Accounting Scandal Updates and Other Fraud on June 30, 2005
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- 

Other Documents

Many of the scandals are documented at 

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

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

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

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

I love Infectious Greed by Frank Partnoy --- 

Bob Jensen's American History of Fraud ---

Future of Auditing --- 

U.S. Pushes Broad Investigation Into Milberg Weiss Law Firm
Federal prosecutors are investigating one of the nation's most aggressive class-action law firms, Milberg Weiss Bershad & Schulman, for alleged fraud, conspiracy and kickbacks in scores of securities lawsuits, and could seek criminal charges against the firm itself and its principals. The three-year investigation focuses on allegations that the New York-based firm routinely made secret, illegal payments to plaintiffs who appeared on securities class-action lawsuits brought by the firm, according to court documents and lawyers close to the case. A grand jury in Los Angeles convened last October has been hearing evidence of alleged illegal payments in dozens of suits filed against oil, biotechnology, drug and chemical companies during the past 20 years, the lawyers close to the case said.
John R. Wilke, "U.S. Pushes Broad Investigation Into Milberg Weiss Law Firm," The Wall Street Journal, June 27, 2005, Page A1 ---,,SB111983956022470148,00.html?mod=todays_us_page_one

KPMG could face criminal charges for obstruction of justice and the sale of abusive tax shelters.
Federal prosecutors have built a criminal case against KPMG LLP for obstruction of justice and the sale of abusive tax shelters, igniting a debate among top Justice Department officials over whether to seek an indictment -- at the risk of killing one of the four remaining big accounting firms. Federal prosecutors and KPMG's lawyers are now locked in high-wire negotiations that could decide the fate of the firm, according to lawyers briefed on the case. Under unwritten Justice Department policy, companies facing possible criminal charges often are permitted to plead their case to higher-ups in the department. These officials are expected to take into account the strength of evidence in the case -- the culmination of a long-running investigation -- and any mitigating factors, as well as broader policy issues posed by the possible loss of the firm. A KPMG lawyer declined to comment. The chief spokesman for the firm, George Ledwith, said yesterday that "we have continued to cooperate fully" with investigators. He declined to discuss any other aspect of the case.
John R. Wilke, "KPMG Faces Indictment Risk On Tax Shelters:  Justice Officials Debate Whether to Pursue Case; Fears of 'Andersen Scenario'," The Wall Street Journal,  June 16, 2005; Page A1 ---,,SB111888827431261200,00.html?mod=todays_us_page_one
Bob Jensen's threads on KPMG scandals are at

J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle a lawsuit filed by investors in Enron
J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle a lawsuit filed by investors in Enron, according to the Associated Press. The decision by the third largest bank in the United States comes just four days after Citigroup said it would pay $2 billion to settle the claims against it in the shareholder lawsuit, which is led by the University of California’s Board of Regents.
"Another Enron Settlement," Inside Higher Ed, June 15, 2005 ---

Bob Jensen's threads on the Enron scandal are at

That's Enron-tainment:  Positive review on the new Enron movie
Alex Gibney's freewheeling -- and terrifically entertaining -- documentary, newly entered into national release, puts faces and voices to the men and women who've become household names since the scandal broke four years ago. Some of these former executives have already enjoyed (or endured) extensive face time on TV. But now they're characters in the context of a film that's been adapted from the book of the same name by Bethany McLean and Peter Elkind, and the big screen lends new immediacy to their appearance. That's not to say Mr. Gibney's documentary turns its characters into real people. Given the scale of the human and economic damage, of the deception and very possibly the pathological self-deception, there may not be any real people behind those scrupulously straight faces. Still, "The Smartest Guys in the Room" gives us the same sort of perverse pleasure that's been a staple of "60 Minutes" over the years -- watching world-class crooks tell world-class lies.
"That's Enron-tainment: Company's Chief Cheats Give 'Smartest Guys' Energy:  Documentary Tracing Firm's Fall Is Provocative, Proudly Partisan; 'Machuca': Classy Class Drama," The Wall Street Journal, April 29, 2005; Page W1 ---,,SB111473473039520299,00.html?mod=todays_us_weekend_journal
Bob Jensen's threads on the history of the Enron/Andersen scandals are at

You can download Enron's Infamous Home Video
Although it has nothing to do with the above professional movie, Jim Borden sent me a copy of the amateur video recording of Rich Kinder's departure from Enron (Kinder preceded Skilling as President of Enron).  This video features nearly half an hour of absurd skits, songs and testimonials by company executives.  It features CEO Jeff Skilling proposing Hypothetical Future Value (HPV) accounting with in retrospect is too true to be funny during the subsequent melt down of Enron.  George W. Bush (then Texas Governor Bush and his father) appear in the video.  You can download parts of it at

Warning:  The above video is in avi format and takes a very long time to download.  It probably dovetails nicely into Alex Gibney's new Hollywood movie.

Footnote:  Rich Kinder left Enron, formed his own energy company, and became a billionaire ---

Bristol-Myers to pay $300 million to settle an accounting scandal
Bristol-Myers Squibb Co. is expected to pay about $300 million to settle a criminal investigation by the Justice Department into its alleged accounting manipulations from several years ago, people familiar with the situation said. As part of the settlement, longtime board member James D. Robinson III is expected to become chairman, according to a person familiar with the situation. Current Chairman and Chief Executive Peter R. Dolan would retain the CEO title.
Paul Davies et al., "Bristol-Myers Expected to Pay $300 Million to Settle Probe," The Wall Street Journal, June 6, 2005 ---,,SB111801100540351254,00.html?mod=todays_us_page_one
The independent auditing firm of PwC insisted on an earnings restatement for the year 2002.

What is "markdown money?"
Saks Inc., facing an investigation by the U.S. Securities and Exchange Commission into the improper collection of allowances from its vendors, disclosed an additional internal investigation into its practices. The additional probe will determine whether Saks's luxury chain, Saks Fifth Avenue, wrongfully collected from its vendors "chargebacks," or fees for failing to comply with Saks's logistics, transportation or billing policies. The internal investigation also will review when "markdown money" was recorded. Markdown money is the sum vendors pay retailers to compensate stores when merchandise doesn't sell and has to go on sale, or be "marked down."
Ellen Byron, "Saks Studies Booking of Allowances:  Retailer Reviews Accounts Of Such Revenue Up to '05, Amid an SEC Investigation," The Wall Street Journal, June 6, 2005; Page B10 ---,,SB111801216304651275,00.html?mod=todays_us_marketplace

Sacks at Saks
Saks Inc. said it asked several senior executives to resign after an internal investigation of allegedly improper collections of vendor-markdown allowances at its Saks Fifth Avenue division.
Ellen Byron, "Saks Inc. Asks Several Executives For Resignations," The Wall Street Journal, May 10, 2005; Page A6 ---,,SB111568927840128924,00.html?mod=todays_us_page_one

Finally a corporate board acts to end a fraud
The abrupt notice of termination given last week to the head of MassMutual Financial Group, one of the nation's largest financial companies, came after a board investigation concluded he had engaged in an improper pattern of self-dealing and abuse of power, according to people familiar with the probe. The probe made several allegations against former Chairman and Chief Executive Robert J. O'Connell, among them that he inflated the value of a special retirement account by tens of millions of dollars, bought a company-owned condominium at a below-market price and interfered in efforts to discipline his son and son-in-law, who worked at MassMutual, said people familiar with the probe.
James Bandler and Joann S. Lublin, "MassMutual Board Fired CEO On Finding 'Willful Malfeasance'," The Wall Street Journal, June 10, 2005; Page A1 ---,,SB111836461879356053,00.html?mod=todays_us_page_one

It's beyond me why anybody does business with Morgan Stanley
Morgan Stanley's past actions hardly inspire confidence that the firm can be relied upon to analyze the legal potential of the documents. All Wall Street firms play hardball when clients bring arbitration cases. But Morgan Stanley is famous for its scorched-earth tactics. The firm often stonewalls routine requests for documents and stalls even when arbitration panelists order that materials be produced. During an October 2003 arbitration, for example, Morgan Stanley was penalized $10,000 a day until it complied with an order that documents be produced. "Enough is enough," the arbitration panel wrote. Morgan Stanley seems similarly obstructionist in its dealings with regulators. New Hampshire's securities department last month cited it for "improper and inadequate production of documents" in a case involving allegations of improper sales. Jeffrey Spill, deputy director of the state's Bureau of Securities Regulation, said in a statement: "What we have seen is a consistent pattern of delay and obfuscation in relation to document production, in addition to inadequate recordkeeping, both here in New Hampshire and in other jurisdictions." Morgan Stanley settled the case W.A.O.D.W. - without admitting or denying wrongdoing.

Gretchen Morgenson, "All That Missing E-Mail ... It's Baaack," The New York Times, May 8, 2005 ---
Bob Jensen's threads on frauds by brokers and investment bankers are at

KPMG Ousts Executive, Partners; Steps Tied to Tax-Shelter Scrutiny
 Accounting firm KPMG LLP this week fired a senior executive who had headed its tax-services division as it promoted tax shelters earlier this decade, another sign of the pressure KPMG is facing as law-enforcement officials investigate the now-contentious sales effort. The New York firm also dismissed two partners who had sat on its 15-member board, the latest personnel change tied to the tax-shelter scrutiny. A KPMG spokesman says the firm doesn't discuss personnel matters. Since February 2004, KMPG has been under criminal investigation by the Justice Department's U.S. attorney's office in Manhattan for its sale of tax shelters in the 1990s and as recently as 2002. KPMG's marketing effort was publicized in hearings in 2003 by the Senate Permanent Subcommittee on Investigations, which concluded in a report that KPMG had been an "active and, at times, aggressive" promoter of tax shelters to individuals and corporations that were later determined by the Internal Revenue Service to be potentially abusive or illegal tax shelters.
 Diya Guollapalli, "KPMG Ousts Executive, Partners; Steps Tied to Tax-Shelter Scrutiny," The Wall Street Journal, April 28, 2005; Page C2 ---,,SB111465047380019062,00.html?mod=todays_us_money_and_investing

Bob Jensen's threads on KPMG's abusive tax shelters that exceeded $1 billion in revenue to the firm are at 

David Reilly and Alessandra Galloni, "Facing Lawsuits, Parmalat Auditor Stresses Its Disunity:  Deloitte Presented Global Face, But Says Arms Acted Alone; E-Mail Trail Between Units:  A Liability Threat for Industry,"  The Wall Street Journal, April 28, 2005; Page A1 ---,,SB111464808089519005,00.html?mod=todays_us_page_one The Big Four accounting firms -- Deloitte, PricewaterhouseCoopers, KPMG and Ernst & Young -- have long claimed in court cases that their units are independent and can't be held liable for each other's sins. U.S. courts to date have backed that argument. The firms say the distinction is important -- allowing them to boost the efficiency of the global economy by spreading uniform standards of accounting around the world, without worrying that one unit's missteps will sink the entire enterprise. But Deloitte e-mails seized by Italian prosecutors and reviewed by The Wall Street Journal, along with documents filed in the court cases, show how the realities of auditing global companies increasingly conflict with the legal contention that an accounting firm's units are separate. The auditing profession -- which plays a central role in business by checking up on companies' books -- has become ever-more global as the firms' clients have expanded around the world. But that's creating new problems as auditors face allegations that they bear liability for the wave of business scandals in recent years.
Bob Jensen's threads on Deloitte's legal woes are at
Bob Jensen's threads on the future of auditing are at

Beware of Counterfeit U.S. Postal Money Orders
In the last six months, the F.B.I. and postal inspectors say, international forgers - mostly in Nigeria, but also in Ghana and Eastern Europe - appear to have turned new attention to the United States postal money order. More than 3,700 counterfeit postal money orders were intercepted from October to December, exceeding the total for the previous 12 months, according to postal inspectors. Moreover, 160 arrests have been made in the United States since October in cases where people have been suspected of knowingly receiving fraudulent postal money orders or trying to cash them, Paul Krenn, a spokesman for the United States Postal Inspection Service, said.
Tom Zeller Jr., "Authorities Note Surge in Online Fraud Involving Money Orders," The New York Times, April 26, 2005 ---
Bob Jensen's threads on consumer fraud are at

Amazon may not be the place to plead your case
Several months ago, Christy Serrato bought a iPod mini digital-music player through Inc.'s Web site. When it failed to arrive, she sent a number of e-mails to the seller, without a reply. Only after another round of e-mails did she finally get a refund, roughly two months after her purchase. The challenge for Ms. Serrato, a software saleswoman in San Francisco, was that, while she used Amazon's Web site -- the seller was actually one of the 925,000 independent merchants that sell through Amazon. When one of these purchases goes awry, consumers aren't always sure who is responsible, or even where to complain.
Mylene Mangalindan, "Who's Selling What on Amazon:  Some Shoppers Are Confused As Independent Merchants Make Up More of Site's Sales," The Wall Street Journal,  April 28, 2005; Page D1 ---,,SB111464129681318824,00.html?mod=todays_us_personal_journal

During his four years as senior chairman of Tyson Foods Inc., the perks Don Tyson received were striking even in an era of lavish executive compensation. They included $464,132 for personal use by him and his family and friends of company-owned homes in the English countryside and Cabo San Lucas, Mexico, $20,000 for oriental rugs, $18,000 of antiques, $84,000 in lawn maintenance at five homes where he and his family and friends lived, an $8,000 horse, and other jewelry, artwork, vacations and theater tickets. The company also paid Mr. Tyson $1.1 million to cover his personal income-tax liability associated with all these benefits. Yesterday, the Securities and Exchange Commission said those perks were among $3 million in benefits the Springdale, Ark., company paid Mr. Tyson between 1997 and 2001. As part of a broad crackdown on hidden executive compensation, the SEC said that Tyson Foods failed to disclose over $1 million in perks and made misleading or inadequate disclosures about other benefits.
Deborah Solomon, "In SEC Complaint, Tale of Chicken Mogul Feathering His Nest:  Don Tyson Took In Millions In Poorly Disclosed Perks; $84,000 in Lawn Care," The Wall Street Journal, April 29, 2005; Page A1 ---,,SB111470683583119695,00.html?mod=todays_us_page_one

Equitable trial: E&Y fights for its future
In one of the biggest court cases in British accounting history, Ernst & Young battles it out with life assurance firm, Equitable Life, at London's High Court. At stake? The future of the Big Four firm. Equitable Life's £2bn lawsuit against Ernst & Young, its former auditors, kicked off on Monday 11 April, 2005. Equitable is suing E&Y for alleged negligence in the overseeing of its accounts in the late 1990s. As well as explaining their cases in court, both parties submitted written explanations of their case. Here, you can read Equitable's claim against the Big Four firm, and E&Y's furious response.
"Equitable trial: E&Y fights for its future," Financial Director, April 26, 2005 ---
Bob Jensen's threads on the legal woes of E&Y ---

Large CPA firms are in a settlement mood
Deloitte & Touche LLP is expected to announce today it will pay a $50 million fine to settle Securities and Exchange Commission civil charges that it failed to prevent massive fraud at cable company Adelphia Communications Corp. In another case, the now-largely defunct accounting firm Arthur Andersen LLP agreed to a $65 million settlement in a class-action suit by investors in WorldCom Inc. over losses from stocks and bonds of the once-highflying telecommunications company now known as MCI Inc. These follow a $22.4 million settlement the SEC reached last week with KPMG LLP related to its audits of Xerox Corp. from 1997 through 2000, and a $48 million settlement by PricewaterhouseCoopers LLP last month to end class-action litigation over its audit of Safety-Kleen Corp., an industrial-waste-services company that filed for bankruptcy-court protection in 2000.
Diya Gullapalli, "Deloitte to Be Latest to Settle In Accounting Scandals," The Wall Street Journal, April 26, 2005; Page A3 ---,,SB111444033641815994,00.html?mod=todays_us_page_one
There are of course other suits that are not settled. 
Bob Jensen's threads on the legal woes of large auditing firms are at

Adelphia Communications Corp. agreed to a $715 million settlement
Adelphia Communications Corp. agreed to a $715 million settlement with the U.S. Justice Department and Securities and Exchange Commission to resolve claims stemming from the corporate looting and accounting-fraud scandal that toppled the country's fifth-largest cable-television operator.
Peter Grant and Deborah Solomon," "Adelphia to Pay $715 Million In 3-Way Settlement," The Wall Street Journal,  April 26, 2005, Page A3 ---,,SB111445555592816193,00.html?mod=todays_us_page_one

But $715 only goes a small way in replacing the billions lost by creditors and stockholders
The family that founded the Adelphia Communications Corporation, the big cable operator, will forfeit almost its entire fortune to the company to pay for a $715 million fund to compensate investors who lost money when the company collapsed, the government said yesterday.

Geraldine Fabrikant, "Rigas Family to Cede Assets to Adelphia," The New York Times, April 26, 2005 ---

At least they will spend a little time in prison
A federal judge in Houston gave two former Merrill Lynch & Co. officials substantially shorter prison sentences than the government was seeking in a high-profile case that grew out of the Enron Corp. scandal. In a separate decision yesterday, another Houston federal judge said that bank-fraud charges against Enron former chairman Kenneth Lay would be tried next year, immediately following the conspiracy trial against Mr. Lay, which is set for January. Judge Sim Lake had previously separated the bank-fraud charges from the conspiracy case against Mr. Lay and his co-defendants, Enron former president Jeffrey Skilling and former chief accounting officer Richard Causey. The government had been seeking to try Mr. Lay on the bank-fraud charges within about the next two months . . . Judge Ewing Werlein, Jr. sentenced former Merrill investment banking chief Daniel Bayly to 30 months in federal prison and James Brown, who headed the brokerage giant's structured-finance group, to a 46-month term. The federal probation office, with backing from Justice Department prosecutors, had recommended sentences for Messrs. Bayly and Brown of about 15 and 33 years, respectively. Mr. Brown had been convicted on more counts than Mr. Bayly.
John Emshwiller and Kara Scannell, "Merrill Ex-Officials' Sentences Fall Short of Recommendation," The Wall Street Journal, April 22, 2005, Page C3 ---,,SB111410393680013424,00.html?mod=todays_us_money_and_investing
Jensen Comment:  I double dare you to go to my "Rotten to the Core" threads and search for every instance of "Merrill" ---

Bob Jensen's threads on the Enron scandals are at

Coke cooked the books
Richard Wessel, District Administrator of the Commission's Atlanta District Office, stated, "MD&A requires companies to provide investors with the truth behind the numbers. Coca-Cola misled investors by failing to disclose end of period practices that impacted the company's likely future operating results." Katherine Addleman, Associate Director of Enforcement for the Commission's Atlanta District Office, stated, "In addition, Coca-Cola made misstatements in a January 2000 Form 8-K concerning a subsequent inventory reduction and in doing so continued to conceal the impact of prior end of period practices and further mislead investors." In its order, the Commission found that, at or near the end of each reporting period between 1997 and 1999, Coca-Cola implemented an undisclosed "channel stuffing" practice in Japan known as "gallon pushing" for the purpose of pulling sales forward into a current period. To accomplish gallon pushing's purpose, Japanese bottlers were offered extended credit terms to induce them to purchase quantities of beverage concentrate the bottlers otherwise would not have purchased until a following period. As Coca-Cola typically sells gallons of concentrate to its bottlers corresponding to its bottlers' sales of finished products to retailers, typically bottlers' concentrate inventory levels increase approximately in proportion to their sales of finished products to retailers.
Bob Jensen's threads on previous channel stuffing revenue recognition frauds are at

Accounting rules are blamed for failure to stockpile children's vaccines
Although opinions differ, it appears that the Pediatric Vaccine Stockpile has become an innocent bystander wounded in the government's crackdown on deceptive accounting practices. Vaccine supply dwindles No one has accused the vaccine manufacturers of wrongdoing. However, they can no longer treat as revenue the money they get when they sell millions of doses of vaccine to the stockpile because the shots are not delivered until the government calls for them in emergencies. Instead, the vials are held in the manufacturers' warehouses, where they are considered unsold in the eyes of auditors, investors and Wall Street . . .The ranking Democrat on the Committee on Government Reform, Waxman said he is willing to sponsor legislation to carve out a legal exception that would allow companies to "recognize" revenue from sales to the vaccine stockpile — if such a radical step becomes necessary. One of the companies, however, said its problem is not with "revenue recognition" but with the details of managing the vaccine inventory. Other parties were reluctant to discuss possible solutions or who, if anyone, is to blame for the empty shelves. The SEC, which enforces accounting practices, would not speak on the record. HHS officials would not make available the person talking to the SEC on the matter. The department referred questions to its subordinate agency, the CDC, whose officials said important decisions about the stockpile are being made at the department level.
"Pediatric vaccine stockpile at risk Many drug makers hesitant to supply government," Washington Post via MSNBC, April 16, 2005 ---
Bob Jensen's threads on revenue accounting are at

It's always serious when the NASD takes action
Citigroup Inc.'s Smith Barney unit expressed disappointment with an arbitration ruling awarding $2.5 million to an investor who alleged he received bad stock-option advice from brokers in Citigroup's Smith Barney branch in Atlanta. Smith Barney spokeswoman Kimberly Atwater said the company was "disappointed with this decision, which is inconsistent with those made in other cases." Virginia resident Travis Brown claimed during the National Association of Securities Dealers hearing that the brokers advised him to use an "exercise and hold" strategy with his WorldCom stock options from 1999 to 2000. Mr. Brown's account lost value as WorldCom's stock price began to tumble in 2000.
"Ruling Disappoints Smith Barney," The Wall Street Journal, April 12, 2005; Page A6 ---,,SB111327048205304284,00.html?mod=todays_us_page_one
Bob Jensen's threads on "Rotten to the Core" are at

Labor officials doing personal things at an increasing rate
But Mr. Yud said that if the department (Department of Labor) had been doing audits as vigorously as in decades past, it might have prevented corruption like the embezzlement of more than $2.5 million by leaders of the Washington Teachers Union. Among the items bought with the stolen union money were a $57,000 Tiffany tea service for 24, a $13,000 plasma television and a $20,000 custom-tailored mink coat. There were also the 277 checks totaling $41,309 that the secretary of an autoworkers' local wrote to herself over two and a half years, and the dues money stolen by the office secretary of a Minnesota plumbers' local, who, in ultimately pleading guilty, agreed to repay $54,469. Since 2001, department officials say, more than 500 union officials have been indicted on charges including fraud and embezzlement.
Steven Greenhouse, "Labor Dept. Plans Increasing Scrutiny of Union Finances," The New York Times, April 17, 2005 ---

Ex-Specialists Face Indictment For NYSE Deals
Several former New York Stock Exchange traders who oversaw stock auctions on the floor face indictment today on charges that they traded to benefit their firms at the expense of their customers, people familiar with the matter said. The criminal probe by federal prosecutors in New York City grew out of a civil case against the seven firms that employ the traders, known as specialist firms. Without admitting or denying wrongdoing, those NYSE specialist firms last year paid a total of $247 million to settle charges that their employees interfered with customer orders or put them aside, usually for just a few crucial seconds, so they could trade their firm's own money, taking advantage of their knowledge of which way the market was moving.
Kara Scannell and Aaron Lucchettii, "Ex-Specialists Face Indictment For NYSE Deals," The Wall Street Journal, April 12, 2005; Page C1 ---,,SB111327015694304271,00.html?mod=todays_us_money_and_investing

Sounds good, but there are well known dangers
For years, a company's highest boss often got rewarded very well for very little performance. Now, in response to a growing outcry from investors -- and their increased clout -- more boards are raising the bar even higher so their leader can't reap supersized pay without supersized performance. Hints of the nascent trend include: bonuses partly based on how a company stacks up against others; difficult triggers for all equity awards; elimination of guaranteed minimum pay; and severance accords that forbid windfalls for poor performance.
Joann S. Lublin, "Goodbye to Pay for No Performance," The Wall Street Journal, April 11, 2005, Page R1 ---,,SB111265005063397590,00.html?mod=todays_us_the_journal_report
Jensen Comment:  Much depends upon how "performance" is evaluated.  If it is based on trends in annual earnings this can be a formula for disaster.  A CEO wanting the highest current bonus available can "eat the company's seed corn" so to speak.  Some items of expense, R&D comes to mind reap a harvest in future years rather than current years.  It is well known that the CEOs of many companies are willing to hurt the future in order to get their current bonuses and other performance-based compensation short-term rewards.

Discontent is rightfully rising over CEO pay versus performance
In fact, the boss enjoyed a hefty raise last year. The chief executives at 179 large companies that had filed proxies by last Tuesday - and had not changed leaders since last year - were paid about $9.84 million, on average, up 12 percent from 2003, according to Pearl Meyer & Partners, the compensation consultants. Surely, chief executives must have done something spectacular to justify all that, right? Well, that's not so clear. The link between rising pay and performance remained muddy - at best. Profits and stock prices are up, but at many companies they seem to reflect an improving economy rather than managerial expertise. Regardless, the better numbers set off sizable incentive payouts for bosses. With investors still smarting from the bursting of the tech bubble, the swift rebound in executive pay is touching some nerves. "The disconnect between pay and performance keeps getting worse," said Christianna Wood, senior investment officer for global equity at Calpers, the California pension fund. "Investors were really mad when pay did not come down during the three-year bear market, and we are not happy now, when companies reward executives when the stock goes up $2."
Claudia H. Deutsch, "My Big Fat C.E.O. Paycheck," The New York Times, April 3, 2005 ---
Bob Jensen's threads on corporate fraud are at
Bob Jensen's updates on fraud are at

How close is the A.I.G. fraud of today to the Enron fraud of yesterday?
There are, however, some disturbing similarities between A.I.G. and Enron: Asleep-at-the-switch auditors. Secretive off-balance-sheet entities that should have been included on the company's financial statements but weren't. A management team willing to try any number of accounting tricks to make the company's results appear better than they actually were. And one more likeness: As A.I.G.'s shares have plummeted, the financial position of one of the company's
Gretchen Morgenson, "A.I.G.: Whiter Shade of Enron," The New York Times, March 3, 2005 ---
Bob Jensen's threads on the A.I.G. fraud are at

A billion here, a billion there --- PS the debits are on the left
The American International Group, the embattled insurance giant, said last night that an in-depth examination of its operations had turned up additional accounting improprieties going back to 2000 that would reduce its net worth by $2.7 billion, or $1 billion more than it had previously estimated.
Gretchen Morgenson, "Giant Insurer Finds $1 Billion More in Flaws, The New York Times, May 2, 2005 ---
Bob Jensen's updates on fraud in the insurance industry are at

Flashback on AIG Fraud (forwarded to me by Miklos Vasarhelyi []
American International Group Inc. agreed to pay a $10 million fine to settle Securities and Exchange Commission allegations that the insurance company participated in an accounting fraud at Brightpoint Inc. The SEC also alleged that New York-based American International, the world's largest insurer by market value, failed to cooperate with its investigation. The SEC charged Brightpoint with accounting fraud in a scheme to conceal losses by using an AIG insurance policy. "AIG worked hand-in-hand with Brightpoint personnel to custom-design a purported insurance policy that allowed Brightpoint to overstate its earnings by a staggering 61 percent," said Wayne M. Carlin, director of SEC's Northeast Regional Office in New York. Carlin said the transaction amounted to a "round-trip" of cash from Brightpoint to AIG and back to Brightpoint. In the past year, the SEC also has charged energy companies, such as Reliant Resources Inc. and Reliant Energy Inc., in "round-trip" arrangements that misled investors.
Reuters, "AIG Pays $10 Million Fine in Brightpoint Accounting Fraud," The New York Times, September 11, 2003
You can read more about the recent AIG scandals at
You can read more about round tripping at
I have a longer quotation on this article at the above link.  You can also read about Enron's round trips to the plate.

Over the last two weeks we have been flooded with revelations of problems with AIG accounting, in particular, some "round trip like" transactions between AIG and Berkshire's General Re: that will reduce AIG's net worth by 2% max according to AIG. However, a much deeper issue came to light that has widely been ignored by the press and maybe by the regulators and the FASB. AIG had extensive dealings with offshore companies which were also owned or controlled by AIG or its executives. These companies paid compensation to the executives that was not included in AIG's 10Ks. As IAG and / or its executives including Mr. Grenberg controlled for example Richmond and Union Reinsurance a Barbados based company the relationship was not arms-length... consequently it is possible that the deals included substantial "extra fat" for rich payments for these same executives in the privately held companies... This arrangement makes it feel very much like Mr. Fastow's Enron SPEs. As I have argued many times, any privately held company or partnership that does extensive business with publicly held companies should be subject to the same onus of disclosure of public companies... consequently the distinction is very murky and like some European countries most companies publicly or privately held including partnerships, LLPs and LLCs should have SEC-like disclosure requirements.
April 3, 2005 message from Miklos Vasarhelyi []

The Supreme Court overturned the conviction of the Arthur Andersen accounting firm for destroying documents related to its Enron account before the energy giant's collapse. The ruling is not based upon guilt or innocence.  It is based only on a technicality in the judge's instructions to the jury.  The ruling will not lead to a revival of this once great firm that in the years preceding its collapse became known for some terrible audits of firms like Waste Management, Enron, and Worldcom.  For more see


"AIG Probes Bring First Charges:  New York Suit Accuses Insurer, Greenberg and Ex-Finance Chief Of Manipulating Firm's Results," by Ian McDonald and Theo Francis, The Wall Street Journal, May 27, 2005; Page C1 ---,,SB111712238633844135,00.html?mod=todays_us_money_and_investing 

In the first formal charges to come

In the first formal charges to come from the probes of American International Group Inc.'s accounting, New York state authorities sued AIG, former Chairman Maurice R. "Hank" Greenberg and the insurance company's former chief financial officer, painting a picture of widespread accounting gimmickry aimed at duping regulators and investors.

New York State Attorney General Eliot Spitzer and the New York State Insurance Department alleged that AIG engaged in "sham transactions," hid losses and created false income. On one occasion, Mr. Greenberg even laughed at a joke about one of the alleged maneuvers, the civil lawsuit says.

The goal, the suit contends, was to exaggerate the strength of the company's core underwriting business, propping up the price of one of the nation's most widely held stocks.

AIG shares rose 3% yesterday after the lawsuit was announced, as investors saw that the charges were civil, not criminal, though a criminal investigation of individuals continues. AIG is the world's biggest publicly traded seller of property-casualty insurance to companies and is the largest life insurer in the U.S., as measured by premiums.

Continued in article

Bob Jensen's threads on insurance company frauds are at

What has been one of the most massive, if not these most massive, fraud in the history of the U.S.?

The attorney/physician rip off on phony asbestos health damage claims. 

"Diagnosing for Dollars A court battle over silicosis shines a harsh light on mass medical screeners—the same people whose diagnoses have cost asbestos defendants billions," by Roger Parloff, Fortune, June 13, 2005, pp. 96-110 ---,15114,1066756,00.html

How, then, to account for this: Of 8,629 people diagnosed with silicosis now suing in federal court in Corpus Christi, 5,174—or 60%—are "asbestos retreads," i.e., people who have previously filed claims for asbestos-related disease.

That anomaly turns out to be just one of many in the Corpus Christi case that sorely challenge medical explanation. At a hearing in February, U.S. District Judge Janis Graham Jack characterized the evidence before her as raising "great red flags of fraud," and a federal grand jury in Manhattan is now looking into the situation, according to two people who have been subpoenaed.

The real importance of those proceedings, however, is not what they reveal about possible fraud in silica litigation but what they suggest about a possible fraud of vastly greater dimensions. It's one that may have been afflicting asbestos litigation for almost 20 years, resulting in billions of dollars of payments to claimants who weren't sick and to the attorneys who represented them. Asbestos litigation—the original mass tort—has bankrupted more than 60 companies and is expected to eventually cost defendants and their insurers more than $200 billion, of which $70 billion has already been paid.

The odor around asbestosis diagnosis has been so foul for so long that by 1999, professor Lester Brickman of the Benjamin N. Cardozo School of Law was referring to asbestos litigation as a "massively fraudulent enterprise." At the request of his defamation lawyer, Brickman says, he toned that down to "massive, specious claiming"

Continued in the article

Bob Jensen's working paper on the history of fraud in the U.S. is at

From The Wall Street Journal Weekly Accounting Review on April 1, 2005

TITLE: AIG's Mistakes Over Accounting May Be in Billions
REPORTER: Monica Langley and Ian McDonald
DATE: Mar 25, 2005 PAGE: A1 LINK:,,SB111170837700789265,00.html 
TOPICS: Accounting Changes and Error Corrections, Advanced Financial Accounting, Regulation, Reserves, Revenue Recognition, Auditing, Consolidation

SUMMARY: AIG "disclosed the initial findings of its internal investigation in a conference call Tuesday evening that its lawyers initiated with authorities from the New York Insurance Department, the New York Atotrney General and the Securities and Exchange Commission. The internal investigation has focused on questionable deals over the past five years..." undertaken with reinsurers.

1.) What is re-insurance? What is the purpose of undertaking a re-insurance contract?

2.) What is the revenue recognition issue at the heart of this investigation into AIG's accounting practices? What accounting standard (or standards) establishes required practice in this area?

3.) What consolidation issue also is being questioned in this investigation? What accounting standard (or standards) addresses requirements for these practices?

4.) How must auditors assess the propriety of transactions described in this article? List and explain all procedures you think might be necessary.

5.) Do you think auditors face a risk of not uncovering problematic practices, even systemic ones, covering a period of five years and relating to multiple accounting areas? Support your answer, then explain what audit practices must be used to address this risk.

6.) Refer to the related article. AIG "is considering hiring forensic accountants to work with them..." What is a forensic accountant? How might such an accountant's work be used in this investigation?

7.) Again refer to the related article. "AIG hasn't yet determined whether to restate past years' earnings or take a charge against current earnings, according to one person familiar with the matter." Is there a choice between these two methods of handling any problems uncovered by this investigation? Explain, supporting your answer with reference to the accounting literature and the nature of the issues discussed in these articles.

8.) Again refer to the related article. "AIG continues to 'believe that the matters subject to review are unlikely to result in significant changes to the company's financial position,' meaning shareholders' equity..." Define the terms "financial position" and "shareholders' equity". Would you use the terms interchangeably? How are they related? How is shareholders' equity particularly of concern in the insurance industry, as in the banking industry?

Reviewed By: Judy Beckman, University of Rhode Island

TITLE: SEC Subpoenas Senior Executives In Probe at AIG
REPORTER: Monica Langley, Deborah Solomon, Theo Francis and Ian McDonald
ISSUE: Mar 28, 2005

A quote from Katherine
After months of government investigations of financial-engineering products in the insurance industry, the nation's accounting rule makers said they will consider tightening standards that govern how companies account for their dealings with insurance companies. The Financial Accounting Standards Board yesterday voted unanimously to add a project to its agenda aimed at clarifying when contracts structured as insurance policies actually transfer risk from the policies' buyers, and when they don't. The FASB's decision is an acknowledgment that the current accounting rules for the insurance industry in many respects are porous. "We've got a specific problem that's been brought to our attention in which there are allegations that the accounting is not representationally faithful and not comparable," said Katherine Schipper, a member of the FASB, the private-sector body that sets generally accepted accounting principles. "So we need to craft a solution that addresses that specific set of allegations."
Diya Gullapalli, "FASB Weighs Its Finite-Risk Rules:  Accounting Body to Start By Defining 'Insurance Risk'; Changes Could Take Years, The Wall Street Journal, April 7, 2005; Page C3

After months of government investigations of financial-engineering products in the insurance industry, the nation's accounting rule makers said they will consider tightening standards that govern how companies account for their dealings with insurance companies.

The Financial Accounting Standards Board yesterday voted unanimously to add a project to its agenda aimed at clarifying when contracts structured as insurance policies actually transfer risk from the policies' buyers, and when they don't. The FASB's decision is an acknowledgment that the current accounting rules for the insurance industry in many respects are porous.

"We've got a specific problem that's been brought to our attention in which there are allegations that the accounting is not representationally faithful and not comparable," said Katherine Schipper, a member of the FASB, the private-sector body that sets generally accepted accounting principles. "So we need to craft a solution that addresses that specific set of allegations."

In recent years, many companies are believed to have used structured insurance-industry products to burnish their financial statements. The FASB's current standards don't define even basic concepts like "insurance contract" and "insurance risk." FASB members said that defining those terms will be their first order of business as they tackle the project. For years, the lack of clarity over what qualifies for insurance accounting, combined with lax public-disclosure requirements, made it fairly easy for companies to interpret the rules aggressively without fear of attracting scrutiny by outside investors.

The accounting for "finite-risk" reinsurance policies is at the heart of regulators' investigations at a host of insurance companies, including American International Group Inc. and MBIA Inc. These nontraditional insurance products blend elements of insurance and financing. To qualify for more-favorable insurance accounting, policies must transfer sufficient risk of loss to a seller from a buyer. Regulators have contended that, in some cases, finite-risk policies appear more akin to loans.

FASB members debated several approaches yesterday. Possibilities include enhancing disclosure rules, issuing new guidance in a question-and-answer format, and amending one of the key standards on risk transfer in reinsurance contracts, known as Financial Accounting Standard 113. Formally amending FAS 113 could require months or years of work, however.

The subject of risk transfer also is under review by the National Association of Insurance Commissioners, whose members are the insurance industry's chief regulators. In addition, the London-based International Accounting Standards Board and the U.S. Securities and Exchange Commission's staff are considering issuing new guidance on accounting for finite-risk reinsurance. With the IASB also in the kitchen, Michael Crooch, an FASB board member, wonders if the FASB's work on the matter will be "seen at least across the pond as the FASB meddling or getting ahead of them."

The least likely scenario would be for the FASB to adopt what, until recently, had been a widely used rule of thumb in the accounting and insurance industries for determining when risk is transferred to an insurer. This held that risk is transferred when there is a 10% chance of a 10% loss by an insurer or reinsurer. That industry guidepost -- developed largely because of the FASB's lack of guidance on the subject -- today is being frowned upon because of its arbitrariness and its openness to abuse.

Large auditing firms are trying to stay on top of finite-risk reinsurance rules, as well. On its internal Web site, for example, PricewaterhouseCoopers LLP, which is AIG's outside auditor, recently posted a 20-page summary for personnel and clients on accounting issues surrounding these products. And at Grant Thornton LLP, the nation's fifth-largest accounting firm, Chief Executive Ed Nusbaum said: "We're more on the lookout for insurance transactions with these accounting issues."

April 7, 2005 reply from


This looks relevant to your quote from Katherine Schipper.


"Accounting for the Abuses at AIG," Insurance and Pensions at the Wharton School of Business," ---

Improper Use of Finite Policies

But in practice, finite policies have sometimes been used improperly. In 2000 and 2001, AIG's Greenberg asked General Re to do an unusual deal involving a bundle of finite contracts General Re had written for clients. AIG took over the obligation to pay up to $500 million in claims on the contracts. At the same time, General Re passed to AIG $500 million in premiums the clients had paid. AIG paid General Re a $5 million fee for moving these contracts to AIG's books.


Last year, General Re reported the deal to investigators who were questioning a number of reinsurers about finite policies. This deal carried a red flag because it was backwards: Typically, it would be AIG seeking a finite policy to shift risk to General Re. Because the $500 million in premiums had to be paid back to General Re, AIG seemed to be losing money on the deal, not making it. So why had Greenberg asked to take over those contracts?


In accounting for the deal, AIG tallied the premiums as $500 million in revenue and applied that amount to its reserve funds used to pay potential claims. This helped satisfy shareholders who had been concerned AIG did not have enough in reserve.


The issue in this deal, as in many finite insurance contracts, is whether AIG was providing insurance coverage or receiving a loan. To be insurance, AIG would have to assume a risk of loss. An industry rule of thumb known as "10/10" says the insurer should face, at a minimum, a 10% chance of losing 10% of the policy amount for the contract to be considered insurance.


In the absence of that degree of risk, the premiums transferred from General Re to AIG, and repayable later, would be a loan. AIG would then not be able to count the $500 million in premiums as additional reserves, as it had.


On March 30, AIG directors announced that: "Based on its review to date, AIG has concluded that the General Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance."


As a result, the company said it would reduce its reserve figure by $250 million and show that liabilities had increased by $245 million. However, it added, these changes would have "virtually no impact" on the company's financial condition. Bottom line: The AIG-General Re deal was an accounting gimmick to make AIG's reserves look healthier than they were -- an apparent effort to deceive regulators, analysts and shareholders.


More Cases of Questionable Accounting

The directors then surprised observers by announcing they had uncovered a number of additional cases of questionable accounting.


The most serious involved reinsurance contracts AIG had taken with a Barbados reinsurer, Union Excess, allowing AIG's risk to pass to the other company and off AIG's books. AIG found that Union did business exclusively with AIG subsidiaries, and that Union was partially owned by Starr International Company Inc. (SICO), a large AIG shareholder controlled by a board made up of current and former AIG managers. Hence, the AIG statement said, SICO could be viewed as an AIG unit, or "consolidated entity," and SICO's risks were therefore actually AIG's. As a result, AIG had to reduce its shareholders' equity by $1.1 billion.


Another case involved a Bermuda insurer, Richmond Insurance Company, that the directors found to be secretly controlled by AIG. A third concerned Capco Reinsurance Company, another Barbados insurer, and "involved an improper structure created to recharacterize underwriting losses as capital losses," the directors said. Fixing this meant listing Capco as a consolidated entity and converting $200 million in capital losses to underwriting losses.


Yet another case involved $300 million in income AIG improperly claimed for selling outside investors covered calls on bonds in AIG's portfolio. Covered calls are supposed to give their owners the option to buy bonds at a set price for a given period, but AIG used other derivatives transactions to assure it could retain the bonds.


The directors also stated that certain debts owed to AIG might be unrecoverable, resulting in after-tax charges of $300 million. And they noted that the company was revising accounting for deferred acquisition costs and other expenses involving some AIG subsidiaries, resulting in as much as $370 million in corrections.


Some of the revelations seemed eerily similar to ones raised in the Enron case, which included use of little known offshore subsidiaries to hide liabilities, although the scale of the abuse so far appears to be far smaller at AIG.


The scandal highlights one of the dilemmas of American accounting, says Catherine M. Schrand, professor of accounting at Wharton. "We have one-size-fits-all accounting for firms in this country. If the standard-setters try to make it too specific and take out all the gray areas, then they would have a problem creating financial statements that are relevant."


The degree of risk assumed by a company that takes out a finite insurance policy is difficult to measure, so it may not be absolutely clear, even to the most well intentioned accountant, whether the policy should be counted as insurance or a loan. Companies like AIG are so big, and their accounting so complex, that it's impossible to write regulations to prevent all abuse, Strand suggests. "They will just find another way to do it.... Flexibility gives companies the opportunity to make their financial statements better. But it also gives them the opportunity to abuse the rules."

KPMG settles Xerox case for $22.475 million in a rare "fraud" action
The Securities and Exchange Commission has announced that KPMG LLP has agreed to settle the SEC's charges against it in connection with the audits of Xerox Corp. from 1997 through 2000. As part of the settlement, KPMG consented to the entry of a final judgment in the SEC's civil litigation against it pending in the U.S. District Court for the Southern District of New York. The final judgment, which is subject to approval by the Honorable Denise L. Cote, orders KPMG to pay disgorgement of $9,800,000 (representing its audit fees for the 1997-2000 Xerox audits), prejudgment interest thereon in the amount of $2,675,000, and a $10,000,000 civil penalty, for a total payment of $22.475 million. The final judgment also orders KPMG to undertake a series of reforms designed to prevent future violations of the securities laws.
Jensen Comment:  The SEC has filed many civil lawsuits against auditing firms.  However, it is rare to actually accuse a CPA firm of outright fraud.  I keep a scrapbook of the legal problems of CPA firms, including KPMG at

On January 23, 2003 I pasted in the following from the The Wall Street Journal 

SEC Set to File Civil Action Against KPMG Over Xerox The Securities and Exchange Commission is set to file civil-fraud charges against KPMG LLP as early as next week for its role auditing Xerox Corp., which last year settled SEC accusations of accounting fraud, people close to the situation said. The expected action by the SEC would represent the second time in recent years that the SEC has charged a major accounting firm with fraud. It comes at a crucial juncture for the accounting industry, which is attempting to rebuild its credibility and make changes following more than a year of accounting scandals at major corporations. It also indicates that, while the political furor over corporate fraud has died down, the fallout may linger for some time. 
The Wall Street Journal, January 23, 2003 ---,,SB1043272871733131344,00.html?mod=technology_main_whats_news 
Also see 

If the S.E.C. files a complaint, KPMG would become only the second major accounting firm to face such charges in recent decades. The first was Arthur Andersen, which settled fraud charges in connection with its audit of Waste Management in 2001, the year before it was driven out of business as a result of the Enron scandal.

The S.E.C. settled a complaint against Xerox in April, when the company said it would pay a $10 million fine and restate its financial results as far back as 1997. The company later reported that the total amount of the restatement was $6.4 billion, with the effect of lowering revenues and profits in 1997, 1998 and 1999 but raising them in 2000 and 2001.

Bob Jensen's threads on the legal woes of CPA firms are at

"Krispy Kreme Ousts Six Executives," by Rick Brooks, The Wall Street Journal, June 22, 2005; Page B3 ---,,SB111936745439365294,00.html?mod=todays_us_marketplace

Six top executives at Krispy Kreme Doughnuts Inc. resigned or retired after a special committee of directors investigating the company's finances concluded they should be discharged.

The Winston-Salem, N.C., company refused to identify the ousted officers, though it said the six included senior executives who oversaw or helped lead the company's operations, finance, business development, manufacturing and distribution. Krispy Kreme spokeswoman Brooke Smith declined to comment beyond a written statement from the company and wouldn't identify the discharged executives.


"Insurer's Filings Had Accounting Clues," By Jonathan Weil and Theo Francis, The Wall Street Journal, April 11, 2005, Page C1 ---,,SB111318484816103175,00.html?mod=todays_us_money_and_investing

It might have taken an eagle eye and extensive knowledge of accounting rules to spot the no-expense treatment as a potential problem. But unlike most of the accounting issues AIG disclosed March 30 -- involving complex insurance contracts, derivative financial instruments and offshore reinsurance dealings -- the information about the stock plan was out there for anybody to see. AIG now says it will change its policy to treat such payments as expenses -- though it has stopped short of saying the original accounting was wrong.

Here is why AIG's prior accounting treatment looks questionable to some accounting specialists: Under the accounting rules for stock compensation, if a principal stockholder of a company establishes a stock plan to pay that company's employees, the company must account for the payments as an expense on its own income statement.

The rules define a principal stockholder as one that either owns 10% or more of a company's common stock or has the ability to exert significant influence over a company's affairs, directly or indirectly.

AIG spokesman Chris Winans declined to clarify whether AIG believes the prior accounting treatment was improper. He said AIG will provide further details when it files its 2004 annual report this month.

The history of the rules governing such stock plans dates to a June 1973 pronouncement by the now-defunct Accounting Principles Board. David Norr, a board member at the time, recalled that it was responding to a move by Ray Kroc, McDonald's Corp.'s founder, to distribute portions of his own stock to the burger chain's employees.

The accounting board noted the difficulty for outsiders of establishing whether a principal stockholder's intent is to satisfy his generous nature or attempt to increase his investment's value. If the latter, it said, "the corporation is implicitly benefiting from the plan by retention of, and possibly improved performance by, the employee," in which case "the benefits to a principal stockholder and to the corporation are generally impossible to separate."

Continued in the article

From The Wall Street Journal's Accounting Weekly Review on April 8, 2005

TITLE: SEC Brings New Federal Oversight to Insurance Industry with Probes
REPORTER: Deborah Solomon
DATE: Apr 01, 2005
TOPICS: Insurance Industry, Regulation, Securities and Exchange Commission, Accounting

SUMMARY: "The Securities and Exchange Commission [SEC], using its power as an enforcer of accounting rules, is asserting for the first time in 60 years a key role for federal oversight of the insurance industry."

1.) Why is the insurance industry regulated? Why is it regulated primarily by the states as opposed to the federal government?

2.) What accounting measures are used to regulate the insurance industry? List those that are mentioned in the article and any that you know of from experience or reading.

3.) How might improper transactions be undertaken to "dress up" the accounting information that is used in the regulatory process over the insurance industry? As one example, specifically comment on the product referred to in the article as "thinly disguised loans". (Hint: you may refer to the related article to help with this answer.)

4.) How has the SEC used its regulatory control over accounting issues to effect change in industries over which it has little jurisdiction, such as the insurance industry?

Reviewed By: Judy Beckman, University of Rhode Island

TITLE: AIG Admits 'Improper' Accounting
REPORTER: Ian McDonald, Deborah Solomon, and Theo Francis
ISSUE: Mar 31, 2005


Bob Jensen's threads on the insurance industry accounting scandals are at

From The Wall Street Journal Weekly Accounting Review on April 1, 2005

TITLE: MCI Warns About Internal Controls
REPORTER: David Enrich
DATE: Mar 17, 2005
TOPICS: Auditing, Financial Accounting, Income Taxes, Accounting Information Systems, Internal Controls, Sarbanes-Oxley Act

SUMMARY: MCI has disclosed material weaknesses in its internal control over accounting for income taxes and other areas.

1.) Why has MCI uncovered weaknesses in its internal controls? Over what areas of accounting are its controls in question?

2.) How do the circumstances faced by MCI demonstrate the need to assess internal controls every year?

3.) Why do you think that the steps undertaken by MCI to resolve its deficiencies in income tax accounting for the current year are not sufficient to allow auditors to conclude that the company's income tax controls are, in general, effective?

4.) The company lists several factors that are particularly difficult areas in which to consider income tax implications, including fresh-start accounting, asset impairments, and cancellation of debt. Define each of these terms. From what transactions do you think each issue arises? For each term, why do you think that it is particularly difficult to assess income tax implications?

Reviewed By: Judy Beckman, University of Rhode Island

Bob Jensen's threads on the WorldCom/MCI scandal ---

"Tyco Ex-Auditor Testifies on Bonuses," by Chad Bray, The Wall Street Journal, April 1, 2005; Page C4 ---,,SB111230974141594835,00.html?mod=todays_us_money_and_investing

Prosecutors have alleged that Mr. Kozlowski, Tyco's former chief executive, and Mr. Swartz, its former chief financial officer, improperly granted themselves millions of dollars in compensation without proper authorization.

However, Mr. Scalzo said the audit firm's job wasn't to determine whether the compensation was properly approved, but rather to determine that it was properly recorded on the company's books and records. As Tyco's former top auditor, Mr. Scalzo is considered a key witness in the case.

. . .

Under questioning from prosecutors, Richard Scalzo, an outside auditor at PricewaterhouseCoopers LLC, said he was told the Bermuda conglomerate had determined the bonuses, which were granted to a number of Tyco employees, to be "direct and incremental" costs associated with the gain on a public offering of the company's Tycom unit and the sale of its ADT Automotive subsidiary.

Mr. Scalzo's testimony that the bonuses were "direct and incremental" costs of the various deals could be important for the prosecution in attacking the credibility of the defense case. In the first trial, Mr. Swartz testified in his own defense that the bonuses in question were part of the regular annual-bonus plan for himself and Mr. Kozlowski. But under accounting rules, regular bonuses can't be booked as "direct and incremental" costs of a particular deal. Pro-conviction jurors from the first trial seized on the contradiction in deciding that the defendants were guilty.

The prosecutor, Assistant District Attorney Marc Scholl, focused on just that point yesterday, getting Mr. Scalzo to testify that a bonus couldn't be booked as incremental on Tyco's books and records if it was included as part of the annual year-end bonus to Messrs. Swartz and Kozlowski.

From The Wall Street Journal Accounting Weekly Review on April 29, 2005

TITLE: Deloitte to Be Latest to Settle in Accounting Scandals
REPORTER: Diya Gullapalli
DATE: Apr 26, 2005
TOPICS: Auditing, Fraudulent Financial Reporting, Securities and Exchange Commission

SUMMARY: Deloitte & Touche LLP agreed to pay a $50 million fine to settle SEC civil charges related to fraud at Adelphia Communications Corp. One related article discusses Adelphia's fine. A second related article discusses a negative reaction by the SEC to Deloitte's statement about Adelphia executives "deliberately misleading" their auditors in its public disclosure about payment of the fine.

1.) The author describes the fine of $50 million paid by Deloitte & Touche as resulting from failure to "prevent massive fraud" as cable company Adelphia Communications Corp. What is the purpose of a financial statement audit? Can an audit "prevent" fraudulent financial reporting? In your answer, define the phrase "fraudulent financial reporting."

2.) Refer to the first related article. Of what failure did the SEC accuse Deloitte & Touche?

3.) Given your answers to #'s 1 and 2 above, how can auditors serve as gatekeepers in a line of defense against fraud?

4.) Refer to the second related article. What steps did the SEC require Deloitte to undertake in relation to its fine regarding Adelphia audits?

5.) Why was the SEC concerned about Deloitte & Touche's characterization of the reason for the failure of the Adelphia audit to detect fraudulent financial reporting? In your answer, comment on the intent of the agreement associated with the payment of the $50 million fine.

Reviewed By: Judy Beckman, University of Rhode Island

TITLE: Adelphia to Pay $715 Million in 3-Way Settlement
REPORTER: Peter Grant and Deborah Solomon
PAGE: A3 ISSUE: Apr 26, 2005

TITLE: Deloitte Statement About Adelphia Raises SEC's Ire
REPORTER: Deborah Solomon
PAGE: C3 ISSUE: Apr 27, 2005

Bob Jensen's threads on Deloitte's legal woes are at

Forwarded by Miklos on April 8, 2005

Guarding the Guards: Rethinking the PCAOB Review Function

Miklos Vasarhelyi
Michael Alles
Alexander Kogan

Rutgers Business School*

In August the PCAOB released the first set of reviews of audit firms as mandated by the Sarbanes/Oxley Act, comprising an examination of 16 engagements from each of the Big 4 audit firms. While fault was found with each firm (with E&Y being a clear negative outlier), the errors were relatively minor, either being immaterial departures from GAAP, or the failure to perform certain tests. But in no case was the previously determined audit opinion affected by the review, a not surprising result given that the samples were taken from engagements that had already gone through the firms own review processes. The PCAOB stated in advance that the 2004 reviews would not be as comprehensive or thorough as ones it will conduct in the future. Thus in 2005 the Big 4 (who are required to be reviewed annually) will see some 500 of their engagements reviewed, while the PCAOB will also begin the required triennial review of smaller audit firms, with some 150 subject to examination.

Given this ambitious agenda, it is time to stop and consider what the best use that the PCAOB can make of the power is granted to it to conduct reviews of the audit industry. The reviews are conducted by auditors drawn from the same firms as the ones they are reviewing, trained in the same traditional methodologies and one has to fear that this will lead to a failure in imagination and innovation in how the PCAOB conceives of the role of the review process.

Thus, evidently the PCAOB feels that the main instrument it should rely on are sample engagement audits, which will then help pinpoint failures in the audit firm’s procedures and policies. The engagement focused approach can certainly lead to some useful information about how the audit firms are operating, but how much is learned clearly depends on how the sample is chosen. Engagements that are subject of firm review are that are inherently problematic and high risk, but it is a good question whether the majority of audit failures are with such engagements since they are already subject to closer scrutiny. An astute manager might feel that the best candidates for fraud are precisely in those quiet, routine accounts that are considered too dull for an auditor to worry too much about—consider that the misrepresentation of expenses as assets at WorldCom far exceeded the total liability at Enron with its sexy SPEs.

Inspecting engagements will help firm do those engagements better, but the approach is not explicitly designed to improve the 95% of audits that will not be inspected, and provides no protection for the industry if one of those unexamined engagements ends in a spectacular failure. By contrast, consider the basis of Section 404 of the Sarbanes/Oxley Act which requires managers to certify as to the effectiveness of the company’s controls over the preparation of financial reports with the auditor then attesting to the certification. A glaring absence in the Sarbanes/Oxley regulatory framework is a 404 type requirement on audit firms themselves with regard to the controls on their audit engagements. The PCAOB can potentially fill that gap by focusing its review on the audit firms control systems rather than almost exclusively on actual engagements. The point is to help the firm improve how it does an audit in the first place rather than to catch a badly done one. The preventive rather than corrective approach underlies Total Quality Control and there is no reason why those principles long used in American manufacturing cannot be applied to auditing.

A justification for an inspection regime is to serve as a deterrent to badly conducted audits, an approach that may appeal to a public burned by the Andersen meltdown. But deterrent only works if it is credible and one has to seriously question whether the Big 4 firms are now too large to fail, meaning that the PCAOB is constrained in how hard it can come down on these audit firms even when a review finds a serious flaw in an engagement. If the PCAOB realistically cannot de-register one of the Big 4, or even publicly reveal enough information that could lead to a crippling lawsuit, then what is gained from these inspections? It is equivalent to an audit in which both the auditor and the manager knows that at the end of the day a qualified opinion will not be issued. In these circumstances a better approach may be to act explicitly like an internal rather than an external auditor, focusing on improving the audit process and helping prevent problems rather than catching errors that have already occurred.

Another credibility problem with the inspection regime proposed by the PCAOB is whether, given the staff and resources at the PCAOB’s disposal, expanding the sample size almost tenfold will result in more or less thorough reviews of each engagement than the rather shallow examinations in 2004. What is noteworthy about the proposed review process is that it is little different in substance from the old and reviled peer review system that it replaced, despite the fact that the PCAOB has far more legal authority to demand access and cooperation from the firm and its documentation than the peer reviewers ever did. That is an indication of the fundamental problem with the PCAOB approach, that it is simply trying to do the old peer reviews better rather than starting from scratch and asking what is the optimal method of assuring auditing.

Such a reengineering approach would surely begin with technology, which when allied with the new requirements for comprehensive documentation by both firm and auditor (“if it isn’t in writing, it doesn’t exist.”) can potentially lead to the creation of a vast depository of digitized audits. Sophisticated audit tools can then be applied against this dataset to provide real time monitoring of audit procedures and to develop models of emerging audit failures.[1] This approach would also enable the PCAOB to take advantage of a major new capability that it potentially has, the ability to benchmark across audit firms and to find both discrepancies and best practices. What the PCAOB ideally needs is a monitoring system, as real time as possible, incorporating a large set of business rules based on statistical analysis that calls attention not to unhealthy high audit risk firms but to profiles of audit failure, and which would issue alarms as audit failures are occurring rather than after an opinion has been issued.

 Finally, recall that an auditor checks whether a firm has prepared income in accordance with GAAP, but the auditor is not responsible for developing GAAP itself. By contrast, the PCAOB both audits auditors and now also has the duty to develop audit standards. This suggests that reviews have to provide a mechanism to understand and improve the way in which auditing takes place, something which cannot happen if the reviews use traditional methodologies to perpetuate the current system. The PCAOB needs to rethink how a properly configured audit review system, imaginatively using the latest information technology, can be part of a systematic continuous improvement process that leads to audits that better serve the needs of financial markets and shareholders.

* Ackerson Hall 300P, 180 University Avenue, Newark NJ 07102. Comments are welcome and may be addressed to and

[1] Further details on the application of continuous auditing methodology to the audit review process can be found in “Restoring Auditor Credibility: Tertiary Monitoring and Logging of Continuous Assurance Systems” Michael Alles, Alex Kogan, Miklos Vasarhelyi. International Journal of Accounting Information Systems, Vol. 5, No. 2, pp. 183-202, June 2004.

PwC's Current Developments for Audit Committees in 2005 ---

From The Wall Street Journal Accounting Weekly Reviews on April 15, 2005

TITLE: GM Didn't Disclose All Details of Two Transactions with Delphi
REPORTER: Mark Maremont and Karen Lundegaard
DATE: Apr 13, 2005
TOPICS: Disclosure, Disclosure Requirements, Financial Accounting

SUMMARY: GM reported two transactions with Delphi during Q3 2000 and Q4 2001 for which Delphi's accounting is now being questioned by the SEC. The article questions the propriety of accounting and disclosure by GM and relies on assessments by several accounting faculty members.

1.) The first transaction questioned in the article relates to warranty/recall costs. Why did Delphi make a payment to GM? How was the payment from Delphi accounted for? How did that accounting impact GM's 3rd quarter income statement in 2000?

2.) Provide summary journal entries for all of the transactions in this warranty issue that are described in the article.

3.) What accounting standards address how this payment should be accounted for and whether the item should be disclosed in the company's final reporting? In your answer, list the relevant standard and explain the requirements related to this issue.

4.) GM's spokesperson explained that the $237 million payment was not separately disclosed in the Q3 2000 financial statements. How should materiality be assessed in relation to this item and its required disclosure? (Note that the assessment of these transactions is presented in terms of quarterly income.)

5.) Describe the second transaction discussed in the article. What is being credited for $85 million? What account, or financial statement classification, was debited?

6.) What was the justification for the accounting treatment of the $85 million?

7.) Why does one accounting professor question this treatment on the basis of the time span it took to resolve the accounting question? In your answer, identify the accounting standard which imposes this time limitation.

Reviewed By: Judy Beckman, University of Rhode Island

"GM's Handling of Transactions With Delphi Raises Questions," by Mark Maremont and Karen Lundegaard, The Wall Street Journal, April 13, 2005, Page A1 ---,,SB111334212244705065,00.html

General Motors Corp. handled two transactions with Delphi Corp., its former parts subsidiary, in 2000 and 2001 in ways that raise questions about the auto giant's accounting and disclosure practices.

How Delphi accounted for the two transactions already is part of a broader investigation by the Securities and Exchange Commission into improper accounting at the auto-parts company, which was spun off from GM in 1999.

GM spokesman Jerry Dubrowski said the company accounted for its side of both transactions properly and provided proper disclosure.

The first transaction, in the third quarter of 2000, involved a payment of $237 million from Delphi to GM that comprised 19% of the auto maker's pretax profit for that quarter, and helped it beat earnings estimates. At the time, GM did not disclose the impact of the payment to investors.

The second transaction came in late 2001, when GM credited $85 million to Delphi. In that case, GM accounted for the credit in a way that didn't reduce its reported income.

Delphi has said it improperly accounted for a number of items, including the $237 million transaction with GM in 2000, since disclosing in early March that an internal investigation found a number of accounting problems. Delphi still is reviewing how it handled the 2001 deal. It has said it will restate financial results since 2001, and that the Justice Department has launched a criminal probe into the matter.

GM's Mr. Dubrowski declined to comment on whether the SEC had contacted GM about its transactions with Delphi.

GM has faced heavy investor pressure in recent months, amid slumping sales in North America and questions about its strategy and leadership. The company recently cut its profit forecast for 2005 and shook up its North American unit, which now is directly controlled by Chairman and Chief Executive Rick Wagoner.

Each of the transactions involves small amounts for a company of GM's size. GM last year posted profit of $2.8 billion on $193.5 billion in revenue.

But four accounting experts who were asked to review the transactions by The Wall Street Journal said they raise questions about the quality of GM's reported earnings and disclosure to investors.

The $237 million pretax payment in the third quarter of 2000 helped GM beat by one penny the earnings estimates of Wall Street, which already had been reduced from earlier estimates. Without it, the company would have fallen about 28 cents shy of the $1.54-a-share estimates of Wall Street analysts for that quarter. At the time, the auto giant was struggling with losses in Europe.

For the quarter, GM reported net income of $829 million on sales of $42.7 billion, or $1.55 on a fully diluted per-share basis.

Mr. Dubrowski said GM didn't need to disclose details about the payment to investors at the time because it wasn't material, adding that at the time GM provided less detail on warranty or recall costs. A GM spokeswoman, Toni Simonetti, said that GM reviewed its accounting of the transactions recently, after Delphi announced the probe of its accounting, and provided a report to the audit committee of its board of directors. "We were satisfied the accounting treatment was correct," she said.

The $237 million payment arose from a dispute between the companies over who was responsible for warranty or recall costs associated with Delphi-produced parts. In an interview last month, Peter Bible, GM's chief accounting officer, said that when GM announces a recall, it typically allocates a share of the cost to any supplier whose parts played a role in the vehicle problem. But with Delphi, he said, "we had not done that," adding "we weren't certain they were going to honor those."

After lengthy negotiations, Delphi in September 2000 agreed to pay GM to cover what Delphi has said were pre-spinoff warranty issues. GM declined to say if the parts were made by Delphi before the May 1999 spinoff, but said the recalls happened after the spinoff.

Ms. Simonetti, the GM spokeswoman, said that GM had previously booked a cost for significantly more than $237 million to cover the recalls, depressing income in prior quarters. She said the payment from Delphi was simply a recovery of Delphi's share of those expenses. "This was a partial recovery of a recall expense from a supplier," she said. "It was not a gain."

But the accounting experts contacted by the Journal said it appeared that the size of the payment was material to GM's earnings in that quarter and likely should have been reported separately.

Continued in the article

It appears SOX is here to stay, but there may be new designs almost every year

Jonathan D. Glater, "Here It Comes: The Sarbanes-Oxley Backlash," The New York Times, April 17, 2005 ---

For corporate America, it is always a good time to lobby - even when the public image of business is increasingly associated with executive perp walks.

Last week, business representatives gathered in Washington at an all-day roundtable discussion held by federal regulators and complained about the cost of complying with a provision of the Sarbanes-Oxley corporate reform law. Not one business leader asked to repeal the law, which was passed in 2002 after a wave of financial scandals, or to gut it. Nearly every executive, however, lamented the costs of compliance

The criticism is striking, given that it comes against a backdrop of continuing revelations of potential fraud, criminal prosecution of fraud and convictions on fraud charges. Bernard J. Ebbers, the former chief executive of WorldCom, is awaiting sentencing after being convicted last month of fraud, conspiracy and filing false reports. Trials of former Enron executives are set to begin this week. Arthur Andersen, audit firm to both WorldCom and Enron, is still fighting to save its reputation and its few remaining assets in a lawsuit brought by WorldCom shareholders.

"There've been so many companies that have gotten in trouble, none of them want to come out now and say we oppose" the law, said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission who now works at Glass, Lewis & Company, an investment research firm in San Francisco. "It just leaves people with a bad feeling about that company."

He added that the last person whom he had heard was bashing Sarbanes-Oxley was Maurice R. Greenberg of the American International Group, who resigned as chief executive last month amid a review of the company's accounting and who invoked the Fifth Amendment when being interviewed by investigators last week.

"I don't think you're going to see that anymore," Mr. Turner said of executives' campaigning against Sarbanes-Oxley.

Instead, executives are pushing for what they describe as specific changes in the implementation of the law, while singing its praises in general terms.

"There is no question that, broadly speaking, Sarbanes-Oxley was necessary," said John A. Thain, chief executive of the New York Stock Exchange, in remarks echoed by others at the roundtable.

Nick S. Cyprus, controller and chief accounting officer for the Interpublic Group of Companies, was even more specific, praising a provision of the law that has become a particular target for many critics. "I'm a big advocate of 404," he said, referring to Section 404 of the law, "and I would not make any changes at this time."

Section 404 requires companies and their auditors to assess the companies' internal controls, which are the practices or systems for keeping records and preventing abuse or fraud. Something as simple as requiring two people to sign a company check, for example, is one type of internal control.

Of the 2,500 companies that filed internal controls reports with the Securities and Exchange Commission by the end of March, about 8 percent, or 200, found material weaknesses, the agency's chairman, William H. Donaldson, said at the roundtable. That exceeds the 5.6 percent rate that Compliance Week magazine found in a review of the first 1,457 companies to report.

Executives at the roundtable consistently said that complying with Section 404 has been more expensive than they had anticipated, and they questioned whether the benefit - which no one has been able to quantify - is worth the cost.

There are, perhaps unsurprisingly, several studies of the cost of compliance from various business groups. Financial Executives International, a networking and advocacy organization, said last month that a survey of 217 publicly traded companies showed they had spent $4.36 million, on average, to comply with Section 404.

A different survey, of 90 clients of the Big Four accounting firms - Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PricewaterhouseCoopers - found that the companies spent an average of $7.8 million on compliance. That was about 0.10 percent of their revenue, and less than the $9.8 million paid, on average, to C.E.O.'s at 179 companies whose annual filings were surveyed earlier this month in Sunday Business.

Continued in the article

Bob Jensen's threads on reforms are at

From The Wall Street Journal's Accounting Weekly Review on June 3, 2005

TITLE: SEC, Heal Thyself: Tighten Controls, GAO Says in Audit
REPORTER: Siobhan Hughes
DATE: May 27, 2005
TOPICS: Audit Report, Auditing, Governmental Accounting, Internal Controls, Sarbanes-Oxley Act, Securities and Exchange Commission

SUMMARY: Add the Securities and Exchange Commission (SEC) " the growing list of institutions disclosing weaknesses in financial controls..."

1.) Summarize the Sarbanes-Oxley requirements regarding internal controls and reporting on them. (Hint: you may find it helpful to review the AICPA's summary of the impact of this law on the accounting profession at 

2.) Who audits the Securities and Exchange Commission (SEC) and issued this report? Why is the SEC audit not done by a public accounting firm? What is the function of the entity that performed the SEC's audit?

3.) Why is it important that the SEC comply with these requirements of the Sarbanes-Oxley Act? In your answer, comment on public companies' concerns with this law.

Reviewed By: Judy Beckman, University of Rhode Island


Calling on regulators, public company boards and executives, auditors and other capital markets influencers to take action to protect capital markets and investors, Grant Thornton LLP announced its Five Steps to Increased Choice and Competition for Public Companies and Auditors.

"Sarbanes-Oxley - not to mention the numerous accounting failures leading up to it - has dramatically changed the audit environment," CEO Ed Nusbaum told members of The National Press Club in Washington on Friday. "But there is also another, less-reported factor in play, and that's the ongoing consolidation and resulting concentration in the accounting profession."

Citing a Government Accountability Office (GAO) study, which found that 97 percent of public companies with sales between $250 million and $5 billion are audited by the Big Four, Mr. Nusbaum said that the high level of concentration in the accounting profession is the result of decades of consolidation, the fall of Andersen, and unchecked liability exposure that prevents smaller firms from competing. Misconceptions among capital markets influencers who believe only the four largest firms are capable of auditing public companies further limits company choice, he added.

Managing Partner of Strategic Relationships Cono Fusco further explained that there is an array of firms capable of serving the varying and diverse needs of public companies. "Effectively matching company size and requirements with firm size and capabilities allows companies to find the best combination of quality, service, value and reach, and protects markets by spreading risk among a greater number of firms," he said.

To accomplish this objective and to protect markets, Grant Thornton LLP proposes the following Five Steps to Increased Choice and Competition for Public Companies and Auditors: The SEC and our nation's stock exchanges must encourage, as a best practice, that public companies conduct a periodic review of their audit firm. As a matter of good governance and good business, companies should be encouraged to periodically evaluate their audit firm to be sure they are getting the best combination of quality, service, value and reach from their firm.

Public company boards and audit committees must embrace the new market realities and "right-size" their audit firm.

Matching company size, complexity and requirements with firm size and capabilities, companies may very well reaffirm their decision to continue working with their current audit firm. But, they also may find that another firm combines the same or better technical expertise with service, attention and market or industry expertise that makes for a better fit.

Companies and other capital markets influencers - including investors, analysts, commercial and investment bankers, and attorneys - must recognize the new paradigm between companies and their external audit firms and open the door to more audit firm choices.

There are more than four audit firms capable of serving public companies, but misconceptions in the capital markets preempt company choices. This cannot be allowed to continue. Influencers must reach out to the broader array of audit firm choices and conduct proper due diligence before discouraging a company from selecting a non-Big Four firm better suited to meet its needs. Auditors must facilitate this process by reaching out to and increasing their visibility with gatekeeper groups.

The PCAOB and the audit profession must implement coordinated best practices for the audit process, and firms must periodically assess whether or not they have the requisite attributes to serve specific clients.

Sharing best practices - including audit procedures, evaluation of fraud risk and possibly even audit software - among the leading audit firms would significantly enhance audit effectiveness and increase public confidence in quality audits.

Because the best audits are completed when companies and audit firms are appropriately matched, auditors should also evaluate their resources in relation to client needs to determine if they are still appropriately matched in terms of size and service capabilities.

A debate and discussion on the topic of caps on auditor liability exposure must begin.

The possibility of being held responsible not only for the magnitude of an error but also for the current market psychology and valuation levers for an individual company creates what could become unlimited liability. This makes it difficult for smaller firms to compete.

To eliminate this barrier to entry and promote competition in the accounting profession, the insurance industry, elected officials, the accounting profession, businesses and others in the capital markets must work together to implement liability caps. Firms should be accountable for their work, but not for the vagaries of market psychology.

Bob Jensen's threads on the Future of Auditing are at

"Eliot Spitzer's Case Book," by Elizabeth Weinstein, The Wall Street Journal, April 28, 2005

Eliot Spitzer is a man on the hunt. From mutual funds to music, executive compensation to counterfeit drugs, the New York attorney general has pursued investigations of alleged misdeeds in half a dozen industries.

Though sometimes criticized for focusing too closely on Wall Street -- and on his own bid for New York state governor in 2006 -- Mr. Spitzer's probes have led to stricter controls on Wall Street research and spurred other attorneys general to action. His landmark investigations have zeroed in on high-profile executives, most recently Maurice Greenberg at insurer American International Group.

Last year alone, the New York attorney general's office recovered a record $2.38 billion earmarked for restitution to individual shareholders and other consumers. Mr. Spitzer's office, which has an annual budget of $214 million, has added nearly 50 lawyers to its staff of more than 500 attorneys since 1999.

Here is an overview of key investigations:

Investment Banking ­ Stock research
Probe launched: 2001
At issue: Misleading information in analysts' public research reports

An investigation into the stock research issued by Merrill Lynch & Co.'s Internet group, whose star analyst was Henry Blodget, showed that some analysts harbored different opinions privately from those they expressed in their public research reports. The investigation spawned a wide-ranging probe over nearly two years into the procedures at many firms. Ultimately, 10 of the largest securities firms
agreed to pay $1.4 billion to settle charges that they routinely issued misleading stock research to curry favor with corporate clients during the stock-market bubble of the late 1990s. The firms consented to the charges without admitting or denying wrongdoing. The $1.4 billion settlement was among the highest ever imposed by securities regulators, and both Mr. Blodget and Jack Grubman of Salomon Smith Barney were banned from the securities business.

Investment Banking - IPOs
Probe launched: 2001
At issue: Unfair allocations of shares in initial public offerings

Mr. Spitzer's office also charged that several big Wall Street firms improperly doled out coveted shares in initial public offerings to corporate executives in a bid to win banking business. Two companies, Citigroup Inc.'s Citigroup Global Markets unit, formerly Salomon Smith Barney, and Credit Suisse Group's Credit Suisse First Boston, settled these charges as part of the $1.4 billion pact with securities firms and did so without admitting or denying wrongdoing. In a related probe, former star CSFB banker Frank Quattrone was
convicted of obstruction of justice for impeding and investigation of CSFB's IPO allocations.

Insurance - Improper transactions
Probe launched: 2003
At issue: Whether several AIG business deals were designed to manipulate its financial statements

In 2003, the Securities and Exchange Commission and Mr. Spitzer's office looked into insurance transactions that American International Group Inc. conducted with two firms, cellphone distributor Brightpoint Inc. and PNC Financial Services Group Inc. AIG paid $126 million in a settlement without admitting or denying guilt. Later, both the SEC and Mr. Spitzer's office scrutinized a deal struck between AIG and Berkshire Hathaway's General Reinsurance unit in 2000 to determine if the deal was aimed at making the giant insurer's reserves look healthier than they were. Longtime Chairman Maurice R. "Hank" Greenberg
retired from the company, and in late March, AIG admitted to a broad range of improper accounting. Other AIG executives were forced out, including chief financial officer Howard Smith. Meanwhile, Berkshire chief Warren Buffett this week told investigators that he didn't know details about the contentious transaction. Mr. Greenberg also was deposed and repeatedly invoked his constitutional right against self incrimination.

Insurance - Broker fees
Probe launched: 2004
At issue: Whether fees paid by insurance companies to insurance brokers and consultants posed a conflict of interest

Mr. Spitzer and other state attorneys general as well as insurance regulators in New York and Illinois alleged that insurance companies routinely paid fees to brokers and consultants who advised employers on where to buy policies for workers, a potential conflict of interest. Mr. Spitzer accused several insurance brokers of accepting undisclosed commissions and, in the case of Marsh & McLennan, of bid-rigging -- soliciting fake bids from insurers to help steer business to favored providers. In February 2005, Marsh
agreed to pay $850 million in restitution to clients of its Marsh Inc. insurance brokerage firm who allegedly were cheated by Marsh brokers. Marsh neither admitted nor denied wrongdoing.

The investigations shook up an insurance dynasty. Marsh was run by Jeffrey W. Greenberg, the eldest son of AIG's former head Maurice Greenberg, before he was ousted as a result of the probe. Another insurance firm included in the probe, Ace Ltd., is run by Evan Greenberg, Jeffrey's younger brother. Meanwhile, Aon Corp.
reached a $190 million settlement without admitting or denying wrongdoing, and earlier this month, insurance broker Willis Group Holdings Ltd. said it would pay $51 million and change its business practices to end an investigation by attorneys general in New York and Minnesota. Willis admitted no wrongdoing or liability.

NYSE - Executive Compensation
Probe launched: 2004
At issue: Whether then-New York Stock Exchange Chairman Dick Grasso's compensation was excessive

Mr. Spitzer sued Mr. Grasso, the NYSE and the Wall Street executive who headed its compensation committee for what Mr. Spitzer claimed was a pay package so huge that it violated the state law governing not-for-profit groups. Mr. Spitzer said the compensation -- valued at nearly $200 million -- came about as a result of Mr. Grasso's intimidation of the exchange's board of directors. Mr. Grasso, who denied there was anything improper about his pay, was
forced to resign from the Big Board in September 2003 following a public outcry over his compensation. The lawsuit, which is still in progress, led to new governance oversight at the Big Board.

Probe launched: 2004
At issue: Antitrust violations by retailers

Mr. Spitzer claimed that Federated Department Stores Inc. and May Department Stores Co. conspired to pressure housewares makers Lenox Inc., a unit of Brown-Forman Corp. and Waterford Wedgwood PLC's U.S. unit to pull out as planned anchors of Bed Bath & Beyond Inc.'s new tableware department. The case was settled in August when the four companies agreed to pay a total of $2.9 million in civil penalties but admit no wrongdoing. Later, Mr. Spitzer
charged James M. Zimmerman, Federated's retired chairman, with perjury, alleging that he lied under oath to conceal evidence of possible antitrust violations. Mr. Zimmerman has pleaded not guilty.

Probe launched: 2004
At issue: Payments by music companies middlemen aimed at securing better airplay for the labels' artists

Mr. Spitzer's
investigation, which is continuing, centers around independent promoters -- middlemen between record companies and radio stations -- whom music labels pay to help them secure better airplay for their music releases. Broadcasters are prohibited from taking goods or cash for playing songs on their stations. The independent-promotion system has been viewed as a way around laws against payola -- undisclosed cash payments to individuals in exchange for airplay. Last fall, Mr. Spitzer requested information from Warner Music Group, EMI Group PLC, Vivendi Universal SA's Universal Music Group, and Sony Corp. and Bertelsmann AG's Sony BMG Music Entertainment. Warner Music received an additional subpoena last week.

Probe launched: 2004
At issue: Software secretly installed on home computers to put ads on screens

After a six-month investigation into Internet marketer Intermix Media Inc., Mr. Spitzer in April 2005
filed suit, claiming the company installed a wide range of advertising software on home computers nationwide. The software, known as "spyware" or "adware," prompts nuisance pop-up advertising on computer screens, setting users up for PC slowdowns and crashes. The programs sometimes don't come with "un-install" applications and can't be removed by most computers' add/remove function. Mr. Spitzer said the suit is designed to combat the practice of redirecting of home computer users to unwanted Web sites, the adding of unnecessary toolbar items and the delivery of unwanted ads that pop up on computer screens. The civil suit accuses Intermix of violating state General Business Law provisions against false advertising and deceptive business practices, and also of trespass under New York common law. Intermix has said it doesn't "promote or condone spyware" and has ceased distribution of the software at issue, which it says was introduced under prior leadership.

Health Care
Probe launched: 2005
At issue: Covert sales of counterfeit drugs

Mr. Spitzer's office has
sent subpoenas to three big drug wholesalers -- Cardinal Health Inc., Amerisource Bergen Corp. and McKesson Corp. -- related to the companies' purchase of drugs on the secondary market. Although few details about the probe have emerged, some industry analysts have said that the subpoenas are likely connected to sales transactions involving counterfeit products. Counterfeit drugs are those sold under a product name without proper authorization -- they can include drugs without the active ingredient, with an insufficient quantity of the active ingredient, with the wrong active ingredient, or with fake packaging. The investigation focuses on the secondary market, where the wholesalers buy drugs from each other, often at lower prices, and counterfeit drugs are hard to track. It isn't clear whether the wholesalers are the focus of a probe or just sources of information.

Bob Jensen's threads on "Rotten to the Core" are at

Other Links
Main Document on the accounting, finance, and business scandals --- 

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The Saga of Auditor Professionalism and Independence ---

Incompetent and Corrupt Audits are Routine ---

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Future of Auditing --- 




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