Accounting Scandal Updates and Other Fraud Between January 1 and June 30, 2007
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- http://www.trinity.edu/rjensen/fraud.htm 

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

Bob Jensen's Enron Updates are at --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates 

Other Documents

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

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

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

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

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

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

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

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

"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 --- http://www.aicpa.org/pubs/jofa/jul2006/wells.htm

What Accountants Need to Know --- http://www.trinity.edu/rjensen/FraudReporting.htm#AccountantsNeedToKnow

Global Corruption (in legal systems) Report 2007 --- http://www.transparency.org/content/download/19093/263155

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


The FBI raided two Republican Congressmen earlier this month, and we can't muster much sympathy. Their misbehavior is the residue of the GOP's lost, arrogant Congressional majority, which allowed its principles to atrophy. If the Republicans hope to retake Congress in 2008, they'd do well to eliminate the habits that created these scandals in the first place.
"Republican Residue," The Wall Street Journal, April 25, 2007; Page A14 --- http://online.wsj.com/article/SB117747021336881547.html?mod=opinion&ojcontent=otep


From ABC News: The Great Ethanol Fraud
There was a great piece on 20/20 last night about the ethanol fraud, read it here: http://abcnews.go.com  For example: But if ethanol made so much sense, we wouldn't have to subsidize it or mandate its consumption. Jerry Taylor of the Cato Institute said, "If you can make a profit in this economy by putting something on the market, the government doesn't need to put a gun to your head."

John Stossel and Andrew G. Sullivan, "Sacrificing Our Children to the 'Corn God':  Ethanol May Not Be the Miracle It's Made Out to Be," ABC News, May 2, 2997 --- http://abcnews.go.com/2020/story?id=3130684&page=1 





"The Ol' Bait and Click:  Devices Meant to Reassure Online Buyers Are Often Used to Swindle Them," by Alan Sipress, The Washington Post, March 16, 2007, Page D01 --- Click Here

The eBay vendor had a glowing record -- more than 900 successful sales, with only a single complaint amid a long series of positive testimonials from customers. So when a Georgia bidder won the seller's auction for an Olympus digital camera in January, there seemed little reason to worry about dispatching almost $700 into cyberspace.

But the camera never arrived.

"I don't think I will ever buy anything over the Internet again," the conned bidder lamented in a posting on an eBay discussion board. "I am not a wealthy person, had saved long and hard for this camera for my business, and don't know when, or IF EVER I will see my $700 again."

Ever since the early days of the Internet, Web sites have struggled to find ways of reassuring users that a stranger could be as honest as a well-known local merchant, as knowledgeable as a respected teacher or as insightful as a wise grandparent. With Internet commerce now estimated to exceed $100 billion a year and greater numbers of people turning to the Internet for products, advice and love, Web sites are crafting more elaborate rating and feedback systems -- reputation monitors of sorts -- to help people evaluate whom they can trust. But the cheats have also noticed the unprecedented chance for ill-gotten gains. This has set off a high-stakes game of cat and mouse as Web sites spend more time and money to secure their systems against those trying to game them.

"We are increasingly living in a mobile, virtual world," said Chrysanthos Dellarocas, a professor of information systems at the University of Maryland business school. "To retain some form of social fabric in this world, we need some reputation mechanism."

One of the best-known reputation systems is the one used by Amazon.com, which provides user-written reviews of the books and it sells and then allows other users to rate the reviewers. Slashdot, a popular technology and current affairs Web site, developed what it calls a "karma" system for evaluating contributors. One of Yahoo's fast-growing features, Yahoo Answers, now boasts 75 million users who ask and answer each other's online questions about nearly any subject, with greater weight accorded to those who earn expert ratings from other users.

"Reputation is key to it all," said Bradley Horowitz, Yahoo's vice president of product strategy.

EBay established its position as the Web's premier auctioneer in part by pioneering a system to allow buyers and sellers to rate each other and comment on the quality of their transactions.

"It has been essential for eBay's success. It increased trust in the marketplace and created a community," eBay chief executive Meg Whitman said in an interview.

But users have repeatedly found ways to inflate or wholly fabricate their reputations. The online encyclopedia, Wikipedia, was thrown into turmoil late last month after users learned that one of the site's major editors was not a tenured university religion professor as he claimed in his online profile but a 24-year-old college dropout. At Amazon, a computer glitch three years ago inadvertently exposed the real names of reviewers writing under pseudonyms. Some turned out not to be disinterested literary judges but authors giving their own books glowing reviews to boost sales.

The scams take countless and ever more ingenious forms. These include intimidating other users who give negative ratings by threatening to retaliate with negative feedback of their own. Some con artists also create false secondary accounts, known as "sock puppets," that a cheat can use to give himself fake positive feedback. It also includes piling up legitimate positive reviews and then closing in for the kill as an eBay seller from New Jersey called "malkilots" did to nearly three dozen would-be camera buyers, including the bidder from Georgia.

That scheme -- according to feedback, discussion boards and auction descriptions on the eBay site -- went down like this: Malkilots built a sterling track record by selling memory cards for digital cameras for as little as $20 each. The vender sold them by the hundreds, delivering them as promised and accumulating page after page of positive feedback from satisfied customers.

Then, in late January, malkilots switched to offering the cameras themselves, which regularly fetched more than $650. In one auction, the Georgia bidder -- who communicated and did business only under a user name and did not respond to e-mails -- put in the highest of 37 offers for an Olympus SLR professional camera, paying for it online. Instead of receiving the camera, the buyer got a cheap camera bag.

"I had checked out the seller, all positive feedback going back several years," the buyer wrote. "What I didn't check out was WHAT kind of item that feedback was for."

Other successful bidders reported they also got cheap bags instead of cameras -- if they got anything at all. With losses totaling about $25,000, the bidders complained to eBay, which shut down the vendor's account. Negative feedback streamed into the site calling malkilots a fraud.

EBay did not return calls requesting comment on the case.

Continued in article

Jensen Comment
I've never purchased anything on eBay. But I do almost all my shopping (even grocery shopping) on Amazon these days. I cannot say enough good things about the product selections, prices, and service. I have an Amazon Visa for such purposes that gives me lower prices, and I often get free shipping. For example, Erika needed an extra-wide wheel chair because of her brace. At the moment we use a wheel chair to carry her up and down the front porch steps. Her Boston doctor wrote a prescription for temporary rental of the chair, but the price was about $120 per week. I purchased a great one through Amazon for $138 that included free shipping. The new high quality chair was here in the boonies in less than five days.

Bob Jensen's threads on how to avoid being taken on eBay if you shop on eBay --- http://www.trinity.edu/rjensen/FraudReporting.htm#eBay

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


Fraud Detection Software

"A Risk-Based Approach to Journal Entry Testing: How software can help auditors detect fraud," by Richard B. Lanza and Scott Gilbert, Journal of Accountancy, July 2007 --- http://www.aicpa.org/pubs/jofa/jul2007/lanza.htm 

The top-side journal entry is most susceptible to fraud by management override. It’s possible to make adjustments in subledgers, but this requires collusion with other organizational departments, which is much harder to accomplish.

The most frequent types of management fraud involve fictitious or premature revenue recognition. One way this can occur is through management override of internal controls.

SAS no. 99 requires external auditors to test journal entries; internal auditors and forensic examiners may find it helpful in designing their procedures to test journal entries. AICPA Practice Alert 2003-02 provides additional guidance for implementing SAS no. 99 and discusses using computer- assisted audit tools to improve test effectiveness.

Data analysis is a critical component for testing journal entries. Testing exclusively by manual means is probably not the most effective approach.

Tests should use the Who, What, When, Where and Why methodology. Like any tool, computer-assisted testing has its limitations. It does not replace a skilled auditor or fraud examiner. But rather, automation allows the auditor or fraud examiner to focus his or her energy on the highest-risk journal entries culled from a full set of entries rather than on a random sample.

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

 


U.S.: Online Payment Network Abetted Fraud, Child Pornography
The principal owners of E-Gold Ltd., an online payment system where users convert currency assets into equivalent amounts of precious metals, were indicted last week for allegedly allowing the service to be used by criminals engaged in financial scams and child pornography.
Brian Krebs, The Washington Post, May 2, 2007 --- Click Here


Question
What online pharmacies are selling fake drugs?

"FDA Warns About Fake Internet Drugs FDA Says 24 Web Sites May Be Involved in Distributing Counterfeit Prescription Drugs," by Miranda Hitti, WebMD, May 1, 2007 ---
http://www.webmd.com/news/20070501/fda-warns-about-fake-internet-drugs

The FDA today strongly cautioned consumers about purchasing drugs from 24 web sites that may be involved in the distribution of counterfeit drugs.

The FDA links two of the 24 web sites to counterfeit versions of the weight loss drug Xenical.

The FDA says that Xenical's maker, the drug company Roche, tested three phony Xenical pills obtained from brandpills.com and pillspharm.com.

One phony Xenical pill contained the active ingredient in another weight loss drug. The two other fake Xenical pills contained only talc and starch, according to the FDA.

The FDA has previously linked four of the 24 web sites to counterfeit versions of the flu drug Tamiflu and counterfeit versions of the erectile dysfunction drug Cialis.

Overseas Web Sites

The web sites, which the FDA says appear to be operated outside the U.S., are:

  • AllPills.net
  • Pharmacy-4U.net
  • DirectMedsMall.com
  • Brandpills.com
  • Emediline.com
  • RX-ed.com
  • RXePharm.com
  • Pharmacea.org
  • PillsPharm.com
  • MensHealthDrugs.net
  • BigXplus.net
  • MediClub.md
  • InterTab.de
  • Pillenpharm.com
  • Bigger-X.com
  • PillsLand.com
  • EZMEDZ.com
  • UnitedMedicals.com
  • Best-Medz.com
  • USAPillsrx.net
  • USAMedz.com
  • BluePills-Rx.com
  • Genericpharmacy.us
  • I-Kusuri.jp

The 24 web sites appear on pharmacycall365.com under the "Our Websites" heading, the FDA notes.

FDA's Advice to Consumers

The FDA says consumers using online pharmacies should be wary if there is no way to contact a web site pharmacy by phone, if prices are dramatically lower than the competition, or if no prescription from your doctor is required.

The FDA's web site includes these safety tips for people buying prescription drugs online:

  • Make sure the web site requires a prescription.
  • Make sure the web site has a pharmacist available for questions.
  • Buy only from licensed pharmacies located in the U.S.
  • Don't provide personal information such as credit card numbers unless you're sure the web site will protect that information.

The FDA urges consumers to visit www.fda.gov/buyonline for more information before buying prescription drugs over the Internet.

Bob Jensen's consumer fraud site is at http://www.trinity.edu/rjensen/FraudReporting.htm


Oxymoron:  Medical Ethics
Two drug companies are paying doctors millions to prescribe anemia drugs, which regulators now say may be unsafe.
Alex Berenson and Andrew Pollack, "Doctors Reap Millions for Anemia Drugs," The New York Times, May 9, 2007 --- Click Here


"Last of 15 Enron Defendants Sentenced:  Former Broadband Chief Gets Lesser Prison Term After Aiding Prosecutors," by Carrie Johnson, The Washington Post, June 19, 2007 --- Click Here

The former chief of Enron's Internet business unit was sentenced to 27 months in prison yesterday, closing what could be the final chapter in the Houston energy trader's downfall.

Kenneth D. Rice, 48, is the 15th and final Enron official to face punishment for his role in the company's bankruptcy more than five years ago. Under federal guidelines, he must serve nearly two years, or 85 percent, of the sentence handed down by U.S. District Judge Vanessa D. Gilmore yesterday in a Houston courtroom.

Kenneth D. Rice, shown with daughter Kirsten Rice, got a 27-month sentence. His testimony helped win the conviction of Enron's top two executives. (By F. Carter Smith -- Bloomberg News)

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"What got me here is, I lied over about a two-year period, on a number of occasions, to the investing community," Rice said yesterday, according to Bloomberg News. "I wasn't raised that way, and I'm ashamed of that."

Rice told the jury in last year's criminal trial of Enron's two top executives that he and others misrepresented the financial health of Enron Broadband Services, a highly touted division that posted billions of dollars in losses. His testimony helped prosecutors win the conviction of former chief executive Jeffrey K. Skilling, who is serving a prison term of 24 1/3 years. Company founder Kenneth L. Lay died in July 2006 before he could be sentenced.

Rice faced as much as a decade in prison and agreed to forfeit cash, sports cars and jewelry worth $14.7 million under the terms of his 2004 plea agreement. Between February 2000 and June 2001, Rice sold $53 million worth of Enron stock, some at a time when he later said he had access to secret information about its high debt burdens.

Once among Skilling's closest confidants and companions on off-road adventure tours, Rice ultimately turned against him. Rice was known within Enron's gleaming office towers as a risk taker who collected motorcycles and fast cars, including a Ferrari and a Shelby he turned over to the government as part of his plea deal.

Federal prosecutors Ben Campbell and Jonathan E. Lopez argued that Rice should receive a reduced prison term in exchange for his testimony against his former colleagues.

"Mr. Skilling would simply say . . . 'this is the number, this is what the number is going to be,' " Rice told jurors in February 2006 about the process of generating financial projections.

Remember the Enron Executive whose desk was a motorcycle in his tower office?
Kenneth Rice, who turned government witness and testified in the trial of former Enron CEO Jeffrey Skilling and company founder Kenneth Lay, was sentenced Monday to 27 months in prison.
"Ex-Enron Broadband Head Sentenced," The New York Times, June 18, 2007 ---
http://www.nytimes.com/aponline/business/AP-Enron-Broadband.html?ref=business

Bob Jensen's threads, including a timeline, on the Enron scandals are at
http://www.trinity.edu/rjensen/FraudEnron.htm

The Enron Timeline is at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronTimeline

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronTimeline

 


The never-ending cycle of Microsoft versus Scammer "Update Patches"

"Microsoft releases new security patch, as do scammers," AccountingWeb, June 14, 2007 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=103622

Microsoft's update was the June entry in the company's regular monthly set of security patches. This month, the patches include repairs that protect Windows users who visit web sites infected with malicious code and users who open infected e-mail messages with Outlook Express or Windows Mail. There are also repairs to the Windows Vista program that was launched earlier this year, and a patch that prevents hackers from accessing PCs.

If your computer is set to install updates automatically, you might not have even noticed the update taking place this week. If you aren't set up for automatic updates, Microsoft recommends you heed the update reminder that appears on your screen, or go to the Microsoft update website to check to see if your computer has been updated and to download updates.

What you should not do is click on the "Download this update" link that appears in an e-mail message entitled "Cumulative Security Update for Internet Explorer." This e-mail message is being sent by scammers or hackers who are hoping you will click the link so they can install malicious software on your computer. The software, when installed, calls out to the Internet to access other programs that are then installed on your computer.

Continued in article

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


Faked Sales at Fujitsu

From The Wall Street Journal Accounting Weekly Review on June 15, 2007

Fujitsu Finds Bogus Accounting at Unit
by Jay Alabaster
The Wall Street Journal
May 08, 2007
Page: A11
http://online.wsj.com/article/SB118123860931027976.html?mod=djem_jiewr_ac

TOPICS: Accounting, Accounting Irregularities, Advanced Financial Accounting, Auditing, Consolidation, International Accounting

SUMMARY: Fujitsu Ltd. announced that a subsidiary, Fujitsu Kansai Systems Ltd. of Osaka, has booked fictitious sales. The irregularity involved booking circular sales at the request of NAJ Co., an Osaka technology company that went bankrupt in May. "The news follows a spate of accounting mishaps at other Japanese companies, in industries as diverse as frozen foods and technology, which have hurt investor confidence in Japan's accounting standards and prompted regulators to crack down on the auditing industry." Questions relate to the nature of materiality and audit planning for subsidiaries with low impact on overall consolidated or group operating results, including consideration of the greater possibility of collusion under a keiretsu form of organization.

QUESTIONS:
1.) Describe the nature of the irregularity found at Fujitsu Ltd.'s subsidiary. In your answer, define the term "accounting irregularity."

2.) Describe the Japanese system of corporate relationships commonly described as a "keiretsu." How might this structure contribute to the nature of an accounting irregularity and impact the way in which an audit is conducted?

3.) Describe a likely audit approach to handling audits of subsidiaries with minor impacts on group or consolidated earnings. Why might an audit structure allow for accounting irregularities in these circumstances to be undetected, perhaps for several years?

4.) Given that the impact of this irregularity on group earnings is expected to be minor, why would the facts lead to investor mistrust in reported earnings? In your answer, comment on the loss of 3.2% of Fujitsu share values following this news about a minor impact on the company's overall earnings.

5.) Define the term "materiality." Is the Fujitsu subsidiary's accounting irregularity material? Support your answer and defend it against opposing viewpoints based on statements made in the article.

Reviewed By: Judy Beckman, University of Rhode Island

"Fujitsu Says Unit Booked Bogus Sales," by Jay Alabaster, The Wall Street Journal, June 8, 2007; Page A14 --- Click Here

Confidence in Japanese corporate accounting took another blow as Fujitsu Ltd. said a subsidiary had booked fictitious sales, the latest case of improper bookkeeping at a major Japanese electronics maker.

The conglomerate said the impact on group earnings would be minor but warned that other companies may be involved with the bogus accounting at the software-consulting and sales unit.

The news follows a spate of accounting mishaps at other Japanese companies in industries as diverse as frozen foods and technology, which have hurt investor confidence in Japan's accounting standards and prompted regulators to crack down on the auditing industry.

"It is a matter of trust," said an analyst at a major Japanese brokerage firm. "The market will lose confidence in the results of these companies."

Fujitsu shares fell 3.2% to 820 yen ($6.77) on the Tokyo Stock Exchange following the news, as the benchmark Nikkei Stock Average of 225 companies recovered from an early drop to end slightly higher.

Spokesmen at Fujitsu and subsidiary Fujitsu Kansai Systems Ltd., based in Osaka, said the amount, timing and details of the improper sales were still being investigated. The transactions involved NAJ Co., a seller of information-technology products and services in Osaka that went bankrupt in May, the companies said.

"At the request of NAJ, at least one employee of this company engaged in 'circular sales transactions,' " said the spokesman at Fujitsu Kansai Systems. "Such transactions require at least three companies," which consecutively book revenue from sales of items that are eventually sold back to where they started, he said.

The spokesman said he didn't know the identity of other companies that might be involved, or if they willingly booked fake sales. "We are reviewing our receipts one-by-one," so it will take time before the details are known, he said.

The Fujitsu situation evoked comparisons to accounting problems at NEC Corp., which last year revealed an engineering subsidiary had logged fake business deals. Some analysts questioned if current accounting oversight was sufficient to oversee the complex dealings of such companies. Fujitsu had 393 subsidiaries and about 161,000 employees as of March.

Last year, NEC said an internal probe found an employee at its NEC Engineering Ltd. unit had fabricated business deals on a vast scale for years, inflating sales figures by 36.3 billion yen from the fiscal year ended March 2002.

"Given the similar businesses of both NEC and Fujitsu, people may begin to wonder why accounting problems are affecting these two," said Motomi Hiratsuka, head of trading at BNP Paribas in Tokyo.  

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

 


Crazy Eddie Fraud Update Years Later

June 26, 2007 message from Richard Campbell [campbell@RIO.EDU]

This 80's fraudster will be interviewed tomorrow at 10:00 PM (CNBC) - I have shown the ABC video from teh 80's on the Crazy Eddie fraud to my accounting students and they love it - The fraud includes skimming, stock manipulation, inventory fraud and marital infidelity and flight to avoid prosecution. The students frequently ask "what ever happened to Crazy Eddie". Now I'll be able to answer.

Richard

Richard J. Campbell
mailto:campbell@rio.edu

June 26, 2007 reply from Elliot Kamlet [ekamlet@STNY.RR.COM]

And for those really interested, Eddie's cousin Sam http://www.whitecollarfraud.com/index.html  who was sent to accounting school to become a CPA who could improve on fraud methods at the company is available for speaking engagements, absolutely free.

He gives a really interesting presentation, including the video to which you referred. However, it would have been better at 2 hours instead of 2.5 hours. I would still recommend him.

Elliot Kamlet
Binghamton University

 


The Accounting Firm Ernst & Young Dodges a Bullet (well sort of anyway)
Four current and former partners of the accounting firm Ernst & Young have been charged with tax fraud conspiracy over their work on questionable tax shelters. The firm itself was not charged. But the indictment against the four, which was announced yesterday, did not mean that Ernst & Young, which has been under investigation since 2004, was entirely off the hook in a widening criminal investigation of the web of banks, accounting firms, law firms and investment boutiques that promoted questionable shelters.
Lynnley Browning, "Four Men, but Not Ernst & Young, Are Charged in Tax Shelter Case," The New York Times, May 31, 2007 --- http://www.nytimes.com/2007/05/31/business/31shelter.html?ref=business

"E&Y partners indicted for tax fraud" AccountingWeb, May 31, 2007 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=103562

Bob Jensen's threads on Ernst & Young scandals are at http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

The firm of KPMG to date has taken a much, much heavier hit for selling questionable tax shelters --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG


BDO Seidman snags guilty verdict
National CPA firm BDO Seidman LLP has been found grossly negligent by a Florida jury for failing to find fraud in an audit that resulted in costing a Portuguese Bank $170 million. The verdict opens up the opportunity for the bank to pursue punitive damages that could exceed $500 million.
"BDO Seidman snags guilty verdict," AccountingWeb, June 26, 2007 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=103667

Bob Jensen's fraud updates are at
http://www.accountingweb.com/cgi-bin/item.cgi?id=103667

Bob Jensen's threads on auditing firm negligence and fraud can be found at Bob Jensen's threads on auditing firm negligence and fraud can be found at http://www.trinity.edu/rjensen/Fraud001.htm 


A federal audit said the U.S. Internal Revenue Service is losing millions of dollars to fraud as a result of softening its questionable claims program.

"Audit Says IRS Losing Millions to Fraud," SmartPros, June 15, 2007 --- http://accounting.smartpros.com/x58035.xml

The report by Inspector General Russell George praised the IRS for responding to a 2006 complaint by Nina Olson, the national taxpayer advocate, that the agency had frozen refunds for thousands of taxpayers without notifying them or giving them a chance to challenge the action.

However, the audit said the agency's response in altering its 30-year-old Questionable Refund Program may have gone too far, USA Today reported Thursday.

Among the problems, the audit said recent changes "could negatively affect tax administration by not holding perpetrators of smaller-valued (fraud) schemes accountable."

It also said $15.9 million in refunds were made as a result of the softer enforcement because initial reviews of questionable claims were not completed within "a certain number of days."

IRS Criminal Investigation Chief Eileen Mayer told the newspaper the agency is studying the recommendations and is trying to balance taxpayer rights with proper enforcement.


More tax preparers indicted over telephone tax refund scams
"We saw limited but serious instances of abuse," said IRS Acting Commissioner Kevin M. Brown. "We used our enforcement resources to move swiftly and decisively to protect this valuable refund for the vast majority of taxpayers and tax preparers who are requesting it properly. We want everyone who is eligible for the telephone tax refund to get it but not to inflate the amount requested." The IRS has been monitoring telephone excise tax refund requests for potential problems. Shortly after the tax-filing season opened in early January, the agency observed problems with returns from some tax preparers that indicated possible criminal intent. Along with the search warrants carried out by the IRS, other tax preparers across the nation who prepared questionable telephone tax refund requests received visits from IRS revenue agents (auditors) and special agents. The IRS has advised taxpayers to stay away from unscrupulous promoters and tax preparers who make false claims about the telephone tax refund and suggest that many, if not most, phone customers can get hundreds of dollars or more back under this program.
AccountingWeb, June 2007 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=103623

Bob Jensen's threads on tax and consumer frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm


LAUSD report card:  All F's
Los Angeles Unified is disorganized, lacks financial controls and suffers from a "pervasive" lack of accountability, says a highly anticipated management audit of the nation's second-largest school district. The $350,000 report, commissioned by Superintendent David Brewer III shortly after he was hired last fall, lays out a scathing litany of organizational, financial and administrative
Naush Boghossian, Los Angeles Daily News, April 21, 2007 --- http://www.dailynews.com/ci_5718482


Four Banks Charged in Parmalat Failure
A Milan judge has ordered Citigroup, UBS, Morgan Stanley and Deutsche Bank to stand trial for market-rigging in connection with dairy firm Parmalat's collapse, judicial sources said. Judge Cesare Tacconi also ordered 13 individuals to face trial on the same charges, at the end of preliminary hearings into the case, the sources told Reuters on Wednesday.
Reuters, June 13, 2007 --- Click Here

Parmalat's external auditor was Grant Thornton ---
http://www.trinity.edu/rjensen/Fraud001.htm#GrantThornton


Question
Do you remember when Accenture was called Andersen Consulting and was founded by the Arthur Andersen accounting firm?

"Government Sues Accenture, Sun & HP for Kickbacks and Fraud," Wired News, April 20, 2007 --- http://blog.wired.com/27bstroke6/2007/04/gov_sues_accent.html

The Justice Department has joined three whistleblower lawsuits targeting Sun Microsystems, Hewlett-Packard and consulting giant Accenture, all of which prosecutors say defrauded the government of millions of dollars through kickbacks and rebates on massive government IT projects, according to an announcement Thursday.

The suits center on Accenture, which the government hired to help it evaluate new technology and make sure the government got the right equipment at a fair price. But the government charges that instead Accenture made $4 million cash in kickbacks from companies who landed contracts with the government through Accenture's recommendations.

The government also charges that Accenture made $26 million by negotiating wholesale hardware deals with vendors such as Sun and Hewlett Packard, then selling them at higher prices to the government -- despite being paid by the government to be its agent. Accenture signed marketing and rebate agreements with a stunning array of large American technology companies, according to the complaint, including Acxiom, Cisco, Compaq, Dell, EMC, HP, IBM, J.D. Edwards, Microsoft, NCR, Oracle, PeopleSoft, SAP, Siebel, Sun, Unisys, BEA, Broadvision, SAS, Seisent, and Vignette.

According to the Accenture complaint:

The United States alleges that since October 1998 and continuing up to the present, Defendants have exploited the trust the Government has reposed in them to act with honesty and candor; to provide accurate, complete and current cost and/or pricing data; to act without conflicts of interest; and to serve as independent third party objective advisors.

The government is seeking three times the amount of its losses, along with fines for lying to and defrauding the government.  Norman Rille and Neal Roberts, the whistleblowing duo who originally filed the suits in September 2004, would share in any recovered damages under federal whistleblower laws.

Specifically the government alleges that Accenture:

  • Illegally kept $16,865,314 from one Defense Logistics Agency contract through agreements with SAP, Oracle, HP, and Northrup Grumman, among others
  • Kept $2.5 million in rebates from a Department of Education contract
  • Kept more than $2 million from Sun in rebate fees between 2003 and 2005
  • Booked a $450,000 kickback from IBM for "favorable treatment and influence" on a contract to run the Air Force AAFES – an online store for soldiers
  • Bilked the Department of Homeland Security out of $676,964 for the US-VISIT program that is intended to track visitors to the country

The government did not join similar suits filed by the whistleblowers against Lockheed Martin, Oracle, Cisco and SAIC. The suits were filed in the Eastern Arkansas Federal District Court.

PDFs of the complaints: Accenture, Sun, Hewlett-Packard

 


Dell's Internal Accounting Probe Uncovers Evidence of Misconduct
Annual Report Is Delayed, Restatements May Follow; Problems Aren't Specified. The computer maker said the investigation also found a number of accounting errors and deficiencies in the financial-control "environment." Dell stressed that its investigation isn't complete, however, and said it will delay filing its annual 10-K report with the Securities and Exchange Commission, originally due April 3, past an extension date of April 18.
Christopher Lawton, The Wall Street Journal, March 30, 2007; Page A3 --- Click Here

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


Ex-Chief at Qwest Found Guilty of Insider Trading
Joseph P. Nacchio, the former chief executive who transformed Qwest Communications International into a major telecommunications rival, was convicted Thursday of insider trading.
Dan Frosch, The New York Times, April 20, 2007 --- Click Here


Question
Is the market for credit default swaps rife with insider trading?

That depends on what you mean by insider trading.
See "Credit Default Swaps: The Land of Efficient Insider Trading?" DealBroker --- http://www.dealbreaker.com/2007/04/credit_default_swaps_the_land.php

Use the term in a loose sense—say defining “insider trading” as trades where one party has material nonpublic information unavailable to their trading counterparts—and the answer is clearly yes. There is a lot of that sort of insider trading in the credit default market, and there is likely to be even more as the market grows and more players gather around the table.

But since federal securities regulations against insider trading apply only to insider trading in securities, the question of whether this counts as "insider trading" in a strictly legal sense is murkier. Credit default swaps do not fit the traditional definition of securities. Prior to the enactment of the Commodity Futures Modernization Act of 2000, there was a lot of debate over the legal answer to the question of whether they should be categorized with the most common types of securities-stocks and bonds. The CFMA split the difference by declaring that swaps were not securities but that insider trading and other federal anti-fraud measures still applied to swaps where the underlying credit was a security, such as those based on publicly traded bonds.

But this has been controversial from the start. Few of those trading in the credit default swap market were calling out for protection from insider trading. Many hedge funds and other debt-holders active in the credit default market lack the kind of internal controls and so-called “Chinese Walls” that investment banks and brokerages have had to build to prevent insider trading in securities. And most of the other market participants are aware that this is the situation. In short, there is plenty of asymmetrical information in the credit default swap market but that fact is widely--even symmetrically--known. Moreover, the legal status of more complex financial products not directly tied to individual securities remains murky.

Regardless, it seems the regulators are exactly crying out to enforce insider-trading laws against the traders in the credit default market either. Right now no US regulatory agency claims oversight jurisdiction for credit-default swaps. Not the SEC. Not the Commodity Futures Trading Commission. Not the Treasury Department. Not the Federal Reserve.

Since no one enforces insider trading laws in the credit default swap market, and apparently no one has the jurisdiction to enforce insider trading laws, it seems the laws only apply to the market in some metaphysical, theoretical sense. There's something of a tree falling in an empty forest thing going on with the application of insider trading laws to credit default swaps. If a statute applies insider trading regs to credit default swaps but no one enforces it, does the tree make any sound?

Over on his new blog at Portfolio, Felix Salmon points us toward the remarks of Erik Sirri, the director of the SEC's division of market regulation.

Salmon writes:

Sirri came out and said what everybody in the markets knows but nobody wants to admit: "In a world of important pricing efficiency, you want insiders trading because the price will be more efficient. That is as it should be."

Sirri then went on to explain that insider-trading laws should still exist, for the purpose of investor protection. But he added that he thought it "very important" that credit default swaps be traded – something which won't happen if the tradable contracts fall under insider-trading regulations while the present bilateral contracts don't.

Sirri’s rationale here seems relatively simple. Insider trading laws have efficiency costs but the government has made the decision that in the case of markets for securities those costs are outweighed by the gains in investor protection and investor confidence. Part of the reason for deciding things in this way is because the government, corporate America and the large brokerages want ordinary investors to feel confident they are playing on something of a level playing field with those with potentially better access to information. But in trades involving more sophisticated players trading more sophisticated financial products, it’s far from clear that this rationale applies. Do we really need to protect hedge funds from other hedge funds and investment banks in credit default swap trading? The enforcement and compliance costs with insider trading rules may outweigh the benefits.

Nonetheless, it is entertaining watching the easily scandalized become so easily scandalized when a regulator mentions the benefits of insider trading. One question: why are so many of the easily scandalized also British?

Continued in article

Bob Jensen's threads on Credit Derivatives are under the C-Terms at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

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


Accounting Controls in the State of Colorado Have Some Leaks
The amount Department of Revenue supervisor Michelle Cawthra allegedly stole from state coffers is now up to $10 million, double the initial estimate, lawmakers learned Friday. Cawthra's supervisor, Janet Swaney, was placed on administrative leave Friday as the investigation continued into how such a large amount could have been diverted without anyone noticing.
"Missing state money now put at $10 million:  Revenue chief testifies; boss of suspect on leave," Rocky Mountain News, May 5, 2007 --- Click Here


Inside U.S. companies' audacious drive to extract more profits from the nation's working poor

"The Poverty Business," by Brian Grow and Keith Epstein, Business Week Cover Story, May 21, 2007 --- http://www.businessweek.com/magazine/content/07_21/b4035001.htm

In recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards, and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge.

Federal Reserve data show that in relative terms, that debt is getting more expensive. In 1989 households earning $30,000 or less a year paid an average annual interest rate on auto loans that was 16.8% higher than what households earning more than $90,000 a year paid. By 2004 the discrepancy had soared to 56.1%. Roughly the same thing happened with mortgage loans: a leap from a 6.4% gap to one of 25.5%. "It's not only that the poor are paying more; the poor are paying a lot more," says Sheila C. Bair, chairman of the Federal Deposit Insurance Corp.

Once, substantial businesses had little interest in chasing customers of the sort who frequent the storefronts surrounding the Byrider dealership in Albuquerque. Why bother grabbing for the few dollars in a broke man's pocket? Now there's a reason.

Armed with the latest technology for assessing credit risks—some of it so fine-tuned it picks up spending on cigarettes—ambitious corporations like Byrider see profits in those thin wallets. The liquidity lapping over all parts of the financial world also has enabled the dramatic expansion of lending to the working poor. Byrider, with financing from Bank of America Corp. (
BAC ) and others, boasts 130 dealerships in 30 states. At company headquarters in Carmel, Ind., a profusion of colored pins decorates wall maps, marking the 372 additional franchises it aims to open from California to Florida. CompuCredit Corp., based in Atlanta, aggressively promotes credit cards to low-wage earners with a history of not paying their bills on time. And BlueHippo Funding, a self-described "direct response merchandise lender," has retooled the rent-to-own model to sell PCs and plasma TVs.

The recent furor over subprime mortgage loans fits into this broader story about the proliferation of subprime credit. In some instances, marketers essentially use products as the bait to hook less-well-off shoppers on expensive loans. "It's the finance business," explains Russ Darrow Jr., a Byrider franchisee in Milwaukee. "Cars happen to be the commodity that we sell." In another variation, tax-preparation services offer instant refunds, skimming off hefty fees. Attorneys general in several states say these techniques at times have violated consumer-protection laws.

Some economists applaud how the spread of credit to the tougher parts of town has raised home- and auto-ownership rates. But others warn that in the long run the development could slow upward mobility. Wages for the working poor have been stagnant for three decades. Meanwhile, their spending has consistently and significantly exceeded their income since the mid-1980s. They are making up the difference by borrowing more. From 1989 through 2004, the total amount owed by households earning $30,000 or less a year has grown 247%, to $691 billion, according to the most recent Federal Reserve data available.

"Having access to credit should be helping low-income individuals," says Nouriel Roubini, an economics professor at New York University's Stern School of Business. "But instead of becoming an opportunity for upward social and economic mobility, it becomes a debt trap for many trying to move up."

HAPPY AS SHE WAS with the Saturn (
GM ) she bought in December, 2005, Roxanne Tsosie soon ran into trouble paying off the loan on it. The car had 103,000 miles on the odometer. She agreed to a purchase price of $7,922, borrowing the full amount at a sky-high 24.9%. Based on her conversation with the Byrider salesman, she thought she had signed up for $150 monthly installments. The paperwork indicated she owed that amount every other week. She soon realized she couldn't manage the payments. Dejected, she agreed to give the car back, having already paid $900. "It kind of knocked me down," Tsosie says. "I felt I'd never get anywhere."

The abortive purchase meant Byrider could dust off and resell the Saturn. Nearly half of Byrider sales in Albuquerque do not result in a final payoff, and many vehicles are repossessed, says David Brotherton, managing partner of the dealership. A former factory worker, he says he sympathizes with customers who barely get by. "Many of these people are locked in a perpetual cycle" of debt, he says. "It's all motivated by self-interest, of course, but we do want to help credit-challenged people get to the finish line."

Byrider dealers say they can generally figure out which customers will pay back their loans. Salesmen, many of whom come from positions at banks and other lending companies, use proprietary software called Automated Risk Evaluator (ARE) to assess customers' financial vital signs, ranging from credit scores from major credit agencies to amounts spent on alimony and cigarettes.

Unlike traditional dealers, Byrider doesn't post prices—which average $10,200 at company-owned showrooms—directly on its cars. Salesmen, after consulting ARE, calculate the maximum that a person can afford to pay, and only then set the total price, down payment, and interest rate. Byrider calls this process fair and accurate; critics call it "opportunity pricing."

So how did Byrider figure that Tsosie had $300 a month left over from her small salary for car payments? Barely a step up from destitution, she now lives in her own cramped apartment in a dingy two-story adobe-style building. Decorated with an old bow and arrow and sepia-tinted photographs of Navajo chiefs, the apartment is also home to her new husband, Joey A. Garcia, a grocery-store stocker earning $25,000 a year, his two children from a previous marriage, and two of Tsosie's kids. She and Garcia are paying off several other high-interest loans, including one for his used car and another for the $880 wedding ring he bought her this year.

Asked by BusinessWeek to review Tsosie's file, Byrider's Brotherton raises his eyebrows, taps his keyboard, and studies the screen for a few minutes. "We probably should have spent more time explaining the terms to her," he says. Pausing, he adds that given Tsosie's finances, she should never have received a 24.9% loan for nearly $8,000.

That still leaves her $900 in Byrider's till. "No excuses; I apologize," Brotherton says. He promises to return the money (and later does). In most transactions, of course, there's no reporter on the scene asking questions.

A QUARTER-CENTURY ago, Byrider's founder, the late James F. Devoe, saw before most people the untapped profits in selling expensive, highly financed products to marginal customers. "The light went on that there was a huge market of people with subprime and unconventional credit being turned down," says Devoe's 38-year-old son, James Jr., who is now chief executive.

The formula produces profits. Last year, net income on used cars sold by outlets Byrider owns averaged $828 apiece. That compared with only $223 for used cars sold as a sideline by new-car dealers, and a $31 loss for the typical new car, according to the National Automobile Dealers Assn. Nationwide, Byrider dealerships reported sales last year of $700 million, up 7% from 2005.

"Good Cars for People Who Need Credit," the company declares in its sunny advertising, but some law enforcers say Byrider's inventive sales techniques are unfair. Joel Cruz-Esparza, director of consumer protection in the New Mexico Attorney General's Office from 2002 to 2006, says he received numerous complaints from buyers about Byrider. His office contacted the dealer, but he never went to court. "They're taking advantage of people, but it's not illegal," he says.

Officials elsewhere disagree. Attorneys general in Kentucky and Ohio have alleged in recent civil suits that opportunity pricing misleads customers. Without admitting liability, Byrider and several franchises settled the suits in 2005 and 2006, agreeing to inform buyers of "maximum retail prices." Dealers now post prices somewhere on their premises, though still not on cars. Doing so would put them "at a competitive disadvantage," says CEO Devoe. Sales reps flip through charts telling customers they have the right to know prices. Even so, Devoe says, buyers "talk to us about the price of the car less than 10% of the time."

Tsosie recently purchased a 2001 Pontiac from another dealer. She's straining to make the $277 monthly payment on a 14.9% loan.

Nobody, poor or rich, is compelled to pay a high price for a used car, a credit card, or anything else. Some see the debate ending there. "The only feasible way to run a capitalist society is to allow companies to maximize their profits," says Tyler Cowen, an economist at George Mason University in Fairfax, Va. "That will sometimes include allowing them to sell things to people that will sometimes make them worse off."

Others worry, however, that the widening income gap between the wealthy and the less fortunate is being exacerbated by the spread of high-interest, high-fee financing. "People are being encouraged to live beyond their means by companies that are preying on low-income consumers," says Jacob S. Hacker, a political scientist at Yale.

Higher rates aren't deterring low-income borrowers. Payday lenders, which provide expensive cash advances due on the customer's next payday, have multiplied from 300 in the early 1990s to more than 25,000. Savvy financiers are rolling up payday businesses and pawn shops to form large chains. The stocks of five of these companies now trade publicly on the New York Stock Exchange (
NYX ) and NASDAQ (NDAQ ). The investment bank Stephens Inc. estimates that the volume of "alternative financial services" provided by these sorts of businesses totals more than $250 billion a year.

Mainstream financial institutions are helping to fuel this explosion in subprime lending to the working poor. Wells Fargo & Co. (
WFC ) and U.S. Bancorp (USB ) now offer their own versions of payday loans, charging $2 for every $20 borrowed. Based on a 30-day repayment period, that's an annual interest rate of 120%. (Wells Fargo says the loans are designed for emergencies, not long-term financial needs.) Bank of America's revolving credit line to Byrider provides up to $110 million. Merrill Lynch & Co. (MER ) works with CompuCredit to package credit-card receivables as securities, which are bought by hedge funds and other big investors.

Once, major banks and companies avoided the poor side of town. "The mentality was: Low income means low revenue, so let's not locate there," says Matt Fellowes, a researcher at the Brookings Institution in Washington, D.C. Now, he says, a growing number of sizable corporations are realizing that viewed in the aggregate, the working poor are a choice target. Income for the 40 million U.S. households earning $30,000 or less totaled $650 billion in 2004, according to Federal Reserve data.

John T. Hewitt, a pioneer in the tax-software industry, recognized the opportunity. The founder of Jackson Hewitt Tax Service Inc. (
JTX ) says that as his company grew in the 1980s, "we focused on the low-hanging fruit: the less affluent people who wanted their money quick."

In the 1990s, Jackson Hewitt franchises blanketed lower-income neighborhoods around the country. They soaked up fees not just by preparing returns but also by loaning money to taxpayers too impatient or too desperate to wait for the government to send them their checks. During this period, Congress expanded the Earned-Income Tax Credit, a program that guarantees refunds to the working poor. Jackson Hewitt and rival tax-prep firms inserted themselves into this wealth-transfer system and became "the new welfare office," observes Kathryn Edin, a visiting professor at Harvard University's John F. Kennedy School of Government. Today, recipients of the tax credit are Jackson Hewitt's prime customers.

"Money Now," as Jackson Hewitt markets its refund-anticipation loans, comes at a steep price. Lakissisha M. Thomas learned that the hard way. For years, Thomas, 29, has bounced between government assistance and low-paying jobs catering to the wealthy of Hilton Head Island, S.C. She worked most recently as a cashier at a jewelry store, earning $8.50 an hour, until she was laid off in April. The single mother lives with her five children in a dimly lit four-bedroom apartment in a public project a few hundred yards from the manicured entrance of Indigo Run, a resort where homes sell for more than $1 million.

Thomas finances much of what she buys, but admits she usually doesn't understand the terms. "What do you call it—interest?" she asks, sounding confused. Two years ago she borrowed $400 for rent and food from Advance America Cash Advance Centers Inc. (
AEA ), a payday chain. She renewed the loan every two weeks until last November, paying more than $2,500 in fees.

This January, eager for a $4,351 earned-income credit, she took out a refund-anticipation loan from Jackson Hewitt. She used the money to pay overdue rent and utility bills, she says. "I thought it would help me get back on my feet."

A public housing administrator who reviews tenants' tax returns pointed out to Thomas that Jackson Hewitt had pared $453, or 10.4%, in tax-prep fees and interest from Thomas' anticipated refund. Only then did she discover that various services for low-income consumers prepare taxes for free and promise returns in as little as a week. "Why should I pay somebody else, some big company, when I could go to the free service?" she asks.

The lack of sophistication of borrowers like Thomas helps ensure that the Money Now loan and similar offerings remain big sellers. "I don't know whether I was more bothered by the ignorance of the customers or by the company taking advantage of the ignorance of the customers," says Kehinde Powell, who worked during 2005 as a preparer at a Jackson Hewitt office in Columbus, Ohio. She changed jobs voluntarily.

State and federal law enforcers lately have objected to some of Jackson Hewitt's practices. In a settlement in January of a suit brought by the California Attorney General's Office, the company, which is based in Parsippany, N.J., agreed to pay $5 million, including $4 million in consumer restitution. The state alleged Jackson Hewitt had pressured customers to take out expensive loans rather than encourage them to wait a week or two to get refunds for free. The company denied liability. In a separate series of suits filed in April, the U.S. Justice Dept. alleged that more than 125 Jackson Hewitt outlets in Chicago, Atlanta, Detroit, and the Raleigh-Durham (N.C.) area had defrauded the Treasury by seeking undeserved refunds.

Jackson Hewitt stressed that the federal suits targeted a single franchisee. The company announced an internal investigation and stopped selling one type of refund-anticipation loan, known as a preseason loan. The bulk of refund loans are unaffected. More broadly, the company said in a written statement prepared for BusinessWeek that customers are "made aware of all options available," including direct electronic filing with the IRS. Refund loan applicants, the company said, receive "a variety of both verbal and written disclosures" that include cost comparisons. Jackson Hewitt added that it provides a valuable service for people who "have a need for quick access to funds to meet a timely expense." The two franchises that served Thomas declined to comment or didn't return calls.

VINCENT HUMPHRIES, 61, has watched the evolution of low-end lending with a rueful eye. Raised in Detroit and now living in Atlanta, he never got past high school. He started work in the early 1960s at Ford Motor Co.'s hulking Rouge plant outside Detroit for a little over $2 an hour. Later he did construction, rarely earning more than $25,000 a year while supporting five children from two marriages. A masonry business he financed on credit cards collapsed. None of his children have attended college, and all hold what he calls "dead-end jobs."

Over the years he has "paid through the nose" for used cars, furniture, and appliances, he says. He has borrowed from short-term, high-interest lenders and once worked as a deliveryman for a rent-to-own store in Atlanta that allowed buyers to pay for televisions over time but ended up charging much more than a conventional retailer. "You would have paid for it three times," he says. As for himself, he adds: "I've had plenty of accounts that have gone into collection. I hope I can pay them before I die." His biggest debts now are medical bills related to a heart condition. He lives on $875 a month from Social Security.

Continued in article

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

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


Question
Does this pass the smell test in the California state university system?

"Ethically Challenged and Tone Deaf in the CSU," Mark Shapiro, The Irascible Professor, May 25, 2007 --- http://irascibleprofessor.com/comments-05-25-07.htm

Several months ago -- July 21, 2006 to be exact -- the Irascible Professor posted a commentary outlining questionable compensation practices for high-ranking officials in the California State University System. These practices have been employed by the system's Chancellor, Charlie Reed, to grant millions of dollars in extra compensation to campus presidents and to cronies of Reed at the system's headquarters in Long Beach upon their retirement or departure from the system. These six-figure payouts for "consulting" work or "special projects" have been so egregiously out of line with what ordinary faculty and staff members in the California State University system earn that the California Legislature is taking hard look a legislation that would end the practice.

Faculty members found it particularly galling that such huge bonuses were being handed out at time when faculty salaries lagged national averages by significant percentages, and at a time when the faculty union was locked in protracted negotiations over a new contract after they had gone without raises for three years. During that three year period, Reed and other high-ranking administrators were granted hefty pay raises. For example, in 2005 Reed received a $45,808 increase in his salary (14.5%) and a $3,000 increase in his car allowance. Reed's total compensation increase in 2005 was about the same as the starting salary for a new assistant professor in the system at the time.

Continued in article

Bob Jensen's threads on higher education controversies are at http://www.trinity.edu/rjensen/HigherEdControversies.htm
In particular, questions of ethics and accountability are discussed at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

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

 


IBM Misleads Investors
The Securities and Exchange Commission has announced a settled enforcement action against International Business Machines Corporation for making materially misleading statements in a chart concerning the impact that the company's decision to expense employee stock options would have on its first quarter 2005 (1Q05) and fiscal year 2005 (FY05) financial results. The misleading chart caused analysts to lower their earnings per share (EPS) estimates for the company. Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "Information regarding a company's earnings is one of the most important factors that many investors consider in making an investment decision, and it is essential that the information companies provide be clear and accurate."
Andrew Priest, AccountingEducation.com, June 15, 2007 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=145059 

The external independent auditor for IBM is PricewaterhouseCoopers (PwC) --- http://www.trinity.edu/rjensen/fraud001.htm#PwC

Bob Jensen's threads on FAS 123(R) are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm


"Apple's Former CFO Settles Options Case:  Finance Official Ties CEO Jobs To Stock Backdating Plan," by Carrie Johnson, The Washington Post, April 25, 2007; Page D01 --- Click Here

A former chief financial officer of Apple reached a settlement with the Securities and Exchange Commission yesterday over the backdating of stock options and said company founder Steve Jobs had reassured him that the questionable options had been approved by the company board.

Fred D. Anderson, who left Apple last year after a board investigation implicated him in improper backdating, agreed yesterday to pay $3.5 million to settle civil charges.

Chief executive Steve Jobs has not been charged in the probe. (Alastair Grant - AP)

Complaint: S.E.C. v. Heinen, Anderson

Separately, SEC enforcers charged Nancy R. Heinen, former general counsel for Apple, with violating anti-fraud laws and misleading auditors at KPMG by signing phony minutes for a board meeting that government lawyers say never occurred.

Heinen, through her lawyer, Miles F. Ehrlich, vowed to fight the charges. Ehrlich said Heinen's actions were authorized by the board, "consistent with the interests of the shareholders and consistent with the rules as she understood them."

Anderson issued an unusual statement defending his reputation and tying Jobs to the scandal in the strongest terms to date. He said he warned Jobs in late January 2001 that tinkering with the dates on which six top officials were awarded 4.8 million stock options could have accounting and legal disclosure implications. Jobs, Anderson said, told him not to worry because the board of directors had approved the maneuver. Regulators said the action allowed Apple to avoid $19 million in expenses. Late last year, Apple said that Jobs helped pick some favorable dates but that he "did not appreciate the accounting implications."

Explaining Anderson's motive for issuing the statement, his lawyer Jerome Roth said: "We thought it was important that the world understand what we believe occurred here."

Roth said his client, a prominent Silicon Valley figure and a managing director at the venture capital firm Elevation Partners, will not be barred from serving as a public-company officer or board member under the settlement, in which Anderson did not admit wrongdoing. Roth declined to characterize the current relationship between Anderson and Jobs.

The SEC charges are the first in the months-long Apple investigation. Jobs was interviewed by the SEC and federal prosecutors in San Francisco, but no charges have been filed against him.

Steve Dowling, a spokesman for Apple, declined to comment on Jobs's conversations with Anderson. Dowling emphasized that the SEC did not "file any action against Apple or any of its current employees."

Government authorities praised Apple for coming forward with the backdating problems last year and for sharing information with investigators. Apple has not publicly released its investigation report.

Continued in article

"SEC charges former Apple executive in options case:  The SEC accuses Apple's former general counsel of fraudulently backdating stock options," by Ben Ames, The Washington Post, April 24, 2007 --- Click Here

The SEC said it did not plan to pursue any further action against Apple itself, which cooperated with the government's probe, but it stopped short of saying its investigation was closed. Commission officials declined to comment on whether possible charges could still be filed against Jobs or other current officers.
"Options troubles at Apple remain despite SEC case against 2 former officers," Associated Press, MIT's Technology Review, April 25, 2007 --- http://www.technologyreview.com/Wire/18587/

A Backdating Settlement
Brocade Communications Systems Inc. agreed to pay a $7 million penalty to settle allegations it improperly issued stock-option grants, making it the first company to pay a fine in connection with the backdating scandal, according to people familiar with the matter. The technology company's settlement with the Securities and Exchange Commission paves the way for similar cases to be resolved. Two other companies -- Analog Devices Inc. and Mercury Interactive Corp. -- previously announced preliminary settlements with the SEC that are to include penalties.
"Backdating Fine May Set Model Brocade Is the First to Pay Penalty in Options Probe; SEC Debated Punishment," by Kara Scannell, The Wall Street Journal, May 31, 2007; Page A3 --- Click Here

Bob Jensen's threads on employee stock option accounting under FAS 123 are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

Bob Jensen's threads on KPMG's woes are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

"Backdating Woes Beg the Question Of Auditors' Role," by David Reilly, The Wall Street Journal, June 23, 2006; Page C1 --- http://online.wsj.com/article/SB115102871998288378.html?mod=todays_us_money_and_investing

Where were the auditors?

That question, frequently heard during financial scandals earlier this decade, is being asked again as an increasing number of companies are being probed about the practice of backdating employee stock options, which in some cases allowed executives to profit by retroactively locking in low purchase prices for stock.

For the accounting industry, the question raises the possibility that the big audit firms didn't live up to their watchdog role, and presents the Public Company Accounting Oversight Board, the regulator created in response to the past scandals, its first big test.

"Whenever the audit firms get caught in a situation like this, their response is, 'It wasn't in the scope of our work to find out that these things are going on,' " said Damon Silvers, associate general counsel at the AFL-CIO and a member of PCAOB's advisory group. "But that logic leads an investor to say, 'What are we hiring them for?' "

 

. . .

While the Securities and Exchange Commission has contacted the Big Four accounting firms about backdating at some companies, the inquiries have been of a fact-finding nature and are related to specific clients rather than firmwide auditing practices, according to people familiar with the matter. Class-action lawsuits filed against companies and directors involved in the scandal haven't yet targeted auditors.

Backdating of options appears to have largely stopped after the passage of the Sarbanes-Oxley corporate-reform law in 2002, which requires companies to disclose stock-option grants within two days of their occurrence.

Backdating practices from earlier years took a variety of forms and raised different potential issues for auditors. At UnitedHealth Group Inc., for example, executives repeatedly received grants at low points ahead of sharp run-ups in the company's stock. The insurer has said it may need to restate three years of financial results. Other companies, such as Microsoft Corp., used a monthly low share price as an exercise price for options and as a result may have failed to properly book an expense for them.

At the PCAOB advisory group meeting, Scott Taub, acting chief accountant at the Securities and Exchange Commission, said there is a "danger that we end up lumping together various issues that relate to a grant date of stock options." Backdating options so an executive can get a bigger paycheck is "an intentional lie," he said. In other instances where there might be, for example, a difference of a day or two in the date when a board approved a grant, there might not have been an intent to backdate, he added.

 

"The thing I think that is more problematic is there have been some allegations that auditors knew about this and counseled their clients to do it," said Joseph Carcello, director of research for the corporate-governance center at the University of Tennessee. "If that turns out to be true, they will have problems."

Continued at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm


$2.2 Billion Alleged Accounting Fraud by Founder of Computer Associates
A special committee of the board of directors has accused Charles Wang, founder and former chairman of Computer Associates International Inc., of directing and participating in fraudulent accounting during the 1980s and 1990s. The committee's report, filed late Friday afternoon in Chancery Court in Delaware, is the first investigation that publicly ties Mr. Wang to what the government has described as a $2.2 billion accounting fraud. The committee recommended that the Islandia, N.Y., software company, which has changed its name to CA Inc., file suit to recover at least $500 million from Mr. Wang in costs related to his conduct, including a $225 million payment CA made to a government-ordered restitution fund . . . In a strongly worded statement, Mr. Wang said he is "appalled" by the "fallacious" committee report, saying it is based on the statements of "those who perpetrated the crimes at issue and then lied about them." Mr. Wang said he felt "personally wronged" by Mr. Kumar -- his successor and onetime protégé -- and called his own decision in 1994 to recommend him for the position that would eventually take him to the corner office a "major mistake."
William Bulkeley and Charles Forelle, "Directors' Probe Ties CA Founder To Massive Fraud Report Suggests Suing Wang for $500 Million; Evidence of Backdating, The Wall Street Journal, April 14, 2007; Page A1 --- http://online.wsj.com/article/SB117649886174069499.html?mod=todays_us_page_one

"Former Computer Associates CEO to Pay Over $52 Million," by Tom Hays, SmartPros, April 16, 2007 --- http://accounting.smartpros.com/x57280.xml

A judge has signed off on a restitution agreement requiring the former chief executive of Computer Associates International Inc. to pay at least $52 million - including proceeds from the sale of his yacht and pair of Ferraris - to victims of a huge accounting fraud at one of the world's largest software companies.
 
U.S. District Judge Leo Glasser approved the deal on Friday following a brief hearing in Brooklyn at which a special master overseeing a restitution fund announced that tens of thousands of people who lost money on the company would recover only a small fraction of their investments.

The agreement with Sanjay Kumar, who was sentenced to 12 years in prison in November for his role in the scandal, would theoretically make him liable for as much as $798.6 million in payments to investors.

Prosecutors acknowledge, though, that Kumar and his family will probably never have enough money to pay that amount.

The deal, which was filed earlier this month, calls for Kumar to instead make installment payments of $40 million, $10 million and $2 million by December of 2008, then pay 20 percent of his annual income once he is released from prison.

Those payments would continue for the rest of his life.

Kumar, 45, will be forced to sell off his stock portfolio, a 57-foot yacht in Naples, Fla., and four cars, including the Ferraris. But his family will keep its estate in Upper Brookville, on Long Island.

The agreement "allows his family to live reasonably well," said Kumar's attorney, Lawrence McMichael. "That's fair. They didn't commit a crime."

Kumar, who attended the hearing, left court without speaking to reporters. He must report to prison on Aug. 14.

The $52 million will go into a restitution fund that currently totals about $235 million, said the special master, Kenneth Feinberg. The roughly 95,000 investors who are eligible for restitution will recover only about 2.3 percent of their loss, he said.

The judge acknowledged that many investors would be disappointed with the payouts. "But that's the nature of the beast," he said.

Continued in article

The independent auditor of Computer Associates is KPMG.

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


Question
Should you advise someone to purchase long term care insurance?

"A Conversation With Barry Goldwater: Are You Recommending Long-Term Care Insurance?" AccountingWeb, April 20, 2007 ---http://www.accountingweb.com/cgi-bin/item.cgi?id=103435

Who is the largest payer of long-term care assistance? It’s the general public who fund long-term care from personal savings and through public assistance programs. But the numbers bear out that CPAs and advisors are doing a poor job of referring their clients to asset protection long-term care programs. Why is this?

Because of the way the U.S. healthcare system is set up, a long-term care event could devastate family retirement savings. Last year the long-term care insurers paid out $3.3 billion in claims but that figure only equated to 6 percent of total claims paid – a percentage that pales in comparison to the real costs born by the general public. Twenty-seven percent, or $30 billion, of all long-term care expenses are paid out of savings accounts, a major contributing reason for people going into bankruptcy. Another $42 billion was paid by Medicaid, and Medicare paid $15 billion.

In our litigious society, the reality of long-term care insurance (LTCI) being treated as a fiduciary item has arrived. Disgruntled beneficiaries whose inheritances have been depleted by the expense their parents bore funding their long-term care experiences are successfully arguing and receiving monetary judgments from advisors who are not bringing up the subject of future liability planning. It is becoming a question of fiduciary responsibility to recommend asset protection.

For example: It is projected that a 50-year-old person today is going to spend more than $1 million a year upon needing long-term care assistance when they are 85. Do you really want to make a negative million dollar decision for your clients if they lose this amount to the lack of asset protection? Are CPAs making these kinds of client assessments or does the CPA really not care whether a client should self insure the risk of a future long-term care event or transfer that risk to an insurance company?

Statistic: Forty percent of those needing long-term care (LTC) are under age 65.

Do CPAs recommend long-term care insurance? Tax and audit professionals are focused on fee planning in their core competencies. They make few financial planning referrals because their firm does not have a team planning approach outside of their core business model. These CPAs usually do not recommend LTCI. The CPA who is a multi-disciplinary advisor is looking for programs of opportunity in a broader environment that incorporates financial services and wealth management. This group usually will have an in house expert or a very close strategic alliance with an advanced planning insurance broker and will try to incorporate long-term care planning into their practice. These CPAs do recommend LTCI and are proactive inserting this item in their financial plan for clients.

Because women generally outlive men by an average of seven years, they face a 50 percent greater likelihood than men of entering a nursing home after age 65.

However, just 18 percent of women who responded to a study on the financial literacy of women have talked with their spouse or partner about long-term care insurance. Most women do not want to be a burden on their children. Yet about three-quarters of respondents have not had serious discussions with their children about long-term care insurance.

How does the CPA connect with the aging baby boomer client on matters of long-term care and asset protection planning when 71 percent of all caregivers are women who are related to the in need relative? Advisors are not connecting with women and long-term care at all! We believe there is reluctance among CPAs to discuss transferring risk to insurance companies because somehow it is an uncomfortable conversation to have. But the numbers are compelling and advisors need to sit up and take notice.

To plan for a future liability in combination with a plan for retirement income is the kind of creative planning clients are expecting. CPA advisors should know and should be making their clients aware that it is not the decision of the client to buy LTC insurance, it is the decision of the carrier whether they will offer the client a contract. When we surveyed our clients with the question, “Would you think it to be a good idea that we do future liability planning alongside of future income planning so that if you need medical or assistance to live in your home in the future, that expense would not come out of your retirement savings account?” When you say it with inflection, it is not as long a sentence as it appears and it is a very responsible question for an advisor to ask. The overwhelming response from our clients was extremely favorable with the most common reasonable accompanying question being “How much does it cost?” In other words, how much of my $20k 401k contribution am I going to be spending in order to protect it? The direct response is; “Based on information analyzed as to costs associated with a long-term care event, you can spend $3k per year for 20 years based on your age and risk factor probabilities or you can spend between $50k-$250k annually, for an average of five years, on your care? Which program can you best afford to fund?” When you consider the potential spend down of assets, you begin to understand the fiduciary aspects associated with prudent advice when the client is told to self insures these kinds of risk.

On the other hand, high net worth clients will not pay for something without recognizing its perceived value. If I can fund future liability events from cash flow, why should I spend money on insurance I do not need? Here is the question for our high net worth clients; “Do you have an asset protection plan in place that covers the downside risk of investment loss due to a future medical liability or long-term care event?” That question enables me to have the conversation about long-term care insurance with high net worth people. And these facts bear me out.

If the client has a $5 million investment portfolio returning 9 percent per year, his/her income from investments is projected to be $450,000 before taxes. If a future liability occurred and the cost of an assistance related liability was $150,000, the cost to the client would be $150,000 plus the loss of investment income at 9 percent. The total loss of principal plus interest for one year is $163,500, for three years the cost is $490,500. This is not how high net worth people plan, they do not leave these kinds of gaps that can effectuate loss. To transfer the risk, the cost is $6,000 for this married couple in their mid-50’s. If we do the math correctly, they would have to pay premiums for 25 years to equal one year’s cost for care. Their premiums would never exceed the cost of two years worth of care. No matter what one does with his or her money, the cost for care is always going to be the same, $163,000 is always going to be greater then $6,000, high net worth or not.

It is our clients call to make, but if we connect our recommendations to the larger picture of asset protection, our message for risk transference becomes more powerful. From the financial data presented, Americans are paying 94 percent of the costs associated with long-term care expenses either in the form of public assistance or from savings. The majority of caretakers are our mothers, wives and daughters. These are alarming figures moving forward and given medical inflation outpacing other inflationary indices, CPAs should be aware of their fiduciary responsibility to make relationships with long-term care insurance specialists so their clients can be better served in this area of asset protection and they will be protected from litigious beneficiaries.

About Barry Goldwater
Barry Goldwater is the Principal of the Financial Resource Group and a 20-year veteran of the insurance industry. He focuses not only on working with the business and affluent clients of CPAs and attorneys, but also in helping CPA's form and develop a business model to include financial services. He can be reached at 617-527-9736,or a
t barry@frg-creative.com. His web sites are http://www.frg-creative.com or www.goldwaterfinancial.net

 

Jensen Comment
It is important to note that the above author is with the insurance industry. In my opinion, elder care insurance is not a good deal for many people. For one thing it is very expensive and adds another "middle man" to profit from elder care. Second, reasonably wealthy people who can afford long-term care expected costs (adjusted for probabilities and family health history) may find insuring for long term care to be a bad deal that cuts into cash flow they might enjoy in earlier years of their lives. Similarly people with limited means who are likely to qualify for Medicaid benefits may find it a bad deal. Also read the fine print of a contract. Insurance companies have a way of limiting their own risk exposures,
especially risks of rising eldercare costs.

Another risk is that your so-called financial advisor may be receiving some sort of kickback for helping to get clients to take out elder care insurance. This is an expensive cash flow item that requires high integrity financial advising.

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

 


"Higher Ed’s Conflict of Interest Problem," by Doug Lederman, Inside Higher Ed, June 6, 2007 --- http://insidehighered.com/news/2007/06/06/conflicts

As revelation after revelation about real and potential conflicts of interest wrongdoing has battered the student loan industry in recent months, college leaders and higher education groups have largely responded (when they have done so at all) by acknowledging problems — and proposing possible solutions — in and around financial aid offices.

Numerous higher education associations, of financial aid administrators and university presidents, are at work on new codes of conduct and other policies aimed at governing the relationships between loan providers, student borrowers and the campus financial aid officials who are charged with serving as objective third-party intermediaries between them.

Overdue as such policies may be, they may be little more than a finger in the dike. Virtually every practice and perceived conflict of interest that has been questioned in the unfolding student loan controversy can be found to occur elsewhere on often highly decentralized campuses where the interests of corporate vendors and students increasingly intersect, with college and university officials at the intersection.

Many technology companies have advisory boards of college IT administrators that closely resemble the bank panels that have drawn New York Attorney General Andrew M. Cuomo’s scorn. Food service and beverage companies, cellular telephone providers and numerous other vendors seeking to reach a campus’s students and employees sometimes offer revenue sharing arrangements or other sweeteners (like refurbishing a cafeteria) that primarily benefit the colleges, much like the various “inducements” that Congress and the Education Department are vowing to prohibit in financial aid. Accounting and auditing firms, like banks, often make contributions to college fund raising drives or sponsor tables at campus events in the course of doing business.

And many if not most higher education associations help pay for their annual and other meetings in large part from corporate sponsorships and memberships of the sort that has put the National Association of Student Financial Aid Administrators in hot water. The American Council on Education’s corporate alliance program offers members of the “president’s circle” the chance to meet with college presidents, among other benefits, for a contribution of at least $200,000, and provides other benefits at lesser donation levels. The several dozen corporate partners of Educause, the higher education technology association, pay anywhere from $20,000 to more than $100,000 over the course of a year for a series of benefits that include the opportunity to make presentations to the association’s members at the group’s annual meeting. And the National Association of College and University Business Officers, for instance, has 11 “diamond” sponsors for its annual meeting next month — technology, bookstore and other companies that agreed to pay at least $30,000 for various forms of visibility at the conference. (Inside Higher Ed is among six “friends of NACUBO” that paid $1,000 each.)

It can be argued that in none of these other areas are college officials so directly in a position to make decisions that could negatively affect students, as Cuomo and Congressional critics of the loan industry (from a consumer protection standpoint) argue that financial aid officers are when they choose a lender to which they refer prospective borrowers. But a technology administrator who chooses one vendor over another or a chief financial officer who has a hand in selecting the food provider can affect what students pay and the quality of the services they receive.

Given the widespread existence of such perceived conflicts of interest across campuses, college leaders risk reacting too narrowly and ignoring the underlying problems if they limit their response to the student loan scandal to their financial aid offices, a broad chorus of higher education leaders and experts on conflicts of interest say.

Don’t merely draft codes of conflicts that apply to financial aid offices; ensure that colleges and universities have strong and clear conflict of interest policies that apply broadly to anyone with authority or influence over campus spending decisions — and that the institutions monitor and enforce those policies, for example. Only by acknowledging that potential conflicts exist across many campus departments and programs, these experts say, can higher education avoid having today’s student loan scandal become tomorrow’s damaging controversy elsewhere.

“I don’t think we serve our institutions well ... if we try to look at this as simply a student loan issue,” says John Lippincott, president of the Council for Advancement and Support of Education, whose organization has its own annual meeting sponsorships.

Continued in article

The Student Loan Scandal:  Plenty of Blame to Spread Around
As the student loan scandal has unfolded in recent months, college financial aid officers and their advocates have repeatedly dismissed the hysteria as a case of a few bad apples in an ethical orchard. But a report released Thursday by Senator Edward M. Kennedy’s (D.-Mass.) office churns some cider out of that argument, naming a large number of colleges that have accepted or even solicited inducements from lenders — often offered with the expectation or explicit agreement that the institution would grant said lender preferential treatment.
Elizabeth Redden, "A ‘Systemic’ Scandal," Inside Higher Ed, June 15, 2007 ---http://www.insidehighered.com/news/2007/06/15/loans

Borrowing Rates: You're Known by the College You Attend
Andrew Cuomo, attorney general of New York State, sent a letter to Congress Monday describing his concern over redlining-type practices by “a significant number of lenders” in the student loan industry, The New York Times reported. In this case, he said that some lenders — whom he did not name — are setting interest rates on private loans on a college-by-college basis, based on default rates. As a result, students whose personal situations make them good credit risks may be punished with a high interest rate because of the college they attend. Some bankers told the Times it was appropriate for them to consider factors such as a college’s default rate.
Inside Higher Ed, June 19, 2007 --- http://www.insidehighered.com/news/2007/06/19/qt

The United Nations Educational, Scientific and Cultural Organization is today releasing a report, “Corrupt Schools, Corrupt Universities: What Can Be Done?” The report says that educational institutions worldwide are losing billions of dollars because of various corrupt practices.
Inside Higher Ed, June 6, 2007 --- http://insidehighered.com/news/2007/06/06/qt

Bob Jensen's threads on conflict of interest problems in higher education are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

 


Drexel Caves in on Student Loan Charges
Under the terms of the accord, Drexel agreed to redistribute to student borrowers about $250,000 that it had received from Education Finance Partners as part of revenue sharing agreements in which the lender paid the university a portion of the private loans its students took out. Drexel also agreed to abide by the code of conduct that Cuomo’s office has promulgated, and that two dozen colleges and a half-dozen lenders have endorsed.
Doug Lederman, "Drexel to Cuomo: Um, Never Mind “Fight on, Drexel!” “Stand Strong Drexel!” Inside Higher Ed, May 16, 2007 --- http://www.insidehighered.com/news/2007/05/16/drexel

Bob Jensen's threads on the student loan scandals are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability


One Person's Claim Can Dramatically Increase a Firm's Employee Health Insurance
Such are the challenges for smaller businesses in Kansas and the many other states where laws permit insurers to raise health premiums substantially for small employers when one worker incurs significant medical bills. And it is why, as state legislatures, Congress and presidential candidates of all stripes debate the growing problem of Americans without health insurance, the struggles of small businesses — which employ about 40 percent of the nation’s work force — are likely to become a central issue. Small-business employees are one of the fastest-growing segments of the nation’s 44 million uninsured; they now represent at least 20 percent of the total, according to federal census data. And even modest-size employers like Varney’s that say they remain committed to providing benefits find themselves wondering how long they can continue.
"Small Businesses’ Premiums Soar After Illness," The New York Times, May 6, 2007 --- http://www.nytimes.com/2007/05/05/business/05insure.html

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


College Researchers With Conflicts of Interest
Sen. Edward M. Kennedy (D-Mass.)
released a report Wednesday that he said showed that researchers at several universities who advised the U.S. Education Department on its Reading First program had “significant financial ties to education publishers while they held Reading First positions that required them advise and provide technical assistance to States and school districts about which reading programs to chose and how to implement them.”
Inside Higher Ed
, May 10, 2007 --- http://www.insidehighered.com/news/2007/05/10/qt

Bob Jensen's threads on appearance versus reality of research independence --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#ResearchIndependence


Questions of Accounting and Accountability for Shrine Charities

"In Shriner Spending, a Blurry Line of Giving," by Stephanie Strom, The New York Times, March 19, 2007 --- http://www.nytimes.com/2007/03/19/us/19shrine.html?_r=1&hp&oref=slogin

But his faith was shaken when he joined the leadership of the Suez Shriners in San Angelo, one of 191 temples affiliated with the order. He found that much of the money collected to support the hospitals was commingled with money used for liquor, parties and members’ travel to Shrine events. The Shrine’s national auditor largely confirmed his findings, but not before Mr. Goline was forced out of office.

His experience is not unique. An examination by The New York Times of Shrine records and minutes of Shrine meetings and interviews with current and former Shrine officials painted a picture of lax accounting procedures and oversight under which money earmarked for the hospitals instead financed temple activities.

Continued in article


Ex-Halliburton unit accused of war profiteering
U.S. lawmakers on Thursday railed against senior Army officials and defense contractor KBR Inc. over persistent allegations of fraud and contract abuse on a multibillion-dollar deal to provide food and shelter to U.S. troops in Iraq. "Profiteering during wartime is inexcusable," said Sen. Byron Dorgan, D-N.D., testifying at a Senate Armed Services Committee hearing. "This is the most significant waste, fraud and abuse we have ever seen in this country." Lawmakers and the U.S. inspector general have accused KBR, formerly a division of Halliburton Co., which was once headed by Vice President Dick Cheney, of abusing federal rules in record-keeping...
Donna Borak, "Ex-Halliburton unit accused of war profiteering," Sun Herald, April 20, 2007 ---
http://www.sunherald.com/102/story/35851.html


"PCAOB: Ernst & Young Signed Without Evidence," AccountingWeb, May 3, 2007 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=103472

A report issued by the Public Company Accounting Oversight Board states that Ernst & Young LLP appears to have signed off on some public-company audits without having sufficient evidence to support its opinion. The Associated Press reported that Ernst & Young defended its work while acknowledging that it agreed, in response to the findings, to perform additional procedures for some clients.

"In no instance did these actions change our original audit conclusions or affect our reports on the issuers' financial statements," Ernst & Young said in an April 5 letter to the oversight board that was included in the report.

The latest inspection findings found fault with eight public-company audits by Ernst & Young, down from 10 deficient audits identified in the recently issued 2005 inspection report. By law, the largest audit firms must undergo annual inspection by the oversight body, created by Congress in 2002 to inspect and discipline public company accountants.

Inspection findings provide limited insight into audit quality since they don't identify audit clients by name. In response to complaints that the oversight board has been slow to issue findings, board chairman Mark Olson pledged last year to pick up the pace.

"Timeliness of inspection reports continues to be a priority for me, and I am pleased by our progress," Olson said in a statement Wednesday.

According to the 2006 inspection report, Ernst & Young didn't identify one client's departure from generally accepted accounting principles with regard to lease abandonment liability. The report also faulted the auditor's handling of the client's self-insurance reserve and severance payments to former executives. Ernst said it supplemented its work papers and performed additional procedures but that its additional work didn't affect its original conclusions on the unidentified client's financial statement.

Inspectors flagged a second audit where unrecorded audit differences would have reduced net income by as much as 5 percent, saying Ernst & Young failed to consider "quantitative or qualitative factors" relevant to the aggregate uncorrected audit differences. Ernst & Young attributed the difference to a prior-year error identified by its audit team, which it said the client firm corrected in its current year results. While Ernst & Young said it supplemented its 2005 audit record and informed the client's audit committee of the audit differences, it said the actions didn't change its original audit conclusions or affect its report on the firm's financial statements.

The audit firm had the same response to findings on a third audit, one where inspectors took issue with its handling of a long-term licensing agreement paid for partly with cash and partly with stock that would vest in the future. The audit firm disputed findings that there was no evidence it had analyzed the terms of the licensing agreement to ensure it complied with relevant accounting rules.

In a fourth audit, the oversight board's inspectors questioned whether Ernst & Young should have allowed the audit client to aggregate business lines when evaluating impairment of goodwill, saying certain factors indicated that aggregation wasn't appropriate. It said there was no evidence in the audit papers and "no persuasive other evidence" that Ernst & Young considered those factors in reaching its conclusion. For its part, Ernst & Young said it believes the issue was "properly evaluated" and that it took no further action as a result.

Bob Jensen's threads on Ernst & Young's legal and professionalism woes are at http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

Bob Jensen's threads on audit firm professionalism are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism


Fraud as Usual in the United Nations

"Kim's U.N. Banker," The Wall Street Journal, June 11, 2007; Page A12 --- Click Here

The case of the United Nations and North Korea gets curiouser and curiouser. Only a week ago, the U.N. was claiming that a preliminary audit of its programs in North Korea showed "irregularities" that were no big deal. But now the U.S. has new evidence that U.N. funds intended to help the people of one of the world's poorest countries were diverted to prop up Kim Jong Il's regime.

The latest chapter in the Cash for Kim saga shows how the United Nations Development Program operated as the North Korean dictator's private banker. The U.N. agency facilitated Pyongyang's purchases of high-tech equipment that could be used for military purposes, as well as property in France, Britain and Canada. The outlines of the scam were reported over the weekend in the Chicago Tribune and Washington Post.

The details are worth studying, however,

. . .

The U.S. has also raised concerns that North Korea used the UNDP to cover up its counterfeiting. The UNDP often paid for foreign travel for North Korean officials. In a number of cases, North Korean employees of the UNDP appear to have abetted a money-laundering scheme involving real dollars and fake dollars and the UNDP's euro account at the Foreign Trade Bank in Pyongyang. The real dollars were pocketed by the government, while the fake ones were distributed by North Korean officials on their foreign travels.

We're told that U.N. Secretary-General Ban Ki-moon claims to be "shocked" by these latest U.N. findings. We hope that means he's finally motivated to buck the U.N. bureaucracy and insist on the independent, external audit of U.N. operations in North Korea that he promised in January. As these revelations show, there's a long way to go before we get to the bottom of the Cash for Kim scandal.


"Prosecutors End Case in Long AOL Fraud Trial:   Executives Accused Of Making Sham Deals," by Carrie Johnson, The Washington Post, January 5, 2007 --- Click Here

Federal prosecutors concluded their accounting-fraud case against two former AOL executives yesterday afternoon, signaling that the long-running trial soon may end after unusual twists including a mistrial for one of the defendants.

The case, which began in an Alexandria federal courtroom in mid-October, is one of the longest criminal trials ever in a jurisdiction that is widely known as "the rocket docket" for its speedy and efficient justice, legal analysts said.

More than three dozen government witnesses testified about complex accounting tricks that hearkened back to early 2001, when the technology boom had turned into a bust. At the time, the Dulles Internet service provider struggled to show revenue and advertising gains by making questionable deals with dot-com business partners in which no revenue changed hands.

"There was an intense focus to get revenue," testified Jason Witt, a manager in AOL's aggressive and freewheeling business affairs unit, which has been disbanded. "It's probably the greatest pressure I've seen since ever."

A number of witnesses recounted how the AOL defendants -- former business affairs executive Kent D. Wakeford and former Netbusiness unit vice president John P. Tuli -- felt squeezed between the expectations of their employer to close more deals and demands from dot-com clients who themselves were struggling to stay afloat.

Witt, for example, said Wakeford told him not to put terms of a deal in writing. He also spoke of a 2002 meeting with Tuli in the AOL parking garage in which they discussed whether regulators had begun to inquire about AOL's dealings with two high-tech business partners. Defense lawyers contend that the accounting treatment on the deals had been vetted by experts in the company and by far-higher-ranking executives.

But the trial perhaps is most notable for the absence of the former AOL officials who led the business-affairs operation, such as David M. Colburn and Eric Keller, whose names came up regularly in testimony and who once had been the focus of government investigation. Time Warner, which absorbed AOL, agreed to pay more than $500 million to settle joint civil and criminal charges two years ago.

Neither Colburn nor Keller was charged with a crime. The five-year statute of limitations against them expired early last year. Prosecutors told U.S. District Judge Walter D. Kelley Jr. with the jury outside the courtroom that the U.S. attorney's office for the Eastern District of Virginia continues to investigate whether Keller misled investigators in sworn testimony to securities regulators. But there have been few, if any, signs of an active criminal investigation. The Securities and Exchange Commission, which has the power to seek the return of bonuses and other compensation, continues to scrutinize a number of former AOL executives.

The courtroom drama eased with the departure more than a month ago of its most colorful presence, Las Vegas entrepreneur Charles E. "Junior" Johnson. Johnson founded PurchasePro.com, a software manufacturing company that prosecutors say made a series of sham deals with AOL in early 2001 in an effort to stave off financial doom.

Johnson, who entertained spectators and courthouse personnel with his lively stories, was removed from the trial in November and a mistrial was declared for reasons that remain secret. Prosecutors say they intend to retry Johnson, who is accused of directing subordinates to destroy e-mail messages and forge accounting documents. That leaves his former employee Christopher J. Benyo as the only PurchasePro representative sitting at a defense table next to the former AOL executives.

Defense lawyers could wrap up their case in the next several days, putting their clients' fate in the hands of a jury that has remained attentive despite the trial's sometimes plodding pace. Earlier this week, five jurors dressed in business attire took notes and pored over documents, although a few panelists' eyes wandered as the morning dragged. So far, none of the three defendants has said he will testify in his own defense. Their lawyers will ask the judge to dismiss the charges against them in arguments today.

Central to the prosecution case are former PurchasePro executives R. Geoffrey Layne and James S. Sholeff, both of whom pleaded guilty in early 2005 and agreed to testify against their former business associates. Layne and Sholeff said they conspired with Johnson at the Bagel Cafe in Las Vegas in April 2001 to forge documents that allowed the company to reach revenue goals after the financial quarter had ended.

Their accounts over the course of the trial mostly implicated Johnson. They testified that they shredded documents and destroyed computers at his direction, then buried the ashes or raked the pieces into Sholeff's yard. Layne and Sholeff also mentioned conversations with Wakeford and Tuli, who were under heavy pressure to close revenue gaps at AOL.

Continued in article


"Shaking Up Loan Industry," by Scott Jaschik, Inside Higher Ed, April 13, 2007 --- http://www.insidehighered.com/news/2007/04/13/ed

A statement released by the department late Thursday said that Spellings has asked Susan Winchell, the department’s chief ethics officer, to review “best practices” on its own financial disclosure forms to identify ways that the department might improve. Spellings also has directed that each financial disclosure form now be reviewed by at least two lawyers.

Last week, Spellings placed on leave Matteo Fontana, an Education Department official who works on student loan issues, after the New America Foundation reported that he had sold at least $100,000 in stock in the Education Lending Group, which owned Student Loan Xpress, a lender at the center of the current controversy.

It is unclear whether that sale (or the prior ownership) violated any laws or regulations, but the news about Fontana prompted calls from Democrats for tougher enforcement of loan rules by the department.

Financial disclosure reports for Fontana released by the department late Thursday in response to a Freedom of Information Act request by Inside Higher Ed offered conflicting evidence on the extent of his stock ownership and sale and of his disclosures to the department about those assets.

In his initial filing in mid-December 2002, soon after joining the department, he reported owning between $1,001 and $15,000 in stock in Direct III Marketing, as Student Loan Xpress was known at the time, and an equivalent amount of stock in Education Lending, Inc., then the parent company of Student Loan Xpress. (A note written on the form by the ethics officer at the time said “Filer [was] advised to contact Ethics Division if ELG stock exceeds $15K.") In May 2004, his first full financial disclosure, covering the 2003 calendar year, he reported having sold between $1,001 and $15,000 in stock in both companies later in mid- to late December 2002. That could be read to suggest that he had sold all of his stock in both companies.

But in May 2005, according to his disclosure form for the 2004 calendar year, Fontana reported having sold between $100,001 and $250,000 in stock in Education Lending common stock in July 2004. There is no explanation of where that stock came from. The fact that Fontana reported the sale is likely to add to Democratic Congressional criticism about the Education Department, as Fontana’s reporting raises the question of whether anyone at the department took action based on the apparent conflict.

Late Thursday, Sen. Edward Kennedy, chairman of the Senate committee with oversight of education programs, issued a statement saying: “The financial disclosure forms filed by Education Department official Matteo Fontana during his time at the department raise grave concerns about the effectiveness and impartiality of the ethics process at the department. The forms show that department officials were aware that Mr. Fontana held a significant financial interest in a company that he was charged with overseeing. Any American can tell you that this is dead wrong.”

The statement from the department Thursday noted that “like many federal government employees, Department of Education employees may own stock in any company, including companies the Department regulates or with whom the Department does business.” The statement went on to elaborate: “The conflict of interest statute prohibits employees from working on department matters that will affect the companies they own stock in unless the employee receives a waiver or an applicable regulatory exemption. For example, employees are generally permitted to work on any matter even if they do own stock as long as their interest in the matter does not exceed $15,000.”

The department also announced that Spellings has asked for the resignation of Ellen Frishberg from the department’s Negotiated Rulemaking Committee on Student Loans. Frishberg, director of student financial services at Johns Hopkins University, was placed on administrative leave by the university after it learned that she had received payments from Student Loan Xpress.

Frishberg is the second person Spellings has asked to leave a student aid post because of the scandal. Spellings earlier sought the resignation of Lawrence W. Burt from the Advisory Committee on Student Financial Assistance. Burt is director of financial aid at the University of Texas at Austin, although he too is on leave, following reports that he owned Student Loan Xpress stock.

The investigation of lender-college relationships has been led by Andrew M. Cuomo, attorney general of New York State, but it has prompted considerable interest among Congressional leaders as well. And there are no signs that the inquiries are winding down.

Reuters reported Thursday that the attorneys general of Connecticut and California are also starting probes of the topic, joining a previously announced review by the attorney general of Minnesota.

To date, most of the individuals implicated in the scandal — at least those working at colleges — have been financial aid officers. But on Thursday, a president joined the list of those being scrutinized.

Elnora Daniel, the president of Chicago State University, is a director and shareholder of a lender to which her university steers students, The Chicago Tribune reported. A Chicago State trustee is also chairman of the board of the lender, Seaway National Bank. Daniel told the Tribune that there was “no quid pro quo” in her relationship with the lender. Chicago’s other daily, The Sun-Times, reported, meanwhile, that Western Illinois University was abandoning an arrangement in which it received payment — called kickbacks by critics — from a lender it was recommending to students.

And Bloomberg reported Friday on a number of college officials — including the president of Morehouse College and the executive vice president of the University of Notre Dame — who collected pay or stocks from lenders at the time those lenders were being recommended to their students.

 

How do lenders rate on treats at the University of Texas?
Officials at the University of Texas at Austin — already facing scrutiny over how they recommended lenders to students — have a new embarrassment to face. The Daily Texan obtained and published documents showing that the office rated lenders not just on the quality of services provided to students, but on the “treats” provided to the aid office — treats like fajita lunches, happy hours, birthday cakes and more.
Inside Higher Ed, May 1, 2007 --- http://www.insidehighered.com/news/2007/05/01/qt

"College Administrator’s Dual Roles Are a Focus of Student Loan Inquiry," by Sam Dillon, The New York Times, April 13, 2007 --- http://www.nytimes.com/2007/04/13/education/13loans.html?_r=1&oref=slogin

  • Walter C. Cathie, a vice president at Widener University, spent years working his way up the ranks of various colleges and forging a reputation as a nationally known financial aid administrator. Then he made a business out of it.

    He created a consulting company, Key West Higher Education Associates, named after his vacation home in Florida. The firm specializes in conferences that bring college deans of finance together with lenders eager to court them.

    The program for the next conference, slated for June at the Marriott Inner Harbor at Camden Yards in Baltimore, lists seven lenders as sponsors. One sponsor said it would pay $20,000 to participate. Scheduled presentations include “what needs to be done in Washington to fight back against the continued attacks on student lenders” and the “economics and ethics of aid packaging.”

    Investigations into student lending abuses are broadening in Washington and Albany. Mr. Cathie is still at Widener, and his roles as university official and entrepreneur have put him center stage, as a prime example of how university administrators who advise students have become cozy with lenders.

    Widener, with campuses in Pennsylvania and Delaware, put Mr. Cathie on leave this week after New York’s attorney general requested documents relating to his consulting firm and told the university that one lender, Student Loan Xpress, had paid Key West $80,000 to participate in four conferences.

    Mr. Cathie said in an interview yesterday that he still hoped to pull off the June event. “Though who knows, if nobody comes, I guess it’ll implode,” he said.

    Several of the scheduled speakers said in interviews that they were canceling.

    “Yes, I’ve made money,” he said, “but I haven’t done anything illegal. So I’d sure like this story to get out, that — you know, Walter Cathie is a giving individual, that he’s been very open, that he’s always taken the profits and given back to students.”

    He said he had donated some consulting profits to a scholarship fund in his father’s name at Carnegie Mellon University, where he worked for 21 years. “I’ve been in this business a long time, I’ve always been a student advocate, and I haven’t done anything wrong,” Mr. Cathie said.

    Others say his case illustrates how some officials have become so entwined with lenders that they have become oblivious to conflicts of interest.

    “The allegations made against Mr. Cathie and his institution point at the structural corruption of the student lending system,” said Barmak Nassirian, a director of the American Association of Collegiate Registrars and Admissions Officers.

    The system has become so complex, and involves so much money, Mr. Nassirian said, “the temptation has become too great for many of the players to take a little bite for themselves.”

    The program for the conference in June lists corporate sponsors. One is Student Loan Xpress, whose president, according to documents obtained by the United States Senate, provided company stock to officials at several universities and at the Department of Education.

    Another is Education Finance Partners Inc., which Attorney General Andrew M. Cuomo of New York has accused of making payments to 60 colleges for loan volume. Neither company returned calls for comment.

    The program lists as a speaker Dick Willey, chief executive of the Pennsylvania Higher Education Assistance Authority, a state loan agency facing calls for reform after reports that board members, spouses and employees have spent $768,000 on pedicures, meals and other such expenses since 2000.

    Mr. Willey’s spokesman, Keith New, said that Mr. Willey would not speak at the conference, but that the agency intended to sponsor it with a “platinum level” commitment of $20,000.

    Mr. Cathie came to Widener in 1997, initially as its dean of financial aid, after years at Allegheny College, Carnegie Mellon and Wabash College in Indiana, building a background in enrollment management and financial aid.

    In 1990, well into his tenure at Carnegie Mellon, Mr. Cathie and his boss, William Elliott, an admissions official who is today Carnegie Mellon’s vice president for enrollment, began organizing annual conferences for college administrators to debate policy issues, both men said.

    They named their conferences the Fitzwilliam Audit after the Fitzwilliam Inn in New Hampshire, where they were held, Mr. Cathie said.

    Continued in article

  • "Lenders Pay Universities to Influence Loan Choice," by Jonathan D. Glater, The New York Times, March 16, 2007 --- http://www.nytimes.com/2007/03/16/education/16loans.html?_r=1&oref=slogin

    Dozens of colleges and universities across the country have accepted a variety of financial incentives from student loan companies to steer student business their way, Attorney General Andrew M. Cuomo of New York announced yesterday.

    The deals include cash payments based on loan volume, donations of computers, expense-paid trips to resorts for financial aid officers and even running call centers on behalf of colleges to field students’ questions about financial aid.

    “We have found that these school-lender relationships are often highly tainted with conflicts of interest,” Mr. Cuomo said. “These school-lender relationships are often for the benefit of the schools at the expense of the student, with financial incentives to the schools that are often undisclosed.”

    Continued in article

    At last some colleges (at least in New York) are paying the price of accepting student loan kickbacks from lenders
    Cuomo announced at a news conference (at high noon, to boot) that facing the threat of legal action, several universities had signed settlement agreements obligating them to repay funds they had received from lenders and to abide by a “code of conduct” that will require them to give up or change certain aspects of their relationships with student loan companies. And one of the student loan industry’s biggest players, Citibank, agreed that it too would abide by the code of conduct, and no longer offer to pay colleges a portion of their private loan volume to use for financial aid — a practice Cuomo had derided as “kickbacks.”
    Doug Lederman, "The First Dominoes Fall," Inside Higher Ed, April 3, 2007 --- http://www.insidehighered.com/news/2007/04/03/cuomo

    "The Student Loan Trap," by Mark Shapiro, The Irascible Professor, April 4, 2007 --- http://irascibleprofessor.com/comments-04-04-07.htm

    Colleges and universities often claim that they are helping students to meet the rising costs of a college education by expanding financial aid for students. What they fail to mention is that these days a "financial aid" package -- even for the neediest of students -- includes a large loan component in addition to whatever scholarships and grants the college or university may be able to provide. For many years the maximum Pell grant was just over $4,000 per year. On July 1, 2007 this will increase to slightly over $4,300 per year. However, for most students even in public colleges and universities this amount is far less than the annual cost of college. The difference is made up from student loans. The poorest students can obtain Perkins Loans. These are government subsidized loans that carry a 5% interest rate, and are made directly by the college to the student from a very limited pool of funds.

    By far the majority of money for student loans comes from two other programs, the Stafford Loan program and the Parent Loan Program for Undergraduate Students (PLUS). Some of the Stafford Loan money comes from directly from the government, but a large fraction is provided by private lenders. The interest rate on Stafford Loans is fixed at 6.8% and the rate for PLUS loans is fixed at 8.5%. Students who qualify based on need, may obtain "subsidized" Stafford Loans. The student with a subsidized Stafford Loan makes no payment until six months after graduation or six months after ceasing to be at least a half-time student. The federal government pays the interest in the interim. Students with unsubsidized Stafford loans must begin payments immediately.

    While the interest rate for Stafford Loans is relatively attractive, that does not tell the whole story. The federal government collects both a 3% "origination" fee and a 1% "insurance" fee on these loans. These fees are used to cover loans that go into default. Thus, to a large extent, private lenders who originate student loans or who purchase them in the secondary market are protected against defaults by the government. But the the private lenders have another great advantage when they provide Stafford or PLUS loans; namely, these debts last forever. If a person who has outstanding student loans falls on hard times, he or she cannot use the bankruptcy laws to discharge the debt. The individual (and often his parents who may have cosigned for the loan) has very limited options available to them if they are unable to make their loan payments on time and if full. In some circumstances, if a person becomes completely disabled the loan may be forgiven. In some limited situations, a person in default on a student loan may obtain deferment or forbearance on their loan. But short of that, the loan simply goes into default and the interest, late fees, and interest on late fees just continues to build.

    Private lenders who hold student loan paper have been very aggressive in their collection efforts; and, because the government aids them by garnishing the debtor's income tax refunds and Social Security benefits the lenders seldom get stiffed. Instead, the hapless debtor continues to pay for decades while the amount he or she owes may actually increase owing to the late fees and interest on the late fees.

    Private lenders have found the stream of income generated by aggressively applying late fees coupled with vigorous collection efforts to be quite lucrative. In fact, it's not unusual for a person who has gone into default on student loans to end up paying more than twice the original debt before everything is settled. Horror stories abound of individuals whose lives essentially have been destroyed by the efforts of the student loan debt collectors.

    At the same time that these private lenders are extracting the last dime from their less fortunate customers, they have developed cozy relationships with college financial aid offices. In a March 29, 2007 New York Times article Jonathan D. Glater reported that a number of well-known colleges and universities have agreements with private lenders to answer telephone queries to their financial aid offices. In many cases students are not told that they are talking to a representative of the private lender rather than a school financial aid staff person. College and university financial aid officials also often receive favors from private lenders who are on their "preferred lender" lists, and some colleges actually have received kickbacks from their preferred lenders from loans taken out by their students.

    The situation had gotten so bad that New York's attorney general, Andrew M. Cuomo, had started investigations into student loan practices at numerous colleges. The Chronicle of Higher Education reported on April 3, 2007 that Cuomo had reached settlements with 36 of these institutions that would prevent administrators from "accepting gifts from lenders, serving on paid lender-advisory boards, and entering into revenue sharing contracts with private lenders." Six of the institutions that had entered into such revenue sharing agreements also agreed to refund the money that they received to the students who actually took out the loans.

    Continued in article

    Bob Jensen's threads on the student loan scandals are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

    Bob Jensen's threads on higher education controversies are at http://www.trinity.edu/rjensen/HigherEdControversies.htm


    January 1, 2007 message from Doug Roberts [robertsfd@APPSTATE.EDU]

    I am teaching for the first time a fraud examination course. As this is not my area of experience, I'm looking for ideas on what to cover and how best to cover it. In addition, the timing of the class and the non- standard "audience" will impact what I do.

    The course will meet 3 and 1/2 hours a day for 12 days (consecutive except for weekends) at the end of the semester. Students will be those just returning from tax internships who need another 3 credit hours to maintain full-time status (rather than taking the course because they have an interest in fraud examination); they will have just finished 15 weeks of busy season and I suspect will be less than motivated to do much work without thoughtful "pressure" on my part. Therefore, my objective is to have activities that will force them to remain involved and hopefully learn something and have fun at the same time.

    The textbook is rather interesting reading covering various forms of fraud. Beyond their reading outside of class and some quizzes over the reading, I need ideas on what to do - I'd like to keep lecture time to a minimum but need to fill up at least 3 hours. I have some videos the Association of Certified Fraud Examiners put out and will try to get some guest speakers who work in the area. But that still leaves me much time.

    Does anyone have any ideas? One thought I had was working with data using Excel and Access to look for fraud flags. However, I have not been able to find datasets. Does anyone know of any good datasets or cases where data analysis is used? I saw where IDEA offers an educational demo - does anyone have experience using that? And how long does that take to complete? Any other ideas using hands-on computer exercises?

    Any ideas would be appreciated.

    Happy New Year,

    Doug Roberts

    January 1, 2007 reply from Len Stokes

    I have used some of the cases from the Knapp Audit Case book published by Thomson. Many of the cases relate to audit failure and I don't focus exclusively on the GAAS perspective but the Internal Control, fraud etc. I break the class into groups and have a specific grup lead the disucssion of the issues in the case and what they think went wrong, why and what could have been done to prevent it. I don't allow them to focus on the questions that are provided My concept is to get them to begin to think outside the box not just think that Fraud involves specific lists of thing to do. The Fraud videos usually are about an hour. The students usally have interesting comments related to what they saw. Use the class time like a seminar with disucssions and the time will fly with a great deal of interest on their behalf.

     

    Len

    January 2, 2007 reply from Bob Jensen

    Here are a few references of possible interest on this topic:

    Turn Excel into a financial sleuth: an easy-to-use digital analysis tool can red-flag irregularities
    Journal of Accountancy, August, 2003 by Anna M. Rose, Jacob M. Rose --- http://www.aicpa.org/pubs/jofa/aug2003/rose.htm 

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

    "Auditors’ New Procedures for Detecting Fraud," by D.D. Montgomery, M.S. Beasley, S. Menelaides, and Z. Palmrose, Journal of Accountancy, May 2002 ---
    http://www.aicpa.org/pubs/jofa/may2002/mont.htm 

    "Let Them Know Someone’s Watching, by Joseph T. Wells, Journal of Accountancy, May 2002 ---
    http://www.aicpa.org/pubs/jofa/may2002/wells.htm 


    How to Avoid Predatory Loans

    The following helper sites were recommended by Time Magazine, March 26, 2007, Page 79:

    Dirty Secrets of Credit Card Companies, Banks, and Credit Rating Agencies --- http://www.trinity.edu/rjensen/FraudReporting.htm#FICO

    Dirty Secrets of Credit Counseling Fraud ---
    http://www.trinity.edu/rjensen/FraudReporting.htm#CreditCounseling

    Subprime Mortgages: A Primer
    Lawmakers on Capitol Hill are demanding answers from regulators and lenders about subprime mortgages. Many worry that rising mortgage defaults and lender failures could hurt America's overall banking system. Already, the subprime crisis has been blamed for steep declines in the stock market. But just what is a subprime loan — and why should you care? Here, a primer:
    "Subprime Mortgages: A Primer," NPR, March 23, 2007 --- http://www.npr.org/templates/story/story.php?storyId=9085408

    Bob Jensen's threads on mortgages are at http://www.trinity.edu/rjensen/FraudReporting.htm#MortgageAdvice

    "Mortgage Meltdown," by Andy Laperriere, The Wall Street Journal, March 21, 2007; Page A19 --- http://online.wsj.com/article/SB117444618278043762.html?mod=opinion&ojcontent=otep&

    Stock markets world-wide have sold off the past few weeks over concerns the collapse of the subprime mortgage industry could prolong and deepen the housing slump and threaten the health of the U.S. economy. Federal Reserve officials and most economists believe the problems in the subprime mortgage market will remain relatively contained, but there is compelling evidence that the failure of subprime loans may be the start of a painful unwinding of a housing bubble that was fueled by easy money and loose lending practices.

    Whether measured in absolute terms or time-tested metrics such as price-to-income or price-to-rent ratios, the rise in U.S. home prices during the past six years is unprecedented. What's more, not only has mortgage debt doubled during this time, but loans have been offered on imprudent terms (for instance, a no down payment, no income verification loan to a borrower with a checkered credit history).

    It's no coincidence that the five-fold growth in subprime lending occurred at a time when home prices soared to nosebleed territory. As home prices kept rising, fewer loans went bad because the homeowner could almost always refinance or sell the property at a profit. (Until the past year or so, it seems the only person in California who sold his house at a loss was the convicted lobbyist who in 2003 bribed former Rep. Randy "Duke" Cunningham by buying his house at an inflated price and selling it six months later for $700,000 less.)

    As the home price boom gained momentum and delinquencies dropped, lenders offered progressively easier and riskier lending terms. Common sense suggests that the boom-time mania that led banks (and investors in mortgage-backed securities) to offer dangerous loans to individuals with poor credit histories also led them to offer the same kinds of risky loans (no income verification, no down payments, high payments as a share of income, low teaser rates) to individuals with good credit scores.

    Far from being limited to the subprime market, the data show these risky loan features have become widespread. According to Credit Suisse, the number of no or low documentation loans -- so-called "liar loans" -- has increased to 49% last year from 18% of purchase loans in 2001, a nearly three-fold increase. The investment bank also found that borrowers put up less than a 5% down payment in 46% of all home purchases last year. Inside Mortgage Finance estimates that nontraditional mortgages -- mostly interest-only and pay-option ARMs that allow the borrower to defer paying back principal or even increase the loan balance each month -- which barely existed five years ago, grew to close to a third of all mortgages last year.

    The Alt-A market, a middle ground between subprime and prime, has increased seven-fold since 2001 and accounted for 20% of home-purchase loans last year. Fully 81% of Alt-A loans last year were no or low documentation loans, according to First American Loan Performance. Why have borrowers employed this kind of risky financing? Because it was the only way many of them could afford a home in some of the hottest housing markets, where prices more than doubled in five years.

    It should come as no surprise that delinquencies on these unconventional loans have increased sharply. Investors were shaken last week by a Mortgage Bankers Association report which found that mortgage delinquencies hit nearly 5% at the end of last year and that prime adjustable rate loans deteriorated at a faster rate than subprime ARMs. A recent UBS report finds that the 2006 Alt-A loans are "on track to be one of the worst vintages ever." This is no subprime niche problem.

    Even if bad loans are more widespread than previously expected, many housing bulls say, the impact on the housing market and the economy will be minimal because total losses due to foreclosures will be a small percentage of outstanding mortgage debt and a still smaller share of the economy. A similar argument holds that bad loans won't lead to a broader foreclosure problem because the average American has plenty of equity in his home.

    Foreclosure losses as a share of the economy will be small and most homeowners have a comfortable amount of equity in their homes. In fact, about one-third of homeowners have no mortgage and own their homes outright, but they are not the reason home prices have been driven to the stratosphere. Home prices -- like all prices -- are set at the margin. It was the marginal buyer, particularly the subprime borrower and housing speculator, who drove prices higher. The easing of lending terms increased the demand for homes, and since the supply of homes is relatively fixed (or inelastic), this increase in demand quickly translated into higher prices. As the loose lending practices are inevitably reversed -- and there is a wide chasm between current lending practices and prudent lending terms -- fewer people will be able to afford to buy a house, which will reduce demand and push home prices lower.

    It's not the size of foreclosure losses as a share of the economy that matters, it is the effect those losses have on the availability of credit. When banks (and investors in mortgage-backed securities) begin suffering losses, they inevitably pull back. This is why so many subprime companies have gone bankrupt virtually overnight; investors balked at buying subprime loans except at a steep discount, which produced immediate losses. In effect, their ability to profitably finance new loans was eliminated.

    What's more, the bank regulators are only now beginning to tighten lending standards and will be under increasing pressure from Congress to do more. After growing by nearly 50% in the first half of 2006, nontraditional loan growth has turned negative since the bank regulators issued new guidelines last September. The CFO of Countrywide recently told an investor conference that 60% of the subprime loans the company is making won't meet proposed federal rules likely to take effect during the summer. The concern that tighter lending standards could reduce access to financing is the reason a widely watched survey of homebuilders conducted by the National Association of Homebuilders dropped earlier this week.

    Continued in article

    Bob Jensen's mortgage advice is at http://www.trinity.edu/rjensen/FraudReporting.htm#MortgageAdvice


     

     


     




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

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

    Bob Jensen's threads on professionalism and independence are at  file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#Professionalism 

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

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

    The Saga of Auditor Professionalism and Independence ---
    http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
     

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

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

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

     

     


     

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

     

    Bob Jensen's home page is at http://www.trinity.edu/rjensen/