"Ethically Challenged and Tone Deaf in the CSU," Mark Shapiro, The Irascible Professor, May 25, 2007 --- http://irascibleprofessor.com/comments-05-25-07.htm

Several months ago -- July 21, 2006 to be exact -- the Irascible Professor posted a commentary outlining questionable compensation practices for high-ranking officials in the California State University System. These practices have been employed by the system's Chancellor, Charlie Reed, to grant millions of dollars in extra compensation to campus presidents and to cronies of Reed at the system's headquarters in Long Beach upon their retirement or departure from the system. These six-figure payouts for "consulting" work or "special projects" have been so egregiously out of line with what ordinary faculty and staff members in the California State University system earn that the California Legislature is taking hard look a legislation that would end the practice.

Faculty members found it particularly galling that such huge bonuses were being handed out at time when faculty salaries lagged national averages by significant percentages, and at a time when the faculty union was locked in protracted negotiations over a new contract after they had gone without raises for three years. During that three year period, Reed and other high-ranking administrators were granted hefty pay raises. For example, in 2005 Reed received a $45,808 increase in his salary (14.5%) and a $3,000 increase in his car allowance. Reed's total compensation increase in 2005 was about the same as the starting salary for a new assistant professor in the system at the time.

Continued in article

Bob Jensen's threads on higher education controversies are at http://www.trinity.edu/rjensen/HigherEdControversies.htm
In particular, questions of ethics and accountability are discussed at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

"SEC charges former Apple executive in options case:  The SEC accuses Apple's former general counsel of fraudulently backdating stock options," by Ben Ames, The Washington Post, April 24, 2007 --- Click Here

The SEC said it did not plan to pursue any further action against Apple itself, which cooperated with the government's probe, but it stopped short of saying its investigation was closed. Commission officials declined to comment on whether possible charges could still be filed against Jobs or other current officers.
"Options troubles at Apple remain despite SEC case against 2 former officers," Associated Press, MIT's Technology Review, April 25, 2007 --- http://www.technologyreview.com/Wire/18587/

A Backdating Settlement
Brocade Communications Systems Inc. agreed to pay a $7 million penalty to settle allegations it improperly issued stock-option grants, making it the first company to pay a fine in connection with the backdating scandal, according to people familiar with the matter. The technology company's settlement with the Securities and Exchange Commission paves the way for similar cases to be resolved. Two other companies -- Analog Devices Inc. and Mercury Interactive Corp. -- previously announced preliminary settlements with the SEC that are to include penalties.
"Backdating Fine May Set Model Brocade Is the First to Pay Penalty in Options Probe; SEC Debated Punishment," by Kara Scannell, The Wall Street Journal, May 31, 2007; Page A3 --- Click Here

Bob Jensen's threads on employee stock option accounting under FAS 123 are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

Bob Jensen's threads on KPMG's woes are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

"Backdating Woes Beg the Question Of Auditors' Role," by David Reilly, The Wall Street Journal, June 23, 2006; Page C1 --- http://online.wsj.com/article/SB115102871998288378.html?mod=todays_us_money_and_investing

Where were the auditors?

That question, frequently heard during financial scandals earlier this decade, is being asked again as an increasing number of companies are being probed about the practice of backdating employee stock options, which in some cases allowed executives to profit by retroactively locking in low purchase prices for stock.

For the accounting industry, the question raises the possibility that the big audit firms didn't live up to their watchdog role, and presents the Public Company Accounting Oversight Board, the regulator created in response to the past scandals, its first big test.

"Whenever the audit firms get caught in a situation like this, their response is, 'It wasn't in the scope of our work to find out that these things are going on,' " said Damon Silvers, associate general counsel at the AFL-CIO and a member of PCAOB's advisory group. "But that logic leads an investor to say, 'What are we hiring them for?' "

 

. . .

While the Securities and Exchange Commission has contacted the Big Four accounting firms about backdating at some companies, the inquiries have been of a fact-finding nature and are related to specific clients rather than firmwide auditing practices, according to people familiar with the matter. Class-action lawsuits filed against companies and directors involved in the scandal haven't yet targeted auditors.

Backdating of options appears to have largely stopped after the passage of the Sarbanes-Oxley corporate-reform law in 2002, which requires companies to disclose stock-option grants within two days of their occurrence.

Backdating practices from earlier years took a variety of forms and raised different potential issues for auditors. At UnitedHealth Group Inc., for example, executives repeatedly received grants at low points ahead of sharp run-ups in the company's stock. The insurer has said it may need to restate three years of financial results. Other companies, such as Microsoft Corp., used a monthly low share price as an exercise price for options and as a result may have failed to properly book an expense for them.

At the PCAOB advisory group meeting, Scott Taub, acting chief accountant at the Securities and Exchange Commission, said there is a "danger that we end up lumping together various issues that relate to a grant date of stock options." Backdating options so an executive can get a bigger paycheck is "an intentional lie," he said. In other instances where there might be, for example, a difference of a day or two in the date when a board approved a grant, there might not have been an intent to backdate, he added.

 

"The thing I think that is more problematic is there have been some allegations that auditors knew about this and counseled their clients to do it," said Joseph Carcello, director of research for the corporate-governance center at the University of Tennessee. "If that turns out to be true, they will have problems."

Continued at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

"A Conversation With Barry Goldwater: Are You Recommending Long-Term Care Insurance?" AccountingWeb, April 20, 2007 ---http://www.accountingweb.com/cgi-bin/item.cgi?id=103435

Who is the largest payer of long-term care assistance? It’s the general public who fund long-term care from personal savings and through public assistance programs. But the numbers bear out that CPAs and advisors are doing a poor job of referring their clients to asset protection long-term care programs. Why is this? Because of the way the U.S. healthcare system is set up, a long-term care event could devastate family retirement savings. Last year the long-term care insurers paid out $3.3 billion in claims but that figure only equated to 6 percent of total claims paid – a percentage that pales in comparison to the real costs born by the general public. Twenty-seven percent, or $30 billion, of all long-term care expenses are paid out of savings accounts, a major contributing reason for people going into bankruptcy. Another $42 billion was paid by Medicaid, and Medicare paid $15 billion. In our litigious society, the reality of long-term care insurance (LTCI) being treated as a fiduciary item has arrived. Disgruntled beneficiaries whose inheritances have been depleted by the expense their parents bore funding their long-term care experiences are successfully arguing and receiving monetary judgments from advisors who are not bringing up the subject of future liability planning. It is becoming a question of fiduciary responsibility to recommend asset protection. For example: It is projected that a 50-year-old person today is going to spend more than $1 million a year upon needing long-term care assistance when they are 85. Do you really want to make a negative million dollar decision for your clients if they lose this amount to the lack of asset protection? Are CPAs making these kinds of client assessments or does the CPA really not care whether a client should self insure the risk of a future long-term care event or transfer that risk to an insurance company? Statistic: Forty percent of those needing long-term care (LTC) are under age 65. Do CPAs recommend long-term care insurance? Tax and audit professionals are focused on fee planning in their core competencies. They make few financial planning referrals because their firm does not have a team planning approach outside of their core business model. These CPAs usually do not recommend LTCI. The CPA who is a multi-disciplinary advisor is looking for programs of opportunity in a broader environment that incorporates financial services and wealth management. This group usually will have an in house expert or a very close strategic alliance with an advanced planning insurance broker and will try to incorporate long-term care planning into their practice. These CPAs do recommend LTCI and are proactive inserting this item in their financial plan for clients. Because women generally outlive men by an average of seven years, they face a 50 percent greater likelihood than men of entering a nursing home after age 65. However, just 18 percent of women who responded to a study on the financial literacy of women have talked with their spouse or partner about long-term care insurance. Most women do not want to be a burden on their children. Yet about three-quarters of respondents have not had serious discussions with their children about long-term care insurance. How does the CPA connect with the aging baby boomer client on matters of long-term care and asset protection planning when 71 percent of all caregivers are women who are related to the in need relative? Advisors are not connecting with women and long-term care at all! We believe there is reluctance among CPAs to discuss transferring risk to insurance companies because somehow it is an uncomfortable conversation to have. But the numbers are compelling and advisors need to sit up and take notice. To plan for a future liability in combination with a plan for retirement income is the kind of creative planning clients are expecting. CPA advisors should know and should be making their clients aware that it is not the decision of the client to buy LTC insurance, it is the decision of the carrier whether they will offer the client a contract. When we surveyed our clients with the question, “Would you think it to be a good idea that we do future liability planning alongside of future income planning so that if you need medical or assistance to live in your home in the future, that expense would not come out of your retirement savings account?” When you say it with inflection, it is not as long a sentence as it appears and it is a very responsible question for an advisor to ask. The overwhelming response from our clients was extremely favorable with the most common reasonable accompanying question being “How much does it cost?” In other words, how much of my $20k 401k contribution am I going to be spending in order to protect it? The direct response is; “Based on information analyzed as to costs associated with a long-term care event, you can spend $3k per year for 20 years based on your age and risk factor probabilities or you can spend between $50k-$250k annually, for an average of five years, on your care? Which program can you best afford to fund?” When you consider the potential spend down of assets, you begin to understand the fiduciary aspects associated with prudent advice when the client is told to self insures these kinds of risk. On the other hand, high net worth clients will not pay for something without recognizing its perceived value. If I can fund future liability events from cash flow, why should I spend money on insurance I do not need? Here is the question for our high net worth clients; “Do you have an asset protection plan in place that covers the downside risk of investment loss due to a future medical liability or long-term care event?” That question enables me to have the conversation about long-term care insurance with high net worth people. And these facts bear me out. If the client has a $5 million investment portfolio returning 9 percent per year, his/her income from investments is projected to be $450,000 before taxes. If a future liability occurred and the cost of an assistance related liability was $150,000, the cost to the client would be $150,000 plus the loss of investment income at 9 percent. The total loss of principal plus interest for one year is $163,500, for three years the cost is $490,500. This is not how high net worth people plan, they do not leave these kinds of gaps that can effectuate loss. To transfer the risk, the cost is $6,000 for this married couple in their mid-50’s. If we do the math correctly, they would have to pay premiums for 25 years to equal one year’s cost for care. Their premiums would never exceed the cost of two years worth of care. No matter what one does with his or her money, the cost for care is always going to be the same, $163,000 is always going to be greater then $6,000, high net worth or not. It is our clients call to make, but if we connect our recommendations to the larger picture of asset protection, our message for risk transference becomes more powerful. From the financial data presented, Americans are paying 94 percent of the costs associated with long-term care expenses either in the form of public assistance or from savings. The majority of caretakers are our mothers, wives and daughters. These are alarming figures moving forward and given medical inflation outpacing other inflationary indices, CPAs should be aware of their fiduciary responsibility to make relationships with long-term care insurance specialists so their clients can be better served in this area of asset protection and they will be protected from litigious beneficiaries. About Barry Goldwater Barry Goldwater is the Principal of the Financial Resource Group and a 20-year veteran of the insurance industry. He focuses not only on working with the business and affluent clients of CPAs and attorneys, but also in helping CPA's form and develop a business model to include financial services. He can be reached at 617-527-9736,or at barry@frg-creative.com. His web sites are http://www.frg-creative.com or www.goldwaterfinancial.net

Jensen Comment
It is important to note that the above author is with the insurance industry. In my opinion, elder care insurance is not a good deal for many people. For one thing it is very expensive and adds another "middle man" to profit from elder care. Second, reasonably wealthy people who can afford long-term care expected costs (adjusted for probabilities and family health history) may find insuring for long term care to be a bad deal that cuts into cash flow they might enjoy in earlier years of their lives. Similarly people with limited means who are likely to qualify for Medicaid benefits may find it a bad deal. Also read the fine print of a contract. Insurance companies have a way of limiting their own risk exposures, especially risks of rising eldercare costs.

Another risk is that your so-called financial advisor may be receiving some sort of kickback for helping to get clients to take out elder care insurance. This is an expensive cash flow item that requires high integrity financial advising.

Bob Jensen's threads on insurance scandals are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Drexel Caves in on Student Loan Charges
Under the terms of the accord, Drexel agreed to redistribute to student borrowers about $250,000 that it had received from Education Finance Partners as part of revenue sharing agreements in which the lender paid the university a portion of the private loans its students took out. Drexel also agreed to abide by the code of conduct that Cuomo’s office has promulgated, and that two dozen colleges and a half-dozen lenders have endorsed.
Doug Lederman, "Drexel to Cuomo: Um, Never Mind “Fight on, Drexel!” “Stand Strong Drexel!” Inside Higher Ed, May 16, 2007 --- http://www.insidehighered.com/news/2007/05/16/drexel

Bob Jensen's threads on the student loan scandals are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

One Person's Claim Can Dramatically Increase a Firm's Employee Health Insurance
Such are the challenges for smaller businesses in Kansas and the many other states where laws permit insurers to raise health premiums substantially for small employers when one worker incurs significant medical bills. And it is why, as state legislatures, Congress and presidential candidates of all stripes debate the growing problem of Americans without health insurance, the struggles of small businesses — which employ about 40 percent of the nation’s work force — are likely to become a central issue. Small-business employees are one of the fastest-growing segments of the nation’s 44 million uninsured; they now represent at least 20 percent of the total, according to federal census data. And even modest-size employers like Varney’s that say they remain committed to providing benefits find themselves wondering how long they can continue.
"Small Businesses’ Premiums Soar After Illness," The New York Times, May 6, 2007 --- http://www.nytimes.com/2007/05/05/business/05insure.html

Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

College Researchers With Conflicts of Interest
Sen. Edward M. Kennedy (D-Mass.) released a report Wednesday that he said showed that researchers at several universities who advised the U.S. Education Department on its Reading First program had “significant financial ties to education publishers while they held Reading First positions that required them advise and provide technical assistance to States and school districts about which reading programs to chose and how to implement them.”
Inside Higher Ed, May 10, 2007 --- http://www.insidehighered.com/news/2007/05/10/qt

Bob Jensen's threads on appearance versus reality of research independence --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#ResearchIndependence

Questions of Accounting and Accountability for Shrine Charities

"In Shriner Spending, a Blurry Line of Giving," by Stephanie Strom, The New York Times, March 19, 2007 --- http://www.nytimes.com/2007/03/19/us/19shrine.html?_r=1&hp&oref=slogin

But his faith was shaken when he joined the leadership of the Suez Shriners in San Angelo, one of 191 temples affiliated with the order. He found that much of the money collected to support the hospitals was commingled with money used for liquor, parties and members’ travel to Shrine events. The Shrine’s national auditor largely confirmed his findings, but not before Mr. Goline was forced out of office.

His experience is not unique. An examination by The New York Times of Shrine records and minutes of Shrine meetings and interviews with current and former Shrine officials painted a picture of lax accounting procedures and oversight under which money earmarked for the hospitals instead financed temple activities.

Continued in article

Ex-Halliburton unit accused of war profiteering
U.S. lawmakers on Thursday railed against senior Army officials and defense contractor KBR Inc. over persistent allegations of fraud and contract abuse on a multibillion-dollar deal to provide food and shelter to U.S. troops in Iraq. "Profiteering during wartime is inexcusable," said Sen. Byron Dorgan, D-N.D., testifying at a Senate Armed Services Committee hearing. "This is the most significant waste, fraud and abuse we have ever seen in this country." Lawmakers and the U.S. inspector general have accused KBR, formerly a division of Halliburton Co., which was once headed by Vice President Dick Cheney, of abusing federal rules in record-keeping...
Donna Borak, "Ex-Halliburton unit accused of war profiteering," Sun Herald, April 20, 2007 ---
http://www.sunherald.com/102/story/35851.html

"PCAOB: Ernst & Young Signed Without Evidence," AccountingWeb, May 3, 2007 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=103472

A report issued by the Public Company Accounting Oversight Board states that Ernst & Young LLP appears to have signed off on some public-company audits without having sufficient evidence to support its opinion. The Associated Press reported that Ernst & Young defended its work while acknowledging that it agreed, in response to the findings, to perform additional procedures for some clients.

"In no instance did these actions change our original audit conclusions or affect our reports on the issuers' financial statements," Ernst & Young said in an April 5 letter to the oversight board that was included in the report.

The latest inspection findings found fault with eight public-company audits by Ernst & Young, down from 10 deficient audits identified in the recently issued 2005 inspection report. By law, the largest audit firms must undergo annual inspection by the oversight body, created by Congress in 2002 to inspect and discipline public company accountants.

Inspection findings provide limited insight into audit quality since they don't identify audit clients by name. In response to complaints that the oversight board has been slow to issue findings, board chairman Mark Olson pledged last year to pick up the pace.

"Timeliness of inspection reports continues to be a priority for me, and I am pleased by our progress," Olson said in a statement Wednesday.

According to the 2006 inspection report, Ernst & Young didn't identify one client's departure from generally accepted accounting principles with regard to lease abandonment liability. The report also faulted the auditor's handling of the client's self-insurance reserve and severance payments to former executives. Ernst said it supplemented its work papers and performed additional procedures but that its additional work didn't affect its original conclusions on the unidentified client's financial statement.

Inspectors flagged a second audit where unrecorded audit differences would have reduced net income by as much as 5 percent, saying Ernst & Young failed to consider "quantitative or qualitative factors" relevant to the aggregate uncorrected audit differences. Ernst & Young attributed the difference to a prior-year error identified by its audit team, which it said the client firm corrected in its current year results. While Ernst & Young said it supplemented its 2005 audit record and informed the client's audit committee of the audit differences, it said the actions didn't change its original audit conclusions or affect its report on the firm's financial statements.

The audit firm had the same response to findings on a third audit, one where inspectors took issue with its handling of a long-term licensing agreement paid for partly with cash and partly with stock that would vest in the future. The audit firm disputed findings that there was no evidence it had analyzed the terms of the licensing agreement to ensure it complied with relevant accounting rules.

In a fourth audit, the oversight board's inspectors questioned whether Ernst & Young should have allowed the audit client to aggregate business lines when evaluating impairment of goodwill, saying certain factors indicated that aggregation wasn't appropriate. It said there was no evidence in the audit papers and "no persuasive other evidence" that Ernst & Young considered those factors in reaching its conclusion. For its part, Ernst & Young said it believes the issue was "properly evaluated" and that it took no further action as a result.

Bob Jensen's threads on Ernst & Young's legal and professionalism woes are at http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

Bob Jensen's threads on audit firm professionalism are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Fraud as Usual in the United Nations

"Kim's U.N. Banker," The Wall Street Journal, June 11, 2007; Page A12 --- Click Here

The case of the United Nations and North Korea gets curiouser and curiouser. Only a week ago, the U.N. was claiming that a preliminary audit of its programs in North Korea showed "irregularities" that were no big deal. But now the U.S. has new evidence that U.N. funds intended to help the people of one of the world's poorest countries were diverted to prop up Kim Jong Il's regime.

The latest chapter in the Cash for Kim saga shows how the United Nations Development Program operated as the North Korean dictator's private banker. The U.N. agency facilitated Pyongyang's purchases of high-tech equipment that could be used for military purposes, as well as property in France, Britain and Canada. The outlines of the scam were reported over the weekend in the Chicago Tribune and Washington Post.

The details are worth studying, however,

. . .

The U.S. has also raised concerns that North Korea used the UNDP to cover up its counterfeiting. The UNDP often paid for foreign travel for North Korean officials. In a number of cases, North Korean employees of the UNDP appear to have abetted a money-laundering scheme involving real dollars and fake dollars and the UNDP's euro account at the Foreign Trade Bank in Pyongyang. The real dollars were pocketed by the government, while the fake ones were distributed by North Korean officials on their foreign travels.

We're told that U.N. Secretary-General Ban Ki-moon claims to be "shocked" by these latest U.N. findings. We hope that means he's finally motivated to buck the U.N. bureaucracy and insist on the independent, external audit of U.N. operations in North Korea that he promised in January. As these revelations show, there's a long way to go before we get to the bottom of the Cash for Kim scandal.

"Prosecutors End Case in Long AOL Fraud Trial:   Executives Accused Of Making Sham Deals," by Carrie Johnson, The Washington Post, January 5, 2007 --- Click Here

Federal prosecutors concluded their accounting-fraud case against two former AOL executives yesterday afternoon, signaling that the long-running trial soon may end after unusual twists including a mistrial for one of the defendants.

The case, which began in an Alexandria federal courtroom in mid-October, is one of the longest criminal trials ever in a jurisdiction that is widely known as "the rocket docket" for its speedy and efficient justice, legal analysts said.

More than three dozen government witnesses testified about complex accounting tricks that hearkened back to early 2001, when the technology boom had turned into a bust. At the time, the Dulles Internet service provider struggled to show revenue and advertising gains by making questionable deals with dot-com business partners in which no revenue changed hands.

"There was an intense focus to get revenue," testified Jason Witt, a manager in AOL's aggressive and freewheeling business affairs unit, which has been disbanded. "It's probably the greatest pressure I've seen since ever."

A number of witnesses recounted how the AOL defendants -- former business affairs executive Kent D. Wakeford and former Netbusiness unit vice president John P. Tuli -- felt squeezed between the expectations of their employer to close more deals and demands from dot-com clients who themselves were struggling to stay afloat.

Witt, for example, said Wakeford told him not to put terms of a deal in writing. He also spoke of a 2002 meeting with Tuli in the AOL parking garage in which they discussed whether regulators had begun to inquire about AOL's dealings with two high-tech business partners. Defense lawyers contend that the accounting treatment on the deals had been vetted by experts in the company and by far-higher-ranking executives.

But the trial perhaps is most notable for the absence of the former AOL officials who led the business-affairs operation, such as David M. Colburn and Eric Keller, whose names came up regularly in testimony and who once had been the focus of government investigation. Time Warner, which absorbed AOL, agreed to pay more than $500 million to settle joint civil and criminal charges two years ago.

Neither Colburn nor Keller was charged with a crime. The five-year statute of limitations against them expired early last year. Prosecutors told U.S. District Judge Walter D. Kelley Jr. with the jury outside the courtroom that the U.S. attorney's office for the Eastern District of Virginia continues to investigate whether Keller misled investigators in sworn testimony to securities regulators. But there have been few, if any, signs of an active criminal investigation. The Securities and Exchange Commission, which has the power to seek the return of bonuses and other compensation, continues to scrutinize a number of former AOL executives.

The courtroom drama eased with the departure more than a month ago of its most colorful presence, Las Vegas entrepreneur Charles E. "Junior" Johnson. Johnson founded PurchasePro.com, a software manufacturing company that prosecutors say made a series of sham deals with AOL in early 2001 in an effort to stave off financial doom.

Johnson, who entertained spectators and courthouse personnel with his lively stories, was removed from the trial in November and a mistrial was declared for reasons that remain secret. Prosecutors say they intend to retry Johnson, who is accused of directing subordinates to destroy e-mail messages and forge accounting documents. That leaves his former employee Christopher J. Benyo as the only PurchasePro representative sitting at a defense table next to the former AOL executives.

Defense lawyers could wrap up their case in the next several days, putting their clients' fate in the hands of a jury that has remained attentive despite the trial's sometimes plodding pace. Earlier this week, five jurors dressed in business attire took notes and pored over documents, although a few panelists' eyes wandered as the morning dragged. So far, none of the three defendants has said he will testify in his own defense. Their lawyers will ask the judge to dismiss the charges against them in arguments today.

Central to the prosecution case are former PurchasePro executives R. Geoffrey Layne and James S. Sholeff, both of whom pleaded guilty in early 2005 and agreed to testify against their former business associates. Layne and Sholeff said they conspired with Johnson at the Bagel Cafe in Las Vegas in April 2001 to forge documents that allowed the company to reach revenue goals after the financial quarter had ended.

Their accounts over the course of the trial mostly implicated Johnson. They testified that they shredded documents and destroyed computers at his direction, then buried the ashes or raked the pieces into Sholeff's yard. Layne and Sholeff also mentioned conversations with Wakeford and Tuli, who were under heavy pressure to close revenue gaps at AOL.

Continued in article

"Shaking Up Loan Industry," by Scott Jaschik, Inside Higher Ed, April 13, 2007 --- http://www.insidehighered.com/news/2007/04/13/ed

A statement released by the department late Thursday said that Spellings has asked Susan Winchell, the department’s chief ethics officer, to review “best practices” on its own financial disclosure forms to identify ways that the department might improve. Spellings also has directed that each financial disclosure form now be reviewed by at least two lawyers.

Last week, Spellings placed on leave Matteo Fontana, an Education Department official who works on student loan issues, after the New America Foundation reported that he had sold at least $100,000 in stock in the Education Lending Group, which owned Student Loan Xpress, a lender at the center of the current controversy.

It is unclear whether that sale (or the prior ownership) violated any laws or regulations, but the news about Fontana prompted calls from Democrats for tougher enforcement of loan rules by the department.

Financial disclosure reports for Fontana released by the department late Thursday in response to a Freedom of Information Act request by Inside Higher Ed offered conflicting evidence on the extent of his stock ownership and sale and of his disclosures to the department about those assets.

In his initial filing in mid-December 2002, soon after joining the department, he reported owning between $1,001 and $15,000 in stock in Direct III Marketing, as Student Loan Xpress was known at the time, and an equivalent amount of stock in Education Lending, Inc., then the parent company of Student Loan Xpress. (A note written on the form by the ethics officer at the time said “Filer [was] advised to contact Ethics Division if ELG stock exceeds $15K.") In May 2004, his first full financial disclosure, covering the 2003 calendar year, he reported having sold between $1,001 and $15,000 in stock in both companies later in mid- to late December 2002. That could be read to suggest that he had sold all of his stock in both companies.

But in May 2005, according to his disclosure form for the 2004 calendar year, Fontana reported having sold between $100,001 and $250,000 in stock in Education Lending common stock in July 2004. There is no explanation of where that stock came from. The fact that Fontana reported the sale is likely to add to Democratic Congressional criticism about the Education Department, as Fontana’s reporting raises the question of whether anyone at the department took action based on the apparent conflict.

Late Thursday, Sen. Edward Kennedy, chairman of the Senate committee with oversight of education programs, issued a statement saying: “The financial disclosure forms filed by Education Department official Matteo Fontana during his time at the department raise grave concerns about the effectiveness and impartiality of the ethics process at the department. The forms show that department officials were aware that Mr. Fontana held a significant financial interest in a company that he was charged with overseeing. Any American can tell you that this is dead wrong.”

The statement from the department Thursday noted that “like many federal government employees, Department of Education employees may own stock in any company, including companies the Department regulates or with whom the Department does business.” The statement went on to elaborate: “The conflict of interest statute prohibits employees from working on department matters that will affect the companies they own stock in unless the employee receives a waiver or an applicable regulatory exemption. For example, employees are generally permitted to work on any matter even if they do own stock as long as their interest in the matter does not exceed $15,000.”

The department also announced that Spellings has asked for the resignation of Ellen Frishberg from the department’s Negotiated Rulemaking Committee on Student Loans. Frishberg, director of student financial services at Johns Hopkins University, was placed on administrative leave by the university after it learned that she had received payments from Student Loan Xpress.

Frishberg is the second person Spellings has asked to leave a student aid post because of the scandal. Spellings earlier sought the resignation of Lawrence W. Burt from the Advisory Committee on Student Financial Assistance. Burt is director of financial aid at the University of Texas at Austin, although he too is on leave, following reports that he owned Student Loan Xpress stock.

The investigation of lender-college relationships has been led by Andrew M. Cuomo, attorney general of New York State, but it has prompted considerable interest among Congressional leaders as well. And there are no signs that the inquiries are winding down.

Reuters reported Thursday that the attorneys general of Connecticut and California are also starting probes of the topic, joining a previously announced review by the attorney general of Minnesota.

To date, most of the individuals implicated in the scandal — at least those working at colleges — have been financial aid officers. But on Thursday, a president joined the list of those being scrutinized.

Elnora Daniel, the president of Chicago State University, is a director and shareholder of a lender to which her university steers students, The Chicago Tribune reported. A Chicago State trustee is also chairman of the board of the lender, Seaway National Bank. Daniel told the Tribune that there was “no quid pro quo” in her relationship with the lender. Chicago’s other daily, The Sun-Times, reported, meanwhile, that Western Illinois University was abandoning an arrangement in which it received payment — called kickbacks by critics — from a lender it was recommending to students.

And Bloomberg reported Friday on a number of college officials — including the president of Morehouse College and the executive vice president of the University of Notre Dame — who collected pay or stocks from lenders at the time those lenders were being recommended to their students.

How do lenders rate on treats at the University of Texas?
Officials at the University of Texas at Austin — already facing scrutiny over how they recommended lenders to students — have a new embarrassment to face. The Daily Texan obtained and published documents showing that the office rated lenders not just on the quality of services provided to students, but on the “treats” provided to the aid office — treats like fajita lunches, happy hours, birthday cakes and more.
Inside Higher Ed, May 1, 2007 --- http://www.insidehighered.com/news/2007/05/01/qt

"College Administrator’s Dual Roles Are a Focus of Student Loan Inquiry," by Sam Dillon, The New York Times, April 13, 2007 --- http://www.nytimes.com/2007/04/13/education/13loans.html?_r=1&oref=slogin

"Lenders Pay Universities to Influence Loan Choice," by Jonathan D. Glater, The New York Times, March 16, 2007 --- http://www.nytimes.com/2007/03/16/education/16loans.html?_r=1&oref=slogin

Bob Jensen's threads on higher education controversies are at http://www.trinity.edu/rjensen/HigherEdControversies.htm

January 1, 2007 message from Doug Roberts [robertsfd@APPSTATE.EDU]

I am teaching for the first time a fraud examination course. As this is not my area of experience, I'm looking for ideas on what to cover and how best to cover it. In addition, the timing of the class and the non- standard "audience" will impact what I do.

The course will meet 3 and 1/2 hours a day for 12 days (consecutive except for weekends) at the end of the semester. Students will be those just returning from tax internships who need another 3 credit hours to maintain full-time status (rather than taking the course because they have an interest in fraud examination); they will have just finished 15 weeks of busy season and I suspect will be less than motivated to do much work without thoughtful "pressure" on my part. Therefore, my objective is to have activities that will force them to remain involved and hopefully learn something and have fun at the same time.

The textbook is rather interesting reading covering various forms of fraud. Beyond their reading outside of class and some quizzes over the reading, I need ideas on what to do - I'd like to keep lecture time to a minimum but need to fill up at least 3 hours. I have some videos the Association of Certified Fraud Examiners put out and will try to get some guest speakers who work in the area. But that still leaves me much time.

Does anyone have any ideas? One thought I had was working with data using Excel and Access to look for fraud flags. However, I have not been able to find datasets. Does anyone know of any good datasets or cases where data analysis is used? I saw where IDEA offers an educational demo - does anyone have experience using that? And how long does that take to complete? Any other ideas using hands-on computer exercises?

Any ideas would be appreciated.

Happy New Year,

Doug Roberts

January 1, 2007 reply from Len Stokes

I have used some of the cases from the Knapp Audit Case book published by Thomson. Many of the cases relate to audit failure and I don't focus exclusively on the GAAS perspective but the Internal Control, fraud etc. I break the class into groups and have a specific grup lead the disucssion of the issues in the case and what they think went wrong, why and what could have been done to prevent it. I don't allow them to focus on the questions that are provided My concept is to get them to begin to think outside the box not just think that Fraud involves specific lists of thing to do. The Fraud videos usually are about an hour. The students usally have interesting comments related to what they saw. Use the class time like a seminar with disucssions and the time will fly with a great deal of interest on their behalf.

 

Len

January 2, 2007 reply from Bob Jensen

Here are a few references of possible interest on this topic:

Turn Excel into a financial sleuth: an easy-to-use digital analysis tool can red-flag irregularities
Journal of Accountancy, August, 2003 by Anna M. Rose, Jacob M. Rose --- http://www.aicpa.org/pubs/jofa/aug2003/rose.htm 

Three books are reviewed in the December 2002 issue of the Journal of Accountancy, pp. 88-90 ---
http://www.aicpa.org/pubs/jofa/dec2002/person.htm 

"Auditors’ New Procedures for Detecting Fraud," by D.D. Montgomery, M.S. Beasley, S. Menelaides, and Z. Palmrose, Journal of Accountancy, May 2002 ---
http://www.aicpa.org/pubs/jofa/may2002/mont.htm 

"Let Them Know Someone’s Watching, by Joseph T. Wells, Journal of Accountancy, May 2002 ---
http://www.aicpa.org/pubs/jofa/may2002/wells.htm 

How to Avoid Predatory Loans

Bob Jensen's mortgage advice is at http://www.trinity.edu/rjensen/FraudReporting.htm#MortgageAdvice