Accounting Scandal Updates and Other Fraud Between January 1 and March 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

Many of the scandals are documented at 

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

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

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

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

I love Infectious Greed by Frank Partnoy --- 

Bob Jensen's American History of Fraud ---

Future of Auditing --- 

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

What Accountants Need to Know ---

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

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

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

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at

Bob Jensen's threads on fraud are at

From CNN:  Clark Howard's Informative Advice About Shopping, Financial Planning, and Warnings About Scams ---

Bob Jensen's warnings about scams ---

Bob Jensen's shopping helpers ---

Accounting Scandals
The funny thing is that I never looked up this item before now. Jim Mahar noted that it is a good link.

Accounting Scandals ---

Bob Jensen's threads on accounting scandals are in various documents:

Accounting Firms ---

Fraud Conclusion ---

Enron ---

Rotten to the Core ---

Fraud Updates ---

American History of Fraud ---

Fraud in General ---


"Former Vice President of Iona College Pleads Guilty to Embezzling $850,000," Chronicle of Higher Education, March 9, 2011 --- Click here

Marie E. Thornton, a former vice president for finance at Iona College, pleaded guilty on Wednesday to embezzling more than $850,000 from Iona, a Roman Catholic institution in New York state, the U.S. attorney’s office in Manhattan said in a news release. At a sentencing hearing scheduled for May 13, Ms. Thornton could face up to 10 years in prison and a fine of $250,000, or twice the gross gain or loss from the offense.

Bob Jensen's Fraud Updates ---

"Tax Havens Devastating To National Sovereignty," Southwerk, January 13, 2011 ---
Thank you Nadine Sabai for the heads up.

The blog post is a review of the book, Nicholas Shaxson’s  - Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens 

Tax havens are the ultimate source of strength for our global elites. Just as European nobles once consolidated their unaccountable powers in fortified castles, to better subjugate and extract tribute from the surrounding peasantry, so financial capital has coalesced in their modern equivalent today: the tax havens. In these fortified nodes of secret, unaccountable political and economic power, financial and criminal interests have come together to capture local political systems and turn the havens into their own private law-making factories, protected against outside interference by the world’s most powerful countries – most especially Britain. Treasure Islands will, for the first time, show the blood and guts of just how they do it.

The nations of the world are harmed by the evasion of their laws and taxes made possible by tax havens. The tax money is important but more important is the ability to threaten governments to force actions that multinational corporations such as investment banks wish done.

These escape routes transform the merely powerful into the untouchable. “Don’t tax or regulate us or we will flee offshore!” the financiers cry, and elected politicians around the world crawl on their bellies and capitulate. And so tax havens lead a global race to the bottom to offer deeper secrecy, ever laxer financial regulations, and ever more sophisticated tax loopholes. They have become the silent battering rams of financial deregulation, forcing countries to remove financial regulations, to cut taxes and restraints on the wealthy, and to shift all the risks, costs and taxes onto the backs of the rest of us. In the process democracy unravels and the offshore system pushes ever further onshore. The world’s two most important tax havens today are United States and Britain.

But the world is not without means to remedy the situation. In the late 1700′s piracy flourished because nations found it advantageous to use them against their enemies. Pirates often employed as privateers fattened the treasury of the nations hiring them and did harm to their enemies.

But over time, it became obvious that the benefits of piracy were outweighed by the faults.

So, nations by treaty and policy ran the pirates out of business.

The United States in concert with the European Union, China and other nations could by agreement make this kind of tax haven impossible to maintain or at the very least difficult.

It has been a daunting task to motivate the government of the United States to act against the interests of these larger corporations particularly the financial ones, but the future of this nation may well depend on those tax dollars and enforcing the national interest.

James Pilant

I wish to thank homophilosophicus for calling my attention to Thriven’s Blog.


"Which of These Banks Was 2010's Most Shameless Corporate Outlaw?" by Richard Escow, Huffington Post, December 30, 2010 ---

Their collective rap sheet includes fraud, sex discrimination, collusion to bribe public officials... even laundering drug money for Mexican drug cartels. One of them is accused of ripping off some nuns! None of this criminal behavior has stopped them from sulking over a presidential slight. Let's review the record for these corporate malefactors, and then decide:

The Greatest Swindle in the History of the World ---

How Does This Work?

Microsoft's Bing, like many other companies online, offers affiliate marketers a percentage commission for revenues they drive to the company.

When Zugo gets users to use Bing, those users will click on some number of search ads. Bing will charge advertisers for those clicks, then give Zugo a percentage of that revenue.


"Facebook's 3rd Biggest Advertiser is (Allegedly) a Bing Affiliate Scam (With Updates)," ReadWriteWeb, January 18, 2011 ---

Matt Cutts is the head of Google's anti-webspam team and tonight he came across what looks like a huge trove of scammy, spammy spam - on Facebook. And it involves Microsoft. Advertising publication AdAge reported tonight on findings from advertising analysts that Facebook sold an estimated $1.86 billion in worldwide advertising for 2010, an amazing sum. Who's spending all that money on Facebook ads? A long, long tail of self-serve advertisers for sure - but near the head of the tail is someone that should have raised a whole lot of red flags.

At the end of the AdAge article is a passing mention that the 3rd largest advertiser across all of Facebook, after AT&T and, is a mysterious company listed as That site bought an estimated 1.75 million billion ad impressions in the third quarter alone. It doesn't seem like a very nice company. Note:Statements from Facebook and Microsoft are below.

Matt Cutts did something anyone could have done. He visited - but be careful if you do the same.

Updates: AdAge's Edmund Lee confirmed by email that his use of the word million was a typo and it should have been billion. Thanks as always to our eagle eyed commenters. See also Danny Sullivan of SearchEngineLand, who used contacts at Bing to follow up on this story. It appears that Comscore is denying the report that it found Make-my-ugly-baby was the third largest advertiser, that Bing is making obtuse statements and that the website in question has now vanished from the internet. Interesting.


Microsoft also just sent us this response:

Distribution deals and affiliate programs are an important part of how all search engines introduce their product to customers. That said, we have been made aware of some practices from a specific publisher that are not compliant with the guidelines, best practices and principles put in place by Bing. As a result, the relationship with this publisher will be terminated.


Further update at 11:20 PM PST: A Facebook spokesperson contacted us and said that the company looked around inside its system and concluded that "make-my-baby is not an advertiser at all on Facebook and any affiliates that try to push people there we would shut down. Those ads would not be allowed as part of our policy."

So Facebook says it's never heard of these people and Bing says it has decided to terminate its relationship with them. It may be relevant that Microsoft owns a meaningful amount of Facebook. Very interesting.

Yet Another Update: Below is the Comscore chart that AdAge's Edmund Lee was referring to in his post, he says by email. Here's the text description:
"...ComScore's third-quarter analysis, which looks at how many ad impressions advertisers bought on Facebook and MySpace, though Facebook accounts for almost all of the ad buys."



Conceivably, all those fabulous baby making ads might be the stand-out success of MySpace. Or Facebook is being fooled by a giant ad buyer.

What is it? It's a paper-doll-type site that lets you put eyeglasses and mustaches on top of a funny looking baby's face. At least that appears to be what it is; before you can do anything the site says you have to install "a browser plug-in to present an enhanced experience." If you do so, according to the fine print, your browser's default search and home page will be switched to Bing. Once you do so, the affiliate company behind the toolbar, called Zugo, will capture a slice of the revenue whenever you click on a search ad.


Apparently the whole thing is working out pretty well for everyone involved. Zugo, or whatever company in a chain of affiliates it is that's behind this, has found a toolbar promotion strategy that converts very well. Enough people install this plug-in, and it captures enough downstream revenue, that it pays off for the company to buy more Facebook ads than any company on earth, except for AT&T and

Bob Jensen's Fraud Updates are at

"Unveiling the Mystery of Forensic Accounting," by Marion Hecht and MaryEllen Redmond, Accounting Today, December 28, 2010 ---
Thanks to Nadine Sabai for the heads up.

Bob Jensen's threads on accounting fraud ---

One Way a Professor Can Become a Felon

"Prof Accused of Billing University for Travel as Consultant," Inside Highe Ed, February 4, 2011 ---

Dov Borovsky, a professor of entomology at the University of Florida, was arrested last week on felony charges of grand theft and fraud based on his expense reimbursement claims, The Gainesville Sun reported. According to authorities, Borovsky took three trips to Malaysia as a consultant to a company based there, was reimbursed by the company for the travel, but also submitted expense forms to the university for travel reimbursement. Borovsky, whom the university has placed on leave, could not be reached for comment.

Bob Jensen's fraud updates are at

An Illustration of Future Free TV News on the Web
Non-Profit CEO Gets 10 Year Prison Sentence ---

"'Fatally flawed' accounting (IFRS) standards inflated RBS's worth: The rules that govern British bank accounting may have over-inflated the capital position of the Royal Bank of Scotland (RBS) by as much as £25bn, a leading expert has warned.," by Louise Armitstead, The Telegraph, March 29, 2011 ---

The International Financial Reporting Standards (IFRS), which have been described as "fatally flawed", let RBS report a core tier one ratio for 2010 more than 4pc higher than it would have been under the UK's old accounting rules that were replaced in 2005.

The analysis comes ahead of the publication of a House of Lords Economic Affairs Committee report into UK accounting practices expected to be highly critical of the IFRS system.

According to RBS's latest accounts, which were calculated using IFRS, the bank has tangible shareholder assets of £58bn and core tier one capital of 10.7pc.

Tim Bush, a City veteran and member of the "Urgent Issues Task Force" that scrutinizes the work of the Accounting Standards Board, has calculated that under pre-2005 UK GAAP (Generally Accepted Accounting Principles) rules, which governed accounting in Britain for over 100 years, RBS would have a tangible shareholder assets of £33bn and a core tier one capital of just 6pc.

The criticism is of the IFRS framework. There is no suggestion RBS or any other British bank has broken the accounting rules.

The radical difference in the numbers highlights the problems described to the Lords Committee during the course of its investigation.

The Committee was told that IFRS, which was introduced after the Enron scandal with the intention of producing less subjective accounting practices, allows banks to disguise the build-up of risks within banks because distressed loans are not reported until they default.

In one session, Iain Richards, of Aviva Investors, said that IFRS had had "a material cost to the taxpayer and to shareholders" because "as a result dividend distributions have been made and bonuses have been paid that were imprudent."

Lord Lawson, the former Chancellor who now sits on the Committee, has asked for a list of proposals on how to overhaul what he described as "very serious problems" with British accounting.

Fellow committee member Lord Forsyth, who was also a Tory minister and former deputy chairman of JP Morgan, said he believed Mr Bush's view "explains why particular banks got into difficulty" during the financial crisis.

Separately the governor of the Bank of Ireland has described the accounting rules for British and Irish banks as "unsatisfactory".

Bob Jensen's threads on accounting standard controversies are at

"Little-Known 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 ---

Early on a Friday morning, four college students stand shivering in the parking lot of an office complex in Sterling, Va. The building itself is unremarkable, red brick and dark glass, but security cameras are bolted to the walls, cement posts line the perimeter, and coils of concertina wire surround the trash bins. This is a branch of U.S. Immigration and Customs Enforcement, the investigative arm of the U.S. Department of Homeland Security.

The students arrived more than an hour early for their appointment. They haven't slept or eaten in two days, passing time instead by obsessively organizing their documents and drinking cup after cup of strong black tea. Their eyelids are at half- mast, their hands shoved in jacket pockets. They are all Indian, all from the city of Hyderabad, and all possibly in deep trouble.

These students, like roughly 1,500 others from India, were enrolled at Tri-Valley University, a California institution that was raided by federal agents in January. The government seized property, threatened to deport students, and in legal filings called Tri-Valley a "sham university" that admitted and collected tuition from foreign students but didn't require them to attend class. (The president of Tri-Valley, Susan Xiao-Ping Su, denies the charges.) Many students allegedly worked full-time, low-level retail jobs—in one case, at a 7-Eleven in New Jersey—that were passed off as career training so they could be employed while on student visas. The university listed 553 students as living in a single two-bedroom apartment near the college; in fact, students were spread out across the country, from Texas to Illinois to Maryland.

As the students move inside and await their interview, a deliveryman wheels in a hand truck stacked with nine boxes of .44-caliber ammunition. On a table nearby rests a brochure titled "Targeting Terrorists," which features the famous image of Mohammed Atta breezing through airport security. When an agent emerges and asks who is going to be first, the four students stare at the carpet. "Come on," the agent says, trying to break the tension. "No one is going to beat you with a rubber hose."

The joke does not go over well.

The raid on Tri-Valley received limited attention in the United States, but it was and remains a big story in India, where newspapers and television shows portray U.S. officials as callous, and oversight of the student-visa program as incompetent. After weeks of bad publicity, Secretary of State Hillary Rodham Clinton felt compelled to assure Indian officials that the situation would be resolved fairly. Meanwhile, immigration officials have pointed to the shuttering of Tri-Valley as proof of their vigilance.

Continued in article

March 20, 2011 reply from Jagdish Gangolly


I have been following this item in the Indian press. The American press has mostly ignored it; I suppose a few hundred prospective illegals do not warrant attention, with millions of illegals already inundating us.

The aspect that upset most Indians seems to be the radio-tagging of these students (do all the illegals in the US who have encountered the law radio-tagged? Was Ms. Su, obviously a flight risk, radio-tagged?) Most people also seemed upset over the lack of regulation of such outfits here in the US.

Many in India also have questioned the intentions of these students for their not doing the homework before applying. Some have gone to the extent of saying that students should be allowed to go to the US only for studies at ivies, AAU and such reputed universities, but I guess that goes against the Indians' sense of liberal democracy.


Bob Jensen's threads on for-profit universities operating in the gray zone of fraud ---

Diploma Mill Frauds ---

"TARP Was No Win for the Taxpayers : Treasury's claim that the bank bailouts will return a profit ignores the other, more costly programs enabling the banks to repay their TARP funds," by Paul Atkins, Mark McWatters, and Kenneth Troske, The Wall Street Journal, March 17, 2011 ---

Today the Senate Banking Committee will explore the Troubled Asset Relief Program (TARP). Almost 30 months after its birth, TARP is far from dead. More than 550 banks, AIG, GM, Chrysler and others still have approximately $160 billion of taxpayer money outstanding.

Even so, the administration would have us believe that TARP has been a success because it supposedly alleviated the financial crisis and is (so far) being paid back at an apparent profit for taxpayers. Perhaps because he helped invent TARP before he joined the Obama administration, Treasury Secretary Timothy Geithner has called TARP the "most effective government program in recent memory."

Treasury's view is misleading. First, it hides the full story of the government's financial crisis effort, of which TARP is but a minor part. Moreover, Treasury has not been content using rhetoric alone to try to put TARP in the best light. The Special Inspector General for TARP criticized Treasury in October for inadequately disclosing a change in its valuation methodology that reduced a $45 billion loss in AIG to $5 billion, making TARP losses appear smaller than they really are. This data manipulation is only part of a much larger problem with Treasury's representations regarding the supposed success of the bank bailout payments that lie at the heart of TARP.

The focus on repayment fails to consider the huge taxpayer costs from non-TARP programs that directly and indirectly enabled many of the large banks to repay their TARP funds. These intertwined programs, operated by the Treasury and the Federal Reserve, dwarf the size of TARP and lack its accountability.

The financial crisis was born in the housing bubble caused by the policies of Fannie Mae and Freddie Mac, the two bankrupt government-sponsored entities (GSEs) charged with buying and packaging mortgages into mortgage-backed securities (MBS). TARP banks own billions of dollars worth of MBS and have remained liquid in part because the Federal Reserve has bought more than $1.1 trillion of these GSE-guaranteed MBS in the securities markets—all outside TARP.

The Fed purchased the MBS at fair market value, but this value reflects Treasury's bailout and continued support of the GSEs—also done outside of TARP with taxpayer money. Had the GSEs failed, TARP recipients probably would have been stuck with these MBS, writing them down at significant loss. Their ability to pay back TARP funding would have been hurt, and they might have had to obtain more TARP funds or go bust.

So the taxpayer-backed GSE guarantee enables the Fed to prop up the market with taxpayer funds, in turn allowing the TARP banks to "repay" their TARP funds. The bailout of the GSEs by Treasury thus shifts potential losses from TARP to other programs that have less oversight and public scrutiny. Any evaluation of TARP's success must take into account the interaction among all government programs designed to prop-up the financial system, and the shifting of costs among these programs.

The Congressional Budget Office estimates that Treasury's bailout of the GSEs will cost the taxpayers approximately $380 billion through fiscal year 2021. If only one-fourth of CBO's estimate ultimately benefits TARP recipients and other financial institutions, taxpayers will have provided a subsidy to these institutions of approximately $100 billion, which is not accounted for under TARP.

Also seldom mentioned are future costs resulting from using TARP funds to rescue "systemically important" financial and other firms. TARP exacerbates the "too big to fail" phenomenon by targeting much of its funding toward large banks and automobile firms, solidifying the market's belief in an implicit guarantee from the government for these firms. As credit-rating agencies have recognized, these large firms can borrow much more cheaply than their small-enough-to-fail competitors, which will lead to less competition, a more concentrated financial sector, and higher prices paid by consumers.

In addition, creating larger, more systemically important financial firms increases the likelihood of future financial crises because these firms have an incentive to invest in riskier projects as a result of the implicit government guarantee. The additional costs borne by consumers in the form of higher prices for financial services and the additional costs that result from future financial crises need to be included in any accounting of the costs of the TARP.

TARP was never where the real action was happening. In fact, other Fed and FDIC programs added another $2 trillion of taxpayer money at risk to the 19 stress-tested banks alone, on top of the $1.1 trillion of MBS purchased by the Fed. TARP is but one-eighth of that total.

The government's efforts inside and outside of TARP have sown the seeds for the next crisis and, unfortunately, last year's 2,319-page Dodd-Frank Act does nothing to fix these problems. Treasury must be more transparent regarding TARP. The real myth that the Treasury secretary should dispel is that TARP is a big win for the taxpayer.

Mr. Atkins was a member of the Congressional Oversight Panel from 2009-2010. Messrs. McWatters and Troske are current members of the panel.

The Commission's Final Report ---

Video:  Charles Furgeson has produced a powerful documentary, “Inside Job,” about the deep capture of financial (de)regulation ---

"How Wall Street Fleeced the World:  The Searing New doc Inside Job Indicts the Bankers and Their Washington Pals," by Mary Corliss and Richard Corliss, Time Magazine, October 18, 2010 ---,9171,2024228,00.html

Like some malefactor being grilled by Mike Wallace in his 60 Minutes prime, Glenn Hubbard, dean of Columbia Business School, gets hot under the third-degree light of Charles Ferguson's questioning in Inside Job. Hubbard, who helped design George W. Bush's tax cuts on investment gains and stock dividends, finally snaps, "You have three more minutes. Give it your best shot." But he has already shot himself in the foot.

Frederic Mishkin, a former Federal Reserve Board governor and for now an economics professor at Columbia, begins stammering when Ferguson quizzes him about when the Fed first became aware of the danger of subprime loans. "I don't know the details... I'm not sure exactly... We had a whole group of people looking at this." "Excuse me," Ferguson interrupts, "you can't be serious. If you would have looked, you would have found things." (See the demise of Bernie Madoff.)

Ferguson—whose Oscar-nominated No End in Sight analyzed the Bush Administration's slipshod planning of the Iraq occupation—did look at the Fed, the Wall Street solons and the decisions made by White House administrations over the past 30 years, and he found plenty. Of the docufilms that have addressed the worldwide financial collapse (Michael Moore's Capitalism: A Love Story, Leslie and Andrew Cockburn's American Casino), this cogent, devastating synopsis is the definitive indictment of the titans who swindled America and of their pals in the federal government who enabled them.

With a Ph.D. in political science from MIT, Ferguson is no knee-jerk anticapitalist. In the '90s, he and a partner created a software company and sold it to Microsoft for $133 million. He is at ease talking with his moneyed peers and brings a calm tone to the film (narrated by Matt Damon). Yet you detect a growing anger as Ferguson digs beneath the rubble, and his fury is infectious. If you're not enraged by the end of this movie, you haven't been paying attention. (See "Protesting the Bailout.")

The seeds of the collapse took decades to flower. By 2008, the financial landscape had become so deregulated that homeowners and small investors had few laws to help them. Inflating the banking bubble was a group effort—by billionaire CEOs with their private jets, by agencies like Moody's and Standard & Poor's that kept giving impeccable ratings to lousy financial products, by a Congress that overturned consumer-protection laws and by Wall Street's fans in academe, who can earn hundreds of thousands of dollars by writing papers favorable to Big Business or sitting on the boards of firms like Goldman Sachs.

Who's Screwing Whom? In the spasm of moral recrimination that followed the collapse, some blamed the bright kids who passed up careers in science or medicine to make millions on Wall Street and charged millions more on their expense accounts for cocaine and prostitutes. After the savings-and-loan scandals of the late-'80s, according to Inside Job, thousands of executives went to jail. This time, with the economy bulking up on the steroids of derivatives and credit-default swaps, the only person who has done any time is Kristin Davis, the madam of a bordello patronized by Wall Streeters. Davis appears in the film, as does disgraced ex--New York governor Eliot Spitzer; both seem almost virtuous when compared with the big-money men. (See "The Case Against Goldman Sachs.")

The larger message of both No End in Sight and Inside Job is that American optimism, the engine for the nation's expansion, can have tragic results. The conquest of Iraq? A slam dunk. Gambling billions on risky mortgages? No worry—the housing market always goes up. Ignoring darker, more prescient scenarios, the geniuses in charge constructed faith-based policies that enriched their pals; they stumbled toward a precipice, and the rest of us fell off.

The shell game continues. Inside Job also details how, in Obama's White House, finance-industry veterans devised a "recovery" that further enriched their cronies without doing much for the average Joe. Want proof? Look at the financial industry's fat profits of the past year and then at your bank account, your pension plan, your own bottom line.

Video:  Watch Columbia's Business School Economist and Dean Hubbard rap his wrath for Ben Bernanke
The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) ---
R. Glenn Hubbard (Dean of the Columbia Business School) ---

Bob Jensen's threads on the Bailout of Banksters and the Greatest Swindle in the History of the World are at

"Professor of Entrepreneurism Arrested for Mortgage Fraud," Inside Higher Ed, January 31, 2011 ---

State police charged John K. Dunn, a professor of entrepreneurial management at the University of Rhode Island, with three felony counts of obtaining money under false pretenses in connection with an alleged mortgage fraud scheme, the Providence Journal reported. Dunn, who is also a lawyer, turned himself in after the warrant was issued for his arrest, the paper reported. He did not enter a plea and was released on $10,000 personal recognizance pending further court action, according to state police. Dunn is accused of obtaining hundreds of thousands of dollars under false pretenses to buy three different properties in Rhode Island.

Jensen Comment
What are Professor Dunn's possible defenses?

  1. He was investigating how difficult versus easy it is to conduct real estate fraud in Rhode Island and intended to return all the money after his research paper was accepted by a leading law journal.
  2. He wanted to illustrate to his students the the finer points of ethics violations.
  3. He was trying to find housing for the homeless during this exceptionally harsh winter.
  4. He's legally insane. Voices in his head are responsible.

Grumpy Old Accountants
"What's Up with Cash Balances?" by: J. Edward Ketz and Anthony H. Catanach Jr, SmartPros, March 2011 ---

The past decade has yielded a growing number of cases of cash reporting problems among global firms. According to Audit Analytics, corporate restatements in the United States for cash-related reporting soared from 0.49 percent of all restatements in 2001 to over 13 percent in 2008.

Between 2002 and 2005, Grant Thornton auditors failed to detect cash frauds totaling almost €4 billion at Parmalat, a global Italian dairy and food corporation.  In 2008, PricewaterhouseCoopers’ auditors missed a £1 billion in fraudulent cash balances at Satyam, the Indian technology outsourcing giant.  What’s going on?

Historically, cash has not been that hard to audit or report, and junior accountants in their first and second years have routinely been tasked with auditing balances and preparing disclosures for these assets.  After all, how hard can it be to audit and report cash assets, when verification and valuation generally are not issues?

Why aren’t companies reporting cash in an ethical and transparent manner? As analysts’ concern with earnings management has grown, they are devoting more attention to reported cash flows.  Global financial managers are aware of this new focus and have responded accordingly by either creatively or intentionally misreporting corporate cash flows.

Initially, most of the gimmickry related to inflating operating cash flows (OCF) by simply misclassifying cash flows in the statement of cash flows (SCF). Investing or financing cash inflows are reported as operating activities, and operating cash outflows are included in the investing and financing sections of the SCF.  While such games continue even today, corporate accountants continue to develop more sophisticated schemes to artificially inflate cash balances and related flows.  Managers now commonly achieve OCF targets via asset liquidations, by delaying payments on payables, and even by counting receivable collections as cash before they are actually received, and employing special purpose entities.

Note the following 8-K disclosure recently filed by Orbitz Worldwide, a leading global online travel company:

The Company determined that credit card receipts in-transit at its foreign operations (which are generally collected within two to three days) should have been classified as “Accounts Receivable” rather than “Cash and Cash Equivalents.”

The Pep Boys, a large U.S. automobile parts, tire, and service provider, also reported the following in its 10-K:

All credit and debit card transactions that settle in less than seven days are also classified as cash and cash equivalents.

Such practices clearly raise questions about the quality of reported cash balances and OCF, and recently the games have reached an all time low.  Managers now have decided to simply change the way they define cash in the balance sheet.  Every accounting student learns that a company reports as cash on their end-of-period balance sheet the amount reflected in the company’s general ledger; however, a growing number of companies are abandoning this generally accepted practice and now inflate their reported balance sheet cash flows by adding back outstanding checks (i.e., those than have not yet cleared the bank) written and mailed before period-end.  This practice not only increases reported cash balances, but also overstates OCF since the outstanding checks are added to accounts payable.  Note the following example from the recent 10-K of Dick’s Sporting Goods, a national U.S. sporting retailer:

Accounts payable at January 30, 2010 and January 31, 2009 include $74.2 million and $74.8 million, respectively, of checks drawn in excess of cash balances not yet presented for payment.

In this case, OCF were overstated by 89.16 percent in 2009 and 22.68 percent in 2010.  Then there is the case of Airgas, a nationwide distributor of gases, welding supplies, safety products, and tools, that reports in its 2010 10-K:

Cash principally represents the balance of customer checks that have not yet cleared through the banking system…Cash overdrafts represent the balance of outstanding checks and are classified with other current liabilities.

In this case, had the company reported its outstanding checks appropriately, its cash balance would have been negative at the end of 2010, and its OCF were overstated by $5.5 million as well.

Continued in article

Bob Jensen's Fraud Updates are at

"Boston Archdiocese, Daughters of St. Paul in dispute over pension funds," by Catholic News Service, The Catholic Review, March 2011 --- 

"The sisters have asked the Supreme Judicial Court of Massachusetts to order the fund’s trustees to provide a full accounting or rule that the sisters were never part of the plan and must be reimbursed for their contributions. The sisters also requested the archdiocese pay their legal fees." "The nuns' lawyer, Michael McLaughlin, said they hesitated to sue the trustees, particularly O'Malley, but felt they had no other choice." "The lawsuit is also reportedly asking the court to review documents in connection with the 2010 sale of Caritas Christi Health Care system, a chain of catholic hospitals, to a for-profit...

Jensen Comment
Historically Rome provides for the care and well being of its aged priests but not so much for the nuns ---

Bob Jensen's Fraud Updates are at

BDO = Big Dollars Out

"$91M awarded in Batchelor case: A jury in Miami awarded millions to the estate and foundation of the late George Batchelor, settling a nine-year-old lawsuit," Miami Herald, February 1, 2011 ---

A Circuit Court jury in Miami decided on Monday that the accounting firm BDO Seidman should pay the late philanthropist/aviation pioneer George Batchelor's estate and foundation $91 million for ``fraudulently'' concealing false information about a company in which Batchelor had invested.

The award consists of $55 million in punitive and $36 million in compensatory damages.

Steven Thomas of the Venice, Calif., firm Thomas, Alexander & Forrester, is lead Batchelor attorney. He said he thought that the punitive damage award was so hefty because ``BDO, right up to the end, denied it had a public duty -- and public is literally their middle name: CPA.''

A lawsuit filed in 2002 -- the year that Batchelor died at age 81 -- alleged that BDO Seidman covered up erroneous financial statements during an audit of Grand Court Lifestyles, a Boca Raton owner/manager of ``senior'' communities. Batchelor had invested in Grand Court, which filed for bankruptcy in 2000.

The jury decided that BDO owed the estate $34.4 million and the foundation $2.3 million in compensatory damages.

Thomas said that the entire award ``goes into the Foundation, which means dozens of organizations in Miami that are funded by the Foundation may be getting additional monies.''

Batchelor, who founded Arrow Air and Batch Air, had given an estimated $100 million to South Florida causes that benefited children, animals, the environment and medical facilities before he died. The foundation continues supporting many of those charities.

In a written statement, the accounting firm said it ``strongly'' disagreed with the verdict and planned to appeal.

Continued in article

"Prosecutors on defensive in BDO Seidman fraud case," by Andrew Longstreth, Reuters, February 4, 2011 ---

NEW YORK, Feb 4 (Reuters Legal) - Federal prosecutors who ignited a legal firestorm five years ago for pressuring the accounting firm KPMG to stop paying its former employees' legal fees are facing the same accusations in another high-profile tax-fraud case.

BDO Seidman case has similarities to KPMG

The defendant in this case, Denis Field, ex-CEO of BDO Seidman, the world's fifth largest accounting firm, claims Manhattan prosecutors intimidated his former firm into curtailing and eventually cutting off payments to his lawyers. In recently filed court papers, he claims that the government deprived him of his constitutional right to counsel and seeks dismissal of the case. Field alleges that among other tactics, prosecutors threatened to indict the firm if it kept funding his defense. During a hearing on Thursday, U.S. Judge William Pauley III of the Southern District of New York, who is presiding over the case, closely questioned prosecutors about the accusations. A ruling is expected soon.

The controversy touches on the common arrangement among U.S. companies of paying the legal fees of executives. It raises the question of whether a government attempt to meddle with this practice amounts to depriving a defendant of his or her lawyer -- which could constitute a violation of the right to counsel under the 6th Amendment.

The Field prosecution, in which he is charged with creating phony tax shelters, is strikingly similar to the KPMG matter. That case was thrown out in 2007 after U.S. Judge Lewis Kaplan found that prosecutors had improperly "coerced" KPMG into cutting off the legal fees of 13 former KPMG partners and employees. "KPMG refused to pay because the government held the proverbial gun to its head," Kaplan wrote.

Two of the prosecutors called out by Judge Kaplan -- Stanley Okula and Shirah Neiman -- have also been involved in the Field case, a fact that is prominently noted by Field's lawyers in their motion to dismiss. "The reason for the government's conduct is obvious -- as with KPMG, the prosecutors believed BDO 'should not pay the fees' of allegedly culpable individuals," Field's lawyers argue. They cited the KPMG case no fewer than 50 times in their brief. Okula and Neiman declined comment, as did a spokesperson for the Manhattan U.S. Attorney's office.

Continued in article

Bob Jensen's threads on BDO are at

"UK banker jailed for insider trading," by Jane Croft and Brooke Masters, Financial Times, February 2, 2011 ---

A high-flying banker who netted £590,000 by trading on secret merger information he obtained at work has been jailed for more than three years, in what a judge described as the “biggest prosecution for insider trading ever brought” in Britain.

Christian Littlewood, who earned an annual salary of more than £350,000 working for Dresdner Kleinwort and Shore Capital , received the longest UK sentence for insider dealing after pleading guilty to illegal trading over a period of eight years.

The case marks the first successful criminal prosecution brought by the Financial Services Authority against a banker who was still working in the City at the time of his arrest. It is part of a deliberate decision by the watchdog to prioritise cases against City professionals and provide “credible deterrence” against market abuse.

Mr Littlewood’s Singaporean-born wife, Angie, received a suspended prison sentence. Her friend, Helmy Omar Sa’aid, who did much of the actual trading, was sentenced to two years in prison and faces deportation.

All three had previously pleaded guilty to eight counts of insider trading in stocks such as Viridian Group and RCO Holdings based on secret price-sensitive information supplied by Mr Littlewood. The trio invested £2.15m in trades and netted £590,000 in profits.

Sentencing the trio, Mr Justice Leonard QC said there was no doubt that the number of “unscrupulous investment bankers” using inside information “exceeds the number of people prosecuted for such offences”.

The judge rejected Mr Littlewood’s attempt to transfer culpability to his wife by arguing that he was not aware of the scale of the trading conducted by her and Mr Sa’aid. Mr Justice Leonard found that trading had been done by Mrs Littlewood “on behalf of the two of you”.

Continued in article

Did Deloitte and PwC turn their eyes toward their billings and away from the fraud that should've been obvious even to blind eyes?

USAID agrees that Deloitte should have aggressively reported evidence of fraud at Kabul Bank to the Mission.

So now this brings up the issue of potential auditor negligence rather than omission on part of a consultant to aggressively report fraud.

"Interesting Developments at Kabul Bank: USAID IG Report Says Deloitte Did Not Report Fraud. But PwC Gave A Clean Audit," Big Four Blog, March 17, 2011 ---

The Office of Inspector General of the USAID did release the much-anticipated audit report of Deloitte’s role in the Kabul bank debacle. It’s a 23 page detailed report and a quick synopsis follows:

The OIG contends that BearingPoint and Deloitte advisers embedded at Afghanistan Central Bank (DAB) did see several fraud indications at Kabul Bank for over 2 years before the run on Kabul Bank in early September 2010; but did not aggressively follow up on indications of serious problems at Kabul Bank.

Further, the OIG contends that Deloitte advisers did not report fraud indicators at Kabul Bank to USAID. In addition, the mission did not have a policy requiring contractors and grantees to report fraud indicators.

Finally, the OIG contends that USAID/Afghanistan’s management of its task order with Deloitte was weak; and if senior program managers and technical experts had been on staff at the mission, USAID could have managed Deloitte better and ask deeper questions than just accepting them at face value.

In a reply back to Timothy Cox, OIG/Afghanistan Director, David McCloud, Acting Assistant to the Administrator, Office of Afghanistan and Pakistan Affairs, makes several counter arguments:

That there was no indications of fraud, waste or abuse by USAID or Deloitte.

Deloitte could not have stopped the massive fraud that occurred at Kabul Bank.

USAID and Deloitte’s scope of work and mandate under Component 2 of the Economic Growth and Governance Initiative task order was to provide trainers and technical experts to build the capacity

of the Bank Supervision unit within the Central Bank of the Government of Afghanistan, Afghanistan Bank, and not for Deloitte itself to supervise private banks.

USAID agrees that Deloitte should have aggressively reported evidence of fraud at Kabul Bank to the Mission.

And then, McCloud brings up an interesting twist by introducing another Big Four firm, PwC, which performed an audit of Kabul Bank, but did not bring up any discrepancies or evidence of fraud, which perhaps delayed any potential investigations and prevented a true understanding of the situation.

“The audit performed by an affiliate of PricewaterhouseCoopers (PwC) was not directly mentioned in the body of the OIG report but it was a significant source of information to the Central Bank¡¦s examination staff. The resulting clean bill of financial health of Kabul Bank issued by PwC may have acted to delay understanding of the gravity of Kabul Bank’s true financial condition both among the examination staff and the international community.

Continued in article

Bob Jensen's threads on accounting firm negligence can be found at

PCAOB advisory group head calls for investigations into audit firms
Auditor rotation, annual reports recommended (Adds PCAOB comment)

"UPDATE 1-US urged to probe auditors' role in credit crisis," by Dena Aubin, Reuters, March 16, 2011 ---

Audit firms that failed to flag risks ahead of the financial crisis have not been held to account and an in-depth investigation is needed, an advisory group to the U.S. auditor watchdog agency said on Wednesday.

Regulators in Europe and the United Kingdom are probing the role of auditors in the 2008 crisis, but the United States has lagged and needs to do more, said Barbara Roper, head of a working group for the Public Company Accounting Oversight Board.

"Auditors failed to perform their basic watchdog function in the financial crisis," Roper said at a PCAOB advisory group meeting in Washington. "There's a need to figure out why they failed to perform that function and what can be done to fix that problem."

The PCAOB was created after the Enron and WorldCom accounting scandals to police audit firms. It oversees the work of the Big Four auditors -- Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers -- and other auditors of public companies.

While auditors did not cause the financial crisis, they gave stamps of approval to many companies' financial statements just months before they failed, said Roper, director of investor protection for the Consumer Federation of America.

She said the PCAOB should look at examples of companies that failed or had to be bailed out and find out what went wrong with the audits and why.

Lehman Brothers (LEHMQ.PK), American International Group (AIG.N), Citigroup (C.N), Fannie Mae (FNMA.OB), and Freddie Mac (FMCC.OB), among others, received unqualified audit opinions on their financial statements months before their collapse or bailouts, Roper said.

"If the auditors were performing as they should and this is the result we get, then there's a problem with the system," she said.


Audit firms also lack the basic independent governance that most public companies around the globe have, Lynn Turner, head of a PCAOB working group on audit firm governance, said at the meeting in Washington.

He said these firms need more transparency. They should have to file annual financial statements with the PCAOB, including information about how they control quality globally, Turner said.

PCAOB members said they will consider all the recommendations and report back on what they decide.

Asked for his response to the recommendations, PCAOB chair James Doty told Reuters that the PCAOB had identified areas where audits performed during the credit crisis needed to be stronger in a report released in September. Some of the problem audits are being investigated and disciplinary actions may result, he said.

"All of these activities, including what we heard from the investor advisory group today, will give us insights into the root causes of problems we identify and will inform our initiatives to strengthen investor protection," he said.

Because the Big Four audit firms are private, they are not required to file public financial statements, though they do report their revenues annually.

Without seeing their financial statements, however, it will be difficult for the PCAOB to properly regulate them, said Turner, a former chief accountant for the Securities and Exchange Commission.

The PCAOB also should require companies to rotate auditors periodically to break up cozy relationships between some companies and their auditors, he said.

Audit partners, but not audit firms, have to be rotated every five years currently.

Continued in article

Bob Jensen's threads on audit firm professionalism are at

Where were the auditors?


"Inside The Mind of An Inside Trader," by Francine McKenna, re:TheAuditors, March 5, 2011 ---

No Big 4 audit firms or their partners have been named in the insider trading scandal surrounding the now-defunct hedge fund Galleon Management. But the SEC has accused one of the most prominent businessmen ever implicated in such crimes, Rajat Gupta, a former McKinsey & Company Global Managing Director.

Mark O’Connor, CEO of Monadnock Research, put together a research note for his subscribers that gives us the details of the accusations. He also provides new insight into why a guy like Gupta may have committed these alleged crimes.

Gupta is alleged to have tipped Galleon’s Rajaratnam, a friend and business associate, providing him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Gupta reportedly made calls to Rajaratnam “within seconds” of leaving board sessions where market-moving information was discussed.

The complaint alleges that Rajaratnam then either used the inside information on Goldman and P&G to execute trades on behalf of some of Galleon’s hedge funds, or shared it with others at Galleon, who then traded on it ahead of public disclosure. The SEC claims the insider trading scheme generated more than $18 million in a combination of illicit profits and loss avoidance.

The SEC also says that Gupta was, at the time of the alleged disclosures of confidential non-public information, a direct or indirect investor in at least some of Galleon’s hedge funds, and had other business interests with Rajaratnam.

Gupta, as a McKinsey veteran, embodied the “trusted advisor” consulting ethos and personified the McKinsey “advisor to CEOs” business strategy and brand. The firm’s value to its clients and its effectiveness as an advisor requires knowing their secrets and holding them close to the vest.

Gupta was McKinsey & Company’s worldwide Managing Director for 9 years from 1994 through 2003…Gupta, now 62, stepped down as a McKinsey partner in 2007, and has since served as Managing Director Emeritus, according to his profile at the Indian School of Business (ISB). Gupta was instrumental in co-founding ISB in 2001, and continues to serve as its current Governing Board Chairman and Executive Board Chairman. He is also a current or former board member (or trustee) of AMR Corp., the parent of American Airlines; the Rockefeller Foundation; the University of Chicago; Harman International Industries; Genpact India; the World Economic Forum; the International Chamber of Commerce, World Business Organization; New Silk Route and New Silk Route Private Equity; and the Emergency Management and Research Institute. Galleon’s Rajaratnam was also associated with the New Silk Route ventures, where Gupta continues as Chairman. Rajaratnam is no longer associated with those entities.

Several media commentators have openly wondered whether the accusations against Gupta, and earlier accusations in the same scandal against McKinsey senior partner and Gupta protégé Anil Kumar, strike a deadly blow to McKinsey.

Will Rajat Gupta Destroy McKinsey? John Carney, NetNet, March 2, 2011

McKinsey’s clients are attracted by its reputation for excellence and discretion—and its stellar network of alumni. Its consultants often refuse to even disclose who their clients are.

If the charges against Gupta prove true, it could be a mortal threat to the firm. Even if there’s no evidence that confidentiality was breached while Gupta was at the firm, being led by a man who would later leak insider information would be devastating. If Gupta is shown to have engaged in similar actions while he was at McKinsey, that could be the end for the Firm.

“At that point, I think we go the way of Arthur Andersen,” another former McKinsey consultant said, referring to the once-prestigious accounting company brought down by its connections to Enron.

Loose Lips, Reuters BreakingViews, Robert Cyran and Rob Cox, March 3, 2011

McKinsey’s reputation rests on its ability to keep secrets. Consultancies, unlike investment banks, don’t provide access to financial markets.  All they offer is counsel, which relies partly on confidences revealed by their clients. According to McKinsey, “Our clients should never doubt that we will treat any information they give us with absolute discretion.” The allegations against Gupta make it hard for clients not to wonder.

It’s understandable that, in the heat of this moment, some might naïvely compare the consequences of the criminal indictment of an audit firm with civil charges against an individual, albeit one who trades on – pun intended – his association with a prestigious professional services firm.

It’s not the same thing.

Extrapolating Gupta’s behavior to McKinsey as a whole is a stretch. I’m no McKinsey apologist but one man, even a former Global Managing Director, does not make this firm.

On the contrary. The firm made him and he’s the one whose currency is now worth less.

Bob Jensen's Fraud Updates ---

"Merrill Traded On Client Data: SEC," by Jean Eaglesham, Dan Fitzpatrick, and Randall Smith, The Wall Street Journal, January 26, 2011 ---

On the fifth floor of Merrill Lynch & Co.'s headquarters at the World Financial Center in lower Manhattan, a small team of traders who bought and sold securities with the firm's own money for two years were close enough to see the computer screens of traders taking orders from clients and overhear their phone calls.

The Securities and Exchange Commission said Tuesday that the proprietary-trading desk, which traded electronic messages with its nearby counterparts, was illegally spoon-fed information about what Merrill's clients were doing, and then copied an unspecified number of trades between 2003 and 2005. Merrill also encouraged market-making traders to generate and share "trading ideas" with the proprietary-trading desk, according to the SEC.

Merrill, acquired by Bank of America Corp. in 2009, agreed to pay $10 million to settle the accusations, which also included charging institutional investors undisclosed trading fees. Merrill neither admitted nor denied wrongdoing.

Such enforcement cases are rare, and the Merrill settlement is likely to fuel longstanding suspicions among many investors that Wall Street firms tap the continuous flow of orders from customers for their own benefit. Securities firms are lobbying U.S. regulators over the wording of the "Volcker rule," part of last year's Dodd-Frank financial law that is expected to force banks to wind down or sell their proprietary-trading desks.

In a statement, Bank of America said the "matter involved issues from 2002 to 2007 at Merrill Lynch." The proprietary-trading desk, which had one to three employees and authority to trade more than $1 billion of Merrill's capital, was shut down in 2005 "for business reasons" after the SEC began investigating, according to people familiar with the situation.

The employees involved in the trading no longer work at Bank of America, these people said.

Bank of America said Merrill has "adopted a number of policy changes to ensure separation of proprietary and other trading and to address the SEC's concerns."

Merrill Lynch also voluntarily implemented enhanced training and supervision to improve the principal-trading processes at the securities firm.

The SEC accused Merrill of numerous regulatory breakdowns, ranging from supervision failures to cheating customers.

"One of our goals in a case like this is to make sure that the problems we find are fixed going forward," said Scott Friestad, an associate director in the SEC's enforcement division. The Merrill case is "one of the few times that the [SEC] has ever charged a large Wall Street firm with misconduct involving the activities of a proprietary-trading desk."

The traders involved in the matter weren't identified in documents released by the SEC. People familiar with the situation said the proprietary traders, who worked on what Merrill called its Equity Strategy Desk, were led by Robert H. May.

Mr. May was among four traders from Bank of America hired last week by boutique-trading firm First New York Securities Inc.

Mr. May couldn't be reached to comment. Neil Bloomgarden, who reported to Mr. May, now works at Morgan Stanley. He and the firm declined to comment.

Bank of America hasn't announced plans to shut down or sell its remaining proprietary-trading desk.

As a result of the investigation, though, the company has physically separated such traders from the rest of the trading floor. Merrill also separates client orders from other trades to eliminate any mingling with positions taken by market makers who buy and sell on behalf of clients.

The SEC cited four examples in which Merrill traders on the proprietary-trading desk bought or sold shares within minutes of a similar order for a customer, according to the agency. Customers of Merrill were assured by the firm that information about their orders would be kept confidential, and the company's code of ethics requires employees to "not discuss the business affairs of any client with any other person, except on a strict need-to-know-basis," the SEC said Tuesday. The number of trades detailed by the SEC was small.

In September 2003, an unidentified institutional client placed an order to sell about 40,000 shares of Teva Pharmaceutical Industries Ltd., according to the SEC filing. Three minutes later, a market-making trader "sent an instant message to an ESD trader informing him about the trade," the filing said. The proprietary trader then sold 10,000 shares in the company for Merrill's own account.

"[I] always like to do what the smart guys are doing," one Merrill proprietary trader wrote in an electronic message, according to the SEC filing.

Continued in article

Jensen Comment
Do a word search for "Merrill" and count the many times Merrill Lynch has engaged in securities fraud (and actually this is just an ad hoc sampling in Bob Jensen's archives). Merrill really was rotten to the core.

"Man with a ‘Passion’ for Charter Buses Managed to Dupe Moss Adams, Deloitte in Washington’s Largest Ponzi Scheme," by Caleb Newquist, Going Concern,  January 20, 2011 --- Click Here

Cringe] Oops. To be fair, auditors can’t be expected to be hand-writing experts…can they? Mr. Calvert seems to think so and told the Seattle Times that he plans on suing Moss Adams and Deloitte for their roles. Oh, right! How do they fit in?

Continued in article

Bob Jensen's Fraud Updates are at

Bob Jensen's threads on Deloitte are at

Infographic:  The Fraud of Bernie Madoff ---
Thank you Nadine Sabai for the heads up.

Hi Ron,

You can read more about Friehling at

He was never licensed as an auditor and lost his CPA certificate after pleading guilty ---

His sentencing keeps getting postponed and is now scheduled for March 18, 2011 ---

Madofff of course got 150 years and seems to be totally unrepentant. Some criminals just seem to be born without consciences and are incapable of remorse. Of course he's in a comfortable Club Fed where he purportedly somewhat enjoys prison life and sees his loyal wife quite often. I wish he had been sent to a NY state prison like Attica ---
Life would not be so cushy in Club Attica.

You can read quite a lot about Bernie at

Madoff was a prominent philanthropist, but this was largely a ruse to get other rich people to invest in his Ponzi hedge fund. As far as I can tell there's not one thing good about Bernie Madoff that offsets his scheming evil. Well yes, there is one good thing. The evidence against him was so overwhelming that at least he did not prolong his punishment for years in court with the highest priced lawyers in the State of New York. Some of those lawyers could've tied up the case of Attilla the Hun for ten years or more.

My threads on Bernie are at
Bob Jensen


Bob Jensen's threads on the Madoff Ponzi scheme ---

Fraud Updates

"Worthless Stocks from China"  When a retiree in Texas discovered that some Chinese companies listed in the U.S. are frauds, he unleashed an army of short-sellers," by Dune Lawrence, Business Week, January 11, 2011 ---

Bird's involvement would evolve from irritation that a company could get away with making a claim that so obviously defies basic business logic to the conviction that many pieces of the Chinese miracle that trade in the U.S. are, in his words, "flat-ass" frauds. And what started as a retiree looking into a company has turned into a dispute that has drawn in other shorts, the Securities and Exchange Commission, auditors, and, according to recent reports, the U.S. House Committee on Financial Services. It has also revealed significant flaws in U.S. markets and how they are regulated. Although the stocks trade on U.S. exchanges, and thus project a sense of having to play by American rules, the assets and the principals of many of the companies reside in China. The companies operate on their terms, leaving injured parties and the SEC powerless. Bird says the carnage is just beginning. "The whole thing has no place to go but to blow up," he says. "That's a rational position for an investor to start with, that every one of these Chinese reverse mergers is a fraud."

Jensen Comment
Which once again demonstrates that fraud in financial reporting greatly harms or may totally destroy capitalism. Early on frauds can badly damage the capital raising ability of legitimate Chinese ventures.

This makes me wonder what proportion of these frauds were audited by affiliates of the Big Four in China. It might make a good student project to see what can be gleaned, if anything, from the audit reports.

January  15, 2011 reply from Ramesh Fernando

In reality, the Shanghai and Shenzhen market are nothing but ponzi schemes. The majority of stocks (red chips) are favoured by the Chinese Communist Party (CCP) and have some money pumped into them, when there whole revenue model(with no worry about P&L statements) is based on false estimates. The SEC's equal in China is totally corrupt and led by CCP people. As long as the CCP continues in power in China, I would recommend that no investor put their money there. Much better more liquid and better regulated markets exist in India and other parts of Asia. It's true the SEC is letting this fraud continue but you need many more inspectors at the SEC to watch over all the markets. The Canadian market, especially the natural resources stock like gold excluding Barrick Gold, GoldCorp or Kinross (they are much more legitimate being large companies ) are full of ponzi schemes. I wish the SEC would put pressure on the Ontario Security Commission as well as other provincial securities commissions to regulate all this false reporting.

February 16, 2011 message from David Albrecht on February 16, 2011

Fascinating look at accounting/auditing in China by retired PWC
auditor now professor.


Teaching Case on Supply Chains and Value Chains

Not Really 'Made in China'
by: Andrew Batson
Dec 16, 2010
Click here to view the full article on

TOPICS: Product strategy, Supply Chains

SUMMARY: "One widely touted solution for current U.S. economic woes is for America to produce more of the high-tech gadgets that the rest of the world craves. Yet two academic researchers have found that Apple Inc.'s iPhone-one of the most iconic U.S. technology products-actually added $1.9 billion to the U.S. trade deficit with China last year. How is this possible? Though the iPhone is entirely designed and owned by a U.S. company, and is made largely of parts produced by other countries, it is physically assembled in China. Both countries' trade statistics therefore consider the iPhone a Chinese export to the U.S. So a U.S. consumer who buys what is often considered an American product will add to the U.S. trade deficit with China."

CLASSROOM APPLICATION: The article is useful in a managerial accounting class or an MBA class. Questions ask students to discuss the concepts of product cost, period cost, value chains, and supply chains, then consider the impact of these accounting concepts as they are used in discussing issues in the world economy.

1. (Advanced) What are the three cost components of any product?

2. (Advanced) What other period costs also contribute to production of any product such as the iPhone and the iPad discussed in this article?

3. (Introductory) What component of the iPhone and iPad product costs and period costs are incurred in China? In the U.S.? In other parts of the world?

4. (Advanced) What is a value chain? How do both product costs and period costs reflect amounts in the value chain for a product?

5. (Advanced) What is a supply chain? How is the functioning of today's global supply chain impacting the statistics traditionally used to assess international trade?

6. (Introductory) How do the researchers cited in the article use the components of a value chain to improve analysis of global supply chains?

"Not Really 'Made in China'," by: Andrew Batson, The Wall Street Journal, December 16, 2010 ---

One widely touted solution for current U.S. economic woes is for America to come up with more of the high-tech gadgets that the rest of the world craves.

Yet two academic researchers estimate that Apple Inc.'s iPhone—one of the best-selling U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year.

How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.

"A distorted picture" is the result, they say, one that exaggerates trade imbalances between nations.

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China's contribution is the last step—assembling and shipping the phones.

So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month.

A spokeswoman for Apple said the company declined to comment on the research.

The result is that according to official statistics, "even high-tech products invented by U.S. companies will not increase U.S. exports," write Yuqing Xing and Neal Detert, two researchers at the Asian Development Bank Institute, a think tank in Tokyo, in their report.

This isn't a problem with high-tech products, but with how exports and imports are measured, they say.

The research adds to a growing debate about traditional trade statistics that could have real-world consequences. Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China's currency policies and its allegedly unfair trading practices.

"What we call 'Made in China' is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries," Pascal Lamy, the director-general of the World Trade Organization, said in a speech in October. "The concept of country of origin for manufactured goods has gradually become obsolete."

Mr. Lamy said if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half.

To correct for that bias is difficult because it requires detailed knowledge of how products are put together.

Continued in article

Bob Jensen's threads on managerial accounting are at


Can Europe Be Saved?

Spreading Infection:  An interactive chart on the state of Europe's economies ---

THE fear that Greece's sovereign-debt crisis might presage similar episodes elsewhere in the euro zone has been borne out. In November, Ireland joined Greece in intensive care, becoming the first euro-zone country to apply for funds from the rescue scheme agreed in May 2010 in concert with the IMF. Sovereign-bond spreads (the extra interest compared with bonds issued by Germany, the safest credit) have risen sharply in other euro-zone countries, notably Portugal, but also in Spain. Promises to tackle budget deficits through public spending cuts and tax increases have offered little reassurance to bondholders, who know that austerity will hold back already-weak GDP growth.

The interactive graphic above (updated January 12th 2011) illustrates some of the problems that the European economy faces. GDP picked up in most countries through 2010 but there were marked differences in performance. Germany was especially sprightly: its economy rose by almost 4% in the year to the third quarter. But GDP in Greece has crashed under the weight of austerity; Ireland has yet to emerge convincingly from a deep recession; and Spain’s economy is barely growing. It is notable that GDP countries outside the euro, such as Britain, Poland and especially Sweden grew at a faster rate than the euro-zone average in the year to the third quarter.

Continued in article

'The Euro Area's Debt Crisis:  Bite the Bullet," The Economist, January 13, 2011 ---

In the first of three articles on the euro zone’s sovereign-debt woes, we present our estimate of the burdens on the currency club’s four most troubled members.

THE euro zone’s strategy for tackling its sovereign-debt crisis is failing. A makeshift scheme was put in place in May to help countries that cannot otherwise borrow at tolerable interest rates. That lowered but did not remove the risk that a country may default for want of short-term funds. But the bond market’s nerves have been shredded again by the likelihood that from 2013, when a permanent bail-out mechanism is due to be in place, it will be easier to restructure an insolvent country’s debts. More worrying still for private investors, this seems set to give official creditors preference over others.

As a result, bail-outs are making private investors less rather than more keen to hold a troubled country’s bonds. As old debts are refinanced and new deficits funded by the European rescue pot and the IMF, the share of such a country’s debt held by official sources will steadily rise. That will leave a shrinking pool of private investors to bear losses if debts are restructured. And the smaller that pool becomes, the larger the loss that each investor will have to accept. Bond purchases by the European Central Bank (ECB) aimed at stabilising markets have further diminished the stock in private hands.

This perverse dynamic argues for a restructuring of insolvent countries’ debts sooner rather than later. But when is a debt burden too heavy to be borne? A first indicator against which to make that judgment is the ratio of gross public debt to GDP. Most rich economies, including the euro area’s most troubled, have large budget deficits and so will be adding to their debts for years. Today’s toll is not so important. What matters is how big the debt burden will be when it stabilises.

Continued in article

Leader: It is time for insolvent euro-zone countries to restructure their debts

Firm demand for Portugal's bonds cannot mask its deep problems

Quantifying the difficulties of Spain’s banking system

An interactive chart on the state of Europe's economies

Our correspondents on what a debt restructuring would mean for the euro zone

Discussion: Is it time for European debt restructuring?


Note the Off Balance Sheet Financing, especially in Greece (also like the U.S. Government)
"Can Europe Be Saved?" by Paul Krugman, The New York Times, January 12, 2011 ---

THERE’S SOMETHING peculiarly apt about the fact that the current European crisis began in Greece. For Europe’s woes have all the aspects of a classical Greek tragedy, in which a man of noble character is undone by the fatal flaw of hubris.

. . .

The answer, unfortunately, was that currency unions have costs as well as benefits. And the case for a single European currency was much weaker than the case for a single European market — a fact that European leaders chose to ignore.

. . .

What does this have to do with the case for or against the euro? Well, when the single European currency was first proposed, an obvious question was whether it would work as well as the dollar does here in America. And the answer, clearly, was no — for exactly the reasons the Ireland-Nevada comparison illustrates. Europe isn’t fiscally integrated: German taxpayers don’t automatically pick up part of the tab for Greek pensions or Irish bank bailouts. And while Europeans have the legal right to move freely in search of jobs, in practice imperfect cultural integration — above all, the lack of a common language — makes workers less geographically mobile than their American counterparts.

. . .

In Greece the story is straightforward: the government behaved irresponsibly, lied about it and got caught. During the years of easy borrowing, Greece’s conservative government ran up a lot of debt — more than it admitted. When the government changed hands in 2009, the accounting fictions came to light; suddenly it was revealed that Greece had both a much bigger deficit and substantially more debt than anyone had realized. Investors, understandably, took flight.

. . .

Toughing it out: Troubled European economies could, conceivably, reassure creditors by showing sufficient willingness to endure pain and thereby avoid either default or devaluation. The role models here are the Baltic nations: Estonia, Lithuania and Latvia. These countries are small and poor by European standards; they want very badly to gain the long-term advantages they believe will accrue from joining the euro and becoming part of a greater Europe. And so they have been willing to endure very harsh fiscal austerity while wages gradually come down in the hope of restoring competitiveness — a process known in Eurospeak as “internal devaluation.”

. . .

In any case, the odds are that the current tough-it-out strategy won’t work even in the narrow sense of avoiding default and devaluation — and the fact that it won’t work will become obvious sooner rather than later. At that point, Europe’s stronger nations will have to make a choice.

It has been 60 years since the Schuman declaration started Europe on the road to greater unity. Until now the journey along that road, however slow, has always been in the right direction. But that will no longer be true if the euro project fails. A failed euro wouldn’t send Europe back to the days of minefields and barbed wire — but it would represent a possibly irreversible blow to hopes of true European federation.

So will Europe’s strong nations let that happen? Or will they accept the responsibility, and possibly the cost, of being their neighbors’ keepers? The whole world is waiting for the answer.

Bob Jensen's threads on entitlements are at

"Prisoners stole millions from the IRS in 2009," by Kevin McCoy, USA Today, February 17, 2011 ---

Prisoners in Florida, Georgia and California lead the nation's inmate population in scamming payments from an unlikely benefactor: the IRS.

Seemingly proving the adage that crime pays, even behind bars, prisoners in the three states received nearly $19 million in IRS refunds during 2009 after filing false or fraudulent tax returns, according to an IRS report to Congress that was included in a federal audit released in January.

Continued in article

Jensen Comment
Florida also leads the nation in Medicare fraud such as phony medical equipment billings where Cuban immigrants (possibly aided by the Cuban government) are often masters of deception.---

Sort of makes me wonder how much of the IRS refunding fraud in Florida makes finds its ultimate home in Cuba.

Is there a developing country where doing business does not require bribery?
"IBM Settles Bribery Charges," by Jessica Holzer and Shaynki Raice, The Wall Street Journal, March 19, 2011 ---

U.S. regulators accused International Business Machines Corp. of a decade-long campaign of bribery in Asia, saying employees handed over shopping bags stuffed with cash in South Korea and arranged junkets for government officials in China in exchange for millions of dollars in contracts.

The Armonk, N.Y., technology giant agreed to pay $10 million to settle the civil charges, which allege "widespread" payment of bribes by more than 100 employees of IBM subsidiaries and a joint venture from 1998 to 2009. In exchange for the payments, the Securities and Exchange Commission said, IBM received contracts for computer gear.

IBM, which neither admitted nor denied the charges, said it holds employees to high ethical standards and has taken "appropriate remedial action" to address the issues raised by the U.S. government, though it wouldn't be more specific.

The charges ding Big Blue's reputation at a time when the company is looking to countries like China, India and Brazil to fuel much of its growth. IBM's emerging market revenue rose 16% last year and accounted for more than a fifth of the company's $99.9 billion total.

As U.S. companies move more aggressively abroad, the federal government has been stepping up its pursuit of cases under the Foreign Corrupt Practices Act, levying large fines and bringing criminal charges against executives. The act outlaws corporations listed on U.S. stock exchanges from bribing foreign officials.

The SEC expanded its team of FCPA investigators about a year ago. The Justice Department, which can bring criminal charges, has beefed up its FCPA unit as well and last year carried out 22 FCPA enforcement actions against corporations. A Justice Department spokeswoman wouldn't comment on whether it was investigating.

The SEC complaint alleges that managers employed by an IBM subsidiary and joint venture in South Korea paid government officials the equivalent of $207,000 in cash bribes from 1998 to 2003 to secure the sale of mainframes and personal computers to the government.

In some instances, IBM employees also provided entertainment to government officials, including depositing payments into the bank account of a "hostess in a drink shop," according to the SEC complaint.

The complaint details bribes totaling hundreds of thousands of dollars in cash, laptop computers, cameras, travel and entertainment expenses that were routinely gifted to government officials by IBM employees over the course of a decade in exchange for millions of dollars of government business.

From 1998 to 2002, the SEC alleges, IBM employees in South Korea paid off 16 South Korean government officials, including stuffing cash into shopping bags and IBM envelopes and handing them over in secret meetings in parking lots near an official's office and home. Another official was met in the parking lot of a Japanese restaurant, the SEC alleged.

The bribes were made in exchange for a variety of types of business, including winning bids for government contracts or to act as the preferred supplier for computers and storage equipment, the SEC complaint said.

In September 2000, a subsidiary of IBM in South Korea sold $1.3 million worth of personal computers to the South Korean government that were later found to have problems, the complaint said. Despite those problems, IBM won a contract to supply computers after the company paid an official $14,320 in cash, according to the SEC.

IBM sold its personal-computer business to China's Lenovo Group Ltd. in 2005.

In China, two key IBM officials and more than 100 employees engaged in a travel scam to provide personal vacations to Chinese government officials from 2004 to as late as early 2009, the SEC alleged.

IBM employees created slush funds at travel agencies and created fake invoices to pay for personal vacations and sightseeing for government officials, according to the SEC.

The settlement included $5.3 million in disgorged profit, $2.7 million in interest and a penalty of $2 million. The payment is relatively small for an FCPA civil case, which may reflect that the alleged bribes, while pervasive, weren't very large.

The SEC alleged in its complaint that IBM's internal controls weren't sufficient to spot or prevent the alleged bribes. IBM didn't keep accurate records, in some cases recording the payments as legitimate business expenses, the SEC said.

Fines in civil FCPA cases can often top $100 million. In cases that involve criminal charges as well, total fines can reach into the several hundreds of millions of dollars.

IBM says it has added $10 billion in annual revenue from its business in emerging markets since 2000. The company wants emerging markets to account for 30% of its revenue by 2015.

The tech industry has been hit with other FCPA investigations. U.S. authorities are looking at whether Hewlett-Packard Co. employees in Russia, Germany, Austria and Serbia paid kickbacks to distributors and customers, H-P disclosed last year. H-P has said it was cooperating with U.S. officials and German officials, who were carrying out their own investigation.

Continued in article

Bob Jensen's Fraud Updates are at

Wasteful Pork Barrel Legislation Department (this time in the State of Georgia)

"TLP: Like Shooting Fish in a Pork Barrel," by Adrienne Gonzalez, Jr. Deputy Accountant Blog, January 18, 2011 ---

Benford's Law: How a mathematical phenomenon can help CPAs uncover fraud and other irregularities

A century-old observation about the distribution of significant digits is now being used to detect fraud.
Thanks to Miguel for the heads up on January 22, 2011---

"The Difficulty of Faking Data," --- PAPERS/difficultyOfFakingData1999.pdf

From Jensen's Archives ---
Benford's Law:  It's interesting to read the "Silly" comments that follow the article.

"Benford's Law And A Theory of Everything:  A new relationship between Benford's Law and the statistics of fundamental physics may hint at a deeper theory of everything," MIT's Technology Review. May 7, 2010 ---

In 1938, the physicist Frank Benford made an extraordinary discovery about numbers. He found that in many lists of numbers drawn from real data, the leading digit is far more likely to be a 1 than a 9. In fact, the distribution of first digits follows a logarithmic law. So the first digit is likely to be 1 about 30 per cent of time while the number 9 appears only five per cent of the time.

That's an unsettling and counterintuitive discovery. Why aren't numbers evenly distributed in such lists? One answer is that if numbers have this type of distribution then it must be scale invariant. So switching a data set measured in inches to one measured in centimetres should not change the distribution. If that's the case, then the only form such a distribution can take is logarithmic.

But while this is a powerful argument, it does nothing to explan the existence of the distribution in the first place.

Then there is the fact that Benford Law seems to apply only to certain types of data. Physicists have found that it crops up in an amazing variety of data sets. Here are just a few: the areas of lakes, the lengths of rivers, the physical constants, stock market indices, file sizes in a personal computer and so on.

However, there are many data sets that do not follow Benford's law, such as lottery and telephone numbers.

What's the difference between these data sets that makes Benford's law apply or not? It's hard to escape the feeling that something deeper must be going on.

Today, Lijing Shao and Bo-Qiang Ma at Peking University in China provide a new insight into the nature of Benford's law. They examine how Benford's law applies to three kinds of statistical distributions widely used in physics.

These are: the Boltzmann-Gibbs distribution which is a probability measure used to describe the distribution of the states of a system; the Fermi-Dirac distribution which is a measure of the energies of single particles that obey the Pauli exclusion principle (ie fermions); and finally the Bose-Einstein distribution, a measure of the energies of single particles that do not obey the Pauli exclusion principle (ie bosons).

Lijing and Bo-Qiang say that the Boltzmann-Gibbs and Fermi-Dirac distributions distributions both fluctuate in a periodic manner around the Benford distribution with respect to the temperature of the system. The Bose Einstein distribution, on the other hand, conforms to benford's Law exactly whatever the temperature is.

What to make of this discovery? Lijing and Bo-Qiang say that logarithmic distributions are a general feature of statistical physics and so "might be a more fundamental principle behind the complexity of the nature".

That's an intriguing idea. Could it be that Benford's law hints at some kind underlying theory that governs the nature of many physical systems? Perhaps.

But what then of data sets that do not conform to Benford's law? Any decent explanation will need to explain why some data sets follow the law and others don't and it seems that Lijing and Bo-Qiang are as far as ever from this.

It's interesting to read the "Silly" comments that follow the article.

"I've Got Your Number:  How a mathematical phenomenon can help CPAs uncover fraud and other irregularities," by Mark J. Nigrini, Journal of Accountancy, May 1999 ---

Top of Form




BENFORD'S LAW PROVIDES A DATA analysis method that can help alert CPAs to possible errors, potential fraud, manipulative biases, costly processing inefficiencies or other irregularities.

A PHYSICIST AT GE RESEARCH LABORATORIES in the 1920s, Frank Benford found that numbers with low first digits occurred more frequently in the world and calculated the expected frequencies of the digits in tabulated data.

CPAs CAN USE BENFORD'S DISCOVERY in business applications ranging from accounts payable to Y2K problems. In addition, subset tests identify small lists of serious anomalies in large data sets, making an analysis more manageable.

DIGITAL ANALYSIS IS WELL SUITED to finding errors and irregularities in large data sets when auditors need computer assisted technologies to direct their attention to anomalies.

MARK J. NIGRINI, CA (SA), PhD, MBA, is an assistant professor at the Edwin L. Cox School of Business, Southern Methodist University, Dallas, and a Research Fellow at the Ernst & Young Center for Auditing Research and Advanced Technology, University of Kansas, Lawrence.


Bottom of Form

Video Lecure by Nobel Laureate Robert Merton
The Future of Finance
MIT World

In his keynote address, Robert Merton chooses not to focus on the financial crisis. It is clear to him there were “fools and knaves,” as well as “many structural elements that would have happened even if people were well behaved and well informed” -- risks are simply “embedded in our systems.” Instead, Merton explores how financial engineering is essential in preparing for the inevitable next crisis, and in solving critical challenges. “The world has changed; we can’t go back. Let’s talk about what we should do going forward.”

To illustrate society’s need for financial innovation, Merton uses “a live case study:” the vast problem of retirement funding. In the past decade, stock market declines and falling interest rates have hit mainstream employer pension plans hard. Municipal pension plans may be underfunded to the tune of three trillion dollars. (“It makes the S&L crisis look like nothing.”) But people seek, and are due, “the standard of living during retirement they enjoyed in the latter part of their work life.”

Generally, determining this standard of living means adding up likely medical, housing and general consumption costs, and Merton describes how to target such retirement income. The main ways to achieve the desired goal are by saving more, working longer or taking more risk. Merton would like to design a software-based tool for ordinary people, simple on the user end, complex on the provider end, which would serve as a “next generation pension solution,” offering a way to manipulate the key variables in retirement income and demonstrate potential financial outcomes. This tool would help users continuously optimize risk to help them reach their retirement funding goals.

There are regulatory obstacles now to the implementation of such a method on a widespread basis, and a gap between how managers, advisers and financial institutions think about pension assets, and what Merton has in mind. Nevertheless, he says, “What we need to do for most of the people who don’t have extra money and must do the most with their assets is deliver a simple, easy to use, and if they don’t use it still gets them there, solution.” Merton acknowledges those who think the giant problem of pension funding can be solved by what’s already available -- bond and equity markets, bank loans – and who hanker “to get rid of all the complexity, go back to 1930, ’50 or ’80.” From his perspective, this means “throwing away a lot of what you could do, because the market-proven strategies people have developed and used…can do a much better job for people.”

Jensen Comment
Contributing to the pension crisis has been a willingness of the accounting and auditing profession to allow both the public and private sectors to deceive taxpayers and investors about the extend to which contracted pension obligations are off the balance sheet and not even disclosed properly.

The sad state of governmental accounting ---

Off Balance Sheet Financing (OBSF) ---

"The Casino Next Door:  How slot machines snuck into the mall, along with money laundering, bribery, shootouts, and billions in profits," by Felix Gellette, Business Week, April 21, 2011 --- 

Inside a one-story building on the edge of a strip mall in Central Florida, Joy Baker calculates the sum total of her morning bets. It's almost noon, and she's down $5. Not bad. Her husband, Tony, sits a few feet away. "This is the most fun we've had in 20 years," says Joy, who is 78 and retired. "At our age, we can't hike. You can't pay him to go to the movies. This gives us a reason to get up in the morning."

Tony concurs. "We enjoy this," he says. "We will be very bitter if the politicians take this away from us. I will take it personally."

It's a Wednesday morning in mid-March, and the Bakers are sitting inside Jacks, a new type of neighborhood business that is flourishing in shopping malls throughout Florida—and across America. Jacks bills itself as a "Business Center and Internet Cafe," but it looks more like a pop-up casino.

Jacks is about the size of a neighborhood deli. There is a bar next door and a convenience store around the corner. Inside, jumbo playing cards decorate the walls. The room is filled with about 30 desktop computers. Here and there, men and women sit in office chairs and tap at the computers. They are playing "sweepstakes" games that mimic the look and feel of traditional slot machines. Rows of symbols—cherries, lucky sevens, four-leaf clovers—tumble with every click of the mouse.

John Pate, a 50-year-old wearing a Harley-Davidson T-shirt, says he is wagering the equivalent of 60 cents a spin. "This place is pretty laid-back," says Pate. "You can come here and get your mind off everything. You're not going to win the mortgage. You're not going to lose the mortgage. It's pretty harmless."

Continued in article

Jensen Comment
It's a question of whether online porn sites are more dangerous than online gambling sites. From the standpoint of probability theory, online gambling sites are probably more dangerous to visit because of the denominator effect --- there are fewer gambling sites relative to the millions upon millions of porn sites. But both types of sites can do great damage to your computer and to your bank account and to your credit score.

From a psychological research standpoint, it's interesting to study what onsite gambling offers that patrons find lacking in online gambling sites.


Bob Jensen's threads on accounting theory are at

Last night on television news a clip was played of a robber in what I think was a book store. The robber was extremely polite and apologetic when claiming he would not be doing this if his kids were not hungry. But he insisted on taking all the cash in the drawer rather than the $40 offered by the store owner.

On the way out the door the polite robber promised that when he got a job and was back on his feet again he would pay all of the stolen money back.

Would the store owner have committed such a robbery if the roles were reversed?

Are ethics and morality variables that depend upon situational circumstances?
How does Sprite or Pepsi soda fit into the following lecture on morality?
What is heteronomy?

Video:  Immanuel Kant Assumes Categorical Imperatives in a World of Relativity (where we're slaves to our varying necessities)
Professor Sandel @ Harvard University

Here is Professor Sandel’s video introducing Immanuel Kant’s philosophy of ethics. In my opinion, one of the best lectures on ethics. Below is an extract for the one hour lesson --- |

I'm not normally a big fan of Tom Selleck films. But this winter Erika and I have really enjoyed the mystery series in which Selleck plays the role of a crusty  alcoholic chief of police, Jesse Stone, in a town of last resort called Paradise. When asked if he shoots to kill or just wound, his automatic response is the categorical imperative "to kill" followed by reasoning decided early in his law enforcement career. Although we've not seen the entire series as of yet, to date all of his victims do not live to see another day.

"F.D.I.C. Sues Ex-Chief of Big Bank That Failed," by Eric Dash, The New York Times, March 17, 2011 ---

The Federal Deposit Insurance Corporation sued the former chief executive of Washington Mutual and two of his top lieutenants, accusing them of reckless lending before the 2008 collapse of what was the nation’s largest savings bank.

F.D.I.C. Sues Ex-Chief of Big Bank That Failed By ERIC DASH Published: March 17, 2011

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The Federal Deposit Insurance Corporation sued the former chief executive of Washington Mutual and two of his top lieutenants, accusing them of reckless lending before the 2008 collapse of what was the nation’s largest savings bank.

The civil lawsuit, seeking to recover $900 million, is the first against a major bank chief executive by the regulator and follows escalating public pressure to hold bankers accountable for actions leading up to the financial crisis.

Kerry K. Killinger, Washington Mutual’s longtime chief executive, led the bank on a “lending spree” knowing that the housing market was in a bubble and failed to put in place the proper risk management systems and internal controls, according to a complaint filed on Thursday in federal court in Seattle.

David C. Schneider, WaMu’s president of home lending, and Stephen J. Rotella, its chief operation officer, were also accused of negligence for their roles in developing and leading the bank’s aggressive growth strategy.

“They focused on short-term gains to increase their own compensation, with reckless disregard for WaMu’s long-term safety and soundness,” the agency said in the 63-page complaint. “The F.D.I.C. brings this complaint to hold these highly paid senior executives, who were chiefly responsible for WaMu’s higher-risk home lending program, accountable for the resulting losses.”

In addition, the complaint says that Mr. Killinger and his wife, Linda, set up two trusts in August 2008 to keep his homes in California and Washington out of the reach of the bank’s creditors. Months earlier, in the spring of 2008, Mr. Rotella and his wife, Esther, made similar arrangements. The F.D.I.C. is seeking to freeze the assets of both couples and named the wives as defendants in the lawsuit.

In unusually vigorous denials, Mr. Killinger and Mr. Rotella came out swinging against the F.D.I.C. Mr. Killinger said the agency’s claims were “baseless and unworthy of the government” and its legal conclusions were “political theater.” Mr. Rotella said the action “runs counter to the facts about my relatively short time at the company,” calling it “unfair and an abuse of power.” He said the trust was for normal estate planning purposes and was set up before the bank’s downfall. Mr. Schneider, who is represented by the same lawyer as Mr. Rotella, did not release a public statement.

Although the F.D.I.C. is mainly known for its role in shuttering failed lenders, the agency has a legal obligation to bring lawsuits against former directors and officers when it finds evidence of wrongdoing.

So far, the F.D.I.C. has brought claims against 158 individuals at about 20 small banks that failed during the recent crisis. The agency is seeking a total of more than $2.6 billion in damages. But the $900 million case against the former WaMu officials is its biggest and most prominent action to date.

Federal regulators have come under fire for failing to hold executives responsible for their involvement in the worst financial crisis since the Great Depression. Last fall, the Securities and Exchange Commission reached a settlement with Angelo R. Mozilo, the former chief executive of Countrywide Financial, to pay a $22.5 million penalty over misleading investors about the financial condition of the giant mortgage lender.

The New York attorney general’s office has brought a civil suit against Kenneth D. Lewis over improper disclosures related to the 2008 rescue of Merrill Lynch by Bank of America, of which he was chief executive.

Continued in article

A massive shareholder lawsuit is also pending against WaMu's auditor, Deloitte ---
WaMu's loan loss reserves were not only massively understated, WaMu should've been audited as a non-going concern ---

More Headaches for Deloitte After Auditing the Biggest Bank to Ever Fail
"Investigation finds fraud in WaMu lending:  Senate report: Failed bank’s own action couldn’t stop deceptive practices," by Marcy Gordon, MSNBC, April 12, 2010 ---

The mortgage lending operations of Washington Mutual Inc., the biggest U.S. bank ever to fail, were threaded through with fraud, Senate investigators have found.

And the bank's own probes failed to stem the deceptive practices, the investigators said in a report on the 2008 failure of WaMu.

The panel said the bank's pay system rewarded loan officers for the volume and speed of the subprime mortgage loans they closed. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to the report being released Tuesday by the investigative panel of the Senate Homeland Security and Governmental Affairs Committee.

Sen. Carl Levin, D-Mich., the chairman, said Monday the panel won't decide until after hearings this week whether to make a formal referral to the Justice Department for possible criminal prosecution. Justice, the FBI and the Securities and Exchange Commission opened investigations into Washington Mutual soon after its collapse in September 2008.

The report said the top WaMu producers, loan officers and sales executives who made high-risk loans or packaged them into securities for sale to Wall Street, were eligible for the bank's President's Club, with trips to swank resorts, such as to Maui in 2005.

Fueled by the housing boom, Seattle-based Washington Mutual's sales to investors of packaged subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, collapsed in September 2008. It was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the Federal Deposit Insurance Corp.

Jennifer Zuccarelli, a spokeswoman for JPMorgan Chase, declined to comment on the subcommittee report.

WaMu was one of the biggest makers of so-called "option ARM" mortgages. These mortgages allowed borrowers to make payments so low that loan debt actually increased every month.

The Senate subcommittee investigated the Washington Mutual failure for a year and a half. It focused on the thrift as a case study for the financial crisis that brought the recession and the loss of jobs or homes for millions of Americans.

The panel is holding hearings Tuesday and Friday to take testimony from former senior executives of Washington Mutual, including ex-CEO Kerry Killinger, and former and current federal regulators.

Washington Mutual "was one of the worst," Levin told reporters Monday. "This was a Main Street bank that got taken in by these Wall Street profits that were offered to it."

The investors who bought the mortgage securities from Washington Mutual weren't informed of the fraudulent practices, the Senate investigators found. WaMu "dumped the polluted water" of toxic mortgage securities into the stream of the U.S. financial system, Levin said.

In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements. The company's own probe in 2005, three years before the bank collapsed, found that two top producing offices — in Downey and Montebello, Calif. — had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.

Washington Mutual was repeatedly criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates by borrowers, according to the report. Violations were so serious that in 2007, Washington Mutual closed its big affiliate Long Beach Mortgage Co. as a separate entity and took over its subprime lending operations.

Senior executives of the bank were aware of the prevalence of fraud, the Senate investigators found.

In late 2006, Washington Mutual's primary regulator, the U.S. Office of Thrift Supervision, allowed the bank an additional year to comply with new, stricter guidelines for issuing subprime loans.

According to an internal bank e-mail cited in the report, Washington Mutual would have lost about a third of the volume of its subprime loans if it applied the stricter requirements.


Deloitte is Included in the Shareholder Lawsuit Against Washington Mutual (WaMu)

"Feds Investigating WaMu Collapse," SmartPros, October 16, 2008 ---

Oct. 16, 2008 (The Seattle Times) — U.S. Attorney Jeffrey Sullivan's office [Wednesday] announced that it is conducting an investigation of Washington Mutual and the events leading up to its takeover by the FDIC and sale to JP Morgan Chase.

Said Sullivan in a statement: "Due to the intense public interest in the failure of Washington Mutual, I want to assure our community that federal law enforcement is examining activities at the bank to determine if any federal laws were violated."

Sullivan's task force includes investigators from the FBI, Federal Deposit Insurance Corp.'s Office of Inspector General, Securities and Exchange Commission and the Internal Revenue Service Criminal Investigations division.

Sullivan's office asks that anyone with information for the task force call 1-866-915-8299; or e-mail

"For more than 100 years Washington Mutual was a highly regarded financial institution headquartered in Seattle," Sullivan said. "Given the significant losses to investors, employees, and our community, it is fully appropriate that we scrutinize the activities of the bank, its leaders, and others to determine if any federal laws were violated."

WaMu was seized by the FDIC on Sept. 25, and its banking operations were sold to JPMorgan Chase, prompting a Chapter 11 bankruptcy filing by Washington Mutual Inc., the bank's holding company. The takeover was preceded by an effort to sell the entire company, but no firm bids emerged.

The Associated Press reported Sept. 23 that the FBI is investigating four other major U.S. financial institutions whose collapse helped trigger the $700 billion bailout plan by the Bush administration.

The AP report cited two unnamed law-enforcement officials who said that the FBI is looking at potential fraud by mortgage-finance giants Fannie Mae and Freddie Mac, and insurer American International Group (AIG). Additionally, a senior law-enforcement official said Lehman Brothers Holdings is under investigation. The inquiries will focus on the financial institutions and the individuals who ran them, the senior law-enforcement official said.

FBI Director Robert Mueller said in September that about two dozen large financial firms were under investigation. He did not name any of the companies but said the FBI also was looking at whether any of them have misrepresented their assets.

"Federal Official Confirms Probe Into Washington Mutual's Collapse," by Pierre Thomas and Lauren Pearle, ABC News, October 15, 2008 ---

The federal government is investigating whether the leadership of shuttered bank Washington Mutual broke federal laws in the run-up to its collapse, the largest in U.S. history.

. . .

Eighty-nine former WaMu employees are confidential witnesses in a shareholder class action lawsuit against the bank, and some former insiders spoke exclusively to ABC News, describing their claims that the bank ignored key advice from its own risk management team so they could maximize profits during the housing boom.

In court documents, the insiders said the company's risk managers, the "gatekeepers" who were supposed to protect the bank from taking undue risks, were ignored, marginalized and, in some cases, fired. At the same time, some of the bank's lenders and underwriters, who sold mortgages directly to home owners, said they felt pressure to sell as many loans as possible and push risky, but lucrative, loans onto all borrowers, according to insiders who spoke to ABC News.

Continued in article


Allegedly "Deloitte Failed to Audit WaMu in Accordance with GAAS" (see Page 351) --- Click Here
Deloitte issued unqualified opinions and is a defendant in this lawsuit (see Page 335)
In particular note Paragraphs 893-901 with respect to the alleged negligence of Deloitte.

More on Deloitte's woes in the wake of the WaMu collapse --- 

"What Caused the Bubble? Mission accomplished: Phil Angelides succeeds in not upsetting the politicians," by Holman W, Jenkins, Jr., The Wall Street Journal, January 29. 2011 ---

The 2008 financial crisis happened because no one prevented it. Those who might have stopped it didn't. They are to blame.

Greedy bankers, incompetent managers and inattentive regulators created the greatest financial breakdown in nearly a century. Doesn't that make you feel better? After all, how likely is it that some human beings will be greedy at exactly the same time others are incompetent and still others are inattentive?

Oh wait.

You could almost defend the Financial Crisis Inquiry Commission's (FCIC) new report if the question had been who, in hindsight, might have prevented the crisis. Alas, the answer is always going to be the Fed, which has the power to stop just about any macro trend in the financial markets if it really wants to. But the commission was asked to explain why the bubble happened. In that sense, its report doesn't seem even to know what a proper answer might look like, as if presented with the question "What is 2 + 2?" and responding "Toledo" or "feral cat."

The dissenters at least propose answers that might be answers. Peter Wallison focuses on U.S. housing policy, a diagnosis that has the advantage of being actionable.

The other dissent, by Keith Hennessey, Bill Thomas and Douglas Holtz-Eakin, sees 10 causal factors, but emphasizes the pan-global nature of the housing bubble, which it attributes to ungovernable global capital flows.

That is also true, but less actionable.

Let's try our hand at an answer that, like Mr. Wallison's, attempts to be useful.

The Fed will make errors. International capital flows will sometimes be disruptive. Speculators will be attracted to hot markets. Bubbles will be a feature of financial life: Building a bunch of new houses is not necessarily a bad idea; only when too many others do the same does it become a bad idea. On that point, not the least of the commission's failings was its persistent mistaking of effects for causes, such as when banks finally began treating their mortgage portfolios as hot potatoes to be got rid of.

If all that can't be changed, what can? How about the incentives that invited various parties to shovel capital into housing without worrying about the consequences?

The central banks of China, Russia and various Asian and Arab nations knew nothing about U.S. housing. They poured hundreds of billions into it only because Fannie and Freddie were perceived as federally guaranteed and paid a slightly higher yield than U.S. Treasury bonds. (And one of the first U.S. actions in the crisis was to assure China it wouldn't lose money.)

Borrowers in most states are allowed to walk away from their mortgages, surrendering only their downpayments (if any) while dumping their soured housing bets on a bank. Change that even slightly and mortgage brokers and home builders would find it a lot harder to coax people into more house than they can afford.

Mortgage middlemen who don't have "skin in the game" and feckless rating agencies have also been routine targets of blame. But both are basically ticket punchers for large institutions that should have and would have been assessing their own risk, except that their own creditors, including depositors, judged them "too big to fail," creating a milieu where they could prosper without being either transparent or cautious. We haven't even tried to fix this, say by requiring banks to take on a class of debtholder who would agree to be converted to equity in a bailout. Then there'd be at least one sophisticated marketplace demanding assurance that a bank is being run in a safe and sound manner. (Sadly, the commission's report only reinforces the notion that regulators are responsible for keeping your money safe, not you.)

The FCIC Chairman Phil Angelides is not stupid, but he is a politician. His report contains tidbits that will be useful to historians and economists. But it's also a report that "explains" poorly. His highly calculated sound bite, peddled from one interview to the next, that the crisis was "avoidable" is worthless, a nonrevelation. Everything that happens could be said to happen because somebody didn't prevent it. So what? Saying so is saying nothing.

Mr. Angelides has gone around trying to convince audiences that the commission's finding was hard hitting. It wasn't. It was soft hitting. More than any other goal, it strives mainly to say nothing that would actually be inconvenient to Barack Obama, Harry Reid, Barney Frank or even most Republicans in Congress. In that, it succeeded.

Jensen Comment
And then the subprime crisis was followed by the biggest swindle in the history of the world ---

At this point time in 2011 there's only marginal benefit in identifying all the groups like credit agencies and CPA audit firms that violated professionalism leading up to the subprime crisis. The credit agencies, auditors, Wall Street investment banks, Fannie Mae, and Freddie Mack were all just hogs feeding on the trough of bad and good loans originating on Main Streets of every town in the United States.

If the Folks on Main Street that Approved the Mortgage Loans in the First Stage Had to Bear the Bad Debt Risks There Would've Been No Poison to Feed Upon by the Hogs With Their Noses in the Trough Up to and Including Wall Street and Fannie and Freddie.

If the Folks on Main Street that Approved the Mortgage Loans in the First Stage Had to Bear the Bad Debt Risks All Would've Been Avoided
The most interesting question in my mind is what might've prevented the poison (uncollectability) in the real estate loans from being concocted in the first place. What might've prevented it was for those that approved the loans (Main Street banks and mortgage companies in towns throughout the United States) to have to bear all or a big share of the losses when borrowers they approved defaulted.

Instead those lenders that approved the loans easily passed those loans up the system without any responsibility for their reckless approval of the loans in the first place. It's easy to blame Barney Frank for making it easier for poor people to borrow more than they could ever repay. But the fact of the matter is that the original lenders like Countrywide were approving subprime mortgages to high income people that also could not afford their payments once the higher prime rates kicked in under terms of the subprime contracts. If lenders like Countrywide had to bear a major share of the bad debt losses the lenders themselves would've been more responsible about only approving mortgages that had a high probability of not going into default. Instead Countrywide and the other Main Street lenders got off scott free until the real estate bubble finally burst.

And why would a high income couple refinance a fixed rate mortgage with a risky subprime mortgage that they could not afford when the higher rates kicked in down the road? The answer is that the hot real estate market before the crash made that couple greedy. They believed that if they took out a subprime loan with a very low rate of interest temporarily that they could turn over their home for a relatively huge profit and then upgrade to a much nicer mansion on the hill from the profits earned prior to when the subprime rates kicked into higher rates.

When the real estate bubble burst this couple got left holding the bag and received foreclosure notices on the homes that they had gambled away. And the Wall Street investment banks, Fannie, and Freddie got stuck with all the poison that the Main Street banks and mortgage companies had recklessly approved without any risk of recourse for their recklessness.

If the Folks on Main Street that Approved the Mortgage Loans in the First Stage Had to Bear the Bad Debt Risks There Would've Been No Poison to Feed Upon by the Hogs With Their Noses in the Trough Up to and Including Wall Street and Fannie and Freddie.

Bob Jensen's threads on this entire mess are at

"Deloitte’s Troubles Bubble To Surface," by Francine McKenna, re:TheAuditors, January 31, 2011 ---

Mainstream media, and the Financial Crisis Inquiry Commission, are focused mainly on Ernst & Young as the auditor whipping boy of the financial crisis. That’s really by default not by design and is thinly justified. No one has given fly-over journalists anything on a silver platter that would draw in the rest. Not that there aren’t a number of reasons to look hard at all of them. They are feigning outrage in the UK. But here in the US, we treat the audit firms as untouchable.

That doesn’t stop me from highlighting all the reasons why the rest of the Big 4 should be scrutinized as much or, perhaps, even more than Ernst & Young for their role in the crisis. And, of course, you know I believe there’s more than their behavior during the crisis to warrant significant scrutiny of the industry’s model and its methods. The popular perception is Ernst & Young is the most vulnerable of the largest firms because of its troubles with Lehman, but that’s more a public relations problem than a fact-based conclusion.

Granted, Ernst & Young hasn’t been very good at crisis communications. In fact, they’ve really sucked at it since last March. Their delay in responding to the original Lehman Bankruptcy Examiner’s report and the suit filed by the New York Attorney General is a case study in how not to respond. Because that’s what they did. Not respond. They either didn’t respond at all to journalists or issued the standard auditor response to any lawsuit. That’s the one with two sentences, or one long one, that includes the phrases “according to GAAP”, “followed all standards”, “stand by our work”, and “we just stand there”.

Give me a few minutes and I can make a case for PricewaterhouseCoopers as the one teetering on the edge of the abyss instead. Or KPMG.

But today, let’s talk about Deloitte.

A few weeks ago I detailed the case of Arnold McClellan, the Deloitte Tax partner who is accused of using his knowledge of Deloitte client private equity firm Hellman & Friedman’s acquisitions to pass insider trading tips to his UK relatives. Deloitte, the firm, is cooperating with FSA, SEC, and DOJ investigations of these allegations, as they did in the SEC’s investigations of their other partner inside trader – former Deloitte Vice Chairman Tom Flanagan. Mr. Flanagan’s case was settled with the SEC last summer and McClellan’s will eventually be settled, too. In both cases, Deloitte’s cooperation will save them from fines and sanctions or even a consent decree requiring them to clean up their compliance act.

How does that translate into trouble for Deloitte? After all, they’re skating away as a firm from major insider trading scandals, looking like the good firm. Well…Two serious insider trading cases, both involving partners and high profile target companies, playing out during the same time frame equals holes in Deloitte’s internal compliance processes you can drive a Mack truck through. Whether the SEC or Deloitte admit it publicly, the heat is on and it’s only a matter of time before another case bobs to the surface. Or more than one.

How many times can Deloitte claim the firm is being “duped” by its own partners? Eventually there will be an egregious case where the firm has to pay a fine or worse. I’m sure there’s already a lot more headaches in the annual independence process for partners and their families. If not, both the SEC and the firm are playing with fire.

Last week I wrote in Forbes about the victory for class action plaintiffs suing Bear Stearns executives and Deloitte for Bear Stearns’ part in the financial crisis. It’s a major accomplishment to get a crisis suit past the motions to dismiss, in general but especially significant, in particular, when thesuit also names the auditor as a defendant. Deloitte will now be subject to discovery and a trial – if they don’t settle first – to refute allegations they performed “no audit at all” at Bear Stearns.

That was the gist of allegations in the UK’s House of Lords regarding Deloitte’s audit of Royal Bank of Scotland. That failed bank was nationalized by the British government and never received a “going concern” qualification in enough time to warn anyone.

Continued in article

Jensen Comment
In spite of the mention of Ernst & Young above, it is my general feeling that Francine has it in for Deloitte more than the other three of the Big Four oligopoly. Of course she hammers at all of the Big Four now and then. But Deloitte seems to ruffle her feathers more than the rest.

Deloitte is the only one of the Big Four that did not sell or spin off its huge consulting division. However, I don't think, since the days of Andersen, that consulting is the main threat to auditor independence. The main threat, in my viewpoint, is that in certain practice offices in all the Big Four audit firms there are some audit clients too big to not get clean audit opinions.

Bob Jensen's threads on Deloitte and the rest are at
One of Deloitte's worst audits had to be Washington Mutual just prior to when this enormous bank with what was probably the worst lending practices of all the failed banks got a clean opinion with badly underestimated loan losses from Deloitte. Instead WaMu should've gotten a going concern signal from the auditors before it went belly up!

"Recidivism and Risk Management: Barry Minkow Goes Back to the Slammer," by Jim Peterson, re:Balance, March 24, 2011 ---

A question for those charged with risk management and fraud prevention:

What’s your company policy on employing or doing business with ostensibly reformed white-collar criminals?

And is a re-think indicated by the news that Barry Minkow, wunderkind among securities swindlers for the scam at ZZZZ Best in the 1980’s, for which he served seven years of a double-digit sentence on 57 counts, is negotiating a securities-fraud plea bargain under which he now faces fives fresh years of jail time (here).

My concern is a prosaic one – not Hollywood’s question whether his return to federal housing means that the pending Minkow bio-pic requires re-shooting of a new ending (here), or whether the February burglary of $50,000 at the Community Bible Church where he recently resigned as pastor (here) bears any of his felonious fingerprints (here).

It’s only this: Given the rate of relapse among those described by English essayist Charles Lamb as “so crooked that if they’d swallow a spike, they’d void out a corkscrew,” should a company concerned for its reputation and fiscal soundness ever yield to sentiment and invite such a fox back into its henhouse?

Experience over the years counsels against it. Examples in my own catalog include the large-company CEO convict, who finagled a reduced sentence via a convenient medical excuse, and was no sooner paroled to a halfway house than he took over its single pay-phone to peddle the rosy promises of new oil deals. Or the youthful CFO applicant who persuaded an employer of his time-served maturation, following bucket-shop charges; the naïve advice of the audit firm partner was to “keep the kid away from the cash” – unavailing to prevent a scandalous and catastrophic collapse and a portfolio of lengthy prison sentences for the entire executive team.

Continued in article

Steve Albrecht (former American Accounting Association President and Professor of Accounting at Brigham Young University) conducted interviews when Barry Minkow was still in prison.  You can read Steve's account of the ZZZZ Best Fraud at 

Why is there so much investment fraud?

What we have is a perfect fraud storm. In places across the country with an appreciating housing market, low interest rates, and consumers dissatisfied with Wall Street returns, you'll find people ripe for [perpetrators].
"Ten Questions for Barry Minkow," CFO Staff, by CFO Magazine, January 2005, Page 20 --- 

The current head of the Fraud Discovery Institute, Barry Minkow, also served more than seven years in prison for the infamous ZZZZ Best scam.

Barry Minkow says he plans to be remembered for more than the ZZZZ Best Co. fraud. The 38-year-old Minkow served more than seven years in prison for the infamous 1980s scam. But he hopes that his current efforts as head of the Fraud Discovery Institute and as pastor of The Community Bible Church in San Diego will supersede his activities as CEO of the carpet-cleaning company. This month his new book, Cleaning Up (Nelson Current), debuts.

1. Currently, you are fighting the very crime you were convicted of. Isn't that ironic?
No one failed worse than I did at such a young age. Sure, you can adjust the dollar amounts and say it was $10 billion with Bernie Ebbers at WorldCom, but it doesn't matter. I was CEO of a public company and I failed. [ZZZZ Best] was a fully reporting public company with a stock that went from $12 to $80. And at 21, I got a 25-year sentence and a $26 million restitution order, and that's [since been] turned into $1 billion in fraud uncoverings.

2. What can other white-collar criminals glean from your mistakes?
Jeff Skilling's and Andy Fastow's best days are ahead of them...if they admit they did wrong, do whatever they can to pay back their victims, and use the same talents they used to defraud people to help them.

3. When you speak to executives about fraud, what's your main message?
When I speak to executives, I wear my orange prison jumpsuit. It's gimmicky... [but] the best way to stop fraud is to talk people out of perpetrating it in the first place by doing two things: increasing the perception of detection and increasing the perception of prosecution.

4. Are you surprised that the fraud techniques you used are still out there?
It doesn't surprise me at all. Long before Enron was touring people on phony trading floors, ZZZZ Best was touring people on buildings for restoration jobs that we never did. Now the variation on a theme is always there, but here's what we do: we lie about what we owe and we lie about what we earn.

5. On what do you blame the rash of corporate fraud in recent years?
It's a mentality called right equals forward motion and wrong is anyone who gets in my way. You see, we used to endorse character and integrity, but today the business ethic that reigns is achievement. And whenever you establish the worth of someone based on what they can do and not on who they are, you have created the environment for fraud.

6. Are you skeptical of efforts, such as Sarbanes-Oxley, to legislate ethics?
Let me tell you why this legislation is brilliant. Sarbox hit at a common denominator of corporate fraud: bypassing systems of internal controls. I would not have been able to perpetrate the ZZZZ Best fraud if I had not been able to bypass the system of internal controls. And you know who are heroes now — the internal auditors and the Public Company Accounting Oversight Board. Unless you're a perpetrator, you don't know how good these moves are.

7. Should the sentencing guidelines for white-collar criminals be overhauled?
Yes, and judges should have more discretion. My judge is the one who said that I had no conscience. Two years ago, he dismissed my $26 million restitution order, dismissed me from probation three years early, and told me to go out and fight corporate fraud. [But] I don't care if anyone goes to jail. The number-one thing white-collar criminals need to do is give the money back to those hurt the most.

8. When will you be satisfied that you've repaid your debt to society?
I won't be. Union Bank had a $7 million loan [against ZZZZ Best], and I have a long way to go. But I haven't missed a payment in nine years. They've gotten over $100,000 this year alone.

9. Why is there so much investment fraud?
What we have is a perfect fraud storm. In places across the country with an appreciating housing market, low interest rates, and consumers dissatisfied with Wall Street returns, you'll find people ripe for [perpetrators].

10. What do you say to those who doubt your conversion to the straight and narrow?
There's this great phrase in the Bible: "When the man's ways please the Lord, he makes even his enemies be at peace with him." The biggest critics of Barry Minkow should be law enforcement. They absolutely know if someone is a fake or real. But they've been my biggest supporters.


Read more about Barry Minkow and the infamous ZZZZ Best accounting fraud at
Financial Accounting by W. Steve Albrecht, Earl K. Stice, James D. Stice --- Click Here
Also see

About those nondisclosure agreements in journal subscription contracts
"Cornell U. Library Takes a Stand With Journal Vendors: Prices Will Be Made Public," by Jennifer Howard, Chronicle of Higher Education, March  24, 2011 ---

Librarians have long complained about the nondisclosure agreements, or NDA's, that some publishers and vendors require them to sign, making it difficult to share information about how much they pay to subscribe to journal databases and other scholarly material. Some state universities' libraries have been able to reveal licensing terms anyway because their institutions are subject to sunshine laws. Now one major private institution, Cornell University, has publicly declared it's had enough of confidentiality agreements, too.

"To promote openness and fairness among libraries licensing scholarly resources, Cornell University Library will not enter into vendor contracts that require nondisclosure of pricing information or other information that does not constitute a trade secret," the library said in a statement posted on its Web site. "The more that libraries are able to communicate with one another about vendor offers, the better they are able to weigh the costs and benefits of any individual offer. An open market will result in better licensing terms."

Anne R. Kenney, Cornell's university librarian, said that with purchasing decisions under close scrutiny, it felt like the right moment to take a stand. Enough major publishers have agreed to drop nondisclosure clauses "that it was time to bite the bullet and make that a principle moving forward," she said. "Publishers are beginning to get it."

At the end of its statement, the Cornell library listed some of the publishers that do not request confidentiality clauses when they negotiate licenses. They include the American Physical Society, the American Chemical Society, Cambridge University Press, EBSCO, Elsevier, Oxford University Press, ProQuest, Sage, Taylor & Francis, and Wiley. (If a publisher does not appear on the list, that doesn't necessarily mean it requires NDA's, just that it hasn't been in recent contract negotiations with Cornell's library.)

Ms. Kenney said that Cornell is joining "a groundswell among academic libraries to start to routinely ask for the removal of NDA's." In June 2009, the Association of Research Libraries urged its members to steer clear of nondisclosure or confidentiality clauses.

"Part of our rationale in going public with this is to make evident that private institutions are also starting to feel that this is not a good way of doing business," Ms. Kenney said.

Support for the Move

Several librarians at other universities said their institutions had taken positions similar to Cornell's, even if they haven't publicly posted their policy on NDA's. "Yes, we have taken a similar approach for the past year," said Winston Tabb, the dean of university libraries and museums at the Johns Hopkins University. He wrote in an e-mail that "we believe that transparency is appropriate for libraries generally; and in particular that we should not agree to withhold information about how we are spending an increasingly huge—and ever-growing—percentage of our stretched library budgets."

Continued in article

Bob Jensen's threads on prestigious journal rip offs of college libraries ---

What absurd government-subsidized "electric" heavy-weight car will go a "paltry" 25 miles before the low-mileage, premium-fuel big gas engine kicks in?

"Chevy Volt: The Car From Atlas Shrugged Motors," by  Patrick Michaels, Forbes, March 16, 2011 --- 

The Chevrolet Volt is beginning to look like it was manufactured by Atlas Shrugged Motors, where (according to Ayn Rand)  the government mandates everything politically correct, rewards its cronies and produces junk steel.

This is the car that subsidies built. General Motors lobbied for a $7,500 tax refund for all buyers, under the shaky (if not false) promise that it was producing the first all-electric mass-production vehicle.

At least that's what we were once told. Sitting in a Volt that would not start at the 2010 Detroit Auto Show, a GM engineer swore to me that the internal combustion engine in the machine only served as a generator, kicking in when the overnight-charged lithium-ion batteries began to run down. GM has continually revised downward its estimates of how far the machine would go before the gas engine fired, and now says 25 to 50 miles.

It turns out that the premium-fuel fired engine does drive the wheels--when the battery is very low or when the vehicle is at most freeway speeds. So the Volt really isn't a pure electric car after all. I'm sure that the people who designed the car knew how it ran, and so did their managers.

Why then the need to keep this so quiet? It's doubtful that GM would have gotten such a subsidy if it had been revealed that the car would do much of its freeway cruising with a gas engine powering the wheels. While the Volt is more complicated than the Prius, and has a longer battery-only range, a hybrid is a hybrid, and the Prius no longer qualifies for a tax credit.

n other words, GM was desperate for customers for what they perceived would be an unpopular vehicle before one even hit the road. It had hoped to lure more if buyers subtracted the $7,500 from the $41,000 sticker price. Instead, as Consumer Reports found out, the car was very pricey. The version they tested cost $43,700 plus a $5,000 dealer markup ("Don't worry," I can hear the salesperson saying, "you'll get more than that back in your tax credit!"), or a whopping $48,700 minus the credit.

This is one reason that Volt sales are anemic: 326 in December, 321 in January, and 281 in February. GM announced a production run of 100,000 in the first two years. Who is going to buy all these cars?

Another reason they aren't exactly flying off the lots is because, well, they have some problems. In a telling attempt to preserve battery power, the heater is exceedingly weak. Consumer Reports averaged a paltry 25 miles of electric-only running, in part because it was testing in cold Connecticut. (My engineer at the Auto Show said cold weather would have little effect.)

It will be interesting to see what the range is on a hot, traffic-jammed summer day, when the air conditioner will really tax the batteries. When the gas engine came on, Consumer Reports got about 30 miles to the gallon of premium fuel; which, in terms of additional cost of high-test gas, drives the effective mileage closer to 27 mpg. A conventional Honda ( HMC - news - people ) Accord, which seats 5 (instead of the Volt's 4), gets 34 mpg on the highway, and costs less than half of what CR paid, even with the tax break.

Continued in article

Jensen Comment
Keep in mind that those 25 miles of all-electric driving are not free. In most instances the expensive batteries are powered by polluting hydrocarbon electric plants that don't charge electric cars for free. And in some instances, drivers will have to take out second mortgages on their homes in order to replace the expensive Volt batteries after five years of frustration filling their tanks at gas stations.

From Huffington Post
The most creative and manipulative accountants in the public sector would not have used adopted the ploys used by governmental accountants and teachers' unions to hide horrible performance?

"[R]eally, when you get down to it, the guys at Enron never would have done this.
Bill Gates

Remedying state budget crises will take better accounting, better tools, and more respect for leaders who step up to address these problems, Gates argued. "We need to reward politicians," he said. "Whenever they say there are these long-term problems, we can't say, 'Oh, you're the messenger with bad news? We just shot you.'"
"Bill Gates On States' Accounting: 'The Guys At Enron Never Would Have Done This'." by Bianca Boscar, Huffington Post, March 3. 2011 ---

During a second appearance onstage at the annual TED conference, Bill Gates spoke out against worsening state budget deficits caused by accounting "tricks" he said would make Enron's former executives blush.

The Microsoft co-founder and philanthropist said state budgets have received a puzzling lack of scrutiny and have been "riddled with gimmicks" aimed at deferring or disguising the true costs of public employees' health care and pension obligations, citing California's ongoing budget crisis as an example of creative deficit spending and the subsequent cuts to education spending as an unacceptable cost.

"[R]eally, when you get down to it, the guys at Enron never would have done this. This is so blatant, so extreme," Gates said of state governments' accounting practices generally. "Is anyone paying attention to some of the things these guys do? They borrow money -- they're not supposed to, but they figure out a way -- they make you pay more in withholding to help their cashflow out, they sell off the assets, they defer the payments, they sell off the revenues from tobacco."

Gates argued that government accounting practices should be more like private accounting. "The amount of IQ and good numeric analysis both inside Google and Microsoft and outside ... really is quite phenomenal. Everybody has an opinion. There's great feedback and the numbers are used to make the decision," he said. "If you go over to the education spending and health care spending ... you don't have that type of involvement on a number that's more important in terms of equity and in terms of learning."

The former Microsoft chief executive, now the co-chair of the Bill & Melinda Gates Foundation, said youth and education programs stand to lose the most as a result of the gaping holes in state budgets.

"It really is the young versus the old to some degree. If you don't solve what you're doing in health care, you're going to be deinvesting in the young," Gates said. "With the kind of cuts we're talking about, it will be far, far harder to get these incentives for excellence or to move over to use technology in the new way."

Remedying state budget crises will take better accounting, better tools, and more respect for leaders who step up to address these problems, Gates argued. "We need to reward politicians," he said. "Whenever they say there are these long-term problems, we can't say, 'Oh, you're the messenger with bad news? We just shot you.'"

The bottom line, according to Gates: "We need to care about state budgets because they are critical for our kids and our future."

Get the latest updates from TED here.

Jensen Comment

Take Home 1
Bill Gates claims that good teachers are the most important ingredient of learning in schools (although I don't think he underestimates the even greater importance of the home environment). He therefore recommends both increasing class sizes of good teachers and rewarding them accordingly for the added effort needed to handle larger classes. Bob Jensen conditionally supports this if the good teachers get the added support needed such as multiple teachers aids and software support.

Take Home 2
Get the bad teachers out of the system and, at a minimum, stop rewarding them with automatic raises based on seniority alone. Bob Jensen thinks that protectionism of bad teachers or uncaring teachers or absentee teachers is probably the most harmful program of teachers' unions when coupled with protectionist game playing by unions to protect bad schools along with bad teachers.

Take Home 3
Bill Gates claims it has never been demonstrated that advanced degrees in education that are automatically rewarded with lifetime pay raises are instrumental in improving teaching and learning. Bob Jensen agrees. I've witnessed to many masters programs in education that are tantamount to summer vacations for teachers.

Bob Jensen's threads on the controversies of higher education ---

Bob Jensen's threads on the horrid state of governmental accounting are at


On the Dark Side 

For nearly two decades I've updated a Web document called "The Dark Side" in which I post things that worry me about advances in education and communication technology ---

Business Week now has a very long cover story that fits right into "The Dark Side." I don't consider myself a prude or a religious nut. But this trend in networking most certainly discourages me about how technology sometimes eats away at morality and good name of technology. This is yet another dark side tidbit on the evils of technology that goes along with ID theft, malware spreading, Internet frauds, porn, plagiarism, malicious hacking, and the like. I was a bit surprised to find this article in Business Week rather than Newsweek or Time Magazine.
The infidelity economy may be "alive, well, and profitable." But so is porn!

Those of you teaching about advances in social networking should also cover the emerging dark sides of social networking.

"Cheating, Incorporated:  At Ashley Madison's website for "dating," the infidelity economy is alive, well, and profitable," by Sheelah Kolhatkar , Business Week, February 10, 2011 ---

Do you want to have an affair?

After hearing an ad on Howard Stern's radio show or seeing a schlocky commercial on late-night TV, you might find yourself on—the premier "dating" website for aspiring adulterers. Type in the URL, and as the page loads a gauzy violet backdrop appears with a fuzzy image of a half-dressed couple going at it beyond a hotel doorway. "Join FREE & change your life today. Guaranteed!"

Setting up a profile costs nothing and takes about 12 seconds. First you check off your availability status: "attached male seeking females," "attached female seeking males," or, even though the concept of the site is that all users are in relationships and therefore equally invested in secrecy, "single female seeking males." Next you're asked for location, date of birth, height and weight, and whether you're looking for something "short term," "long term," "Cyber affair/Erotic Chat," "Whatever Excites Me," and so on. If you're like me, you choose a handle based on the cupcake you most recently ate—"redvelvet2"—and then shave a few years and pounds off your numbers.

Once you provide an e-mail address that your spouse would presumably never have access to, you're thrust into Ashley Madison's low-tech pink and purple interface. And then, if you're a woman, the onslaught begins.

Continued in article

February 12, 2011 reply from Francine McKenna

Maybe you forgot it was that terrible Ashley site, the one that advertises on CNBC and wanted to advertise on the Superbowl that lured the poor Ernst & Young partner into a debauched life of inside trading and illicit love triangles.

Bad, bad internets...

In the fall of 2004, a fortysomething investment banker named Donna Murdoch logged into Ashley Madison, the discreet dating website married people visit "when divorce is not an option," and introduced herself to James Gansman, a partner at Ernst & Young in New York. The two struck up a relationship, meeting occasionally in hotels in Philly, New York, and California, and talking on the phone about their lives: James told Donna about how he was kicking ass at work, Donna told James about how she was struggling with her subprime mortgage.

Eventually the two settled into a comfortable day-to-day routine in their respective offices in New York and Philadelphia, staring at the same Yahoo Finance screen.

Sweet. Bill and Melinda Gates used to do kind of the same thing when they were long-distance dating. They'd see the same movies in different places and then talk about them on the phone. We just though we'd mention that, because that's the kind of information we have trapped inside our brains, and we hope that by releasing it we can make room for other things. Anyway, Donna and James's relationship did not go the way of Bill and Melinda's.

Eventually, their conversations about business grew more specific.

Mr. Gansman led Ms. Murdoch in a guessing game about which deals he was working on, she said. "The game was that I wouldn't be looking and he would give me hints: The market cap of two billion or market cap of 400 billion, and here's what they do, and he'd read it to me, and ultimately make sure I guessed," Ms. Murdoch testified. Before long, the guessing game fell away. Mr. Gansman told her more directly about upcoming deals of Ernst clients, she said.

She made $400, 000 off the deal, and the SEC noticed. He made nothing, and now he's going to jail. The end.

Insider Affair: An SEC Trial of the Heart [WSJ via Business Insider]

Francine McKenna
Managing Editor
@ReTheAuditors on Twitter


February 12, 2011 reply from Jagdish Gangolly

Bob, Steve,

The forensic practices at the Big 4 are WAY ahead of the accounting academia in using the technology to cover the dark side of social networking in e-discovery. We in the accounting academia have been too busy regressing to take note.

I know of at least two who used it extensively in fraud examination as far back as 2008. They demonstrated its use to me while I was designing our fraud examination course.

One commercial product that is popular is attenex. See 


Bob Jensen's threads on social networking are at

Bob Jensen's threads on The Dark Side ---

Bob Jensen's threads on Education Technology ---


"Washington’s Financial Disaster," by Frank Partnoy, The New York Times, January 29, 2011 ---

THE long-awaited Financial Crisis Inquiry Commission report, finally published on Thursday, was supposed to be the economic equivalent of the 9/11 commission report. But instead of a lucid narrative explaining what happened when the economy imploded in 2008, why, and who was to blame, the report is a confusing and contradictory mess, part rehash, part mishmash, as impenetrable as the collateralized debt obligations at the core of the crisis.

The main reason so much time, money and ink were wasted — politics — is apparent just from eyeballing the report, or really the three reports. There is a 410-page volume signed by the commission’s six Democrats, a leaner 10-pronged dissent from three of the four Republicans, and a nearly 100-page dissent-from-the-dissent filed by Peter J. Wallison, a fellow at the American Enterprise Institute. The primary volume contains familiar vignettes on topics like deregulation, excess pay and poor risk management, and is infused with populist rhetoric and an anti-Wall Street tone. The dissent, which explores such root causes as the housing bubble and excess debt, is less lively. And then there is Mr. Wallison’s screed against the government’s subsidizing of mortgage loans.

These documents resemble not an investigative trilogy but a left-leaning essay collection, a right-leaning PowerPoint presentation and a colorful far-right magazine. And the confusion only continued during a press conference on Thursday in which the commissioners had little to show and nothing to tell. There was certainly no Richard Feynman dipping an O ring in ice water to show how the space shuttle Challenger went down.

That we ended up with a political split is not entirely surprising, given the structure and composition of the commission. Congress shackled it by requiring bipartisan approval for subpoenas, yet also appointed strongly partisan figures. It was only a matter of time before the group fractured. When Republicans proposed removing the term “Wall Street” from the report, saying it was too pejorative and imprecise, the peace ended. And the public is still without a full factual account.

For example, most experts say credit ratings and derivatives were central to the crisis. Yet on these issues, the reports are like three blind men feeling different parts of an elephant. The Democrats focused on the credit rating agencies’ conflicts of interest; the Republicans blamed investors for not looking beyond ratings. The Democrats stressed the dangers of deregulated shadow markets; the Republicans blamed contagion, the risk that the failure of one derivatives counterparty could cause the other banks to topple. Mr. Wallison played down both topics. None of these ideas is new. All are incomplete.

Another problem was the commission’s sprawling, ambiguous mission. Congress required that it study 22 topics, but appropriated just $8 million for the job. The pressure to cover this wide turf was intense and led to infighting and resignations. The 19 hearings themselves were unfocused, more theater than investigation.

In the end, the commission was the opposite of Ferdinand Pecora’s famous Congressional investigation in 1933. Pecora’s 10-day inquisition of banking leaders was supposed to be this commission’s exemplar. But Pecora, a former assistant district attorney from New York, was backed by new evidence of widespread fraud and insider dealings, shocking documents that the public had never seen or imagined. His fierce cross-examination of Charles E. Mitchell, the head of National City Bank, Citigroup’s predecessor, put a face on the crisis.

This commission’s investigation was spiritless and sometimes plain wrong. Richard Fuld, the former head of Lehman Brothers, was thrown softballs, like “Can you talk a bit about the risk management practices at Lehman Brothers, and why you didn’t see this coming?” Other bankers were scolded, as when Phil Angelides, the commission’s chairman, admonished Lloyd Blankfein, the chief executive of Goldman Sachs, for practices akin to “selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.” But he couldn’t back up this rebuke with new evidence.

The report then oversteps the facts in its demonization of Goldman, claiming that Goldman “retained” $2.9 billion of the A.I.G. bailout money as “proprietary trades.” Few dispute that Goldman, on behalf of its clients, took both sides of trades and benefited from the A.I.G. bailout. But a Goldman spokesman told me that the report’s assertion was false and that these trades were neither proprietary nor a windfall. The commission’s staff apparently didn’t consider Goldman’s losing trades with other clients, because they were focused only on deals with A.I.G. If they wanted to tar Mr. Blankfein, they should have gotten their facts right.

Lawmakers would have been wiser to listen to Senator Richard Shelby of Alabama, who in early 2009 proposed a bipartisan investigation by the banking committee. That way seasoned prosecutors could have issued subpoenas, cross-examined witnesses and developed cases. Instead, a few months later, Congress opted for this commission, the last act of which was to coyly recommend a few cases to prosecutors, who already have been accumulating evidence the commissioners have never seen.

There is still hope. Few people remember that the early investigations of the 1929 crash also failed due to political battles and ambiguous missions. Ferdinand Pecora was Congress’s fourth chief counsel, not its first, and he did not complete his work until five years after the crisis. Congress should try again.

Frank Partnoy is a law professor at the University of San Diego and the author of “The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals.”

Jensen Comment
Professor Partnoy is one of my all-time fraud fighting heroes. He was at one time an insider in marketing Wall Street financial instrument derivatives products and, while he was one of the bad guys, became conscience-stricken about how the bad guys work. Although his many books are somewhat repetitive, his books are among the best in exposing how the Wall Street investment banks are rotten to the core.

Frank Partnoy has been a a strong advocate of regulation of the derivatives markets even before Enron's energy trading scams came to light. His testimony before the U.S. Senate about Enron's infamous Footnote 16 ---

I quote Professor Partnoy's books frequently in my Timeline of Derivative Financial Instruments Frauds ---





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