Accounting Scandal Updates on May 31, 2003
Bob Jensen at Trinity University

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

If you don't know jewelry, know your jeweler.
Warren Buffett,

Lowly investors who lost their retirement accounts following the advice of Citigroup's Jack Grubman or followed the "research" of some other firm that was bought and paid for by favored clients can only burn with shame and disbelief. Restore investor confidence in Wall Street? Not likely for baby boomers, who've already been publicly fleeced in broad daylight. Wall Street will have to wait for another generation of innocents to prey upon.
Richard Dooling, The New York Times, May 4, 2003

However, Watkins (the infamous Enron internal-memo whistle blower) never uttered a word during her time at Enron Broadband. In "Power Failure," Watkins admits she was involved in the division's sham deals at least 18 months prior to her August 2001 memo. ... While Watkins' memo ethically elevates her above all but five others at Enron who also complained within the company, the facts suggest she acted largely based on her own self-interest and continues to reap the benefits today. Of course, we expect ordinary business people to advance their own pecuniary interest, but we don't put a halo around them unless their name is Sherron Watkins
Charles Ganske, The Houston Review, May 5, 2003 --- http://www.houstonreview.com/0503/enron.htm 

Hypocrisy of an unusual purity is on display as union leaders try to avoid disclosing truthful financial information to their members.
George Will (See below)

Canadian Regulators Okay Use of US GAAP 
AccountingWeb on May 16, 2003 --- http://www.accountingweb.com/item/97568 

KPMG Sued Over United Way Embezzlement --- http://www.accountingweb.com/cgi-bin/item.cgi?id=97615 

AccountingWEB US - May-27-2003 - Big Four firm KPMG is being sued by a Lansing, Michigan branch of United Way after the discovery of a $1.9 million embezzlement by the branch's former finance chief. "The United Way hired experts to protect itself," said United Way lawyer, Powell Miller. "We think if they had done their job properly, this wouldn't have happened."

Employees of Capital Area United Way discovered the embezzlement, which is estimated to have occurred over a period of at least seven years. Former vice president for finance, Jacquelyn Allen-MacGregor, worked for the United Way for 20 years, during which time she wrote more than 300 checks to herself on the United Way account, forging the required signatures of co-signers, then destroying the cancelled checks. The checks were not posted to the United Way books but instead were recorded as pledges never received.

In February of this year, Ms. Allen-MacGregor pleaded guilty to the embezzlement, saying she used the stolen funds to purchase horses for her business, Celebration Quarter Horses. This spring the United Way has been able to recover nearly half of the stolen money by cashing three theft insurance policies and by selling some of Ms. Allen-MacGregor's assets.

The agency hopes to recover additional funds from its two accounting firms, KPMG, which acquired the Lansing area branch of CPA firm Main Hurdman, former auditor for the Capital Area United Way, and Maner, Costerisan & Ellis. The United Way is pursuing arbitration with Maner, Costerisan & Ellis but may pursue action in court at a later date.

The lawsuit against KPMG claims the audit firms KPMG and Main Hurdman were negligent and that they should have detected the embezzlement. Main Hurdman audited the Capital Area United Way from 1985 through 1998. Maner, Costerisan & Ellis performed the 1999 through 2002 audits.

"We think if they had done their job properly, this wouldn't have happened," said Mr. Miller.

Bob Jensen's threads on KPMG lawsuits can be found at http://www.trinity.edu/rjensen/fraud.htm#KPMG 

PricewaterhouseCoopers Agrees to Pay $1M

May 23, 2003 (Associated Press) — PricewaterhouseCoopers, the nation's largest accounting firm, has agreed to pay $1 million to settle federal regulators' allegations that it engaged in improper professional conduct in its audit work -- the second time in less than a year it has been cited for that alleged infraction.

PricewaterhouseCoopers neither admitted nor denied wrongdoing in the settlement that the Securities and Exchange Commission announced Thursday. As it did last July in a similar accord with the SEC, in which it paid $5 million, the firm also agreed to be censured and to make changes in how it operates. That case involved audits of 16 companies from 1996 to 2001.

At issue in the new case is PricewaterhouseCoopers' 1997 audit of SmarTalk TeleServices Inc., a provider of pre-paid phone cards and wireless services which the SEC says is now bankrupt. Because the auditing firm failed to adequately account for a $25 million reserve fund, SmarTalk filed with the SEC an annual report "which contained materially false and misleading financial statements," the agency said.

Spokesmen for New York-based PricewaterhouseCoopers didn't immediately return a telephone call seeking comment.

Nearly a year after now-fallen Arthur Andersen LLC was convicted on obstruction of justice charges for destroying reams of Enron audit documents, alleged violations by other big firms in the scandal-tainted accounting industry continue to be cited.

In January the SEC sued another Big Four accounting firm, KPMG LLP, alleging that it fraudulently allowed Xerox Corp. to manipulate accounting practices to fill a $3 billion gap, thereby satisfying investors about its financial performance. The agency is seeking injunctions, repayment of auditing fees and unspecified civil penalties. KPMG has defended its 1997-2000 audits of Xerox's financial statements and has called the SEC's accusations unfounded.

Antonia Chion, an associate enforcement director at the SEC, called the latest PricewaterhouseCoopers action an example of the agency's "intention to adopt a new enforcement model - one that holds an accounting firm responsible for the actions of its partners."

"It also highlights the firm's failure to maintain the integrity of its audit working papers," Chion said in a statement.

Under the settlement, PricewaterhouseCoopers agreed to establish new policies for preserving documents and to hire an independent consultant to review its computer software system.

The SEC also alleged that Philip Hirsch, who had been the lead audit partner for SmarTalk, engaged in improper professional conduct. Hirsch, who neither admitted nor denied the allegations, consented in a settlement to be barred from auditing publicly traded companies for at least a year, with the right to apply for reinstatement after that.

Hirsch's attorney, Geoffrey Aronow, declined comment.

In the July 2002 case, the SEC alleged that PricewaterhouseCoopers broke rules meant to ensure that auditors remain independent from the companies whose books they oversee.

As a result of the rule violations, the SEC found that 16 clients of the accounting firm submitted financial statements from 1996 to 2001 that didn't comply with federal securities laws. The violations were said to be related to PricewaterhouseCooper's approval of clients' accounting treatment of costs that included the accounting firm's own consulting fees.

Also, the SEC said that PricewaterhouseCoopers entered into improper fee arrangements with the audit clients, in which the companies hired PricewaterhouseCoopers' investment bankers to provide financial advice for a fee that depended on the success of the transaction the company was pursuing.

The new board created by Congress last year to ovesee the accounting industry, which has the power to discipline accountants, recently decided it also will establish new standards for auditors governing quality control, professional ethics and their independence from audit clients. The SEC on Wednesday formally approved the appointment of William J. McDonough, president and chief executive of the Federal Reserve Bank of New York, as chairman of the oversight board.

Bob Jensen's threads on PwC lawsuits can be found at http://www.trinity.edu/rjensen/fraud.htm#pwc 

Ernst & Young in Trouble With the SEC

SEC seeks sanctions against Ernst and Young

By Joshua Chaffin in Washington

Published: New York Times, May 29 2003

Ernst & Young, one of the world's largest auditing firms, faces a six-month ban from taking on new public company auditing clients following a Securities and Exchange Commission investigation. The SEC, the chief US financial regulator, has asked an executive judge for the temporary ban and other sanctions against E&Y to remedy claims that the firm compromised its independence with respect to one of its clients, PeopleSoft, the software maker. Ernst & Young has denied the SEC's claims, and called its recommendations "irresponsible". The judge is not likely to rule on the case for months. Nonetheless, the severity of the proposed penalties reflect the SEC's effort to stop abuses in an accounting industry that has featured prominently in corporate scandals at Enron and other US companies. The SEC has requested the temporary auditing ban only a few times in the last 20 years. The SEC ruled out an outright ban on audits at E&Y out of fear that it would unfairly punish the firm's corporate clients, observers say. Such a measure might also have jeopardised the firm's existence. The US accounting sector has already been pared from five to four large firms with the dissolution of Andersen. The SEC accused E&Y of compromising its independence as PeopleSoft's auditor by entering into two side arrangements with the software maker. In one case, E&Y sold a PeopleSoft software programme used to calculate taxes for overseas employees. In another, E&Y installed PeopleSoft's products for corporate customers, according to the SEC. That arrangement netted E&Y $452m in fees from 1995 to 1999. In addition to the ban, the SEC is also seeking the disgorgement of $1.7m in audting fees from E&Y and the appointment of an independent officer to review the firm's auditing independence. The requests, filed with the court last week, were first reported by The Washington Post. E&Y said it was "confident that the firm in no way violated the independence rules and there is no basis for the imposition of any sanctions of any sort against the Firm."

Bob Jensen's threads on E&Y lawsuits can be found at http://www.trinity.edu/rjensen/fraud.htm#Ernst 

"Suit: Visa, Amex profit from fraud:  Plaintiffs say credit card companies not vigilant," by Bob Sullivan, MSNBC, May 22, 2003 --- http://www.msnbc.com/news/917088.asp?0si=- 

Three merchants have filed suit against Visa, MasterCard American Express and Discover, claiming the credit card companies profit from Internet fraud and do not do all they can to stop it. The suit, which seeks class action status, claims that “merchants have paid virtually all of the costs associated with fraud and theft,” while credit card associations and issuing banks make millions on fraud-related charges. It also alleges the associations use monopoly power to force merchants to sign unfair contracts.

The complete article is at http://www.msnbc.com/news/917088.asp?0si=-#BODY 

The Public Company Accounting Oversight Board has launched a new Internet site for those who want to keep up to date on the latest news and information regarding the Sarbanes-Oxley Act and the activities of the Board. http://www.accountingweb.com/item/97567

Surprise! Surprise!

Audit Fees Swell After Scandals, New Law http://fw.memesys.com/b/ct_click.cgi?type=1&ct_id=15190 

Telecommunications giant MCI, formerly known as WorldCom, agreed on Monday to pay a record fine to the Securities and Exchange Commission, the latest step in the company's road to recovery from the largest corporate bankruptcy in U.S. history. http://www.accountingweb.com/item/97590 

As part of its ongoing attempts to show that the buck stops in the CEO's office, the SEC voted this week to approve strict new internal control requirements, requiring CEOs to sign off that the rules are in place and being followed --- http://www.accountingweb.com/cgi-bin/item.cgi?id=97623 

The San Diego U.S. Attorney's office has added to Gateway's woes by launching a criminal investigation into the computer maker's accounting practices. The SEC is also investigating accounting issues at Gateway. http://www.accountingweb.com/item/97581 

PCAOB Ethics Questioned:  Beresford Quoted About Smoking

"Yet Another Controversy Hits PCAOB," by Editors of the AccountingWeb, May 22, 2003 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=97603 

AccountingWEB US - May-22-2003 - It seems like the organization charged with oversight of the audits of public companies just can’t stay away from controversy. First it was Harvey Pitt’s approach to naming a PCAOB head – then it was William Webster’s resignation due to undisclosed ties to a company under investigation – then SEC chief accountant Robert Herdman stepped down for his role in the Webster nomination. This time, the newly named chief auditor of the PCAOB is at the center of a controversy surrounding his role as an expert witness in currently pending court cases.

Douglas Carmichael, the new Chief Auditor for the PCAOB and a much sought after expert witness when he was an accounting professor at New York’s Baruch College, had received the green light from the PCAOB Board to fulfill his current obligations as an expert witness against major accounting firms in lawsuits brought by public companies.

Carmichael has said that he will only finish those cases in which he has already written a report that contains his opinion. But critics believe that companies that hired him will exploit the status attached to his position, and juries will give extra credence to his testimony now that he has been named "the auditors' auditor."

Critics point to a recent press release by Amerco, who is suing PwC for alleged bad advice, which highlights the PCAOB appointment, and singles out the opinion of Douglas Carmichael, their expert witness.

On the subject of the PCAOB Board providing its approval to continue with these cases, former FASB Chairman Dennis Beresford remarked, "I just don't know what somebody frankly was smoking when they said he could do this." FASB ethics rules prohibit staff from serving as expert witnesses in litigation.

Mr. Carmichael will take unpaid leave from his new position - slated at $425,000 per year - to complete the litigation work, and will have to recuse himself from any PCAOB decisions that may affect any of the current clients for whom he serves as an expert witness.

On the subject of the PCAOB Board providing its approval to continue with these cases, former FASB Chairman Dennis Beresford remarked, "I just don't know what somebody frankly was smoking when they said he could do this." FASB ethics rules prohibit staff from serving as expert witnesses in litigation.

Mr. Carmichael will take unpaid leave from his new position - slated at $425,000 per year - to complete the litigation work, and will have to recuse himself from any PCAOB decisions that may affect any of the current clients for whom he serves as an expert witness.

"Frankly, I'm amazed, I'm a little speechless," Rick Antle, an accounting professor at Yale School of Management, told Bloomberg Media. "There's such an obvious conflict of interest, being a party to litigation at the same time you're the chief adviser to the regulators setting accounting policy."

FASB Improves Accounting for Financial Instruments with Characteristics of both Liabilities and Equity --- http://www.fasb.org/news/nr051503.shtml 

Norwalk, CT, May 15, 2003—The Financial Accounting Standards Board (FASB) has issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position.

Statement 150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares. Statement 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.

"Ratings Ruckus Are credit-rating agencies trying to serve too many masters?" by Janice Revell, Fortune, May 13, 2003 --- http://www.fortune.com/fortune/articles/0,15114,451150,00.html 

When it comes to the financial scandals of the past two years, there's plenty of blame to go around. In April, Congress turned the spotlight on the major credit-ratings agencies--Moody's Investors Service, Standard & Poor's, and Fitch Ratings--for their failure to warn investors of such looming disasters. During one hearing of the House committee on financial services, legislators focused on the conflicts of interest that riddle the ratings industry, not the least of which is the fact that the main players receive the bulk of their revenues by collecting ratings and consulting fees from the very companies whose debt they evaluate.

Another troubling conflict: Moody's chairman, Clifford Alexander, sat on the board of fallen telecommunications company WorldCom. Alexander held the directorship from 1998 to December 2001, during which time he also served a stint as CEO of Moody's then-parent, Dun & Bradstreet. Meanwhile Moody's and the other ratings agencies didn't downgrade WorldCom's debt to "noninvestment grade" status (a level considered risky for investors) until May 2002--just a few weeks before the company collapsed under a wave of accounting fraud. And Alexander is still serving on the board of pharmaceutical giant Wyeth, a company that Moody's also rates. While nobody is accusing Alexander of wrongdoing, such behavior "strikes me as a clear conflict of interest that needs to be avoided," says Representative Christopher Shays (R-Connecticut). "The integrity of the rating agencies needs to approach that of the judiciary." The SEC is expected to release a paper in May outlining its proposals for addressing the concerns brought up by Congress, but it's not certain whether those suggestions will include who is eligible to sit on the boards of companies evaluated by the ratings agencies.

Alexander declined to comment, but a Moody's spokesperson says that because Alexander is a nonexecutive board chairman, he does "not get involved in rating decisions in any way, shape, or form." But for some governance experts, that just doesn't cut it. "He is the final institutional voice of Moody's," says Jeffrey Sonnenfeld, associate dean at the Yale School of Management. "If they're arguing that he's an inconsequential figurehead, that's a novel argument."

Alexander's director pay certainly hasn't been inconsequential: According to data from Thomson Financial, he's collected some $3.3 million since 1997 by selling the stock of Wyeth, MCI, and WorldCom, including $692,000 in WorldCom shares he unloaded in June 1999 when the stock was at its peak.

E&Y Summary: SEC Proposes Audit Committee Standards for Listed Companies --- http://www.ey.com/GLOBAL/content.nsf/US/AABS_-_Assurance_-_Articles_-_SEC_Audit_Committee_Standards_for_Listed_Companies 

To request a complete version of this document (Adobe Acrobat - 67K)

Overview

On April 10, 2003, the SEC published its final rule to implement Section 301 of the Sarbanes-Oxley Act (the "Act"). The rule requires the national securities exchanges and associations (the self-regulatory organizations or "SROs") to amend their listing standards to conform to at least the rule's minimum audit committee requirements in the following areas:

• Audit committee member independence
• Audit committee responsibilities with respect to the company's registered public accounting firm(s)
• Audit committee procedures for handling complaints (including "whistleblowers")
• Audit committee authority to engage advisers
• Audit committee funding

However, an SRO could adopt listing standards regarding audit committees that go beyond the minimum requirements of the final SEC rule. Therefore, companies should continue to monitor the listing standards proposed, and ultimately adopted, by their respective SRO. The SROs have until July 15, 2003 to submit to the SEC their revised listing standards that conform to at least the SEC's minimum audit committee requirements. The SEC must approve each SRO's listing standards no later than December 1, 2003. Our summary discusses the subsequent transition requirements and compliance dates for companies.

 

Forwarded on May 11, 2003 by Patrick E Charles [charlesp@CWDOM.DM] 

Enron to Keep 19 International Assets --- http://abcnews.go.com/wire/Business/ap20030509_1087.html
Enron Says It's Keeping 19 International Assets As Part of Chapter 11 Reorganization Plan
The Associated Press
HOUSTON May 9, 2003

Enron Corp. announced plans Friday to cluster 19 international power and pipeline assets in a new company as part of its Chapter 11 reorganization, ending efforts to sell the businesses after they did not draw satisfactory bids.

The company, temporarily dubbed "InternationalCo.," is one of two in which creditors will have shares when Enron's massive bankruptcy wraps up. Most of the assets are in South and Central America, including a Brazilian power plant used in a sham sale to pump up profits at the energy company.

Enron, which filed for bankruptcy in 2001 amid massive accounting fraud, began seeking bids on its North American pipeline assets and international holdings last year. Enron spokesman Eric Thode said the offers the company received were too low.

"Certainly none of the bids reached a point where it was in the best interests of the estate and our creditors to accept," Thode said.

Enron said the company would have an independent board of directors and would be insulated from liabilities associated with the bankruptcy.

The second company, known for now as "PipeCo.," will include Enron's all or part interest in three North American natural gas pipelines. Both have the blessing of major creditors and need approval from U.S. Bankruptcy Judge Arthur Gonzalez in New York, who is overseeing the Chapter 11 case.

"That makes a lot of sense, as a business decision," said Anthony Sabino, a St. John's University professor specializing in energy and bankruptcy law. "If you're going to segregate assets, you might as well do it on national boundaries."

The Brazilian power plant in Cuiaba is noted in a 109-count indictment against former Enron chief financial officer Andrew Fastow and others.

Federal prosecutors allege Fastow arranged in September 1999 for his LJM partnership to pay $11.3 million for Enron's interest in a company that was building the 480-megawatt power plant. The indictment alleges the sale was a sham because LJM wasn't independent of Enron and the energy company bought back the interest at a profit in a secret 2001 deal.

Fastow is among several former Enron executives charged with participating in or running schemes to beautify Enron's books while skimming kickbacks from shady deals and selling stock when share prices were artificially inflated.

The assets headed for InternationalCo also include the half interest in a Korean gas distributor acquired in a 1998 deal led by Sherron Watkins, who later gained fame for privately warning former Enron chief Kenneth Lay about the accounting tricks and impending scandal.

SK-Enron Co. is the largest gas distributor in Korea that also imports and markets liquefied natural gas. Enron splits ownership of the operation with SK Corp., a member of the South Korean conglomerate SK Group.

The international assets also include Elektro, a Brazilian electricity distribution company Enron bought in 1998 for $1.3 billion, a bid that beat its highest competitor by $300 million. Power plants in Poland, Guam and Turkey also are earmarked for the new company.

Right now, there's a buyer's market for such holdings because energy companies squeezed by a weak economy are selling assets to strengthen their finances, Sabino said.

"Enron is showing a little strength here by pulling back," he said. "If they were truly desperate, they would be compelled to sell everything at these bargain-basement prices."

Enron still intends to sell other assets, including Portland General Electric, the Pacific Northwest utility Enron acquired in 1997 that serves more than 700,000 customers.

The more complex a system is, the more avenues of avoidance or abuse there seem to be for the wealthy and powerful to exploit.

In what marks the first time a corporate executive has been penalized for participating in the practice known as IPO spinning, former Quest Communications International Inc. Chairman Phillip F. Anschutz has agreed to pay millions in the settlement. http://www.accountingweb.com/item/97566 

Question
What is initial public offering (IPO) spinning and why is it illegal?  

Answer
See http://www.trinity.edu/rjensen/fraud.htm#IPOspinning 

New Tax Scams Target Email Users, Armed Forces http://fw.memesys.com/b/ct_click.cgi?type=1&ct_id=15186

Bob Jensen's threads on tax frauds and scams can be found at http://www.trinity.edu/rjensen/fraud.htm#TaxFraud 

May 5, 2003 message from Mary L. Kunkler [mailto:mkunkler@kpmg.com] 

The Sarbanes-Oxley Act of 2002 transformed the environment for corporate governance, creating new responsibilities for companies, executives, audit committees and auditors, and new disclosures for investors.

As you seek to understand the Act's provisions-and their impact on businesses and academia-the professionals of KPMG would like you to have our newest publication, Sarbanes-Oxley: A Closer Look. For your convenience, we have attached a copy of the booklet as well as a link to the publication through KPMG's Audit Committee Institute Website.

This book summarizes four key areas of the Act. It also delineates the Securities and Exchange Commission's (SEC) rules that resulted from the Act, as well as SEC rule proposals that remain outstanding as of January 31, 2003.

Specifically, the book covers:

• The responsibilities of corporate management and audit committees;
• Enhancement of financial disclosures;
• Auditor and audit committee independence; and
• The role of the newly created Public Company Accounting Oversight Board.

Our goal was not only to provide an easy to use reference tool, but to also facilitate discussion about the Act within the business community.

URL link: http://www.kpmg.com/aci/docs/O_A_Closer_Look.pdf 

Best regards,

Martin Salinas, Jr. 
KPMG LLP - 
San Antonio msalinasjr@kpmg.com  
Tel: 210-270-1608

Ernst & Young Sued and Fired by Drug Distributor --- http://www.accountingweb.com/item/97536

AccountingWEB US - May-7-2003 - Drug distributor Accredo Health Inc. has fired its auditor, Big Four firm Ernst & Young, and is suing the firm for more than $53.3 million.

Last year E&Y examined the financial statements of home health care service company Gentiva Health Services and provided information to Accredo that led to the acquisition of Gentiva by Accredo. After the acquisition Accredo determined that Gentiva's allowance for doubtful accounts was understated.

In the lawsuit Accredo claims that E&Y failed to properly determine reserves needed to cover Gentiva's bad debts. Accredo accuses E&Y of accounting and auditing malpractice, negligent misrepresentation, breach of contract, and violating the Tennessee Consumer Protection Act. In response, Ken Kerrigan, E&Y spokesman, said, "Ernst & Young was surprised by Accredo's action today. We believe our work fully complied with all professional standards and we will defend ourselves vigorously."

This isn't the only legal issue Ernst & Young has to contend with. The firm is currently working with a Senate panel that is investigating possible abuses regarding tax shelters sold by the firm. E&Y has also been in the news lately for its involvement in providing tax advice to Sprint executives, its questionable audit techniques with regard to the Swiss state of Geneva, and its recently dismissed charges regarding the audit of British-based Equitable Life, among other high-profile cases.

Bob Jensen's threads on E&Y lawsuits are at http://www.trinity.edu/rjensen/fraud.htm#Ernst 

Head of PwC Advocates More Audit Changes http://fw.memesys.com/b/ct_click.cgi?type=1&ct_id=15188

Labor Unions Resist Efforts to Require Truthful Financial Disclosures

The U.S. Department of Labor's homepage is at http://www.dol.gov/ 
Near the bottom of the page, there are useful economic statistics.

Among other things, you can read short paragraphs about 290 convictions of Labor Union officials since October 2000.  In Time Magazine on May 12, 2003, Page 68 George Will discusses how Labor Unions are fighting the current Secretary of Labor, Elaine Chao, in her efforts to make labor unions provide truthful information to their members.  Will states:  "Hypocrisy of an unusual purity is on display as union leaders try to avoid disclosing truthful financial information to their members."

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

May 28, 2003 message from Colleen Sayther [mailmanager@feiexpress.fei.org] 

The SEC voted to approve rules on Section 404 of the Sarbanes-Oxley Act on internal controls. The SEC expects the final rules to be issued and posted on the SEC Web site by Friday. Read the SEC's press release at http://www.sec.gov/news/press/2003-66.htm. Importantly, the effective date for implementation was pushed back for the majority of filers until June 15, 2004. FEI and our Committee on Corporate Reporting had actively advocated for more time to implement any new provisions of this section.

Highlights of the final rules are as follows:

• Transition of final rules for both the management's report on Internal Controls and the Auditor's Attestation of Internal Controls:
  • For accelerated filers as defined under Exchange Act Rule 12-B2 (majority of filers), rules effective for FYE 6/15/04 (original proposal stated FYE 9/15/03).
  • For foreign private issuers, all other filers, rules effective for FYE 4/15/05.
• SEC allowed a longer transition period to give the PCAOB the necessary time to develop appropriate standards on the attestation. SEC did not believe that it would be fair to ask management and auditors to prepare for this year under a transitional standard, which may substantially change when finalized.
• Defined internal controls similar to the COSO definition to focus on "financial reporting controls".
• Final release will utilize some of the language from Section 103 to describe the auditor requirements for the attestation.
• Within the management report companies must identify the internal control framework they have followed. The release states that companies must use a "suitable" framework. They recommend, but do not require COSO as a "suitable" framework. They did not specifically require COSO due to the international frameworks which exist which may be suitable for foreign private issuers. They mentioned that they did assume most companies would be using COSO.
• Concluded that companies cannot utilize their existing audit firms to perform the documentation of internal controls. This would cause an independence issue.
• Concluded that the safeguarding of assets is part of financial reporting controls.

You may also find of interest a recent survey of FEI member companies on Section 404 implementation costs. Not surprisingly, the costs reported were significant. Members projected that their company employees would be spending an average of 6,700 hours evaluating and enhancing corporate internal controls this year, and that they expected additional spending averaging $480,000 for such things as evaluation software, outside consulting and employee training. These costs were separate from those necessary to cover the independent auditors attestation. Members responded that they expected annual audit fees to increase over 35% to cover auditor attestation. These results were based on a total of 83 responses from public companies whose annual sales revenue averaged $3.27 billion. Complete results are available at: http://www.fei.org/news/404CostSurvey.xls.

May 14, 2003 message from nmeonske [nmeonske@kent.edu] 

As all of you probably know the Public Overshight Board will take over writing auditing standards from the AICPA. I found this short summary interesting and thought you may find it useful also.

Norm
Dr. Norman Meonske Department of Accounting Kent State University Kent, Ohio 44240 330 672 1120 Office Phone

May 2, 2003 (The Washington Post) — An accounting industry association met this week with the new federal oversight board to discuss whether the overseers should pay to use copyrighted standards for auditors that the trade group developed.

The Public Company Accounting Oversight Board, created by Congress last year, announced last month that it would write professional and ethics standards for auditors.

That task had been handled for more than six decades by the American Institute of Certified Public Accountants. The federal board's decision was seen by accountants as a big blow to the AICPA, which was criticized for its response to accounting scandals last year.

Accounting board members said last month that they would adopt the AICPA guidelines temporarily to give them time to develop their own standards. But that plan hit a snag because the AICPA has held a copyright on the standards since 1941.

Representatives of the oversight board and the trade group met Tuesday.

Copyrighting things such as professional standards is common among associations, AICPA spokeswoman Linda Dunbar said. She said the standards bring in significant revenue to the nonprofit group, but she declined to provide figures. The books containing the standards sell for $129 to members of the trade group and $161 to nonmembers, according to a Web site on which they are sold.

"The meeting was really in the spirit of cooperating and brainstorming," Dunbar said.

Sources familiar with the meeting characterized it as the start of a broader discussion between the oversight board and the trade group on several issues. The board and the AICPA plan more meetings on the copyright problem, sources familiar with the talks said.

Ethical decision-making requires more than a belief in the importance of ethics. It also requires ethical sensitivity to implications of choices, the ability to evaluate complex, ambiguous and incomplete facts, and the skill to implement ethical decisions effectively. Part two of five. http://www.accountingweb.com/item/97514 

May 30, 2003 message from P & L Greenberg [plgreen@worldnet.att.net] 

For those who are concerned about the lack of personal accountability of CEOs and BODs, the process by which they came into power and the hurdles that keep Shareholders from having an effective say in corporate matters, the SEC has specifically invited your comments. Time is of the essence. Please follow the links and make your opinions known.

http://www.ConcernedShareholders.com 

"Despite U.S. Efforts, Web Crimes Thrive," by Ariana Eunjung Cha, The Washington Post, May 20, 2003; p. A01 --- http://www.washingtonpost.com/wp-dyn/articles/A12984-2003May19.html 

Here in his hometown, Michael is a respected computer programmer. In the United States, he's a wanted man.

Two and a half years ago, his former boss Vasiliy Gorshkov and co-worker Alexey Ivanov were arrested for hacking and extorting a string of American businesses. Michael, who spoke on the condition that he be identified only by an English translation of his first name, said he helped them.

Shortly after his associates were captured, the FBI determined that Michael might be part of the same hacking ring and tried to go after him, too. An agent sent him an e-mail telling him what had happened to Gorshkov and Ivanov and asking him what he knew about the men's criminal activities. Michael responded that by tricking the two men to travel to Seattle so they could be arrested, the agency had just started a war.

"We'll keep stealing just like we did in the past," he wrote. "If you try to stop us there will be more of the same. Better just leave us alone."

The FBI man, Michael said, apologized and said the agency wouldn't bother him anymore. And so far it hasn't.

Michael, now 21, still lives in the same downtown apartment he purchased with funds from the hacking scheme he says he participated in with Gorshkov and Ivanov. While his compatriots are sitting in prison, Michael is shopping for a car, a Honda Prelude, with his illicit profits. He said he continues hacking into company databases in his spare time, at the rate of about one a week. His recent bounty: documents from a corporate site for a computer-chip company, a medium-size Internet access provider and an agency within the government of Uruguay.

It's impossible to determine how many of the hackers who are responsible for the chaos that now seems to regularly erupt on the Internet remain at large. Many use multiple aliases and electronically hop from country to country, making it difficult to determine who or where they are. Statistics on cybercrime show a huge disparity between the number of attacks reported and the number of people who are caught. The CERT Coordination Center, a federal clearinghouse, logged more than 80,000 incidents of break-ins, viruses and other attacks in 2002, up from around 50,000 the year before. Meanwhile, U.S. law enforcement arrests only several hundred alleged perpetrators each year.

In a series of interviews with U.S. authorities, Ivanov identified Michael and six others as co-conspirators; the complete document is still under seal in U.S. District Court in Connecticut, but portions of the transcript were obtained by The Washington Post. Justice Department lawyers in Washington and Connecticut declined to comment on the investigation because it is continuing. In exchange for Ivanov's cooperation and in response to his fears that his loved ones might be in danger, the government flew his mother, his sister and his girlfriend, Lena, to the United States last fall.

Continued in the article.

From The Wall Street Journal Accounting Educators' Review on May 23, 2003

TITLE: Big Board Plans To Hold Sessions On Governance 
REPORTER: Gaston F. Ceron 
DATE: May 16, 2003 
PAGE: C9 
LINK: http://online.wsj.com/article_print/0,,SB105303855351506300,00.html  
TOPICS: Bankruptcy

SUMMARY: Ceron reports the New York Stock Exchange has agreed to hold hearings to examine corporate-governance procedures. Big Board chairman Grasso said the review will be made by a special committee vowing to make appropriate reforms. Grasso also said that written submissions will be solicited from "organizations and individuals representing our constituents."

QUESTIONS: 
1.) Who are the constituents to whom Mr. Grasso refers? What are the organizations to which he refers? The individuals?

2.) Relate your answers to the preceding questions to the two related articles by Susan Carey regarding Hawaiian Airlines. Who are the stakeholders? What do they view as "egregious conduct?"

3.) Described the alleged fraudulent transfers in the Hawaiian case. Why does there appear to be a "conflict of interest" in this case? Is it merely an appearance? What is self-dealing?

4.) What corporate-governance procedural changes would you suggest to address these sorts of issues?

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University

--- RELATED ARTICLES --- 
TITLE: Bankruptcy Judge to Appoint Trustee for Hawaiian Airlines 
REPORTER: Susan Carey 
PAGE: B2 
ISSUE: May 19, 2003 
LINK: http://online.wsj.com/article_print/0,,SB105313867238593000,00.html 

TITLE: Hawaiian Air Proposes Departure of CEO in Bid to Avoid Trustee 
REPORTER: Susan Carey 
PAGE: A3 
ISSUE: May 16, 2003 
LINK: http://online.wsj.com/article_print/0,,SB105302609321608100,00.html 

From The Wall Street Journal Accounting Educators' Review on M

TITLE: Staples Profit Plummets 74% on Adjustment 
REPORTER: Joseph Pereira 
DATE: May 21, 2003 
PAGE: A2 
LINK: http://online.wsj.com/article/0,,SB105344489113541600,00.html  
TOPICS: Vendor Allowances, Accounting Changes and Error Corrections, Financial Accounting, Financial Analysis, Financial Statement Analysis, Restatement

SUMMARY: Staples reported a decrease in net income as a result of a change in accounting for vendor allowances. Questions focus on changes in accounting principles, accounting estimates, and corrections of errors.

QUESTIONS: 
1.) What are changes in accounting principles, corrections of errors, and changes in accounting estimates? Explain the financial statement effects of each.

2.) What is a vendor allowance? Prior to the current quarter, how did Staples account for vendor allowances? Discuss the appropriateness of the prior accounting method. Be sure to include the matching principle in your discussion.

3.) How does Staples currently account for vendor allowances? Discuss the appropriateness of the current accounting method. Be sure to include the matching principle in your discussion.

4.) Did Staples handle the change in accounting for vendor allowances as a change in accounting principle, correction of error, or change in accounting estimate? Discuss the appropriateness of how 

PricewaterhouseCoopers neither admitted nor denied wrongdoing in the settlement that the Securities and Exchange Commission announced Thursday. As it did last July in a similar accord with the SEC, in which it paid $5 million, the firm also agreed to be censured and to make changes in how it operates. That case involved audits of 16 companies from 1996 to 2001.

At issue in the new case is PricewaterhouseCoopers' 1997 audit of SmarTalk TeleServices Inc., a provider of pre-paid phone cards and wireless services which the SEC says is now bankrupt. Because the auditing firm failed to adequately account for a $25 million reserve fund, SmarTalk filed with the SEC an annual report "which contained materially false and misleading financial statements," the agency said.

Spokesmen for New York-based PricewaterhouseCoopers didn't immediately return a telephone call seeking comment.

Nearly a year after now-fallen Arthur Andersen LLC was convicted on obstruction of justice charges for destroying reams of Enron audit documents, alleged violations by other big firms in the scandal-tainted accounting industry continue to be cited.

In January the SEC sued another Big Four accounting firm, KPMG LLP, alleging that it fraudulently allowed Xerox Corp. to manipulate accounting practices to fill a $3 billion gap, thereby satisfying investors about its financial performance. The agency is seeking injunctions, repayment of auditing fees and unspecified civil penalties. KPMG has defended its 1997-2000 audits of Xerox's financial statements and has called the SEC's accusations unfounded.

Antonia Chion, an associate enforcement director at the SEC, called the latest PricewaterhouseCoopers action an example of the agency's "intention to adopt a new enforcement model - one that holds an accounting firm responsible for the actions of its partners

Staples accounted for the change in accounting for vendor allowances? Should the $86.5 million charge be included in calculating current period net income? Support your answer.

5.) Does is appear that the stock market reacted to the news concerning the vendor allowances? Why do you think that Staples' stock price dropped?

No Accounting for Politics --- http://www.smartpros.com/x38375.xml 

A bipartisan group of lawmakers is pressing legislation that would take the unprecedented step of blocking the Financial Accounting Standards Board (FASB) from adopting a rule on how accountants should do their business. The board has proposed that employee stock options be treated as corporate expenses, the way other forms of compensation are, such as salaries and fringe benefits. But the lawmakers -- mostly representing Silicon Valley and other areas with a concentration of high-technology companies, the leaders of the anti-expensing crusade -- want the Securities and Exchange Commission to study the matter -- for three more years. What's that? FASB has only been trying to act on this issue for nearly two decades. (It backed off in 1994 in the face of congressional pressure.) In an astonishing display of lobbying chutzpah, the high-tech industry is now accusing FASB of a rush to judgment.

Option Pricing : Modeling and Extracting State-Price Densities A New Methodology by Christian Perkner
Haupt Verlag
ISBN 3-258-06101-7  http://www.haupt.ch/asp/titels.asp?o=f&objectId=3372 

The focus of this book is on the valuation of financial derivatives. A derivative (e.g. a financial option) can be defined as a contract promising a payoff that is contingent upon the unknown future state of a risky security. The goal of this book is to illustrate two different perspectives of modern option pricing:

Part I: The normative viewpoint: How does (how should) option pricing theory arrive at the fair value for such a contingent claim? What are crucial assumptions? What is the line of argument? How does this theory (e.g. Black-Scholes) perform in reality?

Part II: The descriptive viewpoint: How are options truly priced in the financial markets? What do option prices tell us about the expectations of market participants? Do investor preferences play a role in the valuation of a derivative?

To answer both questions, the author introduces an insightful valuation framework that consists of five elements. Its central component is the so called state-price density - a density that represents the market's valuation of $1 received in various states of the world. It turns out that the shape of this density is the crucial aspect when determining the price of an option.

The book illustrates several techniques allowing the flexible modeling of the state-price density. Implementation issues are discussed using real datasets and numerical examples, implications of the various modeling techniques are analyzed, and results are presented that significantly improve standard option pricing theory.

Bob Jensen's threads on option pricing theory --- http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#FairValue

DOES A ROSS ECONOMY LUNCH REALLY COST AS MUCH AS
HIRSHLEIFER CUISINE COMPLETE WITH s_m² DESSERT?  
Bob Jensen's unpublished Working Paper 149 --- http://www.trinity.edu/rjensen/149wp/149wp.htm 

Bob Jensen's threads on valuation of derivative financial instruments can be found at http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm 

Code Orange: CyberCrime Center to Open in DC --- http://www.eweek.com/article2/0,3959,1104230,00.asp 
It's gotten so bad that even the feds are worried. So the Department of Homeland Security plans on opening a Cyber-Security Center in DC to address the problem. We're not just talking about nabbing script-kiddies, either—big-time criminals are flocking to the Web. But one key piece is missing—and our experts think the new center will flop until it's addressed. Find out what the fatal flaw is and learn details of this new government bureaucracy in our special coverage.

May 17, 2003 message from Business Ethics [BizEthics@lb.bcentral.com] 

BizEthics Buzz May 2003

This is our second issue in our new format. E-mail any comments or concerns to Karen.McNichol@business-ethics.com. Positive comments appreciated also!

Welcome to the online news report from Business Ethics magazine. The articles in the online version do not appear in the print edition of Business Ethics. (We've highlighted the contents of the latest print edition of Business Ethics for you at the conclusion of our online version.)

Special Issue:
Leveraging the Power of Institutional Investors for Social Good

In looking for points of leverage over corporations, a key one is the power of institutional investors such as pension funds, religious investors, foundations, and college endowments. State and local pension funds alone control $1.1 trillion in equities, or 8 percent of all U.S. equities, so the potential power is enormous. Though progress is slow and cautious, these investors are increasingly bringing social values into their investing decisions.

In this special issue of Buzz, we report on recent developments regarding institutional investors and responsible investing. Many items are drawn from the longer feature story, "The New Fiduciary Duty" from the spring 2003 issue of Business Ethics, at www.business-ethics.com, which offered a comprehensive look at this topic. For a free printed copy of this special annual social investing issue send your postal address to Karen.McNichol@business-ethics.com

BizEthics Factoid:

Pension funds that vote their own proxies: 14%

Pension funds that have voted shares on behalf of social issues: 2%

Source: Institutional Investor, October 2000.

* * * *

In This Issue:

* The Triple-Bottom-Line Simulation: Institutional Investors Learning Together
* Investing Successes in Affordable Housing
* Screened Religious Pension Fund Outperforms
* Mission-Related Investing for Foundations May Be Required by Fiduciary Duty
* Social Investing Resources on the Web
    - Shareholder Action Network
    - iShareowner.com

My new and updated documents the recent accounting and investment scandals are at the following sites:

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

Bob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm  

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

Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm 

The Virginia Tech Overview:  What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm 

Professor Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134  Email:  rjensen@trinity.edu