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

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

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

Tax Fraud Alerts from the IRS --- http://www.irs.gov/compliance/enforcement/article/0,,id=121259,00.html

White Collar Fraud Site --- http://www.whitecollarfraud.com/
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
http://www.trinity.edu/rjensen/2008Bailout.htm

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

From CNN:  Clark Howard's Informative Advice About Shopping, Financial Planning, and Warnings About Scams ---
http://www.cnn.com/CNN/Programs/clark.howard/?iref=allsearch

Bob Jensen's warnings about scams ---
http://www.trinity.edu/rjensen/FraudReporting.htm

Bob Jensen's shopping helpers ---
http://www.trinity.edu/rjensen/Bookbob3.htm

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 --- http://en.wikipedia.org/wiki/Accounting_scandals

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

Accounting Firms --- http://www.trinity.edu/rjensen/Fraud001.htm

Fraud Conclusion --- http://www.trinity.edu/rjensen/FraudConclusion.htm

Enron --- http://www.trinity.edu/rjensen/FraudEnron.htm

Rotten to the Core --- http://www.trinity.edu/rjensen/FraudRotten.htm

Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

American History of Fraud --- http://www.trinity.edu/rjensen/FraudAmericanHistory.htm

Fraud in General --- http://www.trinity.edu/rjensen/Fraud.htm

Tax Foundation Facts & Figures (Free) ---
http://taxfoundation.org/files/ff2012.pdf

FTC Identity Theft Center --- http://www.ftc.gov/bcp/edu/microsites/idtheft/

Identity Theft Resource Center --- http://www.idtheftcenter.org/
Note the tab for State and Local Resources

IRS Identity Protection Specialized Unit at 800-908-4490

"IRS Warns on ‘Dirty Dozen’ Tax Scams for 2012," by Laura Saunders, The Wall Street Journal, February 12, 2012 ---
http://blogs.wsj.com/totalreturn/2012/02/17/irs-warns-on-dirty-dozen-tax-scams-for-2012/?mod=google_news_blog

Every year during tax season the Internal Revenue Service releases a list of its least-favorite tax scams. “Scam artists will tempt people in-person, on-line and by email with misleading promises about lost refunds and free money. Don’t be fooled by these,” warns Commissioner Douglas Stives.

The list changes from year to year. Here’s what the IRS is warning about for this tax season. For more information, click here, or watch a video here.

1. Identity theft

“An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name may be the first tipoff the individual receives that he or she has been victimized.”

2. Phishing

“If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System, report it by sending it to phishing@irs.gov.”

3. Tax-preparer fraud

“In 2012 every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.”

4. Hiding income offshore

“Since 2009, 30,000 individuals have come forward voluntarily to disclose [undeclared] foreign financial accounts. . . With new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly  more difficult.”

5. ‘Free money’ from the IRS and tax scams involving Social Security

“Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing at community churches around the country.”

6. False/inflated income and expenses

“Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions…. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.”

7. False Form 1099 refund claims

“In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.”

8. Frivolous arguments

“Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid.”

9. Falsely claiming zero wages

“Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a ‘corrected’ Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. ”

10. Abuse of charitable organizations and deductions

“The IRS is investigating schemes that involve the donation of non-cash assets – including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor.”

11. Disguised corporate ownership

“Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business…. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.”

12. Misuse of trusts

“IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.”

 

FTC Identity Theft Center --- http://www.ftc.gov/bcp/edu/microsites/idtheft/

Identity Theft Resource Center --- http://www.idtheftcenter.org/
Note the tab for State and Local Resources

IRS Identity Protection Specialized Unit at 800-908-4490

How Income Taxes Work (including history) --- http://money.howstuffworks.com/income-tax.htm

Why not start with the IRS? (The best government agency web site on the Internet) http://www.irs.gov/ 

IRS Site Map --- http://www.irs.gov/sitemap/index.html

FAQs and answers --- http://www.irs.gov/faqs/index.html

Taxpayer Advocate Service --- http://www.irs.gov/advocate/index.html

Forms and Publications, click on Forms and Publications

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

Visualizing Economics
Comparing Income, Corporate, Capital Gains Tax Rates: 1916-2011 and Other Graphics --- Click Here
http://visualizingeconomics.com/2012/01/24/comparing-tax-rates/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+VisualizingEconomics+%28Visualizing+Economics%29&utm_content=Google+Reader

Tax Foundation Facts & Figures (Free) ---
http://taxfoundation.org/files/ff2012.pdf

Bob Jensen's tax filing helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

South Carolina Governor to be Indicted Not Indicted for Tax Fraud

"Haley indictment imminent? Stay tuned…," Palmetto Public Record, March 29, 2012 ---
http://palmettopublicrecord.org/2012/03/29/haley-indictment-imminent-stay-tuned/ 

Two well-placed legal experts have independently told Palmetto Public Record they expect the U.S. Department of Justice to issue an indictment against South Carolina Gov. Nikki Haley on charges of tax fraud as early as this week.

A highly ranked federal official has also privately confirmed rumblings of an investigation and possible indictment of the governor, though the official was not aware of the specific timeframe.

Yesterday, Palmetto Public Record exclusively reported that the Internal Revenue Service has been investigating since March of 2011 the Sikh worship center run by Gov. Haley’s father. At least five lawsuits have been filed against the Sikh Society of South Carolina since 2010, alleging that the group bilked contractors out of nearly $130,000 for the construction of a new temple.

Gov. Haley is reported to have managed the temple’s finances as late as 2003, and our sources believe any indictment would center on what happened to the missing money.

Palmetto Public Record will post a story later this afternoon detailing the temple’s shady finances and the governor’s possible involvement. Stay tuned…

Tax Prof Paul Caron later amended his blog with the following links on April 1, 2012 --- http://taxprof.typepad.com/

Following up on Friday's post, Report: DOJ to Indict SC Gov. Nikki Haley on Tax Fraud Charges:  Governor Haley's office obtained this letter from the IRS.

• ABC News, No IRS Investigation into SC Governor Nikki Haley
• American Thinker, Gov. Haley Will Not be Indicted for Tax Fraud
• The Daily Caller, IRS: Rumors of Nikki Haley Federal Investigation Untrue
• The Huffington Post, Nikki Haley Not Under IRS Investigation
• The State, IRS Not Probing Temple; Some Tried to Tie Haley to Matte

The Palmetto Public Record, the source of the original story, issued this curious response:

We're glad the IRS stated today that they apparently found nothing untoward regarding the temple's finances, and we're glad (as Haley spokesman Rob Godfrey says) the lengthy chapter regarding Gov. Haley's involvement seems to be closed. Since no normal person would have been able to get the IRS to send them such a letter within a day of these questions hitting the blogosphere, and since the IRS certainly didn't answer our phone calls, the only way to get an answer to our questions was by taking them to the public. ... [T]he IRS certainly sent Gov. Haley's chief of staff a letter quickly regarding a situation from which she claims to be so distant. ...

As journalists, all we can do is ask questions, and tell you what we see and hear. We're glad the latest IRS letter answers some of our questions, but it definitely doesn't answer all of them -- and it may create a few more once the chips are finished falling. Until these questions (and many other outstanding ethics questions regarding the way the governor's office operates) are answered, you can bet we'll continue to ask them.

Jensen Comment
It would seem that the Palmetto Public Record violated journalism ethics by not verifying rumors before making headlines about them.

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

"FTC releases final privacy report, says ‘Do Not Track’ mechanism may be available by end of year," by Hayley Tsukayama, Washington Post, March 27, 2012 --- Click Here
http://www.washingtonpost.com/business/technology/ftc-releases-final-privacy-report-says-do-not-track-mechanism-may-be-available-by-end-of-year/2012/03/26/gIQAzi23bS_story.html

The Federal Trade Commission on Monday outlined a framework for how companies should address consumer privacy, pledging that consumers will have “an easy to use and effective” “Do Not Track” option by the end of the year.

The FTC’s report comes a little over a month after the White House released a “privacy bill of rights” that called on companies to be more transparent about privacy and grant consumers greater access to their data but that stopped short of backing a do-not-track rule.

The FTC also said it plans to work with Web companies and advertisers to implement an industry-designed do-not-track technology so as to avoid a federal law that mandates it. The Digital Advertising Alliance, which represents 90 percent of all Web sites with advertising, is working with the Commerce Department and FTC to create an icon that would allow users an easy way to stop online tracking.

But the enforcement agency said that if the companies aren’t able to get the technology launched by the end of the year, lawmakers should force those companies to offer consumers a similar option to stop tracking.

“Although some companies have excellent privacy and data securities practices, industry as a whole must do better,” the FTC said.

In its report, the agency called on companies to obtain “affirmative express consent” from consumers before using data collected for a different purpose and encourage Congress to consider baseline privacy legislation and measures on data security and data brokers.

The FTC also reiterated its recommendations that Congress pass legislation to provide consumers with access to their personal data that is held by companies that compile data for marketing purposes.

The 73-page report focuses heavily on mobile data, noting that the “rapid growth of the mobile marketplace” has made it necessary for companies to put limits on data collection, use and disposal. According to a recent report from Nielsen, 43 percent of all U.S. mobile phone subscribers own a smartphone.

The commission called on companies to work to establish industry standards governing the use of mobile data, particularly for data that reveals a users’ location.

Commissioner Thomas Rosch dissented from the other commissioners in a 3-1 vote on the privacy report. Rosch said that while he agrees with much of what the agency released Monday, he disagrees with the commission’s approach to the framework, which focuses more on what consumers may deem “unfair” as opposed to actual deception perpetrated by companies.

Continued in article

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

Internal Control!
What's internal control?

Academic Standards Control!
What is academic standard control?

"Audit Finds Chicago State U. Lost Track of 950 Computers," Chronicle of Higher Education, March 23, 2012 ---
 

A state audit released on Thursday found that $3.8-million worth of equipment, including 950 computers, is missing from Chicago State University, the Chicago Tribune reports. The university has come under fire in the past for questionable spending by a former president, Elnora D. Daniel, including a 2007 audit that detailed university-sponsored “leadership seminars” on Caribbean cruises. According to the latest audit, over the past four years the university has mistakenly awarded $123,000 in federal aid and $20,000 in state grants to students. The university issued a statement saying the administration of Wayne D. Watson, who took over from Ms. Daniel in 2009, was using a “proactive approach” to deal with the problems, but acknowledged that “these things take time.”

Jensen Comment
The fraud gets even worse. Because state revenues are based, in part, on enrollment it became impossible to flunk out of Chicago State University. Even David Albrecht's dog could enroll in CSU and never flunk out.

I propose changing the abbreviation from CSU to CSI.

Question
How do you stay in college semester after semester with a grade average of 0.0?

"Chicago State Let Failing Students Stay," Inside Higher Ed, July 26, 2011 ---
http://www.insidehighered.com/news/2011/07/26/qt#266185

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

Jensen Comment
There is a bit of integrity at CSU. Professors could've just given the students A grades like some other high grade inflation universities or changed their examination answers in courses somewhat similar to the grade-changing practices of a majority of Atlanta K-12 schools. Now that CSU will no longer retain low gpa students, those other practices may commence at CSU in order to keep the state support at high levels. And some CSU professors may just let students cheat. It's not clear how many CSU professors will agree to these other ways to keep failing students on board.

Oops!
Everything is OK in context. I forgot this is Chicago (the most corrupt city in the United States)

Bob Jensen's threads on Professors Who Cheat and Allow Students to Cheat are at
http://www.trinity.edu/rjensen/Plagiarism.htm#RebeccaHoward

Bob Jensen's threads on grade inflation are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation

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

"Suspended Lawyer Who Wrote ‘Bulletproof Asset Protection’ Pleads Guilty in Tax Case, Must Pay $40M," by Martha Neil, ABA Journal, February 15, 2012 ---
http://www.abajournal.com/news/article/suspended_lawyer_who_authored_bulletproof_asset_protection_pleads_guilty_in/

A suspended Colorado lawyer who authored the book Bulletproof Asset Protection pleaded guilty in federal court in Las Vegas on Monday to multiple tax-related charges.

William S. Reed, 61, of Santa Barbara, Calif., was indicted in July, along with two other defendants, on accusations he participated in a business scheme between 1998 and 2006 that helped others hide assets from creditors and the Internal Revenue Service, the Las Vegas Review-Journal reports.

He pleaded guilty to conspiracy to defraud the United States, attempted tax evasion and aggravated identity theft, and agreed to pay about $40 million to the IRS and the Federal Trade Commission. The two other defendants await trial.

Reed allegedly had $70,000 in cash hidden in his vehicle when he was arrested last year, reports KLAS. He faces up to 12 years when he is sentenced in May.

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

"How CEO Pay Became a Massive Bubble," An interview with Mihir Desai Harvard Business School, Harvard Business Review Blog, February 23, 2012 ---
Click Here
http://blogs.hbr.org/ideacast/2012/02/how-ceo-pay-became-a-massive-b.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date  

Bob Jensen's threads on outrageous executive compensation and golden parachutes ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Newsweek Magazine is a relative liberal, anti-conservative news magazine. Since Tina Brown became editor the magazine is no less liberal, but it is a much thinner magazine now with mostly shallow articles that rarely excite me at all. However, the January 30, 2012 edition is an exception that appeals to my academic nature. Academics generally like to read about opposing sides of most any issue, especially political issue. The article below attacks back at a previous edition's cover story where Andrew Sullivan's praises of President Obama's performance to date.

Thank you Tina for being willing to show both sides of this debate.

"David Frum Strikes Back at Andrew Sullivan on Barack Obama," by David Frum, Newsweek Magazine, January 23, 2012 ---
 http://www.thedailybeast.com/newsweek/2012/01/22/david-frum-strikes-back-at-andrew-sullivan-on-barack-obama.html

Now let’s move to the real debate. You don’t have to succumb to ideological fever or paranoid fantasy to see that the Obama administration is dragging America to the wrong future: a future of higher taxes and reduced freedom, a future in which entrepreneurs will innovate less and lobbyists will influence more, a future in which individuals and communities will make fewer choices for themselves and remote bureaucracies will dictate more answers to us all.

The intentions are not malign. But it’s not intentions that matter—it’s results.

You begin to see those results in the small hearing rooms in which Social Security disability cases are decided. In the months since the financial crisis, the Social Security Administration has been awarding more and more disability pensions: almost 100,000 in the last month of 2011, 50 percent more than before the financial crisis.

Not much surprise there. Applications for disability have jumped even more steeply. It’s not very likely that Americans are suddenly suffering a lot more accidents than they used to suffer, back when many more of them were working. More likely: with unemployment higher, more people are seeking help—and with jobs scarce, more judges are saying yes.

It’s easy to sympathize with the thinking of the individual Social Security judges. Here’s a worker who has lost her job as a forklift operator. Five years ago, a judge might have told her: forget the pension, Walmart is hiring. But now Walmart isn’t hiring—or anyway, not hiring enough. So the judge relents. Why not give the applicant just a little something? An extra $12,000 a year (the size of the average award) won’t break the federal budget. The country can figure out later how to pay for it. Which is how it happened that we’re on the verge of enrolling the 9 millionth American on disability—almost double the number of the late 1990s.

Of course, as the federal government manages more and more disability pensions, it must hire more judges and administrators to hear and process those requests. Employment at the Social Security Administration is up by more than 6,000 since 2007, or 10 percent. In fact, hiring is up across the federal government, by 15 percent since 2007. Federal hiring has been more than offset by layoffs at the state and local level. But when the economy recovers, as it will, the states and localities will hire again—and at the rate we’re going, an upswing in state and local hiring won’t be balanced by commensurate reductions in federal staffing.

You don’t have to vilify President Obama as a Kenyan socialist to recognize that his policies are reorienting the country toward more dependence on the federal government. Through most of the past half century, the federal government has spent about one dollar in five of national income. Right now, it’s spending about one in four. If Barack Obama is reelected and his policies are continued, that one-dollar-in-four ratio will harden into permanent reality, on the way to one dollar in three, with state and local spending on top of that.

Every president since the late 1970s has struggled to contain the growth of government, Democrats as well as Republicans. Jimmy Carter battled Democrats in Congress to stop wasteful construction projects. He signed the deregulation of airlines, trucking, and rail. Bill Clinton announced that “the age of big government is over,” signed welfare reform, and accepted budgets that reduced government spending as a share of national income.

Barack Obama is the first president since Lyndon Johnson to push aggressively for bigger and more interventionist government—and not merely as an emergency measure against the recession.

Look at the president’s energy policy, for example. We need to reduce our use of oil; every president since Richard Nixon has agreed to that. We know how to do it, too: raise the price. When oil prices jumped in the late 1970s, American oil use tumbled. As late as 1995, Americans were using less oil than in 1978. Not less per person. Less oil, period.

When oil prices jumped in the 2000s, Americans again changed their behavior. For the first time in a century, they drove fewer miles, year over year.

Want to reduce oil use even more? Tax it, and then let Americans decide for themselves how to conserve: whether to move closer to work, invest in a hybrid car, or buy fewer consumer products shipped from half the world away.

Instead, Obama has resorted to direct intervention in the energy marketplace. Solyndra, the failed solar-energy company that got $500 million–plus in direct government aid, is one example. Maybe a more important one is the Keystone pipeline from Canada, canceled to conciliate the president’s environmental backers. Those backers apparently prefer to change consumption habits by brute force rather than through the mechanisms of the market, as we can see from their thus-far-successful efforts to scuttle oil projects one by one—drilling in Alaska, drilling in the Gulf of Mexico, Keystone.

You see the same reliance on brute force, not market force, in health care. I am one of the few Republicans who will still defend the Heritage Foundation’s idea of regulated insurance exchanges in which customers are mandated to buy pri-vate insurance, with subsidies for those who need subsidies: Romneycare, in a word. Leaving tens of millions of Americans uninsured is both inhumane and inefficient.

But it is striking that the main engine of coverage expansion under the president’s health-care reform is actually not the mandate you hear so much about. The Congressional Budget Office projects that half of all the net gain in insurance coverage under the president’s health-care proposal will be due to higher enrollment in government programs: Medicaid and the CHIP program for poor children.

Even before Obama took office, half of all the health-care dollars spent in the U.S. were spent by government in one way or another. We’re on our way to government spending much more. And that means that health-care cost control—also urgently needed—will not come via market competition. It will come by direct government order.

Why does the president so favor the expansion of government? There’s no need to resort to paranoid theories. In his characteristically lucid way, he has already told us.

In December, Obama traveled to the Kansas town of Osawatomie to deliver one of the most important speeches of his presidency to date. There he poignantly described the dimming prospects of the American middle class—and then offered the following policy response: “The over 1 million construction workers who lost their jobs when the housing market collapsed, they shouldn’t be sitting at home with nothing to do. They should be rebuilding our roads and our bridges, laying down faster railroads and broadband, modernizing our schools—all the things other countries are already doing to attract good jobs and businesses to their shores ... Of course, those productive investments cost money. They’re not free. And so we’ve also paid for these investments by asking everybody to do their fair share.”

In other words, the president is championing a more active government, not as a way to meet social needs but as a permanent and growing source of middle-class employment. Some of us will work directly for the public sector. Others will be contractors. Either way, many more of us will be working in jobs from which it will be difficult to fire us—and where the government sets more of the terms of employment.

Something like this approach was tried in Britain under the Labour governments of Tony Blair and Gordon Brown. Between 1997 and 2008, Blair and his successor Brown used rapidly rising government revenues to finance new public-sector jobs in depressed old industrial areas. Over the decade, the public sector provided more than half of all the net new jobs in three of the four main economic regions of England—and 80 percent of the net new jobs for women.

They piled more and more taxes on a smaller and smaller slice of the economy. Meanwhile, the expanded public sector did not spark the benefits it was supposed to. The depressed areas remained depressed. The gap between rich and poor grew instead of shrinking.

Obama becomes impatient when his policies are compared to Blair’s or Brown’s. But it’s hard to see the basis for that reaction. A reelected President Obama would want to see the Bush tax rates lapse, federal revenues rise, and the proceeds used to fund a permanently higher level of federal spending and government employment.

. . .

Yes, much of the criticism of the Obama administration has been hysterical and deluded. Yes, many of the attacks on the president and his family have been ugly and hateful. But in rejecting the extremism of some critics, we shouldn’t race to the opposite and equally invalid extreme of denying all criticism.

There is much to admire in Barack Obama the man. But his presidency, especially on the domestic front, has been a bitter disappointment to almost everybody—perhaps above all to those who most desperately needed help from the government he led. It’s time for a new way forward.

Jensen Comment
Social Security was intended originally to be an actuarially sound pension system for retired workers where benefits varied depending upon when a person commenced to draw on the trust funds after becoming 62 years of age or older.. Over the years it became damaged when Congress commenced to fund social benefits from Social Security rather fund those benefits from general revenues on a pay-as-you-go plan to set up separate trust funds for those social benefits. By far the biggest disaster was adding monthly payments for disabled persons at any age they are declared disabled. For example, my wife commenced to collect Social Security Disability Payments at age 53 or thereabouts after she had several unsuccessful spine surgeries.

In this great land there should be benefits for disabled persons. But the decision by President Johnson and his Congress at the time to tack disability onto the Social Security system, because the SS system was never actuarially funded for disability. Sure enough over the years the Social Security trust funds are now depleted and Congress adding to trillion dollar deficits to fund both SS retirement entitlements and disability retirement benefits.

But the story gets worse. At Age 65 or older, persons who have paid into the Medicare system while they were working are eligible for Medicare health benefits that are really quite generous compared to many private medical insurance plans. But unlike retired workers, disabled persons do not have to wait until age 65 to begin collecting Medicare benefits. My wife, for example, became eligible for Medicare the instant she was declared disabled and became eligible for social security disability benefits.

And the story gets even worse as alluded to in the article above. Being fraudulently declared disabled and becoming eligible for disability payments and Medicare has been spreading across the United States like wildfire. Doctors and lawyers everywhere are cooperating in frauds to declare perfectly healthy people disabled.

What happens when we have more "disabled persons" on the dole for the rest of their lives than persons admittedly are able to work?

Another Way to Keep Unemployment Statistics Low
Unemployment benefits have time limits that vary be state. Social Security disability payments continued until the day you die, and in some instances, after you die. Furthermore, being declared disabled by a phony doctor allows Medicare to kick in at any age without having to be 65 years old like other people on Social Security who have not gamed the system.

"Millions of jobless file for disability when unemployment benefits run out," New York Post via Fox News, February 19, 2012 ---
http://www.foxnews.com/politics/2012/02/19/report-millions-jobless-file-for-disability-when-unemployment-benefits-run-out/

Being unemployed for too long reportedly is driving people mad and costing taxpayers billions of dollars in mental illness and other disability claims. 

The New York Post reported Sunday that as unemployment checks run out, many jobless are trying to gain government benefits by declaring themselves unhealthy. 

More than 10.5 million people -- about 5.3 percent of the population aged 25 and 64 -- received disability checks in January from the federal government, the Post wrote, a 18 percent jump from before the recession.

Among those claiming disability, 43 percent are asking for benefits because of mental illness, the Post wrote. A growing number of those people are older, former white-collar workers. 

Disability claims come from the Social Security Trust Fund, which is set to go broke in 2018. Congress last week agreed to dip into the revenue stream to give a 2-percentage point tax break to working Americans.

The Post noted that the more people file for disability claims, the better for the unemployment picture since those people are removed from the jobless rolls.

Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud|
Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits (before age 65)," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm

"Former Penn State Prof Charged With $3M Fraud," Inside Higher Ed,  February 1, 2012 ---
http://www.insidehighered.com/quicktakes/2012/02/01/former-penn-state-prof-charged-3m-fraud

Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

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

Misbehavior Online in Higher Education, Eds. Laura Wankel and Charles Wankel. Emerald Publishing Group, 2012 ---
http://www.emeraldinsight.com/books.htm?issn=2044-9968&volume=5

"A Comparison of Forensic Accounting Corporations in the United States," by Wm. Dennis Huber, SSRN, March 27, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029729

Abstract:
To call entities that issue certifications in forensic accounting “organizations” camouflages their true nature and results in misunderstanding what they really are. They are corporations. Recognizing them as corporations enables forensic accountants who hold their certifications to assess more realistically the costs and benefits of their certifications. A survey reveals that a significant number of forensic accountants believe it is important for forensic accounting corporations to have qualified officers and directors. There are also a significant number who mistakenly believe that the forensic accounting corporations that issued their certifications have qualified officers and directors. However, several forensic accounting corporations do not have qualified officers and directors. Forensic accountants also believe forensic accounting corporations have a duty to disclose the qualifications of their officers and directors but several do not disclose the qualifications of their officers and directors which violates their Codes of Ethics. This paper presents for the first time an in-depth comparison of forensic accounting corporations, their corporate history and the qualifications of their corporate directors and officers. The paper concludes with a recommendation for an independent agency to be established to oversee and accredit forensic accounting corporations. As a matter of public policy regulators cannot let this situation continue unabated. If an independent agency cannot be established, then, as a matter of public policy, states should enact statutes or adopt regulations to regulate forensic accounting corporations.

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Hi Dennis,

I do not have direct answers to your specific questions. However, I did combine two tidbits that may be of interest to you and to other subscribers to the AECM. These specialty certifications are commonly held by persons seeking to be paid for expert witnessing. In my opinion, there's a lack of accountability of most of these so-called "certificates" and the organizations that grant such certificates.


On the other hand, there's also merit in some of the complaints by these associations directed at our most respected colleges and universities. For example, most college accounting programs teach about valuation accountics science models (such as residual income and free cash flow models) that are typically more misleading than helpful when it comes to real world valuation of business firms. It's not common to find college professors who have a history of outstanding professional experience in valuation or forensics. The problem with professors of accounting is that they have no comparative advantages when it comes to valuation of items of value that are not booked such as value of human resources and other intangibles and interactions thereof.


College curricula in accounting and finance are terribly lacking in courses and research professors knowledgeable about the professions of valuation or forensics. For example, most of our auditing courses spend more time stressing how financial audits are not designed to detect fraud rather than becoming professionally focused on ways to detect fraud. We do have course modules on internal controls, but these typically are very superficial  relative to what graduates will encounter in the real world of fraud and systems weaknesses.


The bottom line is that both valuation and forensics are topics that are poorly covered at the university level. And coverage by mysterious associations offering certificates do not always pass the smell tests of credibility.

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

The National Association of Certified Valuators and Analysts (NACVA) ---
http://www.nacva.com/

Business Valuation Standard --- http://en.wikipedia.org/wiki/Business_valuation_standard

Business Valuation Standards (BVS) are codes of practice that are used in business valuation. Each of the three major United States valuation societies — the American Society of Appraisers (ASA), American Institute of Certified Public Accountants (CPA/ABV), and the National Association of Certified Valuation Analysts (NACVA) — has its own set of Business Valuation Standards, which it requires all of its accredited members to adhere to.^[1] The AICPA's standards are published as Statement on Standards for Valuation Services No.1 and the ASA's standards are published as the ASA Business Valuation Standards. All AICPA members are required to follow SSVS1. Additionally, the majority of the State Accountancy Boards have adopted SSVS1 for CPAs licensed in their state.

Criticism of the abovementioned organizations are as follows:
1) These are neither the major valuation societies, nor are they the only valuation societies. They are however, organizations which engage in considerable self-promotion among their members to foster the delusion among their members, that by the mere fact of membership, their members are more qualified to perform business appraisal than non-members.


2) These are all privately held organizations, in which membership is voluntary.


3) There are no regulations mandating that one must belong to any of these organizations in order to practice as a business appraiser.


4) In that these are voluntary membership organizations, their standards have little or no weight with either the business valuation community at large or with the legal and judicial community who appraisers often serve.


5) The standards and ethics of these organizations are constructed to be vague and self-serving, with numerous exceptions, designed more to excuse conflicts of interest, membership poor performance and unsupported opinion, than to encourage, independence, scientific analysis and high quality work. Conflicts of interest are a problem, particularly among CPA/Appraisers, who regularly join these organizations so that they can offer valuation services to their existing accounting clients, in violation of independence rules and ethics.


6) The education which these organizations offer is unaccredited and of low quality, in that it does not reach the threshold level of education in finance of an accredited university.


7) Educational standards have to be kept low to attract new members and membership dues.


8) The credentials which these organizations issue are often issued for reasons of favoritism and cronyism over merit.


9) The purpose of these organizations is often tarnished by the politics of a few active, insider members who consider themselves more entitled then other members, and consequently use the organization resources to further their own self-interests over the interests of the membership at large.


10) There is no accounting of the membership dues paid into these membership organizations. Consequently, members do not know where, to whom, or on what their dues money is spent.

 

Forensic Accounting --- http://en.wikipedia.org/wiki/Forensic_accounting

American College of Forensic Examiners International (ACFEI) ---
http://www.acfei.com/
The ACFEI is mulit-disciplinary, only one discipline of which is accounting

Association of Certified Fraud Examiners (ACFE) ---
http://www.acfe.com/
The ACFE is more focused in on accounting and business fraud than the ACFEI

Other Forensic Associations ---
http://www.hgexperts.com/forensic-science.asp

To my knowledge, the only AACSB-accredited university to offer a forensic accounting certificate is the University of West Virginia ---
http://www.be.wvu.edu/fafi/index.htm
There are also tracks for forensic accounting in the Masters of Public Accounting Degree curriculum.

"Forensic Accounting And Auditing: Compared And Contrasted To Traditional Accounting And Auditing," by Dahli Gray, American Journal of Business Education, Volume 1, Number 2, 2008 ---
http://scholar.googleusercontent.com/scholar?q=cache:lnY92RzjASgJ:scholar.google.com/+ACFE+ACFEI+"lawsuit"&hl=en&as_sdt=0,20

Forensic versus traditional accounting and auditing are compared and contrasted. Evidence gathering is detailed. Forensic science and fraud symptoms are explained. Criminalists, expert testimony and corporate governance are presented.

"Financial Reporting Quality in U.S. Private Firms," Ole-Kristian Hope, Wayne B. Thomas, and Dushyantkumar Vyas, SSRN, January 29, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1995124

Abstract:     
We provide a large-scale investigation of financial reporting quality (FRQ) among U.S. private firms. Private firms are vital to the economy but have received limited attention from researchers due to a lack of available data. Using a new database that contains accounting data for a large sample of U.S. private firms, we provide interesting new evidence on their FRQ. Relative to publicly traded companies, we find that private firms have lower FRQ as proxied for by several commonly used FRQ measures and are less conservative. Further, we provide the first exploration of cross-sectional variations in the FRQ of private firms. Specifically, we show that private firms with greater external financing needs and a greater presence of long-term debt have higher FRQ and greater conservatism. Private firms with greater owner-manager separation (i.e., C corporations) tend to exhibit lower FRQ but more conservatism.

 

Number of Pages in PDF File: 45

Keywords: Private firms, financial reporting quality, public versus private, within private examination, demand, opportunism

One way for these so-called distance education search engines to become more legitimate would be to add top not-for-profit distance education programs to their search engine databases.

"'U.S. News' Sizes Up Online-Degree Programs, Without Specifying Which Is No. 1," by Nick DeSantis, Chronicle of Higher Education, January 10, 2012 ---
http://chronicle.com/article/US-News-Sizes-Up/130274/?sid=wc&utm_source=wc&utm_medium=en

U.S. News & World Report has published its first-ever guide to online degree programs—but distance-education leaders looking to trumpet their high rankings may find it more difficult to brag about how they placed than do their colleagues at residential institutions.

Unlike the magazine's annual rankings of residential colleges, which cause consternation among many administrators for reducing the value of each program into a single headline-friendly number, the new guide does not provide lists based on overall program quality; no university can claim it hosts the top online bachelor's or online master's program. Instead, U.S. News produced "honor rolls" highlighting colleges that consistently performed well across the ranking criteria.

Eric Brooks, a U.S. News data research analyst, said the breakdown of the rankings into several categories was intentional; his team chose its categories based on areas with enough responses to make fair comparisons.

"We're only ranking things that we felt the response rates justified ranking this year," he said.

The rankings, which will be published today, represent a new chapter in the 28-year history of the U.S. News guide. The expansion was brought on by the rapid growth of online learning. More than six million students are now taking at least one course online, according to a recent survey of more than 2,500 academic leaders by the Babson Survey Research Group and the College Board.

U.S. News ranked colleges with bachelor's programs according to their performance in three categories: student services, student engagement, and faculty credentials. For programs at the master's level, U.S. News added a fourth category, admissions selectivity, to produce rankings of five different disciplines: business, nursing, education, engineering, and computer information technology.

To ensure that the inaugural rankings were reliable, Mr. Brooks said, U.S. News developed its ranking methodology after the survey data was collected. Doing so, he said, allowed researchers to be fair to institutions that interpreted questions differently.

Some distance-learning experts criticized that technique, however, arguing that the methodology should have been established before surveys were distributed.

Russell Poulin, deputy director of research and analysis for the WICHE Cooperative for Educational Technologies, which promotes online education as part of the Western Interstate Commission for Higher Education, said that approach allowed U.S. News to ask the wrong questions, resulting in an incomplete picture of distance-learning programs.

"It sort of makes me feel like I don't know who won the baseball game, but I'll give you the batting average and the number of steals and I'll tell you who won," he said. Mr. Poulin and other critics said any useful rankings of online programs should include information on outcomes like retention rates, employment prospects, and debt load—statistics, Mr. Brooks said, that few universities provided for this first edition of the U.S. News rankings. He noted that the surveys will evolve in future years as U.S. News learns to better tailor its questions to the unique characteristics of online programs.

W. Andrew McCollough, associate provost for information technology, e-learning, and distance education at the University of Florida, said he was "delighted" to discover that his institution's bachelor's program was among the four chosen for honor-roll inclusion. He noted that U.S. News would have to customize its questions in the future, since he found some of them didn't apply to online programs. He attributed that mismatch to the wide age distribution and other diverse demographic characteristics of the online student body.

The homogeneity that exists in many residential programs "just doesn't exist in the distance-learning environment," he said. Despite the survey's flaws, Mr. McCollough said, the effort to add to the body of information about online programs is helpful for prospective students.

Turnout for the surveys varied, from a 50 percent response rate among nursing programs to a 75 percent response rate among engineering programs. At for-profit institutions—which sometimes have a reputation for guarding their data closely—cooperation was mixed, said Mr. Brooks. Some, like the American Public University System, chose to participate. But Kaplan University, one of the largest providers of online education, decided to wait until the first rankings were published before deciding whether to join in, a spokesperson for the institution said.

Though this year's rankings do not make definitive statements about program quality, Mr. Brooks said the research team was cautious for a reason and hopes the new guide can help students make informed decisions about the quality of online degrees.

"We'd rather not produce something in its first year that's headline-grabbing for the wrong reasons," he said.

---

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

Institution	Teaching Practices and Student Engagement	Student Services and Technology	Faculty Credentials and Training	Admissions Selectivity
Arizona State U., W.P. Carey School of Business	24	32	37	11
Arkansas State U.	9	21	1	36
Brandman U. (Part of the Chapman U. system)	40	24	29	n/a
Central Michigan U.	11	3	56	9
Clarkson U.	4	24	2	23
Florida Institute of Technology	43	16	23	n/a
Gardner-Webb U.	27	1	15	n/a
George Washington U.	20	9	7	n/a
Indiana U. at Bloomington, Kelley School of Business	29	19	40	3
Marist College	67	23	6	5
Quinnipiac U.	6	4	13	16
Temple U., Fox School of Business	39	8	17	34
U. of Houston-Clear Lake	8	21	18	n/a
U. of Mississippi	37	44	20	n/a

Source: U.S. News & World Report

Jensen Comment
I don't know why the largest for-profit universities that generally provide more online degrees than the above universities combined are not included in the final outcomes. For example, the University of Phoenix alone as has over 600,000 students, most of whom are taking some or all online courses.

My guess is that most for-profit universities are not forthcoming with the data requested by US News analysts. Note that the US News condition that the set of online programs to be considered be regionally accredited does not exclude many for-profit universities. For example, enter in such for-profit names as "University of Phoenix" or "Capella University" in the "College Search" box at
http://colleges.usnews.rankingsandreviews.com/best-colleges/university-of-phoenix-20988
These universities are included in the set of eligible regionally accredited online degree programs to be evaluated. They just did not do well in the above "Honor Roll" of outcomes for online degree programs.

For-profit universities may have shot themselves in the foot by not providing the evaluation data to US News for online degree program evaluation. But there may b e reasons for this. For example, one of the big failings of most for-profit online degree programs is in undergraduate "Admissions Selectivity."

Bob Jensen's threads on distance education training and education alternatives are at
http://www.trinity.edu/rjensen/Crossborder.htm

"Law Deans in Jail," by Morgan Cloud and George B. Shepherd. SSRN, February 24, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1990746

Abstract:
A most unlikely collection of suspects - law schools, their deans, U.S. News & World Report and its employees - may have committed felonies by publishing false information as part of U.S. News' ranking of law schools. The possible federal felonies include mail and wire fraud, conspiracy, racketeering, and making false statements. Employees of law schools and U.S. News who committed these crimes can be punished as individuals, and under federal law the schools and U.S. News would likely be criminally liable for their agents' crimes.

Some law schools and their deans submitted false information about the schools' expenditures and their students' undergraduate grades and LSAT scores. Others submitted information that may have been literally true but was misleading. Examples include misleading statistics about recent graduates' employment rates and students' undergraduate grades and LSAT scores.

U.S. News itself may have committed mail and wire fraud. It has republished, and sold for profit, data submitted by law schools without verifying the data's accuracy, despite being aware that at least some schools were submitting false and misleading data. U.S. News refused to correct incorrect data and rankings errors and continued to sell that information even after individual schools confessed that they had submitted false information. In addition, U.S. News marketed its surveys and rankings as valid although they were riddled with fundamental methodological errors.

Bob Jensen's threads on media rankings of colleges and universities ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

"The Law School System Is Broken," National Jurist, February 2012 --- Click Here
http://www.nxtbook.com/splash/nationaljurist/nationaljurist.php?nxturl=http%3A%2F%2Fwww.nxtbook.com%2Fnxtbooks%2Fcypress%2Fnationaljurist0212%2Findex.php#/18/OnePage
Thank you Paul Caron for the heads up

It's a troubling trend. The total amount of debt that has been used to pay for legal education has risen to $3.6 billion, up from less than $2 billion just ten years prior. And if the current trends continue, that figure could reach $7 billion by 2020.

It's not a problem that has gone unnoticed. Legal education observers are worried, recent graduates are frantic and law schools are looking at their options. ...

[T]here is no easy or simple answer to the problem. ... The reason for the debt is easier to understand: law school tuition continues to outpace inflation. It increased by 74% from 1998 to 2008.

Why does tuition continue to grow? Most agree it is related to the number of law professors walking around law school campuses nowadays. Faculty salaries make up a majority of a law school's budget. And law schools increased their faculty size by 40% from 1998 to 2008, according to a National Jurist report. That meant almost 5,000 law professors were added in 10 years, with the average student-to-faculty ratio dropping from 18.5-to-1 in 1998 to 14.9-to-1.

And why did law schools expand their faculties so rapidly? Law has become more complex and specialized. Law schools today offer far more course than ever before, and specializations. But critics point out that the race to do better in the U.S. News & World Report annual rankings has also fueled the growth.

Turkey Times for Overstuffed Law Schools ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#OverstuffedLawSchools

Lawsuit Databases

AAA PUBLISHES STUDY ON DISCLOSURE TONE AND SHAREHOLDER LAWSUITS ---
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151874

In the U.S. there are both state and federal jurisdictions. And there can be individual or class action lawsuits brought by plaintiffs. One of the better sources for federal securities class action lawsuits is the Stanford University Law School Federal Class Action Clearinghouse ---
http://securities.stanford.edu/
But this by no means covers most of the lawsuits against large auditing firms. In fact, the database has surprisingly few hits for Big Four firms. Many of the SEC lawsuits are not in this database.

For lawsuits dealing with derivative financial instruments I also have a tidbit timeline at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Of course the lawyers are going to use their very expensive legal research databases. A list of sources in the U.S. is provided in
http://en.wikipedia.org/wiki/Legal_Research

 March 14, 2010 reply from Orenstein, Edith [eorenstein@FINANCIALEXECUTIVES.ORG]

Some limited data regarding litigation for the six largest audit firms (U.S. data only, as of 2007) was provided by the Center for Audit Quality (CAQ) - an affiliate of the AICPA, in reports to the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP).

For example, among CAQ's  reports to ACAP, CAQ's Jan. 23, 2008 report to ACAP included a section on Litigation. A caveat in the CAQ report states:

"Information regarding litigation is highly sensitive, because of the risk that the data could be used

unfairly against a firm in litigation. For these reasons, the data presented in this report were gathered from the six audit firms and aggregated (the data relate only to claims against the six U.S. firms and do not include claims in U.S. courts against any non-U.S. firms that are members of the same networks). To prevent "reverse engineering" of the data to tie specific facts to a specific lawsuit or firm, the data have been grouped - for example, aggregating data from several different years. The litigation data discussed in this report do not include information relating to government inquiries, investigations, or enforcement actions.31"  [Footnote 31 in the CAQ report states: "2007 litigation data in this report reflect submissions by five firms of information as of December 20, 2007 and by one firm of information as of November 30, 2007."]

Additionally, CAQ's Second Supplement to ACAP (4/16/08) included data on private actions and shareholder class actions.

Treasury's ACAP published its final report  in 2008; here is related summary in FEI blog.

Edith Orenstein
Director of Accounting Policy Analysis and Communications
Financial Executives International (FEI)
1250 Headquarters Plaza, West Tower, 7th Floor
Morristown, NJ  07932
(973) 765-1046
eorenstein@financialexecutives.org
web: www.financialexecutives.org
blog: www.financialexecutives.blogspot.com
twitter: www.twitter.com/feiblog

---

 

March 14,2010 message from Francine McKenna [retheauditors@GMAIL.COM]

I try to keep up as best I can on litigation against the auditors. It's not easy since I am not an attorney and do not have access to their databases.  I depend of the "kindness of lawyer strangers" to help me often.  

It's not easy since auditors are often one of many defendants in a class action lawsuit , for example. Often news reports or other blog posts do not include all the defendants if auditors are not the focus of the story.  Which they are often not.  Which is why my site is useful.

 I look at the lists compiled by Kevin LaCroix on his site DandODiary.com of securities litigation and class action suits, Francis Pileggi of DelawareLitigation.com also mentions suits against or by auditors (as in the Deloitte suit against their own Vice Chairman ) when they make it to Delaware Chancery Court. They both keep an eye out for me now and it was Frans=cis who alerted me to both the judgement against Deloitte's Flanagan and the recent "in pari delicto" case against pwC.

I also use a site called Justia to look for all other suits against the firms, often focused on suits in Federal Courts.  

http://dockets.justia.com/

The Stanford Law School database is also useful for getting the actual filings and documents. http://securities.stanford.edu/

Interestingly PwC does a great job tracking everyone else's 10b-5 litigation  - except their own.  You will never see auditor litigation broken out in their report.

http://10b5.pwc.com/public/Default.aspx

Bob is right to say that there's a whole slew of suits, at times very large and important that are outside of the US, such as the ones in Hong Kong against EY.  For that I count on Google Alerts (and my blog readers) to alert me, sometimes at odd hours of the night, of new developments.

http://retheauditors.com/category/auditor-litigation/

http://retheauditors.com/2009/07/11/mckenna-on-auditor-litigation-securities-dockets-mid-year-update/

fm

Bob Jensen's threads on shareholder lawsuits ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Journals Inflate Their Prestige by Coercing Authors to Cite Them," Chronicle of Higher Education, February 3, 2012 ---
http://chronicle.com/blogs/ticker/journals-inflate-rankings-by-coercing-authors-to-cite-them/40233?sid=wc&utm_source=wc&utm_medium=en

A survey published today in Science shows that journal editors often ask prospective authors to add superfluous citations of the journal to articles, and authors feel they can’t refuse. (The Science paper is for subscribers only, but you can read a summary here.) The extra citations artificially inflate a journal’s impact and prestige. About 6,600 academics responded to the survey, and about 20 percent said they had been asked to add such citations even though no editor or reviewer had said their article was deficient without them. About 60 percent of those surveyed said they would comply with such a request, which was most often aimed at junior faculty members.

Bob Jensen's threads on how prestigious journals rip off libraries ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals

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

The lobbies prestigious academic journal publishers ripping off libraries with absurd library subscription prices won.
The only thing left for us is to support the campus librarian boycott appeals.

"Legislation to Bar Public-Access Requirement on Federal Research Is Dead," by Jennifer Howard, Chronicle of Higher Education, February 27, 2012 ---
http://chronicle.com/article/Legislation-to-Bar/130949/?sid=wc&utm_source=wc&utm_medium=en

The science-publishing giant Elsevier pulled its support on Monday from the controversial Research Works Act, hours before the bill's co-sponsors in the U.S. House of Representatives declared the legislation dead.

The bill, HR 3699, would have prevented agencies of the federal government from requiring public access to federally subsidized research. In a statement released on Monday morning, the publisher reiterated its opposition to government mandates even as it backed away from the bill. On Monday afternoon, the bill's co-sponsors, Rep. Darrell Issa, a Republican of California, and Rep. Carolyn Maloney, a Democrat of New York, issued a statement of their own saying that they would not push for action on the bill after all.

"As the costs of publishing continue to be driven down by new technology, we will continue to see a growth in open-access publishers. This new and innovative model appears to be the wave of the future," the Issa-Maloney statement said. "The American people deserve to have access to research for which they have paid. This conversation needs to continue, and we have come to the conclusion that the Research Works Act has exhausted the useful role it can play in the debate."

Before the news broke that the bill was dead, open-access advocates credited a growing scholarly boycott of Elsevier for the publisher's change of course. But Elsevier said its shift on the legislation was a response to feedback from the scholars who continue to work with it.

"While we continue to oppose government mandates in this area, Elsevier is withdrawing support for the Research Works Act itself," the publisher said. "We hope this will address some of the concerns expressed and help create a less heated and more productive climate for our ongoing discussions with research funders."

Effect of a Boycott

More than 7,400 scholars so far have signed an online petition, the Cost of Knowledge, inspired by the mathematician Timothy Gowers and organized by Tyler Neylon, who has a Ph.D. in applied mathematics from New York University and is a co-founder of Zillabyte, a big-data startup. The signers come from many disciplines, but mathematicians and biologists have made the strongest showing.

The boycotters say they will not edit, contribute to, and/or review for Elsevier journals. They object to what they call "exorbitantly high prices for subscriptions to individual journals," to how Elsevier markets bundled journal subscriptions to libraries, and to its support for anti-public-access legislation.

Boycott organizers and access advocates celebrated Monday's news. "I see this as a victory won by popular awareness and support," Mr. Neylon said in an e-mail.

Heather Joseph, executive director of the Scholarly Publishing and Academic Resources Coalition, said the boycott had helped spur Elsevier's turnabout. "You don't get almost 8,000 scientists saying 'We think this is a lousy idea' so vocally without taking that seriously," she said.

Alicia Wise, Elsevier's director of universal access, played down the boycott's effect. "It's something that we're clearly aware of," she said. But she emphasized that Elsevier had been sounding out the authors, editors, and reviewers who continue to work with it. "Those are the voices we have been listening to," she said.

'Still a Bit Suspect'

If Elsevier hopes that renouncing the controversial bill will make the boycott go away, it's likely to be disappointed. "Elsevier's sincerity is still a bit suspect," Mr. Neylon said.

"I think the boycott or, at very least, the solidarity and commitment of the research community will continue to push for more-serious changes in the direction of open access," he said. "Ultimately, it is up to those who keep publishers in business to decide what they will do."

Mr. Neylon would like to see the rise of more open journals' publishing platforms. "In practical, tech-friendly fields like computer science and math, I think we are very close to these changes, which is an additional motivation for the community to put effort into bringing about change," he said. "I'm concerned that other fields, such as biology/medicine, may be more entrenched in a profit-supportive culture, so that it may take much longer to realize widespread support of open access there."

Ms. Wise said Elsevier wanted to be part of the conversation about creative models of scholarly access. For instance, "there's a broad discourse right now about how data sets can be made more broadly accessible," she said. "We're quite keen on playing a constructive role there."

The company issued an open letter to the mathematics community on Monday, addressing changes it says it will make to its pricing and access arrangements. "We want to stress that this is just the beginning," the letter said.

Meanwhile, attention has shifted to another proposed bill: the reintroduced Federal Research Public Access Act, which would require public access. Elsevier will "continue to join with those many other nonprofit and commercial publishers and scholarly societies that oppose repeated efforts to extend mandates through legislation," the publisher's statement said.

Asked about the reintroduced bill, Ms. Wise said she expected that "a broad spectrum of different types of publishers will have some concerns" about it.

For now, she said, "what we are really trying to do is create a better atmosphere and environment" for conversations about access. "If this move back from RWA will help us all work together better, than that's a good thing."

Commercial Scholarly and Academic Journals and Oligopoly Textbook Publishers Are Ripping Off Libraries, Scholars, and Students ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals

Insurance fraud is spreading like wildfire
On January 26, 2012 CBS News had a segment on the latest scheme in Florida and elsewhere where all participants in an "accident" are fraudsters. The states most vulnerable to these latest schemes are the 12 "no-fault" insurance states. These fake accident scams have exploded in this down economy.

Since there are so many fake medical clinics in Florida, many of these so-called "rear-enders" are reported in Florida. Florida is also the most troublesome state in the U.S. for filing millions of phony disability claims that give recipients at any age Social Security monthly payments for life plus Medicare coverage for life even if the faker is young such as 23 years of age and a long expectation of life. The phony medical clinics of course get a big cut of the pot. Some of the worst abusers of this fraud are Cuban immigrants in south Florida, but there are tens of millions of other perfectly healthy people in the United States who are now drawing lifetime Social Security benefit checks plus Medicare medical insurance coverage originally intended for retirees over age 65. The road to economic hell is paved with good intentions!

Here's an example of a fake auto accident scam that does not even require a lawsuit in a no-fault insurance state"

1. All the fraudsters are recruited up front for small amounts of cash
2. Two cheap cars are damaged slightly
3. The cars are parked on an isolated road in such a manner that it looks line one car hit the back end of the other car
4. The "accident" is phoned into the police
5. Before the police arrive five fraudsters with picture IDs enter the front car
6. Five more enter the rear car
7. The police arrive and write up an accident report
8. The next day all 10 people are examined by a fraudulent medical clinic that organized the scheme and supposedly finds soft tissue spinal damage in each passenger
9. Insurance laws demand immediate payment to each passenger --- amounts vary by state with $10,000 in Florida to $50,000 in New York
10. Nobody has to sue anybody for causing the accident
11. Most of the money is raked off by the fraudulent medical clinic that organized and carried out the scheme, including recruiting of the passengers

There are of course variations in car accident scams, but these are often more dangerous and may entail lengthy litigation. CBS News, January 26, 2012 ---
http://www.cbsnews.com/8301-18563_162-57367081/scammers-cash-in-on-car-accidents
 

"Scammers cash in on car 'accidents'"  --- Watch the video!

(CBS News)

In this tough economy, one type of insurance fraud is more popular than ever. It involves scam artists who stage car crashes in order to cash in. CBS News chief investigative correspondent Armen Keteyian shows us how it works.

In Tampa, Florida, security cameras outside a business captured an accident: an SUV "slammed" into a car.

But rewind the tape and you see the car was actually driven into the middle of the street. The driver got out, a collision, and then five people climbed into the damaged vehicle.

The passengers later claimed they were injured, to rip off their car insurance company. Instead, they were arrested and convicted of "staging" a car accident.

Ron Poindexter is the Florida director for the National Insurance Crime Bureau, a not-for-profit agency funded by the insurance industry to investigate fraud.

"It's a big problem nationally," he said. "In Florida it's a huge, growing problem that's out of control."

Today 12 states have what's known as no-fault auto insurance. That means no matter who's at fault, everyone involved in a car accident is entitled to insurance money if they're hurt. In Florida, it's up to $10,000 per person; in New York, it's $50,000 -- payouts so big, it's set the stage for massive fraud and scammers like this man, who asked we conceal his identity.

"First of all you gotta recruit people," said the former scammer. "You have to look around for people who wanna do car accidents. And then you have to ask them if they wanna be the hitter or the one [who's] hit [by the] car in front."

"The hitter or the one that's getting hit," asked Keteyian.

"Yeah," he said.

Here's how it works: It's run by organizers who own bogus medical clinics. They in turn hire recruiters who find people willing to stage accidents for money.

The people involved are then taken to the bogus clinics. An undercover video, shot by Florida State investigators, shows what typically happens next. Here, an investigator posing as an accident "victim" was told to sign one insurance form after another for medical treatment he'll never receive. He was then paid $700 in cash for faking the accident and an injury.

"It's easy money like that. And it's a lot of money," said the former scammer.

"Is it always the same thing, is it a back problem?" asked Keteyian.

Continued in article

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

Fabricated Data at Least 145 times
"UConn Investigation Finds That Health Researcher Fabricated Data." by Tom Bartlett, Inside Higher Ed, January 11, 2012 ---
http://chronicle.com/blogs/percolator/uconn-investigation-finds-that-health-researcher-fabricated-data/28291

Jensen Comment
I knew of a few instances of plagiarism, but not once has it been discovered that an accountics scientist fabricated data. This could, however, be due to accountics scientists shielding each other from validity testing ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

"Marquet Embezzlement Report Reveals Continued High Rate Of Employee Theft For 2011 - Vermont tops list of highest risk states," Market Watch, January 17, 2012 ---
http://www.marketwatch.com/story/marquet-embezzlement-report-reveals-continued-high-rate-of-employee-theft-for-2011-2012-01-17
Thank you Caleb Newquist for the heads up.

Marquet International Ltd. announced today that it has released The 2011 Marquet Report On Embezzlement -- its annual study of major embezzlement cases in the United States. The study examined 473 major embezzlement cases active in the US in 2011 -- those with more than $100,000 in reported losses. The 2011 Marquet Report On Embezzlement examined several broad categories related to the white collar fraud phenomenon of employee theft, including:

-- Characteristics of the Schemes

-- Characteristics of the Perpetrators

-- Characteristics of the Victim Organizations

-- Judicial Consequences

Some noteworthy findings from the 2011 study include:

-- The number of major embezzlements dropped only a slight 2% from 2010;

-- Vermont topped the list of states with highest risk for loss due to embezzlement in 2011. Vermont was followed by Connecticut, Pennsylvania, Montana, Virginia, Iowa and Idaho;

-- In 2011, non-profits, including religious organizations, experienced the most embezzlement cases of all industry categories, behind only financial institutions;

-- The average loss was about $750,000 for 2011;

-- The most common embezzlement scheme in 2011 involved the forgery or unauthorized issuance of company checks;

-- Nearly three-quarters of the incidents in 2011 were committed by employees who held finance & accounting positions;

-- The average scheme lasted nearly 5 years;

-- Gambling continues to appear to be a motivating factor in some embezzlement cases; and,

-- Nearly two-thirds of all incidents involved female perpetrators in 2011.

"Unfortunately, 2011 was another banner year for employee theft in the United States, experiencing only a slight drop in frequency from the frenetic pace set in 2010," said Christopher T. Marquet, CEO of Marquet International. "Employee theft is not going away any time soon." The study also reported some conclusions Marquet has derived by combining the data from past four years:

-- Perpetrators typically begin their embezzlement schemes in their early 40s;

-- By a significant margin, embezzlers are most likely to be individuals who hold financial positions within organizations;

-- The Financial Services industry suffers the greatest losses from major embezzlements;

-- Vermont, Virginia and Florida are among the states with the highest risk for loss due to embezzlement;

-- Women are more likely to embezzle on a large scale than men;

-- Men embezzle significantly more than women per scheme;

-- Gambling is a clear motivating factor in driving some major embezzlement cases; and,

-- Only about 5 percent of major embezzlers have a prior criminal history.

Continued in article

Jensen Comment
Vermonters avoid the highest taxes among states by not reporting embezzlement income.

New Hampshirers avoid taxes by voting for 300+ state legislators with only a one-word vocabulary --- "No!"

Mainers avoid taxes by going on tax free welfare.

"Welfare recipients outnumber taxpayers:  That's the situation Maine faces, and perhaps other states as well," Charleston Daily Mail, December 21, 2011 ---
http://www.dailymail.com/Opinion/Editorials/201112220151

Paul LePage, the Republican governor of Maine, mentioned an uncomfortable truth in a radio address this month: Maine has more welfare recipients than income tax payers.

Democrats challenged the accuracy of this assertion.

The Bangor Daily News fact-checked LePage and discovered that 445,074 Mainers paid state income tax, while 453,194 received some sort of state aid.

In Maine, Medicaid, welfare, food stamps and subsidies for education have a combined enrollment of 660,000.

Adjusting for overlap reduces the number to 453,194 - or 8,120 more people on state assistance than there are state income taxpayers in Maine.

What is situation in West Virginia?

Nationally, only 53 percent of the nation lives in a household that pays federal income tax.

While just about every worker has taxes withheld, many people have the entire amount refunded at tax time. With child tax credits and earned income tax credits, some people get more money from filing a return than they paid in.

But 30 percent of Americans live in households that receive some sort of public assistance that is means tested, meaning a person must have an income low enough to qualify for the aid.

Another depressing thought is that nearly half the "taxpayers" in the United States pay no federal or state income taxes.

LIBOR --- http://en.wikipedia.org/wiki/LIBOR

"UBS, Credit Suisse Among Banks in Swiss Libor-Fixing Probe," by Elena Logutenkova, Bloomberg News, February 3, 2012 ---
http://www.bloomberg.com/news/2012-02-03/switzerland-s-comco-opens-investigation-into-ubs-credit-suisse.html

UBS AG (UBSN) and Credit Suisse Group AG (CSGN) are among 12 banks facing a Swiss inquest into possible manipulation of the London interbank offered rate, the latest probe into how the benchmark for $350 trillion of financial products is set.

“Collusion between derivative traders might have influenced” Libor and its Japanese equivalent, Tibor, the Swiss competition watchdog, Comco, said in an e-mailed statement today. “Market conditions regarding derivative products based on these reference rates might have been manipulated too.”

Comco said it opened the investigation after receiving an application for its “leniency program,” which indicated that traders from various banks might have influenced the rate. Libor is set daily by the British Bankers’ Association based on data from banks, which report how much it would cost them to borrow from each other for various periods of time. Regulators in the U.S., U.K. and European Union have been examining how Libor is set, while Japan’s securities watchdog has probed Tibor.

“We are taking these investigations very seriously and are fully cooperating with the authorities,” said Yves Kaufmann, a spokesman for UBS in Zurich. UBS, the biggest Swiss bank, said in July that it was granted conditional immunity from some agencies, including the U.S. Department of Justice.

A spokesman for Credit Suisse said the bank is “not in the position” to comment at the moment.

Jensen Comment
This could be really huge since hundreds of thousands of derivatives financial instruments and hedging contracts use LIBOR as an underlying. Although LIBOR is not technically a risk free interest rate, it fundamentally assumes that traders are not manipulating the rate for devious purposes. It's probably the most popular interest rate underlying in derivatives financial instruments contracts.

Bob Jensen's helpers in accounting for derivative financial instruments and hedging activities ---
http://www.trinity.edu/rjensen/caseans/000index.htm

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

Fraud Beat
"Contest for Funniest New Jersey Joke Has a Winner," by Jonathan Weil, Bloomberg, March 22, 2012 ---
http://www.bloomberg.com/news/2012-03-22/contest-for-funniest-new-jersey-joke-has-a-winner.html

Did you hear the latest joke about New Jersey? A group of investigative journalists this week released a report calling it the least corruptible state in the country. How did that happen?

Easy. We bribed them.

ll kidding aside, this is a state where in 2009 three mayors, two assemblymen and five rabbis were among 44 charged in a single money-laundering and bribery sting by the Federal Bureau of Investigation. One of those mayors, Peter Cammarano, was from Hoboken, where I live. He was sentenced to 24 months in prison. Five years before his arrest, another former Hoboken mayor, Anthony Russo, pleaded guilty to corruption charges. His son now sits on the city council.

In New Jersey, we expect corruption. It’s built into the system. We have 566 municipalities, the most per capita of any state. Local governments tax the citizenry dry, while preserving the opportunities for graft that flow from operating redundant public services. The state legislature likes it this way and always has. Whadayagonnado?

So it was quite a story this week when the Center for Public Integrity, a Washington-based nonprofit, ranked New Jersey as the state with the lowest corruption risk in the U.S. (Local corruption didn’t count, it said. Only “corruption risk” in state government did.) There’s a simple explanation for how the group reached its conclusion, too: Its methodology was awful. Answering Questions

Here’s how the center got the New Jersey data for its nationwide “State Integrity Investigation.” Last year, it hired Colleen O’Dea, a freelance journalist who worked for about 26 years at the Daily Record in Morris County, to answer a list of 330 questions about New Jersey state government. Each called for a numerical score. O’Dea, 49, said she interviewed 26 people for the assignment, five in person. The center paid her $5,000.

The center also hired a former local newspaper editor to review her work. From there, the center provided O’Dea’s responses to another Washington-based nonprofit called Global Integrity. That group fed the answers into an algorithm, said Randy Barrett, a Center for Public Integrity spokesman. The results from the algorithm were used to generate letter grades in 14 categories and an overall score for New Jersey of 87 percent, or a B+.

The center hired reporters for every other state, too, along with “peer reviewers” to read their responses. Each reporter got the same list of queries. The center called this investigative reporting. Really, though, it was just a bunch of people answering questionnaires.

For example, O’Dea gave New Jersey a top score of 100 percent when asked to evaluate this statement: “In practice, the state-run pension funds disclose information about their investment and financial activity in a transparent manner.”

How did she decide that? The questionnaire said to give a high score if such information was available online at little or no cost. Her notes, posted on the center’s website, say she asked someone at the New Jersey State League of Municipalities about this. “Very transparent,” her notes said. The center gave the state an “A” in the category of “state pension-fund management,” based partly on O’Dea’s answer to that question.

Now consider that, in August 2010, New Jersey became the only state ever sued for fraud by the Securities and Exchange Commission. The SEC said the state for years lied to municipal- bond investors about the underfunded condition of its two largest pension plans. New Jersey settled without admitting or denying the agency’s claims. Making a Difference

When I asked O’Dea in a telephone interview if she knew about the SEC lawsuit, she said she didn’t. Later, she e-mailed me to say that she had, in fact, been aware of it, and that “the state has since owned up to the issue.”

Either way, it’s hard to believe New Jersey deserves an A for how it manages its pension funds. Yet for all we know, this grade could have made the difference between finishing No. 1 in the rankings or not. The center ranked Connecticut No. 2 with an overall grade of B, or 86 percent, one point behind New Jersey.

Another example from the survey: “In practice, the state- run pension funds have sufficient staff and resources with which to fulfill their mandate.” O’Dea gave another top score. This time she listed a second source, in addition to the fellow from the league of municipalities: a spokesman at the New Jersey Department of the Treasury. He told her the answer was yes.

And so forth. The center gave New Jersey’s insurance department a B+. One of the inputs was the 100 percent score O’Dea awarded in response to this statement: “In practice, the state insurance commission has a professional, full-time staff.”

Her notes listed two sources: Someone from the Independent Insurance Agents and Brokers of New Jersey, and a spokesman for the New Jersey Department of Banking and Insurance. Both said the statement was true. (Imagine that.) O’Dea said the sources she chose “seemed to logically have knowledge of the question.”

Continued in article

Jensen Comment
All jokes aside, President Obama's home town is still the most corrupt city in the United States

"Chicago Called Most Corrupt City In Nation," CBS Chicago TV, February 14, 2012 ---
http://chicago.cbslocal.com/2012/02/14/chicago-called-most-corrupt-city-in-nation/

A former Chicago alderman turned political science professor/corruption fighter has found that Chicago is the most corrupt city in the country.

He cites data from the U.S. Department of Justice to prove his case. And, he says, Illinois is third-most corrupt state in the country.

University of Illinois professor Dick Simpson estimates the cost of corruption at $500 million.

It’s essentially a corruption tax on citizens who bear the cost of bad behavior (police brutality, bogus contracts, bribes, theft and ghost pay-rolling to name a few) and the costs needed to prosecute it.

“We first of all, we have a long history,” Simpson said. “The first corruption trial was in 1869 when alderman and county commissioners were convicted of rigging a contract to literally whitewash City Hall.”

Corruption, he said, is intertwined with city politics

“We have had machine politics since the Great Chicago Fire of 1871,” he said. “Machine politics breeds corruption inevitably.”

Simpson says Hong Kong and Sydney were two similarly corrupt cities that managed to change their ways. He says Chicago can too, but it will take decades.

He’ll be presenting his work before the new Chicago Ethics Task Force meeting tomorrow at City Hall.

University of Illinois at Chicago Report on Massive Political Corruption in Chicago
"Chicago Is a 'Dark Pool Of Political Corruption'," Judicial Watch, February 22, 2010 ---
http://www.judicialwatch.org/blog/2010/feb/dark-pool-political-corruption-chicago

A major U.S. city long known as a hotbed of pay-to-play politics infested with clout and patronage has seen nearly 150 employees, politicians and contractors get convicted of corruption in the last five decades.

Chicago has long been distinguished for its pandemic of public corruption, but actual cumulative figures have never been offered like this. The astounding information is featured in a lengthy report published by one of Illinois’s biggest public universities.

Cook County, the nation’s second largest, has been a “dark pool of political corruption” for more than a century, according to the informative study conducted by the University of Illinois at Chicago, the city’s largest public college. The report offers a detailed history of corruption in the Windy City beginning in 1869 when county commissioners were imprisoned for rigging a contract to paint City Hall.

It’s downhill from there, with a plethora of political scandals that include 31 Chicago alderman convicted of crimes in the last 36 years and more than 140 convicted since 1970. The scams involve bribes, payoffs, padded contracts, ghost employees and whole sale subversion of the judicial system, according to the report. 

Elected officials at the highest levels of city, county and state government—including prominent judges—were the perpetrators and they worked in various government locales, including the assessor’s office, the county sheriff, treasurer and the President’s Office of Employment and Training. The last to fall was renowned political bully Isaac Carothers, who just a few weeks ago pleaded guilty to federal bribery and tax charges.

In the last few years alone several dozen officials have been convicted and more than 30 indicted for taking bribes, shaking down companies for political contributions and rigging hiring. Among the convictions were fraud, violating court orders against using politics as a basis for hiring city workers and the disappearance of 840 truckloads of asphalt earmarked for city jobs. 

A few months ago the city’s largest newspaper revealed that Chicago aldermen keep a secret, taxpayer-funded pot of cash (about $1.3 million) to pay family members, campaign workers and political allies for a variety of questionable jobs. The covert account has been utilized for decades by Chicago lawmakers but has escaped public scrutiny because it’s kept under wraps. 

Judicial Watch has extensively investigated Chicago corruption, most recently the conflicted ties of top White House officials to the city, including Barack and Michelle Obama as well as top administration officials like Chief of Staff Rahm Emanual and Senior Advisor David Axelrod. In November Judicial Watch sued Chicago Mayor Richard Daley's office to obtain records related to the president’s failed bid to bring the Olympics to the city.

Bob Jensen's threads on the sad state of governmental accounting are at
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

Bob Jensen's threads on political corruption are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/fraudUpdates.htm

Question
Does the IRS offer professional courtesy to delinquent taxpayers on the federal payroll?
Is the IRS especially lenient with Congressional staffers?

"Federal employees owe $1.03 billion in unpaid taxes," by Ed O'Keefe, Washington Post, January 23, 2012 --- Click Here
http://www.washingtonpost.com/blogs/federal-eye/post/federal-employees-owe-103-billion-in-unpaid-taxes/2012/01/20/gIQAv7KKJQ_blog.html

Congressional staffers owed about $10.6 million in unpaid taxes in 2010, a slight increase from the previous year and a growing slice of the roughly $1 billion owed by federal and postal workers nationwide.

The figures come as Republican efforts to pass legislation allowing federal agencies to fire tax delinquent federal employees have slowed and as the White House continues to crack down on improper payments made by agencies to delinquent government contractors and federal beneficiaries.

About 98,000 federal, postal and congressional employees owed $1.03 billion in unpaid taxes at the end of fiscal 2010, according to records provided by the Internal Revenue Service. The total number of delinquent employees dipped slightly from 2009, but the amount owed jumped by $32 million.

The figures are “totally unacceptable and disrespectful to hardworking American taxpayers,” said Rep. Jason Chaffetz (R-Utah). “If you’re on the federal payroll, the very least you can do is pay your taxes.”

Chaffetz and Sen. Tom Coburn (R-Okla.) have authored bills that would force federal agencies, the U.S. Postal Service and congressional offices to fire employees who purposely avoid paying taxes. Exceptions would be made for employees suffering from family turmoil or working to correct significant financial hardship. Chaffetz’s bill was approved by a committee last spring, but Coburn’s still awaits consideration by a Senate panel.

“Nobody’s going to take any joy in firing someone,” Chaffetz said in an interview. “But there’s enough people there that are simply thumbing their nose at American taxpayers that it’s not acceptable.”

(RELATED: Which federal workers owed taxes in 2010?)

But on Capitol Hill, 684 employees, or almost 4 percent, of the 18,000 congressional staffers owed taxes in 2010 – a jump of 46 workers from 2009. Four percent of House staffers owed $8.5 million and 3 percent of Senate employees owed $2.1 million, the IRS said.

Continued in article

So why not the Turbo Tax Defense?
"Former Ohio State Bar President Gets One Year in Prison for Tax Fraud," by Paul Caron, Tax Prof Blog, January 19, 2012 ---
http://taxprof.typepad.com/

Leslie Hines, a former senior antitrust partner in Thompson Hine's Cleveland office, was sentenced Tuesday to serve a year and a day in prison in connection with his guilty plea on a federal tax fraud charge, according to a press release issued by the Justice Department.

Federal prosecutors had been seeking a sentence of up to 16 months in prison for Jacobs, who was charged last October with filing false tax returns and overstating his business expenses by more than $250,000.

According to court filings [PDF], Jacobs filed four federal income tax returns between 2004 and 2007 that inflated his business expenses by as little as $25,000 and as much as $94,000 in an effort to lower the taxable income he collected from his Thompson Hine partnership. Prosecutors said Jacobs's income in each of those years should have ranged from $633,303 to $759,973.

Jensen Comment
A better lawyer would've embezzled more than that from clients.
Even a lousy accountant could've fabricated expense receipts better than that.
Hence Mr. Hines should've been either an accountant or a better lawyer.

Better yet he should've used the TurboTax Defense that works for big crooks ---
Watch the video how how Mr. Hines should6ve proceeded ---
http://www.youtube.com/watch?v=eKVxGlkPRlo

"Who Gets to See Published Research? Opponents of a proposed bill say it would work against the open exchange of ideas," by Jennifer Howard, Chronicle of Higher Education, January 22, 2012 ---
http://chronicle.com/article/Hot-Type-Who-Gets-to-See/130403/?sid=wb&utm_source=wb&utm_medium=en

The battle over public access to federally financed research is heating up again. The basic question is this: When taxpayers help pay for scholarly research, should those taxpayers get to see the results in the form of free access to the resulting journal articles?
 

 

Actions in Washington this month highlight how far from settled the question is, even among publishers. A major trade group, the Association of American Publishers, has thrown its weight behind proposed new legislative limits on requiring public access, while several of its members, including the Massachusetts Institute of Technology's press, have publicly disagreed with that position.
 

 

The White House's Office of Science and Technology Policy just closed a period of public comment on public access to what it called "peer-reviewed scholarly publications resulting from federally funded research." The office hasn't set a timetable for what happens now, but its next moves could also determine whether federal mandates that govern public access have much of a future.
 

 

In Congress, meanwhile, U.S. Reps. Darrell E. Issa, a Republican of California, and Carolyn B. Maloney, a Democrat of New York, introduced the Research Works Act (HR 3699) last month. The bill would forbid federal agencies to do anything that would result in the sharing of privately published research—even if that research is done with the help of taxpayer dollars—unless the publisher of the work agrees first. That would spell the end of policies such as the National Institutes of Health's public-access mandate, which requires that the results of federally supported research be made publicly available via its PubMed Central database within 12 months of publication.

 

The publishers' association came out with a strong statement of support for the proposed legislation. Many commercial publishers of research journals, including major players such as Elsevier, belong to the group.

 

A number of university presses are members of the association's Professional and Scholarly Publishing division, including the presses of MIT, the University of California, and the University of Oxford.

 

The MIT Press was the first to say it didn't agree with the association's endorsement of the bill. Other academic presses, including California's, have said the same.

 

The Nature Publishing Group and Digital Science issued a joint statement last week saying that they do not support the Research Works Act. "We seek to enable the open exchange of ideas, especially in scientific communities, in line with the requirements and objectives of relevant stakeholders," the statement said, noting that the Nature group "encourages self-archiving of the author's accepted manuscript" in PubMed Central six months after publication.

 

The American Association for the Advancement of Science, which publishes the journal Science, also issued a statement saying it is not in favor of the bill. "We believe the current NIH public-access policy provides an important mechanism for ensuring that the public has access to biomedical research findings," said Alan I. Leshner, chief executive officer. "At the same time, the NIH policy provides appropriate support for the intellectual-property rights of publishers who have invested much in science communication."

 

Both the AAAS and the Nature group are members of the publishers' association.

 

More Than Words

The debate over mandates is not just administrative and legislative but also rhetorical. In this case, rhetoric does matter. What does "resulting from" federally financed research mean, exactly? Who gets to claim credit for—and control of—research products?

Continued in article

 

Commercial Scholarly and Academic Journals and Oligopoly Textbook Publishers Are Ripping Off Libraries, Scholars, and Students ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals

Computing from Clouds Versus Computing from Dirt

All isn't lost if your young children can play with the clay.
"Fake iPad 2s hit more major retailers," byDarcy Wintonyk, ctvbc.ca, January 18, 2012 --- Click Here
http://www.ctv.ca/servlet/ArticleNews/print/CTVNews/20120117/bc_steele_more_ipad_fraud_120117/20120118/?hub=BritishColumbiaHome&subhub=PrintStory
Thank you David Fordham for the heads up.

Walmart and London Drugs say that fake Apple iPad 2s made of clay are also appearing on their store shelves, a day after electronic giants Future Shop and Best Buy revealed they are launching a major fraud investigation into the scam.

In most of the cases, the popular tablet computers are bought for cash and then swapped out for a piece of modelling clay. The boxes are then re-wrapped and returned to the store, only to end up back on the shelves and resold to other unsuspecting customers.

Future Shop and Best Buy say as many as 10 fake models were sold in their Metro Vancouver locations. A Victoria resident wrote to say she purchased one of the fraudulent models at a Vancouver Island Best Buy on New Year's Day.

Since CTV broadcast its exclusive story about the frauds on Monday, more victims have come forward and two more major retailers have confirmed they're also dealing with the fake products. London Drugs said it is aware of four incidents in the past month. Walmart officials haven't provided an exact tally, but officials said they are investigating fewer than 10 cases.

Scam artists are taking advantage of the popularity of Apple's latest offering, says Future Shop spokesperson Elliott Chun.

"It's really sad that people stoop to these low levels to take advantage of really hot sellers. As you probably know, tablets were the number one touted gift items for the holidays this year," he said.

Dayna Chabot purchased a bogus 32-gigabyte iPad 2 at Walmart in Langley, south of Vancouver, on Jan. 5.

She recalls being shocked opening the "perfectly sealed" box with her boyfriend once they got home -- and seeing a block of clay instead.

"It was all sealed properly and everything. It was the shape of an iPad. They even had a piece of clay where the charger went and everything. Like, they knew what they were doing," she told CTV's Steele on Your Side in a telephone interview.

Chabot said she was immediately worried about how the retail chain would react when she brought back a hunk of clay that she paid $600 for.

"I understood that it could have easily been us that did it and went back. But they were really good about it at Walmart. They were all just kind of baffled," she said.

Chabot was given a full refund within 20 minutes after speaking with a manager. Her experience is quite different from Surrey resident Mark Sandhu, who said he was treated like a criminal by a manager when he tried to return his fake device to Future Shop on Boxing Day. He has since been given a full refund, an apology and a new iPad 2 after coming forward to CTV with his story.

For its part, Apple says it is part of the investigation, but has refused to comment on any of the frauds.

Both Walmart and London Drugs say the shrink-wrapping on the bogus products was professionally done, so the items did not look tampered with.

Future Shop and Best Buy said their policies on returning wrapped tablet computers changed in early January because of the frauds.

"We still give them the benefit of the doubt that they're coming in for a proper return or exchange … and then we will physically open it up right in front of them as well and make sure every component is there," Chun said.

Chun said in the future all iPads sold from Future Shop's stores will only come factory sealed, direct from Apple.

London Drugs is also adjusting its refund procedures for computers in a bid to prevent any more incidents. Returned computers will now be opened in front of the customer.

Continued in article

Jensen Comment
Makes you wonder a bit about getting a bigger batch of clay in your new wide-screen HDTV set.

"Illinois Attorney General Will Sue For-Profit College," Inside Higher Ed, January 18, 2012 ---
http://www.insidehighered.com/quicktakes/2012/01/18/illinois-attorney-general-will-sue-profit-college

The Illinois attorney general is planning to sue Westwood College, a for-profit institution with four campuses in the Chicago area, saying that it has misled students about its criminal justice program in ways that have left the students facing serious debts without employment prospects, The Chicago Tribune reported. The suit will charge that Westwood is inappropriately recruiting students for the program for a law enforcement career when Illinois requires its police officers to be graduates of regionally accredited institutions. Westwood is nationally accredited so its graduates aren't eligible for the jobs. The suit will say that Westwood "made a variety of misrepresentations and false promises." The students who are enrolling are paying much more than they would have to for a degree that would qualify them for the jobs, the suit says. It notes that to complete a degree in criminal justice at Westwood costs $71,610 (with many students borrowing heavily to pay), compared with $12,672 from the College of DuPage, a nonprofit regionally accredited college.

Continued in article

Bob Jensen's threads on for-profit universities operating in the gray zone of fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

Question
How do you stay in college semester after semester with a grade average of 0.0?

"Chicago State Let Failing Students Stay," Inside Higher Ed, July 26, 2011 ---
http://www.insidehighered.com/news/2011/07/26/qt#266185

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

Jensen Comment
There is a bit of integrity at CSU. Professors could've just given the students A grades like some other high grade inflation universities or changed their examination answers in courses somewhat similar to the grade-changing practices of a majority of Atlanta K-12 schools. Now that CSU will no longer retain low gpa students, those other practices may commence at CSU in order to keep the state support at high levels. And some CSU professors may just let students cheat. It's not clear how many CSU professors will agree to these other ways to keep failing students on board.

Bob Jensen's threads on Professors Who Cheat and Allow Students to Cheat are at
http://www.trinity.edu/rjensen/Plagiarism.htm#RebeccaHoward

Bob Jensen's threads on grade inflation are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation

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

"How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus Fraud," by Francine McKenna, re:TheAuditors, January 5, 2012 ---
http://retheauditors.com/2012/01/02/how-do-you-hide-a-multibillion-dollar-loss-accounting-for-the-olympus-fraud/

Jensen Comment
Violent mobsters are so tied to the public and private sectors in Japan that they can hide almost anything they choose.

Bob Jensen's threads on the Olympus scandal ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Ernst & Young Told to Pay $16 Million in Superior Bank Case," by Susannah Nesmith and Jef Feeley, Bloomberg News, January 13, 2012 ---
http://www.businessweek.com/news/2012-01-13/ernst-young-told-to-pay-16-million-in-superior-bank-case.html

Bob Jensen's threads on Ernst & Young settlements ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Investment strategist: 'Big banks make their money from optimism'," by Joris Luyenduc, The Guardian, January 3, 2012 ---
http://www.guardian.co.uk/commentisfree/joris-luyendijk-banking-blog/2012/jan/03/investment-strategist-emerging-markets

. . .

"If you take an honest look at the financial sector today, you see banks can borrow money almost for free on what is called the short-term market, then lend that money to governments for 2% or 3%. Now why would they lend to small businesses if they can make money so easily? This is what 'zero interest rates' are doing to our economy, as well as taxing savers with inflation at over 5%. You take on new debt to pay off your old debt. It's like drinking your hangover away with ever more drinks. You are destroying your liver. That's what's currently happening."

Continued in article

Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

"U.S. Charges 3 Swiss Bankers in Tax Case," by Chad Barry, The Wall Street Journal, January 3, 2011 ---
http://online.wsj.com/article/SB10001424052970204368104577139043222716600.html

Jensen Comment
These Swiss bankers were indicted for helping U.S. taxpayers hide $1.2 billion from the IRS in offshore accounts

Purportedly their defense is full of holes (sorry about that).

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

Proposed Stop Online Piracy Act (SOPA) in the U.S. Congress ---
http://en.wikipedia.org/wiki/Stop_Online_Piracy_Act

How SOPA Would Affect You ---
http://news.cnet.com/8301-31921_3-57329001-281/how-sopa-would-affect-you-faq/

"Wikipedia begins 24-hour shutdown protest," New Zealand Herald, January 19, 2012 ---
http://www.nzherald.co.nz/technology/news/article.cfm?c_id=5&objectid=10779616

Wikipedia has gone 'dark' for 24 hours in protest of US anti-piracy legislation. Photo / Supplied Expand Wikipedia has gone 'dark' for 24 hours in protest of US anti-piracy legislation. Photo / Supplied

Wikipedia went dark, Google blotted out its logo and other popular websites planned protests to voice concern over legislation in the US Congress intended to crack down on online piracy.

Wikipedia tonight shut down the English version of its online encyclopaedia for 24 hours to protest the Stop Online Piracy Act (SOPA) introduced in the House of Representatives and the Senate version, the Protect IP Act (PIPA).

Google placed a black redaction box over the logo on its much-visited US home page to draw attention to the bills, while social news site reddit and the popular Cheezburger humour network planned to shut down later in the day.

The draft legislation has won the backing of Hollywood, the music industry, the Business Software Alliance, the National Association of Manufacturers and the US Chamber of Commerce.

But it has come under fire from digital rights and free speech organisations for allegedly paving the way for US authorities to shut down websites accused of online piracy, including foreign sites, without due process.

Continued in article

Jensen Copy
This is a classic example of trying to pop a pimple with a sledge hammer. If Congress passes this legislation as proposed it will be a disaster to open sharing as we know it today.

The good news is Wikileaks --- http://wikileaks.org/
I despise the Wikileaks site itself, but the good news is that Congress could not remove Wikileaks from the Internet even if it tried. Wikileaks may fold due to diminished financial support, but an act of Congress cannot shut it down unless there is worldwide cooperation to shut it down, and there will probably be ice fishing in Hell before the U.S. could engineer such cooperation. Similarly, I don't think an act of Congress can shut down Wikipedia or any other open sharing site that moves off shore. Stick that in your ear Rep. Lamar Smith.

"Brake the Internet Pirates:  How to slow down intellectual property theft in the digital era," The Wall Street Journal, January 18, 2012 ---
http://online.wsj.com/article/SB10001424052970203471004577142893718069820.html?mod=djemEditorialPage_t

Wikipedia and many other websites are shutting down today to oppose a proposal in Congress on foreign Internet piracy, and the White House is seconding the protest. The covert lobbying war between Silicon Valley and most other companies in the business of intellectual property is now in the open, and this fight could define—or reinvent—copyright in the digital era.

Everyone agrees, or at least claims to agree, that the illegal sale of copyrighted and trademarked products has become a world-wide, multibillion-dollar industry and a legitimate and growing economic problem. This isn't college kids swapping MP3s, as in the 1990s. Rather, rogue websites set up shop oversees and sell U.S. consumers bootleg movies, TV shows, software, video games, books and music, as well as pharmaceuticals, cosmetics, fashion, jewelry and more.

Often consumers think they're buying copies or streams from legitimate retail enterprises, sometimes not. Either way, the technical term for this is theft.

The tech industry says it wants to stop such crimes, but it also calls any tangible effort to do so censorship that would "break the Internet." Wikipedia has never blacked itself out before on any other political issue, nor have websites like Mozilla or the social news aggregator Reddit. How's that for irony: Companies supposedly devoted to the free flow of information are gagging themselves, and the only practical effect will be to enable fraudsters. They've taken no comparable action against, say, Chinese repression.

Meanwhile, the White House let it be known over the weekend in a blog post—how fitting—that it won't support legislation that "reduces freedom of expression" or damages "the dynamic, innovative global Internet," as if this describes the reality of Internet theft. President Obama has finally found a regulation he doesn't like, which must mean that the campaign contributions of Google and the Stanford alumni club are paying dividends.

The House bill known as the Stop Online Piracy Act, or SOPA, and its Senate counterpart are far more modest than this cyber tantrum suggests. By our reading they would create new tools to target the worst-of-the-worst black markets. The notion that a SOPA dragnet will catch a stray Facebook post or Twitter link is false.

Under the Digital Millenium Copyright Act of 1998, U.S. prosecutors and rights-holders can and do obtain warrants to shut down rogue websites and confiscate their domain names under asset-seizure laws. Such powers stop at the water's edge, however. SOPA is meant to target the international pirates that are currently beyond the reach of U.S. law.

Continued in article

Bob Jensen's threads on the dreaded DMCA ---
http://www.trinity.edu/rjensen/000aaa/theworry.htm#Copyright

January 18, 2012 reply from Bob Jensen

Hi Pat,

The Copyright Trolling Business Model is Most Often a Fraud Model
One disturbing trend is the rise in purchase of companies like failing newspapers by attorneys for pretty much the sole purpose of pretending they will sue. For example, if the Cactus Gulch Daily Sentinel has lousy cash flow prospects, bottom feeders may instead buy the newspaper for almost nothing with a focus on threatening to sue people who put portions, even a single picture from the newspaper's archives, on the Web or in an email message to family.

The copyright trolling buyers may even shut down publishing current articles by the failing newspaper and simply scour the Web daily for people they can threaten to sue for publishing quotations and pictures from the archives.

What is evil is that many of these copyright trolls prey on the weak.
For example, suppose Grandma posts a 1958 newspaper picture of her children at the Cactus Gulch July 4, 1958 parade on her Facebook page. The copyright troll owner of the defunct Cactus Gulch Daily Sentinel will send a threatening letter to her demanding $5,000 immediately or he will sue her for copyright violation. She trembles in fear that if she has to hire an attorney, it will cost her more than $5,000 when hauled into court.

What weak people like Grandma do not know is that more often than this copyright trolling fraudster really has no intent of suing. The reason is that his lawsuit most likely will be thrown out of court if she only copied one old picture from the newspaper, and even if he should win in court this fraudster's damage award may be less than $100. This is how copyright trolls are fraudsters preying on the weak by trying to scare the weak into paying out of fear..

All this may be technically legal, but I still find this copyright trolling business model distasteful.

Look up "Copyright Troll" in Wikipedia when Wikipedia ends its one-day protest of SOPA.

There are quite a few copyright trolling fraudsters out there, some of whom are defrauding other copyright trolls themselves (ha ha)  ---
http://current.com/technology/92979069_copyright-troll-john-steele-uses-flawless-software-he-paid-250k-to-create-in-order-to-generate-evidence-to-sue-1000s-in-torrent-lawsuits.htm 

Respectfully,
Bob Jensen

"CONGRESS THE CORRUPT," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, January 9, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/474

The Christmas and New Year’s break allows university faculty not only to enjoy family and friends, but also it supplies a moment to do some nontechnical reading.  After all, we don’t need that much time to look over our teaching notes.  Faculty need something constructive to do during the three or four weeks we have off, and catching up on our reading fits in marvelously.

We read two interesting books during this break.  The first is Throw Them All Out by Peter Schweizer.  The subtitle tells it all: “How politicians and their friends get rich off insider stock tips, land deals, and cronyism that would send the rest of us to prison.”  For example, the author discusses how Speaker Nancy Pelossi (Democrat) and her husband garnered Visa IPO shares in 2008 after intimating that she would introduce legislation which would prove very costly to Visa.  Of course, Pelosi backed off her threat once she and her husband received those IPO shares.  Schweizer also gives the example of Speaker Dennis Hastert (Republican), who used his knowledge of a proposed interchange for Interstate 88 to buy acreage on the cheap and sell it for its new market value.  Hastert realized millions in profits.

Worse, the ethics rules of the House and the Senate allow these things to occur.  In some twisted logic, Congress permits its members to engage in insider trading and land deals and regulatory intimidation.  It has legalized what is criminal for the rest of us.

We also read China in Ten Words by Yu Hua.  The text is part autobiographical, part historical, and part social commentary.  Mr. Hua describes China in ten chapters, each titled with a single word.  The words he chooses are people, leader, reading, writing, Lu Xun, revolution, disparity, grassroots, copycat, and bamboozle.  With these words, he describes the incredible social and economic changes in China during his life-time, starting with the Cultural Revolution from 1966 until late 1970s, which was followed by the economic revolution to the present.

The description records incredible changes in China, such as the nation’s becoming the second largest economic power in the world.  It also traces the failings of this transformation, such as ranking about 100^th in the world in per capita income.  The contradiction between these two measures foreshadows social conflict that must be dealt with sooner or later.

What proved serendipitous, even ironic, in this reading is to note the connection between the books.  In certain ways the two countries show similar contradictions and shortcomings.  Yu Hua discusses “today’s large-scale, multifarious corruption” in China; but the U.S. Congress engages in similar dishonesty.

Continued in article

The Wonk (Professor) Who Slays Washington

Insider trading is an asymmetry of information between a buyer and a seller where one party can exploit relevant information that is withheld from the other party to the trade. It typically refers to a situation where only one party has access to secret information while the other party has access to only information released to the public. Financial markets and real estate markets are usually very efficient in that public information is impounded pricing the instant information is made public. Markets are highly inefficient if traders are allowed to trade on private information, which is why the SEC and Justice Department track corporate insider trades very closely in an attempt to punish those that violate the law. For example, the former wife of a partner in the auditing firm Deloitte & Touche was recently sentenced to 11 months exploiting inside information extracted from him about her husband's clients. He apparently did was not aware she was using this inside information illegally. In another recent case, hedge fund manager Raj Rajaratnam was sentenced to 11 years for insider trading.

Even more commonly traders who are damaged by insiders typically win enormous lawsuits later on for themselves and their attorneys, including enormous punitive damages. You can read more about insider trading at
http://en.wikipedia.org/wiki/Insider_trading

Corporate executives like Bill Gates often announce future buying and selling of shares of their companies years in advance to avoid even a hint of scandal about exploiting current insider information that arises in the meantime. More resources of the SEC are spent in tracking possible insider information trades than any other activity of the SEC. Efforts are made to track trades of executive family and friends and whistle blowing is generously rewarded.

Question
Trading on insider information is against U.S. law for every segment of society except for one privileged segment that legally exploits investors for personal gains by trading on insider information. What is that privileged segment of U.S. society legally trades on inside information for personal gains?

Hints:
Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television --- CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider" is the most depressing segment I've ever watched on television ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
Also see http://financeprofessorblog.blogspot.com/2011/11/congress-trading-stock-on-inside.html

Jensen Comment

• It came as no surprise that many (most?) members of the U.S. House of Representatives and the U.S. Senate that writes the laws of the land made it illegal for to trade in financial and real estate market by profiting personally on insider information not yet available, including pending legislation that they will decide, wrote themselves out of the law making it legal for them to personally profit from trading on insider information. What came as a surprise is how leaders at the very top of Congress make millions trading on inside information with impunity and well as immunity.
   
• The Congressional  leader that comes off the worst in this Sixty Minutes "Insider" segment is former House Speaker and current Minority leader Nancy Pelosi. When confronted with specific facts on how she and her husband made some of their insider trading millions she fired back at reporter Steve Kroft with an evil glint saying what is tantamount to:  "How dare you question me about insider trades that are perfectly legal for members of Congress. Who are you to question my ethics about exploiting our insider trading privileges. Back off Steve or else!" Her manner can be extremely scary. Other Democratic Party members of Congress come off almost as bad in terms of insider trading for personal gain.
   
• Current Speaker of the House, John Boehner, is more subtle. He denies making any of his personal portfolio investment decisions and denies communicating with the person he hires to make such decision. However, that trust investor mysteriously makes money for Rep. Boehner using insider information obtained mysteriously. Other Republican members of Congress some off even worse in terms of insider trading.
   
• Members of Congress on powerful committees regularly make insider profits on legislation currently being written into the law that is still being held secret from the public. One of my heroes, former Senator Judd Gregg, is no longer my hero.
   
• Everybody knows that influence peddling in Congress by lobbyists, many of them being former members of Congress, is a dirty business of showering gifts on current members of Congress. What is made clear, however, is that these lobbyists are personally getting something in return from friendly members of Congress who pass along insider information to lobbyists. The lobbyists, in turn, peddle this insider information back to the private sector, such as hedge fund managers, for a commission. Moral of story:  Voters do not stop insider trading by a member of Congress by voting him or her out of office if they become peddlers of insider information obtained, as lobbyists, from their old friends still in the Congress.
   
• Five out of 435 members of the House of Representatives are seeking to sponsor a bill to make it illegal for representatives and senators to profit from trading on inside information. The Sixty Minutes show demonstrates how Nancy Pelosi, John Boehner, and other House leaders have buried that effort so deep in the bowels of the legislative process that there's no chance in hell of stopping insider trading by members of Congress. Insider trading is a privilege that attracts unethical people to run for Congress.

Watch the "Insider" Video Now While It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody

Bob Jensen's threads on the Sad State of Government Accounting and Accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Affinity Fraud --- http://en.wikipedia.org/wiki/Affinity_fraud

Ponzi Fraud --- http://en.wikipedia.org/wiki/Ponzi_scheme

"Fleecing the flock The big business of swindling people who trust you," The Economist, January 28, 2012 ---
http://www.economist.com/node/21543526

WITH a nudge from their pastor, the 25,000 members of the New Birth Missionary Baptist Church near Atlanta opened their hearts, and their wallets, to Ephren Taylor. And why not, given his glittering credentials? Mr Taylor billed himself as the youngest black chief executive of a publicly traded company in American history. He had appeared on NPR and CNN. He had given a talk on socially conscious investing at the Democratic National Convention. Snoop Dogg, a rapper, had tapped him to manage a charitable endowment.

So when Mr Taylor’s “Wealth Tour Live” seminars came to town, faithful ears opened wide. Eddie Long, the mega-church’s leader, introduced Mr Taylor at one event with the words: “[God] wants you to be a mover and shaker…to finance you well to do His will.” Mr Taylor offered “low-risk investment with high performances”, chosen with guidance from God.

Divine inspiration, alas, has given way to legal tribulation. For many investors, the 20% guaranteed returns proved illusory. Mr Taylor (whereabouts unknown) stands accused of fraud in a number of lawsuits. Bishop Long, a co-defendant, has urged Mr Taylor to “do the right thing” and cover any losses. The charges are not the first blot on the minister’s reputation: last year he settled for an estimated $15m-25m claims that he had coerced young men into oral sex.

An essential element of Mr Taylor’s approach was to make those he targeted want to invest in him personally, says Cathy Lerman, a lawyer representing some of the victims. “He was a master of creating a marketing presence. He would say: ‘If you want to check me out, just Google me.’” He had no problem convincing them that he was an ordained minister, even though he had no formal seminary training, according to court documents.

It will take time to gauge the full extent of the losses, not least because it will require untangling a web of companies, some of them shells. Victims, many of whom entrusted their life savings to Mr Taylor, are still coming forward. Some call him “the black Bernie Madoff”.

Let us prey

Mr Madoff, whose victims lost perhaps $20 billion, perpetrated the largest “affinity fraud” ever. The term refers to scams in which the perpetrator uses personal contacts to swindle a specific group, such as a church congregation, a rotary club, a professional circle or an ethnic community. Once the scammer gains their trust, his scam spreads like smallpox. Most affinity frauds are Ponzi schemes, in which money from new investors is used to repay old ones, or is siphoned off by the promoters.

The Madoff fraud fed on multiple affinity circles: wealthy Jews in Florida and Israel, country-club types and European old money, lured with help from marketers running “feeder” funds. The next-largest alleged investment fraud of recent years, the $7 billion collapse of Allen Stanford’s empire, also concerned specific groups, including the Latin American and Libyan diasporas and Southern Baptists. Mr Stanford’s trial began on January 23rd. He denies wrongdoing.

Beneath the mega-scams swirls a mass of smaller cons, spanning the world. Any close-knit community can be a target. Last August a South Korean pastor was indicted for misappropriating 2.4 billion Korean won ($2.3m) that the faithful had handed over to set up a Christian bank. In Britain, Kevin Foster’s KF Concept targeted the former coal-mining towns of South Wales, bilking more than 8,000 victims with the help of glitzy roadshows.

Continued in article

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

Affinity fraud in some respects is related to audit firm fraud and negligence. When the audit firms are the largest international accounting firms we tend to trust their names and logos, sometimes at our own peril ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Compensation and the Myth of the Corporate Superstar," by Charles M. Elson and Craig K. Ferrere, Harvard Business Review Blog, February 1, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/02/compensation_and_the_myth_of_t.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

The public is up in arms about some of the big bonuses being paid to the CEOs of big bailed-out banks. The boss of Britain's RBS, one of the biggest casualties of the banking crash, has felt obliged to turn down a $1.5 million bonus in the face of mounting anger and the threat of legislation.

It all used to be very different. Al Dunlap, the former Sunbeam CEO, and once handsomely rewarded corporate icon, was fond of reminding his investors that "the best bargain is an expensive CEO." Great managers, the argument went, deserve the big bucks because of the tremendous wealth they create.

According to this logic, expecting RBS to pay its CEO, Stephen Hester, less is analogous to asking that it pay less for any other necessary business commodity. If executive talent has a price, a firm will get only that which it pays for. So if Stephen Hester were not paid his bonus, another firm would bid away his services and RBS would not be able to attract and retain similar talent at more modest pay levels.

This notion that there is an open and competitive market for highly talented executives is at the heart of the process by which CEO pay is set. Board compensation committees rely almost exclusively on comparisons to CEO compensation at companies of similar size and in similar industries.

This practice, known as peer benchmarking, is used to approximate the next best employment option for that executive in the labor-market, the reservation wage. Pay is typically targeted at the 50th, 75th, or 90th percentile of this group. The implicit assumption is that a talented manager is interchangeable between firms, and thus should be paid very nearly what other executives are paid.

But although the notion that talent is a competitive market is both attractive and plausible, it is highly questionable. Executive talent is not fully transferable between companies. Scholars have long recognized a distinction between firm-specific and general skills. It is quite apparent that successful CEOs leverage not only their intrinsic talents but also, and more importantly, a vast accumulation of firm-specific knowledge developed over a multi-year career. Whether it is deep knowledge of an organization's personnel or the processes specific to a particular operation, this skill set is learned carefully over a long tenure with a company and not easily capable of quick replication at other firms. In fact, when "superstar" executives change companies, the result is usually disappointing.

If this is true, then the CEO labor market is less competitive than CEO compensation committees implicitly assume. Executives are in fact to a great extent captive to their companies, which ought to provide boards with scope for negotiating actively on compensation rather than relying on peer comparisons. The best bargain in corporate America, then, is not Al Dunlap's superstar CEO, but rather the home-grown executive, with whom fair and modest pay is negotiated, often less than suggested by peer comparisons.

Continued in article

Bob Jensen's threads about outrageous executive compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Hi Dean,

Thank you for the kind words.

Hedge fund shorts are often used in expectations to re-buy. You might take a look at the following:
"Subprime crisis: the lay-out of a puzzle: An empirical investigation into the worldwide financial consequences of the U.S. subprime crisis" ---
http://oaithesis.eur.nl/ir/repub/asset/5163/0509ma281597wm.pdf

 

Money for Nothing How CEOs and Boards Enrich Themselves While Bankrupting America
by John Gillespie and David Zweig
Simon and Schuster
http://books.simonandschuster.ca/Money-for-Nothing/John-Gillespie/9781416559931/excerpt_with_id/13802

All eyes are on the CEO, who has gone without sleep for several days while desperately scrambling to pull a rabbit out of an empty hat. Staffers, lawyers, advisors, accountants, and consultants scurry around the company headquarters with news and rumors: the stock price fell 20 percent in the last hour, another of the private equity firms considering a bid has pulled out, stock traders are passing on obscene jokes about the company's impending death, the sovereign wealth fund that agreed to put in $1 billion last fall is screaming at the CFO, hedge fund shorts are whispering that the commercial paper dealers won't renew the debt tomorrow, the Treasury and the Fed aren't returning the CEO's calls about bailout money, six satellite trucks—no, seven now—are parked in front of the building, and reporters with camera crews are ambushing any passing employee for sound bites about the prospects of losing their jobs.

Chaos.

In the midst of this, the board of directors—the supposedly well-informed, responsible, experienced, accountable group of leaders elected by the shareholders, who are legally and ethically required to protect the thousands of people who own the company—are . . . where? You would expect to them to be at the center of the action, but they are merely spectators with great seats. Some huddle together over a computer screen in a corner of the boardroom, watching cable news feeds and stock market reports that amplify the company's death rattles around the world; others sit beside a speakerphone, giving updates to board colleagues who couldn't make it in person. Meetings are scheduled, canceled, and rescheduled as the directors wait, hoping for good news but anticipating the worst.

The atmosphere is a little like that of a family waiting room outside an intensive care unit—a quiet, intense churning of dread and resignation. There will be some reminiscing about how well things seemed to be going not so long ago, some private recriminations about questions never asked or risks poorly understood, a general feeling of helplessness, a touch of anger at the senior executives for letting it come to this, and anticipation of the embarrassment they'll feel when people whisper about them at the club. Surprisingly, though, there's not a lot of fear. Few of the directors are likely to have a significant part of their wealth tied up in the company; legal precedents and insurance policies insulate them from personal liability. Between 1980 and 2006, there were only thirteen cases in which outside directors—almost all, other than Enron and WorldCom, for tiny companies—had to settle shareholder lawsuits with their own money. (Ten of the Enron outside directors who settled—without admitting wrongdoing—paid only 10 percent of their prior net gains from selling Enron stock; eight other directors paid nothing. A number of them have remained on other boards.) More significant, the CEO who over shadowed the board will hardly hurt at all, and will probably leave with the tens or even hundreds of millions of dollars that the directors guaranteed in an employment contract.

So they sit and wait—the board of directors of this giant company, who were charged with steering it along the road to profit and prosperity. In the middle of the biggest crisis in the life of the company, they are essentially backseat passengers. The controls, which they never truly used, are of no help as the company hurtles over a cliff, taking with it the directors' reputations and the shareholders' money. What they are waiting for is the dull thud signaling the end: a final meeting with the lawyers and investment bankers, and at last, the formality of signing the corporate death certificate—a bankruptcy filing, a forced sale for cents on the dollar, or a government takeover that wipes out the shareholders. The CEO and the lawyers, as usual, will tell the directors what they must do.

THIS IS NOT JUST A GLOOMY, hypothetical fable about how an American business might possibly fail, with investors unprotected, company value squandered, and the governance of enormous and important companies breaking down. This is, unfortunately, a real scenario that has been repeated time and again during the recent economic meltdown, as companies have exploded like a string of one-inch firecrackers. When the spark runs up the spine of the tangled, interconnected fuses, they blow up one by one.

Something is wrong here. As Warren Buffett observed in his 2008 letter to Berkshire Hathaway shareholders, "You only learn who has been swimming naked when the tide goes out—and what we are witnessing at some of our largest financial institutions is an ugly sight."

Just look at some of the uglier sights. Merrill Lynch, General Motors, and Lehman Brothers, three stalwart American companies, are only a few examples of corporate collapses in which shareholders were burned. The sleepy complicity and carelessness of their boards have been especially devastating. Yet almost all the public attention has focused on the greed or recklessness or incompetence of the CEOs rather than the negligence of the directors who were supposed to protect the shareholders and who ought to be held equally, if not more, accountable because the CEOs theoretically work for them.

Why have boards of directors escaped blame? Probably because boards are opaque entities to most people, even to many corporate executives and institutional investors. Individual shareholders, who might have small positions in a number of companies, know very little about who these board members are and what they are supposed to be doing. Their names appear on the generic, straight-to-the-wastebasket proxy forms that shareholders receive; beyond that, they're ciphers. Directors rarely talk in public, maintaining a code of silence and confidentiality; communications with shareholders and journalists are invariably delegated to corporate PR or investor relations departments. They are protected by a vast array of lawyers, auditors, investment bankers, and other professional services gatekeepers who keep them out of trouble for a price. At most, shareholders might catch a glimpse of the nonexecutive board members if they bother to attend the annual meeting. Boards work behind closed doors, leave few footprints, and maintain an aura of power and prestige symbolized by the grand and imposing boardrooms found in most large companies. Much of this lack of transparency is deliberate because it reduces accountability and permits a kind of Wizard of Oz "pay no attention to the man behind the curtain" effect. (It is very likely to be a man. Only 15.2 percent of the directors of our five hundred largest companies are women.) The opacity also serves to hide a key problem: despite many directors being intelligent, experienced, well-qualified, and decent people who are tough in other aspects of their professional lives, too many of them become meek, collegial cheerleaders when they enter the boardroom. They fail to represent shareholders' interests because they are beholden to the CEOs who brought them aboard. It's a dangerous arrangement.

On behalf of the shareholders who actually own the company and are risking their money in anticipation of a commensurate return on their investments, boards are elected to monitor, advise, and direct the managers hired to run the company. They have a fiduciary duty to protect the interests of shareholders. Yet, too often, boards have become enabling lapdogs rather than trust-worthy watchdogs and guides.

There are, unfortunately, dozens of cases to choose from to illustrate the seriousness of the situation. Merrill, GM, and Lehman are instructive because they were companies no one could imagine failing, although, in truth, they fostered such dysfunctional and conflicted corporate leadership that their collapses should have been foretold. As you read their obituaries, viewer discretion is advised. You should think of the money paid to the executives and directors, as well as the losses in stock value, not as the company's money, as it is so often portrayed in news accounts, but as your money—because it is, in fact, coming from your mutual funds, your 401(k)s, your insurance premiums, your savings account interest, your mortgage rates, your paychecks, and your costs for goods and services. Also, think of the impact on ordinary people losing their retirement savings, their jobs, their homes, or even just the bank or factory or car dealership in their towns. Then add the trillions of taxpayers' dollars spent to prop up some of the companies' remains and, finally, consider the legacy of debt we're leaving for the next generation.

———

DURING MOST OF HIS nearly six years at the top of Merrill Lynch, Stanley O'Neal simultaneously held the titles of chairman, CEO, and president. He required such a high degree of loyalty that insiders referred to his senior staff as the Taliban. O'Neal had hand-picked eight of the firm's ten outside board members. One of them, John Finnegan, had been a friend of O'Neal's for more than twenty years and had worked with him in the General Motors treasury department; he headed Merrill's compensation committee, which set O'Neal's pay. Another director on the committee was Alberto Cribiore, a private equity executive who had once tried to hire O'Neal.

Executives who worked closely with O'Neal say that he was ruthless in silencing opposition within Merrill and singleminded in seeking to beat Goldman Sachs in its profitability and Lehman Brothers in the risky business of packaging and selling mortgage-backed securities. "The board had absolutely no idea how much of this risky stuff was actually on the books; it multiplied so fast," one O'Neal colleague said. The colleague also noted that the directors, despite having impressive rÉsumÉs, were chosen in part because they had little financial services experience and were kept under tight control. O'Neal "clearly didn't want anybody asking questions."

For a while, the arrangement seemed to work. In a triumphal letter to shareholders in the annual report issued in February 2007, titled "The Real Measure of Success." O'Neal proclaimed 2006 "the most successful year in [the company's] history—financially, operationally and strategically," while pointing out that "a lot of this comes down to leadership." The cocky message ended on a note of pure hubris: "[W]e can and will continue to grow our business, lead this incredible force of global capitalism and validate the tremendous confidence that you, our shareholders, have placed in this organization and each of us."

The board paid O'Neal $48 million in salary and bonuses for 2006—one of the highest compensation packages in corporate America. But only ten months later, after suffering a third-quarter loss of $2.3 billion and an $8.4 billion writedown on failed investments—the largest loss in the company's ninety-three-year history, exceeding the net earnings for all of 2006—the board began to understand the real measure of failure. The directors discovered, seemingly for the first time, just how much risk Merrill had undertaken in becoming the industry leader in subprime mortgage bonds and how overleveraged it had become to achieve its targets. They also caught O'Neal initiating merger talks without their knowledge with Wachovia Bank, a deal that would have resulted in a personal payout of as much as $274 million for O'Neal if he had left after its completion—part of his board-approved employment agreement. During August and September 2007, as Merrill was losing more than $100 million a day, O'Neal managed to play at least twenty rounds of golf and lowered his handicap from 10.2 to 9.1.

Apparently due to sheer embarrassment as the company's failures made headlines, the board finally ousted O'Neal in October but allowed him to "retire" with an exit package worth $161.5 million on top of the $70 million he'd received during his time as CEO and chairman. The board then began a frantic search for a new CEO, because, as one insider confirmed to us, it "had done absolutely no succession planning" and O'Neal had gotten rid of anyone among the 64,000 employees who might have been a credible candidate. For the first time since the company's founding, the board had to look outside for a CEO. In spite of having shown a disregard for shareholders and a distaste for balanced governance, O'Neal was back in a boardroom within three months, this time as a director of Alcoa, serving on the audit committee and charged with overseeing the aluminum company's risk management and financial disclosure.

At the Merrill Lynch annual meeting in April 2008, Ann Reese, the head of the board's audit committee, fielded a question from a shareholder about how the board could have missed the massive risks Merrill was undertaking in the subprime mortgage-backed securities and collateralized debt obligations (CDOs) that had ballooned from $1 billion to $40 billion in exposure for the firm in just eighteen months. Amazingly, since it is almost unheard of for a director of a company to answer questions in public, Reese was willing to talk. This was refreshing and might have provided some insight for shareholders, except that what she said was curiously detached and unabashed. "The CDO position did not come to the board's attention until late in the process," she said, adding that initially the board hadn't been aware that the most troublesome securities were, in fact, backed by mortgages.

Merrill's new CEO and chairman, John Thain, jumped in after Reese, saying that the board shouldn't be criticized based on "20/20 hindsight" even though he had earlier admitted in an interview with the Wall Street Journal that "Merrill had a risk committee. It just didn't function." As it happens, Reese, over a cup of English tea, had helped recruit Thain, who lived near her in Rye, New York. Thain had received a $15 million signing bonus upon joining Merrill and by the time of the shareholders' meeting was just completing the $1.2 million refurnishing of his office suite that was revealed after the company was sold.

Lynn Turner, who served as the SEC's chief accountant from 1998 to 2001 and later as a board member for several large public companies, recalled that he spoke about this period to a friend who was a director at Merrill Lynch in August 2008. "This is a very well-known, intelligent person," Turner said, "and they tell me, 'You know, Lynn, I've gone back through all this stuff and I can't think of one thing I'd have done differently.' My God, I can guarantee you that person wasn't qualified to be a director! They don't press on the issues. They get into the boardroom—and I've been in these boardrooms—and they're all too chummy and no one likes to create confrontation. So they get together five times a year or so, break bread, all have a good conversation for a day and a half, and then go home. How in the hell could you be a director at Merrill Lynch and not know that you had a gargantuan portfolio of toxic assets? If people on the outside could see the problem, then why couldn't the directors?"

The board was so disconnected from the company that when Merrill shareholders met in December 2008 to approve the company's sale to Bank of America after five straight quarterly losses totaling $24 billion and a near-brush with bankruptcy, not a single one of the nine nonexecutive directors even attended the meeting. Finance committee chair and former IRS commissioner Charles Rossotti, reached at home in Virginia by a reporter, wouldn't say why he wasn't there: "I'm just a director, and I think any questions you want to have, you should direct to the company." The board missed an emotional statement by Winthrop Smith, Jr., a former Merrill banker and the son of a company founder. In a speech that used the word shame some fourteen times, he said, "Today is not the result of the subprime mess or synthetic CDOs. They are the symptoms. This is the story of failed leadership and the failure of a board of directors to understand what was happening to this great company, and its failure to take action soon enough . . . Shame on them for not resigning."

When Merrill Lynch first opened its doors in 1914, Charles E. Merrill announced its credo: "I have no fear of failure, provided I use my heart and head, hands and feet—and work like hell." The firm died as an independent company five days short of its ninety-fifth birthday. The Merrill Lynch shareholders, represented by the board, lost more than $60 billion.

AT A JUNE 6, 2000, stockholders annual meeting, General Motors wheeled out its newly appointed CEO, Richard Wagoner, who kicked off the proceedings with an upbeat speech. "I'm pleased to report that the state of the business at General Motors Corporation is strong," he proclaimed. "And as suggested by the baby on the cover of our 1999 annual report, we believe our company's future opportunities are virtually unlimited." Nine years later, the GM baby wasn't feeling so well, as the disastrous labor and health care costs and SUV-heavy product strategy caught up with the company in the midst of skyrocketing gasoline prices and a recession. GM's stock price fell some 95 percent during Wagoner's tenure; the company last earned a profit in 2004 and lost more than $85 billion while he was CEO. Nevertheless, the GM board consistently praised and rewarded Wagoner's performance. In 2003, it elected him to also chair the board, and in 2007—a year the company had lost $38.7 billion—it increased his compensation by 64 percent to $15.7 million.

GM's lead independent director was George M. C. Fisher, who himself presided over major strategic miscues as CEO and chairman at Motorola, where the Iridium satellite phone project he initiated was subsequently written off with a $2.6 billion loss, and later at Kodak, where he was blamed for botching the shift to digital photography. Fisher clearly had little use for shareholders. He once told an interviewer regarding criticism of his tenure at Kodak that "I wish I could get investors to sit down and ask good questions, but some people are just too stupid." More than half the GM board was composed of current or retired CEOs, including Stan O'Neal, who left in 2006, citing time constraints and concerns over potential conflicts with his role at Merrill that had somehow not been an issue during the previous five years.

Upon GM's announcement in August 2008 of another staggering quarterly loss—this time of $15.5 billion—Fisher told a reporter that "Rick has the unified support of the entire board to a person. We are absolutely convinced we have the right team under Rick Wagoner's leadership to get us through these difficult times and to a brighter future." Earlier that year, Fisher had repeatedly endorsed Wagoner's strategy and said that GM's stock price was not a major concern of the board. Given that all thirteen of GM's outside directors together owned less than six one-hundredths of one percent of the company's stock, that perhaps shouldn't have been much of a surprise.

Wagoner relished his carte blanche relationship with GM's directors: "I get good support from the board," he told a reporter. "We say, 'Here's what we're going to do and here's the time frame,' and they say, 'Let us know how it comes out.' They're not making the calls about what to do next. If they do that, they don't need me." What GM's leaders were doing with the shareholders' dwindling money was doubling their bet on gas-guzzling SUVs because they provided GM's highest profit margins at the time. As GM vice chairman Robert Lutz told the New York Times in 2005: "Everybody thinks high gas prices hurt sport utility sales. In fact they don't . . . Rich people don't care."

But what seemed good for GM no longer was good for the country—or for GM's shareholders.

Ironically, GM had been widely praised in the early 1990s for creating a model set of corporate governance reforms in the wake of major strategic blunders and failed leadership that had resulted in unprecedented earnings losses. In 1992, the board fired the CEO, appointed a nonexecutive chairman, and issued twenty-eight structural guidelines for insuring board independence from management and increasing oversight of long-term strategy. BusinessWeek hailed the GM document as a "Magna Carta for Directors" and the company's financial performance improved for a time. The reform initiatives, however, lasted about as long as the tailfin designs on a Cadillac. Within a few years, despite checking most of the good governance structural boxes, the CEO was once again also the board chairman, the directors had backslid fully to a subservient "let us know how it comes out" role, and the executives were back behind the wheel.

In November 2005, when GM's stock price was still in the mid-20s, Ric Marshall, the chief analyst of the Corporate Library, a governance rating service that focuses on board culture and CEO-board dynamics, wrote: "Despite its compliance with most of the best practices believed to comprise 'good governance,' the current General Motors board epitomizes the sad truth that compliance alone has very little to do with actual board effectiveness. The GM board has failed repeatedly to address the key strategic questions facing this onetime industrial giant, exposing the firm not only to a number of legal and regulatory worries but the very real threat of outright business failure. Is GM, like Chrysler some years ago, simply too big to fail? We're not sure, but it seems increasingly likely that GM shareholders will soon find out."

By the time Wagoner was fired in March 2009, at the instigation of the federal officials overseeing the massive bailout of the company, the stock had dropped to the $2 range and GM had already run through $13.4 billion in taxpayers' money. In spite of this, some directors still couldn't wean themselves from Wagoner, and were reportedly furious that his dismissal occurred without their consent. Others were mortified by what had happened to the company. One prominent director, who had diligently tried to help the company change course before it was too late, had eventually quit the board out of frustration with the "ridiculous bureaucracy and a thumb-sucking board that led to GM making cars that no one wanted to buy." Another director who left the board recalled asking Wagoner and his executive team in 2006 for a five-year plan and projections. "They said they didn't have that. And most of the guys in the room didn't seem to care."

The GM shareholders, represented by the board, lost more than $52 billion.

IN A COMPANY as large and complex as Lehman Brothers, you would expect the board to be seasoned, astute, dynamic, and up-to-date on risks it was undertaking with the shareholders' money. Yet the only nonexecutive director, out of ten, with any recent banking experience was Jerry Grundhofer, the retired head of U.S. Bancorp, who had joined the board exactly five months before Lehman's spectacular collapse into bankruptcy. Nine of the independent directors were retired, including five who were in their seventies and eighties. Their backgrounds hardly seemed suited to overseeing a sophisticated and complicated financial entity: the members included a theatrical producer, the former CEO of a Spanish-language television company, a retired art-auction company executive, a retired CEO of Halliburton, a former rear admiral who had headed the Girl Scouts and served on the board of Weight Watchers International, and, until two years before Lehman's downfall, the eighty-three-year-old actress and socialite Dina Merrill, who sat on the board for eighteen years and served on the compensation committee, which approved CEO Richard Fuld's $484 million in salary, stock, options, and bonuses from 2000 to 2007. Whatever their qualifications, the directors were well compensated, too. In 2007, each was paid between $325,038 and $397,538 for attending a total of eight full board meetings.

The average age of the Lehman board's risk committee was just under seventy. The committee was chaired by the eighty-one-year-old economist Henry Kaufman, who had last worked at a Wall Street investment bank some twenty years in the past and then started a consulting firm. He is exactly the type of director found on many boards—a person whose prestigious credentials are meant to reassure shareholders and regulators that the company is being well monitored and advised. Then they are ignored.

Kaufman had been on the Lehman board for thirteen years. Even in 2006 and 2007, as Lehman's borrowing skyrocketed and the firm was vastly increasing its holdings of very risky securities and commercial real estate, the risk committee met only twice each year. Kaufman was known as "Dr. Doom" back in the 1980s because of his consistently pessimistic forecasts as Salomon Brothers' chief economist, but he seems not to have been very persuasive with Lehman's executives in getting them to limit the massive borrowing and risks they were taking on as the mortgage bubble continued to over-inflate.

In an April 2008 interview, Kaufman offered an insight that might have been more timely and helpful a few years earlier in both the Lehman boardroom and Washington, D.C.: "If we don't improve the supervision and oversight over financial institutions, in another seven, eight, nine, or ten years, we may have a crisis that's bigger than the one we have today. . . . Usually what's happened is that financial markets move to the competitive edge of risk-taking unless there is some constraint." With little to no internal supervision, oversight, or constraint having been provided by its board, the bigger crisis for Lehman came sooner rather than later, and it collapsed just four and a half months later.

After Lehman's demise, Kaufman has continued to offer advice to others. Without a trace of irony or guilt, he said to another interviewer in July 2009, "If you want to take risks, you've got to have the capital to do it. But, you can't do it with other people's money where the other people are not well informed about the risk taking of that institution." In his recent book on financial system reform (which largely blames the Federal Reserve for the financial meltdown and has an entire section listing his own "prophetic" warnings about the economy), Kaufman neglects to mention either his role at Lehman or his missing the warning signs when he personally invested and lost millions in Bernie Madoff's Ponzi scheme. He does, however, note that "The shabby events of the recent past demonstrate that people in finance cannot and should not escape public scrutiny."

Dr. Doom did heed his own economic advice, while providing an instructive case of exquisite timing—as well as of having your cake, eating it too, and then patting yourself on the back for warning others of the caloric dangers of cake. Lehman securities filings show that about ten months before Lehman stock went to zero, Kaufman cashed in more than half of the remaining stock options that had been given to him for protecting shareholders' interests. He made nearly $2 million in profits.

"The Lehman board was a joke and a disgrace," said a former senior investment banker who now serves as a director for several S&P 500 companies. "Asleep at the switch doesn't begin to describe it." The autocratic Richard Fuld, whose nickname at the firm was "the Gorilla," had joined Lehman in 1969 when his air force career ended after he had a fistfight with a commanding officer. He served since 1994 as both CEO and chairman of the board, an inherent conflict in roles that still occurs at 61 percent of the largest U.S. companies.

A lawsuit filed in early 2009 by the New Jersey Department of Investment alleges that $118 million in losses to the state pension fund resulted from fraud and misrepresentation by Lehman's executives and the board. The role of the board is described in scathing terms:

The supine Board that defendant Fuld handpicked provided no backstop to Lehman's executives' zealous approach to the Company's risk profile, real estate portfolio, and their own compensation. The Director Defendants were considered inattentive, elderly, and woefully short on relevant structured finance background. The composition of the Board according to a recent filing in the Lehman bankruptcy allowed defendant "Fuld to marginalize the Directors, who tolerated an absence of checks and balances at Lehman." Due to his long tenure and ubiquity at Lehman, defendant Fuld has been able to consolidate his power to a remarkable degree. Defendant Fuld was both the Chairman of the Board and the CEO . . . The Director Defendants acted as a rubber stamp for the actions of Lehman's senior management. There was little turnover on the Board. By the date of Lehman's collapse, more than half of the Director Defendants had served for twelve or more years."

John Helyar is one of the authors of Barbarians at the Gate, which documents the fall of RJR Nabisco in the 1980s. He also cowrote a five-part series for Bloomberg.com on Lehman Brothers' collapse. Helyar was a keen observer of those companies' boards when they folded. "The few people on the Lehman board who actually had relevant experience were kind of like an all-star team from the 1980s back for an old-timers' game in which they weren't even up on the new rules and equipment," Helyar told us. "Fuld selected them because he didn't want to be challenged by anyone. Most of the top executives didn't understand the risks they were taking, so can you imagine a septuagenarian sitting in the boardroom getting a PowerPoint presentation on synthetic CDOs and credit default swaps?"

In a conference call announcing the firm's 2008 third-quarter loss of $3.9 billion, Fuld told analysts, "I must say the board's been wonderfully supportive." Four days later the 159-year-old company declared the largest bankruptcy in U.S. history. The Lehman shareholders, represented by the board, lost more than $45 billion.

THE DISASTERS at Merrill Lynch, GM, and Lehman were not isolated instances of hubris, incompetence, and negligence. Similar stories of boards and CEOs failing to do their jobs on behalf of the companies' owners can be told about Countrywide, Citigroup, AIG, Fannie Mae, Bank of America, Washington Mutual, Wachovia, Sovereign Bank, Bear Stearns, and most of the other companies directly involved in the recent financial meltdown, as well as many nonfinancial businesses whose governance-related troubles came to light in the resulting recession. In the short term, the result has been the loss of hundreds of billions of dollars for shareholders, and economic devastation for employees and others caught in the wake. In the long term, a growing crisis of confidence among investors could cripple our economy, as capital is diverted away from American corporate debt and equity markets and companies suffocate from lack of funding.

Investor mistrust takes hold fast and punishes instantly in the modern economy. Enron, once America's seventh-largest corporation, crashed in a mere three weeks once the scope of its failures and corruption was exposed and its investors and creditors began to withdraw their funds. Today's collapses can happen even faster. Because the companies are larger, their operations more interconnected, and their financing so complex and subject to hair-trigger reactions from institutional investors with enormous trading positions, the impacts are greatly magnified and reverberate globally. Bear Stearns went from its CEO claiming on CNBC that "our liquidity position has not changed at all" to being insolvent two days later.

Of the world's two hundred largest economies, more than half are corporations. They have more influence on our lives than any other institution—not just profound economic clout, but also enormous political, environmental, and civic power. As they have grown in influence, they have also become more concentrated: In 1950, the 100 largest industrial companies owned approximately 40 percent of total U.S. industrial assets; by the 1990s, they controlled 75 percent. Global corporations have assumed the authority and impact that formerly belonged to governments and churches. Boards of directors are supposed to be the most important element of corporate leadership—the ultimate power in this economic universe—and while some companies have made progress during the past decade in improving corporate governance, the recurring waves of scandals and the blatant victimization of shareholders that appear in the wake of economic crashes prove that our approach to leading corporations is badly in need of fundamental reform.

Ideally, a board of directors is informed, active, and advisory, and maintains an open but challenging relationship with the company's CEO. In reality, this rarely happens. In most cases, board members are beholden to CEOs for their very presence on the board, for their renominations, their compensation, their perquisites, their committee assignments, their agendas, and virtually all their information. Even well-intentioned directors find themselves hopelessly compromised, badly conflicted, and essentially powerless. Not that all blame can be put on bullying, manipulative CEOs; many boards simply fail to do their jobs. They allow themselves to be fooled by fraudulent accounting; they look away during the squandering of company resources; they miss obvious strategic shifts in the marketplace; they are blind to massive risks their firms assume; they approve excessive executive pay; they neglect to prepare for crises; they ignore blatant conflicts of interest; they condone a lax ethical tone. The head of one of the world's largest and most successful private equity firms told us that he considers the current model of corporate boards "fundamentally broken."

Continued in article

Hope this helps,
Bob Jensen

How can such a panel have this much legal power?
"Ernst & Young, KPMG Cleared of Wrongdoing in Olympus Scandal," by Michael Foster, Big4.com, January 17, 2012 ---
http://www.big4.com/kpmg/breaking-ernst-young-kpmg-cleared-of-wrongdoing-in-olympus-scandal

An independent panel has determined that KPMG Azsa LLC and Ernst & Young ShinNihon LLC did not break the law and did not violate any legal obligations when auditing Olympus. The panel determined that both Big4 firms were not responsible for the accounting fraud scandal in which Olympus hid $1.7 billion in assets over a 13-year long period.

The panel’s decision clears KPMG and Ernst & Young from culpability, meaning that no party has grounds to file a suit against either accounting firm.

The panel also determined that five internal auditors, some of which are still with Olympus, were responsible for hiding the assets. The panel concluded that those auditors were responsible for 8.4 billion yen ($109 million) in damages.

Continued in article

Jensen Comment
I have no idea why this "panel" has the power "that no party has grounds to file a suit against either accounting firm."

If this were a lower court decision, there are generally routes of appeal in higher courts.

How does an appointed panel decide that shareholders and creditors have no right to sue in lower or higher courts?

Of course in the case of Olympus the guilty executives were purportedly tied to organized crime. Well now I'm beginning to understand. Organized crime members have their own ways of determining that no lawsuits will ever be filed.

"How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus Fraud," by Francine McKenna, re:TheAuditors, January 5, 2012 ---
http://retheauditors.com/2012/01/02/how-do-you-hide-a-multibillion-dollar-loss-accounting-for-the-olympus-fraud/

Bob Jensen's threads on the Olympus scandal are at
http://www.trinity.edu/rjensen/Fraud001.htm

Teaching Case on Political Insanity:  Charging Up Social Security and Medicare Monthly Entitlements on Our Chinese Credit Card

From The Wall Street Journal Accounting Weekly Review on February 17, 2012

Deal Reached on Payroll Tax
by: Naftali Bendavid and Kristina Peterson
Feb 15, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Tax Laws, Tax Policy, Taxation

SUMMARY: Congressional lawmakers negotiated across party lines to extend the FICA payroll tax rate cut which was due to expire on February 29. The original provision to enact the rate cut had been set to expire in December 2011 but a two month extension was then agreed upon as described in the related article from that time. The political parties were in an unusual situation in which Republicans were arguing against the extension--without corresponding spending cuts to pay for the cost-and Democrats were arguing for the tax cut. The bill to be submitted also will "...provide that Medicare would continue to pay physicians at current rates, avoiding a 27.4% cut in fees [when caring for patients on this plan] which would have kicked in March 1....[and] an extension of enhanced unemployment benefits...."

CLASSROOM APPLICATION: The article is useful to introduce the political viewpoints on taxes in a tax class or when discussing payroll taxes in a financial accounting class.

QUESTIONS: 
1. (Advanced) What are payroll taxes? Describe all payroll taxes paid by a company employer and by an employee.

2. (Introductory) What tax rate reduction was given for U.S. payroll taxes? Who pays the tax that was cut? When was this tax cut first scheduled to expire? Hint: You may refer to the related article to find a description of the original expiration of this payroll tax cut.

3. (Advanced) Arguments discussed in the related video identify that temporary tax cuts don't stimulate the economy. In general, how are taxes related to the economy?

4. (Advanced) Further comments in the video indicate that the agreement reached among lawmakers to extend this tax cut has more to do with politics in this presidential election year than with the impact of the payroll taxes on the economy. What are the political viewpoints of the lawmakers on the two sides of the debate over extending this tax cut?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Lawmakers Deadlock Over Tax Cut
by Janet Hook
Dec 20, 2011
Online Exclusive

 

"Deal Reached on Payroll Tax," by: Naftali Bendavid and Kristina Peterson, The Wall Street Journal, February 15, 2012 ---
http://online.wsj.com/article/SB10001424052970204883304577223581091709596.html?mod=djem_jiewr_AC_domainid

Congressional negotiators reached a tentative a deal Tuesday night on extending the current payroll-tax cut through the end of the year, as well as continuing longer unemployment benefits and avoiding a steep cut in Medicare doctors' fees.

The agreement, culminating a long and angry debate, followed a major concession earlier in the week from House Republicans, who agreed to extend the payroll-tax holiday without offsetting spending cuts. Without an agreement, payroll-tax rates would rise on March 1 for 160 million American workers.

Rep. Steve LaTourette (R., Ohio) said that it's "a done deal subject to the i's being dotted and t's crossed."

Rep. David Camp (R., Mich.), who along with Sen. Max Baucus (D., Mont.) was one of the chief negotiators, added, "We have a structure and a framework."

The deal represents a victory for President Barack Obama and fellow Democrats, who have argued the payroll-tax break is an emergency measure to support the weak recovery and doesn't have to be paid for. The deal also plays into Democrats' attempts to position themselves as champions of the middle class.

Republicans also have reason to welcome the deal, since it gets a politically troubling issue off the table. Republicans had found themselves on the defensive over the payroll-tax cut. Some worried about whether it would be effective or wise, and Democrats had hammered them for opposing a middle-class tax cut.

The agreement showed the reluctance of both sides, but especially Republicans, to re-engage in the sort of brinksmanship that has caused congressional approval to plummet. The payroll-tax cut, unemployment benefits and Medicare payment system would have expired on Feb. 29, and an agreement two weeks ahead of time is a major change from last year's 11th-hour deals.

Leaders of both parties had been waiting to gauge the reaction of House GOP conservatives, who have been an unpredictable faction in the past year. But conservatives emerging from a closed-door meeting of House Republicans Tuesday night suggested the deal was likely to pass.

"I think you'll see a fair number of dissenters on it," said Rep. Dennis Ross (R., Fla.), a freshman, who worried that the tax cut could hurt Social Security, which is funded by the payroll tax. But he added, "I think they'll have the votes to pass it."

The deal, which could be formalized as early as Wednesday, would extend the tax cut for the rest of the year. After months of insisting that the tax break, which will cost the government $93 billion in revenue, must be paid for, GOP leaders dropped that demand on Monday.

The agreement would also provide that Medicare would continue to pay physicians at current rates, avoiding a 27.4% cut in fees that would have kicked in March 1. That fee adjustment, expected to cost about $30 billion, would be funded by cuts in payments to Medicare providers, as well as a cut to the wellness and prevention fund in Mr. Obama's health-care law.

Among the thorniest issues was continuing longer unemployment benefits, which currently provide jobless benefits for up to 99 weeks, depending on a state's jobless rate.

The two sides were making conflicting claims on the duration of benefits under the new deal. Some Democrats said the maximum length would be 75 weeks. Republicans said that for most states, the maximum number of weeks would be capped at 63 weeks. About 1.3 million unemployed people would lose their benefits by the end of March in case of no deal.

This extension would be funded with an array of measures, including a sale of the broadband spectrum and a cut in the government's contribution to employee pensions.

Earlier Tuesday, Senate Majority Leader Harry Reid (D., Nev.) had pushed hard for a deal on jobless benefits, noting that Congress is on recess next week.

"We still have about 40 million people who are unemployed," Sen. Reid said. "We cannot leave here without the conference committee having resolved a way of dealing with unemployment compensation."

Many Republicans worry that the payroll-tax cut will hurt Social Security, and others say it should at least be paid for at a time of soaring federal budget deficits. Democrats say the Social Security funds will be replenished with money from the general treasury.

The payroll-tax issue has flummoxed Republicans since late last year, when Democrats began pushing for a one-year extension of the cut, which initially was set to expire in December.

Some Republicans countered the tax code needed a thorough overhaul rather than temporary tinkering, and that the tax break would do little to create jobs. Republicans also demanded offsetting spending cuts to pay for the tax cut. In response, Democrats proposed an upper-income tax increase to pay for the break, but Republicans opposed that.

Continued in article

Why the Canadians never built an $80 trillion Titanic that lies deep in the ocean.
"Expect higher payroll taxes in 2012, taxpayers group says," by Joanna Smith, The Star, December 28, 2011 --- Click Here
http://www.thestar.com/news/canada/politics/article/1107876--expect-higher-payroll-taxes-in-2012-taxpayers-group-says?bn=1

Canadians will see the biggest increase in payroll taxes in a decade next year, according to a Canadian Taxpayers Federation analysis of how many of your dollars will go to federal government coffers.

Employment insurance premiums will increase 5 cents per $100 of insurable earnings as of Jan. 1. That’s half of what the Conservative government originally planned but the analysis shows employees will still see a $53 jump to $840 in EI premiums in 2012

Combine that with the federal pension plan contributions and it means employees will have to give up a total of $3,147 in payroll taxes next year — an increase of about $142 over this year.

Employers will have to shell out about $164 more in payroll taxes next year, for a total of $3,483.

The combined net increase of 4.84 per cent is the highest since 2002.

“Finance Canada tells us that we should be thanking the government because they are not going to be raising payroll taxes as much as they promised,” said Derek Fildebrandt, national research director for the advocacy group.

A spokeswoman for the federal finance department suggested exactly that.

“The Canada Employment Insurance Financing Board is responsible for setting premium rates to ensure that the program just breaks even over time and managing a cash reserve — including adjustments in rates,” Suzanne Prebinski wrote in an email.

“However, to protect the economy and jobs, we cut any potential increases in half for 2012 — keeping EI premiums near their lowest level since 1982. This change is expected to save employers and employees $600 million in 2012.”

Prebinski noted there is no change to the Canada Pension Plan contribution rate, which has been at 9.9 per cent of pensionable earnings since 2003, but there will be an increase in the maximum contribution to account for inflation.

Continued in article

Bob Jensen's threads on entitlements ---
http://www.trinity.edu/rjensen/Entitlements.htm

Video
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September 10, 2011 --- Click Here
http://paul.kedrosky.com/archives/2011/09/debt-the-first-5000-years.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29

Jensen Questions
How did the accounting system account for debt 5,000 years ago?
Does care and nurturing human children create debt to parents?

"When Debt Gets in the Way of Growth," Harvard Business Review Blog, September 13, 2011 --- Click Here
http://blogs.hbr.org/hbr/hbreditors/2011/09/when_debt_gets_in_the_way_of_g.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

From The Wall Street Journal Accounting Weekly Review on February 10, 2012

On 'Bleak' Street, Bosses in Cross Hairs
by: Liz Moyer
Feb 08, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Compensation, Restatement, Stock Options

SUMMARY: Goldman Sachs and Morgan Stanley have announced clawback provisions that affect managers as well as their traders if those traders put the firms at risk "of substantial financial or legal repercussions. The firms said the policy disclosure...shows [that] the companies won't just go after the excessive risk-takers if bad trades hurt the firms' profits." The policies resulted from proxy fights initiated by the New York City Comptroller John Liu who is responsible for the city's pension funds. The provisions apply to both stock and cash bonus compensation plans. "In its proxy last year, Goldman said its clawback policy allowed for forfeiture of stock awards "in the event that conduct or judgment results in a restatement of the firm's financial statements or other significant harm to the firm's business." The firm also can claw back pay for misconduct that results in legal or reputational harm."

CLASSROOM APPLICATION: The article is useful when introducing the incentives associated with compensation plans-either cash or stock--in financial accounting classes for intermediate level undergraduates or MBA students. It also can be used to discuss general corporate governance issues, particularly as they are being raised by institutional investors.

QUESTIONS: 
1. (Introductory) What are compensation "clawback" provisions?

2. (Advanced) What improvement in incentives do clawback provisions help to implement?

3. (Introductory) Who will be affected by the clawback provisions announced by Goldman Sachs and Morgan Stanley?

4. (Advanced) What is the notion of corporate governance? How have corporate governance activists influenced the decisions and disclosures by Goldman Sachs and Morgan Stanley management?
 

Reviewed By: Judy Beckman, University of Rhode Island

"On 'Bleak' Street, Bosses in Cross Hairs," by: Liz Moyer. The Wall Street Journal, February 8, 2012 ---
http://online.wsj.com/article/SB10001424052970204136404577209383447837986.html?mod=djem_jiewr_AC_domainid

Wall Street's bleak bonus season just got bleaker at Goldman Sachs Group Inc. and Morgan Stanley, where it is becoming clear that traders aren't the only ones at risk of having their pay taken back. Their bosses are on the hook, too.

The Wall Street securities firms said they would seek to recover pay from any employee whose actions expose the firms to substantial financial or legal repercussions. The firms said the policy isn't new, but the disclosure shows the companies won't just go after the excessive risk-takers if bad trades hurt the firms' profits. The latest disclosures clarify for the first time that managers are on the line.

The companies disclosed the clawback policies separately in Securities and Exchange Commission filings in late January and early February, in connection with agreements they reached to end proxy fights being waged by the office that runs New York City's pension funds.

New York City Comptroller John Liu filed papers last year seeking to force the firms to strengthen their clawback policies.

The move comes at a touchy time on Wall Street, where pay is in decline after a year of mixed financial performance and stock-price declines. At Goldman Sachs, compensation and benefits dropped 21% from a year ago to $12.22 billion, taking per capita pay and perks down to $367,000, a level last seen in the financial crisis. The firm cut 2,400 jobs last year, joining roughly two dozen firms around the globe that plan to shed more than 100,000 positions.

"These two firms have set the standard for clawback policies in the banking industry," said Mr. Liu in a statement Tuesday. "We appreciate the dialogue we've had on this issue and will continue to call for them to disclose the amount of clawbacks if forthcoming regulation does not require it."

Goldman Sachs and Morgan Stanley declined to comment.

Though soft economic growth, volatile markets and tighter rules rank as bigger worries for most on Wall Street than clawbacks triggered by the actions of traders, it is hard to ignore the risk completely. UBS AG, Switzerland's largest bank by assets, said Tuesday that it will cut investment-bank bonuses 60% following a retrenchment that started after a London-based employee made unauthorized trades that cost the bank $2.3 billion.

Regulators have pressured banks to detail clawbacks in compensation agreements since the financial crisis, when, they contend, incentives encouraged Wall Street workers to overlook risk in pursuit of profit.

The banks said they adopted clawback policies but said little beyond that.

It is unclear how effective clawback policies have been in reining in risky behavior. Michael Deutsch, an employment lawyer who specializes in Wall Street pay, said that despite their prevalence, "the actual implementation of a clawback has been pretty rare."

Now, under pressure from shareholders such as the New York comptroller's office, Goldman Sachs and Morgan Stanley are clarifying their stance. The shareholder group also made these demands on J.P. Morgan Chase & Co. The firm hasn't addressed the proposal.

Goldman Sachs and Morgan Stanley separately said they anticipate a new global regulation from the Basel Committee on Banking Supervision that requires they disclose aggregate dollar amounts clawed back in a given year.

"We believe clawbacks are a focus for our regulators," Goldman Sachs said in correspondence with the comptroller's office disclosed in an SEC filing.

In exchange for the clarifications, the shareholder group withdrew proxy proposals that called on the banks to broaden the scope of their policies, hold managers and supervisors accountable to clawbacks, and publicly disclose clawbacks.

Continued in article

"Clawbacks Without Claws," by Gretchen Morgenson, The New York Times, September 10, 2011 ---
http://www.nytimes.com/2011/09/11/business/clawbacks-without-claws-in-a-sarbanes-oxley-tool.html?_r=2&emc=tnt&tntemail1=y

AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books.

Fair Game Clawbacks Without Claws By GRETCHEN MORGENSON Published: September 10, 2011

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AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books. Add to Portfolio

Diebold Inc New Century Financial Corp NutraCea

Go to your Portfolio »

Under the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission was encouraged to hit executives where it hurts — in the wallet — if they certified financial results that turned out to be, in a word, bogus.

SarbOx was supposed to keep managers honest. They would have to hand back incentive pay like bonuses, even if they didn’t fudge the accounts themselves.

That, anyway, was the idea. The record suggests a bark decidedly worse than its bite. The S.E.C. brought its first case under Section 304 of SarbOx in 2007. Since then, it has filed cases demanding that only 31 executives at only 20 companies return some pay.

In 2007 and 2008, most of the cases involved shenanigans with stock options and produced some big recoveries. In the wake of the financial crisis, the dollars recouped have amounted to an asterisk. Since the beginning of 2009, the S.E.C. has pursued 18 executives at 10 companies. So far, it has recovered a total of $12.2 million from nine former executives at five. The other cases are pending.

“It seems like a dormant enforcement tool,” Jack T. Ciesielski, president of R. G. Associates and editor of The Analyst’s Accounting Observer, says of the SarbOx provision. “It was supposed to be a deterrent, but it’s only really a deterrent if they use it.”

How assiduously the S.E.C. enforces this aspect of Sarbanes-Oxley is important. Only the S.E.C. can bring cases under Section 304. Companies can’t. Nor, it appears, can shareholders. In 2009, the Court of Appeals for the Ninth Circuit ruled that there was no private cause of action for violations of Section 304.

Half the companies pursued by the S.E.C. during the past three years have been small and relatively obscure.

For example, the commission sued executives at SpongeTech Delivery Systems (2008 revenue: $5.6 million), contending that the company had booked $4.6 million in phony sales that year. NutraCea, a maker of dietary supplements with 2008 sales of $35 million, was sued along with Bradley D. Edson, its former chief executive, over what the S.E.C. called its recording of $2.6 million in false revenue. An executive at Isilon Systems, a data storage company, was pursued because, the S.E.C. maintained, the company had inflated sales by $4.8 million during 2007.

No money has been recovered in the SpongeTech or Isilon matters, which are still pending. Mr. Edson, who could not be reached for comment, returned his 2008 bonus of $350,000.

In all cases when executives have returned money, they have neither admitted nor denied allegations.

The S.E.C. typically recovers more money from executives at bigger companies. But top executives are rarely compelled to return all their incentive pay.

In a case brought last year against Navistar, for example, the S.E.C. contended that the company had overstated its income by $137 million from 2001 through 2005. Daniel C. Ustian, who is Navistar’s chief executive and who was not charged with wrongdoing, returned common stock worth $1.32 million. He had received $2.2 million in incentive pay and restricted stock during the time that the S.E.C. says Navistar inflated its accounting. A company spokeswoman said Mr. Ustian would not comment.

Robert C. Lannert, Navistar’s former chief financial officer, who also was not charged, gave back stock worth $1.05 million. His incentive pay consisted of only $828,555 during the years that the S.E.C. said the company misstated its results. He didn’t return a phone call seeking comment.

ANOTHER case brought by the S.E.C. last year involved Diebold, a maker of automated teller machines. Contending that Diebold had overstated its results by $127 million between 2002 and 2007, the commission sued to recover money from three former executives. Walden W. O’Dell, who is a former C.E.O. and who was not charged, repaid $470,000 in cash, and 30,000 Diebold shares and 85,000 stock options. During the years that the S.E.C. alleged that results were overstated, he received bonuses totaling $1.9 million, in addition to restricted stock worth $261,000 and 295,000 stock options. Mr. O’Dell didn’t return a message seeking comment. The cases against the other Diebold executives are pending. A company spokesman said it had settled with regulators and declined to comment further.

Continued in article

"Commissioner slams SEC settlement," SmartPros, July 13, 2011 ---
http://accounting.smartpros.com/x72323.xml

One of the SEC's five commissioners has taken the extraordinary step of publicly dissenting from an enforcement action on the grounds that it was too weak.

Commissioner Luis A. Aguilar said the Securities and Exchange Commission should have charged a former Morgan Stanley trader with fraud in view of what he called "the intentional nature of her conduct."

The dissent comes weeks after the SEC took flak for negotiating a $153.6 million fine from J.P. Morgan Chase in another enforcement case but taking no action against any of the firm's employees or executives.

Under a settlement announced Tuesday, the SEC alleged that former Morgan Stanley trader Jennifer Kim and a colleague who previously settled with the agency had executed at least 32 sham trades to mask the amount of risk they had been incurring and to get around an internal restriction.

Their trading contributed to millions of dollars of losses at the investment firm, the SEC said.

Without admitting or denying the SEC's findings, Kim agreed to pay a fine of $25,000.

Aguilar said the settlement was "inadequate" and "fails to address what is in my view the intentional nature of her conduct."

"The settlement should have included charging Kim with violations of the antifraud provisions," Aguilar wrote.

Continued in article

Bob Jensen's Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

"UCLA MBA Applicants Rejected for Plagiarism Totals 52," by: Louis Lavelle, Business Week, February 2, 2012 ---
http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2012/02/ucla_mba_applicants_rejected_for_plagiarism_totals_52.html

The number of MBA applicants at UCLA’s Anderson School of Management that have been rejected because of plagiarism has grown exponentially, with 40 more rejected in the second round of applications.

The new cases of plagiarism bring the total to 52. As we reported yesterday, 12 cases of plagiarism were discovered in a batch of 870 first-round applications. An additional 40 cases were discovered in the applications submitted for the second-round, says Elise Anderson, a spokeswoman for the school. The third round, which has an April 18 deadline, typically gets another 500 to 700 applications, Anderson says. So it’s possible that more plagiarized essays will be found in the third round.

The plagiarism was discovered through the use of a service called Turnitin for Admissions, which scans admissions essays looking for text that matches any documents in the Turnitin database. The archive contains billions of pages of web content, books and journals, as well as student work previously submitted to Turnitin for a plagiarism check. Turnitin flags any matches it finds, but individual schools determine if the similarity constitutes plagiarism. The service is now in use by nearly 20 business schools, including those at Penn State, Iowa State, Northeastern, and Wake Forest.
 

Anderson said the school does not currently notify applicants that their essays will be checked through Turnitin. She said the school is determining what, if any, disclosure should be made on its web site.

Research done by Turnitin suggests that plagiarism in admissions essays is vast. The company's study of 453,000 "personal statements" received by more than 300 colleges and universities in an unnamed English-speaking country found that "more that 70,000 applicants that applied though this system did so with statements that may not have been their own work." That's more than 15 percent.

For schools that do not currently vet application essays with Turnitin, the apparent prevalence of plagiarized essays raises an interesting question: Is it ethical for a school to turn a blind eye to this and award degrees to people who got their foot in the door by lying?

And for those that do screen essays, there's another issue. Many students use the same essays (with minor modifications) at every school they apply to, but there's no mechanism in place to flag plagiarized essays discovered by one school to all the other schools where that essay may have been submitted. One way to do this would be for the school discovering the plagiarism to notify the Graduate Management Admission Council, and have GMAC send a notice to every school that received the applicant's GMAT scores.

Continued in article

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

JOBS Act would let companies keep regulatory disputes (including accounting disputes with the SEC)  secret from investors

It would be nice if this was an April Fools Day joke --- no such luck!
"In Wake of Groupon Issues, Critics Wary of JOBS Act ," by Michael Rapaport, The Wall Street Journal, April 1, 2012 ---
http://online.wsj.com/article/SB10001424052702304023504577317932455874856.html?mod=dist_smartbrief

A little-noticed provision in the new JOBS Act would allow companies to iron out disagreements with regulators behind closed doors before they go public—a provision that might have prevented investors from finding out about Groupon Inc.'s GRPN -11.19% early accounting questions until after they had been resolved.

The provision, part of the bill passed by Congress and expected to be signed by President Barack Obama this week, would enable companies to submit confidential drafts of their initial-public-offering documents to the Securities and Exchange Commission before they file publicly.

A little-noticed provision in the new JOBS Act would allow companies to iron out disagreements with regulators behind closed doors before they go public—a provision that might have prevented investors from finding out about Groupon Inc.'s GRPN -11.19% early accounting questions until after they had been resolved.

The provision, part of the bill passed by Congress and expected to be signed by President Barack Obama this week, would enable companies to submit confidential drafts of their initial-public-offering documents to the Securities and Exchange Commission before they file publicly.

Continued in article

"GROUPON’S FIRST 10-K: APRIL FOOL’S!," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, April 1, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/593

What’s all the hoopla about Groupon’s latest “revision” to its financial reports and lack of internal controls?  Why is everyone acting so surprised?  You should have known something was up when the Groupon’s 10K was so long in coming after earnings were originally released on February 8^th.  Moreover, we warned you all in “Trust No One, Particularly Not Groupon’s Accountants,” that this day would soon come.  Remember this?

 It is absolutely ludicrous to think that Groupon is anywhere close to having an effective set of internal controls over financial reporting having done 17 acquisitions in a little over a year.  When a company expands to 45 countries, grows merchants from 212 to 78,466, and expands its employee base from 37 to 9,625 in only two years, there is little doubt that internal controls are not working somewhere.  Any M&A expert will agree.  And don’t forget that Groupon admitted to having an inexperienced accounting and reporting staff.

We just can’t resist: TOLD YOU SO!  We just wonder what took E&Y so long to figure this out…after all, as Groupon’s auditors, they get to see the Company’s books and records, and we don’t.  Maybe it’s just a case of not being able to see the forest for all of the trees.  That’s not very comforting is it?

And could it be any more appropriate that this latest “revision” release comes so close to April Fool’s Day?

For those of you that have real lives and may have missed it, here’s what happened:

• On February 8, 2012, Groupon issued a press release reporting revenues of $506.5 million, free cash flows of $155.1 million, and operating profits of $15.0 million (among other things). See the Company’s 8K filed on this date for more details.
• Then, this past Friday after the markets’ close, the Company announced a “revision” to its original earnings press release.  2011 revenues and operating profits were both revised downward, revenues down to $492.2 million and operating profits flipping to a loss of $15 million.  See Groupon’s 8K filed on March 30, 2012 for more details.
• But the biggest “surprise,” or confirmation of trouble, can be found in Item 9A of the Company’s 2011 10K, also filed on March 30, where Groupon admits to having a material weakness in internal control over financial reporting.  The following Company admissions are particularly damning:

 We did not maintain financial close process and procedures that were adequately designed, documented and executed to support the accurate and timely reporting of our financial results.

 We did not maintain effective controls to provide reasonable assurance that accounts were complete and accurate and agreed to detailed support, and that account reconciliations were properly performed, reviewed and approved.

 We did not have adequate policies and procedures in place to ensure the timely, effective review of estimates, assumptions and related reconciliations and analyses, including those related to customer refund reserves. As noted previously, our original estimate disclosed on February 8 of the reserve for customer refunds proved to be inadequate after we performed additional analysis.

So, what should all this mean for investors and market regulators?  Well, first of all, the Groupon’s earnings revision which was prompted by an increased reserve requirement for customer refunds, highlights the subjectivity and uncertainty associated with any accounting assumptions (or judgments) made by relatively “new” companies, operating in “new” industries, with inexperienced management: yes, internet companies!  In short, internet company accounting is suspect given all the unsupported assertions and assumptions that must be made to comply with generally accepted accounting principles, not to mention the likely internal control weakness issue.

Next, we question whether there is any real corporate governance at Groupon whatsoever.  Usually, when material weaknesses surface, heads roll…not at Groupon!  Instead, the board of directors rewarded the Company’s chief financial officer with a salary increase and bonus.  According to a Groupon 8K filed on March 19, 2012:

Mr. Child’s base salary was increased from $350,000 to $380,000 per year. This increase will be effective on April 1, 2012…Mr. Child’s annual bonus guarantee of $350,000 will remain in place for 2012, and he will receive half of the guaranteed bonus in June 2012. The remainder of the guarantee plus any additional bonus earned under the plan will be paid in the first quarter of 2013.

Absolutely unbelievable!  Not only does the guy who is responsible for the aforementioned system of internal control bust get to keep his job, but he gets a raise and a bonus!  Need we say more?

Finally, do you really believe that this material weakness in internal control (and related refund issue) mysteriously appeared in the fourth quarter of 2011?  Of course not, but by assigning it to the fourth quarter of 2011, Groupon and E&Y can avoid the embarrassment of admitting that the financial statements included in the Company’s IPO filing were incorrect.  This is probably not a bad strategy from their perspective given the impending securities litigation that is now lurking.

Continued in article

Bob Jensen's threads on Groupon are at
http://www.trinity.edu/rjensen/Fraud001.htm
Search on the word "Groupon"

Teaching Case:  Bribery by Avon in China?

From The Wall Street Journal Accounting Weekly Review on February 17, 2012

Foreign Bribe Case at Avon Presented to Grand Jury
by: Joe Palazzolo and Emily Glazer
Feb 13, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Foreign Corrupt Practices Act, Foreign Subsidiaries, Internal Auditing, Internal Controls

SUMMARY: "Federal prosecutors investigating whether U.S. executives at Avon Products, Inc., broke foreign-bribery laws have presented evidence in the probe to a grand jury...Authorities are focused on a 2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials in violation of the Foreign Corrupt Practices Act [FCPA]...."

CLASSROOM APPLICATION: Questions ask students to consider what audit steps they would undertake to investigate the issues identified in the article. The article is useful in an auditing class to discuss internal audit functions.

QUESTIONS: 
1. (Introductory) Describe how Avon sells its products.

2. (Advanced) What is the Foreign Corrupt Practices Act (FCPA)? How do the law's requirement, and general ethics, make it imperative to prevent illegal payments or other corrupt acts?

3. (Advanced) How might Avon's business model make it difficult to establish internal controls over items such as possible illegal payments to foreign officials?

4. (Advanced) Define the internal audit function and compare it to the audits done by external auditors.

5. (Introductory) How was the Avon Products, Inc. internal audit function used in connection with the company's Chinese operations? What evidence did the internal auditors apparently find in 2005?

6. (Advanced) Suppose you are a member of the Avon internal audit team asked to investigate payments made out of Chinese operations. What steps would you plan to investigate the propriety of the payments?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Foreign Bribe Case at Avon Presented to Grand Jury," by: Joe Palazzolo and Emily Glazer, The Wall Street Journal, February 13, 2012 ---
http://online.wsj.com/article/SB10001424052970203315804577209443264460570.html?mod=djem_jiewr_AC_domainid

Federal prosecutors investigating whether U.S. executives at Avon Products Inc. broke foreign-bribery laws have presented evidence in the probe to a grand jury, people familiar with the matter said.

Authorities are focused on a 2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials in violation of the Foreign Corrupt Practices Act, according to three people familiar with the matter. Avon had earlier said it first learned of bribery allegations in 2008.

The audit found several hundred thousand dollars in questionable payments to Chinese officials and third-party consultants in 2005, one of these people said. It came as Avon was pursuing a license to conduct door-to-door sales in China. Some of the payments were recorded on invoices as gifts for government officials, the person said. Avon secured China's first such license to a foreign company in 2006.

The Federal Bureau of Investigation and U.S. prosecutors in New York and Washington are trying to determine whether current or former executives ignored the audit's findings or actively took steps to conceal the problems, both potential offenses, two people familiar with the matter said.

Executives at Avon headquarters in New York who saw the audit report at the time didn't disclose its findings to the board's audit committee, finance committee or the full board, according to people familiar with the investigation. Board members didn't learn of the audit report until after Avon launched its own internal investigation of overseas bribery allegations in 2008, say the people familiar with the situation.

Legal experts say executives can be liable in overseas bribery cases even if they didn't authorize illegal payments or try to hide evidence of bribes. Under a legal concept known as willful blindness, a person can also be found guilty of taking steps to avoid learning of wrongdoing, they said, but prosecutors face a higher legal bar.

"We're not aware that a federal grand jury is investigating this," said an Avon spokeswoman. She declined to confirm whether there had been an audit in 2005 and declined to discuss how executives handled any such audit. She said Avon is fully cooperating with the investigation.

While grand juries gather information to determine whether there is enough evidence to bring criminal charges, they also can decline any action.

The investigation of Avon's headquarters comes as members of Congress pressure the Justice Department to hold more high-level executives accountable for corruption overseas. In December, the government unveiled charges against a group of former executives of German conglomerate Siemens AG. Siemens has said it is cooperating.

Avon opened an internal investigation into possible bribery in China in 2008, more than two years after the purported audit report. The company's internal review was later expanded to other regions of the world. The door-to-door cosmetics company has said the internal probe was triggered by an employee who sent a letter in 2008 to Chief Executive Andrea Jung alleging improper spending on travel for Chinese government officials.

The investigation put a cloud over the 12-year tenure of Ms. Jung, who won plaudits for securing the direct-sales license in China. She said in December she would step down once the company finds a replacement CEO; her announcement came amid pressure from investors concerned about Avon's financial performance. Avon has said questions about the company's activities in China kicked off probes by the Justice Department and Securities and Exchange Commission, as well as the audit committee of Avon's board.

Ms. Jung declined to comment. She has said little about the investigations in the past, except that the company is cooperating with the government.

Some high-ranking Avon executives have lost their jobs in the probe. The company said it fired Vice Chairman Charles Cramb on Jan. 29 in connection with the overseas corruption probe and another investigation into allegedly improper disclosure of financial information to analysts. Mr. Cramb couldn't be reached for comment.

Continued in article

February 17, 2012 reply from Bob Jensen to Jagdish Gangolly

Hi Jagdish,

I never suggested profiling when it comes to things like policies on investigating and prevention of plagiarism or cheating in general. The policies must apply to all national origins, and rule enforcement must apply to every student and faculty member. And this is not a racial thing since many of our Asian, Irish, Norwegian, and Latin students were born and educated in the U.S.


What is sad, however, in the United States is when being "street smart" is synonymous knowing how to get away with cheating relative to people who are more trusting and are not "street smart."


I do, however, believe that there is relativism of many things in different nations, including their heritages for bribery customs and norms for cheating/corruption ---
 

Corruption Perceptions Index 2009 | Transparency International

http://wbpllc.wordpress.com/2009/11/19/corruption-perceptions-index-2009-transparency-international/


The interactive map is at http://media.transparency.org/imaps/cpi2009/


As a footnote when viewing the graphic at the above site, I notice how greatly some nations vary from their neighbors. For example, Argentina is perceived as being over twice as corrupt than Chile. Italy and France are more more corrupt than Germany even though all three nations have similar religious (Catholic) heritages. Religion is probably not the dominant factor in controlling corruption.


Law and tax rule enforcement, however, can be very powerful. The least-corrupt nations seem to rise above the other nations in terms of vigorous law enforcement and tax collections.


However, law enforcement is not synonymous with brutality. Russia, for example, has a brutal police and prison system that has not quelled widespread corruption. The same is true for Viet Nam.


Respectfully,
Bob Jensen

 

"Washington's Knack for Picking Losers," by Michael J. Boskin, The Wall Street Journal, February 15, 2012 ---
http://online.wsj.com/article/SB10001424052970204883304577221630318169656.html?mod=djemEditorialPage_t

Like the mythical monster Hydra—who grew two heads every time Hercules cut one off—President Obama, in both his State of the Union address and his new budget, has defiantly doubled down on his brand of industrial policy, the usually ill-advised attempt by governments to promote particular industries, companies and technologies at the expense of broad, evenhanded competition.

Despite his record of picking losers—witness the failed "clean energy" projects Solyndra, Ener1 and Beacon Power—Mr. Obama appears determined to continue pushing his brew of federal spending, regulations, mandates, special waivers, loan guarantees, subsidies and tax breaks for companies he deems worthy.

Favoring key constituencies with taxpayer money appeals to politicians, who can claim to be helping the overall economy, but it usually does far more harm than good. It crowds out valuable competing investment efforts financed by private investors, and it warps decisions by bureaucratic diktats susceptible to political cronyism. Former Obama adviser Larry Summers echoed most economists' view when he warned the administration against federal loan guarantees to Solyndra, writing in a 2009 email that "the government is a crappy venture capitalist."

Markets function well when the returns are received and the risks borne by private owners. There are, of course, exceptions: Governments have a responsibility to fund defense R&D and other forms of pre-competitive, generic R&D—e.g., basic science and technology from nanoscience to batteries—but only when they pass rigorous cost-benefit tests and maintain a level playing field among alternative commercial applications.

For example, the computer-linking technology that created the Internet was funded by the Defense Department for defense purposes. But, like numerous defense technologies, it wound up with commercially valuable civilian applications. Yet it would be foolish for the government to subsidize a particular search engine or social-networking platform.

The previous peak for U.S. industrial policy was in the 1970s and 1980s, when many Democrats wanted to emulate the then-growing Japanese economy by managing trade and directing specific technology and investment outcomes. Japanese subsidies mostly went to old industries like agriculture, mining and heavy manufacturing. We now know that this misallocation of capital was one of the main reasons for Japan's stagnation over the past two decades.

Industrial-policy fever waned after the 1980s but never died. President George W. Bush expanded ethanol mandates and pushed hydrogen cars. Hydrogen's use for transportation must still overcome combustibility concerns, or we'll be driving mini-Hindenburgs. The Bush and Obama administrations bet big on ethanol and other biofuels, providing subsidies that distorted the global market for corn. The federal government was forced to drop its cellulosic ethanol quota by 97% last year because of a lack of viable biorefineries—and the quota still wasn't met.

Even under optimistic projections, heavily subsidized wind and solar would each amount to a tiny fraction of global energy by 2030 and thus cannot be the main answer to energy-security or environmental problems. The short-run focus of most Department of Energy funding misses the main strategic imperative: We need alternatives that can scale to significance long-term without subsidies, and we need a lot more North American oil and gas in the meantime.

Mr. Obama is spending immense sums for subsidies to particular industries and technologies, almost $40 billion for clean-energy programs alone (some, appropriately, for pre-competitive generic technology.) Yet a large number of prominent venture-capital funds are devoted to alternative-energy providers. They should be competing with each other and with the technologies they seek to replace—not for government handouts.

Meanwhile, the administration blocks shovel-ready private investment such as the Keystone XL pipeline from Canada to the Gulf Coast, which would create thousands of American jobs, increase energy security, and even improve the environment. The alternative is shipping the Canadian oil to China; we can refine it more cleanly than the Chinese, and pipelines are safer than shipping.

America certainly has energy-security and possible environmental concerns that merit diversifying energy sources. More domestic oil and natural gas production will clearly play a large role. The shale gas hydraulic fracturing revolution—credit due to Halliburton and Mitchell Energy; the government's role was minor—is rapidly providing a piece of the intermediate-term solution.

The arguments to promote industrial policy—incubating industries, benefits of clustering and learning, more jobs, etc.—don't stand up to scrutiny. Echoing 1980s Japan-fear and envy, some claim we must enact industrial policies because China does. We should remember that Presidents Lyndon Johnson and Richard Nixon wanted the U.S. to build a supersonic transport (SST) plane because the British and French were doing so. The troubled Concorde was famously shut down after a quarter-century of subsidized travel for wealthy tourists and Wall Street types.

Instead of an industrial policy that fails miserably to pick winners, a better response to foreign competition should be:

• Remove our own major competitive obstacles. We can do this with more competitive corporate tax rates, more sensible regulation, improved K-12 education, and better job training for skills that the market demands such as the computer literacy necessary even to operate today's machinery. (Mr. Obama's green jobs training program spent hundreds of millions but only 3% of enrollees had the targeted jobs six months later.)

• Base trade and industrial policies on sound economics, not 'in-sourcing' protectionism. If another country has a comparative cost advantage, we gain from exchanging such products for those we produce relatively more efficiently. If we tried to produce everything in America, our standard of living would plummet.

• Pursue rapid redress for illegal subsidization and protectionism by our competitors. The appropriate venue for trade complaints is the World Trade Organization, not the campaign trail. We need to strengthen the WTO, not threaten its legitimacy with protectionist rhetoric that could spark a trade war.

Continued in article

Bob Jensen's threads on the biggest swindle in the history of the world ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

"MF Global Mystery: The Beginning of the End or the End of The Beginning?" by Francine McKenna, re:TheAuditors, January 10, 2011 ---
http://retheauditors.com/2012/01/10/mf-global-mystery-the-beginning-of-the-end-or-the-end-of-the-beginning/

Yesterday I wrote a long and detailed column for Forbes about the conscious dodging by regulators and the trustees in the MF Global case.

Continued in article

Teaching Case on the MF Global Scandal

From The Wall Street Journal Weekly Accounting Review on January 6, 2012

The Unraveling of MF Global
by: Aaron Lucchetti and Mike Spector
Dec 31, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Information Systems, Auditing, Disclosure

SUMMARY: "The article is based on interviews with traders, executives and other employees...as more details emerge about MF Global's ruin..." from the bankruptcy process, Congressional hearings, and other inquiries into the process behind the firm's demise. The article provides a description of the background of MF Global and the significant change effort led by John Corzine. MF Global had faced declining interest revenue it once earned as interest rates in the U.S. have fallen to near zero. "As soon as Mr. Corzine arrived in March 2010, Moody's Investors Service, Standard & Poor's and Fitch ratings told Mr. Corzine he needed to rev up profits or face downgrades on the securities firm's debt." Corzine increased revenues by executing trades in European sovereign debt, but structured the transactions as "repurchase to maturity." As a result, the investments in European sovereign debt totaling $6.3 billion were removed from the company's balance sheet; there was an obligation to repay under these agreements that was excluded from the balance sheet as well. The demise of the firm came after MF Global disclosed the huge $6.3 billion sum total of these trades; regulators asked for additional collateral, squeezing cash available and then a run on the bank began, securing the demise.

CLASSROOM APPLICATION: The article is useful to cover this case in an auditing or systems controls class.

QUESTIONS: 
1. (Introductory) What was the background of MF Global prior to the arrival of Jon Corzine as the company's leader?

2. (Introductory) What operating changes occurred at MF Global during the time of Mr. Corzine's tenure there?

3. (Advanced) What is the significance of the statements in the article that Mr. Corzine roamed the company's trading floor encouraging "...traders to make larger bets...but...spent little time on the firm's back offices and record-keeping, several former employees say." Are these statements necessarily accurate because they are reported in this newspaper?

4. (Advanced) Refer again to the question above. Regardless of whether the statements are accurate in this case, would observing these behaviors influence your plan to audit MF Global? Explain your answer.

5. (Introductory) Refer to the graphic at the beginning of the article entitled "The Corzine Trade." Summarize in words the impact of the "estimated revenue from trade" on total net revenue. Based on discussion in the article, would these trades have increased costs at the firm? Explain your answer.

6. (Advanced) How large was the company's trading activity in European Sovereign debt? Was this an unprofitable series of transactions for the firm?

7. (Advanced) What was the reaction by creditors and regulators when MF Global disclosed its "sovereign-debt trades...on pages 77 and 78 of the company's annual report..."? In your answer, define the term "run on the bank."

8. (Advanced) Based on the activities described in this article, what are possible ways you would consider as an auditor to trace or recover the lost $1.2 billion in missing client funds? In your answer, comment on the propriety of trading with funds from customer accounts and goal of accounting controls you believe should be present in an operation such as MF Global's.
 

Reviewed By: Judy Beckman, University of Rhode Island

"The Unraveling of MF Global," by: Aaron Lucchetti and Mike Spector, The Wall Street Journal, December 31, 2011 ---
http://online.wsj.com/article/SB10001424052970203686204577117114075444418.html?mod=djem_jiewr_AC_domainid

In September, MF Global Holdings Ltd.'s management sent a memo to the securities firm's 2,800 employees: Start printing on both sides of paper.

The unusual request was a sign that executives at the New York company then led by Jon S. Corzine, a former New Jersey governor and Goldman Sachs Group Inc. chairman, saw tougher times ahead. They were right.

Less than two months later, MF Global collapsed into bankruptcy, undone by a huge bet by Mr. Corzine on European sovereign bonds that was part of his ambition to transform a sleepy commodities broker into a Goldman-like investment-banking powerhouse.

MF Global filed for Chapter 11 bankruptcy protection on Oct. 31. An estimated $1.2 billion in customer funds remain missing, according to the bankruptcy trustee of MF Global's brokerage unit, and there are few solid clues about where the money went. The shortfall has snarled the finances of thousands of traders, farmers and other commodities customers at MF Global.

Mr. Corzine, who turns 65 years old on Jan. 1, has testified before Congress that he never intended for anyone at MF Global to misuse customer funds. He and other MF Global executives face intensifying probes from regulators and law-enforcement officials into the firm's demise.

For employees who worked at MF Global after Mr. Corzine's tenure began in March 2010, the past two months have been filled with anger, sadness, confusion and reflection about how a Wall Street firm that seemed to have so much promise could unwind so quickly.

Some say they saw red flags that worried them as Mr. Corzine ramped up risk-taking and tried to return MF Global to profitability. This article is based on interviews with traders, executives and other employees, many of whom declined to be identified because they are looking for new jobs and are leery about being dragged into the investigations.

As more details emerge about MF Global's ruin, the reasons for Mr. Corzine's decision to bet $6.3 billion on bonds from shaky European countries are becoming clearer.

Some of those who saw Mr Corzine in action at the time reject the oft-repeated narrative that the bet was simply a reckless gamble by an overconfident trader. Instead, they say the unusual trade was driven as much by desperation as self-assurance. Read More

Weekend Investor: Are Brokerage Accounts Safe?

One big reason for the bet: It instantly boosted revenue at a time when Mr. Corzine wanted to appease anxious credit-rating firms and shareholders, said two executives familiar with his thinking. Mr. Corzine declined to comment for this article.

As soon as Mr. Corzine arrived in March 2010, Moody's Investors Service, Standard & Poor's and Fitch Ratings told Mr. Corzine he needed to rev up profits fast or face downgrades on the securities firm's debt.

The European bet was "a way to answer the...demands while buying time to transform the business," one MF Global executive recalls Mr. Corzine telling him.

In the end, he ran out of time. 1,100 New Faces

Mr. Corzine, a Democrat, wouldn't have gone back to work on Wall Street had he been re-elected as governor in 2009. But after his narrow loss to Republican Chris Christie, private-equity investor J. Christopher Flowers, an MF Global shareholder and close friend of Mr. Corzine, persuaded him to run the company. Mr. Corzine was intrigued by the opportunity to turn around the struggling firm, declining another job offer to be a high-ranking executive at a hedge fund.

Mr. Corzine arrived at MF Global with a plan to reinvigorate the firm by introducing the kind of risk-taking that made him a bond-trading star at Goldman in the 1980s and 1990s. He moved quickly at MF Global, cutting hundreds of employees and hiring 1,100 new traders and other employees.

In all, 1,400 employees, or 40% of the firm's work force, eventually left between his arrival and the company's bankruptcy filing, according to a company presentation shortly before the bankruptcy.

The move to become a full-fledged banking firm was an extraordinary change for MF Global, whose roots go back more than 225 years to a sugar broker in London. MF Global spent most of its history as a middleman between farmers, traders and companies that liked to hedge or bet on the direction of commodity prices. 'Take More Risk'

Roaming MF Global's trading floor, Mr. Corzine encouraged traders to make larger bets, without fear of losing money. He added new, riskier businesses that wagered the firm's own money, creating a proprietary-trading desk and increasing the emphasis on higher-risk products like mortgage-backed securities and stock-index derivatives.

Continued in article

Bob Jensen's threads on MF Global ---
http://www.trinity.edu/rjensen/Fraud001.htm

From The Wall Street Journal Accounting Weekly Review on March 30, 2012

Top MF Global Witness Talks Deal With Justice
by: Aaron Lucchetti, Michael Rothfeld and Mike Spector
Mar 28, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Bankruptcy, Internal Controls

SUMMARY: This article describes the actions of two responsible accountants at MF Global, Ms. Edith O'Brien, Assistant Treasurer, and Ms. Christine Serwinski, Chief Financial Officer of MF Global's North America Unit. These accounting executives conducted reviews of reconciliations for missing customer funds on October 30, 2011, just prior to the firm's collapse. Ultimately, customer funds totaling $1.2 billion were missing following transfers from accounts containing both the firms' and its customers' funds. NOTE: The related article was published December 31, 2011 and was covered in this Review. The Review is available on the WSJ's Professor Journal web site at http://www.profjournal.com/educators_reviews/article_page_new.cfm?article_id=35301. Click on Search the Database; search for Accounting Discipline for keyword MF Global. The summary of that review provides an answer to the first question in this review.

CLASSROOM APPLICATION: The topic may be used when covering topics in reconciliations in auditing, internal control systems, and financial accounting classes.

QUESTIONS: 
1. (Advanced) What is MF Global? What problems with customer accounts came to light during the company's recent demise? (You may base your answer on the related article.)

2. (Introductory) Who is Ms. Edith O'Brien? What was her role at MF Global?

3. (Introductory) Who is Ms. Christine Serwinski? What was her role at MF Global?

4. (Introductory) What is a reconciliation? What types of items arise in reconciliations?

5. (Introductory) How can reconciliations between control accounts and subsidiary ledger totals maintain internal controls in any business operation? How can they help maintain control when accounts contain both the firm's and its customers' funds?

6. (Advanced) Based on the information in the article, what types of reconciliations were being investigated to find the source of the missing customer funds that ultimately have become the subject of these Congressional hearings?

7. (Introductory) What are the accountants' responsibilities with respect to these missing funds? What are the possible outcomes of this investigation into whether those responsibilities were upheld, particularly for Ms. O'Brien?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
The Unraveling of MF Global
by Aaron Lucchetti and Mike Spector
Dec 31, 2011
Page: B1

 

"Top MF Global Witness Talks Deal With Justice," by: Aaron Lucchetti, Michael Rothfeld and Mike Spector, The Wall Street Journal, March 28, 2012 ---
http://online.wsj.com/article/SB10001424052702303816504577307502611998054.html?mod=djem_jiewr_AC_domainid

The star witness in a congressional hearing about MF Global Holdings Ltd.'s collapse has told Justice Department representatives through her lawyers details about transactions that ended up dipping into customer funds, people familiar with the matter said.

But Edith O'Brien, the assistant treasurer at MF Global, isn't expected to reveal those details when she appears at Wednesday's hearing of the House Financial Services Committee's oversight and investigations subcommittee. Ms. O'Brien plans to invoke her constitutional right against self-incrimination and to decline to answer questions, people familiar with the matter said.

Ms. O'Brien, 46 years old, who has been working for an MF Global bankruptcy trustee, wasn't expected as of Tuesday afternoon to give a statement, but members of the subcommittee will still direct questions to her, a person familiar with the matter said. After the hearing, she is planning to depart Washington for a family vacation, another person familiar with the matter said.

In recent months, lawyers for Ms. O'Brien offered a so-called proffer at a meeting in New York as part of an effort to negotiate immunity from prosecution in exchange for her cooperation with federal investigators, one of the people said.

In a proffer, a person under investigation tells the government how he or she would testify in exchange for immunity, nonprosecution or leniency at sentencing. Normally, if the talks break down the government can't use information it didn't already know in a subsequent prosecution.

Enlarge Image mfglobal0208 mfglobal0208 Mario Tama/Getty Images

Edith O'Brien's name was first brought into the spotlight in December, when former MF Global chief Jon Corzine testified before Congress that Ms. O'Brien was the back-office official who provided him assurances that a $175 million transfer to an MF Global account in London was proper..

It is unclear what Ms. O'Brien's attorneys discussed with federal officials and it is unlikely that congressional officials will be able to unearth details about the conversations.

A different MF Global official is expected to testify Wednesday that she had concerns about apparent shortfalls in the buffer of firm money meant to protect customer accounts just before the firm's Oct. 31 bankruptcy filing. Customer funds aren't supposed to be touched under federal regulations.

A big part of the MF Global investigation centers on exactly what Ms. O'Brien knew. Because MF Global customer accounts dropped into a deficit in the days before the bankruptcy filing, investigators have scrutinized movements of customer money and the state of mind of officials who ordered money to be moved to meet margin calls and other needs as the firm tried to stay solvent.

Ms. O'Brien's name was first brought into the spotlight in December, when former MF Global chief Jon Corzine testified before Congress that Ms. O'Brien was the back-office official who provided him assurances that a $175 million transfer to an MF Global account in London was proper. She later declined to sign a document certifying that it indeed followed the rules, and later, it was discovered that the money had come ultimately from the firm's customer account.

The second MF Global official, Christine Serwinski, said in her statement that she had concerns about the company's handling of customer money on Oct. 27, four days before the firm collapsed and more than $1 billion went missing from customer accounts.

Ms. Serwinski, chief financial officer of MF Global's North America unit, said in remarks posted on a congressional website Tuesday morning that she was "not comfortable with the firm putting customer funds at risk," when she had learned that one metric for the company's financial health had "showed a substantial deficit" for Wednesday, Oct. 26.

MF Global officials who have testified and discussed the shortfall in customer money previously have said they didn't know the shortfall had developed until late on Oct. 30, four days after a bankruptcy trustee later said it had started growing.

Ms. Serwinski, who like Ms. O'Brien was based in Chicago, added in her testimony that she was told that the "firm had borrowed money" from its futures unit, where some customer money was held, "on an intraday basis and had missed the wire deadline to pay it back."

Checking in by email and telephone from a planned vacation, Ms. Serwinski said she was "assured that the matter was under control and being addressed and that the funds would be returned on Thursday," Oct. 27.

Ms. Serwinski decided to cut her vacation short, returning from a ballroom-dancing competition in Las Vegas on Sunday, Oct. 30.

"I was not alarmed, but I believed it would be better to return early" to the office, she said in her statement.

When she returned that Sunday evening, Ms. O'Brien and others at the company were investigating an apparent shortfall in customer funds that was at the time blamed on an error in reconciling accounts.

The witnesses at the hearing will also include MF Global General Counsel Laurie Ferber and Chief Financial Officer Henri Steenkamp, who may face questions about another MF Global trustee's plan to pay performance bonuses.

Continued in article

Bob Jensen's threads on MF Global are at
http://www.trinity.edu/rjensen/Fraud001.htm
Conduct a word search for "MF Global"

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

Bob Jensen's threads on derivatives scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

"Deloitte & Touche Sued in New York Over WG Trading Fraud," by Chris Dolmetsch and Bob Van Voris, Bloomberg, March 23, 2012 ---
http://www.bloomberg.com/news/2012-03-23/deloitte-touche-sued-in-new-york-over-wg-trading-fraud-1-.html

Bob Jensen's threads on the woes of Deloitte and Touche are at
http://www.trinity.edu/rjensen/Fraud001.htm