report on the Riggs Bank noted that it had developed novel strategies for concealing its trade with General Augusto Pinochet, former Chilean dictator. It noted (page 2) that the bank "disregarded its anti-money laundering (AML) obligations ... despite frequent warnings from ... regulators, and allowed or, at times, actively facilitated suspicious financial activity". The committee chairman Senator Carl Levin stated that "the 'Don't ask, Don't tell policy' at Riggs allowed the bank to pursue profits at the expense of proper controls ... Million-dollar cash deposits, offshore shell corporations, suspicious wire transfers, alteration of account names - all the classic signs of money laundering and foreign corruption made their appearance at Riggs Bank".

    The Senate committee report (see page 7) stated that:

    "Over the past 25 years, multiple financial institutions operating in the United States, including Riggs Bank, Citigroup, Banco de Chile-United States, Espirito Santo Bank in Miami, and others, enabled [former Chilean dictator] Augusto Pinochet to construct a web of at least 125 US bank and securities accounts, involving millions of dollars, which he used to move funds and transact business. In many cases, these accounts were disguised by using a variant of the Pinochet name, an alias, the name of an offshore entity, or the name of a third party willing to serve as a conduit for Pinochet funds."

    The Senate report stated (page 28) that "In addition to opening multiple accounts for Mr Pinochet in the United States and London, Riggs took several actions consistent with helping Mr Pinochet evade a court order attempting to freeze his bank accounts and escape notice by law enforcement". Riggs bank's files and papers (see page 27) contained "no reference to or acknowledgment of the ongoing controversies and litigation associating Mr Pinochet with human rights abuses, corruption, arms sales, and drug trafficking. It makes no reference to attachment proceedings that took place the prior year, in which the Bermuda government froze certain assets belonging to Mr Pinochet pursuant to a Spanish court order - even though ... senior Riggs officials obtained a memorandum summarizing those proceedings from outside legal Counsel."

    The bank's profile did not identify Pinochet by name and at times he is referred to (see page 25) as "a retired professional, who achieved much success in his career and accumulated wealth during his lifetime for retirement in an orderly way" (p 25) ... with a "High paying position in Public Sector for many years" (p 25) ... whose source of his initial wealth was "profits & dividends from several business[es] family owned" (p 27) ... the source of his current income is "investment income, rental income, and pension fund payments from previous posts " (p 27).

    Finger is also pointed at other banks. Barclays France, Société Marseillaise de Credit, owned by HSBC, and the National Bank of Pakistan are facing allegations of money laundering. In 2002, HSBC was facing a fine by the Spanish authorities for operating a series of opaque bank accounts for wealthy businessmen and professional football players. Regulators in India are investigating an alleged $8bn (£4bn) money laundering operation involving UBS.

    Nigeria's corrupt rulers are estimated to have stolen around £220bn over four decades and channelled them through banks in London, New York, Jersey, Switzerland, Austria, Liechtenstein, Luxembourg and Germany. The Swiss authorities repatriated some of the monies stolen by former dictator General Sani Abacha. A report by the Swiss federal banking commission noted (page 7) that there were instances of serious individual failure or misconduct at some banks. The banks were named as "three banks in the Credit Suisse Group (Credit Suisse, Bank Hofmann AG and Bank Leu AG), Crédit Agricole Indosuez (Suisse) SA, UBP Union Bancaire Privée and MM Warburg Bank (Schweiz) AG".

    Continued in article

    Jensen Comment
    Prem Sikka has written a rather brief but comprehensive summary of many of the bad things banks have been caught doing and in many cases still getting away with. Accounting standards have be complicit in many of these frauds, especially FAS 140 (R) which allowed banks to sell bundles of "securitized" mortgage notes from SPE's (now called VIEs) using borrowed funds that are kept off balance sheet in these entities called SPEs/VIEs. The FASB had in mind that responsible companies (read that banks) would not issue debt in excess of the value of the collateral (e.g., mortgage properties). But FAS 140 (R) fails to allow for the fact that collateral values such as real estate values may be expanding in a huge bubble about to burst and leave the bank customers and possibly the banks themselves owing more than the values of the securities bundles of notes. Add to this the frauds that typically take place in valuing collateral in the first place, and you have FAS 140 (R) allowing companies, notably banks, incurring huge losses on debt that was never booked due to FAS 140 (R).

    FAS 140 (R) needs to be rewritten ---
    However, the banks now control their regulators! We're not about to see the SEC, FED, and other regulators allow FAS 140 (R) to be drastically revised.

    Also banks are complicit in the "dirty secrets" of credit cards and credit reporting ---

    Then there are the many illegal temptations which lure in banks such as profitable money laundering and the various departures from ethics discussed above by Prem Sikka.

    Bob Jensen's "Rotten to the Core" threads are at


    Lessons Not Learned from Enron
    Bad SPE Accounting Rules are Still Dogging Us

    From The Wall Street Journal Accounting Weekly Review on October 19, 2007

    Call to Brave for $100 Billion Rescue
    by David Reilly
    The Wall Street Journal

    Oct 16, 2007
    Page: C1
    Click here to view the full article on

    TOPICS: Advanced Financial Accounting, Securitization

    SUMMARY: This article addresses a proposed bailout plan for $100 billion of commercial paper to maintain liquidity in credit markets that have faced turmoil since July 2007, and the fact that this bailout "...raises two crucial questions: Why didn't investors see the problems coming? And how could they have happened in the first place?" The author emphasizes that post-Enron accounting rules "...were supposed to prevent companies from burying risks in off-balance sheet vehicles." He argues that the new rules still allow for some off-balance sheet entities and that "...the new rules in some ways made it even harder for investors to figure out what was going on."

    CLASSROOM APPLICATION: The bailout plan is a response to risks and losses associated with special purpose entities (SPEs) that qualified for non-consolidation under Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing of financial Assets and Extinguishments of Liabilities, and Financial Interpretation (FIN) 46(R), Consolidation of Variable Interest Entities.

    1.) Summarize the plan to guarantee liquidity in commercial paper markets as described in the related article. In your answer, define the term structured investment vehicles (SIVs).

    2.) The author writes that SIVs "...don't get recorded on banks books...." What does this mean? Present your answer in terms of treatment of qualifying special purpose entities (SPEs) under Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing Financial Assets and Extinguishments of Liabilities.

    3.) The author argues that current accounting standards make it difficult for investors to figure out what was going on in markets that now need bailing out. Explain this argument. In your answer, comment on the quotations from Citigroup's financial statements as provided in the article.

    4.) How might reliance on "principles-based" versus "rules-based" accounting standards contribute to solving the reporting dilemmas described in this article?

    5.) How might the use of more "principles-based standards" potentially add more "fuel to the fire" of problems associated with these special purpose entities?

    Reviewed By: Judy Beckman, University of Rhode Island

    Call to Brave to $100 Billion Rescue: Banks Seek Investors for Fund to Shore Up Commercial Paper
    by Carrick Mollenkamp, Deborah Solomon and Craig Karmin
    The Wall Street Journal
    Oct 16, 2007
    Page: C1

    Plan to Save Banks Depends on Cooperation of Investors
    by David Reilly
    The Wall Street Journal
    Oct 15, 2007
    Page: C1


    Bob Jensen's threads on accounting theory are at


    I have an article today on The Guardian website with the title "After Northern Rock". The lead line reads "The government's proposals for preventing another banking crisis are inadequate and will not work without major surgery". It is available at 

    As many of you will know Northern Rock, a UK bank, is a casualty of the subprime crisis and has been bailed out by the UK government, which could possibly cost the UK taxpayer £100 billion. My article looks at the reform proposals floated by the government to prevent a repetition. These have been formulated without any investigation of the problems. Within the space permitted, the article refers to a number of major flaws, including regulatory, auditing and governance failures, as well offshore, remuneration and moral hazard issues.

    The above may interest you and you may wish to contribute to the debate by adding comments.

    As always there is more on the AABA website (  <>  ).


    Prem Sikka
    Professor of Accounting
    University of Essex
    Colchester, Essex CO4 3SQ UK

    "Microsoft Helps Nab $900M Piracy Ring," Jessica Mintz, The Washington Post, February 8, 2008 --- Click Here

    Near-perfect knockoffs of 21 different Microsoft programs began surfacing around the world just over a decade ago.

    Soon, PCs in more than a dozen countries were running illegal copies of Windows and Office, turning unwitting consumers into criminals and, Microsoft says, exposing them to increased risk of malicious viruses and spyware.

    The case began to turn in 2001 when U.S. Customs officers seized a shipping container in Los Angeles filled with $100 million in fake software, including 31,000 copies of the Windows operating system.

    From there, Microsoft pushed the investigation through 22 countries. Local law enforcement officials seized software, equipment and records, and made arrests. A court in Taiwan handed down the last of the major sentences in December. Microsoft estimates the retail value of the software the operation generated at $900 million.

    "That is a tremendous accomplishment," said James Spertus, a former federal prosecutor in Los Angeles who later led anti-piracy efforts for the Motion Picture Association of America. "There are only going to be a few cases like this a decade."

    Now Microsoft is eager to talk about the experience because taking down that operation _ responsible for about 90 percent of the fake software the company found between 1999 and 2004, more than 470,000 disks _ didn't actually stop piracy. It just left room for more counterfeiters to rise. Microsoft hopes would-be pirates will think twice if they know how far it will go to protect the computer code worth billions in revenue each quarter.

    The pirates mimicked complex holograms stamped directly onto disks and packaging materials embedded with the kind of tiny safety threads used in making money. In some cases, it took experts with microscopes to notice that disks printed with codes used by legitimate software factories lacked certain minuscule, unique smudges.

    "The copies were so good, we went to tremendous forensic and scientific lengths to establish that the counterfeits were, in fact, counterfeits," said David Finn, an associate general counsel at Microsoft.

    Without a solid lead on the source, Microsoft continued to gather string. Members of its 80-person worldwide anti-piracy team made test buys to see if retailers were selling fake disks, knowingly or unwittingly, and worked leads back up the black-market supply chain.

    The seizure of the container in Los Angeles led to Taiwan, where the Ministry of Justice raided Chungtek Hightech, recovering an estimated $100 million more in software and equipment. Months later, Taipei city police and the criminal investigations branch of the national police hit Cinway Technology, a related manufacturer in the same industrial complex, seizing another $126 million in phony software. Records found there led to a packing, storage and shipping center in China's Guangdong province, and back to distributor Maximus Technology in Taiwan.

    Finally, in 2007, the owner and operator of Chungtek and Cinway, Chen Bi-ching, was sentenced in Taiwan to four years in prison, while her two co-defendants received jail terms of three years and one year. And the distribution outfit's owner, Huang Jer-sheng, was sentenced to four years in prison. In China, the Public Security Bureau raided the packing and shipping company, Zhang Sheng Electronics, and Li Jian, the manager, was sentenced to three years in 2004.

    Matching the Taiwanese counterfeits to copies found around the world, Microsoft gave law enforcement agencies ammunition for raids and criminal cases in the U.S., the U.K., Italy, Canada, Germany, Singapore, Australia, Paraguay and Poland. Dozens of big distributors, middlemen and retailers were convicted, including 35 people in the U.S.

    One was Lisa Chen, who according to a Customs press release arrived at the scene of the 2001 shipping container bust with additional counterfeit software in her vehicle. Chen was prosecuted by the Los Angeles district attorney's office as a major U.S. distributor of the Taiwan fakes and received a nine-year prison term in November 2002. She has since been released, according to her lawyer at the time.

    Microsoft would not say how much it spent on the investigation or how many counterfeit copies of Windows, Office and other programs were found in use on consumer or business PCs.

    Continued in article

    "Companies Avoid Financial Penalties After Massive Computer Data Breaches," by Dan Caterinicchia, The Washington Post, March 28, 2008; Page D02 ---

    "These cases bring to 20 the number of complaints in which the FTC has charged companies with security deficiencies in protecting sensitive consumer information," FTC Chairman Deborah Platt Majoras said in a release.

    TJX said last March that at least 45.7 million credit cards were exposed to possible fraud in a breach of its computer systems. Court filings by banks that sued TJX estimated the number of cards affected at more than 100 million.

    In the other case, personal information about hundreds of thousands of people held by Netherlands-based Reed Elsevier's LexisNexis unit may have been accessed in 2005 by unauthorized individuals using stolen passwords and IDs to get into Seisint databases.

    Sherry Lang, TJX's senior vice president for investor and public relations, said that the company disagreed with the FTC's allegations but that it agreed to the settlement, "which is consistent with the agreements between the FTC and other retailers that have been victimized by cyber crime."

    The Framingham, Mass., company's 2,500 stores include the T.J. Maxx and Marshalls chains.

    Continued in article

    "FSP 140-3: Plugging a Hole in GAAP, or Another Off-Balance Sheet Financing Gimmick?" by Tom Selling, The Accounting Onion, March 4, 2008 ---

     I subscribe to a listserv for professors of accounting ( ) to discuss emerging technologies, pedagogy, and pretty much anything else. One of the recent topics of discussion on the listserv had to do with the impact of accounting complexity on preparing students to become auditors. One participant in the conversation offered up the following quotation from a masters student's paper on the bogus reinsurance transactions between AIG and General Re:

    "When companies are involved in these complicated transactions, auditors often don't have the time, training, or knowledge to spot questionable items. When I audited a financial services company during my internship, I didn't really understand their business let alone the documentation that I was reviewing to ensure that controls were operating properly. So much of the work we conducted was based on mimicking the prior year's work papers that even after levels of review I believe fraud could have easily slipped by." [italics supplied]

    Coincidentally, FASB Staff Position (FSP) FAS140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, has been recently finalized; this student's lament came to my mind while I was attempting to decipher the new accounting rule.

    In order to begin to explain the FSP, you need to know that FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, contains criteria that restrict "sale accounting" on transferred financial assets when there is a concurrent purchase agreement. Consequently, “repurchase agreements” (repos) may be subject to "loan accounting" instead of sale accounting. The difference in accounting treatments is as follows: under sale accounting, the asset comes off the balance sheet and is replaced by the proceeds from sale; under loan accounting, the asset stays on the balance sheet, so the credit offset to recognition of the proceeds is to debt. So most significantly, sale accounting is off-balance sheeting financing, and loan accounting is on-balance sheet financing.

    To the financial engineer attempting to defeat the best efforts of investors and/or regulators of financial institutions, loan accounting is a bad thing, and sale accounting is good. So one important for them is how to fabricate an 'arrangement' that gets under FAS 140's fence to permit sale accounting. Thus appears to have been invented by a mortgage REIT a variation on the repo (essentially a round trip for the asset) whereby the financial instrument now makes one more trip back to the original transferee. If you're confused, this picture may help:

    Continued in article (with exhibits)

    Bob Jensen's threads on General Re and AIG are at

    Bob Jensen's threads on accounting theory are at

    Bob Jensen's threads on off balance sheet financing are at

    Are our U.S. standard setters bent transitioning to IFRS (and its loopholes )in the U.S. like fools rushing in where angels fear to tread?

    "IFRS Chaos in France: The Incredible Case of Société Générale," by Tom Selling, The Accounting Onion, March 7, 2008 ---

    IFRS Chaos in France: The Incredible Case of Société Générale "Breaking the Rules and Admitting It" is the title of Floyd Norris's column describing the accounting by Société Générale for the losses incurred by their rogue trader Jérôme Kerviel; the title is provocative enough, but it's still not adequate to describe this amazing story. Although I am reluctant to come off as a prudish American unfairly criticizing suave and sophisticated French norms, what Société and its auditors have perpetrated would be regarded here as the accounting equivalent of pornography.

    I don't aim to re-write Norris's excellent column, who rightly asks what a case like this says about the prospects for IFRS adoption in the U.S. But, I want to make two additional points. To tee them up, here's an encapsulation of the sordid tale:

    Société Générale chose to lump Kerviel's 2008 trading losses in 2007's income statement, thus netting the losses of the later year with his gains of the previous year. There is no disputing that the losses occurred in 2008, yet the company's position is that application of specific IFRS rules (very simply, marking derivatives to market) would, for reasons unstated, result in a failure of the financial statements to present a "true and fair view." You might also be interested to know that the financial statements of French companies are opined on by not just one -- but two -- yes, two -- auditors. Even by invoking the "true and fair" exception, Société Générale must still be in compliance with IFRS as both E&Y and D&T have concurred. How could both auditors be wrong? C'est imposible. The first point I want to make is that Société's motives to commit such transparent and ridiculous shenanigans are not clearly apparent from publicly available information. My unsubstantiated hunch is that it has to do with executive compensation. For example, could it be that 2007 bonuses have already been determined on same basis that did not have to include the trading losses (maybe based on stock price appreciation)? Moreover, pushing the losses back to 2007 could have bee the best way to clear the decks for 2008 bonuses, which could be based on reported earnings -- since the stock price has already tanked.

    The second point was made by Lynn Turner, former SEC Chief Accountant in a recent email. The PCAOB and SEC are considering a policy of mutual recognition of audit firms whereby the PCAOB would promise not to inspect foreign auditors opining on financial statements filed with the SEC. Instead, the U.S. investors would have to settle for the determination of foreign authorities. Thus, if the French regulators saw nothing wrong with the actions of local auditors -- even operating under the imprimaturs of EY or D&T -- then the PCAOB could not say otherwise.

    Never mind the black eye the Société debacle gives IFRS, this sordid case must surely signal the SEC that mutual recognition would be a step too far; however, I'm not counting on the current SEC leadership to get the message.

    "Loophole Lets Bank Rewrite the Calendar," by Floyd Norris, The New York Times, March 7. 2008 ---

    It is not often that a major international bank admits it is violating well-established accounting rules, but that is what Société Générale has done in accounting for the fraud that caused the bank to lose 6.4 billion euros — now worth about $9.7 billion — in January.

    In its financial statements for 2007, the French bank takes the loss in that year, offsetting it against 1.5 billion euros in profit that it says was earned by a trader, Jérôme Kerviel, who concealed from management the fact he was making huge bets in financial futures markets.

    In moving the loss from 2008 — when it actually occurred — to 2007, Société Générale has created a furor in accounting circles and raised questions about whether international accounting standards can be consistently applied in the many countries around the world that are converting to the standards.

    While the London-based International Accounting Standards Board writes the rules, there is no international organization with the power to enforce them and assure that companies are in compliance.

    In its annual report released this week, Société Générale invoked what is known as the “true and fair” provision of international accounting standards, which provides that “in the extremely rare circumstances in which management concludes that compliance” with the rules “would be so misleading that it would conflict with the objective of financial statements,” a company can depart from the rules.

    In the past, that provision has been rarely used in Europe, and a similar provision in the United States is almost never invoked. One European auditor said he had never seen the exemption used in four decades, and another said the only use he could recall dealt with an extremely complicated pension arrangement that had not been contemplated when the rules were written.

    Some of the people who wrote the rule took exception to its use by Société Générale.

    “It is inappropriate,” said Anthony T. Cope, a retired member of both the I.A.S.B. and its American counterpart, the Financial Accounting Standards Board. “They are manipulating earnings.”

    John Smith, a member of the I.A.S.B., said: “There is nothing true about reporting a loss in 2007 when it clearly occurred in 2008. This raises a question as to just how creative they are in interpreting accounting rules in other areas.” He said the board should consider repealing the “true and fair” exemption “if it can be interpreted in the way they have interpreted it.”

    Société Générale said that its two audit firms, Ernst & Young and Deloitte & Touche, approved of the accounting, as did French regulators. Calls to the international headquarters of both firms were not returned, and Société Générale said no financial executives were available to be interviewed.

    In the United States, the Securities and Exchange Commission has the final say on whether companies are following the nation’s accounting rules. But there is no similar body for the international rules, although there are consultative groups organized by a group of European regulators and by the International Organization of Securities Commissions. It seems likely that both groups will discuss the Société Générale case, but they will not be able to act unless French regulators change their minds.

    “Investors should be troubled by this in an I.A.S.B. world,” said Jack Ciesielski, the editor of The Analyst’s Accounting Observer, an American publication. “While it makes sense to have a ‘fair and true override’ to allow for the fact that broad principles might not always make for the best reporting, you need to have good judgment exercised to make it fair for investors. SocGen and its auditors look like they were trying more to appease the class of investors or regulators who want to believe it’s all over when they say it’s over, whether it is or not.”

    Not only had the losses not occurred at the end of 2007, they would never have occurred had the activities of Mr. Kerviel been discovered then. According to a report by a special committee of Société Générale’s board, Mr. Kerviel had earned profits through the end of 2007, and entered 2008 with few if any outstanding positions.

    But early in January he bet heavily that both the DAX index of German stocks and the Dow Jones Euro Stoxx index would go up. Instead they fell sharply. After the bank learned of the positions in mid-January, it sold them quickly on the days when the stock market was hitting its lowest levels so far this year.

    In its annual report, Société Générale says that applying two accounting rules — IAS 10, “Events After the Balance Sheet Date,” and IAS 39, “Financial Instruments: Recognition and Measurement” — would have been inconsistent with a fair presentation of its results. But it does not go into detail as to why it believes that to be the case.

    One rule mentioned, IAS 39, has been highly controversial in France because banks feel it unreasonably restricts their accounting. The European Commission adopted a “carve out” that allows European companies to ignore part of the rule, and Société Générale uses that carve out. The commission ordered the accounting standards board to meet with banks to find a rule they could accept, but numerous meetings over the past several years have not produced an agreement.

    Investors who read the 2007 annual report can learn the impact of the decision to invoke the “true and fair” exemption, but cannot determine how the bank’s profits would have been affected if it had applied the full IAS 39.

    It appears that by pushing the entire affair into 2007, Société Générale hoped both to put the incident behind it and to perhaps de-emphasize how much was lost in 2008. The net loss of 4.9 billion euros it has emphasized was computed by offsetting the 2007 profit against the 2008 loss.

    It may have accomplished those objectives, at the cost of igniting a debate over how well international accounting standards can be policed in a world with no international regulatory body.

    From Jim Mahar's blog on January 25, 2008 ---

    Saturday, January 26, 2008

    Kerviel joins ranks of master rogue traders:
    "In being identified as the lone wolf behind French investment bank Société Générale's staggering $7.1-billion loss Thursday, Jérôme Kerviel joined the ranks of a rare and elite handful of rogue traders whose audacious transactions have single-handedly brought some of the world's financial powerhouses to their knees.

    This notorious company includes Nick Leeson, who brought down Britain's Barings Bank in 1995 by blowing $1.4-billion, Yasuo Hamanaka, who squandered $2.6-billion on fraudulent copper deals for Sumitomo Corp. of Japan in 1998, John Rusnak, who frittered away $750-million through unauthorized currency trading for Allied Irish Bank in 2002 and Brian Hunter of Calgary, who oversaw the loss of $6-billion on hedge fund bets at Amaranth Advisors in 2006.

    Bob Jensen's threads on controversies of accounting standard setting are at

    Bob Jensen's threads on "Rotten to the Core" are at


    What is one of the most frightening thing about universal health care patterned after Medicare/Medicaid at all ages?

    Increased opportunity for massive fraud.

    Link forwarded by Rose
    "Blatant Medicare fraud costs taxpayers billions Officials say outrageous fraud schemes are 'off the charts'," by Mark Potter, MSNBC, December 11, 2007 ---

    On an FBI undercover tape, the fraud was plain to see: A patient came to a South Florida AIDS clinic, signed some papers, walked into an office and was handed $150 in cash. She politely thanked the workers and left, her visit to the doctor finished without ever receiving any treatment.

    According to records seized by investigators, the office staff (who was assured of the patient's cooperation) used her name to fraudulently bill Medicare for a list of expensive treatment and medications.

    Law enforcement officials said it's just one of the many widespread, organized and lucrative schemes to bilk Medicare out of an estimated $60 billion dollars a year — a staggering cost borne by American taxpayers.

    Officials say the array of criminals running these schemes are stealing blatantly from the social safety net that cares for 43 million seniors and the disabled, and along the way are hurting honest patients, physicians and legitimate businesses.

    "These people have absolutely nothing to do with health care," said Kirk Ogrosky, a prosecutor with the U.S. Justice Department. "They're thieves that would be committing other types of crimes if they weren't committing Medicare fraud."

    Outrageous fraud called "off the charts" While Medicare fraud is a national scourge, found primarily in large urban areas, federal authorities said the very worst of it these days is in South Florida— particularly in Miami-Dade County.

    Most of these schemes, they said, are found in the cities of Miami and Hialeah, where they are often concentrated in parts of the Cuban immigrant community.

    After visiting the region, and seeing the extent of the fraud, Michael Leavitt, the U.S. Secretary of Health and Human Services, said, "In a decade and a half of public service, this was the most disheartening, disgusting day I have ever spent. We have to fix this."

    A recent report by the inspector general for the Department of Health and Human Services noted that 72 percent of the Medicare claims submitted nationwide for HIV/AIDS treatment in 2005 came from South Florida alone. That percentage is of great concern to authorities, since only eight percent of the country's HIV/AIDS Medicare beneficiaries actually live in South Florida, a clear indication that the level of fraud was, as one official put it, "off the charts."

    To attack the fraud, the Justice Department this year set up a strike force at a remote office park near Miami, and in just six months prosecutors filed 74 cases charging 120 people with allegedly trying to steal $400 million from Medicare.

    While officials claimed the concentrated law enforcement efforts led to a $1.4 billion drop in Medicare billing in the area (another clear indication of the phony nature of many of the earlier claims), they said they have still barely scratched the surface of the fraud schemes involving bogus clinics, fake medicines, and illegitimate medical supply companies.

    "The problem is far from solved," said Timothy Delaney, a supervisor for the FBI's Miami office. "For every one owner we arrest, another one pops up, maybe even two, tomorrow. It's so lucrative that we have yet to turn the tide."

    Illegal billing for non-existent medical equipment One of the most common schemes is the illicit billing for DME, or durable medical equipment, such as oxygen generators, breathing machines, air mattresses, walkers, orthopedic braces and wheelchairs. This scheme involves billions of dollars a year in illegal claims.

    Raul Lopez, the president of the Florida Association of Medical Equipment and Services and the director of a legitimate medical supply company, said the fraud is so widespread it hurts the many valid DME companies, which are struggling to compete.

    "We're here providing services to patients that need healthcare services, and as a result of the fraud our industry is suffering enormously," he said.

    Unlike real DME companies, which have showrooms, warehouses, public offices, trained staff and professional record-keeping, the fraudulent companies are usually shell companies with shadowy business practices, hidden owners, and tiny, locked offices which are only there to create the illusion of legitimacy. They rarely have any medical products for actual sale or delivery.

    "They're lined up in hallways one after the other, office after office with a locked door, no foot traffic, no employees, no medical equipment," said Ogrosky. "We're talking about billing that goes up in the tens of millions of dollars for places that don't exist."

    FBI agents looking for suspected front-companies that Medicare records show are actively billing rarely find much to search. "We often don't see places. We find vacant lots, we see mailboxes, we see an office suite shared by 30 companies. We're not finding legitimate companies where we can go in and do a search warrant," said Delaney.

    On a recent trip to some shopping centers and office buildings in the Miami area, FBI agents Brian Waterman and Christopher Macrae knocked on the doors of several purported medical supply companies. Most of the offices were locked during business hours, with no signs of any activity. Calls to the offices went unanswered.

    Referring to one of the closed offices, Waterman said, "The amount of money in dollars that this company is billing for in the last month are close to a half million dollars. We're just trying to find out what they're billing for and what they're doing."

    Continued in article

    Bob Jensen's fraud updates are at

    Bob Jensen's "Rotten to the Core" threads are at

    "Avoid These Debit Card Traps:  New scams, fees, and traps to avoid," by Teri Cettina Close, Readers Digest, (Add Date) ---

    The Latest Target of Thieves When Brad Lipman took his family out for dinner in July 2006, he had no idea it would end up costing him $1,800. Lipman paid for the $60 meal with his debit card. After the waiter took the card, someone swiped it through a portable "skimmer." This handheld electronic device allowed the thief to copy Lipman's account information and security codes, and clone his card.

    Over the following week, the culprit drained Lipman's checking account and tapped into his overdraft line. He didn't realize anything was amiss until his credit union called him about some unusual charges. "It's hard to explain the feelings of violation," says Lipman, 40, owner of a lending company in Thousand Oaks, California. "Someone had their hand directly in my money."

    Many people wrongly assume that debit cards offer the same protection against fraud as credit cards. But when a debit card is stolen or copied, there's no grace period while you contest the charges. Your cash has already been electronically zapped from your checking account. And if it falls short, as Lipman's did, you could face expensive overdraft charges that your bank isn't required to repay.

    Debit cards have overtaken credit cards as Americans' plastic of choice for in-store transactions—33 percent debit, compared with 19 percent credit. Financial experts often recommend them as a money-management tool. Three years from now, debit card use will account for more than half our retail purchases, according to the Nilson Report, a payment-systems industry publication.

    Debit cards have become the latest target of thieves, and it's not just random cases like Lipman's. In early 2007, hundreds of customers of a national chain restaurant in Sioux City, Iowa, learned their debit card numbers had been stolen. Thieves made cloned cards and are using them in stores in California and northern Mexico. And in 2006, the TJX Companies, which owns T.J. Maxx and Marshalls, reported one of the largest customer-data breaches ever: 45.7 million debit and credit card numbers were stolen from the retailer's computer systems over an 18-month period. Authorities still don't fully know the scope.

    There's little you can do to predict a mass retail theft. But you can be smarter about how you use your card to avoid these and other common pitfalls. In addition to scams, hidden overdraft fees are at an all-time high, not to mention surprise holds and mismanagement traps that could land your account in the red faster than the ATM can spit out your receipt.

    Know When to Hold 'Em

    When Ann Agent of Portland, Oregon, was planning to attend a children's book publishing conference in Tulsa, Oklahoma, she booked her hotel room over the phone by debit card. She and three colleagues intended to split the bill and each pay the hotel directly at checkout time.

    Two days into the conference, Agent's husband called from home to read her a letter from her bank: Her checking account was overdrawn, and she was being charged $35 a day in overdraft fees. "I thought there had to be a mistake," Agent, 45, says. "I keep close track of my account balance."

    Turns out when Agent reserved the room, the hotel "blocked," or held, enough money in Agent's account to cover the entire four nights' stay, plus miscellaneous charges, amounting to $580. This blocked every available penny she had and caused her to overdraw. The charges weren't reversed until Agent returned home the following Monday.

    Holds are common practice in the travel and hospitality industry. They're the merchant's way of ensuring you'll pay your bill. If you rent a car, the agency could block several thousand dollars to make sure you return the vehicle. Some restaurants will place debit card holds for large parties, and a friendly bartender can put a hold on your card if you start a tab. The hold is usually removed within five business days, sometimes much sooner.

    Gas stations are notorious for holds. On a Friday morning in January 2005, Jessica Hathaway of Allentown, Pennsylvania, bought $22.29 of gas by debit. On Saturday, the 34-year-old single mother of three checked her bank balance and learned she was almost broke. Right before the gas station debited Hathaway's account for the gas, it imposed a $75 block.

    "I was living paycheck to paycheck. I didn't have much extra in my account, and this $75 charge worried me all weekend," she says. Hathaway was out of luck—and cash—until the following Tuesday, when her bank released the hold.

    The kind of hold Hathaway described is a standard preauthorization for signature (non-PIN) transactions. Stations vary widely in their hold amounts. Because Hathaway bought gas before the weekend, her hold may have taken longer than usual to clear.

    Avoid the Trap

    Leave your debit card at home when traveling. "People should use a credit card, even if they don't any other time," advises Clark Howard, consumer advocate and radio host of The Clark Howard Show. Never use a debit card any place your card is taken out of sight, like a restaurant. Book dinner reservations on a credit card. If you must use debit at a gas station—a hot spot for skimming—use your PIN inside or at the pump. Your card is safest if it stays in your hand, and typing in a PIN eliminates the hold.

    Be Wary on the Web Say you buy an MP3 player for $80 through an Internet discounter. You wait two weeks. Your music player never arrives, and now the seller is nowhere to be found.

    If you used your credit card to buy the player, you've got options. Under the terms of the Fair Credit Billing Act, your card company must remove the questionable charge from your bill while it investigates. The law says you're liable for up to $50, but you'll most likely end up owing nothing.

    If you paid by debit card, you're doubly out of luck: no pocket tunes for you, and your money is already gone. Under the Electronic Fund Transfer Act, your debit card issuer isn't required to step in if you make a deal with an unscrupulous merchant. You get to wrangle with the seller yourself, no matter what your bank promised when you opened your account.

    Then there's the fraud issue. Federal law generally limits your liability to no more than $50 if your debit card is stolen or copied, as long as you report the crime within two days of receiving your statement. However, if you don't notice the suspicious activity till weeks later, you may be liable for up to $500 or more. As with transaction disputes, recouping your cash isn't a sure thing.

    Avoid the Trap

    Don't use debit for online purchases, especially if you don't know the retailer's reputation, says Avivah Litan, electronic security specialist for Gartner, an information technology research firm that works with banks. Also opt for credit for all expensive items, like furniture.

    Fraud is trickier because it can strike even if you're careful. Nessa Feddis, a senior federal counsel to the American Bankers Association, recommends checking your printed statements every month. Better yet, register for online banking and track your money trail even more frequently.

    Some card issuers offer zero liability policies, meaning they won't hold customers responsible for even that first $50 in fraud charges. But they are not legally bound to do so. "We get calls from listeners who struggle for weeks to get their own money back," notes Howard. Even if a store's card reader prompts for your PIN, you can override the system by pressing Credit/Other or asking the cashier to process the sale that way. When you sign a receipt, your debit transaction piggybacks on the credit card processing system, triggering the zero liability policy to kick in.

    Steer Clear of Hidden Fees At the end of the week, most of us pull a wad of debit receipts out of our wallets and purses. Do we religiously record these amounts? Probably not. And even a $5 purchase can cause you to overdraw if your balance is tight.

    "Banks sometimes change the order of transactions at night. They take your biggest transactions and run them first," says Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. By manipulating the order of checks and debits, banks can cause you to overdraw sooner and more often than you thought, earning huge overdraft fees for themselves. Debit purchases and withdrawals are now the single largest cause of customer overdrafts, according to the Center for Responsible Lending (CRL). "Five years ago, if you didn't have enough money in your account to buy something, your card would be declined," says Leslie Parrish, a CRL senior researcher. Today banks extend "courtesy overdraft loans," the financial euphemism for letting you overdraw and then charging you for it. Charges average $34 per transaction and add up to an estimated $17.5 billion in annual fees for financial institutions, says the CRL.

    Avoid the Trap

    Link your checking account to another account in case you overdraw. The fee, if any, is much lower than overdraft loans. If you incur fees, banks will often waive them if you ask. Some banks offer e-mail or text-message alerts if your balance gets too low. That could be a warning that someone has copied your card or charged you incorrectly.

    What's Next?

    If you thought debit cards were popular now, just wait. The young tech-savvy generation is entering its prime earning and spending phase of life, and they live by their debit cards.

    All the more reason for debit card security to step up a notch. Brad Lipman, the man who lost $1,800 at a restaurant (his credit union eventually returned his money, including overdraft fees) was inspired to develop TablePay, a device that allows diners to safely swipe their debit cards right at their tables. Before long, U.S. debit card issuers may embed electronic chips in cards' magnetic strips, predicts Litan, the security specialist. These sophisticated cards are much harder to copy and use fraudulently.

    And that's good, since even fraud victims like Lipman aren't willing to part with their debit cards. "I just can't give up the convenience," he says.

    How to avoid those huge debit card fees?
    Debit cards may seem attractive to consumers who want to avoid racking up credit charges, because they appear to have the safeguard of drawing from your checking account. But it is possible to overdraw from your debit card, and the resulting fees are very high. Here's how to avoid such charges.
    Michelle Singletary, "Watch Your Debit Card Balance," NPR, July 31, 2007 ---

    Bob Jensen's threads on the dirty secrets of credit card and debit card companies are at

    "Merck to Pay Over $650 Million To Settle Pricing Suits," by Sarah Rubenstein and Avery Johnson, The Wall Street Journal, February 8, 2008; Page B4

    Merck & Co. will pay more than $650 million to settle a variety of lawsuits and probes related to past sales and marketing practices, Merck and U.S. government officials said.

    The major issue involved a practice known as "nominal pricing" in a lawsuit filed by a former Merck employee and joined by the Justice Department and all states except Arizona. The settlement allocates $218 million to the federal government and $181 million to 49 states and the District of Columbia.

    Merck also said it is paying $250 million to resolve a suit involving pricing of its heartburn drug Pepcid, filed in Louisiana by a local doctor and joined by the Justice Department and the same 49 states. In all, the company agreed to pay $649 million plus interest.

    The two men who originally sued Merck will benefit significantly from the settlements.

    Continued in article

    "Fair dues:  Corporate tax dodging places a greater burden on those least able to pay. It's time we made the multinationals play by new rules," by Prem Sikka, The Guardian, March 4, 2008 ---

    Corporations are engaged in a relentless race-to-the-bottom. Companies boost their profits and executive remuneration by diluting or abandoning employee pension schemes and tax contributions.

    The UK state pension is already one of the lowest in the western world and amount to just 17% of average earnings, compared to an average of 57% for the European Union. Nearly 30,000 pensioners die each winter because they cannot afford to heat their homes. In a United Nations study of child welfare in 21 major countries, the UK was ranked last. Yet companies and their advisers rarely reflect on their latest tax dodge and the social squalor that they create.

    HSBC infrastructure, 3iInfrastructure and Babcock and Brown Partnerships are the latest examples of Private Finance Initiative (PFI) companies creating elaborate corporate offshore structures to avoid tax. No additional wealth or economic activity is created, but the financial engineering results in low taxes to enrich a few. In the age of reverse socialism, companies are happy for the taxpayers to finance the cost of policing, security, courts, trade consuls, subsidies, embassies and the environmental clean-up, as long as they can avoid the costs. Normal people continue to bear of cost of this corporate welfare programme.

    Successive governments have done little to check the race-to-the-bottom. The UK is the world's biggest sponsor of tax havens, often known as Crown Dependencies and Overseas Territories. Their secrecy, low regulation and low tax have made them a magnet for the tax avoidance and the rules avoidance industries. The UK is legally and morally responsible for their good governance, but has done little to improve regulation or public accountability. The Treasury select committee should examine the governance of these boltholes. Given the increasing role of UK-sponsored tax havens in global tax avoidance, a special select committee could be formed to examine their role.

    The PFI companies are paid by the tax payer, but by locating their operations in tax havens, they have eroded the UK tax base. As a result, normal people have to bear a higher burden of taxes. Corporate affairs remain shrouded in secrecy. Local and central governments are the biggest spenders and should not award any public contract to companies located in tax havens. As full details of these entities are not publicly known, it is inappropriate to give them any public monies. The successful bidders for public contracts should guarantee that they would remain in the UK for the entire duration of the contract.

    In a globalised world, companies are easily able to establish residence and control in tax havens. As companies are taxed on the basis of their residence and control, they are easily able to avoid taxes in the places where they generate profits. Thus the PFI companies make money in the UK, but avoid taxes by claiming to be resident elsewhere. The easiest way of tackling this is to change the basis of taxation and tax them according to their economic activity: that is, they should pay tax in the UK on the basis of the profits made in the UK. Such an approach often known as "apportionment formula (pdf)" is already applied by states within the US and can be applied by EU member states to counter this erosion of tax authorities.

    Public information and disclosure is another way of checking this relentless descent to the bottom. All companies bidding for significant public contracts should be required to explain the taxes that they have paid in the five preceding years. Indeed, company tax returns should be publicly available so that concerned citizens can see the tax avoidance schemes and alert the authorities.

    All multinational companies should be required to adopt what is known as the country-by-country approach (pdf). Under this, they would be required to publish a table showing the jurisdictions from which they operate, together with income, profits, assets, liabilities, tax and employees in each. This would help to mobilise questions about corporate structures and tax avoidance. Thus we might see, for example, that News Corporation has lots of economic activity in the UK but pays little or no tax.

    Continued in article


    Before reading this module you may want to read about Governmental Accounting at

    Corruption, whether in government or in private industry, serves as a serious drag on a nation's wealth and creates a less favorable climate for business, says GSB Professor Ernesto Dal Bó. For one thing, corruption swells the number of employees needed, driving up costs and sidetracking workers from jobs that could help grow an economy.
    Research News, Stanford University, December 2007 ---

    "The Government Is Wasting Your Tax Dollars! How Uncle Sam spends nearly $1 trillion of your money each year," by Ryan Grim with Joseph K. Vetter, Readers Digest, January 2008, pp. 86-99 ---

    1. Taxes:
    Cheating Shows. The Internal Revenue Service estimates that the annual net tax gap—the difference between what's owed and what's collected—is $290 billion, more than double the average yearly sum spent on the wars in Iraq and Afghanistan.

    About $59 billion of that figure results from the underreporting and underpayment of employment taxes. Our broken system of immigration is another concern, with nearly eight million undocumented workers having a less-than-stellar relationship with the IRS. Getting more of them on the books could certainly help narrow that tax gap.

    Going after the deadbeats would seem like an obvious move. Unfortunately, the IRS doesn't have the resources to adequately pursue big offenders and their high-powered tax attorneys. "The IRS is outgunned," says Walker, "especially when dealing with multinational corporations with offshore headquarters."

    Another group that costs taxpayers billions: hedge fund and private equity managers. Many of these moguls make vast "incomes" yet pay taxes on a portion of those earnings at the paltry 15 percent capital gains rate, instead of the higher income tax rate. By some estimates, this loophole costs taxpayers more than $2.5 billion a year.

    Oil companies are getting a nice deal too. The country hands them more than $2 billion a year in tax breaks. Says Walker, "Some of the sweetheart deals that were negotiated for drilling rights on public lands don't pass the straight-face test, especially given current crude oil prices." And Big Oil isn't alone. Citizens for Tax Justice estimates that corporations reap more than $123 billion a year in special tax breaks. Cut this in half and we could save about $60 billion.

    The Tab* Tax Shortfall: $290 billion (uncollected taxes) + $2.5 billion (undertaxed high rollers) + $60 billion (unwarranted tax breaks) Starting Tab: $352.5 billion

    2. Healthy Fixes.
    Medicare and Medicaid, which cover elderly and low-income patients respectively, eat up a growing portion of the federal budget. Investigations by Sen. Tom Coburn (R-OK) point to as much as $60 billion a year in fraud, waste and overpayments between the two programs. And Coburn is likely underestimating the problem.

    The U.S. spends more than $400 per person on health care administration costs and insurance -- six times more than other industrialized nations.

    That's because a 2003 Dartmouth Medical School study found that up to 30 percent of the $2 trillion spent in this country on medical care each year—including what's spent on Medicare and Medicaid—is wasted. And with the combined tab for those programs rising to some $665 billion this year, cutting costs by a conservative 15 percent could save taxpayers about $100 billion. Yet, rather than moving to trim fat, the government continues such questionable practices as paying private insurance companies that offer Medicare Advantage plans an average of 12 percent more per patient than traditional Medicare fee-for-service. Congress is trying to close this loophole, and doing so could save $15 billion per year, on average, according to the Congressional Budget Office.

    Another money-wasting bright idea was to create a giant class of middlemen: Private bureaucrats who administer the Medicare drug program are monitored by federal bureaucrats—and the public pays for both. An October report by the House Committee on Oversight and Government Reform estimated that this setup costs the government $10 billion per year in unnecessary administrative expenses and higher drug prices.

    The Tab* Wasteful Health Spending: $60 billion (fraud, waste, overpayments) + $100 billion (modest 15 percent cost reduction) + $15 billion (closing the 12 percent loophole) + $10 billion (unnecessary Medicare administrative and drug costs) Total $185 billion Running Tab: $352.5 billion +$185 billion = $537.5 billion

    3. Military Mad Money.
    You'd think it would be hard to simply lose massive amounts of money, but given the lack of transparency and accountability, it's no wonder that eight of the Department of Defense's functions, including weapons procurement, have been deemed high risk by the GAO. That means there's a high probability that money—"tens of billions," according to Walker—will go missing or be otherwise wasted.

    The DOD routinely hands out no-bid and cost-plus contracts, under which contractors get reimbursed for their costs plus a certain percentage of the contract figure. Such deals don't help hold down spending in the annual military budget of about $500 billion. That sum is roughly equal to the combined defense spending of the rest of the world's countries. It's also comparable, adjusted for inflation, with our largest Cold War-era defense budget. Maybe that's why billions of dollars are still being spent on high-cost weapons designed to counter Cold War-era threats, even though today's enemy is armed with cell phones and IEDs. (And that $500 billion doesn't include the billions to be spent this year in Iraq and Afghanistan. Those funds demand scrutiny, too, according to Sen. Amy Klobuchar, D-MN, who says, "One in six federal tax dollars sent to rebuild Iraq has been wasted.")

    Meanwhile, the Pentagon admits it simply can't account for more than $1 trillion. Little wonder, since the DOD hasn't been fully audited in years. Hoping to change that, Brian Riedl of the Heritage Foundation is pushing Congress to add audit provisions to the next defense budget.

    If wasteful spending equaling 10 percent of all spending were rooted out, that would free up some $50 billion. And if Congress cut spending on unnecessary weapons and cracked down harder on fraud, we could save tens of billions more.

    The Tab* Wasteful military spending: $100 billion (waste, fraud, unnecessary weapons) Running Tab: $537.5 billion + $100 billion = $637.5 billion

    4. Bad Seeds.
    The controversial U.S. farm subsidy program, part of which pays farmers not to grow crops, has become a giant welfare program for the rich, one that cost taxpayers nearly $20 billion last year.

    Two of the best-known offenders: Kenneth Lay, the now-deceased Enron CEO, who got $23,326 for conservation land in Missouri from 1995 to 2005, and mogul Ted Turner, who got $590,823 for farms in four states during the same period. A Cato Institute study found that in 2005, two-thirds of the subsidies went to the richest 10 percent of recipients, many of whom live in New York City. Not only do these "farmers" get money straight from the government, they also often get local tax breaks, since their property is zoned as agricultural land. The subsidies raise prices for consumers, hurt third world farmers who can't compete, and are attacked in international courts as unfair trade.

    The Tab* Wasteful farm subsidies: $20 billion Running Tab: $637.5 billion + $20 billion = $657.5 billion

    5. Capital Waste.
    While there's plenty of ongoing annual operating waste, there's also a special kind of profligacy—call it capital waste—that pops up year after year. This is shoddy spending on big-ticket items that don't pan out. While what's being bought changes from year to year, you can be sure there will always be some costly items that aren't worth what the government pays for them.

    Take this recent example: Since September 11, 2001, Congress has spent more than $4 billion to upgrade the Coast Guard's fleet. Today the service has fewer ships than it did before that money was spent, what 60 Minutes called "a fiasco that has set new standards for incompetence." Then there's the Future Imagery Architecture spy satellite program. As The New York Times recently reported, the technology flopped and the program was killed—but not before costing $4 billion. Or consider the FBI's infamous Trilogy computer upgrade: Its final stage was scrapped after a $170 million investment. Or the almost $1 billion the Federal Emergency Management Agency has wasted on unusable housing. The list goes on.

    The Tab* Wasteful Capital Spending: $30 billion Running Tab: $657.5 billion + $30 billion = $687.5 billion

    6. Fraud and Stupidity.
    Sen. Chuck Grassley (R-IA) wants the Social Security Administration to better monitor the veracity of people drawing disability payments from its $100 billion pot. By one estimate, roughly $1 billion is wasted each year in overpayments to people who work and earn more than the program's rules allow.

    The federal Food Stamp Program gets ripped off too. Studies have shown that almost 5 percent, or more than $1 billion, of the payments made to people in the $30 billion program are in excess of what they should receive.

    One person received $105,000 in excess disability payments over seven years.

    There are plenty of other examples. Senator Coburn estimates that the feds own unused properties worth $18 billion and pay out billions more annually to maintain them. Guess it's simpler for bureaucrats to keep paying for the property than to go to the trouble of selling it.

    The Tab* General Fraud and Stupidity: $2 billion (disability and food stamp overpayment) Running Tab: $687.5 billion + $2 billion = $689.5 billion

    7. Pork Sausage.
    Congress doled out $29 billion in so-called earmarks—aka funds for legislators' pet projects—in 2006, according to Citizens Against Government Waste. That's three times the amount spent in 1999. Congress loves to deride this kind of spending, but lawmakers won't hesitate to turn around and drop $500,000 on a ballpark in Billings, Montana.

    The most infamous earmark is surely the "bridge to nowhere"—a span that would have connected Ketchikan, Alaska, to nearby Gravina Island—at a cost of more than $220 million. After Hurricane Katrina struck New Orleans, Senator Coburn tried to redirect that money to repair the city's Twin Span Bridge. He failed when lawmakers on both sides of the aisle got behind the Alaska pork. (That money is now going to other projects in Alaska.) Meanwhile, this kind of spending continues at a time when our country's crumbling infrastructure—the bursting dams, exploding water pipes and collapsing bridges—could really use some investment. Cutting two-thirds of the $29 billion would be a good start.

    The Tab* Pork Barrel Spending: $20 billion Running Tab: $689.5 billion + $20 billion = $709.5 billion

    8. Welfare Kings.
    Corporate welfare is an easy thing for politicians to bark at, but it seems it's hard to bite the hand that feeds you. How else to explain why corporate welfare is on the rise? A Cato Institute report found that in 2006, corporations received $92 billion (including some in the form of those farm subsidies) to do what they do anyway—research, market and develop products. The recipients included plenty of names from the Fortune 500, among them IBM, GE, Xerox, Dow Chemical, Ford Motor Company, DuPont and Johnson & Johnson.

    The Tab* Corporate Welfare: $50 billion Running Tab: $709.5 billion + $50 billion = $759.5 billion

    9. Been There,
    Done That. The Rural Electrification Administration, created during the New Deal, was an example of government at its finest—stepping in to do something the private sector couldn't. Today, renamed the Rural Utilities Service, it's an example of a government that doesn't know how to end a program. "We established an entity to electrify rural America. Mission accomplished. But the entity's still there," says Walker. "We ought to celebrate success and get out of the business."

    In a 2007 analysis, the Heritage Foundation found that hundreds of programs overlap to accomplish just a few goals. Ending programs that have met their goals and eliminating redundant programs could comfortably save taxpayers $30 billion a year.

    The Tab* Obsolete, Redundant Programs: $30 billion Running Tab: $759.5 billion + $30 billion = $789.5 billion

    10. Living on Credit.
    Here's the capper: Years of wasteful spending have put us in such a deep hole, we must squander even more to pay the interest on that debt. In 2007, the federal government carried a debt of $9 trillion and blew $252 billion in interest. Yes, we understand the federal government needs to carry a small debt for the Federal Reserve Bank to operate. But "small" isn't how we would describe three times the nation's annual budget. We need to stop paying so much in interest (and we think cutting $194 billion is a good target). Instead we're digging ourselves deeper: Congress had to raise the federal debt limit last September from $8.965 trillion to almost $10 trillion or the country would have been at legal risk of default. If that's not a wake-up call to get spending under control, we don't know what is.

    The Tab* Interest on National Debt: $194 billion Final Tab: $789.5 billion + $194 billion = $983.5 billion

    What YOU Can Do Many believe our system is inherently broken. We think it can be fixed. As citizens and voters, we have to set a new agenda before the Presidential election. There are three things we need in order to prevent wasteful spending, according to the GAO's David Walker:

    • Incentives for people to do the right thing.

    • Transparency so we can tell if they've done the right thing.

    • Accountability if they do the wrong thing.

    Two out of three won't solve our problems.

    So how do we make it happen? Demand it of our elected officials. If they fail to listen, then we turn them out of office. With its approval rating hovering around 11 percent in some polls, Congress might just start paying attention.

    Start by writing to your Representatives. Talk to your family, friends and neighbors, and share this article. It's in everybody's interest.

    "Taxpayers distrustful of government financial reporting," AccountingWeb, February 22, 2008 ---

    The federal government is failing to meet the financial reporting needs of taxpayers, falling short of expectations, and creating a problem with trust, according to survey findings released by the Association of Government Accountants (AGA). The survey, Public Attitudes to Government Accountability and Transparency 2008, measured attitudes and opinions towards government financial management and accountability to taxpayers. The survey established an expectations gap between what taxpayers expect and what they get, finding that the public at large overwhelmingly believes that government has the obligation to report and explain how it generates and spends its money, but that that it is failing to meet expectations in any area included in the survey.

    The survey further found that taxpayers consider governments at the federal, state, and local levels to be significantly under-delivering in terms of practicing open, honest spending. Across all levels of government, those surveyed held "being open and honest in spending practices" vitally important, but felt that government performance was poor in this area. Those surveyed also considered government performance to be poor in terms of being "responsible to the public for its spending." This is compounded by perceived poor performance in providing understandable and timely financial management information.

    The survey shows:

  • The American public is most dissatisfied with government financial management information disseminated by the federal government. Seventy-two percent say that it is extremely or very important to receive this information from the federal government, but only 5 percent are extremely or very satisfied with what they receive.


  • Seventy-three percent of Americans believe that it is extremely or very important for the federal government to be open and honest in its spending practices, yet only 5 percent say they are meeting these expectations.


  • Seventy-one percent of those who receive financial management information from the government or believe it is important to receive it, say they would use the information to influence their vote.

    Relmond Van Daniker, Executive Director at AGA, said, "We commissioned this survey to shed some light on the way the public perceives those issues relating to government financial accountability and transparency that are important to our members. Nobody is pretending that the figures are a shock, but we are glad to have established a benchmark against which we can track progress in years to come."

    He continued, "AGA members working in government at all levels are in the very forefront of the fight to increase levels of government accountability and transparency. We believe that the traditional methods of communicating government financial information -- through reams of audited financial statements that have little relevance to the taxpayer -- must be supplemented by government financial reporting that expresses complex financial details in an understandable form. Our members are committed to taking these concepts forward."

    Justin Greeves, who led the team at Harris Interactive that fielded the survey for the AGA, said, "The survey results include some extremely stark, unambiguous findings. Public levels of dissatisfaction and distrust of government spending practices came through loud and clear, across every geography, demographic group, and political ideology. Worthy of special note, perhaps, is a 67 percentage point gap between what taxpayers expect from government and what they receive. These are significant findings that I hope government and the public find useful."

    This survey was conducted online within the United States by Harris Interactive on behalf of the Association of Government Accountants between January 4 and 8, 2008 among 1,652 adults aged 18 or over. Results were weighted as needed for age, sex, race/ethnicity, education, region, and household income. Propensity score weighting was also used to adjust for respondents' propensity to be online. No estimates of theoretical sampling error can be calculated.

    You can read the Survey Report, including a full methodology and associated commentary.


    The Most Criminal Class is Writing the Laws ---

    Update on Frauds from That Perfect Storm for Cheaters

    "9th ward activist to be sentenced in mortgage scam," by Susan Finch, The Times Picayune, February 26, 2008 ---

    Robert Green, who became a symbol of suffering and resilience in the Lower 9th Ward after Hurricane Katrina, will be sentenced in federal court Wednesday for his role in a house-flipping scam before the 2005 storm.

    Green's personal experience when floodwaters poured into his neighborhood through a break in a levee has become emblematic of the misery many others suffered: his home was destroyed and he lost two family members: his 73 year-old mother and a 3 year-old granddaughter.

    But according to federal prosecutors -- and by his own admission in a guilty plea last spring -- Green used his skills as a preparer of income tax returns to help further a scheme that left the federal government responsible for paying off hundreds of thousands of dollars in home mortgages defaulted on by borrowers who used false tax returns prepared by Green to qualify for federally insured loans.

    Green, the sixth person convicted in the scam allegedly endorsed by Citywide Mortgage Co. owner Michael O'Keefe Jr., could be sentenced to as much as five years in prison and fined up to $250,000. Green pleaded guilty in a deal with prosecutors that requires him to testify for the government if called on to do so.

    Green said today he's sorry that he broke the law and that the federal government lost money as a result. He said the sentencing is "something I have to deal with."

    Continued in article

    Bob Jensen's fraud updates are at

    "Jury Finds Former Insurance Executives Guilty," The New York Times, February 25, 2008 ---

    A Connecticut jury found five former insurance company executives guilty Monday of a scheme to manipulate the financial statements of the world's largest insurance company.

    The verdict came in the seventh day of jury deliberations following a month long trial in federal court.

    The defendants, four former executives of General Re Corp. and a former executive of American International Group Inc., sat stone-faced as the verdict was read. They were accused of inflating AIG's (NYSE:AIG) reserves through reinsurance deals by $500 million in 2000 and 2001 to artificially boost its stock price.

    The defendants were former General Re CEO Ronald Ferguson; former General Re Senior Vice President Christopher P. Garand; former General Re Chief Financial Officer Elizabeth Monrad; and Robert Graham, a General Re senior vice president and assistant general counsel from about 1986 through October 2005.

    Also charged was Christian Milton, AIG's vice president of reinsurance from about April 1982 until March 2005.

    Ferguson, Monrad, Milton and Graham each face up to 230 years in prison and a fine of up to $46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.

    "This is a very sad day, not only for Ron Ferguson, but for our criminal justice system," Clifford Schoenberg, Ferguson's personal attorney, said in a statement distributed at U.S. District Court in Hartford. "I and the rest of Ron's legal team will not rest until we see him -- and justice -- vindicated."

    Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.

    Prosecutors said AIG Chief Executive Maurice "Hank" Greenberg was an unindicted coconspirator in the case. Greenberg has not been charged and has denied any wrongdoing, but allegations of accounting irregularities, including the General Re transactions, led to his resignation in 2005.

    Continued in article

    Bob Jensen's fraud updates are at

    Bob Jensen's threads on insurance frauds are at

    Jury Orders U. of Phoenix Parent to Pay $277 Million
    With a major lawsuit challenging its admissions practices looming on the horizon, the Apollo Group — parent of the University of Phoenix — took a beating in another legal proceeding Wednesday. A federal jury in Arizona ordered Apollo to pay an estimated $277.5 million to shareholders who sued the higher education company and two former executives in 2004 for securities fraud. The lawsuit alleged that company officials withheld a harshly critical U.S. Education Department report in February 2004 that accused Apollo of violating a federal prohibition against paying recruiters based on the number of students they enrolled. The company did not disclose the report in its Securities and Exchange Commission filings or in calls with analysts or reporters for months. When the company finally released the preliminary report, in September when it announced a $9.8 million settlement with the Education Department, its stock took a dive. That month, a group of shareholders, led by the Policemen’s Annuity and Benefit Fund of Chicago, sued the company under federal securities fraud laws, seeking to recoup the money they said they had lost.
    Doug Lederman, Inside Higher Ed, January 17, 2008 ---

    "NIH Doesn't Check Academics on Financial Conflicts of Interest, Auditors Say," by Jeffrey Brainard, Chronicle of Higher Education, January 21, 2008 ---

    The National Institutes of Health has failed to adequately oversee hundreds of financial conflicts of interest among university biomedical researchers, partly because the reports universities sent the agency about the conflicts lacked any details, according to a new audit.

    The NIH rarely asks universities to provide missing details about the nature of the conflicts and how they were resolved, information that the agency needs to determine whether universities acted properly, said the inspector general of the Department of Health and Human Services. The agency "should take a more active role" and obtain and evaluate that information more often, the inspector general said in the audit, released on Thursday. (The department is the NIH's parent agency.)

    The NIH disagreed in a response. The existing system for reporting conflicts, which largely relies on universities to police themselves, provides "an appropriate framework for the effective management" of them, the agency said. NIH officials asserted, and the audit report agreed, that the agency was following the letter of existing regulations, which require only reporting of the conflicts' existence, without details.

    But one bioethicist observed that if universities' reports contain no useful information, their submission is a pointless, bureaucratic exercise. Jeffrey P. Kahn, director of the Center for Bioethics at the University of Minnesota-Twin Cities, said the NIH "has no evidence to support their assertion that things are working fine."

    Continued in article

    Federal Monitor Finds Health-Sciences U. in N.J. Lacks Research Compliance
    Despite receiving a much-improved bill of health this month from a federal monitor, the University of Medicine and Dentistry of New Jersey’s troubles may not be over. A previously undisclosed portion of the monitor’s report — which was released as federal oversight of the university ended after two years — found that the institution had “no research compliance capability,” according to The Star-Ledger, a newspaper in New Jersey.
    Chronicle of Higher Education, January 21, 2008 --- Click Here

    Bob Jensen's threads on college accountability are at

    Broken Promises and Pork Binges
    The Democratic majority came to power in January promising to do a better job on earmarks. They appeared to preserve our reforms and even take them a bit further. I commended Democrats publicly for this action. Unfortunately, the leadership reversed course. Desperate to advance their agenda, they began trading earmarks for votes, dangling taxpayer-funded goodies in front of wavering members to win their support for leadership priorities.

    John Boehner, "Pork Barrel Stonewall," The Wall Street Journal, September 27, 2007 ---

    "Earmarks Again Eat Into the Amount Available for Merit-Based Research, Analysis Finds," by Jeffrey Brainard, Chronicle of Higher Education, January 9, 2008 ---

    After a one-year moratorium for most earmarks, Congress resumed directing noncompetitive grants for scientific research to favored constituents, including universities, this year, a new analysis says.

    Spending for nondefense research fell by about one-third in the 2008 fiscal year, compared with 2006, but the earmarked money nevertheless ate into sums available for traditional, merit-reviewed grants, the analysis by the American Association for the Advancement of Science found.

    In all, Congress earmarked $4.5-billion for 2,526 research projects in appropriations bills for 2008, according to the AAAS. Legislators approved the measures in November and December, and President Bush signed them.

    More important, lawmakers increased spending for earmarks in federal research-and-development programs by a greater amount than they added to the programs for all purposes, the AAAS reported. That will result in a net decrease in money available for nonearmarked research grants, which federal agencies typically distributed based on merit and competition.

    For example, Congress added $2.1-billion to the Pentagon's overall request for basic and applied research and for early technology development, but lawmakers also specified an even-larger amount, $2.2-billion, for earmarked projects in those same accounts.

    For nondefense research projects, Congress showed restraint in earmarking, providing only $939-million in the 2008 fiscal year, which began in October. That was down from about $1.5-billion in 2006 and appeared to reflect a pledge by Congressional Democrats to reduce the total number of earmarks.

    For the Pentagon, total spending on research earmarks of all kinds reached $3.5-billion, much higher than the $911-million tallied by the AAAS in 2007. (Pentagon earmarks were among the only kind financed by Congress that year.) However, the apparent increase was largely the result of an accounting change: For 2008, Congress mandated increased disclosure of earmarks, a change that especially affected the tally of Pentagon earmarks, said Kei Koizumi, director of the association's R&D Budget and Policy Program. Adjusting for that change, the total number of Defense Department earmarks appears to have fallen in 2008, he said.

    As in past years, lawmakers avoided earmarking budgets for the National Institutes of Health and the National Science Foundation, the two principal sources of federal funds for academic research. The Departments of Energy and Agriculture were the most heavily earmarked domestic research agencies. After being earmark-free for the first years of its existence, the Department of Homeland Security got $82-million in research-and-development earmarks for 2008.

    The AAAS did not report how much of the earmarked research money will go to colleges, but academic institutions have traditionally gotten most of it. Some research earmarks go to corporations and federal laboratories. In addition, many colleges obtain earmarks for nonresearch projects, like renovating dormitories and classroom buildings, but the AAAS does not track that spending.

    Academic earmarks more than quadrupled from 1996 to 2003, The Chronicle found. The practice is controversial because some critics see it as circumventing peer review and supporting projects of dubious quality. Supporters call earmarks the only way to finance some types of worthy projects not otherwise supported by the federal government.

    When Jeff Flake was elected to Congress in 2000 from Arizona’s Sixth Congressional District with the hope of “effectively advanc[ing] the principles of limited government, economic freedom, and individual responsibility,” he was a relatively unknown entity outside Arizona. Some may have dismissed the Arizona newbie as just another congressman out of a 435-member body, but that would have been a big mistake.Over his seven years in the House, the mild-mannered contrarian has become the bane of porkers everywhere. To the chagrin of his congressional colleagues, the Arizona representative has made a career out of targeting some of Congress’s most outrageous pork projects by introducing amendments to eliminate those projects from congressional spending bills. In 2006, Flake introduced nineteen amendments, putting each member of Congress on record either in favor or in opposition to spending taxpayer dollars on such crucial projects as the National Grape and Wine Initiative, a swimming pool in California, and hydroponic tomato production in Ohio.
    Pat Toomey, "Make It Flake! An appropriating move," National Review, January 17, 2008 --- Click Here
    Jensen Comment
    Jeff Flake is a thorn in Majority Speaker Nancy Pelosi's side as she agrees to earmarks in order to grease legislation through the House. It's really hard to manage a bunch of thieves  without giving them something to steal.

    Bob Jensen's threads on higher education controversies are at

    Yawn:  Just Billions More in World Bank Frauds Coming to Light
    Corruption is an endemic problem in bank projects, swallowing unknown but significant chunks from its $30 billion-plus annual portfolio. No less a problem has been the bank staff's ferocious resistance to anything that might stand in the way of its lending ever more money to projects run by the same governments that tolerate this malfeasance. Yet nothing we've seen so far can compare to what has now been uncovered about five health projects in India, involving $569 million in loans. The projects were the subject of a "Detailed Implementation Review," a lengthy forensic examination undertaken by Ms. Folsom's Department of Institutional Integrity, known within the bank as INT. As of this writing the bank has not publicly released the review, though it's been shared with the bank's board. But we've seen a copy and are posting its executive summary on  and   (click here to see it).
    "World Bank Disgrace," The Wall Street Journal, January 14, 2008; Page A12 ---

    Why doesn't Section 401 of the Sarbanes-Oxley Act apply to attestation of internal controls in the World Bank?

    "World Bank Reckoning," The Wall Street Journal, September 13, 2007; Page A16 ---

    Since we're talking about the world's second most out-of-control international bureaucracy -- no prizes for guessing the first -- we shouldn't get our hopes up. But in the past week some prominent outsiders have been forcing the World Bank to reckon with the alien concept of accountability. Now it's up to new bank President Robert Zoellick to see that their efforts bear fruit.

    First up is former Federal Reserve Chairman Paul Volcker. For the past five months, Mr. Volcker and a panel of international experts have been conducting an independent review of the Department of Institutional Integrity, the bank's anticorruption unit known internally as the INT. Their report, which readers can find on, is being released to the public today.

    In sober and measured terms, Mr. Volcker's report provides a devastating indictment of what it calls the bank's "ambivalence" toward both corruption and its own anticorruption unit. "There was then, and remains now, resistance among important parts of the Bank staff and some of its leadership to the work of INT," the report says (our emphasis).

    It goes on to say that, "Some resistance is more parochial. There is a natural discomfort among some line staff, who are generally encouraged by the pay and performance evaluation system to make loans for promising projects, to have those projects investigated ex post, exposed as rife with corruption, creating an awkward problem in relations with borrowing clients." To put it more plainly, the report is saying that every incentive at the bank is to push more money out the door, and bank employees hate the anticorruption effort because it interferes with that imperative.

    The report endorses the work of the INT, which was created a mere six years ago and which has been under what it calls a "particularly strong" institutional attack ever since. The INT, the Volcker panel says, "is staffed by competent and dedicated investigators who work hard and long hours with professionalism" and deploy "advanced investigative methods to detect and substantiate allegations of fraud and corruption." And it goes on to recommend that the anticorruption crusaders "should be nurtured and maintained as an exemplary investigative organization" within the bank.

    In a phone interview yesterday, Mr. Volcker added that he gives "high marks" to current INT director Suzanne Rich Folsom. Mr. Volcker's endorsement should stop cold the recent attempts by some in the bank's entrenched bureaucracy to run Ms. Folsom out of the bank, as they did Paul Wolfowitz.

    The bank is also being put on notice by the U.S. Senate through provisions in its foreign operations appropriations bill. The provision threatens to withhold 20% of U.S. funds to the bank's International Development Association arm (which provides interest-free loans to the world's poorest countries) until it is assured that the bank "has adequately staffed and sufficiently funded the Department of Institutional Integrity." The bill also demands that the bank provide "financial disclosure forms of all senior World bank personnel." Now, that will get the bureaucracy's attention.

    Notably, it's a Democrat -- Evan Bayh of Indiana -- who's taken the lead on this issue. Mr. Bayh has ordered a Government Accountability Office report on the effectiveness of IDA loans and their susceptibility to corruption, the bank's procurement procedures, as well as the legendary pay packages enjoyed by its senior management. "There's a tendency [at the bank] to say 'just give us the money and go away,'" the Senator told us by phone yesterday. "Until there are some tangible consequences, they won't take us seriously. We shouldn't let that happen."

    Continued in article

    January 15, 2008 reply from Randy Kuhn [jkuhn@BUS.UCF.EDU]

    I am in no way surprised. As a part of the Deloitte audit team the first year after we “won” the engagement, I can clearly speak on the attitudes displayed by some World Bank staffers. The CFO at the time was an ex-employee of the previous auditing firm and frankly treated us with utter contempt repeatedly commenting on how much better the other firm was. I was not permitted to speak or ask questions in any Bank meetings that I attended (direct order from the CFO). If I wanted clarification on anything, I needed to schedule time with staffers through a central person. Even when formally scheduled, staffers would blow me off and tell me to reschedule when I arrived at the agreed upon time and the firm ate the costs of these inefficiencies. Due to confidentiality reasons, I cannot reveal any of the control weaknesses but, in general, there was either an overall lack of appreciation for the value of internal controls or lack of understanding of their purpose. As more issues like these are revealed, however, I am led to believe there might have been other underlying reasons for the constant battles we faced auditing the Bank.

    Bob Jensen's "Rotten to the Core" threads are at

    Note that there's a pretty good summary of the Sarbanes-Oxley Act at

    Buffett Won’t Be Witness in Fraud Trial
    Defense lawyers rested their case at the fraud trial of General Reinsurance executives accused of helping the American International Group mislead investors, without jurors hearing from the billionaire investor Warren E. Buffett. Closing arguments are scheduled for Monday, and the case is expected to go to the jury shortly after that. Mr. Buffett’s holding company, Berkshire Hathaway, owns General Re. In the case, four former executives from General Reinsurance and one from A.I.G. are accused of conspiring on a transaction that let A.I.G. inflate loss reserves by $500 million in 2000 and 2001. Lawyers for two defendants presented character witnesses on Thursday.
    "Buffett Won’t Be Witness in Fraud Trial," Bloomberg News via The New York Times, February 8, 2008 ---

    Accounting Fraud Can Cost Billions
    AIG is close to a deal involving a payment of at least $1.5 billion to resolve accounting fraud and other allegations with federal and state authorities. The expected agreement could be the largest finance-industry regulatory settlement with a single company in U.S. history.
    Kara Scannell and Ian McDonald, "AIG Close to Deal To Settle Charges, Pay $1.5 Billion," The Wall Street Journal, February 6, 2006; Page C1 ---

    Bob Jensen's threads on the A.I.G. frauds are at 

    Update on Professors Who Cheat

    "Columbia U. Professor Denies Plagiarism, Saying Accusers Instead Stole Her Work," by Thomas Bartlett, Chronicle of Higher Education, February 22, 2008 --

    A Columbia University professor who was found to have committed numerous acts of plagiarism struck back at her accusers on Thursday, saying it was they who stole her work and accusing administrators of blackmail and intimidation.

    In a lengthy interview with The Chronicle, Madonna G. Constantine, a professor of psychology and education at Columbia's Teachers College, spelled out her side of the story. She said she believes that her accusers are motivated by professional envy and possibly racism. Ms. Constantine also contended that the president of Teachers College, Susan H. Fuhrman, is biased against her.

    As for the alleged plagiarism itself, Ms. Constantine insisted that her work was finished first and that she was the victim of academic fraud. In a written statement, she said she had "documentary proof that my scholarly work under question was started and completed well before the accusers' own work."

    Ms. Constantine promised to provide that proof once all the materials had been gathered. She plans to submit her evidence to a faculty appeals committee, which will then make a nonbinding recommendation to the president of the Teachers College.

    A law firm hired by the university concluded, after an 18-month investigation, that Ms. Constantine had plagiarized the work of two former students and a former colleague. As part of that investigation, Ms. Constantine was allowed to submit a rebuttal to the complaints against her. The law firm investigating the matter, Hughes Hubbard & Reed LLP, found that the evidence she presented was not credible.

    As a result of the investigation, the university reduced her salary and, according to Ms. Constantine, asked for her resignation, which she declined to give. A university spokeswoman could not confirm that the university asked for the professor's resignation.

    Ms. Constantine, however, argues that the investigation was biased and that she was not given a full opportunity to make her case. She also questions the neutrality of the investigation because her three accusers were given indemnity—a fact, she argues, that proves that they received favorable treatment.

    But, according to Christine Yeh, a former associate professor at Teachers College whose work Ms. Constantine was found to have copied, she and the two former students insisted on such protections in case Ms. Constantine filed a lawsuit—which she had previously threatened to do. The agreement with the university did not protect them from charges of plagiarism, had the law firm discovered that they were to blame. But Columbia did agree to defend them if they were to be sued.

    Who Saw What When?

    Untangling the opposing allegations is difficult. The two former students both say Ms. Constantine stole their unpublished work and published it as her own. Ms. Constantine says it was the other way around.

    In the case of the accusation by Ms. Yeh, who now teaches at the University of San Francisco, Ms. Constantine's paper was published in 2004, several months before Ms. Yeh's. Both papers focused on indigenous healing. Ms. Yeh's research has long centered around indigenous healing, and drafts of her paper had circulated as early as 2001 in the department of counseling and clinical psychology, where both women taught.. In addition, Ms. Yeh's co-authors had presented a version of the paper at a meeting of the American Psychological Association in 2002.

    It would have been easy, Ms. Yeh says, for Ms. Constantine to get a copy of an earlier draft.

    Ms. Constantine says Ms. Yeh must have obtained a copy of a proposal she sent to the editor of the journal that published her paper. She did not know how Ms. Yeh might have obtained that proposal.

    For Ms. Yeh, the study of indigenous healing has been a lifelong endeavor. Her father, now deceased, was a professor at Villanova University and studied indigenous healing himself. When he was ill, she used energy-healing techniques to help him. "The idea that I would make this up or steal her work when I have been doing this for so long is ridiculous," she said.

    Nearly Identical Language

    One of the former graduate students, Tracy Juliao, says Ms. Constantine borrowed a number of passages from her dissertation on the multiple roles of women for a paper the professor published in 2006 in the journal Professional School Counseling. The two documents share many of the same ideas, along with examples of identical or near-identical language.

    For instance, here is an excerpt from Ms. Juliao's dissertation, which was completed in 2004 and published the following year:

    "The theory acknowledges that different roles might come into conflict with one another, but proposes that adjusting the entire system of roles to accommodate the conflicts will produce more rewarding results."

    And here is a passage from Ms. Constantine's 2006 paper:

    "Role balance theory acknowledges that different roles might come into conflict with each other, but women's ability to adjust their entire system of roles to accommodate potential conflicts will likely produce more rewarding results."

    Several other examples of parallels between the two documents were provided to The Chronicle. And Ms. Yeh confirmed that Ms. Juliao had been working in the area of multiple roles of women since 2000. For a time, Ms. Constantine was Ms. Juliao's academic adviser, and the two discussed her research. And, as a faculty member, Ms. Constantine would have had access to student dissertations before they were published.

    Ms. Constantine says she did not see Ms. Juliao's dissertation until the fall of 2006, after her paper was published. She says they both talked about their ideas freely. Ms. Constantine could not explain how Ms. Juliao would have been able to copy her paper several years before it was published.

    Ms. Juliao says she had no clue, until she saw the paper, that Ms. Constantine might be copying her work. "This is very personal to me," she said. "I have pictures of her playing with my daughter on graduation day. Just looking at that makes me sick to my stomach now."

    Assertions About the Role of Race

    The accusations and the resulting investigation are part of what Ms. Constantine terms a "conspiracy" and a "witch hunt."

    "There are people working behind the scenes collectively, as a unit, to create distress and dissension and to bring people down," Ms. Constantine said on Thursday.

    Among those people, according to Ms. Constantine, is Ms. Fuhrman, the president of Teachers College. Ms. Constantine said she did not know why Ms. Fuhrman disliked her. However, she cited a memorandum about the plagiarism investigation that was sent to faculty members earlier this week as proof of animus from the administration. The fact that the memo was hand-delivered, rather than being sent through the campus mail, shows that the president is trying to intimidate her, she said.

    According to a spokeswoman for the university, Marcia Horowitz, Ms. Fuhrman barely knows Ms. Constantine.

    Ms. Constantine said she believes that one reason she is being accused of plagiarism is that she African-American. Race, she said, plays a major role in the investigation.

    . . .

    Professors at the Teachers College also received an e-mail message from Karen Cort, the other graduate student whose work Ms. Constantine was found to have copied. In the message, Ms. Cort says that Ms. Constantine, who was her mentor, had told her that her work was not good enough to be published. She later saw portions of that same work in print, under Ms. Constantine's name.

    Ms. Cort, who is African-American, says Ms. Constantine's claim that the investigation is motivated by race is "what pains me the most."

    In the e-mail message, Ms. Cort calls her former mentor "the most hypocritical person I ever met in my life."

    Bob Jensen's threads on professors who cheat are at

    Fishy Politics Leads to Fishy Accounting

    "Shrimp Shame," by Greg Bushford, The Wall Street Journal, March 6, 2008 ---

    A three-judge World Trade Organization panel has ruled America's method for taxing shrimp imports out of line with the country's WTO obligations. What happens next will say a lot about the credibility of American leadership in promoting free trade.

    The new WTO ruling is the latest twist in a politically charged case involving some $2 billion in annual shrimp exports to the U.S., counting not just India and Thailand -- the two countries pressing the current litigation -- but also China, Vietnam, Brazil and Ecuador. Three years ago, the U.S. Commerce Department slapped punitive duties ranging from 4% to 113% on shrimp from the six countries, alleging that they had been "dumping" their seafood delicacies in the U.S. at "unfairly" low prices.

    That move was bad enough. But then U.S. Customs officials made matters worse by rolling out a novel accounting trick. Customs decided that shrimp imports from the six involved countries would be subject to a newfangled policy concoction called "continuous bonds."

    In practice, that meant that an importer who planned to bring in, say, $100 million annually in shrimp subject to a 6% antidumping tariff would normally be required to post a $6 million cash deposit to cover the expected duties. On top of that, the importer would pay a $50,000 surety bond as "insurance" that payment can be made, in case import duties -- which can subsequently be raised or lowered by Commerce officials -- exceed the expected amount that year. Such bonds are backed by credit lines extended by the duty payer's banks.

    But the new continuous-bond policy morphed the traditional $50,000 bonds into a bond equal to the expected-duty deposit over again -- meaning in the example above a bond of $6 million, in addition to the $6 million cash deposit importers already had to put up. While Customs was aiming at foreign exporters, the agency ended up squeezing the American importers who normally pay the duties.

    For importers, the continuous bonds have been a continuous nightmare. They've been forced by lenders to scramble to obtain enormous annual credit lines, secured by putting up a portion of their businesses as collateral. Whether or not the importers end up having to borrow against their credit lines, the burdensome bonds constrain their ability to raise capital to re-invest in their businesses, as assets against which they could ordinarily borrow are already tied up. Predictably, some U.S. shrimp importers have been forced to exit the business, as their credit lines have been over-extended.

    Customs officials justified the new policy -- which was announced without official prior notice in the Federal Register, and thus with no opportunity for affected importers to comment publicly -- as necessary to prevent possibly shady shrimp importers from failing to ante up duties when they are calculated at year's end. Such evasions had occurred in previous antidumping cases involving Vietnamese catfish and Chinese crawfish.

    But when the National Fisheries Institute, whose members import some 80% of the seafood that Americans eat, challenged the Customs' paperwork burdens in the New York-based U.S. Court of International Trade, evidence of unsavory political calculations surfaced. Citing the agency's internal documents, U.S. Judge Timothy Stanceu found that Customs officials had been motivated "by domestic political pressures to take action directed against the shrimp importing industry." The bureaucrats had calculated that lawmakers from shrimp-producing states wielded more influence on important congressional committees than did representatives from shrimp-importing states. Despite that finding, the case is still wending its way through the federal courts.

    Continued in article

    Credit Default Swaps:  Another Stumbling Block for Fair Value Accounting and FAS 133/IAS 39
    The banks, as counterparties, are on the hook for billions in insurance they bought to hedge credit-derivatives positions. The insurance policies, called credit default swaps, have exploded in popularity in the last few years, with some $45 trillion outstanding. Closely watched bond guru Bill Gross of Pacific Investment Management calls banks' participation in the CDS market a ponzi scheme that may trigger losses of $250 billion. Bank disclosure is sketchy, and the market is hard to evaluate for lack of information. Credit default swaps are sold over the counter, are not traded on an exchange and are outside the close scrutiny of regulators. 'The ultimate systemic risk caused by the weakened positions of the monoline insurers is overwhelming and scary,' said CIBC World Markets analyst Meredith Whitney in a late-December research note. 'The impact will be sizable and very negative for the banks.'"
     Liz Moyer, "You Should Worry About Ambac, Forbes, January 17, 2008 --- Click Here

    Bob Jensen's fraud updates are at

    Bob Jensen's threads on credit swaps can be found under "Credit Derivative and Credit Risk Swap" at

    February 7, 2008 question from Miklos A. Vasarhelyi [miklosv@ANDROMEDA.RUTGERS.EDU]

    Does anyone understand what this is?

    Jensen Comment
    Miklos forwarded interactive graphics video link on monoline insurance --- Click Here

    February 7, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]


    Buyers of bonds can insure against default risks by buying policies from monoline insurance companies who service exclusively the capital markets. To protect against default by the monoline on its policy, you buy a credit swap on it from another monoline insurance company (which would be obligated to either buy the bonds at face value or to pay the difference between that and the recovery value in case of default).

    When such trades take place, the buyer of the bonds (usually investment banks) have theoretically transferred the risk in bonds, and so can account for the bundle of transactions and recognise "profits".

    Apparently, these trades have been very lucrative for banks and so have taken the profits in such transactions over the entire life of the bonds at the consummations of such transactions.

    The problem with such accounting for profits is that, if the monoline insurance companies are downgraded, the risk on the bonds reverts to the holder (bank), who must reverse the profits.

    The usual culprits in these fancy transactions are investment banks. It is difficult to account for the "profits" because the bonuses paid to the traders on such transactions might have been paid years ago.

    What a wonderful fiction we accountants have created wheere profits are not what they seem. Alice in Wonderland pales by comparison.

    I should have stuck with my first intended profession (actuary).



    February 7, 2008 reply from Paul Williams [Paul_Williams@NCSU.EDU]


    Thank you for explaining this. The fault is not entirely ours. Deregulated finance entrepreneurs have invented these complex transactions, which, frankly, can't be accounted for (part of the motivation for their design is precisely because they can't be accounted for). In theory the probability that a bond issuer will default is not altered by these arrangements.

    All they do is shift the risk many degrees removed from where it originated. An interesting empirical issue is whether the probability of default does change in the presence of these risk shifting transactions. How does it alter the monitoring of debtors by their creditors when their creditors may not even know they are their creditors?

    Do these risk shifting arrangements change the risk? Anyone out there know of any literature that addresses the issue?

    February 7, 2008 reply from Bob Jensen

    Hi Miklos, Jagdish, Paul, and others,

    Actually there’s a very good module (one of the best) on the history of monoline insurance in Wikipedia ---  There are excellent references as to when (belatedly) and why monoline insurance companies have been put under review by credit rating agencies.

    Credit rating agencies placed the other monoline insurers under review [16]. Credit default swap markets quoted rates for default protection more typical for less than investment grade credits. [17] Structured credit issuance ceased, and many municipal bond issuers spurned bond insurance, as the market was no longer willing to pay the traditional premium for monoline-backed paper[18]. New players such as Warren Buffett's Berkshire Hathaway Assurance entered the market[19]. The illiquidity of the over-the-counter market in default insurance is illustrated by Berkshire taking four years (2003-06) to unwind 26,000 undesirable swap positions in calm market conditions, losing $400m in the process. By January 2008, many municipal and institutional bonds were trading at prices as if they were uninsured, effectively discounting monoline insurance completely. The slow reaction of the ratings agencies in formalising this situation echoed their slow downgrading of sub-prime mortgage debt a year earlier. Commentators such as investor David Einhorn [20] have criticized rating agencies for being slow to act, and even giving monolines undeserved ratings that allowed them to be paid to bless bonds with these ratings, even when the bonds were issued by credits superior to their own.

    It has been particularly problematic for investors in municipal bonds.

    Bob Jensen

    Bob Jensen's threads on credit derivatives accounting ---

    Bob Jensen's threads on derivative financial instrument frauds are at

    Bob Jensen’s “Rotten to the Core” threads are at 

    Foreign hackers seek to steal Americans' health records
    Foreign hackers, primarily from Russia and China, are increasingly seeking to steal Americans’ health care records, according to a Department of Homeland Security analyst. Mark Walker, who works in DHS’ Critical Infrastructure Protection Division, told a workshop audience at the National Institute of Standards and Technology that the hackers’ primary motive seems to be espionage. “They’ve been focused on the [Department of Defense] – the military – but now are spreading out into the health care private sector,” Walker said. Early in 2007, a virus was placed on a Centers for Disease Control and Prevention Web site, he said, and in April a Military Health System server holding Tricare records was hacked. Walker said the hackers are seeking to exfiltrate health care data. “We don’t know why,” he added. “We want to know why.” At the same time, he said, it’s clear that “medical information can be used against us from a national security standpoint.”

    Nancy Ferris, Federal Computer Week, January 17, 2008 ---

    Bob Jensen's threads on computing and networking security are at

    "Bringing down Public Enemy No. 1: IRS makes Al Capone’s records public," AccountingWeb, March 6, 2008 ---
    The IRS archives are at,,id=179352,00.html

    All Federal tax records are confidential by law. The availability of historical records is highly unusual. However, the records of the criminal investigation of Al Capone below are of historical significance and of interest to the public. Therefore, they are being made available under the Freedom of Information Act (FOIA). The IRS is committed to its FOIA obligations and to an open government by making information available as authorized by law. No other IRS records meet the unique set of circumstances that make the Capone records publicly available.

    Two stories forwarded by my good friend Bob Every

    Many years ago, Al Capone virtually owned Chicago. Capone wasn't famous for anything heroic. He was notorious for enmeshing the windy city in everything from boot-legged booze and prostitution to murder. 

    Capone had a lawyer nicknamed "Easy Eddie." He was Capone's lawyer for a good reason. Eddie was very good! In fact, Eddie's skill at legal maneuvering kept Big Al out of jail for a long time.  To show his appreciation, Capone paid him very well. Not only was the money big, but also, Eddie got special dividends. For instance, he and his family occupied a fenced-in mansion with live-in help and all of the conveniences of the day. The estate was so large that it filled an entire Chicago City block. 

    Eddie lived the high life of the Chicago mob and gave little consideration to the atrocity that went on around him.  Eddie did have one soft spot, however. He had a son that he loved dearly. Eddie saw to it that his young son had clothes, cars, and a good education. Nothing was withheld. Price was no object.  And, despite his involvement with organized crime, Eddie even tried to teach him right from wrong. Eddie wanted his son to be a better man than he was.  Yet, with all his wealth and influence, there were two things he couldn't give his son; he couldn't pass on a good name or a good example.  One day, Easy Eddie reached a difficult decision. Easy Eddie wanted to rectify wrongs he had done. 

    He decided he would go to the authorities and tell the truth about Al "Scarface" Capone, clean up his tarnished name, and offer his son some semblance of integrity. To do this, he would have to testify against The Mob, and he knew that the cost would be great.  So, he testified.  Within the year, Easy Eddie's life ended in a blaze of gunfire on a lonely Chicago Street  But in his eyes, he had given his son the greatest gift he had to offer, at the greatest price he could ever pay. Police removed from his pockets a rosary, a crucifix, a religious medallion, and a poem clipped from a magazine. The poem read: "The clock of life is wound but once, And no man has the power to tell Just when the hands will stop At late or early hour. Now is the only time you own. Live, love, toil with a will. Place no faith in time. For the clock may soon be still. 

    STORY NUMBER TWO  World War II produced many heroes. One such man was Lieutenant Commander Butch O'Hare. He was a fighter pilot assigned to the aircraft carr ier Lexington in the South Pacific. One day his entire squadron was sent on a mission. After he was airborne, he looked at his fuel gauge and realized that someone had forgotten to top off his fuel tank. He would not have enough fuel to complete his mission and get back to his ship. His flight leader told him to return to the carrier.

    Reluctantly, he dropped out of formation and headed back to the fleet. As he was returning to the mother ship he saw something that turned his blood cold: a squadron of Japanese aircraft was speeding its way toward the American fleet. The American fighters were gone on a sortie, and the fleet was all but defenseless. He couldn't reach his squadron and bring them back in time to save the fleet. Nor could he warn the fleet of the approaching danger. There was only one thing to do. He must somehow divert them from the fleet.

    Laying aside all thoughts of personal safety, he dove into the formation of Japanese planes. Wing-mounted 50 caliber's blazed as he charged in, attacking one surprised enemy plane and then another. Butch wove in and out of the now-broken formation and fired at as many planes as possi ble until all his ammunition was finally spent. Undaunted, he continued the assault. He dove at the planes, trying to clip a wing or tail in hopes of damaging as many enemy planes as possible and rendering them unfit to fly. Finally, the exasperated Japanese squadron took off in another direction.

    Deeply relieved, Butch O'Hare and his tattered fighter limped back to the carrier. Upon arrival, he reported in and related the event surrounding his return . The film from the gun-camera mounted on his plane told the tale. It showed the extent of Butch's daring attempt to protect his fleet. He had, in fact, destroyed five enemy aircraft. This took place on February 20, 1942, and for that action Butch became the Navy's first Ace of W.W.II, and the first Naval Aviator to win the Congressional Medal of Honor. A year later Butch was killed in aerial combat at the age of 29.

    His hometown would not allow the memory of this WW II hero to fade, and today, O'Hare Airport in Chicago is named in tribute to the courage of this great man. So, the next time you find yourself at O'Hare International, give some thought to visiting Butch's memorial displaying his statue and his Medal of Honor. It's located between Terminals 1 and 2. 

    Butch O'Hare was "Easy Eddie's" son.?

    Jensen Comment
    Snopes says parts of the stories are true albeit exaggerated ---
    The Senior Eddie in reality was a really bad gangster!


    Other Links
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    The Saga of Auditor Professionalism and Independence ---

    Incompetent and Corrupt Audits are Routine ---

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