Accounting Scandal Updates and Other Fraud Between October 1 and December 31, 2011
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- 

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

Bob Jensen's Enron Updates are at --- 

Other Documents

Richard Campbell notes a nice white collar crime blog edited by some law professors --- 

To date Nadine has eight modules on accounting fraud plus more modules on other types of fraud
A woman known as "Fraud Girl" ran a series of weekly columns in Simoleon Sense. Now Fraud Girl has her own blog called Sleight of Hand ---
Her real name is Nadine Sebai
Now I have two women to stalk in Chicago ---
Francine --- 
Nadine  ---

Nadine's accounting modules to date ---

Bob Jensen's threads on accounting education blogs ---

"SEC Whistleblower Fund Totals $450 Million," Huffington Post, October 29, 2010 ---

The Securities and Exchange Commission says it has set aside about $450 million for payments to outside whistleblowers whose information results in successful cases and penalties collected from companies or individuals.

The SEC set up the program in accordance with the financial overhaul law enacted in July. It follows intense public criticism of the agency for the breakdown that allowed Bernard Madoff's multibillion-dollar fraud to go undetected for 16 years, despite numerous red flags raised by whistleblowers.

A report issued Friday by the SEC shows it has put $451.9 million into a new fund to pay whistleblowers, which must have a minimum $300 million.

Bob Jensen's threads on whistle blowing ---

"Boomers Wearing Bull's-Eyes Postcrisis:  Those Over 50 Targeted in Investment Scams; Problem is 'Rampant'," by Blake Ellis, The Wall Street Journal, December 13, 2011 ---

Forensic Accounting Helper Site

December 7, 2011 message from Emma

Hi Bob,

Thanks for getting back to me!

When I graduated from college I realized that forensic accounting was something that a lot of fellow students were really interested in. However, people knew very little about what it was or how their skills could be applied to a career in the field. Basically, I'm trying to create something that acts as both an educational resource and a primer/gateway for people who want to learn more about the academic and professional nature of forensic accounting. The site is located here: , and I'd really appreciate any feedback you might have. If you like it, I'd be great if you could include it on your site as a resource for others.

Thanks again!


Jensen Comment
The University of West Virginia now has a "Graduate Certificate in Forensic Accounting and Fraud Investigation (FAFI)" --- 

Forensic accountants in demand

The widespread growth in white-collar crime and the increased need for homeland security have greatly raised the demand for forensic accountants, fraud investigators and for auditors who posses those skills. Federal, state, and local governmental agencies, such as the Securities and Exchange Commission, the Internal Revenue Service, and the Offices of Inspector General all need accountants with forensic investigation skills. In the private sector, recent legislation (Sarbanes-Oxley Act of 2002) and auditing standards (Statement on Auditing Standard No. 99) require companies and their auditors to be more aggressive in detecting and preventing fraud.

A unique program to answer the need

The Division of Accounting has responded to this demand by developing an academic program designed to prepare entry-level accountants and others for forensic accounting and fraud investigative careers. Although many schools have added a single graduate or undergraduate course to their curricula, very few offer a multi-course graduate certificate program. This program is the only one in the region.

The 12-credit graduate Certificate Program in Forensic Accounting and Fraud Investigation (FAFI) is offered during the summer. Students may take two paths to earn this certificate:

WVU developed the National Curriculum

Drs. Richard Riley and Bonnie Morris led the effort to develop national curriculum guidelines for fraud and forensic accounting programs for the National Institute of Justice.

Journal of Forensic Accounting ---

Journal of Forensic & Investigative Accounting ---

Association of Certified Fraud Examiners ---

A Simple Guide to Understanding Forensic Accounting ---
Thank you Jim Martin for the heads up.

Bob Jensen's threads on fraud are at

Graduates Who Are Happy to Land Minimum Wage Careers
"Little-Known (usually unaccredited) Colleges Exploit Visa Loopholes to Make Millions Off Foreign Students," by Tom Bartlett, Karin Fischer, and Josh Keller, Chronicle of Higher Education, March 20, 2011 ---

Bob Jensen's threads on for-profit colleges working in the gray zone of fraud ---

Bob Jensen's threads on diploma mills ---


CFO's job description should have read: financial professional with extensive consulting, management, and prison experience.
"SEC Charges Add to an Already Blemished Bio," by Sarah Johnson,, December 22, 2011 ---

Jensen Comment
Note that the SEC cannot send bad men and women to prison. It's mission really is to let them off the hook for a penny fine on every dollar that they steal.

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

Bob Jensen's threads on how white collar crime pays even if you get caught ---

"How Insiders Use the College Bowl System to Loot American Universities," by Pete Kotz, Phoenix New Times, December 15, 2011 ---
Thanks to Richard Campbell for the heads up.

By the time the 2009 football season rolled around, the University of Minnesota hadn't won a Big Ten title in 42 years. The Gophers largely spent those decades serving as target practice for the league's higher powers, yet they weren't without occasional bursts of second-string glory.

One arrived two years ago. Minnesota finished 6-6, collecting the minimum wins needed to earn a slot in the Insight Bowl in Tempe.

Their bragging rights would be slender. Every year, 70 of Division I football's 120 teams get bowl invitations, making faceless games like the Insight akin to summer camp participation awards.

Minnesota would face Iowa State, a 6-6 team from the Big 12. The teams were charged with providing three hours of TV programming for hardcore fans and shut-ins just before New Year's. The ratings would be measured in decimal points.

But within the U of M football offices in Minneapolis, there was cause for celebration, however muted. Though the game orbited well outside the realm of consequence, it was still a chance to reward players, boast to recruits, liquor up boosters, and feed a small army of university suits with a paid vacation in the Arizona sun.

The accounting office no doubt held a much different view. It surely knew that, like nearly all bowls, the Insight was designed to plunder all it could from a college treasury.

The bloodbath began the moment the contract was signed. Minnesota was obligated to write a check for 10,000 tickets, which were supposed to be resold to fans. Never mind that even the best of teams struggle to unload such sums. For middling squads like the Gophers, it was nothing more than a way for the men in funny yellow blazers who ran the Insight to grab piles of money from a public university.

Minnesota managed to sell just 901 seats. After kicking another 900 to the band, administrators, and cherished hangers-on, the school was forced to eat $476,000 worth of useless tickets.

The contract also required the team to show up a week early, if only to burn as much school money as possible at the restaurants and retailers of Greater Phoenix.

One would think school administrators would protest such gall. But one would be wrong. They were quick to see the advantages of a luxury vacation on the school's dime. So they happily signed off.

The school's traveling party was larded up with 722 people, including players, band members, and faculty. Airfare alone ran $542,000. Toss in hotels and meals, and the school had blown $1.3 million before the opening kickoff.

The ballsiest part of all: None of it was necessary.

Minnesota and Iowa State sit less than 200 miles apart. Their teams were providing the game. Their bands supplied the halftime entertainment. In fact, the Insight offered nothing — save for warm weather — that the schools couldn't have done better themselves.

Had the game been played in Minneapolis, the teams could have sold more tickets and put on a profitable game, since Big Ten matches typically generate $1 million to $2 million — not knee-bending losses.

Yet none of this was ever considered. Thanks to an alliance of unblushing incompetence and corruption, college football long ago decided to outsource its most valuable asset — its post-season earnings.

The scheme plays out each year on the ostensibly pristine fields of amateur athletics. Bowl executives grant themselves breathtaking salaries. The games, meanwhile, provide coaches, athletic directors, and the suits who nominally supervise them with an unending stream of bonuses.

Everyone else picks up the tab.

There's a reason cities hosting Super Bowls or rounds of March Madness bid with buffets of giveaways just to land the tourist traffic: If you want a taste, you have to pay.

College football is the only sport that gives away its postseason revenues. Its business model is akin to Walmart keeping its profits for the first 10 months of the year, then letting Value World host its holiday sales.

This is an especially hazardous form of capitalism for the nation's universities, which have been bloodied by ever-diving state funding combined with double-digit tuition hikes. And contrary to popular belief, their athletic departments just widen the damage.

Depending upon the year, only about 20 of the 120 athletic departments featuring Division I football actually pay for themselves. The rest require students and taxpayers to ride to the rescue.

Minnesota is typical. From 2006 to 2009, the Gophers went to three Insight Bowls. Their bill for unsold tickets alone was well over $1 million. At the same time, their athletic department needed a $25 million infusion over five years just to break even.

These kinds of losses could be allayed if college football simply cut out the middlemen — the bowls — and took its postseason in-house by adopting a playoff system. Instead, universities have chosen to hand their money away in a deal that's at best moronic, and at worst an epic swindle.

The racket works like this: Through required purchases of anywhere from 10,000 to 17,500 tickets, schools essentially pay for the right to appear in a bowl. The bowls keep the ticket and sponsorship money. Bowl execs also negotiate their own TV contracts.

After taking 50 percent to 60 percent off the top, the bowls then write checks to the teams' conferences. The conferences, in turn, split that money among their schools. (Profits from the five Bowl Championship Series games are spread to varying degrees among all conferences.)

Continued in article

Bob Jensen's Fraud Updates are at

"Endpoint Security is Changing Fast," by Richi Jennings, Computer World, December 14, 2011 ---
Thank you Jerry Trites for the heads up ---

Sophisticated social engineering techniques for hacking are becoming the norm. And it is moving fast, such that traditional tools don't do the job any more. Advanced Persistent Threat (APT) is one of the manifestations of this trend. It involves sending malware to people disguised in something that is likely to appear to them and to fool them. APT messages are very customized, based on knowledge of a person that is obtained from information available in the internet, through such social media as Facebook and perhaps other sources.They can even follow shortly after a person performs some action, such as paying bills on their bank website. In such a case, they might receive a message that their transaction has failed, or that their account has gone into an overdraft and they should log in (to a bogus account) and verify it. There are countless variations.

Most of us are aware of many of these messages and don't get fooled by them. However, there is a possibility that one variation might be sufficiently relevant that we are fooled, and it might only take once to cause a lot of damage.

Companies are exposed because all of their employees are exposed, and might inadvertently expose corporate assets to theft or damage.

Various solutions are available, many cloud based, that are particularly designed to keep up with the rapidly changing trends in this area. It is imperative to keep up with these tools. Such knee jerk reactions as prohibiting employees from using Facebook and the like just won't work. But some clearly defined and carefully designed policies around the use of corporate computers, resources and IDs are badly needed.

Continued in article

Bob Jensen's threads on computing and networking security ---

PwC already dmitted its guilt and already apologized.
"PwC Accused of Breaking Financial Rules Again," Big Four Blog,  December 16, 2011

PwC is being probed for its reporting of client assets held by Barclays Capital Securities Ltd. to see if the Big4 firm broke financial rules.

The UK’s Accountancy and Actuarial Discipline Board is investigating PwC’s reports to the Financial Services Authority on Barclays’s compliance with rules about separating client assets from other assets. In January, the FSA fined Barclays £1.12 million (about $1.7 million) after concluding that the bank failed to put client money in separated and protected accounts. At issue was £752 million ($1.16 billion) in client assets.

PwC told Business Week that they “will cooperated fully with the AADB investigation and we will be defending our work vigorously,” adding that “the focus of the AADB is on cases which raise important issues affecting the public interest.”

The AADB is also seeking a fine of £1.5 million against PwC for its role on a client-money account issue with JPMorgan Chase & Co.’s London activities. The fine would be the highest ever levied for such a case.

PwC lawyer Tim Dutton has previously told a London tribunal that the fine should be capped at £1 million because the firm has admitted its guilt and already apologized.

Bob Jensen's threads on PwC are at


Credit Scoring Models in the U.S. ---

FICO ---

"A Credit Score That Tracks You More Closely," by Tra Siegel Bernard,  The New York Times, December 2, 2011 --- Click Here

Anyone who has recently applied for a mortgage knows that lenders are already looking much more closely at your financial affairs. But soon, they’ll be able to easily delve into the deepest recesses of your financial life, accessing information that never before appeared on your credit report.

This week, a company called CoreLogic introduced a new type of credit file, which is based on the giant repository of consumer data it maintains on just about everything that most of the traditional credit bureaus do not: missed rental payments that have gone into collection, any evictions or child support judgments, as well as any applications for payday loans, along with your repayment history.

The new report also includes any property tax liens and whether you’ve fallen behind on your homeowner’s association dues. It may reflect that you now owe more than your house is worth or if you own any other real estate properties outright. It also is supposed to catch mortgages made by smaller lenders that the big credit bureaus may have missed.

The idea, CoreLogic says, is to provide lenders with more details about prospective borrowers, supplementing what they already know through the more traditional credit reports furnished by the big three credit bureaus, Equifax, Experian and TransUnion. Moreover, CoreLogic has formed a partnership with FICO — the provider of one of the most popular credit scores used by lenders — which will formulate a new consumer score based on the new data.

Perhaps it’s not surprising that a company decided to pull together this information, since much of it is already publicly available. But because it comes on top of all the other information that’s being collected about you — your exact location at every minute, where you’ve been on the Web — you can’t help but feel that some of these companies know more about your activities than your spouse.

While the CoreScore credit report became available to all types of lenders on Wednesday, the actual score, which will be ready in March, is being created specifically for mortgage and home equity lenders, though it could eventually be developed for other types of credit.

For many consumers, the files are likely to reveal black marks that previously went undetected, which may damage an otherwise clean record. But the companies contend that it works both ways: The added information could help consumers with thin credit files by illustrating positive behaviors elsewhere, say making timely rent payments.

So why now? Clearly, the two companies saw a business opportunity. Lenders, who just a few years back looked the other way, remain particularly skittish about mortgage lending and are looking for more information about prospective borrowers’ ability to pay their debts.

“Lending is very constrained and origination volumes need to grow to make for a profitable mortgage business,” said Joanne Gaskin, director of product management global scoring at FICO. “So lenders are looking for ways to expand, but to expand safely.”

An estimated 100 million American consumers will have a CoreScore credit report, while more than 200 million people have traditional reports from the big three bureaus. Though the new information can influence a lender’s decision, the new score isn’t replacing the classic scores used in the automated mortgage underwriting systems kept by Fannie Mae, Freddie Mac or the Federal Housing Administration, which buy or back the vast majority of mortgages (though CoreLogic said it has let the agencies know what it is doing). But the added information may sway a lender to charge you more (or less) in interest on a mortgage. Lenders of all stripes, including auto lenders, have access to the reports, and they will be marketed to employers and insurers, too.

Ms. Gaskin said that FICO was still tweaking the credit score’s formula. But the next step is to build something that will try to get even deeper inside your financial mind: The company plans to create a more sophisticated tool that will predict how you might behave under different loan terms.

The reason all of this is such a big deal, according to John Ulzheimer, president of consumer education at, is that CoreLogic already has major inroads with many lenders. When lenders want to pull your credit file, they go to a company like CoreLogic, which collects all three reports from the traditional bureaus, cleans them up a bit and merges them into a more user-friendly report. “They already have this massive market of mortgage companies that buy these credit reports from them,” he said. “It’s not like they have to go out and convince the companies to work with them.”

Continued in article

Bob Jensen's threads on FICO Scores ---

A Teaching Case on Price Fixing and Contingent Liabilities

From The Wall Street Journal Accounting Weekly Review on December 16, 2011

Dirty Secrets in Soap Prices
by: Max Colchester and Christina Passariello
Dec 09, 2011
Click here to view the full article on

TOPICS: Antitrust

SUMMARY: Procter & Gamble, Henkel AG, and Colgate-Palmolive have been accused of, and fined for, operating a cartel in order to fix prices of laundry detergent in France. "The group was helped by a French law that makes it illegal for shops to sell products below costs. As a result, all price increases were passed on to consumers." The report issued by French antitrust authorities detailed how the companies managed the scheme. For example, "in 1996, four brand directors met in the restaurant La Tête Noire in a western suburb of Paris. The aim: to ensure that they pitched heir detergents to supermarkets at pre-agreed prices and notified each other of any special offers....They allegedly took turns choosing spots for the clandestine rendezvous....To ensure that few got wind of the fix, those who attended the meetings...took documents home with them and expensed the restaurant bills under different names...."

CLASSROOM APPLICATION: Questions ask students to understand the concept of antitrust and to consider the accounting system violations that must have happened in order to conceal the price fixing meetings.

1. (Advanced) What is the concept of antitrust? What types of transactions do antitrust authorities review?

2. (Advanced) What antitrust behaviors were the soap manufacturers Procter & Gamble, Henkel AG, and Colgate-Palmolive fined for committing?

3. (Introductory) How did these three companies commit these price-fixing negotiations? Who participated in meetings?

4. (Introductory) What happened to soap pricing after the cartel amongst the three companies broke apart? How does this provide evidence that antitrust regulation is effective in its objective?

5. (Advanced) In order to conceal their behaviors, what accounting control violations did brand directors commit?

Reviewed By: Judy Beckman, University of Rhode Island

Bob Jensen's Fraud Updates are at

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

Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 ---
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.

Wall Street Remains Congress to the Core
The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic problem. It is against the law to trade on inside information about an imminent merger, of course. But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.
Gretchen Morgenson, "Whispers of Mergers Set Off Suspicious Trading," The New York Times, August 27, 2006 ---
Click Here


"Should Some Bankers Be Prosecuted?" by Jeff Madrick and Frank Partnoy, New York Review of Books, November 10, 2011 ---
Thank you Robert Walker for the heads up!

More than three years have passed since the old-line investment bank Lehman Brothers stunned the financial markets by filing for bankruptcy. Several federal government programs have since tried to rescue the financial system: the $700 billion Troubled Asset Relief Program, the Federal Reserve’s aggressive expansion of credit, and President Obama’s additional $800 billion stimulus in 2009. But it is now apparent that these programs were not sufficient to create the conditions for a full economic recovery. Today, the unemployment rate remains above 9 percent, and the annual rate of economic growth has slipped to roughly 1 percent during the last six months. New crises afflict world markets while the American economy may again slide into recession after only a tepid recovery from the worst recession since the Great Depression.

n our article in the last issue,1 we showed that, contrary to the claims of some analysts, the federally regulated mortgage agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis. Rather, private financial firms on Wall Street and around the country unambiguously and overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold, particularly the subprime mortgages sold to low-income borrowers with poor credit, was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities to investors throughout the world.

Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank. The federal government has been far more active in rescuing bankers than prosecuting them.

In September 2011, the Securities and Exchange Commission asserted that overall it had charged seventy-three persons and entities with misconduct that led to or arose from the financial crisis, including misleading investors and concealing risks. But even the SEC’s highest- profile cases have let the defendants off lightly, and did not lead to criminal prosecutions. In 2010, Angelo Mozilo, the head of Countrywide Financial, the nation’s largest subprime mortgage underwriter, settled SEC charges that he misled mortgage buyers by paying a $22.5 million penalty and giving up $45 million of his gains. But Mozilo had made $129 million the year before the crisis began, and nearly another $300 million in the years before that. He did not have to admit to any guilt.

The biggest SEC settlement thus far, alleging that Goldman Sachs misled investors about a complex mortgage product—telling investors to buy what had been conceived by some as a losing proposition—was for $550 million, a record of which the SEC boasted. But Goldman Sachs earned nearly $8.5 billion in 2010, the year of the settlement. No high-level executives at Goldman were sued or fined, and only one junior banker at Goldman was charged with fraud, in a civil case. A similar suit against JPMorgan resulted in a $153.6 million fine, but no criminal charges.

Although both the SEC and the Financial Crisis Inquiry Commission, which investigated the financial crisis, have referred their own investigations to the Department of Justice, federal prosecutors have yet to bring a single case based on the private decisions that were at the core of the financial crisis. In fact, the Justice Department recently dropped the one broad criminal investigation it was undertaking against the executives who ran Washington Mutual, one of the nation’s largest and most aggressive mortgage originators. After hundreds of interviews, the US attorney concluded that the evidence “does not meet the exacting standards for criminal charges.” These standards require that evidence of guilt is “beyond a reasonable doubt.”

This August, at last, a federal regulator launched sweeping lawsuits alleging fraud by major participants in the mortgage crisis. The Federal Housing Finance Agency sued seventeen institutions, including major Wall Street and European banks, over nearly $200 billion of allegedly deceitful sales of mortgage securities to Fannie Mae and Freddie Mac, which it oversees. The banks will argue that Fannie and Freddie were sophisticated investors who could hardly be fooled, and it is unclear at this early stage how successful these suits will be.

Meanwhile, several state attorneys general are demanding a settlement for abuses by the businesses that administer mortgages and collect and distribute mortgage payments. Negotiations are under way for what may turn out to be moderate settlements, which would enable the defendants to avoid admitting guilt. But others, particularly Eric Schneiderman, the New York State attorney general, are more aggressively pursuing cases against Wall Street, including Goldman Sachs and Morgan Stanley, and they may yet bring criminal charges.

Successful prosecutions of individuals as well as their firms would surely have a deterrent effect on Wall Street’s deceptive activities; they often carry jail terms as well as financial penalties. Perhaps as important, the failure to bring strong criminal cases also makes it difficult for most Americans to understand how these crises occurred. Are they simply to conclude that Wall Street made well- meaning if very big errors of judgment, as bankers claim, that were rarely if ever illegal or even knowingly deceptive?

What is stopping prosecution? Apparently not public opinion. A Pew Research Opinion survey back in 2010 found that three quarters of Americans said that government policies helped banks and financial institutions while two thirds said the middle class and poor received little help. In mid-2011, half of those surveyed by Pew said that Wall Street hurts the economy more than it helps it.

Many argue that the reluctance of prosecutors derives from the power and importance of bankers, who remain significant political contributors and have built substantial lobbying operations. Only 5 percent of congressional bills designed to tighten financial regulations between 2000 and 2006 passed, while 16 percent of those that loosened such regulations were approved, according to a study by the International Monetary Fund.2 The IMF economists found that a major reason was lobbying efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby Congress during the passage of the Dodd-Frank Act. The financial reregulation legislation was weakened in such areas as derivatives trading and shareholder rights, and is being further watered down.

Others claim federal officials fear that punishing the banks too much will undermine the fragile economic recovery. As one former Fannie official, now a private financial consultant, recently told The New York Times, “I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again.”

The responsibility for reluctance, however, also lies with the prosecutors and the law itself. A central problem is that proving financial fraud is much more difficult than proving most other crimes, and prosecutors are often unwilling to try it. Congress could fix this by amending federal fraud statutes to require, for example, that prosecutors merely prove that bankers should have known rather than actually did know they were deceiving their clients.

But even if Congress does not, it is not too late for bold federal prosecutors to try to bring a few successful cases. A handful of wins could create new precedents and common law that would set a higher and clearer standard for Wall Street, encourage more ethical practices, deter fraud—and arguably prevent future crises.

Continued in article

Watch the video! (a bit slow loading)
 Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
 "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
 Watch the video!

The greatest swindle in the history of the world ---

Bob Jensen's threads on how the banking system is rotten to the core ---

"What the Hell Has Happened to College Sports?" Chronicle of Higher Education, December 11, 2011 ---

Flaunting the NCAA Academic Standards for Top Athletes
"Bad Apples or More?" by Doug Lederman, Inside Highe Ed, February 7, 2011 ---

"North Carolina Admits to Academic Fraud in Sports Program," Inside Higher Ed, September 20, 2011 ---

"College athletes studies guided toward 'major in eligibility'," by Jill Steeg et al., USA Today, November 2008, Page 1A ---

Steven Cline left Kansas State University last spring with memories of two years as a starting defensive lineman for a major-college football team. He left with a diploma, credits toward a master's degree and a place on the 2007 Big 12 Conference all-academic team. He also left with regrets about accomplishing all of this by majoring in social sciences — a program that drew 34% of the football team's juniors and seniors last season, compared with about 4% of all juniors and seniors at Kansas State. Cline says he found not-so-demanding courses that helped him have success in the classroom and on the field but did little for his dream of becoming a veterinarian.

"I realize I just wasted all my efforts in high school and college to get a social science degree," says Cline, who adds he did poorly in biology as a freshman, then chose what an athletics academic adviser told him would be an easier path.

His experience reflects how the NCAA's toughening of academic requirements for athletes has helped create an environment in which they are more likely to graduate than other students — but also more likely to be clustered in programs without the academic demands most students face.

Some athletes say they have pursued — or have been steered to — degree programs that helped keep them eligible for sports but didn't prepare them for post-sports careers.

"A major in eligibility, with a minor in beating the system," says C. Keith Harrison, an associate professor at the University of Central Florida, where he is associate director of the Institute of Diversity and Ethics in Sports.

Special Admission Students in Varsity Athletics
Many universities fill the spots on their football squads through the use of “special admits,” a phrase that means that these students didn’t meet regular admissions requirements, according to an article and survey in The Indianapolis Star. While most colleges have provisions for special admits, which in theory are for truly special applicants, very few non-athletes benefit. For example, the Star noted that 76 percent of the freshman football class at Indiana University at Bloomington is made up of special admits. Among all freshmen last year, only 2 percent are special admits. Some universities rely even more on special admits for football, the survey found: the University of California at Berkeley (95 percent of freshmen football players, compared to 2 percent for the student body), Texas A&M University (94 percent vs. 8 percent), the University of Oklahoma (81 percent vs. 2 percent). While some universities didn’t report any special admits, the Star article quoted athletics officials who are dubious of these claims. Myles Brand, president of the National Collegiate Athletic Association, told the newspaper he was surprised by the extent of special admits, but said the issue was whether universities provide appropriate help for these students to succeed academically.
Inside Higher Ed, September 8, 2008 ---

"The Admissions Gap for Big-Time Athletes," by Doug Lederman, Inside Higher Ed, December 29, 2008 ---

"Academic fraud runs rampant at major universities," by Mike Finger, San Antonio Express-News, September 2, 2003 --- 

The first time a coed casually walked up to him, introduced herself and offered to do his homework, it would have been natural for Terrance Simmons to be taken aback.

When he learned that his basketball coach at Minnesota, Clem Haskins, was being forced out as a result of massive NCAA rules violations, Simmons understandably could have been shocked.

And when he read this spring about another seemingly endless string of new academic fraud cases — involving people who somehow didn't learn from the 1999 scandal that was supposed to be a national wake-up call — one might have expected Simmons to be a bit dismayed.

But he wasn't.

None of it surprised him.

Because the way Simmons sees it, he knew the kind of world he was getting into from the very beginning.

He remembers sitting in his family's living room in Louisiana as a prized high school recruit. He remembers college coaches — "and we're talking about coaches from major universities," he said — giving him all kinds of reasons to join their programs.

Most of all, he remembers many of those recruiters making it quite clear that scholastic integrity wasn't exactly their top priority.

"They didn't come right out and say I didn't have to go to class," Simmons said, "but it wasn't very hard to read between the lines."

Likewise, it doesn't take many code-breaking skills to figure out that academic fraud has become a scourge of epic proportions in major college athletics.

In the past four years alone, the NCAA has doled out punishment nine times for academic infractions, ranging from grade tampering to improper use of tutors. That number doesn't even include all of the schools involved in the latest outbreak.

In the span of just a few weeks at the end of last season, the men's basketball teams at Fresno State, Georgia and St. Bonaventure all removed themselves from postseason play amid reports of fraud.

Those scandals were followed by accusations of similar violations at Fairfield and Missouri. The possibility of academic infractions hasn't been ruled out at Baylor, where the basketball program is already under intense scrutiny after the alleged murder of a player, the ensuing cover-up and the resignation of coach Dave Bliss.

Simmons, who graduated from Minnesota with a degree in communications and economics and wasn't involved in the violations that occurred while he played for the Golden Gophers, thinks the frequency of reported similar transgressions will grow before it subsides.

Continued in the article

Academic Fraud and Friction at Florida State University
On Friday, the National Collegiate Athletic Association announced that more than 60 athletes at the university had cheated in two online courses over a year and a half long period, one of the most serious cases of academic fraud in the NCAA's recent history. Yet just about all anyone seemed to be able to talk about -- especially Florida State fans in commenting on the case and news publications in reporting on it -- is how the NCAA's penalties (which include requiring Florida State to vacate an undetermined number of victories in which the cheating athletes competed) might undermine the legacy of the university's football coach, Bobby Bowden. Bowden has one fewer career victory than Pennsylvania State University's longtime coach, Joe Paterno, and if Florida State has to wipe out as many as 14 football wins from 2007 and 2008, it could end Bowden's chance of being the all-time winningest coach in big-time college football.
Inside Higher Ed, March 9, 2009 ---

Compounding FSU's problem is an earlier cheating scandal
20 Florida State University Football Players Likely to Be Suspended in Cheated Scandal

"Source: Multiple suspensions likely for Music City Bowl, plus 3 games in 2008," by Mark Schlabach,, December 18, 2007 ---

As many as 20 Florida State football players will be suspended from playing against Kentucky in the Dec. 31 Gaylord Hotels Music City Bowl, as well as the first three games of the 2008 season, for their roles in an alleged cheating scandal involving an Internet-based course, a source with knowledge of the situation said Tuesday morning.

Florida State officials are expected to announce the results of the investigation this week. The source said university officials determined Monday night the exact number of football players who will be suspended. Federal privacy laws prohibit the school from releasing names.

. . .

The investigation already has led to the resignations of two academic assistance employees who worked with FSU student-athletes. The school revealed in September that as many as 23 student-athletes were given answers before taking tests over the Internet.

Further investigations revealed additional student-athletes were involved in the cheating, according to the source.

"If the players fight the suspensions, they'll risk losing all of their eligibility," a source with knowledge of the situation said Tuesday morning.

The school's investigation found that a tutor gave students answers while they were taking tests and filled in answers on quizzes and typed papers for students.

Florida State president T.K. Wetherell, a former Seminoles football player, reported the initial findings in a letter to the NCAA in September.

Wetherell ordered an investigation by the university's Office of Audit Services in May after receiving information an athletics department tutor had directed one athlete to take an online quiz for another athlete and then provided the answers.

The tutor implicated in the audit told investigators he had been providing students with answers for the test since the fall of 2006, according to a university report.

Wisconsin was the last football program to suspend as many as 20 players. Days before the start of the 2000 regular season, 26 Badgers were given three- or one-game suspensions for getting unadvertised price breaks at a shoe store.

Florida State announced in October that athletics director Dave Hart Jr. will resign Dec. 31. Wetherell appointed State Rep. William "Bill" Proctor interim athletics director. Proctor also is a former FSU football player.

The school announced last week that longtime football coach Bobby Bowden had agreed to a one-year contract extension through the 2008 season that will pay him at least $1.98 million. Bowden, who is in his 32nd season at the school, is major college football's all-time winningest coach with 373 career victories.

Florida State also designated offensive coordinator Jimbo Fisher as Bowden's eventual successor. Fisher's new contract calls for him to replace Bowden by the end of the 2010 season. If Fisher isn't named FSU's new coach by then, the school's booster organization would owe him $2.5 million. Under the terms of the new contract, Fisher would owe Seminoles boosters $2.5 million if he leaves the school before the end of the 2010 season.

The Seminoles struggled for the fourth consecutive season in 2007, finishing 7-5 overall, 4-4 in ACC play. It is the fourth consecutive season they failed to win 10 games, after winning at least 10 games in 14 consecutive seasons, from 1987 to 2000.

Continued in article

Jensen Comment
It ended up being 25 players who were suspended ---
Florida State lost to Kentucky in the Music Bowl (35-28)

The Now Infamous Favored Professor by University of Michigan Athletes
A single University of Michigan professor taught 294 independent studies for students, 85 percent of them athletes, from the fall of 2004 to the fall of 2007, according to The Ann Arbor News. According to the report, which kicks off a series on Michigan athletics and was based on seven months of investigation, many athletes reported being steered to the professor, and said that they earned three or four credits for meeting with him as little as 15 minutes every two weeks. In addition, three former athletics department officials said that athletes were urged to take courses with the professor, John Hagen, to raise their averages. Transcripts examined by the newspaper showed that students earned significantly higher grades with Hagen than in their regular courses. The News reported that Hagen initially denied teaching a high percentage of athletes in his independent studies, but did not dispute the accuracy of documents the newspaper shared with him. He did deny being part of any effort to raise the averages of his students. The newspaper also said that Michigan’s president and athletics director had declined to be interviewed for the series.
Inside Higher Ed, March 17, 2008 ---

Has the University of Michigan blocked efforts to investigate its "independent study" athletics scandals?

In March, The Ann Arbor News ran a series of articles exploring allegations that many top athletes at the University of Michigan were encouraged to enroll in independent study courses with a professor who allegedly didn’t require much work for great grades. On Sunday, the newspaper started a new seriesarguing that the university has blocked efforts by professors to study issues related to athletes and academics. While university officials have said that they would provide information sought by faculty members, the series suggests otherwise.
Inside Higher Education, June 16, 2008 ---


"When Independent Study Raises Red Flags," by Elia Powers, Inside Higher Ed, March 18, 2008 ---


Bob Jensen's threads on athletics controversies in higher education ---

"The Man Who Busted the ‘Banksters’," Smithsonian, November 29, 2011 ---

Three years removed from the stock market crash of 1929, America was in the throes of the Great Depression, with no recovery on the horizon. As President Herbert Hoover reluctantly campaigned for a second term, his motorcades and trains were pelted with rotten vegetables and eggs as he toured a hostile land where shanty towns erected by the homeless had sprung up. They were called “Hoovervilles,” creating the shameful images that would define his presidency. Millions of Americans had lost their jobs, and one in four Americans lost their life savings. Farmers were in ruin, 40 percent of the country’s banks had failed, and industrial stocks had lost 80 percent of their value.

With unemployment hovering at nearly 25 percent in 1932, Hoover was swept out of office in a landslide, and the newly elected president, Franklin Delano Roosevelt, promised Americans relief. Roosevelt had decried “the ruthless manipulation of professional gamblers and the corporate system” that allowed “a few powerful interests to make industrial cannon fodder of the lives of half the population.” He made it plain that he would go after the “economic nobles,” and a bank panic on the day of his inauguration, in March 1933, gave him just the mandate he sought to attack the economic crisis in his “First 100 Days” campaign. “There must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and wrongdoing,” he said.

Ferdinand Pecora was an an unlikely answer to what ailed America at the time. He was a slight, soft-spoken son of Italian immigrants, and he wore a wide-brimmed fedora and often had a cigar dangling from his lips. Forced to drop out of school in his teens because his father was injured in a work-related accident, Pecora ultimately landed a job as a law clerk and attended New York Law School, passed the New York bar and became one of just a handful of first-generation Italian lawyers in the city. In 1918, he became an assistant district attorney. Over the next decade, he built a reputation as an honest and tenacious prosecutor, shutting down more than 100 “bucket shops”—illegal brokerage houses where bets were made on the rise and fall prices of stocks and commodity futures outside of the regulated market. His introduction to the world of fraudulent financial dealings would serve him well.

Just months before Hoover left office, Pecora was appointed chief counsel to the U.S. Senate’s Committee on Banking and Currency. Assigned to probe the causes of the 1929 crash, he led what became known as the “Pecora commission,” making front-page news when he called Charles Mitchell, the head of the largest bank in America, National City Bank (now Citibank), as his first witness. “Sunshine Charley” strode into the hearings with a good deal of contempt for both Pecora and his commission. Though shareholders had taken staggering losses on bank stocks, Mitchell admitted that he and his top officers had set aside millions of dollars from the bank in interest-free loans to themselves. Mitchell also revealed that despite making more than $1 million in bonuses in 1929, he had paid no taxes due to losses incurred from the sale of diminished National City stock—to his wife. Pecora revealed that National City had hidden bad loans by packaging them into securities and pawning them off to unwitting investors. By the time Mitchell’s testimony made the newspapers, he had been disgraced, his career had been ruined, and he would soon be forced into a million-dollar settlement of civil charges of tax evasion. “Mitchell,” said Senator Carter Glass of Virginia, “more than any 50 men is responsible for this stock crash.”

The public was just beginning to get a taste for the retribution that Pecora was dishing out. In June 1933, his image appeared on the cover of Time magazine, seated at a Senate table, a cigar in his mouth. Pecora’s hearings had coined a new phrase, “banksters” for the finance “gangsters” who had imperiled the nation’s economy, and while the bankers and financiers complained that the theatrics of the Pecora commission would destroy confidence in the U.S. banking system, Senator Burton Wheeler of Montana said, “The best way to restore confidence in our banks is to take these crooked presidents out of the banks and treat them the same as [we] treated Al Capone.”

President Roosevelt urged Pecora to keep the heat on. If banks were worried about the hearings destroying confidence, Roosevelt said, they “should have thought of that when they did the things that are being exposed now.” Roosevelt even suggested that Pecora call none other than the financier J.P. Morgan Jr. to testify. When Morgan arrived at the Senate Caucus Room, surrounded by hot lights, microphones and dozens of reporters, Senator Glass described the atmosphere as a “circus, and the only things lacking now are peanuts and colored lemonade.”

Continued in article

Bob Jensen's Fraud Updates ---

Bob Jensen's American History of Fraud ---



"SEC Brings Crisis-Era Suits Fannie, Freddie Ex-Executives Face Cases Stemming From Subprime Disclosures," by Nick Timiraos and Chad Bray, The Wall Street Journal, December 17, 2011 ---

U.S. securities regulators accused six former executives at mortgage firms Fannie Mae and Freddie Mac of playing down the risks to investors of the firms' foray into subprime loans.

The civil lawsuits, filed Friday by the Securities and Exchange Commission in Manhattan federal court, rank among the highest-profile crisis-related cases the government has brought. They are also the first cases against the top executives at Fannie and Freddie before their 2008 government takeover, which has cost taxpayers $151 billion.

The complaints name as defendants former Freddie Mac Chief Executive Richard Syron and former Fannie Mae CEO Daniel Mudd, who is currently chief executive of Fortress Investment Group LLC. The agency also accused four other high-ranking former executives at Freddie Mac and Fannie Mae.

The executives and their lawyers said they would vigorously contest the charges.

At the heart of the lawsuits is the government's contention that Fannie and Freddie executives knowingly misled investors about the volumes of risky mortgages that the companies were purchasing as the housing boom turned to bust. Documents

Complaints: SEC v. Fannie Mae | SEC v. Freddie Mac Nonprosecution Agreements: Fannie Mae | Freddie Mac

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, director of the SEC's Enforcement Division.

The lawsuits come as the SEC and other law-enforcement agencies face rising political pressure to take more aggressive action against financial companies over the 2008 crisis. Federal authorities have a mixed record in cases tied to the subprime-mortgage bust, with no major cases having been brought in some of the highest-profile blowups, such as the September 2008 bankruptcy of Lehman Brothers Holdings Inc.

Continued in article


Jensen Comment
So why is the Department of Justice and the SEC backing off of bigger criminals like the banksters of Countrywide, Washington Mutual, Citigroup, JP Morgan, Merrill Lynch, Lehman Brothers, Bear Sterns, etc.?

The Justice Department can put criminals in jail, but the SEC can only go for fines. The problem is that when dealing with banksters the SEC has a track record of pittance, chicken feed  fines. Steal a dollar and the SEC will go after less than a dime from a bankster.


Another CBS Sixty Minutes Blockbuster (December 4, 2011)
"Prosecuting Wall Street"
Free download for a short while;stories
Note that this episode features my hero Frank Partnoy

Sarbanes–Oxley Act (Sarbox, SOX) ---

 Key provisions of Sarbox with respect to the Sixty Minutes revelations:

The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.

Sarbanes–Oxley Section 404: Assessment of internal control ---

Both the corporate CEO and the external auditing firm are to explicitly sign off on the following and are subject (turns out to be a ha, ha joke)  to huge fines and jail time for egregious failure to do so:

  • Assess both the design and operating effectiveness of selected internal controls related to significant accounts and relevant assertions, in the context of material misstatement risks;
  • Understand the flow of transactions, including IT aspects, in sufficient detail to identify points at which a misstatement could arise;
  • Evaluate company-level (entity-level) controls, which correspond to the components of the COSO framework;
  • Perform a fraud risk assessment;
  • Evaluate controls designed to prevent or detect fraud, including management override of controls;
  • Evaluate controls over the period-end financial reporting process;
  • Scale the assessment based on the size and complexity of the company;
  • Rely on management's work based on factors such as competency, objectivity, and risk;
  • Conclude on the adequacy of internal control over financial reporting.

Most importantly as far as the CPA auditing firms are concerned is that Sarbox gave those firms both a responsibility to verify that internal controls were effective and the authority to charge more (possibly twice as much) for each audit. Whereas in the 1990s auditing was becoming less and less profitable, Sarbox made the auditing industry quite prosperous after 2002.

There's a great gap between the theory of Sarbox and its enforcement

In theory, the U.S. Justice Department (including the FBI) is to enforce the provisions of Section 404 and subject top corporate executives and audit firm partners to huge fines (personal fines beyond corporate fines) and jail time for signing off on Section 404 provisions that they know to be false. But to date, there has not been one indictment in enormous frauds where the Justice Department knows that executives signed off on Section 404 with intentional lies.

In theory the SEC is to also enforce Section 404, but the SEC in Frank Partnoy's words is toothless. The SEC cannot send anybody to jail. And the SEC has established what seems to be a policy of fining white collar criminals less than 20% of the haul, thereby making white collar crime profitable even if you get caught. Thus, white collar criminals willingly pay their SEC fines and ride off into the sunset with a life of luxury awaiting.

And thus we come to the December 4 Sixty Minutes module that features two of the most egregious failures to enforce Section 404:
The astonishing case of CitiBank
The astonishing case of Countrywide (now part of Bank of America)

The Astonishing Case of CitiBank
What makes the Sixty Minutes show most interesting are the whistle blowing  revelations by a former Citi Vice President in Charge of Fraud Investigations

The astonishing case of Countrywide (now part of Bank of America)

I was disappointed in the CBS Sixty Minutes show in that it completely ignored the complicity of the auditing firms to sign off on the Section 404 violations of the big Wall Street banks and other huge banks that failed. Washington Mutual was the largest bank in the world to ever go bankrupt. Its auditor, Deloitte, settled with the SEC for Washington Mutual for $18.5 million. This isn't even a hand slap relative to the billions lost by WaMu's investors and creditors.

 No jail time is expected for any partners of the negligent auditing firms. .KPMG settled for peanuts with Countrywide for $24 million of negligence and New Century for $45 million of negligence costing investors billions.

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

Bob Jensen's threads on how white collar crime pays even if you get caught ---


The Wall Street Journal, in an investigational piece (December 20, 2010), reported that five spine surgeons at Norton Hospital in Louisville, Kentucky, who performed the third-most spinal fusions of Medicare patients in the country, had received more than $7 million in “royalties” from Medtronic, the nation’s biggest manufacturer of spinal implants.
"Physician Payment Sunshine Act Signals New Dawn for Compliance," by Joseph J. Feltes, MD News, November 14, 2011 ---

Once upon a time, physicians and their families used to be able to enjoy exotic cruises sponsored by pharmaceutical companies where their only obligation, it seems, was to sign in briefly at sparsely attended meetings before embarking on offshore adventures. It’s been awhile since the sun slowly set on the wake of the last ship’s 
sybaritic junket.

Today, the Federal Physician Payment Sunshine Act — part of national healthcare reform — signals a new dawn of transparency, compliance obligations, and regulatory scrutiny. Beginning January 1, 2012, manufacturers of drugs, devices, biologicals or medical supplies, covered by Medicare, Medicaid or other federal healthcare program, must report to the Department of Health and Human Services all payments or transfers of value they make to physicians or 
teaching hospitals.

The Sunshine Act applies to payments or transfers of value covering a broad array of activities, including: consulting fees; compensation for services other than consulting; honoraria; gifts; entertainment; food; travel (including specified destinations); education and research; charitable contributions; royalties or licenses; current or prospective ownership or investment interests (other than through publicly traded securities or mutual funds); direct compensation for serving as faculty or as a speaker for medical education programs; grants; or falling within the catchall “any other nature of payment or other transfer of value as defined by the Secretary of HHS.” Additionally, if the payment or transfer of value relates to marketing, education, or research which pertains to a covered drug, biological, device or supply, that also must be reported, along with the name of the covered product.

Remaining outside the aura are certain excluded items that need not have to be reported, such as the transfer of items having a value of less than $10 (unless the items exceed an annual aggregate of $100); product samples for patient use not intended to be sold; educational materials that directly benefit patients or are intended for patient use; the loan of a covered device for 90 days or less for evaluation purposes; items or services provided under a contractual warranty; certain discounts and rebates; and in-kind items used to provide charity care, to name a few.

Covered manufacturers must disclose to the Secretary in electronic form the name of the physician (or teaching hospital); the physician’s business address, specialty and National Provider Identifier; the amount of payment or value of transfer; the dates on which payments or transfers are made; a description of whether payment or transfer was made in cash or cash equivalents, in-kind items or services, or stocks or stock options. This information will be stored in a database.

While the burden of reporting rests with covered manufacturers, access to and use of the electronic information stored in the database can be accessed by the media, consumers, the Office for Inspector General, and by prosecutors. That could pose potential liability risk to physicians for non-compliance with federal Anti-Kickback (illegal remuneration), the Stark laws (financial interest), or the False Claims Act (ill-gotten gain). It also could create potential reputational damage — fairly or unfairly — if it were to appear that research was flawed or a physician’s choice of drug was influenced by payments or other transfers of value.

The Wall Street Journal, in an investigational piece (December 20, 2010), reported that five spine surgeons at Norton Hospital in Louisville, Kentucky, who performed the third-most spinal fusions of Medicare patients in the country, had received more than $7 million in “royalties” from Medtronic, the nation’s biggest manufacturer of spinal implants.

The WSJ indicated that it had “mined” certain Medicare databases as the source of its exposé. The new Sunshine Act likely will eliminate the need to dig deeply, since the information will be collected in one database, there for the picking. Critics of the law, including Thomas Peter Stossel, MD, Professor of Medicine at Harvard Medical School, objects that the term “Sunshine” carries with it the “implicit aura of corruption,” which indeed is unfortunate.

Continued in article

Bob Jensen's Fraud Updates are at

Bob Jensen's healthcare news threads are at

"Undercover Researchers Expose Chinese Internet Water Army: An undercover team of computer scientists reveals the practices of people who are paid to post on websites," Technology Review, November 22, 2011 ---
Thank you Glen Gray for the heads up

In China, paid posters are known as the Internet Water Army because they are ready and willing to 'flood' the internet for whoever is willing to pay. The flood can consist of comments, gossip and information (or disinformation) and there seems to be plenty of demand for this army's services.

This is an insidious tide. Positive recommendations can make a huge difference to a product's sales but can equally drive a competitor out of the market. When companies spend millions launching new goods and services, it's easy to understand why they might want to use every tool at their disposal to achieve success.

The loser in all this is the consumer who is conned into making a purchase decision based on false premises. And for the moment, consumers have little legal redress or even ways to spot the practice.

Today, Cheng Chen at the University of Victoria in Canada and a few pals describe how Cheng worked undercover as a paid poster on Chinese websites to understand how the Internet Water Army works. He and his friends then used what he learnt to create software that can spot paid posters automatically.

Paid posting is a well-managed activity involving thousands of individuals and tens of thousands of different online IDs. The posters are usually given a task to register on a website and then to start generating content in the form of posts, articles, links to websites and videos, even carrying out Q&A sessions.

Often, this content is pre-prepared or the posters receive detailed instructions on the type of things they can say. And there is even a quality control team who check that the posts meet a certain 'quality' threshold. A post would not be validated if it is deleted by the host or was composed of garbled words, for example.

Having worked undercover to find out how the system worked, Cheng and co then studied the pattern of posts that appeared on a couple of big Chinese websites: and In particular, they studied the comments on several news stories about two companies that they suspected of paying posters and who were involved in a public spat over each other's services.

The Sina dataset consisted of over 500 users making more than 20,000 comments; the Sohu dataset involved over 200 users and more than 1000 comments.

Cheng and co went through all the posts manually identifying those they believed were from paid posters and then set about looking for patterns in their behaviour that can differentiate them from legitimate users. (Just how accurate were there initial impressions is a potential problem, they admit, but the same one that spam filters also have to deal with.)

They discovered that paid posters tend to post more new comments than replies to other comments. They also post more often with 50 per cent of them posting every 2.5 minutes on average. They also move on from a discussion more quickly than legitimate users, discarding their IDs and never using them again.

What's more, the content they post is measurably different. These workers are paid by the volume and so often take shortcuts, cutting and pasting the same content many times. This would normally invalidate their posts but only if it is spotted by the quality control team.

So Cheng and co built some software to look for repetitions and similarities in messages as well as the other behaviours they'd identified. They then tested it on the dataset they'd downloaded from Sina and Sohu and found it to be remarkably good, with an accuracy of 88 per cent in spotting paid posters. "Our test results with real-world datasets show a very promising performance," they say.

That's an impressive piece of work and a good first step towards combating this problem, although they'll need to test it on a much wider range of datasets. Nevertheless, these guys have the basis of a software package that will weed out a significant fraction of paid posters, provided these people conform to the stereotype that Cheng and co have measured.

And therein lies the rub. As soon as the first version of the software hits the market, paid posters will learn to modify their behaviour in a way that games the system. What Cheng and co have started is a cat and mouse game just like those that plague the antivirus and spam filtering industries.

And that means, the battle ahead with the Internet Water Army will be long and hard.

Continued in article

Bob Jensen's threads on computer and network security are at


Remember when the 2007/2008 severe economic collapse was caused by "street events":
Fraud on Main Street         --- issuance of "poison" mortgages (many subprime) that lenders knew could never be repaid by borrowers.
                                                                    Lenders didn't care about loan defaults because they sold the poison mortgages to suckers like Fannie and Freddie.
                                                                    For low income borrowers the Federal Government forced Fannie and Freddie to buy up the poisoned mortgages ---

Math Error on Wall Street --- issuance of CDO portfolio bonds laced with a portion of healthy mortgages and a portion of poisoned mortgages.
                                                                   The math error is based on an assumption that risk of poison can be diversified and diluted using a risk diversification formula.
                                                                   The risk diversification formula is called the
Gaussian copula function
                                                                   The formula made a fatal assumption that loan defaults would be random events and not correlated.
                                                                   When the real estate bubble burst, home values plunged and loan defaults became correlated and enormous.

 Fraud on Wall Street          --- all the happenings on Wall Street were not merely innocent math errors
 Banks and investment banks were selling CDO bonds that they knew were overvalued.
                                                                    Credit rating agencies knew they were giving AAA high credit ratings to bonds that would collapse.
                                                                    The banking industry used powerful friends in government to pass its default losses on to taxpayers.

                                                                    Greatest Swindle in the History of the World ---

Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster:  The Formula That Killed Wall Street ---
Link forwarded by Jim Mahar --- 

Some highlights:

"For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart." The article goes on to show that correlations are at the heart of the problem.

"The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are."

I would highly recommend reading the entire thing that gets much more involved with the actual formula etc.

The “math error” might truly be have been an error or it might have simply been a gamble with what was perceived as miniscule odds of total market failure. Something similar happened in the case of the trillion-dollar disastrous 1993 collapse of Long Term Capital Management formed by Nobel Prize winning economists and their doctoral students who took similar gambles that ignored the “miniscule odds” of world market collapse -- -  


History (Long Term Capital Management and CDO Gaussian Coppola failures) Repeats Itself in Over a Billion Lost in MF Global

"Models (formulas) Behaving Badly Led to MF’s Global Collapse – People Too," by Aaron Task, Yahoo Finance, November 21, 2011 ---

"The entire system has been utterly destroyed by the MF Global collapse," Ann Barnhardt, founder and CEO of Barnhardt Capital Management, declared last week in a letter to clients.

Whether that's hyperbole or not is a matter of opinion, but MF Global's collapse — and the inability of investigators to find about $1.2 billion in "missing" customer funds, which is twice the amount previously thought — has only further undermined confidence among investors and market participants alike.

Emanuel Derman, a professor at Columbia University and former Goldman Sachs managing director, says MF Global was undone by an over-reliance on short-term funding, which dried up as revelations of its leveraged bets on European sovereign debt came to light.

In the accompanying video, Derman says MF Global was much more like Long Term Capital Management than Goldman Sachs, where he worked on the risk committee for then-CEO John Corzine.

A widely respected expert on risk management, Derman is the author of a new book Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life.

As discussed in the accompanying video, Derman says the "idolatry" of financial models puts Wall Street firms — if not the entire banking system — at risk of catastrophe. MF Global was an extreme example of what can happen when the models — and the people who run them -- behave badly, but if Barnhardt is even a little bit right, expect more casualties to emerge.

Jensen Comment
MF Global's auditor (PwC) will now be ensnared, as seems appropriate in this case, the massive lawsuits that are certain to take place in the future ---

Where did the missing MF Global funds end up?

The the word "repo" sound familiar?

"MF Global and the great Wall St re-hypothecation scandal," by Chrisopher Elias, Reuters, December 7, 2011 ---

A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients. 

MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet. 

If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing. 


Current estimates for the shortfall in MF Global customer funds have now reached $1.2 billion as revelations break that the use of client money appears widespread. Up until now the assumption has been that the funds missing had been misappropriated by MF Global as it desperately sought to avoid bankruptcy. 

Sadly, the truth is likely to be that MF Global took advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name - a legal loophole that may mean that MF Global clients never get their money back. 


First a quick recap. By now the story of MF Global’s demise is strikingly familiar. MF plowed money into an off-balance-sheet maneuver known as a repo, or sale and repurchase agreement. A repo involves a firm borrowing money and putting up assets as collateral, assets it promises to repurchase later. Repos are a common way for firms to generate money but are not normally off-balance sheet and are instead treated as “financing” under accountancy rules. 

MF Global used a version of an off-balance-sheet repo called a "repo-to-maturity." The repo-to-maturity involved borrowing billions of dollars backed by huge sums of sovereign debt, all of which was due to expire at the same time as the loan itself. With the collateral and the loans becoming due simultaneously, MF Global was entitled to treat the transaction as a “sale” under U.S. GAAP. This allowed the firm to move $16.5 billion off its balance sheet, most of it debt from Italy, Spain, Belgium, Portugal and Ireland. 

Backed by the European Financial Stability Facility (EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds would remain default free whilst yields would continue to grow. Ultimately, however, it proved to be MF Global’s downfall as margin calls and its high level of leverage sucked out capital from the firm. For more information on the repo used by MF Global please see Business Law Currents MF Global – Slayed by the Grim Repo? 

Puzzling many, though, were the huge sums involved. How was MF Global able to “lose” $1.2 billion of its clients’ money and acquire a sovereign debt position of $6.3 billion – a position more than five times the firm’s book value, or net worth? The answer it seems lies in its exploitation of a loophole between UK and U.S. brokerage rules on the use of clients funds known as “re-hypothecation”. 


By way of background, hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults. 

In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default. 

In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital). 

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds. 


Under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets. 

But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500). 

This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions. 

In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation. 


Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules. 

Under subtle brokerage contractual provisions, U.S. investors can find that their assets vanish from the U.S. and appear instead in the UK, despite contact with an ostensibly American organisation. 

Potentially as simple as having MF Global UK Limited, an English subsidiary, enter into a prime brokerage agreement with a customer, a U.S. based prime broker can immediately take advantage of the UK’s unrestricted re-hypothecation rules. 


In fact this is exactly what Lehman Brothers did through Lehman Brothers International (Europe) (LBIE), an English subsidiary to which most U.S. hedge fund assets were transferred. Once transferred to the UK based company, assets were re-hypothecated many times over, meaning that when the debt carousel stopped, and Lehman Brothers collapsed, many U.S. funds found that their assets had simply vanished. 

A prime broker need not even require that an investor (eg hedge fund) sign all agreements with a European subsidiary to take advantage of the loophole. In fact, in Lehman’s case many funds signed a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but margin-lending agreements and securities-lending agreements with LBIE in the UK (normally conducted under a Global Master Securities Lending Agreement). 

These agreements permitted Lehman to transfer client assets between various affiliates without the fund’s express consent, despite the fact that the main agreement had been under U.S. law. As a result of these peripheral agreements, all or most of its clients’ assets found their way down to LBIE. 


A similar re-hypothecation provision can be seen in MF Global’s U.S. client agreements. MF Global’s Customer Agreement for trading in cash commodities, commodity futures, security futures, options, and forward contracts, securities, foreign futures and options and currencies includes the following clause: 

 “7. Consent To Loan Or PledgeYou hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate,loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.” 

In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements. With these transactions taking place off-balance sheet it is difficult to pin down the exact entity which was used to re-hypothecate such large sums of money but regulatory filings and letters from MF Global’s administrators contain some clues. 

According to a letter from KPMG to MF Global clients, when MF Global collapsed, its UK subsidiary MF Global UK Limited had over 10,000 accounts. MF Global disclosed in March 2011 that it had significant credit risk from its European subsidiary from “counterparties with whom we place both our own funds or securities and those of our clients”. 


Matters get even worse when we consider what has for the last 6 years counted as collateral under re-hypothecation rules. 

Despite the fact that there may only be a quarter of the collateral in the world to back these transactions, successive U.S. governments have softened the requirements for what can back a re-hypothecation transaction. 

Beginning with Clinton-era liberalisation, rules were eased that had until 2000 limited the use of re-hypothecated funds to U.S. Treasury, state and municipal obligations. These rules were slowly cut away (from 2000-2005) so that customer money could be used to enter into repurchase agreements (repos), buy foreign bonds, money market funds and other assorted securities. 

Hence, when MF Global conceived of its Eurozone repo ruse, client funds were waiting to be plundered for investment in AA rated European sovereign debt, despite the fact that many of its hedge fund clients may have been betting against the performance of those very same bonds. 


As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. Even without circumventing U.S. limits on re-hypothecation, the off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering. 

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link. 

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing. 

The lack of balance sheet recognition of re-hypothecation was noted in Jefferies recent 10Q (emphasis added): 

 “Note 7. Collateralized Transactions
We pledge securities in connection with repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. The pledge of our securities is in connection with our mortgage−backed securities, corporate bond, government and agency securities and equities businesses. Counterparties generally have the right to sell or repledge the collateral.Pledged securities that can be sold or repledged by the counterparty are included within Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition. We receive securities as collateral in connection with resale agreements, securities borrowings and customer margin loans. In many instances, we are permitted by contract or custom to rehypothecate securities received as collateral. These securities maybe used to secure repurchase agreements, enter into security lending or derivative transactions or cover short positions. At August 31, 2011 and November 30, 2010, the approximate fair value of securities received as collateral by us that may be sold or repledged was approximately $25.9 billion and $22.3 billion, respectively. At August 31, 2011 and November 30, 2010, a substantial portion of the securities received by us had been sold or repledged. 

We engage in securities for securities transactions in which we are the borrower of securities and provide other securities as collateral rather than cash. As no cash is provided under these types of transactions, we, as borrower, treat these as noncash transactions and do not recognize assets or liabilities on the Consolidated Statements of Financial Condition. The securities pledged as collateral under these transactions are included within the total amount of Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition. 

According to Jefferies’ most recent Annual Report it had re-hypothecated $22.3 billion (in fair value) of assets in 2011 including government debt, asset backed securities, derivatives and corporate equity- that’s just $15 billion shy of Jefferies total on balance sheet assets of $37 billion. 


With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble. 

Bob Jensen's threads on the Bankruptcy Examiner's Report in the Lehman Brothers Repo 105/108 scandals --- |




"Mortgage Defaults Drive 88% Jump in Suspected Fraud," Journal of Accountancy, September 28, 2011 ---

From The Economist, October 8-14, Page 12

America's Justice Department and New York State's attorney general filed separate civil lawsuits against BNY Mellon for allegedly defrauding clients by systematically using the foreign exchange rate on transactions that best suited the bank.

Bob Jensen's Rotten to the Core threads are at

Bob Jensen's Fraud Updates ---

Billings for Services Never Rendered
"SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement," SEC, November 14, 2011 ---
Morgan Stanley settled the charges for $3.3 million fine

Bob Jensen's Fraud Updates ---

A Multiple Choice Test
"What's Your Fraud IQ? Do you know how to prevent fraud? Test your basic understanding of ways to protect personal and corporate information," by Dawn Taylor and Andi McNeal, Journal of Accountancy, November 2011 ---

Bob Jensen's threads on fraud detection and prevention ---

The Fed Audit
Socialist Bernie Sanders is probably my least favorite senator alongside Barbara (mam) Boxer. But he does make some important revelations in the posting below.

The first ever GAO audit of the Federal Reserve was conducted in early 2011 due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill (HR1207), so that a complete audit would not be carried out. Ben Bernanke, Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have on markets. Nevertheless, the results of the first audit in the Federal Reserve nearly 100 year history were posted on Senator Sanders webpage in July.

The list of institutions that received the most money from the Federal Reserve can be found on page 131 of the GAO Audit and is as follows:

Citigroup: $2.5 trillion($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America : $1.344 trillion ($1,344,000,000,000)
Barclays PLC ( United Kingdom ): $868 billion* ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank ( Germany ): $354 billion ($354,000,000,000)
UBS ( Switzerland ): $287 billion ($287,000,000,000)
Credit Suisse ( Switzerland ): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland ( United Kingdom ): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)


"The Fed Audit," by Bernie Sanders, Independent Senator from Vermont, July 21, 2011 ---

The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. "As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Among the investigation's key findings is that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland, according to the GAO report. "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president," Sanders said.

The non-partisan, investigative arm of Congress also determined that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse.  In fact, according to the report, the Fed provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

For example, the CEO of JP Morgan Chase served on the New York Fed's board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed.  Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's emergency lending programs.

In another disturbing finding, the GAO said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given bailout funds.  One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it might have created the appearance of a conflict of interest.

To Sanders, the conclusion is simple. "No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed's board of directors or be employed by the Fed," he said.

The investigation also revealed that the Fed outsourced most of its emergency lending programs to private contractors, many of which also were recipients of extremely low-interest and then-secret loans.

The Fed outsourced virtually all of the operations of their emergency lending programs to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo.  The same firms also received trillions of dollars in Fed loans at near-zero interest rates. Altogether some two-thirds of the contracts that the Fed awarded to manage its emergency lending programs were no-bid contracts. Morgan Stanley was given the largest no-bid contract worth $108.4 million to help manage the Fed bailout of AIG.

A more detailed GAO investigation into potential conflicts of interest at the Fed is due on Oct. 18, but Sanders said one thing already is abundantly clear. "The Federal Reserve must be reformed to serve the needs of working families, not just CEOs on Wall Street."

To read the GAO report, click here Fed Investigation.pdf

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

"ENRON’S TENTH ANNIVERSARY: THE CRIMES," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, November 7, 2011

Bob Jensen's threads on the Enron, Worldcom, and Andersen scandals ---

"Have We Got a Convention Center to Sell You! From Boston to Austin, politicians spend money on fancy white elephants," by Steven Malanga, The Wall Street Journal, December 31, 2011 ---

. . .

Then there's Boston, perhaps the quintessential example of a city that interprets failure in the convention business as a license to spend more on it. Massachusetts officials shelled out $230 million to renovate Hynes Convention Center in the late 1980s. When the makeover produced virtually no economic bounce, officials decided that the city needed a new, $800 million center financed by a hotel occupancy excise tax, a rental-car surcharge, and the sale of taxi medallions. Opened in 2004, that new Boston Convention and Exhibition Center was projected (by consultants hired by the state) to have Boston renting some 670,000 additional hotel rooms annually within five years. Instead, Beantown saw just 310,000 additional hotel room rentals in 2009.

Now Massachusetts officials want to spend $2 billion to double the size of the Boston Convention Center and add a hotel. Of course, they predict that the expanded facilities would bring an additional $222 million into the local economy each year, including 140,000 hotel room rentals. Even with these bullish projections, officials claim that the hotel would need $200 million in public subsidies.

"The whole thing is a racket," Boston Globe columnist Jeff Jacoby recently observed. "Once again the politicos will expand their empire. Once again crony capitalism will enrich a handful of wired business operators. And once again Joe and Jane Taxpayer will pay through the nose. How many times must we see this movie before we finally shut it off?"

Many times, if officials in Baltimore have their way. Several years ago they built a $300 million city-owned hotel, (the Hilton Baltimore Convention Center Hotel) to boost the fortunes of the city's struggling convention center. Having opened in 2008, the hotel lost $11 million last year. Now the city is considering a public-private expansion plan that would add a downtown arena, an additional convention hotel, and 400,000 feet of new convention space at the cost of $400 million in public money.

The list goes on—everywhere from Columbus, Ohio, to Dallas, Austin, Phoenix and places in between. One problem is that optimistic projections about new facilities fail to account for how other cities are expanding, too. Why did Minneapolis struggle to hit projected targets after it enlarged its convention center in 2002? "Other cities expanded right along with us,'' Minneapolis's convention center director, Jeff Johnson, said this year.

The surest sign that taxpayers should be leery of such public investments is that officials have changed their sales pitch. Convention and meeting centers shouldn't be judged, they now say, by how many hotel rooms, restaurants, and local attractions they help fill. That's "narrow-minded thinking," said James Rooney of the Massachusetts Convention Center Authority this year. Instead, as Boston Mayor Thomas Menino has said, expanding a convention center can "demonstrate to the world that we have unlimited confidence in our city and what it can do, not only as a convention destination but as the center of the most important trends in hospitality, science, health and education."

Continued in article

Jensen Comment
When I still lived in San Antonio, taxpayers went on the hook for an Alamo Dome Convention Center that cost nearly $300 million intended to also be the home of the NBA San Antonio Spurs. Almost the instant the ribbon was cut on the the Alamo Dome, the San Antonio Spurs asked taxpayers to fund their own new arena. These things sell because the promoters say that the funding will come for taxes on visitors to the city rather than local taxpayers. What they don't tell you is that the new taxes event revenues do not pay millions of dollars in operating and vacancy losses. Those losses are then quietly billed to local taxpayers. Welcome to the world of urban crony business fraud

"Tracing the L.A. Coliseum's fiscal decay As the landmark stadium's finances nose-dived, commissioners took little notice," by Paul Pringle and Rong-Gong Lin II, Los Angeles Times, December,0,338108.story
Thank you Glen Gray for the heads up.

Month after month, the financial forecasts for the Los Angeles Memorial Coliseum seemed as sunny as could be.

General Manager Patrick Lynch would tell his bosses on the Coliseum Commission that the box office from rave concerts was brisk and a lucrative deal for naming rights to the stadium could be just around the corner, records show.

For the most part, the nine-member commission took the affable Lynch at his word. And why not? As L.A. County Supervisor Don Knabe, who si

Despite Lynch's assurances, there was a different reality: The Coliseum had become mired in conflicts of interest, spending irregularities and loose accounting that eroded its fiscal foundation and had all but bankrupted its future as one of the nation's most-storied public landmarks.

Lynch resigned in February after The Times began a series of reports on the Coliseum's finances. He and his former events manager, Todd DeStefano, who quit shortly before the first story appeared, are the subjects of a criminal investigation by county prosecutors involving alleged kickbacks and self-dealing. State regulators and the Los Angeles city controller's office have also launched inquiries.

Three other Coliseum managers and employees have gone on leave or left the stadium's employment after The Times' investigation questioned the propriety of their financial dealings. All deny wrongdoing.

How a multimillion-dollar scandal at such a high-profile venue could go undetected for so long is not entirely clear. But the groundwork for alleged abuse lay in a history of clumsy stewardship, inattentiveness by commission members and a cozy relationship between Lynch and his overseers.

The commission was empowered to safeguard the interests of the state, county and city. But it became more of a sportsmen's club than a watchdog.

"The place was on autopilot," said mall developer Rick Caruso, who resigned as a commissioner earlier this year. He was often a lone voice in challenging Lynch, with scant results. "There was no accountability."

The Coliseum is now so broke that it is unable to make upgrades promised in its lease with USC, whose football Trojans are the stadium's main tenant. As a result, the panel is about to turn over day-to-day control of the taxpayer-owned property to the private school.

Jessica Levinson, a Loyola Law School professor who studies public corruption, described the commission's failure to spot warning signs of the scandal as a "great tragedy."

"This was below the standards of how you would run a neighborhood lemonade stand," she said.

The Coliseum, completed in 1923 when Warren G. Harding was in the White House, was heralded as a symbol of a burgeoning metropolis' ambitions to play on the global stage.

Continued in article

Bob Jensen's Fraud Updates are at


How Professor Stapel committed academic research fraud is becoming known, but why he did so remains a mystery

"The Fraud Who Fooled (Almost) Everyone," by Tom Bartlett, Chronicle of Higher Education, November 3. 2011 ---

It’s now known that Diederik Stapel, the Dutch social psychologist who was suspended by Tilburg University in September, faked dozens of studies and managed not to get caught for years despite his outrageous fabrications. But how, exactly, did he do it?

That question won’t be fully answered for a while—the investigation into the vast fraud is continuing. But a just-released English version of Tilburg’s interim report on Stapel’s deception begins to fill in some of the details of how he manipulated those who worked with him.

This was, according to the report, his modus operandi:

Continued in article

Bob Jensen's threads on professors who cheat ---

"Plagiarism, Profanity, Fraud, and Design," by Josh Keller, Chronicle of Higher Education, November 4, 2011 --- Click Here

Plagiarism: A study of 24 million college papers by Turnitin, which makes plagiarism-detection software, finds that college students are most likely to lift copy from Wikipedia, Yahoo Answers, and Slideshare. The study counted all suspiciously similar language and did not consider whether students cited the sources they lifted from. Via the Scholarly Kitchen, where Phil Davis noted some of the study’s limitations.

Profanity: A Web site promoting Oberlin College co-created by its social media coordinator, Why the F*** Should I Choose Oberlin?, drew varied reactions and plenty of attention last week. The site, which notes it is not officially affiliated with Oberlin, collects profanity-laced quotes about why Oberlin is great. Georgy Cohen interviews the co-creator, Ma’ayan Plaut, who says she has “tacit and unofficial approval” from her boss. On Higher Ed Marketing, Andrew Careaga says his inner 15-year-old thought the site is brilliant, but his 51-year-old “shook his jaded head.”

Fraud: Educause offers advice on how colleges can respond to a Dear Colleague letter from the U.S. Department of Education that asks colleges to limit student-aid fraud in online programs.

Design: Keith Hampson argues that good design will play an increasingly important role in the college student experience as college move online. “Somehow, though, digital higher education—both its software and content—has managed to remain untouched by good design. Design is not even on the agenda,” he says.

Bob Jensen's threads on higher education controversies are at

Why did Joe Paterno sell his relatively modest home to his wife for $1?"

"Paterno Passed On Home to His Wife for $1," by Mark Viera and Pete Thamel, The New York Times, November 15, 2011 ---

Joe Paterno transferred full ownership of his house to his wife, Sue, for $1 in July, less than four months before a sexual abuse scandal engulfed his Penn State football program and the university.

Documents filed in Centre County, Pa., show that on July 21, Paterno’s house near campus was turned over to “Suzanne P. Paterno, trustee” for a dollar plus “love and affection.” The couple had previously held joint ownership of the house, which they bought in 1969 for $58,000.

¶ According to documents filed with the county, the house’s fair-market value was listed at $594,484.40. Wick Sollers, a lawyer for Paterno, said in an e-mail that the Paternos had been engaged in a “multiyear estate planning program,” and the transfer “was simply one element of that plan.” He said it had nothing to do with the scandal.

¶ Paterno, who was fired as the football coach at the university last week, has been judged harshly by many for failing to take more aggressive action when he learned of a suspected sexual assault of a child by one of his former top assistants.

¶ Some legal experts, in trying to gauge the legal exposure of the university and its top officials to lawsuits brought by suspected victims of the assistant, Jerry Sandusky, have theorized that Paterno could be a target of civil actions. On Nov. 5, Sandusky, Penn State’s former defensive coordinator, was charged with 40 counts related to the reported sexual abuse of eight boys over 15 years. Paterno, 84, was among those called to give testimony before a grand jury during the investigation, which began in 2009.

¶ Experts in estate planning and tax law, in interviews, cautioned that it would be hard to determine the Paternos’ motivation simply from the available documents. It appears the family house had been the subject of years of complex and confusing transactions.

¶ Lawrence A. Frolik, a law professor at the University of Pittsburgh who specializes in elder law, said that he had “never heard” of a husband selling his share of a house for $1 to his spouse for tax or government assistance purposes.

¶ “I can’t see any tax advantages,” Frolik said. “If someone told me that, my reaction would be, ‘Are they hoping to shield assets in case if there’s personal liability?’ ” He added, “It sounds like an attempt to avoid personal liability in having assets in his wife’s name.”

¶ Two lawyers examined the available documents in recent days. Neither wanted to be identified because they were not directly involved in the case or the property transaction. One of the experts said it appeared to be an explicit effort to financially shield Joe Paterno. The other regarded the July transaction, at least on its face, as benign.

Continued in article

Jensen Comment
Ruth Madoff was not allowed to keep assets in her name except for assets that were not gifts from her husband or passed through her husband's financial transactions. For example, I think she was allowed to keep her family inheritance.

This kind of "fraud" is extremely common, albeit illegal, where home titles and other assets of a parent are passed on to children in anticipation of having Medicaid pay for the parent's eventual nursing home care. Medicare does not pay for long-term nursing home care, and Obamacare just eliminated this extremely expensive benefit that would've greatly driven up the price of medical insurance.


Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud

Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

Bob Jensen's threads on the entitlements disaster are at

Audit Failure:  The GAO Reported No Problems Amidst All This Fraud
This is what a union site claims about the Long Island Rail Road workers for disability ---

What you won't read in Newsday or the New York Times from non-copyrighted labor source:

GAO Audit Gives Railroad Occupational Disability Program a Clean Bill of Health

The United States Government Accountability Office (GAO) just issued its second review of the Railroad Retirement Board Occupational Disability Program. And once again it found no problems.

“This was a major accomplishment for rail labor,” says TCU President Bob Scardelletti. “Occupational Disability is a vitally important program for members who need it. It’s the best in the country, and this Report will help keep it that way.”

The increased government attention on Occupational Disability began when New York politicians and newspapers began a full scale campaign targeting Long Island Rail Road workers’ alleged abuse of the program. After extensive scandalous press reports, public hearings, wild allegations, and a congressionally requested GAO investigation, no improprieties were found.

The Railroad Retirement Board did institute some oversight measures specific to Long Island Rail Road to make sure that no abuses were occurring, reflecting the fact that the rate of applications for occupational disability were higher than on any other railroad. But these oversight procedures wound up finding that all Long Island applications that were approved were properly reviewed, legitimate and in accordance with existing law and regulations. And that fact was endorsed by the first GAO audit of Long Island Rail Road claims in a report released in September, 2009.

Not satisfied with the GAO’s findings, two Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on March 18, 2009 formally requested the GAO to “conduct a systematic review of RRB’s occupational disability program”, not just limited to Long Island Rail Road.

The Congressmen’ request prompted yet another GAO review of the occupational disability program. In their just-issued response to the two Congressmen, the GAO reported they found no improprieties and made no recommendations.

Once again efforts to find fault with the occupational disability have come up empty,” says President Scardelletti. “That’s because the program is functioning as it was intended – to be a last resort for rail workers who because of illness or injury can no longer perform their jobs. It is a necessary benefit and it is not abused by those who unfortunately must apply for it. We will continue to do everything in our power to preserve it as is.

Jensen Comment
The program seems to be "working as intended." Either 90% of all the railroad's workers are becoming disabled on the job or the system is "intended" to defraud the taxpayers. One sign of that it was a fraud is that the same doctor (now indicted) was receiving millions of dollars from the union to sign phony disability claims.

And there are some who advocate that the GAO take over the private sector auditing because there will be less fraud, greater independence, and more competent auditors than anything the Big Four and other auditing firms can come up with. Baloney!

"Europe's Entitlement Reckoning From Greece to Italy to France, the welfare state is in crisis," The Wall Street Journal, November 9, 2011 ---

In the European economic crisis, all roads lead through Rome. The markets have raised the price of financing Italy's mammoth debt to new highs, and on Tuesday Silvio Berlusconi became the second euro-zone prime minister, after Greece's George Papandreou, to resign this week. His departure may keep the world's eighth largest economy solvent for the time being, but it hardly addresses the root of the problem.

In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived.

If the first step in curing an addiction is to acknowledge it, there is little sign of that in Europe. The solutions on offer are to spend still more money, to have the Germans bail out everybody else, or to ditch the euro so bankrupt countries can again devalue their own currencies. France's latest debt solution includes raising corporate, capitals gains and sales taxes.

Yet Europe's problem isn't the euro. If it were, Hungary, Iceland and Latvia—none of which use the euro—would have been spared their painful days of reckoning. The same applies for Britain. Europe is in a debt spiral brought about by spendthrift, overweening and inefficient governments.

This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of "self-inflicted strangulation." Government debt is 120% of GDP, making Italy the world's third largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000.

An aging and shrinking population is a symptom, but not a leading cause, of the eurosclerosis. A fifth of Italy's 60 million people are 65 or older and make increasingly expensive claims on state-paid pensions and other benefits. In fast-growing Turkey, only 6.3% fit that demographic. Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries.

But the bulk of the responsibility lies with politicians. Mr. Berlusconi, Italy's richest man, promised a shake up each time he ran for office (in 1994, 1996, 2001, 2006 and 2008). He was the longest serving premier in post-war Italy, from 2001 to 2006, controlled parliament and could have pushed through reforms. He didn't. Promises to lower taxes and hack away at regulations and protections for Italy's powerful guilds—from taxi drivers to pharmacists to journalists—were broken.

"It is not difficult to rule Italy," Benito Mussolini once said, "it is useless." The so-called concertazione, or concert, of Italian coalition politics that brings together numerous parties in the Parliament makes for unstable and indecisive governments. So does the fear prominent in many European countries that any serious reform will provoke street protests. An unhappy byproduct of a welfare state is that it creates powerful interests that will fight to the last to preserve their free lunch, no matter the cost to the country.

But now hard choices can no longer be postponed. And the solution to Europe's debt crisis must begin with reforming, if not dismantling, the welfare state. Europe rose from the economic grave in the 1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the 1980s-'90s, and it can grow again. A decade ago, Germany was called the "sick man of Europe," bedeviled by Italian-like economic problems. But a center-left coalition, supported by trade unions and German society, overhauled labor and welfare codes and set the stage for the current (if still modest) export-led revival in Germany.

The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America's federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short.

"U.S. Expected to Charge Executive Tied to Galleon Case," by Azam Ahmed, Peter Lattman, and Ben Protess, The New York Times, October 25, 2011 ---

Federal prosecutors are expected to file criminal charges on Wednesday against Rajat K. Gupta, the most prominent business executive ensnared in an aggressive insider trading investigation, according to people briefed on the case.

The case against Mr. Gupta, 62, who is expected to surrender to F.B.I. agents on Wednesday, would extend the reach of the government’s inquiry into America’s most prestigious corporate boardrooms. Most of the defendants charged with insider trading over the last two years have plied their trade exclusively on Wall Street.

The charges would also mean a stunning fall from grace of a trusted adviser to political leaders and chief executives of the world’s most celebrated companies.

A former director of Goldman Sachs and Procter & Gamble and the longtime head of McKinsey & Company, the elite consulting firm, Mr. Gupta has been under investigation over whether he leaked corporate secrets to Raj Rajaratnam, the hedge fund manager who was sentenced this month to 11 years in prison for trading on illegal stock tips.

While there has been no indication yet that Mr. Gupta profited directly from the information he passed to Mr. Rajaratnam, securities laws prohibit company insiders from divulging corporate secrets to those who then profit from them.

The case against Mr. Gupta, who lives in Westport, Conn., would tie up a major loose end in the long-running investigation of Mr. Rajaratnam’s hedge fund, the Galleon Group. Yet federal authorities continue their campaign to ferret out insider trading on multiple fronts. This month, for example, a Denver-based hedge fund manager and a chemist at the Food and Drug Administration pleaded guilty to such charges.

A spokeswoman for the United States attorney in Manhattan declined to comment.

Gary P. Naftalis, a lawyer for Mr. Gupta, said in a statement: “The facts demonstrate that Mr. Gupta is an innocent man and that he acted with honesty and integrity.”

Mr. Gupta, in his role at the helm of McKinsey, was a trusted adviser to business leaders including Jeffrey R. Immelt, of General Electric, and Henry R. Kravis, of the private equity firm Kohlberg Kravis Roberts & Company. A native of Kolkata, India, and a graduate of the Harvard Business School, Mr. Gupta has also been a philanthropist, serving as a senior adviser to the Bill & Melinda Gates Foundation. Mr. Gupta also served as a special adviser to the United Nations.

His name emerged just a week before Mr. Rajaratnam’s trial in March, when the Securities and Exchange Commission filed an administrative proceeding against him. The agency accused Mr. Gupta of passing confidential information about Goldman Sachs and Procter & Gamble to Mr. Rajaratnam, who then traded on the news.

The details were explosive. Authorities said Mr. Gupta gave Mr. Rajaratnam advanced word of Warren E. Buffett’s $5 billion investment in Goldman Sachs during the darkest days of the financial crisis in addition to other sensitive information affecting the company’s share price.

At the time, federal prosecutors named Mr. Gupta a co-conspirator of Mr. Rajaratnam, but they never charged him. Still, his presence loomed large at Mr. Rajaratnam’s trial. Lloyd C. Blankfein, the chief executive of Goldman, testified about Mr. Gupta’s role on the board and the secrets he was privy to, including earnings details and the bank’s strategic deliberations.

The legal odyssey leading to charges against Mr. Gupta could serve as a case study in law school criminal procedure class. He fought the S.E.C.’s civil action, which would have been heard before an administrative judge. Mr. Gupta argued that the proceeding denied him of his constitutional right to a jury trial and treated him differently than the other Mr. Rajaratnam-related defendants, all of whom the agency sued in federal court.

Mr. Gupta prevailed, and the S.E.C. dropped its case in August, but it maintained the right to bring an action in federal court. The agency is expected to file a new, parallel civil case against Mr. Gupta as well. It is unclear what has changed since the S.E.C. dropped its case in August.

An S.E.C. spokesman declined to comment.

Continued in article

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

How is the current Olympus scandal in Japan related to the Enron scandal?

Think Special Purpose Vehicles (SPVs)

Accounting Fraud in Japan
Olympus Urged to Extend Purge of Executives Over Hidden Losses

At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.


"Olympus Urged to Extend Purge of Executives Over Hidden Losses," Business Week, November 8, 2011 ---

Olympus Corp.’s admission that three of its top executives colluded to hide losses from investors fails to address the roles played by other officials, according to the company’s biggest overseas shareholder.

The Japanese camera maker’s shares slumped 29 percent yesterday after it reversed weeks of denials that there was any wrongdoing in past acquisitions. The company fired Executive Vice President Hisashi Mori over his role in covering up the losses with former Chairman Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada would step down.

Olympus’ biggest overseas shareholder is now demanding investor relations head Akihiro Nambu go too because of his role as a director of Gyrus Group Plc, the U.K. takeover target used to funnel more than $600 million in inflated advisory fees to a Cayman Islands fund. And after Nambu, the rest of the board must follow, said Josh Shores, a London-based principal for Southeastern Asset Management Inc.

“Even if they didn’t know the specific details around where payments were going and exactly why, they knew that cash was going out the door and they also failed to raise their hands to ask questions,” Shores said. “I don’t know who else is involved, but somebody else is. There is a third party somewhere who received this money.”

Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

Cayman Links

At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

Kikukawa, Mori and Nambu became the three directors of Gyrus in June 2008 following the $2 billion acquisition of the U.K. medical equipment maker in February that year. They were also directors of three companies set up to handle the takeover, including the decision to pay out advisory fees that amounted to more than a third of the acquisition’s value, filings show.

Olympus declined a request to interview Kikukawa and Mori. In six attempts to talk to Kikukawa at his home, the former chairman didn’t appear. Mori’s home address given in U.K. filings leads to a house under renovation in Kawasaki city, about an hour from central Tokyo. Nobody answered the doorbell on a recent visit to Nambu’s home in a seven-story condominium about 27 kilometers from the city center.

Japanese and U.S. regulators are probing allegations by former chief executive officer Michael C. Woodford that more than $1.5 billion was siphoned through offshore funds. That money may have been used to cancel out non-performing securities that Olympus was keeping off its books, according to a report in the Shukan Asahi magazine, which cited people familiar with the process.


Yesterday’s plunge in Olympus shares pulled other Japanese equities lower on concerns the country hasn’t escaped corporate governance weaknesses that have dogged it since the stock market bubble burst at the end of 1989. Olympus shares have lost 70 percent of their value since Woodford took his accusations public after he was axed on Oct. 14.

“Institutional investors will stay away from Japan’s market until they confirm this is an isolated case,” said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors probably think that if there’s one cockroach, there may be 10 more,” he said.


Olympus’ revelations echo the practice of hiding losses known as “tobashi” that became widespread in Japan in the late 1980s and led to the failure of Yamaichi Securities Co., according to Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used overseas paper companies to hide problematic securities, until it failed in 1997 with 260 billion yen ($3.3 billion) in hidden impairments.

Takayama declined to comment on the involvement of any securities firms in Olympus’ cover-up. The Topix Securities and Commodity Futures Index fell 11 percent, the most of any industry group in the broader gauge. Nomura Holdings Inc. tumbled 15 percent to the lowest in 37 years.

“There is speculation in the market that Nomura may somehow be involved in this Olympus case,” said Shoichi Arisawa, an Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in particular probably sold after seeing a high volume of Nomura’s shares being traded.”

Nomura didn’t participate in Olympus’s concealment of losses, said Hajime Ikeda, managing director of corporate communications for the securities firm.

Nomura Unaware

“We are not aware of any involvement by Nomura in Olympus’s hiding of losses in the 1990s, and we weren’t involved when Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a telephone interview in Tokyo yesterday.

Olympus plunged by its 300 yen daily limit in Tokyo trading, closing at 734 yen. The Topix ended 1.7 percent lower, the worst-performing Asian stock index.

The Tokyo Stock Exchange said it’s considering moving the shares in Olympus, the world’s biggest maker of endoscopes, to a watchlist for possible delisting. Takayama pledged to continue with the investigation into the losses, which he said were probably inherited by Kikukawa.

“The investigation must continue to determine how much rot there is,” said David Herro, chief investment officer of Harris Associates LP. “All responsible must, at a minimum, leave. Also, since the management’s credibility is nearly nonexistent, all of what they say must be verified.”

Bowed in Apology

Harris held 10.9 million Olympus shares as of June 30, a 4 percent stake that makes it the company’s second-biggest overseas investor. Southeastern had a 5 percent stake as of Aug. 16, according to data compiled by Bloomberg.

Olympus President Takayama yesterday said he was unaware of the hidden losses until he was told by Mori and Kikukawa the previous evening. At the press conference, he bowed three times in seven minutes to apologize.

In the weeks running up to his dismissal, Woodford was engaged in an exchange of letters with Kikukawa and Mori in which he detailed the allegations and which were copied to all member of the board.

After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

Olympus paid a total of 73.4 billion yen to increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006 and 2008, which was also used to hide losses, it said yesterday. Olympus wrote down 55.7 billion yen, or 76 percent of the acquisition value, in March 2009, the company said in a statement Oct. 19.

“It’s beyond belief that Mr. Takayama claims he only found out about it last night,” Woodford said in a telephone interview yesterday. “If he didn’t know before I started writing my letters then he should have known after.”

Continued in article

Teaching Case on Olympus and SPV Frauds

From The Wall Street Journal Accounting Weekly Review on December 2, 2011

Olympus Heat Rises
by: Juro Osawa and Phred Dvorak
Nov 25, 2011
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Audit Quality, Audit Report, Auditing, Auditor Changes, Auditor/Client Disagreements, business combinations, Business Ethics, Fraudulent Financial Reporting

SUMMARY: The series of events leading to questions about auditing practices at Olympus that failed to uncover a decades-long coverup of investment losses is highlighted in this review. The company must submit its next financial statement filing to the Tokyo Stock Exchange by December 14, 2011 for the period ended September 30, 2011 or face delisting.

CLASSROOM APPLICATION: The review focuses on auditing questions about sufficient competent evidence, change of auditors, and ability to provide an audit report given knowledge of the length of time this coverup has been ongoing.

1. (Introductory) What fraudulent accounting and reporting practices has Olympus, the Japanese optical equipment maker, admitted to committing?

2. (Advanced) What services is Mr. Woodford calling for to investigate the inappropriate payments and accounting practices by Olympus? Specifically name the type of engagement for which Mr. Woodford thinks that Olympus should contract with outside accountants.

3. (Introductory) Refer to the related articles. What questions have been raised about outside accountants' examinations of Olympus's financial statements for many years?

4. (Advanced) Based only on the discussion in the article, what evidence did Olympus's auditors rely on to resolve their questions about the propriety of accounting for mergers and acquisitions? Again, based only on the WSJ articles, how reliable was that audit evidence?

5. (Advanced) What happened with Olympus's engagement of KPMG AZSA LLC as its outside auditor? What steps must be taken under U.S. requirements when a change of auditors occurs?

6. (Introductory) What challenges will Olympus face in meeting the deadline of December 14 to file its latest financial statements? What will happen to the company if it cannot do so?

Reviewed By: Judy Beckman, University of Rhode Island

Olympus Casts Spotlight on Accounting
by Kana Inagaki
Nov 08, 2011
Online Exclusive

Olympus Admits to Hiding Losses
by Kana Inagaki and Phred Dvorak
Nov 08, 2011
Online Exclusive


"Olympus Heat Rises (video)," by: Juro Osawa and Phred Dvorak, The Wall Street Journal, November 25, 2011 ---

Bob Jensen's threads on the criminal activity at Olympus
Scroll down deeply at

What's Right and What's Wrong With SPEs, SPVs, and VIEs ---

"ENRON: what happened and what we can learn from it," by George J. Benston and Al L. Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-127 
The following are excerpts only.


Enron's accounting for its non-consolidated special-purpose entities (SPEs), sales of its own stock and other assets to the SPEs, and mark-ups of investments to fair value substantially inflated its reported revenue, net income, and stockholders' equity, and possibly understated its liabilities.  We delineate six accounting and auditing issues, for which we describe, analyze, and indicate the effect on Enron's financial statements of their complicated structures and transactions.  We next consider the role of Enron's board of directors, audit committee, and outside attorneys and auditors.  From the foregoing, we evaluate the extent to which Enron and Andersen followed the requirements of GAAP and GAAS, from which we draw lessons and conclusions.

The accounting issues

The transactions involving SPEs at Enron, and the related accounting issues are, indeed, very complex.  This section summarizes some of the key transactions and their related accounting effects.  The Powers Report, a 218-page document, provides in great detail a discussion of a selected group of Enron SPEs that have been the central focus of the Enron investigations.  While very much less detailed than the Powers Report, the discussion in the following section (which may seem laborious at times), supplemented with additional material that became available after publication of the Report, should provide the reader with insight into how Enron sought to bend the accounting rules to their advantage.  However, even a cursory review of this section will give the reader a sense of the complex financing structures that Enron used in an attempt to create various financing, tax, and accounting advantages.

Six accounting and auditing issues are of primary importance, since they were used extensively by Enron to manipulate its reported figures: (1) The accounting policy of not consolidating SPEs that appear to have permitted Enron to hide losses and debt from investors.  (2) The accounting treatment of sales of Enron's merchant investments to unconsolidated (though actually controlled) SPEs as if these were arm's length transactions.  (3) Enron's income recognition practice of recording as current income fees for services rendered in future periods and recording revenue from sales of forward contracts, which were, in effect, disguised loans.  (4) Fair-value accounting resulting in restatements of merchant investments that were not based on trustworthy numbers.  (5) Enron's accounting for its stock that was issued to and held by SPEs.  (6) Inadequate disclosure of related party transactions and conflicts of interest, and their costs to stockholders.

Continued in article at

"KPMG Scrutinized Over Handling of Olympus Accounting Fraud Scandal," by Kalen Smith, Big Four Blog, December 15, 2011 ---

KPMG’s auditors in Tokyo are under scrutiny after signing off on reports issued by Olympus Corp. Auditors found several accounting irregularities when they reviewed financial statements provided by Olympus executives. The auditors were particularly concerned over $600 million worth of takeover advisory fees and payments on acquisitions. Despite their concerns, auditors chose to sign off on the reports after an outside consultant approved of the findings.

Although the consultant said the takeover costs were justified, they were also hired from Olympus Corp. This has raised some red flags over a possible conflict of interest in the matter.

Olympus has now been revealed to have engaged in financial fraud for more than two decades. Following the revelation of the accounting scandal at Olympus, regulators are looking closely at KPMG and Ernst & Young. Regulators feel the auditors should have seen signs of the fraud and taking measures to stop them.

According to allegations, KPMG was Olympus’s auditor for years. They failed to catch the discrepancies and Ernst & Young was called in as well.

According to Yuuki Sakurai of Fukoku Capital Management, auditors work for the companies that pay them. Auditors are going to have a hard time staying in business if they get a reputation for being the kind of company that goes to the regulators without solid evidence of malfeasance.

Although the manner in which KPMG handled the Olympus case created some concern for regulators, it may signify greater concern over the corporate culture that has created a serious conflict of interest between auditors’ responsibilities for their clients and need to uphold the law.

Bob Jensen's threads on KPMG ---

Bob Jensen's threads on the the decline of professionalism and independence in auditing ---

"ENRON’S TENTH ANNIVERSARY: THE CRIMES," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, November 7, 2011

Bob Jensen's threads on the Enron, Worldcom, and Andersen scandals ---

The idea of a central bank manipulating world markets packs an increasingly powerful emotional punch with voters.
"Is there a shadowy plot behind gold?" by Gillian Tett, Financial Times, October 21, 2011 ---

Out there in the world today, a cabal of western central bankers is secretly determined to manipulate the world’s markets. They are doing this not via interest rates, but by rigging gold prices. More specifically, they have kept bullion prices artificially low in recent decades to ensure that our so-called fiat currency system – that is, money created by central banks – continues to work. For if the public ever knew the “real” price of gold, we would finally understand that our currencies, such as the dollar, are a sham … hence the need for that central bank plot.

Does this sound like the ranting of a Tea Party activist? A Hollywood screenplay? Or could there be a grain of truth in it? The question has been provoking hot debate among a small tribe of investors in America for many years, particularly those owning gold mining stocks. Right now it is also leaching into the more mainstream American political world.

Continued in article

Jensen Comment
This is not a rant from an long-haired anarchist defecating in a NYC park, but such a guy probably takes such market manipulation for granted. Such strange things are happening with gold prices I'm a bit of a believer myself.

Bob Jensen's Rotten to the Core threads are at

Hi Honey,
"I'll show you mine (insider news about My Nookie)  if you show me yours (insider news about Deloitte's audit clients),"

"Former Deloitte Employee Swings to Settlement with SEC Over Insider Trading Charges," by Calib Newquist, Going Concern, October 18, 2011 ---

Remember Annabel McClellan? She’s the wife (some doubt about this) of former Deloitte partner Arnold McClellan who sorta got wrapped up into an insider trading mess with her sister and brother-in-law last fall. Annabel is also a former Deloitte employee who gave up the glamorous life of a Salzberg solider to be a stay-at-home mom. Oh! and she was working on swingers app called My Nookie that was on the verge of taking the scene by storm. The whole insider trading thing put those ambitions on hold due to the fact that Annabel may be looking at some jail time and she settled civil charges with the SEC yesterday for $1 million. The good news for Arnie is that if judge gives the settlement the thumbs-up, he’ll be off the hook who, prosecutors say, had no clue that the Mrs. was engaging in extracurricular activities:

Bob Jensen's threads about Deloitte ---

"Deloitte Faulted by PCAOB Over Unresolved Audit Deficiencies," by Jesse Hamilton, Business Week,  October 17, 2011 ---

Deloitte & Touche LLP repeatedly failed to support assumptions in audits examined in a 2007 inspection, the Public Company Accounting Oversight Board said in the first public report of unresolved deficiencies involving one of the so-called Big Four accounting firms.

The firm’s quality controls and independence systems give “cause for concern,” the PCAOB said in its report, which was released today. The Washington-based nonprofit, created in 2002 to oversee audits of public companies after the collapses of Enron Corp. and WorldCom Inc., gives audit firms at least a year to fix deficiencies and only releases the reports in cases where auditors fail to make sufficient improvements.

“These deficiencies may result, in part, from a Firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis,” the PCAOB said in the Deloitte report, which didn’t name the clients involved in the cited audits.

The PCAOB in 2007 looked at Deloitte’s practices through inspections at the company’s New York headquarters and 18 other offices. The report made public today lays out instances in which the firm insufficiently weighed clients’ valuation of assets and income-tax assumptions. The watchdog also faulted Deloitte’s independence procedures, saying it “has no formal system in place to monitor the services its foreign affiliates actually perform.”

“In our drive for continuous improvement, we have been making a series of investments focused on strengthening and improving our practice,” Deloitte Chief Executive Officer Joe Echevarria said in a statement. Echevarria, who has been with the firm since 1978, was elected to the top job in April.

The disclosure isn’t a disciplinary action, said Colleen Brennan, a PCAOB spokeswoman. Dozens of smaller registered public accounting firms have had similar criticisms made public and have retained their registration, she said.

The 2007 Inspection Report is at

Bob Jensen's threads about Deloitte ---

Dennis Kozlowski Talks Jail, Pay (no mention that he cost PwC $225 million for negligence)

"Dennis Kozlowski Talks Jail, Pay," by Joann S. Lublin, The Wall Street Journal, October 21, 2011 --- Click Here

As convicted hedge-fund manager Raj Rajaratnam gets ready to enter the prison system, L. Dennis Kozlowski, a poster child for the last wave of corporate scandals, is hoping he'll soon get out.

The former chief executive of Tyco International Ltd. was found guilty in 2005 of looting his employer and sentenced to as much as a quarter century behind bars. Now, he's suing New York state to win work release and awaiting his first parole hearing in April.

Meanwhile, Mr. Kozlowski looks out—across razor wire made by Tyco—at a world where the stumbling economy and scorn heaped on big business have a familiar feel.

Once one of America's highest paid CEOs, the 64-year-old felon acknowledges he got "piggy" when it came to his pay. And he says he shares the outrage over corporate greed expressed by the Occupy Wall Street protesters, many of whom wonder why the recent financial crisis didn't send as many executives to prison as the scandals of a decade ago. "I understand their frustration," Mr. Kozlowski said in an interview in a visitors' room here at the Mid-State Correctional Facility. Kozlowski On:

Jail food: "Everything is bad about the food. It's mysterious. By the time it gets to us, it's cold.'' His expected salary during work-release: "I would be satisfied with minimum wage.'' Why rich men's toys no longer appeal to him: "I have learned how little I can live with…. There are no shower curtains here.''

The former executive, who pulled in a pay package worth more than $105 million in fiscal 2000, criticized ailing financial firms for paying out sizable executive bonuses after they were helped by taxpayer bailouts. "That's indefensible," he said.

Mr. Kozlowski also discussed his post-prison plans, his meetings with General Electric Co. CEO Jeff Immelt about possibly combining their companies, and the missteps that led him to prison.

Mr. Kozlowski was found guilty in June 2005 on 22 of 23 counts, including grand larceny, conspiracy and securities fraud, stemming from giant bonuses and other improper compensation he got as Tyco's CEO.

He received a sentence of 8 1/3 years to 25 years, compared with 25 years for former WorldCom CEO Bernard J. Ebbers and 24 for former Enron President Jeffrey Skilling. In seeking the maximum sentence, Assistant District Attorney Owen Heimer called Mr. Kozlowski's crimes "unprecedented" and said he made Tyco a "symbol of kleptocratic management."

Mr. Kozlowski hopes to take a work-release job with Access Technologies Group Inc., a small company in New Canaan, Conn., whose services include job-search training for ex-convicts. But New York state has turned down his request for work release four times.

He's suing to overturn the decision and chafes that Mark H. Swartz, the former Tyco finance chief convicted of similar crimes, already has such a job. The New York Department of Corrections and Community Supervision confirmed that Mr. Swartz started a Manhattan work-release assignment in late September but declined to comment on Mr. Kozlowski's request. An attorney for Mr. Swartz declined to comment.

Continued in article

Jensen Comment
Unlike many of these executive "Go to Jail" events that take place for companies that have crashed and burned (like Enron and Worldcom), Kozlowski and Swartz were sent to prison for stealing from a company (Tyco) that was actually in good shape and made much better with the fast wheeling and dealing of L. Dennis Kozlowski.

Certainly Dennis lived very high on the hog on his Tyco expense account, including his multi-million dollar wedding in Cyprus that he put on a Tyco credit card. Dennis had a weakness for women and high living, but he also was pretty shrewd about finding and negotiating acquisitions for Tyco.

And the Dennis and Swartz cover ups of fraud resulted in PwC paying out one of the largest audit-malpractice settlements in the history of CPA firm auditing.

"PwC Sets Accord in Tyco Case:  Pact for $225 Million Settles Claims Involving Auditing Malpractice," by David Reilly and Jennifer Levitz, The Wall Street Journal, July 7, 2007 --- Click Here

Accounting titan PricewaterhouseCoopers LLP agreed to pay $225 million to settle audit-malpractice claims arising from the criminal misdeeds of top executives at Tyco International Ltd., marking the largest single legal payout ever made by that firm and one of the biggest ever by an auditor.

The settlement applies to claims from both Tyco investors, who had filed a class-action lawsuit against the accounting firm in federal court in New Hampshire, and Tyco itself. The agreement was disclosed Friday by PwC, Tyco and the class-action investors.

Tyco's involvement in the PwC deal followed on its agreement in May to settle for $2.98 billion claims brought against it by the same class-action plaintiffs -- removing a cloud of liability that shadowed the conglomerate as it split into three publicly traded companies. As part of that agreement, Tyco allowed investors to pursue its own claims against PricewaterhouseCoopers, while Tyco would pursue claims on behalf of shareholders against former executives, including former Chief Executive L. Dennis Kozlowski.

Attorneys for Tyco investors said the settlement marked a victory for shareholders. The $225 million payout "sends a message to accounting firms" and will act as a "deterrent to future situations like this," according to Jay Eisenhofer of Grant & Eisenhofer PA, who represented investors in the case. Tyco declined to comment beyond saying that the agreement had been filed.

The PwC settlement ranks among the top 10 legal payouts made by accounting firms related to work on behalf of one company. Ernst & Young LLP's $335 million settlement in 1999 related to work for Cendant Corp. remains the biggest-ever payout by an auditor.

As a percentage of the overall settlement reached by the company and other parties -- an important metric looked at by accounting firms -- the PwC deal represented a payout on its end of about 7% of the total. That is generally in line with payouts by accounting firms, which tend to range from 5% to 15% of total payouts.

While the Tyco case was one of several corporate scandals that rocked markets earlier this decade, it is somewhat unusual in that the malfeasance revolved around compensation issues involving top executives. That contrasted with the kind of bankruptcy-inducing fraud seen in many other scandals such as those at Enron Corp. and WorldCom Inc. In June of 2005, a jury convicted Mr. Kozlowski, and Mark Swartz, Tyco's former chief financial officer, of grand larceny, conspiracy and securities fraud. Both are serving prison sentences in New York.

While PwC stood by its work, the firm's position was potentially undermined when the Securities and Exchange Commission in 2003 barred Richard P. Scalzo, the firm's lead partner on Tyco's audits from 1997 to 2001, from audits of publicly listed companies. The SEC didn't accuse him of deliberately covering up faulty accounting at Tyco, but said he was "reckless" for not heeding warning signs regarding the integrity of the company's management. Mr. Scalzo didn't admit or deny wrongdoing.

Although the PwC settlement with Tyco will have to be approved by class-action investors, and some could drop out to pursue claims individually, the deal mostly brings to a close one of the biggest legal issues for PwC. Other high-profile cases the firm has outstanding are suits related to its work for insurance titan American International Group Inc. and computer maker Dell Inc.

Bob Jensen's threads on PwC lawsuits ---

"Where There's Smoke, There's Fraud:  Sarbanes-Oxley has done little to curb corporate malfeasance. Therefore, CFOs should implement a range of fraud-prevention measures," by Laton McCartney,, March 1, 2011 ---

As a convicted felon, Sam E. Antar, the former CFO for the now-defunct consumer-electronics chain Crazy Eddie, no doubt has regrets. Among them: he is no longer in the game at a time when corporate fraud is experiencing a resurgence. "If I were out of retirement today, I'd be bigger than Bernie Madoff," he boasts.

In conjunction with CEO Eddie Antar (his cousin), Sam Antar helped mastermind one of the largest corporate frauds in the 1980s, bilking investors and creditors out of hundreds of millions of dollars. Today, he makes a living lecturing about corporate fraud (and shorting the stocks of companies he thinks may have inflated earnings).

Antar says that despite the antifraud provisions of the Sarbanes-Oxley Act of 2002 and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, it remains as easy today for bad guys, both internal and external, to loot corporate coffers as it was during the Enron and WorldCom days. "Nothing's changed," he says. "Wall Street analysts are just as gullible, internal controls remain weak, and the SEC is underfunded and, at best, ineffective. Madoff only got caught because the economy tanked."

Antar won't get much of an argument from organizations that monitor corporate fraud. In fact, the consensus today is that financial shenanigans are markedly on the increase. "There's a lot more employee fraud and embezzlement today then there was 10 years ago, and this past year there was much more than a year ago," says Steve Pedneault of Forensic Accounting Services. "People blame the economy, but much of the fraud and embezzlement that's coming to the surface now was in the works for 4 or 5 years before the recession hit."

Last year, the Committee of Sponsoring Organizations of the Treadway Commission's report on corporate fraud concluded that fraud continues to increase in depth and breadth despite Sarbanes-Oxley; the methods of committing financial fraud have not materially changed; and traditional measures of corporate governance have limited impact on predicting fraud. Median loss due to fraud, based on presence of antifraud controls, 2010No. of fraud cases, based on perpetrator's dept. (2010)

In other words, same old same old, only worse: in its 2010/2011 Global Fraud Report, risk consulting firm Kroll found that business losses due to fraud increased 20% in the last 12 months, from $1.4 million to $1.7 million per billion dollars of sales. The report, based on a survey of more than 800 senior executives from 760 companies around the world, also found that 88% of the respondents reported being victims of corporate fraud over the past 12 months. If fraud were the flu, this would qualify as a pandemic.

The most likely targets by industry are financial services, media, technology, manufacturing, and health care. Small and midsize companies are also more vulnerable. "Many of these organizations typically rely on a small accounting department, especially in today's economy," says Pedneault. They simply don't have the resources to catch fraudsters.

That challenge becomes all the more daunting when one considers the many varieties of fraud that exist. Aside from various forms of embezzlement and outright theft, and the growing risk of information theft (think hackers), two other kinds of corporate malfeasance have come to the fore in recent years: fraud in the business model and fraud in the business process.

The former is defined by a company selling illegal or worthless wares. "If the pharmaceutical industry sells alleged off-label drugs that have not been approved by the FDA, or the financial-services industry is offering worthless subprime mortgages, that can constitute business-model fraud," says Toby J. F. Bishop, director of the Deloitte Forensic Center for Deloitte Financial Advisory Services.

Fraud of the business-practice variety, Bishop explains, can range from corporations ignoring or turning a blind eye to environmental or safety laws to the ever-popular practice of engaging in "window dressing" at the end of the quarter.

An Action Plan With fraud on the rise, and with all parties that could possibly be tempted feeling more pressure to cross the line, how should companies respond? First, the bad news: "Most fraud today is uncovered by whistle-blowers, or by accident — a tip, a rogue piece of mail, or by happenstance," says Tracy L. Coenen, a forensic accountant and fraud investigator who heads up Sequence, a forensic accounting firm.

In a sense, companies (at least those that are publicly traded) were supposed to self-insure against fraud by implementing, at great expense, the controls framework included in Sarbanes-Oxley. But a framework still requires an enforcer, and at many companies there is none. "There's often no single entity for oversight," says Deloitte's Bishop. "Many companies have no compliance or risk management at all."

Even when they do, there's the issue of how effective it can be. It's not a job that wins friends and influences fellow workers. "The compliance officer is the most hated person in the company," notes Thomas Quilty, CEO of BD Consulting and Investigations. "Companies often retaliate against them," adds Antar.

"Compliance staff frequently end up pushing paper [just] so it looks like the company has tried to do the right thing in case there's an investigation," says Coenen. "They're not effective."

As for what to do, while no one has yet come up with a silver bullet, experts point to seven useful steps that all companies can take:

Continued in a long article

Bob Jensen's fraud updates ---

Bob Jensen's threads on professionalism in auditing ---

"ACCOUNTANTS BEHAVING BADLY," by Anthony H. Catanach, Jr. and J. Edward Ketz, Grumpy Old Accountants, October 3, 2011 ---

Cheating is all around us.  Athletics provide a never ending series of ethical disappointments whether it be the use of performance enhancing drugs in bicycling, baseball, and football, the bout fixing in Sumo wrestling, or the recent NCAA rule violations by Ohio State’s football program.

David Callahan in his controversial book The Cheating Culture, states:

When “everybody does it,” or imagines that everybody does it, a cheating culture has emerged.

However, not everyone feels this way. Warren Buffet opines on ethics and protecting reputation in the 2010 Berkshire Hathaway Annual Report (pages 104 and 105), and states:

Sometimes your associates will say “Everybody else is doing it.” This rationale is almost always a bad one if it is the main justification for a business action. It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as a rationale, in effect they are saying that they can’t come up with a good reason. If anyone gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.

But why are so many accountants cheating today?  How could this happen with the continuing education ethics hours requirement for licensing?  Aren’t accountants supposed to be our first line of defense against financial reporting fraud?  Twenty years ago Eli Mason, one of the acknowledged leaders of the accounting profession, clearly defined the ethical responsibilities of accountants in his CPA Credo:


This is how accountants and auditors are supposed to behave: public service, ethics, and independence.  Unfortunately, these three key attributes appear to have been abandoned by many in the profession.

Just look at what we have recently seen from the senior leadership of large accounting firms? 



Unbelievable for accountants, but is any of this new?  No, not really, the history of accounting is filled with cases of accountants misbehaving, but it sure does seem like it’s getting worse in the recent past.  Behind each and every one of the many recent corporate reporting failures is a major accounting and auditing firm that has committed “malpractice.”  And it seems that despite increased scrutiny by the press and investment community, as well as required ethics training, these “accounting meltdowns” are becoming more frequent, and more costly to investors. 

Continued in article

Bob Jensen's threads on professionalism and independence ---

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 information illegally. 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 ---;contentBody#ixzz1dfeq66Ok
Also see

Jensen Comment

Watch the "Insider" Video Now While It's Still Free ---;contentBody

"They have legislated themselves as untouchable as a political class . . . "
"The Wonk (Professor) Who Slays Washington," by Peter J. Boyer, Newsweek Magazine, November 21, 2011, pp. 32-37 ---

In the Spring of 2010, a bespectacled, middle-aged policy wonk named Peter Schweizer fired up his laptop and began a months-long odyssey into a forbidding maze of public databases, hunting for the financial secrets of Washington’s most powerful politicians. Schweizer had been struck by the fact that members of Congress are free to buy and sell stocks in companies whose fate can be profoundly influenced, or even determined, by Washington policy, and he wondered, do these ultimate insiders act on what they know? Yes, Schweizer found, they certainly seem to. Schweizer’s research revealed that some of Congress’s most prominent members are in a position to routinely engage in what amounts to a legal form of insider trading, profiting from investment activity that, he says, “would send the rest of us to prison.”

Schweizer, who is 47, lives in Tallahassee with his wife and children (“New York or D.C. would be too distracting—I’d never get any writing done”) and commutes regularly to Stanford, where he is the William J. Casey research fellow at the Hoover Institution. His circle of friends includes some bare-knuckle combatants in the partisan frays (such as conservative media impresario Andrew Breitbart), but Schweizer himself comes across more as a bookish researcher than the right-wing hit man liberal critics see. Indeed, he sounds somewhat surprised, if gratified, to have attracted attention with his findings. “To me, it’s troubling that a fellow at Stanford who lives in Florida had to dig this up.”
It was in his Tallahassee office that Schweizer began what he thought was a promising research project: combing through congressional financial-disclosure records dating back to 2000 to see what kinds of investments legislators were making. He quickly learned that Capitol Hill has quite a few market players. He narrowed his search to a dozen or so members—the leaders of both houses, as well as members of key committees—and focused on trades that coincided with big policy initiatives of the sort that could move markets.

While examining trades made around the time of the 2003 Medicare overhaul, Schweizer experienced what he calls his “Holy crap!” moment. The legislation, which created a new prescription-drug entitlement, promised to be a huge boon to the pharmaceutical industry—and to savvy investors in the Capitol. Among those with special insight on the issue was Massachusetts Sen. John Kerry, chairman of the health subcommittee of the Senate’s powerful Finance Committee. Kerry is one of the wealthiest members of the Senate and heavily invested in the stock market. As the final version of the drug program neared approval—one that didn’t include limits on the price of drugs—brokers for Kerry and his wife were busy trading in Big Pharma. Schweizer found that they completed 111 stock transactions of pharmaceutical companies in 2003, 103 of which were buys.

“They were all great picks,” Schweizer notes. The Kerrys’ capital gains on the transactions were at least $500,000, and as high as $2 million (such information is necessarily imprecise, as the disclosure rules allow members to report their gains in wide ranges). It was instructive to Schweizer that Kerry didn’t try to shape legislation to benefit his portfolio; the apparent key to success was the shaping of trades that anticipated the effect of government policy.

Continued in article

Jensen Questions
If all these transactions were only by chance profitable, why is it that the representatives, senators, and their trust investors always profited and never lost in dealings connected to inside information?

More importantly why did representatives and senators who write the laws have to write themselves in as exempt from insider trading laws?

Why aren't national leaders like Nancy Pelosi, John Kerry, and John Boehner who vigorously deny inside trading actively seeking to overturn laws that exempt representatives and senators from insider trading lawsuits? Why do they still hold themselves above their own law?

Why have representatives and senators buried reform legislation concerning their insider trading exemption so deep in the legislative process that there's zero hop of reforming themselves against abuses of insider trading and exploitation of other investors?

Watch the "Insider" Video Now While It's Still Free ---;contentBody

If you agree with the above, pass it on.
Warren Buffett, in a recent interview with CNBC, offers one of the best quotes about the debt ceiling:"I could end the deficit in 5 minutes," he told CNBC. "You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election. The 26th amendment (granting the right to vote for 18 year-olds) took only 3 months & 8 days to be ratified! Why? Simple! The people demanded it. That was in1971...before computers, e-mail, cell phones, etc. Of the 27 amendments to the Constitution, seven (7) took 1 year or less to become the law of the land...all because of public pressure.Warren Buffet is asking each addressee to forward this email to a minimum oftwenty people on their address list; in turn ask each of those to do likewise. In three days, most people in The United States of America will have the message. This is one idea that really should be passed around.*Congressional Reform Act of 2011......
1. No Tenure / No Pension. A Congressman collects a salary while in office and receives no pay when they are out of office.

2.. Congress (past, present & future) participates in Social Security. All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system,and Congress participates with the American people. It may not be used for any other purpose..

3. Congress can purchase their own retirement plan, just as all Americans do...

4. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.

5. Congress loses their current health care insurance and participates in the same health care plan as the American people.

6. Congress must equally abide by all laws they impose on the American people..

7. All contracts with past and present Congressmen are void effective 1/1/12. The American people did not make this contract with Congressmen. Congressmen made all these contracts for themselves. Serving in Congress is an honor,not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and back to work.

If each person contacts a minimum of twenty people then it will only take
three days for most people (in the U.S.) to receive the message. Maybe it is


Read more:;contentBody#ixzz1dfeq66Ok

Holman Jenkins of The Wall Street Journal contends that in total representatives and senators do not perform better (possibly even worse) than average investors in the stock market ---
What he does not mention is that opportunities to trade on inside information is generally infrequent and often limited to a few members of a particular legislative committee receiving insider testimony or preparing to release committee recommendations to the legislature.

Jenkins misses the entire point of insider trading. If it was a daily event in the public or private sector it would be squashed even harder than it is now being squashed, because rampant insider trading would drive the public away from the financial and real estate markets. The trading markets survive this cancer because it is relatively infrequent when it does take place among corporate executives (illegally) or our legislators (legally).


Feeling cynical?
They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss. 
What's a sweetheart like you doin' in a dump like this?

Lyrics of a Bob Dylan song forwarded by Amian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US

If the law passes in its current form, insider trading by Congress will not become illegal.
"Congress's Phony Insider-Trading Reform:  The denizens of Capitol Hill are remarkable investors. A new law meant to curb abuses would only make their shenanigans easier," by Jonathan Macey, The Wall Street Journal, December 13, 2011 ---

Members of Congress already get better health insurance and retirement benefits than other Americans. They are about to get better insider trading laws as well.

Several academic studies show that the investment portfolios of congressmen and senators consistently outperform stock indices like the Dow and the S&P 500, as well as the portfolios of virtually all professional investors. Congressmen do better to an extent that is statistically significant, according to studies including a 2004 article about "abnormal" Senate returns by Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski in the Journal of Financial and Qualitative Analysis. The authors published a similar study of the House this year.

Democrats' portfolios outperform the market by a whopping 9%. Republicans do well, though not quite as well. And the trading is widespread, although a higher percentage of senators than representatives trade—which is not surprising because senators outperform the market by an astonishing 12% on an annual basis.

These results are not due to luck or the financial acumen of elected officials. They can be explained only by insider trading based on the nonpublic information that politicians obtain in the course of their official duties.

Strangely, while insider trading by corporate insiders has long been the white collar crime equivalent of a major felony, the Securities and Exchange Commission has determined that insider trading laws do not apply to members of Congress or their staff. That is because, according to the SEC at least, these public officials do not owe the same legal duty of confidentiality that makes insider trading illegal by nonpoliticians.

The embarrassing inconsistency was ignored for years. All of this changed on Nov. 13, 2011, after insider trading on Capitol Hill was the focus of CBS's "60 Minutes." The previously moribund "Stop Trading on Congressional Knowledge Act" (H.R. 1148), first introduced in 2006, was pulled off the shelf and reintroduced. The bill suddenly had more than 140 sponsors, up from a mere nine before the show.

The "Stock" Act, as it is called, would make it illegal for members of Congress and staff to buy or sell securities based on certain nonpublic information. It would toughen disclosure obligations by requiring congressmen and their staffers to report securities trades of more than $1,000 to the clerk of the House (or the secretary of the Senate) within 90 days. And it would bring the new cottage industry in Washington, the so-called political intelligence consultants used by hedge funds, under the same rules that govern lobbyists. These political intelligence consultants are hired by professional investors to pry information out of Congress and staffers to guide trading decisions.

Publicly, House members echo bill sponsor Rep. Louise Slaughter (D., N.Y) in saying things like: "We want to remove any current ambiguity" about whether insider trading rules apply to Congress. Or as co-sponsor Rep. Timothy Walz (D., Minn.) put it: "We are trying to set the bar higher for members of Congress."

On closer examination, it appears that what Congress really wants is to keep making the big bucks that come from trading on inside information but to trick those outside of the Beltway into believing they are doing something about this corruption. For one thing, the rules proposed for Capitol Hill are not like those that apply to the rest of us. Ours are so broad and vague that prosecutors enjoy almost unfettered discretion in deciding when and whom to prosecute.

Congress's rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered.

At a Dec. 6 House hearing, SEC enforcement chief Robert Khuzami opined that any new rules for Congress should not apply to ordinary citizens. He worried that legislators might "narrow current law and thereby make it more difficult to bring future insider trading actions against individuals outside of Congress."

This don't-rock-the-boat approach serves the interests of the SEC because it maximizes the commission's power and discretion, but it's not the best approach. The sensible thing to do would be to rationalize the rules by creating a clear definition of what constitutes insider trading, and then apply those rules to everyone on and outside Capitol Hill.

If the law passes in its current form, insider trading by Congress will not become illegal. I predict such trading will increase because the rules of the game will be clearer. Most significantly, the rule proposed for Congress would not involve the same murky inquiry into whether a trader owed or breached a "fiduciary duty" to the source of the information that required that he refrain from trading.

Continued in article


Bob Jensen's threads on Rotten to the Core ---


"Accused of Deception, Citi Agrees to Pay $285 Million," by Edward Wyatt, The New York Times, October 19, 2011 ---

Citigroup agreed to pay $285 million to settle charges that it misled investors in a $1 billion derivatives deal tied to the United States housing market, then bet against investors as the housing market began to show signs of distress, the Securities and Exchange Commission said Wednesday.

The S.E.C. also brought charges against a Citigroup employee who was responsible for structuring the transaction, and brought and settled charges against the asset management unit of Credit Suisse and a Credit Suisse employee who also had responsibility for the derivative security.

¶ The S.E.C. said that the $285 million would be returned to investors in the deal, a collateralized debt obligation known as Class V Funding III. The commission said that Citigroup exercised significant influence over the selection of $500 million of assets in the deal’s portfolio.

¶ Citigroup then took a short position against those mortgage-related assets, an investment in which Citigroup would profit if the assets declined in value. The company did not disclose to the investors to whom it sold the collateralized debt obligation that it had helped to select the assets or that it was betting against them.

¶ The S.E.C. also charged Brian Stoker, the Citigroup employee who was primarily responsible for putting together the deal, and Samir H. Bhatt, a Credit Suisse portfolio manager who was primarily responsible for the transaction. Credit Suisse served as the collateral manager for the C.D.O. transaction.

¶ “The securities laws demand that investors receive more care and candor than Citigroup provided to these C.D.O. investors,” said Robert Khuzami, director of the S.E.C.’s division of enforcement. “Investors were not informed that Citigroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

¶ Citigroup received fees of $34 million for structuring and marketing the transaction and realized net profits of at least $126 million from its short position. The $285 million settlement includes $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty, all of which will be returned to investors.

¶ The companies and individuals who settled the charges neither admitted nor denied the charges.

Continued in article

Bob Jensen

We've come to expect that lawyers lie --- it's part of their job responsibilities in some instances
But it's a bit of a shock how much law schools themselves lie (until we make the connection that law schools are run by lawyers)

"Coburn, Boxer Call for Department of Education to Examine Questions of Law School Transparency," New Release from the Official Site of Senator Barbara Boxer, October 14, 2011 ---

Washington, D.C. – U.S. Senators Tom Coburn (R-OK) and Barbara Boxer (D-CA) yesterday asked the Department of Education’s Inspector General to provide information about key law school job placement, bar passage and loan debt metrics in light of serious concerns that have been raised about the accuracy and transparency of information being provided to prospective law school students.  

This letter follows repeated calls from Senator Boxer to the American Bar Association to provide stronger oversight of reporting by law schools and better access to information for students. 

In their letter, the Senators pointed to media reports that raise questions about whether the claims law schools use to lure prospective students are, in fact, accurate. They also cited reporting that questions whether law school tuition and fees are used for legal education or for unrelated purposes.  

The full text of the Senators’ letter appears below. 

October 13, 2011 

Ms. Kathleen Tighe
Inspector General
U.S. Department of Education
400 Maryland Ave., S.W.
Washington, DC 20202-1500

To help better inform Congress as it prepares to reform the Higher Education Act, we write to request an examination of American law schools that focuses on the confluence of growing enrollments, steadily increasing tuition rates and allegedly sluggish job placement.  

Recent media stories reveal concerning challenges for students and graduates of such schools. For example, The New York Times reported on a law school that “increased the size of the class arriving in the fall of 2009 by an astounding 30 percent, even as hiring in the legal profession imploded.” The New York Times found the same school is ranked in the bottom third of all law schools in the country and has tuition and fees set at $47,800 a year but reported to prospective students median starting salaries rivaling graduates of the best schools in the nation “even though most of its graduates, in fact, find work at less than half that amount.” 

Other reports question whether or not law schools are properly disclosing their graduation rates to prospective students. Inside Higher Ed recently highlighted several pending lawsuits which “argue that students were essentially robbed of the ability to make good decisions about whether to pay tuition (and to take out student loans) by being forced to rely on incomplete and inaccurate job placement information. Specifically, the suits charge the law schools in question (and many of their peers) mix together different kinds of employment (including jobs for which a J.D. is not needed) to inflate employment rates.”  

Media exposes also reveal possible concerns about whether tuition and fees charged by law schools are used directly for legal education, or for purposes unrelated to legal education. For example, The New York Times reports “law schools toss off so much cash they are sometimes required to hand over as much as 30 percent of their revenue to universities, to subsidize less profitable fields.” The Baltimore Sun recently reported on the resignation of the Dean of the University of Baltimore (UB) Law School, who said he resigned, in part, over his frustration that the law school’s revenue was not being retained to serve students at the school. In his resignation letter, UB’s Dean noted: “The financial data [of the school] demonstrates that the amount and percentage of the law school revenue retained by the university has increased, particularly over the last two years. For the most recent academic year (AY 10-11), our tuition increase generated $1,455,650 in additional revenue. Of that amount, the School of Law budget increased by only $80,744.”  

To better understand trends related to law schools over the most recent ten-year window, we request your office provide the following information: 

1. The current enrollments, as well as the historical growth of enrollments, at American law schools – in the aggregate, and also by sector (i.e., private, public, for-profit).  

2. Current tuition and fee rates, as well as the historical growth of tuition and fees, at American law schools – in the aggregate, and also by sector (i.e., private, public, for-profit).  

3. The percentage of law school revenue generated that is retained to administer legal education, operate law school facilities, and the percentage and dollar amount used for other, non-legal educational purposes by the broader university system. If possible, please provide specific examples of what activities and expenses law school revenues are being used to support if such revenue does not support legal education directly. 

4. The amount of federal and private educational loan debt legal students carried upon graduation, again in the aggregate and across sectors. 

5. The current bar passage rates and graduation rates of students at American law schools, again in the aggregate and across sectors.  

6. The job placement rates of American law school graduates; indicating whether such jobs are full- or part-time positions, whether they require a law degree, and whether they were maintained a year after employment. 

In your final analysis, please include a description of the methodology the IG employed to acquire and analyze information for the report. Please also note any obstacles to acquiring pertinent information the agency may encounter.  

We thank you in advance for your time and attention to this matter. Please feel free to contact us if you have any questions concerning this request.  


Tom A. Coburn,
M.D. United States Senator 

Barbara Boxer
United States Senator

Jensen Comment
Faculty urged not to be “too choosy” in admitting new cash-cow graduate students
"Not So Fast," by Lee Skallerup Bessette, Inside Higher Ed, August 29, 2011 ---

Bob Jensen's threads on Turkey Times for Overstuffed Law Schools ---

Student Financial Aid Fraud
"Hitting Hard on Fraud," by Paul Fain, Inside Higher Ed, October 11, 2011 ---

A fast-moving effort by the U.S. Education Department to crack down on financial aid fraud faces a common dilemma in higher education: how to protect the integrity of government aid coffers without harming students.

Fraud rings that use “straw students” to pilfer federal financial aid are a growing problem, particularly in online programs at largely open-access community colleges and for-profit institutions. But proposed regulatory fixes, even if well-meaning, could create layers of red tape for colleges and make it harder for some students to receive financial aid.

“It’s a balancing act,” said Evan Montague, dean of students for Lansing Community College. Montague said the fraud rings are a threat, but that his college has adequate safeguards in place, thanks to a recent upgrade. He worries that the proposed federal policies would be an added “regulatory burden.”

The department’s Office of the Inspector General has seen a dramatic increase in online education scams, according to a report released last month. The crimes typically feature a ringleader and phony students who enroll, receive federal aid and split the proceeds with the ringleader. Community colleges may be targeted more often than for-profits because they typically charge less in tuition, leaving more of a leftover aid balance for thieves to pocket.

Continued in article

Jensen Comment
Much of the student financial aid fraud takes place amongst for-profit universities operating in the gray zone of fraud ---

But there is substantial fraud among the non-profit universities as well. One recent example is Chicago State University that clung to students who never passed a course.

"Chicago State Let Failing Students Stay," Inside Higher Ed, July 26, 2011 ---

Chicago State University officials have been boasting about improvements in retention rates. But an investigation by The Chicago Tribune  found that part of the reason is that students with grade-point averages below 1.8 have been permitted to stay on as students, in violation of university rules. Chicago State officials say that they have now stopped the practice, which the Tribune exposed by requesting the G.P.A.'s of a cohort of students. Some of the students tracked had G.P.A.'s of 0.0.

How does the government use fraudulent accounting to hide the cost of student loan defaults?

"Washington's Quietest Disaster Student loan defaults are growing, and the worst is still to come," The Wall Street Journal, September 30, 2011 ---

When critics warned about rising defaults on government-backed student loans two years ago, the question was how quickly taxpayers would feel the pain. The U.S. Department of Education provided part of the answer this month when it reported that the default rate for fiscal 2009 surged to 8.8%, up from 7% in 2008.

This rising default rate doesn't even tell the whole story. The government allows various "income contingent" and "income-based" repayment options, so the statistics don't count kids who were given permission to pay less than they owed. Taxpayers shouldn't expect relief any time soon. Thanks to policy changes in recent years and fraudulent government accounting, the pain could be excruciating.

Readers who followed the Congressional birth of ObamaCare in 2010 may recall that student lending was the other industry takeover that came along for the legislative ride. Private lenders used to originate federally guaranteed loans, but the new law required all such loans to come directly from the feds. Combined with earlier changes that discouraged private loans sold without a federal guarantee, the result is a market dominated by Washington.

The 2010 changes did not happen simply because President Obama and legislators like Rep. George Miller and Sen. Tom Harkin distrust profit-making enterprises. The student-loan takeover also advanced the mirage that ObamaCare would save money.

Thanks to only-in-Washington accounting, making the Department of Education the principal banker to America's college students created a "savings" of $68 billion over 11 years, certified by the Congressional Budget Office. Even CBO Director Douglas Elmendorf admitted that this estimate was bogus because CBO was forced to use federal rules that ignored the true cost of defaults. But Mr. Miller had earlier laid the groundwork for this fraud by killing amendments in the House that would have required honest accounting and an audit.

Armed in 2010 with their CBO-certified "savings," Democrats decided they could finance a portion of ObamaCare, as well as an expansion of Pell grants. But as Bernie Madoff could have told them, frauds break down when enough people show up asking for their money. That's happening already, judging by recent action in the Senate Appropriations Committee, where lawmakers apparently realize that the federal takeover isn't going to deliver the promised riches.

To preserve Team Obama's priority of maintaining a maximum Pell grant of $5,550 per year and doubling the total annual funding to $36 billion since President Obama took office, Democrats recently decided to make student-loan borrowers pay interest on their loans for their first six months out of college. Washington used to give the youngsters an interest-free grace period. Taxpayers might cheer this change if the money wasn't simply being transferred to another form of education subsidy. But it seems almost certain to raise default rates as it puts recent grads under increased financial pressure.

None of these programs has anything to do with making it easier to afford college. Universities have been efficient in pocketing the subsidies by increasing tuition after every expansion of federal support. That's why education is a rare industry where prices have risen even faster than health-care costs.

This is also the rare market where the recent trend of de-leveraging doesn't apply. An August report from the Federal Reserve Bank of New York found that Americans cut their household debt from a peak of $12.5 trillion in the third quarter of 2008 to a recent $11.4 trillion. Consumers have reduced their debt on houses, cars, credit cards and nearly everything except student loans, where debt has increased 25% in the three years.

Perhaps this is because most federal student loans are made without regard to income, assets or credit history. Much like the federal obsession to finance a home for every American regardless of ability to pay, the obsession to finance higher education for every high school student ignores inconvenient facts. These include the certainty that some of these kids will take jobs that don't require college degrees and may not support timely repayment.

For this school year, even the loans that pay on time aren't necessarily winners for the taxpayer. That's because of a 2007 law that Mr. Miller and Nancy Pelosi pushed through Congress—and George W. Bush signed—that cut interest rates on many federally backed student loans. Stafford loans, the most common type, have been available since July at a fixed rate of 3.4%, barely above the historically low rates at which the Treasury is currently borrowing for the long term. The student loan rates are scheduled to rise back to 6.8% next year. But if our spendthrift government ends up borrowing money above 7% and lending it to kids at 6.8%, taxpayers will suffer even before the youngsters go delinquent.

Efforts to clean up this debacle are stirring on Capitol Hill, with House Republicans moving to limit Pell grants to students who have a high school diploma or GED. Oklahoma Sen. Tom Coburn would go further and have government leave the business of subsidizing the education industry via student loans and let private lenders finance college. That may be too radical at the moment, but it won't be if taxpayers ever figure out how much subsidized loans will cost them

The fact is, some schools represent terrific investments. At Caltech, financial aid recipients can expect to spend $91,250 for a degree that over 30 years will allow them to repay that investment and out-earn a high school graduate by more than $2 million. But schools like Caltech are the exception that proves the rule: most students would be better off investing their college nest eggs in the S&P 500 rather than a college education. So if you are going to choose college, it pays to choose wisely.
Louis Lavelle, Business Schools Editor Bloomberg Business Week, April 14, 2011

"The New Math: College Return on Investment," Bloomberg Business Week Special Report, April 2011 ---

The Case Against College Education ---

From The Wall Street Journal on October 7, 2011

U.S.-Chinese Progress on Accounting Is Dealt Setback
by: Michael Rapoport
Oct 04, 2011
Click here to view the full article on

TOPICS: Auditing, Fraud, Fraudulent Financial Reporting, International Auditing, PCAOB

SUMMARY: The Public Company Accounting Oversight Board (PCAOB) had previously announced that negotiations to allow U.S. auditing inspectors into Chinese accounting firms-those which audit U.S.-traded companies-would continue with a meeting in Washington this month. The talks began in Beijing in July and were to have continued with visitors from China's regulatory agencies coming to Washington. "No reason was given for the delay, [but it]...comes only a few weeks after the Securities and Exchange Commission's move to bypass Chinese regulators and take action directly against the Chinese arm of accounting giant Deloitte Touche Tohmatsu...." Chinese regulators have cited concerns over maintaining sovereignty as a reason for not allowing the U.S. regulators in for inspections. The article follows PCAOB issuance of a Staff Audit Practice Alert No. 8, Audit Risks in Certain Emerging Markets, on Monday, October 3, 2011. The link to this audit alert is given below and also in the questions.

CLASSROOM APPLICATION: The article is useful in auditing classes to cover the role of the PCAOB, international issues, and/or fraud concerns in financial statement audits.

1. (Introductory) What is the role of the Public Company Accounting Oversight Board (PCAOB) in the U.S.? When was this organization established?

2. (Introductory) How does the PCAOB execute oversight responsibilities over the auditing profession in the U.S?

3. (Introductory) Why does the PCAOB visit auditing firms in other countries? What limitations does the PCAOB face in doing so in China?

4. (Advanced) Access the PCAOB Staff Audit Practice Alert issued Monday, October 3, 2011 ( What is the purpose of an audit alert in general and of this audit alert in particular?

5. (Advanced) What circumstances has the PCAOB observed that indicate risks of fraud in an audit? From what U.S. regulatory filings has the PCAOB observed these circumstances?

6. (Introductory) What is the auditor's responsibility for detecting fraud in an engagement to audit financial statements? How does this information in this practice alert help auditors to fulfill that responsibility?

Reviewed By: Judy Beckman, University of Rhode Island

Norway and U.S. Strike Deal on Accounting Oversight
by Michael Rapoport
Sep 14, 2011
Online Exclusive

"U.S.-Chinese Progress on Accounting Is Dealt Setback," by: Michael Rapoport, The Wall Street Journal, October 4, 2011 ---

U.S.-Chinese negotiations to allow American audit-firm inspectors into China suffered a setback Monday, as U.S. regulators indicated that a planned visit to Washington by their Chinese counterparts to continue the talks has been postponed.

Regulators previously said the Chinese were slated to visit Washington this month for a second round of the talks, which began in Beijing in July. The two countries are negotiating on whether to allow inspectors from the Public Company Accounting Oversight Board, the U.S.'s auditing regulator, into China to scrutinize the work of Chinese accounting firms which audit U.S.-traded companies.

But dates for the meeting "are not set," a spokeswoman for the accounting board said Monday. No new meeting date was disclosed. "We remain hopeful that we will be able to meet with the Chinese regulators in the near future," the spokeswoman said.

No reason was given for the delay, and officials from the China Securities Regulatory Commission, one of the agencies that was to have participated in the talks this month, couldn't be immediately reached for comment.

The delay comes only a few weeks after the Securities and Exchange Commission's move to bypass Chinese regulators and take action directly against the Chinese arm of accounting giant Deloitte Touche Tohmatsu to seek documents related to a former Deloitte client the SEC is investigating.

Joseph Carcello, a University of Tennessee professor who serves on two advisory panels for the accounting watchdog, said he didn't know whether the delay was China's way of retaliating for the Deloitte matter. But he said "there has been great hesitation on the part of the Chinese to allow the PCAOB to do inspections. I think this is further indication a resolution of this issue is not close."

Jacob Frenkel, a former SEC enforcement attorney now in private practice, said that because the SEC had "thrown down the gauntlet" against Deloitte, the Chinese may have decided it's better for them not to meet in the U.S. right now. From their perspective, "this is not a time when they want to be meeting and negotiating," he said.

An SEC spokesman declined to comment.

The accounting board's chairman, James Doty, has made it a priority to negotiate a China-inspection agreement, saying it is critical to protection of U.S. investors. Inspectors for the watchdog conduct regular evaluations of accounting firms that audit companies listed on U.S. markets, even if the firms and their clients are based overseas, but Chinese authorities haven't allowed U.S. inspectors into China, citing sovereignty concerns.

Continued in article

"CONSISTENCY IN ACCOUNTING AND LEGAL DISCOURSES: THE OVERTIME CASES," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, October 10. 2011 ---

For several years battles have raged in several courtrooms concerning whether accounting firms have a legal obligation to pay junior accountants overtime.  We are sympathetic to the position of the accounting firms, but worry about the soundness of their legal reasoning and conclusions.  Do accounting firms have to be consistent in different domains?  For example, does the logic in legal briefs and oral arguments have to be congruent with ethical principles and auditing standards?

There are a number of accounting overtime cases, including Campbell and Sobek v. PwC (California) and Litchfield v. KPMG (Washington).  Essentially the facts in these cases are the same.  Plaintiffs are unlicensed employees of a Big Four firm in the attestation unit or division who serve as associates or senior associates.  They worked long hours but were not paid overtime; the plaintiffs seek damages in the amount of the unpaid overtime work.

On September 20, in Ho v. Ernst & Young, the court partially certified a class of junior tax accountants at E&Y in California.  These overtime cases now include other areas of accounting besides attestation.

Details of these cases can be found at: Orey’s BusinessWeek articleWage Wars,” Francine McKenna’s “PwC Hit with Overtime Lawsuit Wave” and “Auditors Want Overtime: California Lawsuit Against PwC Could Change Model,” Caleb Newquist’s “Plaintiffs File Brief in Overtime Lawsuits Against PricewaterhouseCoopers,” and Kim Lacata’s “Another Accounting Firm Hit With Overtime Suit.”  Similar suits were filed in Canada as well, where three of the four large accounting firms settled.

We are sympathetic to the position of the large accounting firms because these firms generally have been open and honest with potential recruits.  While they do promise busy periods involving long hours with no overtime pay, they historically have held out the prospect of other rewards (e.g., bonuses, extra vacation time, etc.).  If these cases pivoted about contracts, they would be a slam dunk in favor of the large accounting firms.  Recruits cannot claim they did not know what awaited them.

Further, if the plaintiffs prevail, it is easy to conclude that the Big Four will most likely change the pay model in the future.  The base compensation will be significantly reduced so that the base pay plus estimated overtime will equal the current levels.  If the plaintiffs prevail, they and their attorneys will be the only ones to benefit.

Be that as it may, we have read some of the legal filings and are disturbed by the defense counsel arguments.  Federal and state labor laws require overtime pay, but allow for various exemptionsOne exemption is for “professionals,” but unlicensed accountants may not be viewed as “professional.”  Only licensed CPAs can perform audits, so the license appears to be a demarcation whether this exemption can be applied.

Defense attorneys in many of these cases utilize the administrative exemption, which essentially states the firm does not have to pay overtime if the employees have duties and responsibilities that require them to exercise discretion and independent judgment.  This is a peculiar thing to argue for a junior accountant working on an attest function, because he or she does not have the authority to issue an audit opinion.  How much discretion and judgment can these individuals exercise without simultaneously having the authority to form and write audit opinions?

Continued in article

Bob Jensen's threads on miscellaneous litigation in the large accounting firms ---

"Dismissed' partner accuses Ernst & Young of corruption:  Accountant Ernst & Young is facing an allegation of corruption at one of its global headquarters as part of a whistleblowing case brought by one of its ex-managing partners," by Jonathan Russell, The Telegraph, December 4, 2011 ---

The allegation is made in a High Court case brought against the Big Four accountant by former employee Cathal Lyons. The ex-E&Y partner claims he was dismissed from the company and had hundreds of thousands of pounds worth of medical cover withdrawn after he reported the alleged corruption to the practice’s director of global tax.

Mr Lyons’ claim in the High Court relates to his employment by E&Y’s Russian practice.

In 2006 he suffered a serious road accident resulting in permanent disabilities and partial amputation. Despite suffering serious medical complications Mr Lyons continued to work for Ernst & Young, albeit in a reduced capacity, until he claims he was dismissed in 2010.

Following his dismissal, the medical insurance cover provided by Ernst & Young was withdrawn. Mr Lyons claims this was in direct breach of an agreement he had reached with E&Y that he would be covered by the medical insurance for life.

His dismissal and the subsequent removal of his medical insurance were a direct result of him reporting his concerns about corruption, he claims.

Continued in article

Bob Jensen's threads on Ernst & Young are at

"Police Tactic: Keeping Crime Reports Off the Books," by Al Baker and Joseph Goldstein, The New York Times, December 30, 2011 ---

Jill Korber walked into a drab police station in Queens in July to report that a passing bicyclist had groped her two days in a row. She left in tears, frustrated, she said, by the response of the first officer she encountered.

“He told me it would be a waste of time, because I didn’t know who the guy was or where he worked or anything,” said Ms. Korber, 34, a schoolteacher. “His words to me were, ‘These things happen.’ He said those words.”

Crime victims in New York sometimes struggle to persuade the police to write down what happened on an official report. The reasons are varied. Police officers are often busy, and few relish paperwork. But in interviews, more than half a dozen police officers, detectives and commanders also cited departmental pressure to keep crime statistics low.

While it is difficult to say how often crime complaints are not officially recorded, the Police Department is conscious of the potential problem, trying to ferret out unreported crimes through audits of emergency calls and of any resulting paperwork.

As concerns grew about the integrity of the data, the police commissioner, Raymond W. Kelly, appointed a panel of former federal prosecutors in January to study the crime-reporting system. The move was unusual for Mr. Kelly, who is normally reluctant to invite outside scrutiny.

The panel, which has not yet released its findings, was expected to focus on the downgrading of crimes, in which officers improperly classify felonies as misdemeanors.

But of nearly as much concern to people in law enforcement are crimes that officers simply failed to record, which one high-ranking police commander in Manhattan suggested was “the newest evolution in this numbers game.”

It is not unusual for detectives, who handle telephone calls from victims inquiring about the status of their cases, to learn that no paperwork exists. Detectives said it was hard to tell if those were administrative mix-ups or something deliberate. But they noted their skepticism that some complaints could simply vanish in the digital age.

Detective Louis A. Molina, president of the National Latino Officers Association, said that for some officers, the desire of supervisors to keep recorded crime levels low was “going to be on your mind,” and that it “can play a role in your decision making.”

“For police officers,” he added, “it’s gotten to the point of what’s the most diplomatic way to discourage a crime report from being taken.”

Some public officials have said they have received more complaints from constituents that their reports of crime were not being recorded. State Assemblyman Hakeem Jeffries of Brooklyn said his office had to contact “local precincts directly to make sure that criminal complaints were filed and processed appropriately.”

In the case of Ms. Korber, the police did eventually take a report of her being groped, but only after her city councilman, Peter F. Vallone Jr., intervened, she and Mr. Vallone said. In fact, Mr. Vallone said that he had grown so alarmed over how many women were being groped in his district that he contacted the 114th Precinct; his staff then asked Ms. Korber to go there again.

Paul J. Browne, the Police Department’s chief spokesman, said each precinct must audit police responses to radio dispatches four times a month “to assure that crime complaints are taken when necessary and prepared accurately.”

Continued in article


If audit reform swaggered into a Luckenbach, Texas saloon, it would be "all hat and no horse"
The ladies of the night would die laughing at that "itty-bitty thang" that walked in
And it would need a ladder to peek over the top of the spittoon

"Recent Comments On European and U.S. Audit Reform," by Francine McKenna, re:TheAuditors, October 4, 2011 ---

The topic of audit industry reform is hot again. OK, that’s relative to where you stand on what’s hot. But in the world of legal and regulatory compliance and auditors the only thing hotter would be a significant development in the New York Attorney General’s case against Ernst & Young.

Here in the U.S. the PCAOB has been busy.  I’ll give them – mostly Chairman James Doty and the Investor Advisory Group led by Board Member Steve Harris – credit for that.  The Investor Advisory Group – rather, the boldest amongst them – recently sent a letter to the PCAOB to provide comments on the PCAOB’s June 21, 2011 Concept Release entitled Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements and Related Amendments to PCAOB Standards.

It is worth noting that a number of other parties agree that the current form of the auditor’s report fails to meet the legitimate needs of investors.  First, the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP) called for the PCAOB to undertake a standard-setting initiative to consider improvements to the standard audit report.  The ACAP members support “… improving the content of the auditor’s report beyond the current pass/fail model to include a more relevant discussion about the audit of the financial statements.”

Second, surveys conducted by the CFA Institute in 2008 and 2010 indicate that research analysts want auditors to communicate more information in their reports.

Finally, even leaders of the accounting profession have acknowledged that the audit report needs to become more relevant.  In testimony before ACAP, Dennis Nally, Chairman of PwC International stated, “It’s not difficult to imagine a world where the … trend to fair value measurement — lead one to consider whether it is necessary to change the content of the auditor’s report to be more relevant to the capital markets and its various stakeholders.”

Finally, leaders of the accounting profession have previously stated that changes to the audit report should reflect investor preferences.  In their 2006 White Paper, the CEOs of the six largest accounting firms stated, “The new (reporting) model should be driven by the wants of investors and other users of company information …” (their emphasis).

Before we turn to a discussion of the IAG investor survey, we believe it is important to underscore the fundamental but often overlooked fact that the issuer’s investors, not its audit committee or management team or the company itself, are the auditor’s client. It is therefore not only appropriate, but essential, that investors’ views and preferences take center stage as the PCAOB considers possible changes to the format and content of the audit report.

In the meantime, I’ve written two articles about the proposals on auditor regulation before the European Commission.

In Forbes, I told you not to count on Europe to reform the audit model or auditors, in general.

The audit industry is reportedly under siege in Europe and on the verge of being broken up, restrained, and rotated until all the good profit is spun out.

This is neither a foregone conclusion nor highly likely.

The European Commission’s internal markets commissioner Michel Barnier is talking tough, but the rhetoric should be no surprise to those who have been following the European response to the financial crisis closely…

Please read the rest at, “Don’t Count On Europe To Reform Auditors And Accounting”.

In American Banker, I focused on the impact of auditor reforms on financial services.  Why is the European Commission taking such strong action now? Why is the U.S. lagging so far behind?

The clamor for accountability from the auditors for financial crisis failures and losses has been much louder, much stronger, and going on much longer in the U.K. and Europe, than in the United States. Barnier’s most dramatic proposals are viewed by most commenters as a reaction to the bank failures. “Auditors play an essential role in financial markets: financial actors need to be able to trust their statements,” Barnier told the Financial Times. “There are weaknesses in the way the audit sector works today. The crisis highlighted them.”

There’s is a concern on both sides of the Atlantic over long-standing auditor relationships.

The average auditor tenure for the largest 100 U.S. companies by market cap is 28 years. The U.S. accounting regulator, the PCAOB, highlighted the auditor tenure trap in its recent Concept Release on Auditor Independence and Auditor Rotation. According to The Independent, quoting a recent House of Lords report, only one of the FTSE 100 index’s members uses a non-Big Four firm and the average relationship lasts 48 years. Some of the U.S. bailout recipients — General Motors, AIG, Goldman Sachs, Citigroup — and crisis failure Lehman had as long or longer relationships with their auditors…

Please read the rest at American Banker, “Bank Debacles Drive Europe to Raise the Bar on Audits”.

Continued in article

Bob Jensen's threads on auditor professionalism and independence are at

Trust No one, Particularly Not Groupon's Accountants and Auditors (Ernst & Young)

From The Wall Street Journal Weekly Accounting Review on September 30, 2011

Groupon Unsure on IPO Time
by: Shayndi Raice and Randall Smith
Sep 26, 2011
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Accounting Changes and Error Corrections, Audit Report, Auditing, Disclosure, Disclosure Requirements, Financial Accounting, Financial Reporting, SEC, Securities and Exchange Commission

SUMMARY: This article presents financial reporting and auditing issues stemming from the Groupon planned IPO. Groupon originally filed for an initial public offering in June 2011. At the time, the filing contained a measure Adjusted Consolidated Segment Operating Income that is a non-GAAP measure of performance. The SEC at the time required the company to change its filing to use GAAP-based measures of performance. The SEC has continued to scrutinize the Groupon financial statements and has required the company to report revenue based only on the net receipts to the company from sales of its coupons after sharing proceeds with the businesses for which it makes the coupon offers.

CLASSROOM APPLICATION: The article is useful in financial accounting and auditing classes. Instructors of financial accounting classes may use the article to discuss reporting of the change in measuring revenues and related costs. Instructors of auditing classes may use the article to discuss non-standard audit reports. Links to SEC filings are included in the questions. The video is long; discussion of Groupon's issues stops at 5:30.

1. (Introductory) According to the article, what accounting and disclosure issues have delayed the initial public offering of shares of Groupon, Inc.? What overall economic and financial factors are also affecting this timing?

2. (Introductory) What was the problem with Groupon CEO Andrew Mason's letter to Groupon employees? Do you think Mr. Mason intended for this letter to be made public outside of Groupon? Should he have reasonably expected that to happen?

3. (Advanced) What accounting change forced restatement of the financial statements included in the Groupon IPO filing documents? You may access information about this restatement directly at the live link included in the online version of the article.

4. (Introductory) According to the article, by how much was revenue reduced due to this accounting change?

5. (Introductory) Access the full filing of the IPO documents on the SEC's web site at Proceed to the Consolidated Statements of Operations on page F-5. How are these comparative statements presented to alert readers about the revenue measurement issue?

6. (Advanced) Move back to examine the consolidated balance sheets on page F-4. Do you think this accounting change for revenue measurement affected net income as previously reported? Support your answer.

7. (Advanced) Proceed to footnote 2 on p. F-8. Does the disclosure confirm your answer? Summarize the overall impact of these accounting changes as described in this footnote.

8. (Advanced) What type of audit report has been issued on the Groupon financial statements in this IPO filing? Explain the wording and dating of the report that is required to fulfill requirements resulting from the circumstances of these financial statements.

Reviewed By: Judy Beckman, University of Rhode Island


Groupon's Fast-growing Business Faces a Churning Point
by: Rolfe Winkler
Sep 26, 2011
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Cost Accounting, Cost Management, Disclosure, Financial Statement Analysis, Managerial Accounting

SUMMARY: This article focuses on financial statement analysis of the Groupon IPO filing documents including some references to cost measures. "Forget the snappy 'adjusted consolidated segment operating income.' That profit measure...was rightly rejected by regulators. It is the complete absence of details on subscriber churn that is more problematic. How often are folks unsubscribing from Groupon's daily emails?...The issue is important since...the cost of adding new subscribers has increased quickly."

CLASSROOM APPLICATION: The article may be used in a financial statement analysis or managerial accounting class.

1. (Introductory) What is the overall concern about Groupon's business condition that is expressed in this article?

2. (Advanced) The author states that the cost of adding new subscribers has increased. How was this cost determined? How does this calculation make the cost assessment comparable from one period to the next?

3. (Advanced) What does Groupon CEO Andrew Mason say about the company's cost of acquiring customers? What income statement expense item shows this cost? How does the increasing unit cost discussed in answer to question 2 above bring the CEO's assertion into question?

4. (Advanced) In general, how does the author of this assess the quality of the filing by Groupon for its initial public offering? Why should that assessment impact the thoughts of an investor considering buying the Groupon stock when it is offered?

Reviewed By: Judy Beckman, University of Rhode Island


"Groupon: Comedy or Drama?"  by Grumpy Old Accountants  Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros, July 2011 --- 

"Trust No one, Particularly Not Groupon's Accountants," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, August 24, 2011 --- 

"Is Groupon "Cooking Its Books?"  by Grumpy Old Accountants  Anthony H. Catanach Jr. and J. Edward Ketz, SmartPros, September  2011 --- 


Teaching Case
When Rosie Scenario waved goodbye "Adjusted Consolidated Segment Operating Income"

From The Wall Street Journal Weekly Accounting Review on August 19, 2011

Groupon Bows to Pressure
by: Shayndi Raice and Lynn Cowan
Aug 11, 2011
Click here to view the full article on

TOPICS: Advanced Financial Accounting, SEC, Securities and Exchange Commission, Segment Analysis

SUMMARY: In filing its prospectus for its initial public offering (IPO), Groupon has removed from its documents " unconventional accounting measurement that had attracted scrutiny from securities regulators [adjusted consolidated segment operating income]. The unusual measure, which the e-commerce had invented, paints a more robust picture of its performance. Removal of the measure was in response to pressure from the Securities and Exchange Commission...."

CLASSROOM APPLICATION: The article is useful to introduce segment reporting and the weaknesses of the required management reporting approach.

1. (Introductory) What is Groupon's business model? How does it generate revenues? What are its costs? Hint, to answer this question you may access the Groupon, Inc. Form S-1 Registration Statement filed on June 2, 011 available on the SEC web site at

2. (Advanced) Summarize the reporting that must be provided for any business's operating segments. In your answer, provide a reference to authoritative accounting literature.

3. (Advanced) Why must the amounts disclosed by operating segments be reconciled to consolidated totals shown on the primary financial statements for an entire company?

4. (Advanced) Access the Groupon, Inc. Form S-1 Registration Statement filed on June 2, 011 and proceed to the company's financial statements, available on the SEC web site at Alternatively, proceed from the registration statement, then click on Table of Contents, then Selected Consolidated Financial and Other Data. Explain what Groupon calls "adjusted consolidated segment operating income" (ACSOI). What operating segments does Groupon, Inc., show?

5. (Introductory) Why is Groupon's "ACSOI" considered to be a "non-GAAP financial measure"?

6. (Advanced) How is it possible that this measure of operating performance could be considered to comply with U.S. GAAP requirements? Base your answer on your understanding of the need to reconcile amounts disclosed by operating segments to the company's consolidated totals. If it is accessible to you, the second related article in CFO Journal may help answer this question.

Reviewed By: Judy Beckman, University of Rhode Island

Groupon's Accounting Lingo Gets Scrutiny
by Shayndi Raice and Nick Wingfield
Jul 28, 2011
Page: A1

CFO Report: Operating Segments Remain Accounting Gray Area
by Emily Chasan
Aug 15, 2011
Page: CFO


"Groupon Bows to Pressure," by: Shayndi Raice and Lynn Cowan, The Wall Street Journal, August 11, 2011 ---

Groupon Inc. removed from its initial public offering documents an unconventional accounting measurement that had attracted scrutiny from securities regulators.

The unusual measure, which the e-commerce had invented, paints a more robust picture of its performance. Removal of the measure was in response to pressure from the Securities and Exchange Commission, a person familiar with the matter said.

In revised documents filed Wednesday with the SEC, the company removed the controversial measure, which had been highlighted in the first three pages of its previous filing. But Groupon's chief executive defended the term Wednesday. [GROUPON] Getty Images

Groupon, headquarters above, expects to raise about $750 million.

Groupon had highlighted something it called "adjusted consolidated segment operating income", or ACSOI. The measurement, which doesn't include subscriber-acquisitions expenses such as marketing costs, doesn't conform to generally accepted accounting principles.

Investors and analysts have said ACSOI draws attention away from Groupon's marketing spending, which is causing big net losses.

The company also disclosed Wednesday that its loss more than doubled in the second quarter from a year ago, even as revenue increased more than ten times.

By leaving ACSOI out of its income statements, the company hopes to avoid further scrutiny from the SEC, the person familiar with the matter said. The commission declined comment.

Groupon in June reported ACSOI of $60.6 million for last year and $81.6 million for the first quarter of 2011. Under generally accepted accounting principles, the company generated operating losses of $420.3 million and $117.1 million during those periods.

Wednesday's filing included a letter from Groupon Chief Executive Andrew Mason defending ACSOI. The company excludes marketing expenses related to subscriber acquisition because "they are an up-front investment to acquire new subscribers that we expect to end when this period of rapid expansion in our subscriber base concludes and we determine that the returns on such investment are no longer attractive," the letter said.

There was no mention of when that expansion will end, but the person familiar with the matter said the company reevaluates the figures weekly.

Groupon said it spent $345.1 million on online marketing initiatives to acquire subscribers in the first half and that it expects "to continue to expend significant amounts to acquire additional subscribers."

The latest SEC filing also contains new financial data. Groupon on Wednesday reported second-quarter revenue of $878 million, up 36% from the first quarter. While the company's growth is still rapid, the pace has slowed. Groupon's revenue jumped 63% in the first quarter from the fourth.

The company's second-quarter loss was $102.7 million, flat sequentially and wider than the year-earlier loss of $35.9 million.

Groupon expects to raise about $750 million in a mid-September IPO that could value the company at $20 billion.

The path to going public hasn't been easy. The company had to file an amendment to its original SEC filing after a Groupon executive told Bloomberg News the company would be "wildly profitable" just three days after its IPO filing. Speaking publicly about the financial projections of a company that has filed to go public is barred by SEC regulations. Groupon said the comments weren't intended for publication.

Continued in article

"Groupon, Zynga and Krugman's Frothy Valuations," by Jeff Carter, Townhall, September 2011 ---,_zynga_and_krugmans_frothy_valuations

Jensen Comment
In the 1990s, high tech companies resorted to various accounting gimmicks to increase the price and demand for their equity shares ---

Bob Jensen's threads about cooking the books ---

How can a company that's "technically insolvent" have any sort of IPO success?

"GROUPON IS TECHNICALLY INSOLVENT," by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants, October 21, 2011 ---

Two Update Teaching Cases on Groupon:  IPO, Working Capital, and Cash Flow

From The Wall Street Journal Weekly Accounting Review on November 11, 2011

Case 1
Exclusive Deal Floats Groupon
by: Rolfe Winkler
Nov 05, 2011
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: business combinations, Financial Analysis, Goodwill, Impairment

SUMMARY: Groupon filed its initial public offering (IPO) on Friday, November 4, 2011, selling only a total of 6.4% of the company's total shares. The IPO proceeds brought in $805 million, the third smallest total for all IPOs since 1995, only larger than the IPOs of Vonage Holdings and Orbitz in total proceeds. In terms of the percent of outstanding shares sold, only Palm has sold a smaller percentage in that same time frame. Quoting from the related article, "Silicon Valley and Wall Street took Groupon's stock market debut as a sign that investors are still willing to make risky bets on fast-growing but unprofitable young Internet companies....Groupon shares rose from their IPO price of $20 by 40% in early trading, and ended at the 4 p.m. market close at $26.11, up 31%. The closing price valued Groupon at $16.6 billion...."

CLASSROOM APPLICATION: Questions focus on measuring the implied fair value of an entire business from the value of only a portion. The concept is used in accounting for business combinations and in goodwill impairment testing.

1. (Introductory) Summarize the Groupon initial public offering (IPO). How many shares were sold? At what price?

2. (Introductory) Describe the market activity of the stock on its first day of trading. How does that activity show that "investors are...willing to make risky bets on...young Internet companies"?

3. (Advanced) How has the Groupon stock fared to the date you write your answer to this question?

4. (Advanced) Define the term "implied fair value". How did sale of only 6.3% of the shares outstanding translate into an overall firm valuation of $12.8 billion? Show your calculation.

5. (Advanced) Given the range of trading reported in the article and your answer to question 3 above, what is the range of total firm value shown during this short time of public trading of Groupon stock? Again, show your calculations. How does the small percentage of shares contribute to the size of this range?

Reviewed By: Judy Beckman, University of Rhode Island

Groupon IPO Cheers Valley
by Shayndi Raice and Randall Smith
Nov 05, 2011
Page: B3


"Exclusive Deal Floats Groupon," by: Rolfe Winkler, The Wall Street Journal, November 5, 2011 ---

Even by dot-com standards, Groupon's initial public offering is puny in terms of the number of shares it actually sold to the public. According to Dealogic, dating back to 1995 just three U.S. tech companies floated a smaller percentage of their shares in their IPOs. Palm sold 4.7% of its shares in a $1 billion offering; Portal Software sold 6.2% in a tiny $64 million offering, and Ciena sold 6.2% in a $132 million offering. Then comes Groupon, which sold 6.3% this week as part of its $805 million offering.

That is well below the median of 21% for the 50 largest technology IPOs dating back to 1995, according to Dealogic.

Groupon's limited float strategy isn't new. Two of this year's other big Internet IPOs, LinkedIn and Pandora Media also sold a limited number of shares, just 9.4% of the total outstanding for both companies. Those deals were also led by Morgan Stanley.

Considering doubts about Groupon's business model, in order to ensure a strong first day's trading, the underwriters not only limited the free-float, but they also scaled back their original valuation target.

At Friday's close of trading, Groupon shares were at $26.11 apiece, 31% above the IPO price. That puts Groupon's market capitalization at about $17 billion, or roughly eight times next year's likely revenue. That is steep, considering that the daily-deals Internet company is still unprofitable and that growth appears to be slowing quickly.


Case 2
Groupon Holds Cash Tight
by: Sarah E. Needleman and Shayndi Raice
Nov 10, 2011
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Cash Flow, Cash Management, Financial Statement Analysis

SUMMARY: Groupon finally completed its IPO on Friday, November 4, 2011, and interest in the company is therefore naturally high. Competitors to Groupon attempt to obtain market share from the newly public company by offering quicker payment terms to the small business which provide the merchant benefits offered by Groupon. Small businesses need their working capital as fast as possible and therefore some complain about the Groupon terms. Groupon argues that its terms are designed to ensure that merchant suppliers cannot use Groupon for a quick infusion of cash just prior to closing operations.

CLASSROOM APPLICATION: Questions ask students to analyze Groupon's financial statements-particularly its working capital components-to assess the issues with the company's payment terms.

1. (Introductory) What are Groupon's payment terms? How do those terms help Groupon's customers, the buyers of its electronic coupons?

2. (Introductory) How do Groupon's payment terms help Groupon's own financial position and operating results? In your answer, define the financial concepts of cash flow and working capital mentioned in the article.

3. (Advanced) Groupon issued its initial public offering of stock (IPO) on Friday, November 4, 2011. Access the S-1 registration statement filed with the SEC for this offering on June 2, 2011. It is available on the SEC web site at Click on the link to the Table of Contents, then on Index to Consolidated Financial Statements, then on Consolidated Balance Sheets. As of December 31, 2010, how much working capital did the company have? Did this amount improve through the quarter ended March 31, 2011?

4. (Advanced) Given your measurement of Groupon's working capital, how easy do you think it would be for Groupon to address its competition by changing its payment terms? Support your answer.

5. (Advanced) Continue working with the Groupon audited consolidated financial statements as of December 31, 2010 and the unaudited quarterly statements. What items comprise Groupon's Accounts Receivable? How collectible are these amounts?

6. (Advanced) What items comprise Groupon's Accounts Payable, accrued Merchants Payable, and Accrued Expenses? Given your knowledge of Groupon's payment terms, can you identify how soon each of these payments must be made?

7. (Advanced) Consider how you would schedule a detailed estimate of the timing of Groupon's cash flows for the three current liabilities discussed above.

Reviewed By: Judy Beckman, University of Rhode Island

"Groupon Holds Cash Tight by: Sarah E. Needleman and Shayndi Raice, The Wall Street Journal, November 10, 2011 ---

Rivals of Groupon Inc. are threatening the daily deal site leader by offering quicker payment to merchants, possibly jeopardizing a key part of Groupon's business model.

Groupon keeps itself in cash by collecting money immediately when it sells its daily coupons to consumers while extending payments to the merchants over 60 days. For instance, a hair salon might run a deal offering $100 of services for just $50 on Groupon's website, which then keeps as much as half of the total collected and sends the remainder to the salon in three installments about 25 to 30 days apart.

"The payment timing is so erratic you can't count on any of that money helping to pay your bills," says Mark Grohman, owner of Meridian Restaurant in Winston-Salem, N.C.

After running three Groupon promotions this year and last, Mr. Grohman says he won't use the service again in part because it puts too big a strain on his cash flow. "With smaller margins in restaurants, you need that capital in the bank as fast as possible," he says.

Heissam Jebailey, co-owner of two Menchie's frozen-yogurt franchises in Winter Park, Fla., says he also has begun to view Groupon's installment payments as too slow.


"You want to get paid in full as quickly as possible," says Mr. Jebailey, who has run deals with both Groupon and its rival LivingSocial Inc. offering customers $10 of frozen yogurt for $5. He says both promotions were successful but that he'd only use Groupon again if the service promises to pay faster. "We're the ones that have to cover the cost of goods for giving away everything at half price," he says. "I will not do another deal with Groupon unless they agree to my terms."

Groupon executives have no plans to change payments terms, said a person familiar with the matter. Because Groupon has a backlog of 49,000 merchants in line to offer a deal with the site, executives feel confident that they don't need to make any changes to payment terms, said another person.

While Groupon pays merchants in installments of 33% over a period of 60 days, LivingSocial and Inc.'s Amazon Local pay merchants their full share in 15 days. Google Inc.'s Google Offers promises 80% of the merchant's cut within four days, and the remainder over 90 days.

Groupon pays in installments for a reason, according to a person familiar with the matter: It has seen some merchants try to use Groupon to get a quick infusion of cash before going out of business, leaving customers with vouchers that can't be redeemed.

The Chicago-based start-up has a policy of offering refunds to customers who aren't satisfied, and as a result it is cautious about doing deals with merchants who may not carry through on their end, says the person familiar with the matter.

Groupon also says it pays merchants before they provide services to customers and will accelerate payments if merchants experience unusually fast consumer redemption.

"We believe Groupon's payment terms are fair to merchants and important to protect consumers," says Julie Mossler, director of communications for Groupon.

It also is in Groupon's best interest to stretch out payments to its customers for as long as possible, says John Hanson, a certified public accountant and executive director at Artifice Forensic Financial Services LLC in Washington, D.C. "It makes their cash position look stronger on their books."

Steady cash flow has helped fuel the valuation of Groupon, which first sold shares to the public last week. Groupon's stock was down nearly 4% Wednesday, bringing its share price of $23.98 closer to the company's IPO price of $20 a share. Based on the 5.5% of shares that trade, the company has a valuation of about $15 billion. But its working-capital deficit has ballooned to $301.1 million as of Sept. 30, and the amount it owes its merchants is also way up.

Groupon's "accrued merchant payable" balance increased to $465.6 million as of Sept. 30, from $4.3 million at year-end 2009, its filings say. This merchant payable balance exceeded Groupon's cash and contributed to the company's working capital deficit, according to the company's filing.

Offering merchants faster payment terms could hurt its cash flow and force it to raise funds to cover its day-to-day cash needs, Groupon said in a recent securities filing. In international markets, the company pays merchants only once a coupon has been redeemed.

Every one-day reduction in Groupon's merchant payables represents a risk of about $14 million in free cash flow, according to estimates by Herman Leung, a Susquehanna analyst. "It's a key driver of cash flow dollars and a key assumption in the Groupon model," he says of the 60-day payment period. "It's highly sensitive."

To be sure, Groupon has faced waves of competition for more than a year, and many of those challengers already have come and gone.

Continued in article

Teaching cases on the accounting scandals at Groupon (especially overstatement of revenues) and its auditor (Ernst & Young) ---



Other Links
Main Document on the accounting, finance, and business scandals --- 

Bob Jensen's Enron Quiz ---

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

Bob Jensen's threads on pro forma frauds are at 

Bob Jensen's threads on ethics and accounting education are at

The Saga of Auditor Professionalism and Independence ---

Incompetent and Corrupt Audits are Routine ---

Bob Jensen's threads on accounting theory are at 

Future of Auditing --- 




The Consumer Fraud Portion of this Document Was Moved to 





Bob Jensen's home page is at