Accounting Scandal Updates and Other
Fraud Between April 1 and June 30, 2012
Bob Jensen's Main Fraud Document ---
Bob Jensen at
Bob Jensen's Enron Quiz (and answers) ---
Bob Jensen's Enron Updates are at ---
Many of the scandals are documented at
Resources to prevent and discover fraud
from the Association of Fraud Examiners ---
Self-study training for a career in
fraud examination ---
Source for United Kingdom
reporting on financial scandals and other news ---
Updates on the leading books on the
business and accounting scandals ---
I love Infectious Greed by Frank
American History of Fraud ---
Future of Auditing ---
"What’s Your Fraud IQ? Think you
know enough about corruption to spot it in any of its myriad forms? Then rev up
your fraud detection radar and take this (deceptively) simple test." by Joseph
T. Wells, Journal of Accountancy, July 2006 ---
What Accountants Need to Know ---
Global Corruption (in legal systems) Report 2007 ---
Tax Fraud Alerts from the IRS ---
White Collar Fraud Site ---
Note the column of links on the left.
Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of
appendices can be found at
History of Fraud in America ---
Rotten to the Core ---
Bob Jensen's threads on fraud are at
"Justice Dept. Sues Apple and Major Publishers in E-Book Price-Fixing Case,"
by Nick DeSantis, Chronicle of Higher Education, April 11, 2012 ---
The Rotten Apple iBooks ---
Bob Jensen's threads on Ebooks ---
Copyright Troll ---
TED Video: Drew Curtis: How I beat a patent troll ---
Bob Jensen's threads on copyrights ---
"Psychology Of Fraud: Why Good People Do Bad Things (with cartoons)," by
Chana Joffe-Walt and Alix Spiegel, NPR, May 1, 2012 ---
Thank you Jim McKinney for the heads up.
This was a very good broadcast. I've tracked fraud for years --
One of the most important aspects of fraud psychology is the
follow-the-herd-mentally when those around you are both committing fraud and
getting away with it. My best illustrations here are tracked in my extensive
timeline of derivative financial instruments frauds ---
Another key ingredient of some large frauds is that white collar crime pays
big even if you get caught ---
For some fraud is a disease like pedophilia in that the worst of the worst
just seem to not be able to help themselves. Recidivism: is very high after
being released from prison.---
In two pending lawsuits and in her first public
interview, Ms. Koper described company-paid luxuries that she said appeared to
violate the Internal Revenue Service’s ban on “excess compensation” by nonprofit
organizations as well as possibly state and federal laws on false bookkeeping
"Family feud reveals luxuries at largest Christian TV network:
Granddaughter attacks founders, who accuse her of embezzlement," by Erik
Eckholm, MSNBC, May 5, 2012 ---
Thank you Dennis Huber for the heads up
NEWPORT BEACH, Calif. — For 39 years, the Trinity
Broadcasting Network has urged viewers to give generously and reap the
Lord’s bounty in return.
The prosperity gospel preached by Paul and Janice
Crouch, who built a single station into the world’s largest Christian
television network, has worked out well for them.
Mr. and Mrs. Crouch have his-and-her mansions one
street apart in a gated community here, provided by the network using viewer
donations and tax-free earnings. But Mrs. Crouch, 74, rarely sleeps in the
$5.6 million house with tennis court and pool. She mostly lives in a large
company house near Orlando, Fla., where she runs a side business, the Holy
Land Experience theme park. Mr. Crouch, 78, has an adjacent home there too,
but rarely visits. Its occupant is often a security guard who doubles as
Mrs. Crouch’s chauffeur.
The twin sets of luxury homes only hint at the high
living enjoyed by the Crouches, inspirational television personalities whose
multitudes of stations and satellite signals reach millions of worshipers
across the globe. Almost since they started in the 1970s, the couple have
been criticized for secrecy about their use of donations, which totaled $93
million in 2010.
Now, after an upheaval with Shakespearean echoes,
one son in this first family of televangelism has ousted the other to become
the heir apparent. A granddaughter, who was in charge of TBN’s finances, has
gone public with the most detailed allegations of financial improprieties
yet, which TBN has denied, saying its practices were audited and legal.
The granddaughter, Brittany Koper, and her husband
have been fired by the network, which accused them of stealing $1.3 million
to buy real estate and cars and make family loans. "They’re just trying to
divert attention from their own crimes," said Colby May, a lawyer
representing TBN. Janice and Paul Crouch declined requests for interviews.
In two pending lawsuits and in her first public
interview, Ms. Koper described company-paid luxuries that she said appeared
to violate the Internal Revenue Service’s ban on “excess compensation” by
nonprofit organizations as well as possibly state and federal laws on false
bookkeeping and self-dealing.
The lavish perquisites, corroborated by two other
former TBN employees, include additional, often-vacant homes in Texas and on
the former Conway Twitty estate in Tennessee, corporate jets valued at $8
million and $49 million each and thousand-dollar dinners with fine wines,
paid with tax-exempt money.
In the lawsuits and interviews, Ms. Koper, 26, also
charges that TBN has spent millions of dollars in sweetheart deals with a
commercial film company owned until recently by a son of the Crouches,
Matthew, including poorly monitored investments made after he joined the TBN
board in 2007.
“My job as finance director was to find ways to
label extravagant personal spending as ministry expenses,” Ms. Koper said.
This is one way, she said, the company avoids probing questions from the
I.R.S. She said that the absence of outsiders on TBN’s governing board —
currently consisting of Paul, Janice and Matthew Crouch — had led to a
serious lack of accountability for spending. Image: Religious theme park
souvenir Brian Blanco for The New York Times A Holy Land Experience souvenir
of a park actor depicting Jesus. Performers are said to be ministers playing
Ms. Koper and the two other former TBN employees
also said that dozens of staff members, including Ms. Koper, chauffeurs,
sound engineers and others had been ordained as ministers by TBN. This
allowed the network to avoid paying Social Security taxes on their salaries
and made it easier to justify providing family members with rent-free
houses, sometimes called “parsonages,” she said.
The company did not always succeed. Last year,
officials in Orange County, Fla., turned down TBN’s application to register
the adjacent lakefront houses in Windermere as parsonages, saying they
served no religious purpose, The Orlando Sentinel reported. The designation
would have resulted in religious exemptions and saved TBN roughly $50,000 in
taxes a year.
Ms. Koper said that the company run by Matthew
Crouch, 50, who is her uncle, had received an estimated $50 million in TBN
money over the years, with little oversight, to finance religious film
projects and television shows. TBN recouped only a small fraction of its
loans and investments, sometimes forgiving large sums in return for
broadcast rights of limited value, she said.
Continued in article
Bob Jensen's Fraud Updates are at
"Assess Carefully: Don’t Be Duped by Bogus Journals," by Brendan A.
Rapple, Inside Higher Ed, June 17, 2012 ---
This blog follows a previous post on a related
theme by Maria Yudkevich, "Publications
for Money: What Creates the Market for Paid Academic Journals."
Numerous evaluative criteria may be used in
determining a journal’s scholarly worth. A common criterion is a journal’s
Impact Factor (IF). However, among the many problems with IFs is that only
journals indexed by ISI’s
Journal Citation Report have them (over 8,000
in Science and 2,700 in the Social Sciences).
Journal & Country Rank, a portal showing the
visibility of the journals contained in the
from 1996, is also useful for assessing journals. Another tool,
Google Scholar Metrics, facilitates gauging the
visibility and influence of recent journal articles and by extension
journals themselves. Yet another instrument, the
score and Article Influence score, utilizes
citation data to evaluate the influence of a journal in relation to others.
Of course, strong pointers about a journal’s quality are usually provided by
the status of the body publishing it, the reputation of its editorial board
members, the rigor of its peer-reviewing, its acceptance/rejection rates,
and where it is indexed.
Another factor in assessing a journal’s worth may be author publication
fees. Such fees do not necessarily constitute a red flag as numerous quality
open access (OA) journals employ a system of “author pays". However, there’s
the swiftly growing difficulty of sham journals whose sole rationale is to
make a profit with little interest in disseminating scholarship. Such
journals, often with credible scholarly names, publish most articles
submitted and charge authors high publication fees. It’s a significant
problem that more and more academics are being hoodwinked by these clearly
fake journals. A useful resource for determining some of these phony
publications is Jeffrey Beall's
Predatory, Open-Access Publishers.
Though I’m a librarian I receive numerous
solicitations to submit articles, together with hefty publication fees, to
supposedly scholarly journals and/or to serve on their editorial boards. I
suspect that faculty scholars receive far more of these invitations. It’s an
epidemic. Indeed, it’s probable that the owners of these sham periodicals
when spamming scholars pay little attention to whether the recipients’
academic interests are relevant to the journal’s disciplinary focus. Some
scholars are even placed on editorial boards even though they have not given
their consent. Generally these ersatz journals, with scientific and
technological disciplines being particularly well represented, have
abnormally high acceptance rates with minimal or no peer reviewing. Of
course, this is a rational modus operandi for the journals’ sleazy
operators as genuine peer review that weeds out poor scholarship would
thwart their primary goal of making money. The more articles they publish,
the more money they make with publication fees of $500 or more per article
being common. Moreover, articles are often published with little or no
proofreading and checking. Indeed, authors are often not asked for their
final approval before publication. Little thought is given to digital
preservation. Articles, journals and, indeed, the publishers themselves can
disappear without trace. The result is a proliferation of essentially vanity
press publishing that benefits the purveyors of these spurious journals and
does damage to the academic reputation of the naïve or careless authors who
are conned by these predators.
Continued in article
We also have some bogus journals in accounting research and education, those
journals of last resort when your paper has been rejected by three or more
legitimate accounting research journals. Sometimes those journals publish
proceedings of bogus conferences. Those are conferences held in very delightful
tourist places in Europe, the tropics, Australia, New Zealand, etc. where your
presentation session will be attended by three "scholars" only because they are
presenters in the same session. These high registration fee conferences are
attended mainly by professors ripping off their universities for a free tourist
trip, and publishing the conference papers electronically is an added bonus of a
line on a resume. Does anybody really read those "published" papers for which
"refereeing" is a fraud?
Absurdly Successful Tax Frauds
"Woman's Absurdly Unsophisticated Tax Scheme Still Managed to Dupe The Oregon
Department of Revenue," by Caleb Newquist, Going Concern, June 8,
As we've witnessed, perpetrators of tax fraud
oftentimes utilize very simple methods. Slapping a
dead person's name, birthdate, social security
number, isn't terribly difficult once the data is obtained; throw some
minors on there as dependents and you've got
yourself a nice little refund at the expense of some grieving family
members. Not complicated. You don't even have to
breathe free air to do it!
Typically these frauds are small and repeated
dozens, sometimes hundreds of times for a nice little haul. This, however
was not the preferred technique for Krystle
Marie Reyes of Salem, Oregon who couldn't be
bothered with such tedious processes (allegedly!):
According to the affidavit, Reyes used Turbo
Tax, a popular tax preparation software package, to file a faked 2011
income tax return that reported wages of $3 million and claimed she was
owed a $2.1 million refund. The state authorized the refund, and Turbo
Tax issued Reyes a Visa debit card with the full refund amount. [...]
State revenue officials did not discover the fraud until Reyes reported
the card as lost or stolen. In the meantime, she racked up more than
$150,000 in purchases. Reyes, according to the affidavit, paid $2,000 in
cash for a 1999 Dodge Caravan and used the card to buy $800 worth of
tires and wheels.
Continued in article
Absurdly Successful Mortgage Fraud
Marvene Halterman, an unemployed
Arizona woman with a long history of creditors, took out a $103,000 mortgage on
her 576 square-foot-house in 2007. Within a year she stopped making payments.
Now the investors with an interest in the house will likely recoup only $15,000.
The Wall Street Journal slide show
of indoor and outdoor pictures ---
The $15,000 is mostly the value of the lot since at the time the mortgage was
granted the shack was virtually worthless even though corrupt mortgage brokers
and appraisers put a fraudulent value on the shack. Bob Jensen's threads on
these subprime mortgage frauds are at
Probably the most common type of fraud in the Savings and Loan debacle of the
1980s was real estate investment fraud. The same can be said of the 21st Century
subprime mortgage fraud. Welcome to fair value accounting that will soon have us
relying upon real estate appraisers to revalue business real estate on business
balance sheets ---
The Rest of Marvene's Story ---
Bob Jensen's Fraud Updates ---
When you wish the auditor had been a Big Four firm with deep, deep pockets
"City of Dixon Sues Auditors Over...Ya Know," by Caleb Newquist, Going
Concern, June 8, 2012 ---
"The Education of Dasmine Cathey," by Brad Wolverton, Chronicle of
Higher Education, June 2012 ---
This is an article that each of us will probably react differently to after
reading it carefully. Some readers will see this as another case, in a long list
of cases, where a NCAA Division 1 university makes a sham out of college
education of a star, albeit learning disabled, athlete. By sham I mean where the
main goal is to make that athlete able to read after four years --- whereas the
goal for non-athletes in the university is much higher. As a non-athlete he
probably would have flunked out of the university in the first year. The coaches
helped pull him through courses while he was still eligible to play football
only to leave him hanging out to dry in completing the requirements for a
Other readers will see this as a case where a learning disabled student was
pushed beyond what he might have otherwise been without special treatment as an
athlete in college. The tragedy is that his non-athlete counterparts receive no
such special treatment from "coaches."
As a retired college professor I question the commitment of any student who
does not care enough to try by attending class every day and by seeking help
from the teachers.
Personally, I think if Dasmine Cathey gets his diploma it makes a sham out of
that diploma. Dasmine deserves better in life, but why does it have to be at the
expense of lowered academic standards in higher education?
I certainly hope this isn't an April Fools Day joke..
"Texas jury slaps $195 million penalty on TaxMasters, CEO Cox (files for
bankruptcy)," by Libloather, Yahoo News, March 30, 2012 ---
This makes me wonder where this scum bag buried his loot.
Bob Jensen's Fraud Updates ---
From The Wall Street Journal Accounting Weekly Review on June 1, 2012
Adidas Accuses Former Officials in India of Fraud
R. Jai Krishna and Rumman Ahmed
May 24, 2012
Click here to view the full article on WSJ.com
TOPICS: Accounting Changes and Error Corrections, Auditing,
Executive Compensation, Fraudulent Financial Reporting, Restatement, Revenue
SUMMARY: "German sportswear-and-equipment maker Adidas AG filed a
criminal complaint against the former chief of its India operations and
another former senior employee for alleged financial and commercial
irregularities...of theft, fraud and accounting malpractices that resulted
in the company taking a charge of $155 million, or 8.70 billion
rupees....The alleged irregularities were uncovered during an internal probe
by two Adidas executives between January and March ."
CLASSROOM APPLICATION: The article is most useful to cover auditing
topics; particularly planning procedures designed to detect fraud, but is
also useful for its mention of financial accounting topics of franchise
revenue recognition, executive compensation, and fraudulently inflating
1. (Advanced) What is a fraud? What are two types of fraudulent
2. (Introductory) What irregular or fraudulent activities does
Adidas accuse two former executives of committing?
3. (Advanced) In which of these two categories of fraud do you
think that Adidas accuses its former executives?
4. (Advanced) If the accusations described in the article are
accurate, what seems to be the incentive behind the executives' actions?
5. (Advanced) "The alleged irregularities were uncovered during an
internal probe by two Adidas executives between January and March." Suppose
you are an auditor charged with assisting in this investigation. For each
item listed in answer to question 2, identify an audit procedure designed to
determine whether or not the suspected irregular or fraudulent activity
6. (Advanced) What are franchise fee revenues? How should such fees
be recognized by Reebok or Adidas?
7. (Introductory) What was the accounting result from these
Reviewed By: Judy Beckman, University of Rhode Island
"Adidas Accuses Former Officials in India of Fraud," by: R. Jai Krishna and
Rumman Ahmed, The Wall Street Journal, May 24, 2012 ---
NEW DELHI—German sportswear and equipment maker
Adidas AG ADS.XE -4.02% filed a criminal complaint against the former chief
of its India operations and another former senior employee for alleged
financial and commercial irregularities.
The complaint, filed Tuesday at a police station in
the Delhi suburb of Gurgaon, accused Subhinder Singh Prem and Vishnu Bhagat
of theft, fraud and accounting malpractices that resulted in the company
taking a charge of $155 million, or 8.70 billion rupees. Adidas also said
that restructuring its business in India as a result of the alleged
irregularities will lead to a further charge of $87 million, or 4.87 billion
Mr. Prem was managing director and head of the
Indian operations at Adidas Group, while Mr. Bhagat was chief operating
officer at the sportswear maker's India unit until their services were
terminated March 26.
Mr. Prem wasn't available for comment. Mr. Bhagat
couldn't be reached. In previous interviews with Indian media, they have
denied any wrongdoing.
Back in April Adidas disclosed that irregularities
at its Reebok India division were likely to result in a pretax charge of
about $155 million, and may require the company to restate financial
statements from last year.
The alleged irregularities are a black eye for the
sportswear giant, which had been expanding rapidly in India in recent years.
India, until recently, only allowed "single brand" retailers such as Adidas
to operate through joint ventures. That has been a deterrent to many global
retailers, including Sweden's IKEA, which doesn't have any Indian stores.
But Adidas and Reebok, which Adidas acquired in 2006, have been seeking to
tap growing demand for branded goods and clothing as the nation's economy
Adidas and Reebok operated independently in India
until 2011, when Mr. Prem was appointed managing director of the combined
entity. Previously, he was head of Reebok in India. Mr. Bhagat handled
finance at Reebok's India unit.
The criminal complaint, filed by Adidas, claims the
two former executives diverted the company's products to "secret" warehouses
and recorded them as fake sales.
Adidas also alleges that money was "fraudulently"
collected from prospective franchisees on the pretext of opening new stores.
The executives also are accused of claiming incentives and bonuses based on
inflated sales numbers, which resulted in a higher tax payout for the
company. And the complaint alleges they overstated receivables.
Continued in article
Replication Paranoia: Can you imagine anything like this happening
in accountics science?
"Is Psychology About to Come Undone?" by Tom Bartlett, Chronicle of
Higher Education, April 17, 2012 ---
If you’re a psychologist, the news has to make you
a little nervous—particularly if you’re a psychologist who published an
article in 2008 in any of these three journals: Psychological Science,
the Journal of Personality and Social Psychology, or the
Journal of Experimental Psychology: Learning, Memory, and Cognition.
Because, if you did, someone is going to check your
work. A group of researchers have already begun what they’ve dubbed
the Reproducibility Project, which aims to
replicate every study from those three journals for that one year. The
project is part of Open Science Framework, a group interested in scientific
values, and its stated mission is to “estimate the reproducibility of a
sample of studies from the scientific literature.” This is a more polite way
of saying “We want to see how much of what gets published turns out to be
For decades, literally, there has been talk about
whether what makes it into the pages of psychology journals—or the journals
of other disciplines, for that matter—is actually, you know, true.
Researchers anxious for novel, significant, career-making findings have an
incentive to publish their successes while neglecting to mention their
failures. It’s what the psychologist Robert Rosenthal named “the file drawer
effect.” So if an experiment is run ten times but pans out only once you
trumpet the exception rather than the rule. Or perhaps a researcher is
unconsciously biasing a study somehow. Or maybe he or she is flat-out faking
results, which is not unheard of.
Diederik Stapel, we’re looking at you.
So why not check? Well, for a lot of reasons. It’s
time-consuming and doesn’t do much for your career to replicate other
researchers’ findings. Journal editors aren’t exactly jazzed about
publishing replications. And potentially undermining someone else’s research
is not a good way to make friends.
knows all that and he’s doing it anyway. Nosek, a
professor of psychology at the University of Virginia, is one of the
coordinators of the project. He’s careful not to make it sound as if he’s
attacking his own field. “The project does not aim to single out anybody,”
he says. He notes that being unable to replicate a finding is not the same
as discovering that the finding is false. It’s not always possible to match
research methods precisely, and researchers performing replications can make
But still. If it turns out that a sizable
percentage (a quarter? half?) of the results published in these three top
psychology journals can’t be replicated, it’s not going to reflect well on
the field or on the researchers whose papers didn’t pass the test. In the
long run, coming to grips with the scope of the problem is almost certainly
beneficial for everyone. In the short run, it might get ugly.
Nosek told Science that a senior colleague
warned him not to take this on “because psychology is under threat and this
could make us look bad.” In a Google discussion group, one of the
researchers involved in the project wrote that it was important to stay “on
message” and portray the effort to the news media as “protecting our
science, not tearing it down.”
The researchers point out, fairly, that it’s not
just social psychology that has to deal with this issue. Recently, a
scientist named C. Glenn Begley attempted to replicate 53 cancer studies he
deemed landmark publications. He could only replicate six. Six! Last
I interviewed Christopher Chabris about his paper
titled “Most Reported Genetic Associations with General Intelligence Are
Probably False Positives.” Most!
A related new endeavour called
Psych File Drawer
allows psychologists to upload their attempts to
replicate studies. So far nine studies have been uploaded and only three of
them were successes.
Both Psych File Drawer and the Reproducibility
Project were started in part because it’s hard to get a replication
published even when a study cries out for one. For instance, Daryl J. Bem’s
2011 study that seemed to prove that extra-sensory perception is real — that
subjects could, in a limited sense, predict the future —
got no shortage of attention and seemed to turn
everything we know about the world upside-down.
Yet when Stuart Ritchie, a doctoral student in
psychology at the University of Edinburgh, and two colleagues failed to
replicate his findings, they had
a heck of a time
getting the results into print (they finally did, just recently, after
months of trying). It may not be a coincidence that the journal that
published Bem’s findings, the Journal of Personality and Social
Psychology, is one of the three selected for scrutiny.
Continued in article
In accountics science such a "Reproducibility Project" would be much more
problematic except in behavioral accounting research. This is because accountics
scientists generally buy rather than generate their own data (Zoe-Vonna Palmrose
is an exception). The problem with purchased data from such as CRSP data,
Compustat data, and AuditAnalytics data is that it's virtually impossible to
generate alternate data sets, and if there are hidden serious errors in the data
it can unknowingly wipe out thousands of accountics science publications all at
one --- what we might call a "scale risk."
A second problem in accounting and finance research is that researchers tend to
rely upon the same models over and over again. And when serious flaws were
discovered in a model like CAPM it not only raised doubts about thousands of
past studies, it made accountics and finance researchers make choices about
whether or not to change their CAPM habits in the future. Accountics researchers
that generally look for an easy way out blindly continued to use CAPM in
conspiracy with journal referees and editors who silently agreed to ignore CAPM
problems and limitations of assumptions about efficiency in capital markets---
We might call this an "assumptions risk."
Hence I do not anticipate that there will ever be a Reproducibility Project
in accountics science. Horrors. Accountics scientists might not continue to be
the highest paid faculty on their respected campuses and accounting doctoral
programs would not know how to proceed if they had to start focusing on
accounting rather than econometrics.
Bob Jensen's threads on replication and other forms of validity checking
In 2011 what were the main causes of financial statement restatements?
"Restatements Flat in 2011, Foreign Firms Lead Pack," Maxwell Murphy,
The Wall Street Journal, June 4, 2012 ---
Financial restatements were essentially flat in
2011 compared with 2010, and foreign firms continue to post the largest
restatements, according to new research.
Audit Analytics said 702 unique filers produced 787
restatements last year, down from 790 restatements in 2010 and up from 708
restatements in 2009. In 2006, 1,560 unique filers produced 1,790
For the seventh straight year, the most common
issue causing companies to restate prior results was accounting for debt,
quasi-debt, warrants and equity, with 23.1% of all restatements last year
related to those security-related issues. For the fifth consecutive year,
recording expenses like payroll and selling, general and administrative
costs came in second.
The largest adjustment in 2011 was a $1.55 billion
negative revision by China Unicom. Audit Analytics noted that this is the
third year in a row where the largest negative restatement was disclosed by
a foreign company, and in 2011 a foreign company also ranked No. 2 behind
Bob Jensen's threads on debt (on and off balance sheet) ---
Here is a politically incorrect tax loophole costing billions ---
How would you treat the issue of plagiarism below?
I received this
featured message below from one of those wearisome for-profit college promotion
sites that tries to hide behind a link to an accounting history essay at
Suppose that we pretend that one of your students (Jaime) submitted this essay
to you as part of an assignment in your course.
Without taking the time and trouble to find the original source of this essay
using plagiarism detection software, suppose that you performed a simple text
stream check on Google --- as I often did when I was still teaching.
Further suppose that one of the text stream hits led to
Firstly, are the essays similar enough to call Jaime to your office to discuss
the possibility of plagiarism?
How likely is it that both essays were plagiarized?
Actually, when backing up the Robert Nowlan link it appears that the Robert
Nowlan site is likely to be legitimate
Would you pursue a charge of plagiarism against your student who submitted the
Note that these two essays are not duplicates. But there are terms that lead to
suspicion in my devious mind --- terms and phrases like the following:
"came under the influence of the artist Piero della Francesca from whose
work he freely"
"Pacioli went to Venice to become a tutor to the sons of a wealthy merchant.
In 1471 he arrived in Rome and entered the brotherhood of St. Francis.
Pacioli traveled extensively, wandering through Italy and possibly to the
Orient and lectured on mathematics at Perugia, Rome, Naples, Pisa, and
Venice. He was at the court of Ludovico Sforza, known as the Moor, at Milan
with Leonardo da Vinci. It was here, at the most glittering court in Europe,
that Pacioli became the first occupant of the chair of mathematics. Pacioli
spent the last years of his life in Florence and Venice, returning to the
place of his birth to die.."
I think that by now you probably get the picture.
Bob Jensen's threads on
Pacioli are at
---------- Forwarded message ----------
Date: Mon, Jun 4, 2012 at 3:05 PM
Subject: Broken link on your page
"Did F. Lee Bailey Have A Fool For A Client?" by Peter J. O'Reilly,
Forbes, April 3, 2012 ---
When I was young, if a person knew the name of only
one lawyer, that lawyer was probably F. Lee Bailey. I remember once taking a
phone call at 1:00 AM from someone wanting to talk to the general manager of
the hotel where I was working. When you called the hotel at 1:00 AM the only
person you would ever get to talk to was the night auditor, who in a 140
room hotel would also run the front desk and answer the phone on third
shift, so that was a ridiculous request. The angry caller informed me that
he was going to sue the hotel and he was hiring F LEE BAILEY ! I knew at the
time that F. Lee Bailey was famous for being a criminal defense attorney. It
was guys like this that needed him.
Probably if that caller ever received a 90 Day
Letter from the IRS. He would make an angry phone call in which he would let
the responsible agent know that he was going to hire F. LEE BAILEY ! to
represent him in Tax Court. That would be mere rhetoric or fancy, though
like the counting sheep hiring Mr. Bailey to represent them against Serta
Seriously, would anybody actually get F. Lee Bailey
to represent him in Tax Court ? You want a tax litigator to represent you
in tax court. Who would want F. Lee Bailey ? And why would F. Lee Bailey
choose to take on a tax case ? As it turns out, there is one person who not
only wanted F. Lee Bailey to represent him, but could actually persuade F.
Lee Bailey to take the case. The client in the case was F. Lee Bailey.
The proverb is that an attorney who represents
himself has a fool for a client. The import of the proverb is that picking
yourself to be your own attorney is a foolish choice. Now the
decision in the case is on the long side and there
are a number of complicated issues. It was not a total win for either Mr.
Bailey or the IRS. Overall, I am not sure that the proverb was actually
proved out in this case. I don’t know that many tax litigators would have
done a lot better with the mess that Mr. Bailey’s difficult client dumped on
him. It may well be that his actual foolishness might not have been so much
in acting as his own lawyer as in the attempts he made to act as his own
accountant. The case could actually form the basis of a novel, so I
probably won’t do it justice, but here are some highlights.
Where Bailey Won – Kind Of
The big issue in the case concerns Mr. Bailey’s
handling of client funds. It is rather on the convoluted side. Claude
DuBoc had entered into a plea agreement with the United States in a
marijuana smuggling case. His sentence was dependent, in part, in how much
property the Government was able to seize from him. Thus it was in his
interest to facilitate seizures, which were complicated by legal, diplomatic
and practical difficulties. In order to address these issues:
the Government entered into a vague and unusual
agreement with Mr. Bailey, under which Mr. Bailey would perform services to
facilitate Mr. Duboc’s forfeiture of his assets, and Mr. Duboc would
transfer 602,000 shares of Biochem Pharma stock to Mr. Bailey, to provide
funds that Mr. Bailey could use to maintain and transfer Mr. Duboc’s foreign
assets. Thomas Kirwin, an Assistant U.S. Attorney who worked for the
Government on the Duboc case (and who later became a U.S. Attorney)
testified at trial that the Duboc case was important and complex and that
the nature of the work that Mr. Bailey undertook to do was “extraordinary”.
Nonetheless, the agreement was completely unwritten.
That brings in my favorite legal proverb – Verbal
contracts are not worth the paper they are printed on. Like “fool for a
client”, the verbal contract proverb probably does not hold up in this
case. The verbal contract did prove to be worth something. The Government
had issues with how Mr. Bailey handled the funds, which resulted in two
lawsuits and his spending 44 days in jail for contempt. So the IRS wanted
to tax him on the value of the stock at the point that he received it.
Because of the agreement the Tax Court ruled that he received the stock as a
trustee and was only taxed when and to the extent that he converted funds to
his personal use. When the Tax Court rules it does not keep score. It
calls the strikes and balls and sends the IRS and the taxpayer back to
recompute. Of the over four million in deficiency, though, that issue
seemed to be worth about half. So I think we can give Mr. Bailey pretty
high marks for his first foray into tax litigation.
On the other hand, he had borrowed against the
stock, which the Tax Court did not find to be a taxable event, but when fees
from other cases were used to pay down the debt, those fees were taxable
income, even though Mr. Bailey never received them.
The Rest Of The Case Is A Mess (Bailey loses here)
Continued in article
"Scottsdale accountant indicted in $66 million ponzi scheme," by Peter
Corbett, azcentral.com, April 19. 2012 ---
A federal grand jury in Phoenix has returned a
102-count indictment against a former Scottsdale certified public accountant
on charges he operated a $66 million ponzi scheme.
The indictment of Daniel Wise, 55, was announced
Thursday by the U.S. Attorney's Office for Arizona. He is accused of mail
and wire fraud, and money laundering.
"The U.S. Attorney's Office will continue to work
with our law enforcement partners to investigate and prosecute those who
prey on the public for personal financial gain," said Ann Birmingham Scheel,
acting U.S. Attorney for Arizona.
Read more: http://www.azcentral.com/community/scottsdale/articles/2012/04/19/20120419scottsdale-accountant-indicted-million-ponzi-scheme-brk.html#ixzz1sbYPzZih
The indictment alleges Wise fraudulently induced
victims to invest $66 million with false promises of high-yield returns by
making short-term, high-interest, hard-money loans in real estate ventures.
He is accused of using a web of bank accounts and entities from June 2005 to
December 2008 to deceive his clients.
The indictment alleges that Wise did not make the
investments but instead operated a ponzi scheme by using money obtained from
newer victims to pay off older victims.
Read more: http://www.azcentral.com/community/scottsdale/articles/2012/04/19/20120419scottsdale-accountant-indicted-million-ponzi-scheme-brk.html#ixzz1sbYVpGOH
Bob Jensen's threads on Ponzi schemes are at
"Tacoma woman charged with $540K embezzlement," Seattle Times,
April 19, 2012 ---
A Tacoma woman has been indicted on charges she
stole more than $540,000 from the company she worked for, Food Services of
Julie Anne White worked as an accountant at FSA's
center in Kent. Federal prosecutors say that from 2007 until last year, she
used the company's electronic payment system to pay the mortgage on her
home, to transfer money to her own account and to buy a $39,000 boat.
White pleaded not guilty Thursday to five counts of
wire fraud. Prosecutors are seeking to seize her home and the boat as
proceeds of illegal activity.
R. Allen Stanford ---
"The Stanford Sentence SEC examiners first flagged Stanford way back in
the 1990s," The Wall Street Journal, June 15, 2012 ---
Convicted Ponzi schemer
R. Allen Stanford was sentenced Thursday to 110 years in federal prison for his
$7 billion fraud. Stanford victimized thousands of individual investors to fund
a lifestyle of private jets and island vacation homes. Now the question is
whether there will be anything left at all for these victims once authorities in
jurisdictions around the world finish sifting through the wreckage.
Stanford "stole more
than millions. He stole our lives as we knew them," said victim Angela Shaw,
according to Reuters. Certificates of deposit issued by a Stanford bank in
Antigua promised sky-high returns but succeeded only in destroying the savings
of middle-class retirees. More than three years after U.S. law enforcement shut
down the Stanford outfit, victims have recovered nothing.
A receiver appointed by
a federal court, Ralph Janvey, has collected $220 million from the remains of
Stanford's businesses but has already used up close to $60 million in fees for
himself and other lawyers, accountants and professionals, plus another $52
million to wind down the Stanford operation.
And then there's the
Securities and Exchange Commission, which didn't charge Stanford for years even
after its own examiners raised red flags as early as the 1990s. The SEC has
lately pursued a bizarre attempt at blame-shifting, trying to get the Securities
Investor Protection Corporation to cover investor losses. Even the SEC must know
that SIPC doesn't guarantee paper issued by banks in Antigua—or anywhere else
for that matter.
SEC enforcers should
instead focus on catching the next Allen Stanford. Careful investors should
expect that they won't.
Bob Jensen's threads on Ponzi schemes are at
One of the major concerns of the IASB is that some nations at some points in
time will simply not enforce the IASB standards that these nations adopted. The
biggest problem that the IASB is now having with European Banks is that the IASB
feels many of many (actually most) EU banks are not conforming to standards for
marking financial instruments to market (fair value). But the IASB thus far has
been helpless in appealing to IFRS enforcement in this regard.
European Union officials knew this and let Spain
proceed with its own brand of accounting anyway.
"The EU Smiled While Spain’s Banks Cooked the Books," by Jonathan Weil,
Bloomberg, June 14, 2012 ---
Only a few years ago,
banks were seen in some policy-making circles as a
model for the rest of the world. This may be hard to fathom now, considering
that Spain is seeking $125 billion to bail out its ailing lenders.
But back in 2008 and early 2009, Spanish regulators
riding high after their country’s banks seemed to
have dodged the financial crisis with minimal losses. A big reason for their
success, the regulators said, was an accounting technique called dynamic
By this, they meant that Spain’s banks had set
aside rainy- day loan-loss reserves on their books during boom years. The
purpose, they said, was to build up a buffer in good times for use in bad
This isn’t the way accounting standards usually
work. Normally the rules say companies can record losses, or provisions,
only when bad loans are specifically identified. Spanish regulators said
they were trying to be countercyclical, so that any declines in lending and
the broader economy would be less severe.
What’s now obvious is that Spain’s banks weren’t
reporting all of their losses when they should have, dynamically or
otherwise. One of the catalysts for last weekend’s bailout request was the
decision last month by the
Bankia (BKIA) group, Spain’s third-largest lender,
to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss
rather than a 40.9 million-euro profit. Looking back, we probably
should have known Spain’s banks would end up this
way, and that their reported financial results bore no relation to reality.
Dynamic provisioning is a euphemism for an old
balance- sheet trick called
cookie-jar accounting. The point of the technique
is to understate past profits and shift them into later periods, so that
companies can mask volatility and bury future losses. Spain’s banks began
using the method in 2000 because their regulator, the
Bank of Spain,
required them to.
“Dynamic loan loss provisions can help deal with
procyclicality in banking,” Bank of Spain’s director of financial stability,
Jesus Saurina, wrote in a July 2009
paper published by the
Bank. “Their anticyclical nature enhances the
resilience of both individual banks and the banking system as a whole. While
there is no guarantee that they will be enough to cope with all the credit
losses of a downturn, dynamic provisions have proved useful in Spain during
the current financial crisis.”
The danger with the technique is it can make
companies look healthy when they are actually quite ill, sometimes for
years, until they finally deplete their
excess reserves and crash. The practice also
clashed with International Financial Reporting Standards, which Spain
adopted several years ago along with the rest of
Europe. European Union officials knew this and
let Spain proceed with its own brand of accounting anyway.
One of the more candid advocates of Spain’s
approach was Charlie McCreevy, the EU’s commissioner for financial services
from 2004 to 2010, who previously had been Ireland’s finance minister.
During an April 2009 meeting of the
monitoring board that oversees the
International Accounting Standards Board’s
trustees, McCreevy said he knew Spain’s banks were violating the board’s
rules. This was fine with him, he said.
“They didn’t implement IFRS, and our regulations
said from the 1st January 2005 all publicly listed companies had to
implement IFRS,” McCreevy said, according to a
transcript of the meeting on the monitoring
board’s website. “The Spanish regulator did not do that, and he survived
this. His banks have survived this crisis better than anybody else to date.”
McCreevy, who at the time was the chief enforcer of
EU laws affecting banking and markets, went on: “The rules did not allow the
dynamic provisioning that the Spanish banks did, and the Spanish banking
regulator insisted that they still have the dynamic provisioning. And they
did so, but I strictly speaking should have taken action against them.”
Why didn’t he take action? McCreevy said he was a
fan of dynamic provisioning. “Why am I like that? Well, I’m old enough to
remember when I was a young student that in my country that I know best,
banks weren’t allowed to publish their results in detail,” he said. “Why?
Because we felt if everybody saw the reserves, etc., it would create maybe a
run on the banks.”
sum up this way of thinking: The best system is
one that lets banks hide their financial condition from the public. Barring
that, it’s perfectly acceptable for banks to violate accounting standards,
if that’s what it takes to navigate a crisis. The proof is that Spain’s
banks survived the financial meltdown of 2008 better than most others.
Continued in article
Thus it is one thing to promote the advantages of international accounting
standards and quite another to own up to the major problems of international
accounting standards enforcement.
Bob Jensen's threads on cookie jar accounting deceptions ---
Bob Jensen's threads on cookie jar accounting are at
February 19, 2010 reply from Bob Jensen
The Sandrew article is really terrific (thanks for the heads up)
As to the cookie jar question, I think it reduces to an issue of
whether the bad quant reserves are used primarily to smooth income in
the same sense as cookie jar reserves are traditionally used to smooth
income. Or are the bad quant reserves more like bad debt reserves that
are used for better matching under the matching concept where timing of
cost write offs better matches revenues with expenses incurred to
generate those revenues.
To me, the Allowance for Bad Quants seems to me to be a bit more
like the Allowance for Bad Debts, but I’ve not really taken time to
study this question in detail.
A great example of cookie jar accounting, aside from the classic
examples allowed in Switzerland, is Tom Selling’s General Motors example
"FAS 106: Will the SEC Allow GM to
Have the Largest Earnings Cookie Jar in History?" by Tom Selling, The
Accounting Onion, March 13, 2008 ---
Bob Jensen's thread on creative accounting are at
How true can you get?
As (Commissioner) Bridgeman left office last year, he praised (Controller) Rita
Crundwell for being an asset to the city and said she "looks
after every tax dollar as if it were her own,"
according to meeting minutes.
As quoted by Caleb Newquest on April 27, 2012 ---
She was mostly just horsing around
"Somehow the City of Dixon, Illinois Just Noticed (after six years) That $30
Million Was Missing," Going Concern, April 19, 2012 ---
Rita Crundwell has been the CFO/comptroller of
Dixon, Illinois since the 1980s; a typical tenure for even an unelected
Illinois official. In those 30-ish years, it appears that she performed her
duties adequately enough, but she was just put on unpaid leave. You see, at
some point in 2006, it is alleged that Ms. Crundwell started helping herself
to money that belonged to the citizens of
Ronald Reagan's boyhood home. Prosecutors allege
that this went for the last six years and that
Crundwell made off with $30,236,503 (and 51¢).
Federal agents served warrants and seized
contents of her bank accounts, seven trucks and trailers, a $2 million
motor home and a Ford Thunderbird—all of which prosecutors allege were
paid for with money taken from city bank accounts by Crundwell.
[...] Bank records obtained by the FBI allegedly show Crundwell
illegally withdrew $30,236,503 from Dixon accounts since July 2006 ,
money she used, among other things, to buy a 2009 Liberty Coach Motor
home for $2.1 million; a tractor truck for $147,000; a horse trailer for
$260,000; and $2.5 million in credit card payments for items that
included $340,000 in jewelry.
So a decent haul, but a Ford Thunderbird?
Good Christ, spring a bit for the Lincoln Continental at least. Questionable
taste in automobiles aside, one can't help but wonder how Dixon - a city
with a population of just ~15,000 - could not notice millions of dollars
missing. But they did! It's strange because in a city of that size, people
gossip about one another's $35 overdraft fees, never mind millions of
dollars being spent on multi-million dollar motorhomes. Anyway, Crundwell
(who has a thing for horses apparently) had a good thing going, but then
made the mistake of taking a little extra vacation:
[L]ast year she took an additional 12 weeks of
unpaid vacation. A city employee substituting for Crundwell examined
bank statements and notified the mayor of activity in an account that,
according to the complaint, he didn't know existed. Bank records list
the primary account holder as the City of Dixon. An entity named RSCDA
also is named on the account, with checks written on the account more
expansively identifying that second account holder as "R.S.C.D.A., C/O
So basically the city discovere the missing cash by
the virtue of dumb luck, which sometimes is what it takes for these things
to get uncovered. Better late than, oh
whatever... seriously, a Thunderbird?
Bob Jensen's Fraud Updates ---
Owning Up to False Accounting in the Academy
"Institute Accused of Falsely Reporting How It Spent State Dept. Funds
Settles Lawsuit for $1-Million," by Ian Wilhelm, Chronicle of Higher
Education, April 16, 2012 ---
Bob Jensen's Fraud Updates are at
Nepotism and Insider Trading in Washington DC
Congress is our only native criminal class.
Mark Twain ---
We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop
Crescent Dunes Solar Energy Project ---
Under a power purchase agreement (PPA) between
SolarReserve and NV Energy, all power generated by the Crescent Dunes
project in the next 20 years will be sold to Nevada Power Company for $0.135
per kilowatt-hour. In late September, Tonopah received a $737 million
loan guarantee from the U.S. Department of Energy (DOE).[
Nepotism in Washington DC
Pacific Corporate Group ---
Financial Report ---
Ron Pelosi ---
"$737 million in green-tech loan to company connected to Pelosi family?"
Tonapa Solar Home ---
Tonopah Solar company in Harry Reid's Nevada received a $737 million loan
from the Department of Energy.
* The project will produce a 110 megawatt power system and employ 45
* That's only costing us $16 million per job.
One of the investment partners in this endeavor is Pacific Corporate Group
* The PCG executive director is Ron Pelosi, who is the brother-in-law of
Nancy Pelosi Alleged Insider Trading---
In November 2011, 60 Minutes alleged that Pelosi
and several other member of Congress had used information they gleaned from
closed sessions to make money on the stock market. The program cited
Pelosi's purchases of Visa stock while a bill that would limit credit card
fees was in the House. Pelosi denied the allegations and called the report
"a right-wing smear.
The Wonk (Professor) Who Slays Washington
Insider trading is an asymmetry of information between a buyer and a seller
where one party can exploit relevant information that is withheld from the other
party to the trade. It typically refers to a situation where only one party has
access to secret information while the other party has access to only
information released to the public. Financial markets and real estate markets
are usually very efficient in that public information is impounded pricing the
instant information is made public. Markets are highly inefficient if traders
are allowed to trade on private information, which is why the SEC and Justice
Department track corporate insider trades very closely in an attempt to punish
those that violate the law. For example, the former
wife of a partner in the auditing firm Deloitte & Touche was recently sentenced
to 11 months exploiting inside information extracted from him about her
husband's clients. He apparently did was not aware she was using this inside
In another recent case, hedge fund manager Raj Rajaratnam was sentenced to 11
years for insider trading.
Even more commonly traders who are damaged by insiders typically win enormous
lawsuits later on for themselves and their attorneys, including enormous
punitive damages. You can read more about insider trading at
Corporate executives like Bill Gates often announce future buying and selling
of shares of their companies years in advance to avoid even a hint of scandal
about exploiting current insider information that arises in the meantime. More
resources of the SEC are spent in tracking possible insider information trades
than any other activity of the SEC. Efforts are made to track trades of
executive family and friends and whistle blowing is generously rewarded.
Trading on insider information is against U.S. law for every segment of society
except for one privileged segment that legally exploits investors for personal
gains by trading on insider information. What is that privileged segment of
U.S. society legally trades on inside information for personal gains?
Congress is our only native criminal class.
Mark Twain ---
We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop
Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television ---
CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider"
is the most depressing segment I've ever watched on television ---
- It came as no surprise that many (most?) members of the U.S. House of
Representatives and the U.S. Senate that writes the laws of the land made it
illegal for to trade in financial and real estate market by profiting
personally on insider information not yet available, including pending
legislation that they will decide, wrote themselves out of the law making
it legal for them to personally profit from trading on insider information.
What came as a surprise is how leaders at the very top of Congress make
millions trading on inside information with impunity and well as immunity.
- The Congressional leader that comes off the worst in this Sixty
Minutes "Insider" segment is former House Speaker and current Minority
leader Nancy Pelosi.
When confronted with specific facts on how she and her husband made some of
their insider trading millions she fired back at reporter Steve Kroft with
an evil glint saying what is tantamount to: "How dare you question me about
insider trades that are perfectly legal for members of Congress. Who are you
to question my ethics about exploiting our insider trading privileges. Back
off Steve or else!" Her manner can be extremely scary. Other Democratic
Party members of Congress come off almost as bad in terms of insider trading
for personal gain.
- Current Speaker of the House,
Boehner, is more subtle. He denies making any of his personal portfolio
investment decisions and denies communicating with the person he hires to
make such decision. However, that trust investor mysteriously makes money
for Rep. Boehner using insider information obtained mysteriously. Other
Republican members of Congress some off even worse in terms of insider
- Members of Congress on powerful committees regularly make insider
profits on legislation currently being written into the law that is still
being held secret from the public. One of my heroes, former Senator
is no longer my hero.
- Everybody knows that influence peddling in Congress by lobbyists, many
of them being former members of Congress, is a dirty business of showering
gifts on current members of Congress. What is made clear, however, is that
these lobbyists are personally getting something in return from friendly
members of Congress who pass along insider information to lobbyists. The
lobbyists, in turn, peddle this insider information back to the private
sector, such as hedge fund managers, for a commission. Moral of story:
Voters do not stop insider trading by a member of Congress by voting him or
her out of office if they become peddlers of insider information obtained,
as lobbyists, from their old friends still in the Congress.
- Five out of 435 members of the House of Representatives are seeking to
sponsor a bill to make it illegal for representatives and senators to profit
from trading on inside information. The Sixty Minutes show demonstrates how
Nancy Pelosi, John Boehner, and other House leaders have buried that effort
so deep in the bowels of the legislative process that there's no chance in
hell of stopping insider trading by members of Congress. Insider trading is
a privilege that attracts unethical people to run for Congress.
"CONGRESS THE CORRUPT," by Anthony H. Catanach Jr. and J. Edward Ketz,
Grumpy Old Accountants, January 9, 2012 ---
The Christmas and New Year’s break allows
university faculty not only to enjoy family and friends, but also it
supplies a moment to do some nontechnical reading. After all, we don’t need
that much time to look over our teaching notes. Faculty need something
constructive to do during the three or four weeks we have off, and catching
up on our reading fits in marvelously.
We read two interesting books during this break.
The first is
Throw Them All Out by Peter Schweizer.
The subtitle tells it all: “How politicians and their friends get rich off
insider stock tips, land deals, and cronyism that would send the rest of us
to prison.” For example, the author discusses how Speaker Nancy Pelossi
(Democrat) and her husband garnered Visa IPO shares in 2008 after intimating
that she would introduce legislation which would prove very costly to Visa.
Of course, Pelosi backed off her threat once she and her husband received
those IPO shares. Schweizer also gives the example of Speaker Dennis
Hastert (Republican), who used his knowledge of a proposed interchange for
Interstate 88 to buy acreage on the cheap and sell it for its new market
value. Hastert realized millions in profits.
Worse, the ethics rules of the House and the Senate
allow these things to occur. In some twisted logic, Congress permits its
members to engage in insider trading and land deals and regulatory
intimidation. It has legalized what is criminal for the rest of us.
We also read
China in Ten Words by Yu Hua. The text
is part autobiographical, part historical, and part social commentary. Mr.
Hua describes China in ten chapters, each titled with a single word. The
words he chooses are people, leader, reading, writing, Lu Xun, revolution,
disparity, grassroots, copycat, and bamboozle. With these words, he
describes the incredible social and economic changes in China during his
life-time, starting with the Cultural Revolution from 1966 until late 1970s,
which was followed by the economic revolution to the present.
The description records incredible changes in
China, such as the nation’s becoming the second largest economic power in
the world. It also traces the failings of this transformation, such as
ranking about 100th in the world in per capita income. The
contradiction between these two measures foreshadows social conflict that
must be dealt with sooner or later.
What proved serendipitous, even ironic, in this
reading is to note the connection between the books. In certain ways the
two countries show similar contradictions and shortcomings. Yu Hua
discusses “today’s large-scale, multifarious corruption” in China; but the
U.S. Congress engages in similar dishonesty.
Continued in article
Bob Jensen's Fraud Updates ---
"Former top ICE official James Woosley pleads guilty in $600,000 scam,"
by Jeff Black, msnbc.com, May 1, 2012 ---
Thank you Dennis Huber for the heads up.
James M. Woosley, former Immigration and Customs
Enforcement (ICE) intelligence chief, pleaded guilty on Tuesday to an
elaborate scam over several years involving false travel expense reports
totaling nearly $600,000.
Woosley must surrender more than $180,000 he made
in a scheme that also included several other ICE employees and contractors,
federal prosecutors said.
The former federal employees all pleaded guilty to
submitting false receipts and vouchers for reimbursement of travel expenses
and time worked, according to court documents.
“Today James Woosley became the fifth — and
highest-ranking — individual to plead guilty as part of a series of fraud
schemes among rogue employees and contractors at ICE,” said U.S. Attorney
Ronald Machen said in a statement. “He abused his sensitive position of
trust to fleece the government by submitting phony paperwork for and taking
kickbacks from subordinates who were also on the take.”
Sentencing was scheduled for July 13. Woosley could
serve 18 to 27 months in prison, and faces a potential fine.
Continued in article
Bob Jensen's fraud updates are at
Ernst & Young Takes Another Big (CBS Sixty Minutes) Hit for Putting
Client Interests Above Investor Interests
The SEC and the Department of Justice Also Get Hammered for Doing Nothing
Against Lehman and E&W
"The case against Lehman Brothers," CBS Sixty Minutes, April 22, 2012 ---
Steve Kroft talks to the bank examiner whose
investigation reveals the how and why of the spectacular financial collapse
of Lehman Brothers, the bankruptcy that triggered the world financial
crisis. Web Extras
The case against Lehman Brothers Kroft: When to
give up on accountability Inside the SEC More »
Update: A statement from Ernst and Young: Lehman's
bankruptcy occurred in the midst of a global financial crisis triggered by
dramatic increases in mortgage defaults, associated losses in mortgage and
real estate portfolios, and a severe tightening of liquidity.
We firmly believe that our work met all applicable
professional standards, applying the rules that existed at the time.
Lehman's demise was caused by the global financial crisis that impacted the
entire financial sector, not by accounting or financial reporting issues.
It's hard to overstate the enormity of the 2008
collapse of Lehman Brothers. It was the largest bankruptcy in history;
26,000 employees lost their jobs; millions of investors lost all or almost
all of their money; and it triggered a chain reaction that produced the
worst financial crisis and economic downturn in 70 years.
Yet four years later, no one at Lehman has been
held responsible. Steve Kroft investigates the collapse of Lehman Brothers:
what the SEC did and didn't know about the firm's finances, the role of a
top accounting firm, and why no one at Lehman has been called to account.
The following script is from "The Case Against
Lehman" which originally aired on April 22, 2012. Steve Kroft is the
correspondent. James Jacoby and Michael Karzis, producers.
On September 15, 2008, Lehman Brothers, the fourth
largest investment bank in the world, declared bankruptcy -- sparking chaos
in the financial markets and nearly bringing down the global economy. It was
the largest bankruptcy in history -- larger than General Motors, Washington
Mutual, Enron, and Worldcom combined. The federal bankruptcy court appointed
Anton Valukas, a prominent Chicago lawyer and former United States attorney
to conduct an investigation to determine what happened.
Included in the nine-volume, 2,200-page report was
the finding that there was enough evidence for a prosecutor to bring a case
against top Lehman officials and one of the nation's top accounting firms
for misleading government regulators and investors. That was two years ago
and there have been no prosecutions. Anton Valukas has never given an
interview about his report until now.
Steve Kroft: This is the largest bankruptcy in the
world. What were the effects?
Anton Valukas: The effects were the financial
disaster that we are living our way through right now.
Steve Kroft: And who got hurt?
Anton Valukas: Everybody got hurt. The entire
economy has suffered from the fall of Lehman Brothers.
Steve Kroft: So the whole world?
Anton Valukas: Yes, the whole world.
When Lehman Brothers collapsed, 26,000 employees
lost their jobs and millions of investors lost all or almost all of their
money, triggering a chain reaction that produced the worst financial crisis
and economic downturn in 70 years. Anton Valukas' job was to provide the
bankruptcy court with accurate, reliable information that the judges could
use to resolve the claims of creditors picking over Lehman's corpse.
Steve Kroft: Had you ever done anything like this
Anton Valukas: I've never done anything like Lehman
Brothers. I don't think anybody else has ever done anything like Lehman
Steve Kroft: So your job, I mean, in some ways,
your job was to assess blame?
Anton Valukas: Our job is to determine what
actually happened, put the cards face up on the table, and let everybody see
what the facts truly are.
Valukas' team spent a year and a half interviewing
hundreds of former employees, and pouring over 34 million documents. They
told of how Lehman bought up huge amounts of real estate that it couldn't
unload when the market went south -- how it had borrowed $44 for every one
it had in the bank to finance the deals -- and how Lehman executives
manipulated balance sheets and financial reports when investors began losing
confidence and competitors closed in.
Steve Kroft: Did these quarterly reports represent
to investors a fair, accurate picture of the company's financial condition?
Anton Valukas: In our opinion, they did not.
Steve Kroft: And isn't that against the law?
Anton Valukas: It certainly, in our opinion, was
against civil law if you will. There were colorable claims that this was a
By colorable claims Valukus means there is
sufficient evidence for the Justice Department or the Securities and
Exchange Commission to bring charges against top Lehman executives,
including CEO Richard Fuld, for overseeing and certifying misleading
financial statements, and against Lehman's accountant, Ernst and Young, for
failing to challenge Lehman's numbers.
Anton Valukas: They'd fudged the numbers. They
would move what turned out to be approximately $50 billion of assets from
the United States to the United Kingdom just before they printed their
financial statements. And a week or so after the financial statements had
been distributed to the public, the $50 billion would reappear here in the
United States, back on the books in the United States.
Steve Kroft: And then the next financial statement,
they would move it overseas again, and file the report, and then move it
Anton Valukas: Right.
Steve Kroft: It sounds like a shell game.
Anton Valukas: It was a shell game. It was a
Lehman misused an accounting trick called Repo 105
to temporarily remove the $50 billion from its ledgers to make it look as
though it was reducing its dependency on borrowed money and was drawing down
its debt. Lehman never told investors or regulators about it.
Steve Kroft: This is really deception to make the
company look healthier than it was?
Anton Valukas: Yes.
Steve Kroft: Deliberate?
Anton Valukas: Yes.
Steve Kroft: How are you so sure of that?
Anton Valukas: Because we read the emails in which
we observed the people saying that they were doing it. We interviewed the
witnesses who wrote those emails, or some of those emails, and asked them
why they were doing it, and they told us they were doing it for purposes of
affecting the numbers.
Steve Kroft: Do you think that Lehman executives
knew that this was wrong?
Anton Valukas: For some of 'em, certainly. There
was concerns being expressed by-- at high levels about whether this is
appropriate, what happens if the street found out about it. So, you know,
there was a concern that there's a real question about whether we can do
this, whether this was right or not.
One of those people was Matthew Lee who had been a
senior executive at Lehman and the accountant responsible for its global
balance sheet. Lee was one of the first to raise objections inside Lehman
about the accounting trick known as Repo 105.
Matthew Lee: It sounded like a rat poison, Repo
105, when I first heard it. So I investigated what it was, and I didn't like
what I saw.
Continued in article
Lehman executives took an interesting tack when defending themselves from the
SEC. Their defense is that the SEC knew in advance about the Repo 105 and Repo
108 transactions and could've prevented those deceptions from happening in the
first place. Hence if the SEC sues over these deceptions the SEC will end up
bringing a lawsuit against itself.
In any case who cares about an SEC lawsuit. Director Mary Shapiro only throws
marshmallows. Only the Department of Justice can throw people in Jail, which is
what the Lehman Bankruptcy Examiner (Valukas) really wants in this case. But the
DOJ is too busy trying to get itself out of the mess its in for sending
terrifying weapons to the Mexican Drug Cartels.
Were the Ernst & Young's auditors negligent or cleverly deceived or
complicit in the deception by the Lehman Brothers?
More from the examiner’s report:
Lehman never publicly disclosed its use of
Repo 105 transactions, its accounting treatment for these
transactions, the considerable escalation of its total Repo 105
usage in late 2007 and into 2008, or the material impact these
transactions had on the firm’s publicly reported net leverage ratio.
According to former Global Financial Controller Martin Kelly, a
careful review of Lehman’s Forms 10‐K and 10‐Q would not reveal
Lehman’s use of Repo 105 transactions. Lehman failed to disclose its
Repo 105 practice even though Kelly believed “that the only purpose
or motive for the transactions was reduction in balance sheet”; felt
that “there was no substance to the transactions”; and expressed
concerns with Lehman’s Repo 105 program to two consecutive Lehman
Chief Financial Officers – Erin Callan and Ian Lowitt – advising
them that the lack of economic substance to Repo 105 transactions
meant “reputational risk” to Lehman if the firm’s use of the
transactions became known to the public. In addition to its material
omissions, Lehman affirmatively misrepresented in its financial
statements that the firm treated all repo transactions as financing
transactions – i.e., not sales – for financial reporting purposes.
"Report Details How Lehman Hid Its Woes as It Collapsed," by Michael de
la Merced and Andrew Ross Sorkin, The New York Times, March 11,
Former employees of Big Four firms (alumni) have a blog that is
generally upbeat and tends not to be critical of their former employers
However, with respect to the impact of the Lehman Bankruptcy Examiners
Report, this Big Four Blog is unusually critical of Ernst and Young and
predicts a very tough time for E&Y in the aftermath.
The next few
days will reveal how the regulators, erstwhile shareholders of Lehman and other
stakeholders will move against E&Y. Valukas’ statement that there is sufficient
evidence to show that E&Y was negligent is enough to spur a whole host of law
suits. E&Y is in a very tough spot now, and while it may escape an imploding
collapse like Andersen, the long tail of Lehman is sure to create a strong
whiplash with painful monetary, reputational and punitive
"Ernst and Young Found Negligent in Lehman Report, Tough
Consequences," The Big Four Blog, March 17, 2010 ---
There’s been so
much press on the recently released report on the spectacular failure of
Lehman Brothers by Anton Valukas, so we’ll just focus on the key elements
which involve Lehman’s auditor Ernst & Young.
Valukas is highly
critical of E&Y’s work, claiming that they did not perform the due diligence
needed by audit firms, the ultimate watchdog of investors’ interests. He
believes there is a case of negligence and professional malpractice against
the firm. Though in a very limited sense Lehman perhaps followed standard
accounting principles, and this is the basis on which E&Y signed off on
their annual and quarterly filings, they wrongly categorized a repo as a
sale to knowingly report a lower leverage ratio, they exceeded internal
limits on the infamous Repo 105, and they found a loophole in the British
system to execute these transactions, and keep them off the public eye.
Lehman was clearly
at fault and grossly fraudulent in hiding this from investors, and then
obfuscating answers to clear questions from analysts. Is Ernst and Young
E&Y should have
been more rigorous in pursuing this issue, knowing that it was material,
being misrepresented and highly abused. With full knowledge of its usage,
and then signing off on SEC documents is definitely negligent.
E&Y is now being
investigated by the FRC in the UK and very likely in due course by the SEC.
The Saudi government has already cancelled E&Y’s security license in the
kingdom. The law suits are yet to hit the wires, but they are coming. The
key is whether a criminal indictment of the firm is likely, recall that this
is what brought down Andersen. Dealing with civil suits is only a matter of
money, but a criminal charge is going to send clients away in droves. The
critical question is whether the industry can withstand the loss of a $20
billion accounting giant, the consequences of a Big Three are quite hard to
E&Y was recently
hit with a $8.5 million fine by the SEC for its involvement with Bally
Fitness, and in that settlement E&Y agreed to tighten internal procedures
and refrain from audit abuse. So the SEC is unlikely to look favorably on
The next few days
will reveal how the regulators, erstwhile shareholders of Lehman and other
stakeholders will move against E&Y. Valukas’ statement that there is
sufficient evidence to show that E&Y was negligent is enough to spur a whole
host of law suits.
E&Y is in a
very tough spot now, and while it may escape an imploding collapse like
Andersen, the long tail of Lehman is sure to create a strong whiplash with
painful monetary, reputational and punitive consequences.
Bob Jensen's threads on the
Examiner's Report aftermath can be found at
Also see "Repo Sales Gimmicks" at
"Lehman's Demise and Repo 105:
No Accounting for Deception," Knowledge@Wharton, March 31, 2010 ---
"Auditors Face Fraud Charge: New York Set to Allege Ernst
& Young Stood By as Lehman Cooked Its Books," by Liz Rappaport and Michel
Rapoport, The Wall Street Journal, December 20, 2010 ---
"Ernst & Young — Cuomo Initiates Settlement Talks With Filing," by
Walter Pavlo, Forbes, December 24, 2010 ---
"Ernst & Young dismissed from IndyMac shareholder case," by Amanda
Bronstad, Law.com, June 8, 2012 ---
The courts have been very kind to large auditing firms that allowed clients to
grossly underestimate bad debt reserves and failed to detect (or at least
report) insider frauds and going concern questions for nearly 2,000 clients that
went bankrupt after 2007. This particular IndyMac case judge was also not a bit
sympathetic with the SEC's case in general.
Bob Jensen's threads on Ernst & Young are at
"An (Almost) Unnoticed $497 Million Accounting Error," by Jonathon
Weil, Bloomberg, May 2, 2012 ---
One telltale sign of a
bull market is that
investors don't care as much about dodgy corporate accounting practices. A
case in point: the public reaction -- or lack thereof -- to a financial
restatement disclosed late yesterday afternoon by Williams Cos., the
didn't issue a press release about the
restatement. As far as I can tell, there have been no news reports about the
company's accounting errors, which Williams divulged in a
filing with the Securities and Exchange
Commission. They aren't a small matter, though.
As a result of the restatement, Williams said its
shareholder equity fell $497 million, or 28 percent, to $1.3 billion as of
Dec. 31. Additionally, the company said it had "identified a material
weakness in internal control over financial reporting," which is never a
good sign. Net income wasn't affected.
Shares of Williams were trading for $33.65 this
afternoon, down 73 cents, after setting a 52-week high yesterday. The stock
is up 88 percent since Oct. 4.
Williams, which is audited by Ernst & Young, said
the restatement was necessary to correct errors in deferred tax liabilities
related to its investment in Williams Partners LP, a publicly traded master
limited partnership in which it owns a 68 percent stake. A Williams
spokesman, Jeff Pounds, declined to comment when asked why the company
didn't issue a press release flagging the restatement.
The answer seems obvious, though: The company
didn't want anyone to write about it. Oh well.
Bob Jensen's threads on Ernst & Young are at
"GROUPON’S FEEBLE TAX ASSETS: WE TOLD YOU SO…AGAIN!" by Anthony H. Catanach
and J. Edward Ketz, Grumpy Old Accoutants Bllog, June 11, 2012 ---
Bob Jensen's threads on Groupon
Search for "Groupon" at
Teaching Case on Groupon
From The Wall Street Journal Accounting Weekly Review on April 6,
SEC Probes Groupon
Shayndi Raice and Jean Eaglesham
Apr 03, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: Cash Flow, Contingent Liabilities, Internal Controls,
SUMMARY: As described by Colin Barr in the related video, "One
month after they came out with their fourth quarter numbers, '[Groupon]
said--guess what-- "Oh, those were wrong..." The company reissued is report
for the quarter and year ended December 31, 2011 because they had not booked
a sufficient reserve for customer refunds. In the first quarter of 2012,
customer refunds under the company's policy exceeded the amount that
management had expected because the company faces higher refund rates when
selling Groupons for higher priced goods.
CLASSROOM APPLICATION: The article is useful in a financial
reporting class to cover corrections of errors, restatements, accruals for
contingent liabilities, and the difference between earnings and cash flows.
The article conveys a sense of the need for confidence in financial
reporting in order for investors and others to have confidence in
management's abilities. Also mentioned in the article is the firm's auditor,
Ernst & Young, stating that this event clearly represents a material
weakness in internal control.
1. (Introductory) Based on the information in the article and the
related video, what problem is Groupon now having to correct?
2. (Advanced) Access the press release announcing the revised
fourth quarter and full year 2011 results, available on the SEC web site at
What accounts are affected by the revision? What was the nature of the
3. (Advanced) Why does first quarter 2012 activity result in
accounting changes to fourth quarter 2011 results of operations?
4. (Advanced) What accounting standards require reissuing Groupon's
financial statements as the company has done under these circumstances? What
disclosures must be made in these circumstances? Provide references to
authoritative accounting standards for these requirements.
5. (Advanced) As noted in the press release, there was no change to
the company's previously reported operating cash flows. Why not?
6. (Introductory) What sense is portrayed in the article and the
video about Groupon's operations and the maturity of its leadership in
handling a public company? How does this viewpoint stem from the accounting
problems that they have faced in the first quarter of operating as a public
7. (Advanced) How has the company's stock price reacted to this
8. (Advanced) (Refer to the related article) What is a material
weakness in internal control?
9. (Advanced) (Refer to the related article) Do you think that
Groupon's auditor Ernst & Young needed to perform any systems testing to
make the statement about internal control that was quoted in the article?
Explain your answer.
Reviewed By: Judy Beckman, University of Rhode Island
Groupon Forced to Revise Results
by Shayndi Raice and John Letzing
Mar 31, 2012
"SEC Probes Groupon," by: Shayndi Raice and Jean Eaglesham, The Wall
Street Journal, April 3, 2012 ---
The Securities and Exchange Commission is examining
Groupon Inc.'s GRPN -2.48% revision of its first set of financial results as
a public company, according to a person familiar with the situation.
The regulator's probe into the popular
online-coupon company is at a preliminary stage and the SEC hasn't yet
decided whether to launch a formal investigation into the matter, the person
The SEC decision to examine the circumstances
surrounding Groupon's surprise revision is the start-up's latest run-in with
the regulator. Groupon twice revised its finances before its November IPO.
An SEC spokesperson declined to comment, as did a spokesman for Groupon.
Groupon shares plunged Monday, ending the day down
nearly 17% at $15.27, far below its $20 IPO price. The selloff came despite
damage control efforts by Groupon's top two executives, Chief Executive
Andrew Mason and finance chief Jason Child.
The Chicago company also closed ranks around Mr.
Child, even as accounting experts and investors criticized his performance.
People familiar with the situation said Mr. Child, who joined Groupon from
Amazon.com Inc. in December 2010, continues to have the support of Mr. Mason
and others at the company.
Groupon said Friday it was revising its results for
the fourth quarter after discovering executives had failed to set aside
enough money for customer refunds. The company had reported a loss of $37
million for its fourth quarter. The accounting changes reduced the company's
revenue for the quarter by $14.3 million and widened its loss by $22.6
The revision came after an unsettling discovery in
late February. That's when Groupon's chief accounting officer told Messrs.
Mason and Child that many customers had returned their coupons in January,
said a person familiar with the matter. Read More
Heard: Disclosure Could Aid Groupon Therapy Deal
Journal: Analysts Question Groupon Model After Groupon, Critics Wary of JOBS
Act Groupon Forced to Revise Results 3/31/12
What's worse: the four-year-old company didn't have
enough money set aside in its reserves to cover those refunds, according to
The duo questioned whether this meant people
weren't interested in buying daily deals anymore, according to this person:
"It made [the executives] think there's got to be something [they] don't
understand. A business just doesn't go sideways and go in another direction
overnight." Related Video
Groupon shares slid Monday as several Wall Street
analysts questioned the stability of the company's business following a
revision of its fourth-quarter results, Dan Gallagher reports on digits.
Ultimately both men got comfortable after an
internal analysis found only certain types of coupons were being returned,
this person said.
The moment of crisis illustrates how deep the
growing pains are at Groupon as it comes to grips with its status as a newly
public Web company. In addition to revising its quarterly results, the
company on Friday revealed a "material weakness in its internal controls."
Insight from CFO Journal
Investor Outreach Having Big Effect on Say-on-Pay
Results Lufthansa Convertibles Monetize JetBlue Stake Multiemployer Pension
Plans May Be in Hot Water
According to people familiar with the situation,
Groupon expects to address the material weakness by the time it reports its
first-quarter earnings on May 14.
Groupon has also hired a second accounting firm,
KPMG, in addition to its current accountant Ernst & Young. KPMG's role is to
make Groupon compliant with Sarbanes-Oxley, federal regulations around
accounting and disclosures of public companies. In addition, Groupon plans
to hire more accounting and finance staff, said a person familiar with the
The revision threw open the question of "whether
there is any real corporate governance at Groupon whatsoever," wrote
professors Anthony Catanach of Villanova University and Ed Ketz of Penn
State University on their Grumpy Old Accountants blog.
Others fingered Groupon's fast growth—its revenue
was $1.62 billion last year, up from $14.5 million in 2009—as the culprit
for its recent mishaps. Groupon previously had to change its accounting
twice before its IPO in response to SEC concerns.
"I view this as growing pains," said one Groupon
investor who declined to be named. "This is like a high school kid who is a
five-foot sophomore and becomes seven feet by the time he's a senior."
At the heart of Groupon's most recent problem is
something known as the "Groupon Promise" which allows customers to return
one of its coupons. The company has no plans to change its policy, said a
person familiar with the matter, since it uses it to compete with rivals
like LivingSocial Inc.
But that policy led to a meeting in late February
between Mr. Child and his chief accounting officer Joe Del Preto, just a few
weeks after Groupon had reported its first earnings report as a public
For the month of January, Mr. Del Preto told Mr.
Child the number of refunds had exceeded all previous models Groupon had
built to predict its customers' behavior, said a person familiar with the
Continued in article
"Groupon: You Must Have Fallen From The Sky," by Francine McKenna,
re:TheAuditors, April 7, 2012 ---
Last week was Groupon’s big week, although not in a
good way. What happened? Well, the premier source of daily deal dish got
knocked down a few more pegs after announcing a revision to 4th quarter
earnings and the announcement by management that there was a material
weakness in internal controls over financial reporting that was causing
their disclosure controls to be ineffective. Groupon went public just a few
months ago, last November, and the annual report was the company’s first
filing as a public company.
Here’s one of the few journalists who got the
Jonathan Weil of Bloomberg, explaining why, in
this case, the news was especially bad:
Didn’t Groupon know before its initial public
offering that its controls were weak? A company spokesman, Paul Taaffe,
declined to comment. Let’s assume for the moment, though, that its
executives did know. Even then, they wouldn’t have had to tell investors
That’s because there is no requirement to
disclose a control weakness in a company’s IPO prospectus. Groupon would
have had no obligation to disclose the problem until it filed its first
quarterly or annual report as a public company — which is what it did.
Sandbagging IPO investors in this manner is perfectly legal, it turns
The reason lies with a gaping hole in the
Sarbanes-Oxley Act, which Congress passed in 2002 in response to the
accounting scandals at Enron Corp. and WorldCom Inc. That statute had
two main sections related to companies’ internal controls, which are the
systems and processes that companies are supposed to have in place to
ensure the information they report is accurate. Those provisions apply
only to companies that are public already, not ones that have registered
One section, called 302, requires public
companies’ top executives to evaluate each quarter whether their
disclosure controls and procedures are effective. The other section,
known as 404, is better known. It requires public companies in their
annual reports to include assessments by management and outside auditors
about the effectiveness of their internal controls over financial
reporting. Congress left it to the Securities and Exchange Commission to
write the rules implementing those provisions.
Here’s where it gets tricky. Groupon reported
the weakness in its financial-reporting controls through a Section 302
disclosure, not a Section 404 report. In other words, the problem was
serious enough that it amounted to a shortcoming in the company’s
overall disclosure controls.
Groupon won’t have to comply with Section 404’s
requirements until its second annual report, due next year, under an
exemption the SEC passed in 2006 for newly public companies.
Likewise, Groupon’s auditor, Ernst & Young LLP, to date has expressed no
opinion on the company’s internal controls in its audit reports.
From the moment Groupon announced
the revision on March 30, there were two important facts that almost all
major media financial journalists got wrong:
1) The announcement of lower revenue and lower
income for the fourth quarter was a revision of an earnings
release, not a restatement. Groupon never filed a 10Q so there
was no SEC filing to restate. Fessing up to the right numbers in the annual
report was the first time the company was bound to report those numbers and,
at that time, they corrected previously announced earnings for the 4th
2) Management made the assessment of the material
weakness in internal controls over financial reporting that caused
disclosure controls to be ineffective, not auditor Ernst & Young.
Ernst & Young deserves no credit for the announcement, nor any blame, just
yet, for the fact that the weaknesses had to be finally admitted. There is
no transparency regarding the auditor’s agreement or disagreement previously
with Groupon, any public documentation of their discussions or any reason to
believe Ernst & Young either encouraged or discouraged Groupon to get their
act together sooner.
We just don’t know.
Continued in article
"THE “BEAUTY” OF INTERNET COMPANY ACCOUNTING," by Anthony H. Catanach Jr. and
J. Edward Ketz, Grumpy Old Accountants Blog, April 9, 2012 ---
And the same can be said for financial reporting as practiced by internet
companies given their “new business models” that require “new accounting.”
Internet company financial statements seem to mean different things to
different people, not unlike a piece of artwork. Unfortunately, some of
this accounting “artwork” is junk, as we have recently reported in the case
of Groupon (First
10K: April Fool’s!). At times like this beauty
rests in the I of the artist.
How can management and directors and auditors see
one thing, when the complete opposite reflects reality? And why do internet
IPOs seem particularly vulnerable? Well, we think the problem is with the
accounting “standards” (and we use that term loosely) that apply to these
companies. As we stated in an earlier post:
Internet company accounting is suspect given
all the unsupported assertions and assumptions that must be made to comply
with generally accepted accounting principles…
Think about it. The internet company balance sheet
is generally dominated by intangible assets whose values are based on
assumptions that are works of art themselves. And then there’s revenue
recognition in these companies with management making all kinds of
assumptions about primary obligors, selling price hierarchies, and virtual
sales. Yes, what makes internet company accounting “special” is that so
many of the applicable accounting rules require major assumptions, many of
which could be better characterized as “giant leaps of faith.” Clearly, the
accounting rules used for internet companies should not be called
“standards,” as their many judgments make any meaningful comparison an
impossibility! Enough pontificating…
Given Groupon’s recent accounting struggles we
thought it might be interesting to see if there were any other internet
company accounting issues lurking within today’s “hot” internet companies.
So, we looked at the most recent 10K filings of Demand Media, Facebook,
Groupon, Linked In, and Zynga, focusing primarily on revenue and expense
recognition, “unusual” accounting issues, and of course some of our
favorites: intangible assets, cash flows, and non-GAAP financial metrics.
Here is what we found.
Two of the five companies (Demand Media and
Facebook) generate a significant amount of their revenue from advertising.
The way these companies record revenue appears to be relatively
straight-forward. Generally, ad revenue is recognized either when the ad
content is delivered, or for click-based ads, when a user clicks on an ad.
Nothing very interesting or complicated here.
Linked In, on the other hand, has a much more
subjective revenue recognition method for its hiring and marketing
solutions. Most of the Company’s contractual arrangements include
multiple deliverables, i.e., several products packaged
together which Linked In swears can’t be pulled apart to record revenue
separately. Gee, if the Company’s cost accounting system keeps track of
product and service costs separately, why can’t revenue be estimated
separately? Interesting question, huh? Anyway, Linked In uses
convoluted GAAP criteria to record revenue, the relative selling price
method, based on a selling price hierarchy. In short, management decides
what revenue will be based on vendor specific evidence, third party
evidence, or management’s best estimate of selling price, in that order of
priority. Which one do you thing management likely favors?
Then, there’s our poster child for bad internet
company accounting, Groupon. As you may recall, the Company was busted by
the SEC for improper revenue recognition last September. See “Groupon
Finally Restates Its Numbers.” Basically, Groupon
ignored accounting guidance (that’s a much better word than “standard”) in
Emerging Issues Task Force (EITF) 99-19, as well as SEC Staff Accounting
Bulletin 101 (question 10), and recorded the gross amounts
it received on Groupon sales as revenues. Since being forced to restate its
financial statements, the Company now records revenue at the net
amount retained from the sale of Groupons (gross collections less
an agreed upon percentage of the purchase price due to the featured merchant
excluding any applicable taxes), since it is acting as the merchant’s agent
in the transaction.
It should be noted that Demand Media also faces the
“gross vs. net” revenue issue discussed in EITF 99-19. For
revenue sharing arrangements in which the Company is considered the primary
obligor, it reports revenue on a gross basis. But for those situations
where it distributes its content on third-party websites and the customer
acts as the primary obligor, it records revenue on a net basis.
And last, but not least, there is Zynga with its
consumable or durable virtual goods! For the sale of
consumable virtual goods (goods consumed by player game actions), revenue is
recognized as the goods are consumed. On the other hand, revenue from the
sale of durable virtual goods (goods accessible to a player over an extended
period of time) is recognized ratably over the estimated average playing
period of paying players for the applicable game. Confused yet? Basically,
we have to rely on Zynga to provide us with a best estimate of the lives of
both consumable and virtual goods to book revenue. As we indicated in “Zynga’s
First 10K: Zestful Zephyrs,” by merely
changing the game’s rules, the Company can change what it books as revenue!
This is all too arbitrary. Are we really surprised?
So, when it comes to recording revenue, it appears
that booking advertising income is relatively easy, compared to the
management estimates needed for multiple deliverables (Linked In) and
virtual good sales (Zynga), or deciding who the “primary obligor” is (Demand
Media and Groupon). We would not be surprised if some internet companies
don’t intentionally complicate their product offerings to make revenue
recognition a function of management guesstimates!
Given that several of these companies are
struggling to achieve or maintain profitability, it is not surprising that
they would try to record as an asset what really is an expense. And sure
enough, we find several instances of this. For example, Demand Media
capitalizes many different types of costs including content costs,
registration and acquisition costs for undeveloped websites and internally
developed software, as well as intangible assets acquired in acquisitions.
How significant is this? Over 72 percent of the Company’s $590.1 million in
total assets are intangible in nature! Now that takes cost capitalization
to a new height…we’d probably try that too if we were losing as much money
every year as they are (2011’s net loss was $18.5 million).
Linked In also plays this “game,” but with a new
twist. The Company does do something quite interesting…it defers expensing
$13.6 million in commissions already paid on non-cancelable subscription
contracts, presumably to match the commission costs with the related revenue
streams. Why stop there? Couldn’t you make the same argument for a whole
host of other expenses as well? Maybe they did, but Deloitte didn’t buy it.
Groupon and Zynga also have played a slightly
different version of the cost capitalization game, by recording tax assets
that presumably will lower future tax liabilities. In recording
these tax assets, the companies reduce income tax expense in the income
statement, thus improving the bottom line. The only problem is that a
company must have future taxable income in order to use these
alleged tax assets! Well, if the companies did this to mitigate their
operating losses, the game has ended for Zynga, and soon will end for
In 2011 Zynga recorded a $113.4 million allowance
against its deferred tax assets, almost fully reserving these assets, and
effectively wiping them off the books. This suggests that the Company may
have had a reality check as to its future prospects, given that it no longer
projects a future that includes profitability, more specifically taxable
As for Groupon, we highlighted this same tax issue
Groupon’s First 10K: Looking Under the Hood. In
2011, the Company increased its valuation reserve for deferred tax assets by
$72.3 million reducing reported deferred tax assets to $65.3 million.
Although Groupon gave no reason for the increased reserve, it likely was
forced to record it for the same reason as Zynga, i.e., little likelihood of
generating taxable income in the foreseeable future against which deferred
tax assets could be used. So, who would have thought…the income tax note
might actually shed some light on what a company really thinks its profit
forecast is (as opposed to the press release)!
Other Accounting Issues
Our internet company reviews also turned up a
couple of interesting points, which give us insight into managements’
attitude toward financial reporting transparency…and believe it or not,
Groupon is NOT involved!
The first involves cash, naturally, and how Demand
Media “defines” cash. You may recall that we first reported on the
increasing trend of companies to manipulate reported cash balances in
Up With Cash Balances?” And, yes, Demand Media is
overstating its balance sheet cash by including accounts receivable as cash
even though it has yet to receive the monies. Here is what the Company’s
accounting policy note says:
Continued in article
In the 1990s tech boom, startup companies in particular were not making any
profits and had cash shortage problems. These companies tried to shift the focus
to revenues and devised all sort of (mostly fraudulent) schemes to record
non-cash revenue. The EITF worked overtime trying to plug the dikes against new
revenue reporting schemes ---
Various Teaching Cases Featuring Groupon ---
Search on the word "Groupon"
"Why Is The SEC Pursuing Deloitte Shanghai? Looks Like It’s Personal,"
by Francine McKenna, re:TheAuditors, May 10, 2012 ---
The Securities and Exchange Commission is rattling
a dull sabre again towards Shanghai-based Deloitte Touche Tohmatsu CPA Ltd.
for its refusal to provide the agency with audit work papers related to
Longtop, a China-based company under investigation for potential accounting
fraud against U.S. investors. The regulator filed
action” instituting an “administrative proceeding”
This has been
going on now for two years and seems to have
escalated into the kind of fight men have when trying to prove who’s bigger
and tougher. It looks to me like it’s personal rather than productive. The
SEC has access to as much as they need to review the work of the Deloitte
China firm’s audit of Longtop - or any other Chinese fraud for a US listed
company - assuming
the US Deloitte firm had as much as they needed to sign off on the
companies’ filings with the SEC over the years.
The SEC admits in their
latest complaint against Deloitte Shanghai that
they asked Deloitte US for the information the firm has right here in the US
on Longtop and other US listed foreign based audits. The firm’s first answer
was to deny any involvement in the audit.
4. On April 9, 2010, staff served Deloitte LLP,
the U.S. member firm of the Global Firm with a subpoena requesting audit
work papers relating to the Global Firm’s audit of Client A’s financial
statements for the period January 1, 2008 through April 9, 2010.
5. Between April 13, 2010 and May 18, 2010,
staff had several communications with U.S. based counsels for both
Deloitte LLP and the Global Firm.
6. Counsel for Deloitte LLP initially
informed the staff that Deloitte LLP did not perform any audit work for
Client A, that all audit work was conducted by Respondent, and that
Deloitte LLP did not have possession, custody, or control of the
documents called for by the subpoena.
7. Counsel for Deloitte LLP subsequently
informed the staff that Deloitte LLP performed some review work of
Client A’s periodic reports and produced certain documents relating to
this review to the staff.
Deloitte did eventually produce some
documents related to the audit that are, and always have been, available in
the US. If the Deloitte US reviews were sufficient, that should be enough
for the SEC to see the quality of work performed by the Deloitte Shanghai
So why is SEC continuing to fight this inane fight
when, in reality, they should have all the information they need to
investigate the Longtop or any other fraud? I suspect that the SEC attorneys
are super annoyed with Deloitte’s lawyers and have decided to use their
unlimited budget and intimidating administrative powers to annoy them back.
Unfortunately, this just puts more money in the pocket of the
super expensive Sidley & Austin outside counsel
representing Deloitte Shanghai.
(Coincidentally, it was also a Sidley & Austin
lawyer for KPMG that recently
so annoyed a judge in a class action overtime case against the firm
the judge ordered the firm to preserve the hardrives
of all laptops for past, present and future class members. Note to Sidley &
Austin: Scorched earth tactics not working.)
US-based GAAP and SEC reporting experts in the
global audit firms review the workpapers behind the filings for every non-US
based audit client that is listed on a US stock exchange, all over the
world, before any filing with the SEC. That’s one of the quality control
procedures all the firms who audit foreign-based, US listed multinationals
have in place, not only because it is expected by regulators but because
it’s good business.
The SEC/GAAP reporting team or Reg S-X review team
– it may be drawn from and called something different in each firm – is the
last stop before a foreign-based US issuer can file its quarterly and annual
reports, as well as any filings for additional stock or debt offerings, with
the SEC. Sometimes the team consists of experts from the firm’s financial
advisory consulting group or capital markets group – the professionals who
help companies prepare for IPOs, especially foreign companies who want a
stock exchange listing in the US. The team may also call on additional
expertise from the firm’s national office – a kind of one-stop shop for
getting questions answered on arcane technical matters or standards for
specific industries. Professionals may play double duty as consultants to
some companies and remote members of an audit team for others. That way they
can pick up billable hours reviewing filings when there are no deals to be
When a US-based listed company is a multinational,
the US audit firm will use its member firm network extensively to do the
audit work necessary all over the world to support the overall audit
opinion. In this case, a US audit firm is expected to closely supervise and
control the work of foreign affiliates who contribute to its audit.
From Part 2 of the PCAOB’s inspection report – the
private quality control review of US firms.
Review of Processes Related to the Firm’s Use
of Audit Work that the Firm’s Foreign Affiliates Perform on the Foreign
Operations of the Firm’s U.S. Issuer Audit Clients
The inspection team performed procedures in
this area with respect to the processes the Firm uses to ensure that the
audit work that its foreign affiliates perform on the foreign operations
of U.S. issuers is effective and in accordance with applicable standards
performed by the Firm’s foreign affiliates on the foreign operations of
U.S. issuer clients.
Some non-US audit member firms have more SEC
reporting and GAAP experts on-site than others. I suspect the largest firms
in Canada and the UK have their own SEC and GAAP reporting quality assurance
review team for this purpose, but many countries do not.
PwC, for example, has the Global Capital Markets
Group, a team of professionals dedicated to providing technical, strategic
and project management advisory services to non-US companies actively
interested in raising capital and/or listing their securities in the US
securities markets. GCMG has partners and hundreds of professionals in more
than 20 countries around the world.
GCMG assists companies in meeting ongoing SEC
reporting requirements (e.g., review the company’s annual filing on Form
20-F and assist the company in responding to any SEC review comments). They
are qualified to review management’s evaluation of the accounting treatment
under U.S. GAAP and/or IFRS of new, complex or unusual transactions, such as
a new type of financial instrument or a business combination. (Henri
Steenkamp, a native of South Africa and a PwC alumni, is one of these
accounting technical experts who helped companies prepare for IPOs for
PwC before he helped Man Financial spin off MF Global and went on to become
CFO of that PwC audit client.)
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
May 18, 2012
Chinese Audits See New Heat
May 10, 2012
Click here to view the full article on WSJ.com
TOPICS: Audit Firms, Audit Quality, Auditing, Big Four,
International Auditing, SEC, Securities and Exchange Commission
SUMMARY: By bringing an enforcement action, the SEC is increasing
pressure on the Chinese unit of Deloitte Touche Tohmatsu to submit audit
work papers relating to its client Longtop Financial Technologies, Ltd. This
company is one of a number of Chinese firms that were traded on U.S. stock
exchanges and have become the subjects of SEC investigations into accounting
fraud. Deloitte's Chinese unit resigned from the audit engagement but states
that it is unable to comply with the SEC's subpoena for work papers under
Chinese secrecy laws. The related article specifically quotes a Deloitte
representative stating that the "Chinese authorities explicitly told its
Shanghai unit in June 2011 that they 'did not consent to the production of
the Longtop work papers directly to the SEC.'" If Deloitte does not comply
with the SEC's recent action to enforce the subpoena, the firm could be
barred from auditing publicly traded firms in the U.S.
CLASSROOM APPLICATION: The article is useful to integrate global
business perspectives on the conduct of the auditing profession.
1. (Introductory) What enforcement action has the SEC taken against
the Chinese unit of the global Big Four accounting firm Deloitte Touche
2. (Advanced) What circumstances precipitated this action by the
SEC? Refer to the main and related article.
3. (Introductory) What is the firm's explanation for not complying
with the SEC subpoena and enforcement action?
4. (Introductory) What could happen to Deloitte's Chinese unit and
its staff if the firm does comply with the SEC request?
5. (Advanced) Refer to the related article. How does the auditing
firm hope that this matter will be resolved?
Reviewed By: Judy Beckman, University of Rhode Island
"Chinese Audits See New Heat," by: Michael Rapoport, The Wall Street
Journal, May 10, 2012 ---
The Securities and Exchange Commission has
ratcheted up the pressure in its monthslong dispute with Deloitte Touche
Tohmatsu's Chinese arm, saying the firm's refusal to turn over documents
violates U.S. law.
Deloitte Touche Tohmatsu CPA Ltd., the
Shanghai-based Chinese affiliate of the Big Four accounting firm, is
violating the Sarbanes-Oxley Act by refusing to turn over audit work papers
requested for a Deloitte client the agency is investigating, the commission
said in an administrative proceeding filed Wednesday.
The case marks the first time the commission has
brought an enforcement action against a foreign audit firm for failing to
comply with a request under Sarbanes-Oxley, which requires foreign firms
that audit U.S.-traded companies provide documents to the SEC on request. If
the proceeding is decided against the Chinese firm, it could be barred from
auditing U.S.-traded companies.
The SEC's move boosts the stakes in its clash with
the Deloitte China affiliate that began last September, when Deloitte
refused to comply with an SEC subpoena seeking documents relating to its
client Longtop Financial Technologies Ltd., a financial-software company
whose shares traded in the U.S. until last December.
Deloitte cited concerns that Chinese authorities
could penalize the firm or its partners under China's state-secrecy laws.
The SEC filed suit in September to enforce the subpoena, and that case
remains pending in U.S. District Court in Washington. Longtop couldn't be
reached for comment.
Deloitte's international organization said in a
statement that its Chinese affiliate "is caught in the middle of conflicting
laws of two different governments" and that Chinese law prohibits accounting
firms in China from providing documents directly to foreign regulators
without government approval, which hasn't been forthcoming. The firm said it
"is hopeful that this diplomatic disagreement will be resolved soon."
The SEC's latest action raises the potential
penalties for Deloitte's Chinese arm and broadens the dispute, by bringing
in a separate request for Deloitte documents relating to a second,
unidentified client that is under SEC investigation.
"The SEC is really upping the stakes here. This is
a pretty strong action," said Paul Gillis, a professor of practice at Peking
University's Guanghua School of Management in Beijing. The commission, he
said, "is really playing tough on [Deloitte], and on the other side the
Chinese aren't giving them a lot of room to wiggle."
An SEC administrative-law judge will hear the
proceeding against the Chinese firm. If the judge decides in the SEC's
favor, the sanctions against the Deloitte affiliate could range from censure
to denial of "the privilege of appearance and practice before the
commission," according to the filing. The affiliate audits more than 40
Chinese companies that are traded on U.S. markets, according to data from
the Public Company Accounting Oversight Board, the U.S. government's
Continued in article
Bob Jensen's threads on professionalism in auditing ---
Bob Jensen's threads on Deloitte are at
"Not Much Illumination: JP Morgan, MF Global & Man in the Middle, Jamie
Dimon," by Francine McKenna, re:TheAuditors, June 15, 2012 ---
The more I write about banks, auditors,
legislators, regulators and the big money that passes amongst them, the
easier it is to see the connections between them all.
Jonathan Safran Foer wrote a book in 2002 called
Everything is Illuminated. According to
Wikipedia, the novel tells the story of…
“…a young American Jew who journeys to Ukraine
in search of Augustine, the woman who saved his grandfather’s life
during the Nazi liquidation of Trachimbrod, his family shtetl. Armed
with maps, cigarettes and many copies of an old photograph of Augustine
and his grandfather, Jonathan begins his adventure with Ukrainian native
and soon-to-be good friend, Alexander “Alex” Perchov, who is Foer’s age
and very fond of American pop culture, albeit culture that is already
out of date in the United States. Alex studied English at his
university, and even though his knowledge of the language is not
“first-rate”, he becomes the translator. Alex’s “blind” grandfather and
his “deranged seeing-eye bitch,” Sammy Davis, Jr., Jr., accompany them
on their journey. Throughout the book, the meaning of love is deeply
It’s widely believed that the title of the book
comes from a line in one of my all time favorite novels The
Unbearable Lightness of Being by Milan
Continued in article
Bob Jensen's threads on bank frauds are at
Baker Cooks the Books
"Former Bakery Accountant Accused Of Stealing More Than $235K," CBS News,
May 16, 2012 ---
Thank you Going Concern for the heads up
A former accountant for a Brea-based bakery chain
was arrested Wednesday on charges of using company-issued credit cards to
steal lots of dough, but not the kind you eat.
Ligia Baciu, 35, was arrested at her Fullerton home
by Brea police on multiple charges stemming from the alleged embezzlement
which, they say, adds up to $236,000.
Prosecutors allege she used the stolen money to buy
an engagement ring, pay for fertility treatments, put a down payment on an
Audi, as well as paying for car insurance, groceries and other goods at
Costco, Deputy District Attorney Marc Labreche said.
Baciu worked in accounting at Sweet Life
Enterprises from August 2005 to October 2009, Labreche said. In 2007, the
company was acquired by Fresh Start Bakeries Inc., which got its start
making hamburger buns for McDonald’s.
Baciu, who was responsible for the company’s credit
card accounts, allegedly began stealing from the company in February 2008,
She managed to conceal the theft by ordering bills
from the credit card companies that she could manipulate to make it look
like the expenses were from various other employees, Labreche alleged.
Baciu was laid off from her job in October 2009,
but allegedly kept using the credit cards. Her replacement in accounting
uncovered the alleged theft in January 2010, Labreche said.
“We had to get search warrants at a lot of
different businesses,” the prosecutor said in explaining the delay in the
Continued in article
"Western Governors University embezzler is sentenced: Courts »
Check forger bought home with cash; still owes school $288K," by Cimaron
Neugebauer, The Salt Lake Tribune, April 27, 2012 ---
A woman who forged checks worth more than half a
million dollars while working for Western Governors University — using a
majority of the stolen cash to buy a house — was sentenced Friday to
probation, community service and eight days in jail.
Shelley Ann Wilkinson, 45, of Belgrade, Mont., was
charged last year with one count of theft, a second-degree felony, and three
counts of forgery, all third-degree felonies.
Last month, Wilkinson pleaded guilty to two
third-degree felony forgery counts and the other charges were dismissed.
On Friday, Wilkinson stood in tears as 3rd District
Judge Elizabeth Hruby-Mills ordered the jail time, 200 hours of community
service, along with 36 months probation. Wilkinson also must continue paying
Prosecutor Vincent Meister said that of the roughly
$526,700 embezzled by Wilkinson, she used some to buy a $350,000 house in
"The embezzlement in itself is selfish," Meister
said, refuting the defense’s claims that Wilkinson always gave and helped
others. "What she stole wasn’t something she needed for subsistence. She
bought [another] house and she got caught."
Defense attorney Taylor Hartley said that after a
few weeks after buying the home, Wilkinson’s guilt got to her and she tried
to sell it. She later turned the deed to the home over to the university and
Wilkinson started paying money back, but still owes the school about
Meister said the most "aggravating factor" is that
she had the money to pay back the school right away.
Continued in article
"Jenkins: Wal-Mart Is Not Alone: An Australian firm encounters New
York's notorious labor graft," by Holman W. Jenkins, Jr., The Wall Street
Journal, April 27, 2012 ---
When in Mexico, don't do as the Mexicans do. That
was good advice for Wal-Mart, though it perhaps seemed impractical at the
time. Now the company is enveloped in allegations that it paid $24 million
in bribes to expedite store openings in our southern neighbor.
Just maybe a little air should leak out of the
sanctimony bubble in light of another story this week of corporate innocents
blundering around Gomorrah. The Mexican people at the very least are
entitled to a twinge of irony.
In 1999, the Australian giant Lend Lease Group
bought a New York construction firm, Bovis, and soon was erecting many
modern landmarks, including Citi Field (where the Mets play) and the
renovated Grand Central. One thing the Australian company didn't do was
upend and purify a 70-year tradition of labor graft in the city's building
In a settlement announced on Tuesday, the U.S.
Justice Department charged that "Bovis intentionally and fraudulently billed
clients, from at least 1999 to 2009, for hours that were not worked by labor
foremen from Local 79 Mason Tenders District Council of Greater New York."
A Bovis executive told a judge: "From at least 1999
to 2009, I agreed with others at Bovis to continue the existing practice for
laborers at Local 79."
The company will pay a fine and submit to
monitoring. Two executives may face jail terms. But these statements beg an
obvious question: What motive would Bovis have for overpaying union workers?
Because it was the victim of a labor racket that's been going on in New York
for decades and will continue to go on is the obvious answer nowhere alluded
to in Justice's lengthy statement.
About one thing Lend Lease and Justice agree: The
illicit practices didn't begin when Lend Lease arrived. They were already
entrenched during a period when Justice itself was in control of the Mason
Justice took over the Mason Tenders in 1995,
installing a court-appointed monitor for an initial period of four years,
impelled by the testimony of Salvatore "Sammy the Bull" Gravano, the Gambino
family underboss who turned on boss John Gotti. Gravano testified that the
union, representing unskilled workers, was a mob favorite because the
goombahs didn't need special skill or training certifications to qualify for
Under trustee Michael Chertoff, the government did
much to clean up the city's most mobbed-up union. It halted the looting of
the union's pension and benefit funds by another crime family, the Genoveses,
under Vincent "the Chin" Gigante, also known as the "Oddfather" for his
habit of walking on Sullivan Street in his bathrobe talking to himself (a
stratagem to avoid prosecution by feigning incompetence, many presumed).
What Justice apparently didn't clean up, however,
was the practice of extorting no-show payments from builders. In the last
year of its trusteeship, the union was raided by the Manhattan district
attorney in an attempted crackdown on such scams.
Graft cultures are hardy for a reason. As much as
some arms of government may seek diligently to root them out, others are
mobilized to protect them. If you have any doubt, just read former Brooklyn
D.A. Burton Turkus's account of the Roosevelt administration's bizarre
manipulations to stall New York state's execution of labor racketeer and
Murder Inc. chief Louis "Lepke" Buchalter, which the late Turkus attributed
to Lepke's connection to labor leaders who were connected to FDR. Of recent
vintage is the mystery of Arthur Coia, head of the Laborers' International
Union and friend of Bill Clinton, whose pending RICO indictment in 1995 was
abruptly dropped, even as one of his constituent unions, the Mason Tenders,
was seized by the government.
Lend Lease has now been paraded for the press, but
prosecutors acknowledge that the practices are widespread and continuing.
Companies will continue to pay up. The Mason Tenders will remain an
important stop for politicians running in the city and state. For all the
fulmination, the illegal payments to several dozen union foremen amounted to
$19 million over 10 years—a sum to be weighed against tens of thousands of
votes represented by building-trades members and their families.
Ironically, as nonunion builders encroach and
compete more successfully in the city, those builders bound by union
contracts will be even more pressured to pay union bribes to allow cheaper
nonunion workers on site—what this scandal fundamentally was all about.
Continued in artiicle
Bogus Wash Trades to Cheat the Canadian Government
"Regulator Accuses Royal Bank of Canada of ‘Massive’ Trading Scheme,"
by Ben Protess, The New York Times, April 2, 2012 ---
Bob Jensen's Fraud Updates are at
"Convicted former CFO seeks $60 million from Tyco," by Karen Freifeld,
Reuters, May 7, 2012 ---
Former Tyco International Chief Financial Officer
Mark Swartz, who is serving a prison sentence for looting the company, has
sued for $60 million in retirement and other money he says he is owed.
The lawsuit, which was made public on Monday,
accuses Tyco of breach of contract and unjust enrichment for not paying him
some $48 million from an executive retirement agreement, $9 million in
reimbursement for New York taxes, and other money.
"We know of no basis on which Swartz could recover
from the company," Tyco spokesman Paul Fitzhenry said in an email, although
the company had not yet been served with the complaint.
Swartz was convicted of grand larceny and
securities fraud in 2005, along with former Chief Executive Dennis
Kozlowski. They are each serving sentences of 8-1/3 to 25 years.
In his lawsuit, filed in New York state Supreme
Court, Swartz charges the company knew the Manhattan District Attorney
intended to bring criminal charges against him when it approved the main
contract at issue in the lawsuit.
"The directors and management of Tyco approved the
subject agreement with actual knowledge that he was shortly to be indicted,"
the lawsuit said.
Tyco has a separate suit against Swartz pending in
U.S. District Court in the Southern District of New York. That case, to fix
the amount Swartz must pay Tyco, is scheduled for trial in September,
Tyco also brought a similar suit in federal court
against Kozlowski. In that case, the judge dismissed Kozlowski's
counterclaims for pay and benefits after 1995. The remaining issues are
scheduled for trial in August, Fitzhenry said.
Swartz was chief financial officer of the
industrial conglomerate from 1995 through 2002. He was indicted in September
2002 and convicted in June 2005. Besides the prison sentence, he paid $72
million in court-ordered restitution and fines.
Since September, Swartz has been assigned to
Lincoln Correctional Facility in New York city, a minimum-security facility
where Kozlowski also is based, according to the state Department of
Swartz is on a furlough schedule where he can leave
on Wednesdays and return on Monday. He is scheduled to appear before the
Parole Board in September 2013.
Kozlowski, whose purchase of a $6,000 shower
curtain made him a symbol of corporate greed, was denied parole in April.
Continued in article
Bob Jensen's threads on Tyco are at
Search for Tyco at the above site.
Unlike many companies that failed after their top executives went to prison,
Tyco was and remained financially very sound because of successful acquisitions
engineered by the top executives that went to prison for criminal activities
along the way, including stealing from the company.
"Accounting firm settles $285M claim over LeNature's loan,"
Bloomberg News, April 6, 2012 ---
BDO Seidman LLP, the accounting firm, settled
investor claims over a $285 million loan that was made to LeNature's Inc.
before the drink maker went bankrupt in 2006, according to a court filing.
Terms of the settlement were not disclosed in the
Monday filing in New York State Supreme Court in Manhattan.
BDO Seidman, based in New York, prepared LeNature's
financial statements, and Wachovia Capital Markets arranged the loan.
Normandy Hill Master Fund LP, which bought some of the debt on the secondary
market, sued Wachovia, BDO Seidman and others in June 2010.
"It has been resolved, and the parties are pleased
to put it behind them," Aaron Mitchell, an attorney for the plaintiffs, said
Timothy Hoeffner, an attorney representing BDO
Seidman, could not be reached for comment on the settlement.
Wachovia Capital Markets, now a part of Wells Fargo
& Co., said in court documents filed in February that it settled claims
against it in the lawsuit, without disclosing terms.
LeNature's, based in Latrobe, made bottled water,
tea and other flavored drinks. Gregory J. Podlucky, the company's founder,
and others were indicted in September 2009 on charges that they duped
creditors out of more than $800 million by overstating company revenue.
Podlucky pleaded guilty in May 2011 and was sentenced to 20 years in prison
Continued in article
"Ex-BDO Seidman Partner Favato Gets 18 Months for Tax Crimes," by
David Voreacos, Bloomberg Business Week, April 16, 2012 ---
Bob Jensen's threads on BDO Seidman are at
"ObamaCare's Secret History: How a Pfizer CEO and Big
Pharma colluded with the White House at the public's expense," The Wall
Street Journal, June 11, 2012 ---
On Friday House Republicans released more documents
that expose the collusion between the health-care industry and the White
House that produced ObamaCare, and what a story of crony capitalism it is.
If the trove of emails proves anything, it's that the Tea Party isn't angry
Over the last year, the Energy and Commerce
Committee has taken Nancy Pelosi's advice to see what's in the Affordable
Care Act and how it passed. The White House refused to cooperate beyond
printing out old press releases, but a dozen trade groups turned over
thousands of emails and other files. A particular focus is the drug lobby,
President Obama's most loyal corporate ally in 2009 and 2010.
The business refrain in those days was that if
you're not at the table, you're on the menu. But it turns out Big Pharma was
also serving as head chef, maître d'hotel and dishwasher. Though some parts
of the story have been reported before, the emails make clear that ObamaCare
might never have passed without the drug companies. Thank you, Pfizer. ***
The joint venture was forged in secret in spring
2009 amid an uneasy mix of menace and opportunism. The drug makers worried
that health-care reform would revert to the liberal default of price
controls and drug re-importation that Mr. Obama campaigned on, but they also
understood that a new entitlement could be a windfall as taxpayers bought
more of their products. The White House wanted industry financial help and
knew that determined business opposition could tank the bill.
Initially, the Obamateers and Senate Finance
Chairman Max Baucus asked for $100 billion, 90% of it from mandatory
"rebates" through the Medicare prescription drug benefit like those that are
imposed in Medicaid. The drug makers wheedled them down to $80 billion by
offsetting cost-sharing for seniors on Medicare, in an explicit quid pro quo
for protection against such rebates and re-importation. As Pfizer's then-CEO
Jeff Kindler put it, "our key deal points . . . are, to some extent, as
important as the total dollars." Mr. Kindler played a more influential role
than we understood before, as the emails show.
Thus began a close if sometimes dysfunctional
relationship with the Pharmaceutical Research and Manufacturers of America,
or PhRMA, as led by Billy Tauzin, the Louisiana Democrat turned Republican
turned lobbyist. As a White House staffer put it in May 2009, "Rahm's
calling Nancy-Ann and knows Billy is going to talk to Nancy-Ann tonight.
Rahm will make it clear that PhRMA needs a direct line of communication,
separate and apart from any coalition." Nancy-Ann is Nancy-Ann DeParle, the
White House health reform director, and Rahm is, of course, Rahm.
Terms were reached in June. Mr. Kindler's chief of
staff wrote a memo to her industry colleagues explaining that "Jeff would
object to me telling you that his communication skills and breadth of
knowledge on the issues was very helpful in keeping the meeting productive."
Soon the White House leaked the details to show that reform was making
health-care progress, and lead PhRMA negotiator Bryant Hall wrote on June 12
that Mr. Obama "knows personally about our deal and is pushing no agenda."
But Energy and Commerce Chairman Henry Waxman then
announced that he was pocketing PhRMA's concessions and demanding more,
including re-importation. We wrote about the double-cross in a July 16, 2009
editorial called "Big Pharma Gets Played," noting that Mr. Tauzin's
"corporate clients and their shareholders may soon pay for his attempt to
get cozy with ObamaCare."
Mr. Hall forwarded the piece to Ms. DeParle with
the subject line, "This sucks." The duo commiserated about how unreasonable
House Democrats are, unlike Mr. Baucus and the Senators. The full exchange
is among the excerpts from the emails printed nearby.
Then New York Times reporter Duff Wilson wrote to a
PhRMA spokesman, "Tony, you see the WSJ editorial, 'Big Pharma Gets Played"?
I'm doing a story along that line for Monday." The drug dealers had a
The White House rode to the rescue. In September
Mr. Hall informed Mr. Kindler that deputy White House chief of staff Jim
Messina "is working on some very explicit language on importation to kill it
in health care reform. This has to stay quiet."
PhRMA more than repaid the favor, with a $150
million advertising campaign coordinated with the White House political
shop. As one of Mr. Hall's deputies put it earlier in the minutes of a
meeting when the deal was being negotiated, "The WH-designated folks . . .
would like us to start to define what 'consensus health care reform' means,
and what it might include. . . . They definitely want us in the game and on
the same side."
In particular, the drug lobby would spend $70
million on two 501(c)(4) front groups called Healthy Economy Now and
Americans for Stable Quality Care. In July, Mr. Hall wrote that "Rahm asked
for Harry and Louise ads thru third party. We've already contacted the
Mr. Messina—known as "the fixer" in the West
Wing—asked on December 15, 2009, "Can we get immediate robo calls in
Nebraska urging nelson to vote for cloture?" Ben Nelson was the last
Democratic holdout toward the Senate's 60-vote threshold, and, as Mr.
Messina wrote, "We are at 59, we have to have him." They got him.
At least PhRMA deserves backhanded credit for the
competence of its political operatives—unlike, say, the American Medical
Association. A thread running through the emails is a hapless AMA lobbyist
importuning Ms. DeParle and Mr. Messina for face-to-face meetings to discuss
reforming the Medicare physician payment formula. The AMA supported
ObamaCare in return for this "doc fix," which it never got.
"We are running out of time," this lobbyist,
Richard Deem, writes in October 2009. How can he "tell my colleagues at AMA
headquarters to proceed with $2m TV buy" without a permanent fix? The
question answers itself: It was only $2 million. ***
Mr. Waxman recently put out a rebuttal memo
dismissing these email revelations as routine, "exactly what Presidents have
always done to enact major legislation." Which is precisely the point—the
normality is the scandal. In 2003 PhRMA took a similar road trip with the
Bush Republicans to create the Medicare drug benefit. That effort included
building public support by heavily funding a shell outfit called Citizens
for a Better Medicare.
Of course Democrats claim to be above this kind of
merger of private profits and political power, as Mr. Obama did as a
candidate. "The pharmaceutical industry wrote into the prescription drug
plan that Medicare could not negotiate with drug companies," he said in
2008. "And you know what? The chairman of the committee who pushed the law
through"—that would be Mr. Tauzin— "went to work for the pharmaceutical
industry making $2 million a year."
Continued in article
Jensen's universal health care messaging ---
Accounting and finance professors should use this video
every semester in class!
The best explanation ever of the sub-prime (meaning
lending to borrowers with much less than prime credit ratings) mortgage greed
The best explanation ever about securitized financial instruments and worldwide
banding frauds using such instruments.
The best explanation ever about how greedy employees will cheat on their
employers and their customers.
"House Of Cards: The Mortgage Mess Steve Kroft Reports How The
Mortgage Meltdown Is Shaking Markets Worldwide," Sixty Minutes Television on
CBS, January 27, 2008 ---
For a few days the video may be available free.
The transcript will probably be available for a longer period of time.
Bob Jensen's "Rotten to the Core" threads are at