Accounting Scandal Updates on April 30, 2003
Bob Jensen at Trinity University

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

The Whitewing SPE is only one of the thousands of Special Purpose Entities set up by Enron CFO Andy Fastow with the assistance of its auditor, Andersen, and its law firm.  The SPE appears to be almost hopelessly complex to hide risk as well as hide the trail of the millions of dollars Andy Fastow was making in double dealing at Enron. 

As an educator, I find the following chart interesting because it illustrates the hopelessness of applying the new 2003 FASB Interpretation 46 that requires tracing out the ultimate risks in deciding whether to consolidate SPEs (that are now called VIEs by the FASB).

The chart below appears as Appendix D beginning on Page 372 of the infamous Enron whistleblower's book.

Power Failure: The Inside Story of the Collapse of Enron, by Mimi Swartz, Sherron Watkins, Page 373.

For more details, see  http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

"Tough rules have been replaced by free marketeers," he says, alluding to the moves such as the 1999 repeal of the Glass-Steagall Act, which had separated banks, securities firms and insurers since 1933.  "I think we've shown that a free-market system left to its own devices will destroy itself."
Jack Willoughby quoting former tough SEC Director of Enforcement Stanley Sporkin in "Strictly Accountable," Barron's, April 7, 2003, Page 20.

Corporate governance is one of the key components of investor protection," William H. Donaldson, the new SEC chairman, said before the unanimous vote at a public meeting. "The audit committee ... is the bedrock upon which corporate governance has to be built."
As reported in "SEC Adopts Auditing Rules for Companies," by: SmartPros Editorial Staff, SmartPros, April 4, 2003

The San Jose newspaper contained an interesting story on internal auditors in last Sunday's edition. They are in great demand given Sarbanes-Oxley and other recent developments. The article is at: http://www.bayarea.com/mld/mercurynews/business/5571474.htm?template=contentModules/printstory.jsp
Denny Beresford

The only statistics you can trust are those you falsified yourself.
Winston Churchill

The day Arthur Andersen loses the public's trust is the day we are out of business.  
Steve Samek, Country Managing Partner, United States, on Andersen's Independence and Ethical Standards CD-Rom, 1999.

In his eulogy for Arthur Andersen, delivered on January 13, 1947 the Rev. Dr. Duncan E. Littlefair closed with the following words:

Mr. Andersen had great courage.  Few are the men who have as much faith in the right as he, and fewer still are those with the courage to live up to their faith as he did...For those of you who worked with him and carry on his company, the meaning is clear.  Those principles upon which his business was built and with which it is synonymous must be preserved.  His name must never be associated with any program or action that is not the highest and the best.  I am sure he would rather the doors be closed than that it should continue to exist on principles other than those he established.  To you he has left a great name.  Your opportunity is tremendous; your responsibility is great.

It is not too much to expect that principles have a place in business today.  They do.  It's too late for this once-great Firm, but there's still time for the rest of us.
As quoted from pp. 253-254 in Final Accounting, by Barbara Ley Toffler (Broadway Books, 2003).  I might  note that the main message at the start of Barbara Ley Toffler’s book is that Andersen adopted a policy of overcharging for services or in her words “padding the bill.”  This perhaps was the beginning of the end!

Sherron Watkins' whistle blowing Memo2 to Enron CEO Ken Lay as quoted on Page 366 of her book  Power Failure (Doubleday, 2003):

Summary of Raptor oddities: 

1.  The accounting treatment looks questionable. 

a. Enron booked a $500 mm gain from equity derivatives from a related party. 
b. That related party is thinly capitalized, with no party at risk except Enron. 
c. It appears Enron has supported an income statement gain by a contribution of its own shares.

One basic question: The related party entity has lost $500 mm in its equity derivative transactions with Enron. Who bears that loss? I can't find an equity or debt holder that bears that loss. Find out who will lose this money. Who will pay for this loss at the related party entity?

Enron had done its homework in Washington. Help came largely from the husband-and-wife team of economists Senator Phil Gramm and his wife, Wendy. Before joining the Enron board, Wendy Gramm had exempted energy futures contracts from government oversight in 1992; her husband now pushed for the Commodity Futures Modernization Act in December 2000, which would deregulate energy trading. There was strong opposition to Phil Gramm's bill in the House, mainly from the President's Working Group on Financial Markets, who included Secretary of the Treasury Lawrence Summers; Alan Greenspan, the chairman of the Federal Reserve; and Arthur Levitt, chairman of the SEC. But Enron spent close to $2 million lobbying to combat that opposition, while Gramm kept the bill from floor debate in the waning days of the Clinton administration. He reintroduced it under a new name immediately after Bush assumed office and got his bill passed. Enron, in turn, got the opportunity to trade with abandon. No one needed to know--or could find out--how much power Enron owned and how or why the company moved it from place to place.
Power Failure: The Inside Story of the Collapse of Enron, by Mimi Swartz, Sherron Watkins, Page 227.  See "What was Enron getting for its political bribes?"

A paragraph form Page 360 of Pipe Dreams:  Greed, Ego, and the Death of Enron, by Robert Bryce (Public Affairs, 2002):

On June 17, Enron filed documents in bankruptcy court that showed total cash payments of $309.8 million to a group of 144 top Enron executives during 2001. In addition, those same executives cashed in stock options worth $311.7 million. There were lots of other perquisites that haven't been made public. According to one Enron insider, since the bankruptcy the company has been canceling club memberships all over Houston. When Enron filed for bankruptcy, the insider said, the company was paying for twenty-nine different country club memberships, each of which were costing the company an average of $28,000 per year.

The secret of success is sincerity. Once you can fake that, you've got it made!
Arthur Bloch  (although Chris Nolan says it should be attributed to Daniel Schorr)

Off Balance Sheet Financing Lives On
"Creative Deal or Highflying Pork?" by Leslie Wayne, The New York Times, April 28, 2003

The plan — in which Boeing and the Air Force propose to employ the kind of off-the-books financing made infamous by the Enron scandal — could provide Boeing up to $30 billion in fresh military contracts. The proposal would lease 100 planes — Boeing 767 airborne refueling tankers — to the Air Force. To critics, it is a perfect example not only of creative accounting but also of the political pork that has crept into government spending since the terrorist attacks of Sept. 11, 2001. Senator John McCain, Republican of Arizona and an influential member of the Senate Armed Services Committee, has called the Boeing proposal "cockamamie" and has vowed "to do everything I can to see the taxpayers of America are protected from this military-industrial rip-off." But what is a rip-off to Senator McCain, who has thrown one roadblock after another in front of the proposal, is portrayed by Boeing and the Air Force as a cost-effective way to provide a new link in the military supply chain as the Air Force begins to face the issue of replacing aging air refueling tankers. Some of the tankers date back to the Eisenhower administration, and many are now in use refueling Air Force military jets over Iraq and Afghanistan. "New tankers are a critical need," said Marvin R. Sambur, assistant secretary of the Air Force for acquisitions. "But we don't have that money to put out front." The lease proposal, he said, "gives us the ability to leverage the total amount of money the Air Force has. It's a super lease deal." But studies from the General Accounting Office, the Office of Management and Budget and the Congressional Budget Office, some ordered by Senator McCain, conclude that the Boeing-Air Force lease option is more costly than buying the planes outright. The studies also say the lease plan is far more expensive than simply overhauling the existing tanker fleet, an option the Air Force calls unrealistic, given the fleet's age. Now Mr. Rumsfeld must choose between the two sides. At a news conference last month, he declined to tip his hand as the Pentagon budget begins to move through Congress. He said that the issue was complex and that he had asked for more information. "And it's something that I guess I'll decide when I decide," he said. "But I don't need to set arbitrary deadlines as to when that might be."

The $1.4 billion settlement sounds like a big number, but the crooks are only giving back a small fraction of the take.

"Wall Street Firms Settle Charges Over Research in $1.4 Billion Pact," by Randall Smith, Susanne Craig, and Deborah Solomon, The Wall Street Journal, April 29, 2003, Page C1

In a pact that could change the face of Wall Street, 10 of the nation's largest securities firms agreed to pay a record $1.4 billion to settle government charges involving abuse of investors during the stock-market bubble of the late 1990s.

The long-awaited settlement, which followed an intense investigation that brought together three national regulatory bodies and a dozen state securities authorities, centers on civil charges that the Wall Street firms routinely issued overly optimistic stock research to investors in order to curry favor with corporate clients and win their lucrative investment-banking business. The pact also settles charges that at least two big firms, Citigroup Inc.'s Citigroup Global Markets unit, formerly Salomon Smith Barney, and Credit Suisse Group's Credit Suisse First Boston, improperly doled out coveted shares in initial public offerings to corporate executives in a bid to win banking business from their companies.

Regulators unveiled dozens of previously undisclosed examples of financial analysts tailoring their research reports and stock ratings to win investment-banking business. They added up to a scathing critique that scorched all the firms involved. The boss of one star analyst, Internet expert Mary Meeker of Morgan Stanley, praised her for being "highly involved" in the firm's investment-banking business. An analyst at the UBS Warburg unit of UBS AG explained she soft-pedaled concerns about a drug because its developer was "a very important client."

"I am profoundly saddened -- and angry -- about the conduct that's alleged in our complaints," said William Donaldson, chairman of the Securities and Exchange Commission. "There is absolutely no place for it in our marketplace and it cannot be tolerated."

The penalties included lifetime bans from the securities business for two former star analysts, Jack Grubman of Salomon and Henry Blodget of Merrill Lynch & Co., who were charged with issuing fraudulent research reports and agreed to pay penalties of $15 million and $4 million, respectively. Both the firms and the individuals consented to the charges without admitting or denying wrongdoing. But the regulators vowed to pursue cases against analysts and their supervisors as far up the chain of command as possible.

Bowing to political pressure from Congress, the regulators, which also included the National Association of Securities Dealers, the New York Stock Exchange and state regulators led by New York's Eliot Spitzer, also won a promise by the firms not to seek insurance repayment or tax deductions for $487.5 million of the settlement payments.

The agreement sets new rules that will force brokerage companies to make structural changes in the way they handle research. Analysts, for instance, will no longer be allowed to accompany investment bankers during sales pitches to clients. The pact also requires securities firms to have separate reporting and supervisory structures for their research and banking operations, and to tie analysts' compensation to the quality and accuracy of their research, rather than how much investment-banking fees they help generate.

Moreover, stock research will be required to carry the equivalent of a "buyer beware" notice. Securities firms, regulators said, must include on the first page of research reports a note making clear that the reports are produced by firms that do investment-banking business with the companies they cover. This, the firms must acknowledge, may affect the objectivity of the firms' research.

Continued in the article.

THE REFORMS The main points of the settlement:   • A clear separation of stock research from investment banking   • "Independent" research for investors at no cost   • Better disclosure of stock rankings   • Ban of IPO "spinning"   • $1.4 billion payout, including a $387.5 million investor fund   • Penalties aren't tax deductible for the firms   WHO ALLEGEDLY DID WHAT Issued fraudulent research reports CSFB Merrill Lynch Salomon Smith Barney Issued unfair research, or research not in good faith Bear Stearns CSFB Goldman Sachs Lehman Brothers Merrill Lynch Piper Jaffray Salomon Smith Barney UBS Received or made undisclosed payments for research UBS Piper Jaffray Bear Stearns Morgan Stanley J.P. Morgan Engaged in spinning of IPOs CSFB Salomon Smith Barney Source: Securities and Exchange Commission --- www.sec.gov

Additional Reading

Regulators Unveil Research Settlement
 
• Settlement Creates Restitution Fund
 
• Spitzer Views Salomon Notes as Key
 
• More Lawsuits Could Follow Deal
 
• How You Come Out in Settlement

 
• See excerpts of firms' internal e-mails released by regulators.
 
• See who's paying what and where it's going.
 
• See a gallery of key players.
 
• Listen to the SEC's press conference.
 
• See other resources available online.

Bob Jensen's threads on "Rotten to the Core" are available at http://www.trinity.edu/rjensen/fraud.htm#Cleland 

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

Answer
"IPO 'Spinning' Is Under Fire; Securities Firms Are Charged:  Regulators Say Exchanges Of Business May Be Bribes," by Randall Smith, The Wall Street Journal, April 29, 2003 ---  http://online.wsj.com/article/0,,SB105157294734000800,00.html?mod=article-outset-box 

WASHINGTON -- Regulators took special aim at IPO "spinning" Monday, warning that corporate executives who received hot initial public offerings of stock in exchange for investment-banking business may have accepted "virtual commercial bribery" from Wall Street and could be forced to disgorge IPO profits.

Securities regulators Monday, as part of a broader $1.4 billion global-research pact, brought formal spinning charges against two of the securities firms in the settlement, the Credit Suisse First Boston unit of Credit Suisse Group and the former Salomon Smith Barney unit of Citigroup Inc.

Spinning occurs when securities firms allocate initial public stock offerings to the personal brokerage accounts of corporate or venture-capital executives -- so the shares can then be sold, or "spun," for quick profits -- in a potential bid to get future business from the executives' companies.

CSFB declined to comment. But Charles Prince, chairman and chief executive of Citigroup's global corporate and investment bank, said in an unusual public apology accompanying the settlement: "We deeply regret that our past research, IPO and distribution practices raised concerns about the integrity of our company and we want to take this opportunity to publicly apologize to our clients, shareholders and employees."

New York Attorney General Eliot Spitzer, who has filed suit against five telecommunications executives who received hot IPOs, warned executives who received IPO profits that should have gone to their companies may be forced to return those profits to the companies.

Under a legal doctrine known as "corporate opportunity," executives are barred from taking personal advantage of financial opportunities that come to them by virtue of their position at the company. Rather, executives are supposed to offer the opportunity to their companies.

And Robert Glauber, chairman and CEO of the National Association of Securities Dealers, said the cases sent Wall Street "an unmistakeable signal ... that hot IPOs cannot be doled out to corporate insiders as virtual commercial bribes." The spinning charges Monday were brought by the Securities and Exchange Commission and the NASD.

Monday's charges included new details about how Salomon Smith Barney, now named Citigroup Global Markets, directed the IPO shares to corporate executives through a special team of two brokers that functioned as a separate branch.

Between June 1996 and August 2000, Bernard Ebbers, the former WorldCom Inc. CEO, received a total of $11.5 million in profits on 21 IPOs from Salomon; in the same period, WorldCom, now named MCI, paid Salomon $76 million in investment-banking fees, according to the settlement papers filed Monday. Both firms neither admitted or denied wrongdoing.

The executives named in Mr. Spitzer's suit were Mr. Ebbers, Philip Anschutz, the former chairman and founder of Qwest Communications International Inc.; Joseph Nacchio, former Qwest CEO; Stephen Garofalo, founder of Metromedia Fiber Network Inc.; and Clark E. McLeod, founder of McLeod Telecommunications. The executives have denied wrongdoing.

Continued in the article.

The AICPA Issues Business Fraud Case Studies --- http://www.aicpa.org/antifraud/spotlight/030409_cases.asp 

List of Cases

• A Young CPA Stands His Ground: Revenue Recognition for a High-Tech Startup View Case>>

   

• Loose Controls at an NPO: Internal Controls and Fictitious Invoices View Case>>

   

• Cybrealty: Revenue Recognition of Stock Options and Stock Placement View Case>>

   

• A Star Employee's Indiscretions: Unethical Behavior By a Star Employee View Case>>

   

• Due Diligence and Buying An Enterprise: Due Diligence Engagement—Importer Tax Avoidance Scheme View Case>>

   

• Good Works, Bad Accounting: Failure to Disclose Significant Information to Improve the Financial Picture of the Organization to the Outside View Case>>

   

• Conservative Recognition or Cookie Jar Reserves: Multi-Element Revenue Recognition and Creating Reserves View Case>>

   

• Accounting and Ethical Problems at Walax: Revenue Recognitiion—Multi Elements View Case>>

   

• Rising Sun Construction Company: Expense Transaction Problems for an International Company View Case>>

   

• Accounting and Ethical Problems at Sigma Industries: Revenue Recognition—Loans, Guarantees for Personal Asset Acquisitions View Case>>

   

• Manager Persuades Employees to Unknowingly Allow Embezzlement: Making Detection of Embezzlement Difficult By Misappropriating Financial Records View Case>>

   

• Strike Two: You're Out—Again! Revenue Recognition for Nonmonetary Transactions View Case>>

Bummer of the Week:  They Still Don't Get It
Protection of Employees That Need it the Least

"Top Executives’ Pensions Protected in Bankruptcy Filings," by the Editors of The Accounting Web, April 14, 2003 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=97425&u=ee2eC47&m=4518 

AccountingWEB US - Apr-14-2003 - Even in the wake of significant layoffs, some companies are reportedly making use of trusts and other creative arrangements to protect their top executives’ huge pensions, which are not usually covered by pension insurance when a company declares bankruptcy.

Airlines such as Delta and United have taken steps to protect their top executives’ pensions as the airline industry struggles to regain its footing after the Sept. 11 terrorist attacks.

Delta, which is working hard to stay afloat, disclosed recently that it had formed retirement trusts that will guarantee pension payments to its top 33 executives, a move that infuriated rank and file employees who may see their pensions cut as the airline strives to reduce costs.

UAL Corp., the parent company of United Airlines, used a similar arrangement to attract its Chairman and Chief Executive Glenn F. Tilton last September. UAL put $4.5 million in three trusts in Tilton’s name to compensate him for the pension benefits he gave up by leaving ChevronTexaco Corp. The agreement was designed to protect Tilton if the company ended up filing for bankruptcy court protection, which did in fact occur in December. Tilton will keep the money if he puts in three years with UAL or if the company emerges from bankruptcy.

While these arrangements clearly afford top executives even more security than regular employees enjoy, industry defends the practice by noting that when tough times are coming, it is better for the company to ensure its top people will stay put to ride out the storm.

LTV Corp., Conseco, Altria Group Inc. (formerly Philip Morris) and Abbott Laboratories are just a few of the companies that have disclosed similar arrangements in the last year.

They Still Don't Get It

CEO performance stank last year, yet most CEOs got paid more than ever. Here's how they're getting away with it.

But the pigs were so clever that they could think of a way round every difficulty.
--George Orwell, Animal Farm

Who says CEOs don't suffer along with the rest of us? As his company's stock slid 71% last year, one corporate chief saw his compensation fall 12%. Sure, he still earned $82 million, making him the second-highest-paid executive at an S&P 500 company in 2002, according to the 360 proxy statements that had rolled in as of April 9. And yeah, he's under indictment for the wholesale looting of his company, Tyco. But at least Dennis Kozlowski set a better example than the top-paid executive, who pulled in a whopping $136 million. That was Mark Swartz, his former CFO.

Unusual, you might say, for one company to produce the two top earners in a given year. But three of the top six? Now that's truly striking--especially since the other person isn't part of Kozlowski's gang at all. It's Ed Breen, the guy hired to clean up the mess.

You'd think that in the aftermath of a scandal that made Tyco a symbol of cartoonish greed, its board might want to make a point of frugality. Yet even as it was pressuring its former officers to "disgorge" their ill-gotten gains, it was letting its new man, who became CEO last July, gorge himself on $62 million worth of cash, stock, and other prizes. By all accounts Breen is doing a fine job so far (see Exorcism at Tyco), but still. And the gravy train didn't stop there. Tyco's board of directors dished out another $25 million for a new CFO, plus $25 million to a division head, putting them both on a par with the CEOs of Wal-Mart and General Electric. At least the company, now with a new board of directors, seems to recognize the need for some limits: Its bonus scheme "now caps out at 200% of base salary," notes Breen, "whereas before it was more like 600% or 700%."

That, in a nutshell, is what a year of unprecedented uproar and outrage can do. Before, CEOs had a shot at becoming very, very, very rich. Now they're likely to get only very, very rich. More likely, in fact. FORTUNE asked Equilar, an independent provider of compensation data, to analyze CEO compensation at 100 of the largest companies that had filed proxy statements for 2002. Their findings? Average CEO compensation dropped 23% in 2002, to $15.7 million, but that's mostly because the pay of a few mega-earners fell significantly. A more telling number--median compensation, or what the middle-of-the-road CEO earned--actually rose 14%, to $13.2 million. This in a year when the total return of the S&P 500 was down 22.1%.

"The acid test for reform," wrote Warren Buffett in his most recent letter to shareholders, "will be CEO compensation." With most of the results now in, the acid strip is bright red: Corporate reform has failed. Not only does executive pay seem more decoupled from performance than ever, but boards are conveniently changing their definition of "performance." "From a compensation point of view," says Matt Ward, an independent pay consultant, "it's a whole new bag of tricks."

What did fall last year were monster grants of stock options, like the 20 million awarded to Apple's Steve Jobs in 2000. The declining use of options (which even Kozlowski once called a "free ride--a way to earn megabucks in a bull market") would seem cause for reformers to rejoice. But delve more closely into the data for those 100 big companies and what do you find? That every other form of compensation--including some burgeoning forms of stealth wealth--has grown.

Continued in the article.

Also see Enron's Cast of Characters at http://www.trinity.edu/rjensen/FraudEnronCast.htm

Book Recommendation from The AccountingWeb on April 25, 2003

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

Bob Jensen's references to other books on accounting and corporate fraud are at http://www.trinity.edu/rjensen/fraud.htm#References 

April 22, 2003 message from Adamshallpublish@aol.com 

Our latest book by Don Silver, Cookin' the Book$: Say Pasta La Vista to Corporate Accounting Tricks and Fraud, is a parable about accounting fraud.

Author Don Silver is also an educational consultant for The Wall Street Journal Classroom Edition Teacher Guide.

Thanks,

Sue Ann Bacon 
Marketing Director 
Adams-Hall Publishing 800/888-4452

At a time when interest rates are low and personal bankruptcies are high, credit card companies have come up with new ways to boost revenues. Increasingly, customers are seeing new income- generating tactics, such as increased late fees and surcharges for overseas purchases. http://www.accountingweb.com/item/97461 

Beware Mystery Fees for Web Services --- http://www.pcworld.com/news/article/0,aid,110349,00.asp 
Web firms face investigations of 'cramming'--charging via telcos for unordered services.

CyberStalking Is Increasing --- http://dc.internet.com/news/article.php/2193131 

Management perceives major threats from viruses and teenage hackers. But bigger threats come from organised crime involving fraud and commercial espionage, argues David Love, former head of security at NATO and current Head of Security Strategy for Europe, the Middle East and Africa at Computer Associates --- http://www.out-law.com/php/page.php?page_id=organisedcrimeont1050497394&area=news 

Experience is the best teacher, especially for con artists.
Online Fraud Complaints Triple Internet auction fraud continues to lead the list at IFCC, but the Nigerian oil minister scam actually rips off the most money on a per-complaint basis. http://ecommerce.internet.com/news/news/article/0,,10375_2179261,00.html 
Complaints about fraud perpetrated online tripled in 2002, and auction fraud continues to be the most frequently reported offense, according to figures from the Internet Fraud Complaint Center 

FBI report that Internet Fraud is up sharply --- http://www.wired.com/news/culture/0,1284,58409,00.html 

Bob Jensen's threads on Internet Fraud are at http://www.trinity.edu/rjensen/fraud.htm#ThingsToKnow 
The above link contains things to know before buying on eBay.

Forwarded on April 16, 2003 by MABDOLMOHAMM@BENTLEY.EDU 

U.S. accounting board votes to set auditing rules

April 16, 2003 11:14am ET (Reuters)

WASHINGTON, April 16 (Reuters) - The new U.S. board set up to regulate accountants on Wednesday voted to take over responsibility for setting auditing rules, marking the end of an era in which the accounting industry set its own standards.

Under the Sarbanes-Oxley Act -- a sweeping corporate reform bill passed last year -- the Public Company Accounting Oversight Board had the option to leave the auditing standard-setting process to another group, but decided against that.

So far, the accounting profession has been governed by auditing rules developed and issued by the Auditing Standards Board, an arm of the industry's main trade and lobby group -- the American Institute of Certified Public Accountants.

The recently formed accounting board, which named departing New York Federal Reserve President William McDonough as its new head on Tuesday, also agreed to set auditing rules with help from an advisory group to be set up comprising of accounting, investing and other experts.

Apart from setting auditing rules, the board's other crucial task will be to regularly inspect major accounting firms. It can also revoke an auditing firm's registration and set fines up to $15 million.

"Deloitte 'Sends Wrong Message' By Not Spinning Off Consultancy Arm," by: SmartPros Editorial Staff, SmartPros, April 4, 2003

Apr. 4, 2003 (AFX News Limited) — PwC chief executive Samuel DiPiazza said rival Deloitte Touche Tohmatsu's decision not to split off its consultancy arm could undermind efforts to restore the profession's integrity.

In an interview with the Financial Times, the head of the world's largest accountancy firm said Deloitte's decision not to follow the rest of the Big Four in selling or breaking from their main consultancy practices could "send the wrong message".

The spinoffs were implemented in response to widespread criticism over conflicts of interest within the industry.

"I'm surprised (Deloitte) reached that conclusion. We felt that the market was sending a clear message," DiPiazza said.

Deloitte said it would not offer banned consultancy services to its existing audit clients, and is committed to compliance with all new regulations, the newpaper added.

Also see http://www.smartpros.com/x37828.xml 

Deloitte's decision last week not to separate its consulting arm is beginning to show its affects in the marketplace. "We are in the process of absorbing change; and change is a challenge," said James Quigley, who is set to take over the Big Four firm in June. http://www.accountingweb.com/item/97394 

Also see http://www.smartpros.com/x37772.xml 

From The Wall Street Journal Accounting Educators' Review on April 11, 2003

TITLE: GM Will End Consulting Projects With Deloitte Touche Tohmatsu 
REPORTER: Cassell Bryan-Low 
DATE: Apr 07, 2003 
PAGE: C7 
LINK: http://online.wsj.com/article/0,,SB104966858679674700,00.html  
TOPICS: Accounting, Audit Quality, Auditing, Auditing Services, Auditor Independence, Consulting

SUMMARY: Amid concerns of lack of independence, General Motors Corp. will no longer accept consulting services from its independent auditor. Questions focus on the importance of independence and changes in the profession.

QUESTIONS: 
1.) What is independence in fact? What is independence in appearance? Does providing consulting services to audit clients compromise independence in fact and/or independence in appearance? Support your answer.

2.) Why is independence in fact important to the audit profession? Why is independence in appearance important to the audit profession? Is it possible to achieve either independence in fact or independence in appearance without achieving the other? Support your answer.

3.) Why did General Motors Corp opt to eliminate consulting services provided by its independent auditor? Was General Motors Corp more concerned about independence in fact or independence in appearance or both? Support your answer.

4.) When did consulting become a significant part of the services provided by large accounting firms? Why did the accounting firms begin providing these services? Why have most large accounting firms disposed of their consulting divisions?

5.) Discuss the advantages and disadvantages of accounting firms providing both independent auditing and consulting services.

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

Stock Analysts:  They Still Don't Get It

"Wall Street Analysts Still Give Banking Clients High Ratings," by Randall Smith, The Wall Street Journal, April 7, 2003, Page C1 --- http://snurl.com/StockAnalystsApril7

Some investors, heartened by regulatory scrutiny of stock-research conflicts, expect big changes in the way securities firms rate stocks of their corporate clients.

They shouldn't.

Despite a raft of new rules enacted to curtail the influence of investment banking on Wall Street research, the nation's top securities firms still consistently give higher ratings to stocks of their own banking clients, according to a review of the firms' research disclosures. The statistics, which recently began appearing at the back of all Wall Street research reports under regulatory reform measures enacted last summer, quantify for the first time a pattern that lies near the heart of the uproar over alleged stock-research bias, and one that has persisted on Wall Street for decades.

The upshot: Individual investors still must take Wall Street research with a chunk of salt, some specialists say.

"There's still a hesitancy to put a sell on a banking client," says Chuck Hill, director of research at Thomson First Call, which tracks analysts' stock ratings and earnings estimates. "There's still a good possibility that some firms are still biasing things in favor of their clients -- not to the extent they had been, but there's still some of that in there."

Historically, Wall Street firms have tended to pick up coverage of companies for which they underwrite securities sales, including initial public offerings, and analysts have played a key role in evaluating the companies before agreeing to manage those sales. So securities firms argue that they wouldn't underwrite, say, an IPO if they didn't believe their analysts would issue a positive stock recommendation.

Conversely, if analysts wouldn't be comfortable recommending the stock at that level, a Wall Street executive says, "we won't do the deal." In addition, he says, it's only natural for top securities firms to "want to do investment-banking business with the better-quality companies," which would also lead the firm to rate clients higher than average.

That said, take a look at the numbers. At Goldman Sachs Group Inc., 79% of all stocks with the highest "outperform" rating were investment-banking clients, based on the firm's most recent tally. But 61% of the stocks with the lowest "underperform" rating were clients. At Morgan Stanley, 40% of all stocks rated "overweight" were investment-banking clients, while 27% of stocks rated "underweight" were clients.

At Merrill Lynch & Co., 35% of the stocks rated "buy" were clients, but clients accounted for 21% of those rated "sell." At Citigroup Inc.'s recently rechristened Smith Barney brokerage network, 47% of all stocks rated "outperform/buy" were clients, while 37% of the stocks rated "underperform/sell" were clients. And at Credit Suisse Group's Credit Suisse First Boston, 49% of stocks rated "outperform" were clients, but 33% of those rated "underperform" were clients.

"We would try to underwrite better-quality companies, with strong fundamentals," says William Genco, chairman of Merrill's research-recommendation committee. As a former analyst who covered environmental-services companies for more than 30 years, Mr. Genco says he wouldn't allow the firm to underwrite securities sales for companies he didn't consider "suitable," and has vetoed as many as a dozen deals on that basis.

As a result, Mr. Genco says, "If you're underwriting companies that have positive fundamentals, you're more likely to have a positive recommendation on their stock."

At Goldman, Kim Ritrievi, co-director of investment research for the Americas, says "the determination of ratings has nothing to do with whether someone is a client or not." Ms. Ritrievi wouldn't address why the highest rating category contained more clients on a percentage basis, saying she didn't want to speculate on the reasons.

Continued in the article.

Bob Jensen's threads on "Rotten to the Core" are at http://www.trinity.edu/rjensen/fraud.htm#Cleland 

A US Push on Accounting Fraud, by Alex Berenson, The New York Times, April 9, 2003

Anew emphasis at the Justice Department on accounting and securities fraud cases is already producing indictments and will almost certainly lead over the next several months to a wave of additional cases, according to prosecutors, defense lawyers and independent legal experts.

Nine months after President Bush ordered the formation of a federal task force to prosecute corporate fraud, the former chief executives of Enron and WorldCom, who have come to symbolize corporate corruption, have not been charged, and may never be.

But in other cases, federal prosecutors are moving aggressively to bring criminal charges for accounting gimmickry or securities fraud that in the past might not have been pursued.

 

Prosecutors and regulators were not willing to speculate about which companies might face criminal charges, or how many new cases might be brought. And they cautioned that securities cases, especially those where companies appear to have manipulated accounting rules to inflate their earnings,