Accounting Scandal Updates and Other Fraud Between April 1 and June 30, 2013
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- http://www.trinity.edu/rjensen/fraud.htm 

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

Bob Jensen's Enron Updates are at --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates 

Other Documents

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

Resources to prevent and discover fraud from the Association of Fraud Examiners --- http://www.cfenet.com/resources/resources.asp 

Self-study training for a career in fraud examination --- http://marketplace.cfenet.com/products/products.asp 

Source for United Kingdom reporting on financial scandals and other news --- http://www.financialdirector.co.uk 

Updates on the leading books on the business and accounting scandals --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

I love Infectious Greed by Frank Partnoy ---  http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

Bob Jensen's American History of Fraud ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing 

"What’s Your Fraud IQ?  Think you know enough about corruption to spot it in any of its myriad forms? Then rev up your fraud detection radar and take this (deceptively) simple test." by Joseph T. Wells, Journal of Accountancy, July 2006 --- http://www.aicpa.org/pubs/jofa/jul2006/wells.htm

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

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

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

White Collar Fraud Site --- http://www.whitecollarfraud.com/
Note the column of links on the left.

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm

The Heroes of Financial Fraud, The Atlantic, April 2009 --- http://meganmcardle.theatlantic.com/archives/2009/04/the_heroes_of_financial_fraud.php

History of Fraud in America ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

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

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

AICPA Fraud Resource Center --- Click Here
http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/fraud-prevention-detection-response.aspx

"New Report Shows Changing Fraud Environment," by Curtis C. Verschoor, AccountingWeb, March 18, 2013 ---
http://www.accountingweb.com/article/new-report-shows-changing-fraud-environment/221374

Today’s FBI: Facts and Figures 2013-2014—which provides an in-depth look at the FBI and its operations—is now available ---
http://www.fbi.gov/stats-services/publications/todays-fbi-facts-figures/facts-and-figures-031413.pdf/view

Center for Audit Quality Releases 'Fighting Fraud' Video in April 2013 ---
http://www.accountingweb.com/article/center-audit-quality-releases-fighting-fraud-video/221506

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

Academic Versus Political Reporting of Research:  Percentage Columns Versus Per Capita Columns ---
http://www.cs.trinity.edu/~rjensen/temp/TaxAirlineSeatCase.htm
by Bob Jensen, April 3, 2013

WRESTLING WITH REFORM: FINANCIAL SCANDALS AND THE LEGISLATION THEY INSPIRED ---
http://www.sechistorical.org/
Thank you Jim McKinney for the heads up.

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

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

 




2012 Internet Crime Report
IC3 via FBI, May 14, 2013
http://www.fbi.gov/news/stories/2013/may/internet-crime-in-2012/internet-crime-in-2012


Nine Famous Whistle-Blowers: Where Are They Now?

This includes updates on Sherron Watkins (foul mouthed whistle blower who helped bring down Enron)
This includes updates on Cynthia Cooper (persistent internal auditor whistle blower that helped bring down Worldcom)

9 Famous Whistle-Blowers: Where Are They Now?
http://www.businessinsider.com/9-famous-whistle-blowers-2013-6?op=1

Bob Jensen's threads on Sherron (Smith) Watkins and Cynthia Cooper are at
http://www.trinity.edu/rjensen/FraudEnron.htm

Two types of speakers are popular on the convention circuit --- former whistle blowers and former fraudsters (after their prison years)
Both types usually write top selling books as well.
One problem with former fraudsters is that recidivism is somewhat high

"Recidivism and Risk Management: Barry Minkow Goes Back to the Slammer," by Jim Peterson, re:Balance, March 2011 --- Click Here
http://www.jamesrpeterson.com/home/2011/03/recidivism-and-risk-management-barry-minkow-goes-back-to-the-slammer.html
 

Can Ethics Be Taught?
"Crazy Eddie Revisited: Old Lessons for Today's Accountants," by Anthony H. Catanach Jr., Grumpy Old Accountant, June 7, 2013 ---
http://grumpyoldaccountants.com/blog/2013/6/7/crazy-eddie-revisited-old-lessons-for-todays-accountants

 


"Vast Majority of Applicants Lie in Job Interviews," Harvard Business Review Blog, June 3, 2013 --- Click Here
http://blogs.hbr.org/daily-stat/2013/06/vast-majority-of-applicants-li.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date


"Feds shut down 'financial hub of the cyber-crime world'," by Bob Sullivan, NBC News, May 28, 2013 ---
http://redtape.nbcnews.com/_news/2013/05/28/18560809-feds-shut-down-financial-hub-of-the-cyber-crime-world?lite
Thank you Dennis Huber for the heads up.

Liberty Reserve was the financial glue that held together a massive worldwide network of cybercriminals, but the network that enabled $6 billion to change hands has been ripped apart, U.S. prosecutors said Tuesday, leaving thousands of criminals wondering where the money is.

One of the world’s most widely used digital currencies, Liberty Reserve was used as a secret money system for credit card thieves, identity thieves, Ponzi scheme peddlers, hackers for hire, child pornographers, even drug dealer websites, federal officials claim in an indictment unsealed Tuesday in Manhattan federal court. The virtual money system allowed perhaps a million criminals to anonymously move money around the world.

The scope of the crime is "staggering," federal officials allege in the indictment: Liberty Reserve had a million users and serviced 55 million transactions since 2006. Some are calling this the largest money laundering prosecution in history.

"(Liberty Reserve is) a criminal business venture...designed to help criminals conduct illegal transactions and launder the proceeds," the unusually colorful indictment says. "(It was) a financial hub of the cyber-crime world."

Continued in article

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


From the IRS
IRS Criminal Investigation Issues Fiscal 2012 Report, IR-2013-50, May 10, 2013 ---
http://www.irs.gov/uac/Newsroom/IRS-Criminal-Investigation-Issues-Fiscal-2012-Report


From the CFO Journal's Morning Ledger on June 21, 2013

Libor case ensnares more banks
Employees of some of the world’s largest financial institutions conspired with a former bank trader to rig benchmark interest rates, British prosecutors alleged, a sign authorities have their sights on an array of banks and brokerages. The U.K.’s Serious Fraud Office charged former UBS and Citigroup trader Tom Hayes with eight counts of “conspiring to defraud” in an attempt to manipulate Libor, the WSJ reports. The charges read in court Thursday accuse Mr. Hayes of conspiring with employees of eight banks and interdealer brokerage firms, as well as with former colleagues at UBS and Citigroup. Mr. Hayes, who was charged with similar offenses by the U.S. last December, hasn’t entered a plea in either country.

"Libor Case Ensnares More Banks U.K. Prosecutors Allege Staff From J.P. Morgan, Deutsche Bank and Others Tried to Fix Rates," by David Enrich, The Wall Street Journal, June 20, 2013 ---
http://online.wsj.com/article/SB10001424127887323893504578556941091595054.html?mod=djemCFO_h

Employees of some of the world's largest financial institutions conspired with a former bank trader to rig benchmark interest rates, British prosecutors alleged Thursday, a sign authorities have their sights on an array of banks and brokerages.

The U.K.'s Serious Fraud Office this week charged former UBS AG UBSN.VX +0.43% and Citigroup Inc. C -3.40% trader Tom Hayes with eight counts of "conspiring to defraud" in an alleged attempt to manipulate the London interbank offered rate, or Libor. Mr. Hayes appeared in a London court Thursday, where prosecutors for the first time detailed their allegations against him, including a list of institutions whose employees Mr. Hayes allegedly conspired with.

Mr. Hayes, who was charged with similar offenses by the U.S. last December, hasn't entered a plea to either country's charges. He wrote in a January text message to The Wall Street Journal that "this goes much much higher than me."

The charges read in court Thursday accuse Mr. Hayes of allegedly conspiring with employees of eight banks and interdealer brokerage firms, as well as with former colleagues at UBS and Citigroup. Each of the eight charges accused Mr. Hayes of "dishonestly seeking to manipulate [Libor]…with the intention that the economic interests of others would be prejudiced and/or to make personal gain for themselves or another."

The banks include New York-based J.P. Morgan Chase JPM -2.04% & Co.; Germany's Deutsche Bank DBK.XE +0.78% AG; British banks HSBC Holdings HSBA.LN +1.34% PLC and Royal Bank of Scotland Group RBS.LN -3.06% PLC; and Dutch lender Rabobank Groep NV. Prosecutors alleged Mr. Hayes also worked with employees of ICAP IAP.LN +4.74% PLC, Tullett Prebon TLPR.LN -0.07% PLC and R.P. Martin Holdings Ltd., which are London-based interdealer brokers that serve as middlemen between bank traders.

An ICAP spokeswoman said the firm has provided information to British prosecutors and continues to cooperate. A Rabobank spokesman said the bank continues to cooperate with investigators and is likely to eventually reach a settlement. In a statement, Tullett said it is "cooperating fully" with prosecutors' requests for information. Representatives for the rest of the named institutions declined to comment.

The list of banks and brokerages named at Thursday's court hearing underscores the breadth of institutions that remain under government scrutiny. So far, only three banks—UBS, RBS and Barclays BARC.LN +0.30% PLC—have reached settlements with U.S. and British authorities. Authorities hope to hammer out settlements with additional institutions, including Rabobank, in coming months, according to a person familiar with the investigation.

The list that prosecutors read Thursday included at least one institution that has said it wasn't involved in the Libor scandal. After UBS settled rate-rigging allegations last December, Tullett Prebon spokeswoman Charlotte Kirkham said the firm didn't help UBS manipulate rates and that no Tullett employees had been disciplined in connection with Libor. In April, Tullett said it stood by that statement.

In a statement Thursday, Tullett disclosed for the first time that it has been asked to provide information to various regulators and government agencies in connection with Libor investigations. In addition to saying it is cooperating with the requests, the firm reiterated it hasn't been informed that it or its brokers are under investigation in relation to Libor. A spokesman declined to comment further.

The interdealer brokers' alleged involvement in attempts to rig Libor has rocked the industry in recent months. Two R.P. Martin employees were arrested along with Mr. Hayes in December but not charged. The U.S. Justice Department and the Commodity Futures Trading Commission also are investigating brokers as part of their Libor probes, according to people familiar with those investigations.

Mr. Hayes, a 33-year-old British citizen, was a derivatives trader in Tokyo from 2006 through 2010, the period during which prosecutors allege he attempted to manipulate Libor. He is the only person the Serious Fraud Office has charged in their nearly yearlong Libor investigation, although an agency spokesman said this week that more arrests and charges are possible.

Mr. Hayes, wearing beige trousers and an untucked, navy dress shirt, didn't respond to the charges at court Thursday. Standing behind a glass partition in the courtroom, he was mostly silent aside from telling the judge his name, address and date of birth. At one point, the judge asked him to take his hands out of his pockets.

Continued in article

Bigger than Enron and Rotten to the Core:  The LIBOR Scandal
Bob Jensen's threads on the LIBOR Scandal ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

 


Teaching Case
From  The Wall Street Journal Accounting Weekly Review on June 14, 2013

CRU, After LIBOR Scandal, Audits Steel Prices Index
by: John W. Miller
Jun 05, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Assurance Services, Auditing, Auditing Services

SUMMARY: CRU Group compiles steel prices and issues a report every Wednesday. "The compiler...said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. The move is believed to be a first by a commodity-price-index firm to audit information provided to it."

CLASSROOM APPLICATION: The article may be used in an auditing or other assurance services class to discuss non-audit services, audit planning for a first-of-its-kind engagement, and determination of materiality in such a setting.

QUESTIONS: 
1. (Introductory) What does Commodity Research Unit Group (CRU) do? Who uses the information that the group prepares?

2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be specific in stating a type of service to be provided and the type of report that you think may be issued under U.S. assurance service requirements.

3. (Advanced) What is the significance for assurance work planning of the fact that this engagement is apparently the first by a commodity-price-index firm to audit information provided to it?

4. (Advanced) Suppose you are an audit manager planning an engagement for KPMG to examine steel prices. What factors will you consider in deciding on materiality of amounts to examine?
 

Reviewed By: Judy Beckman, University of Rhode Island

"CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller, The Wall Street Journal, June 5, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid

A key price compiler in the global steel industry said it will begin auditing its data providers, part of an effort to address concerns about transparency in price indexes following the Libor rate-fixing scandal.

The compiler, Commodity Research Ltd., said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. Much of these steel types are destined for the U.S automotive market.

The move is believed to first by a commodity-price-index firm to audit information provided to it. CRU, based in London and Pittsburgh, has hired KPMG LLP to conduct the audits, according to a person familiar with the matter. KPMG didn't respond to a request for comment.

Glenn Cooney, London-based head of operations for CRU Indices, which publishes price data on 75 commodities in metals, mining and fertilizers, said it would look at auditing other data providers in other sectors to bolster industry transparency.

Currently, CRU collects price and volume data on spot transactions from steel producers and buyers, who submit their prices voluntarily to a CRU website. CRU publishes an index price based on the submissions every Wednesday.

CRU officials say they hope the move will lend it added credibility at a time of concern about indexes. Three banks in Europe have agreed to pay over $2 billion in settlement fees to U.S. and U.K. regulators after they were caught manipulating the London interbank offered rate, or Libor, the interest rate banks charge to borrow from each other. Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company started receiving more requests for improved transparency after the Libor scandal.

The company also hopes it will be able to reassure several major U.S. steel mills, which in April said they would no longer link some contracts to CRU's steel indexes because they felt prices quoted weren't an accurate reflection of the market. The steelmakers that stopped using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23% and Nucor Corp. NUE +3.01%

Grant Davidson, general manager for sales at ArcelorMittal's Dofasco mill in Canada, said big steel companies would welcome more transparency. "We're for what's most accurately reflecting the price in the market," he said.

Michael Steubing, vice president of global procurement for Mauser USA LLC, which makes steel drums and barrels, said an audited index would help guarantee that he can sell his product at a competitive price. He sells barrels to big chemical companies that use CRU to help determine how much they will pay for the barrels. "So we'd like that (CRU) to be as accurate as possible," he said.

CRU, which is used by the Chicago Mercantile Exchange and says its prices are used to settle steel contracts with an annual global value of over $20 billion, faces more competition from Platts, a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago bought price compiler The Steel Index.

Joe Innace, Platts's editorial director for metals, said Platts would continue its phone survey for its Platts industry newsletter independently of The Steel Index and wouldn't use audits because he said it has enough verifications, such as checking that prices match the types and volumes of steel appropriate to the index, in place.

Steve Randall, who founded The Steel Index in 2006, said it had no plans to audit data providers. "We run all our data through a series of screenings," he said. He declined to provide details about the screening procedure.

Continued in article

"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:   The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

Bob Jensen's LIBOR fraud threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's threads on LIBOR are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

Bob Jensen's threads on LIBOR and other derivative financial instruments frauds (timeline) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
This is so huge it's better to do a word search for LIBOR

 


Definition of Screwed:
avg mkt return ~12%, avg mutual fund ret ~9%, average investor ret ~ 2.6%. Timing, selection, and costs destroy

Finance Professor Jim Mahar

"Romancing Alpha (α), Breaking Up with Beta (β)," by Barry Ritholtz, Ritholtz, February 15, 2013 --- |
http://www.ritholtz.com/blog/2013/02/alpha-beta/

 


"McGladrey settles fraud lawsuit over Abbate embezzlement," by Paul Brinkman, Biz Journal, June 14, 2013 ---
http://www.bizjournals.com/southflorida/blog/2013/06/mcgladrey-settles-fraud-lawsuit-over.html

The McGladrey accounting firm has settled a lawsuit that accused the firm of fraud in connection with embezzlement by Miami Beach Community Health Center CEO Kathryn Abbate.

Although terms of the settlement were not confidential, the center’s attorney Richard E. Brodsky declined to reveal the terms.

Abbate was sentenced to six years in prison on Wednesday for embezzling $7 million over a period of five years.

During that period, accountants working for McGladrey and CohnReznick audited the center’s accounts.

The center sued both McGladrey and CohnReznick after learning about Abbate’s theft of funds in August. The center accused its auditors of failing to detect the embezzlement for years. McGladrey prepared federal tax returns for the center from 2007 to 2009.

According to the center’s lawsuit, McGladrey fired its main auditor on the center’s account, Steven D. Schwartz, in January 2011, and Schwartz went to work for CohnReznick.

The lawsuit alleges that Schwartz no longer performed regular work on the center’s accounts after leaving McGladrey, but continued to supervise others who did.

The center states in its lawsuit that it was eventually Schwartz who alerted someone besides Abbate to her embezzlement in May 2012.

An amended complaint in the lawsuit alleged that auditors had failed to adequately detect problems with procedures governing checks and other financial transactions and failed to report those properly to management and the board of directors.

Continued in article

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


"The CIA, the FCPA and the double standard on policing corruption," by Alison Frankel, Thompson Reuters, May 8, 2013 ---
http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=76925&terms=%40ReutersTopicCodes+CONTAINS+ANV
Thank you Dennis Huber for the heads up.

It's been a busy couple of weeks for the Foreign Corrupt Practices Act, the Justice Department's versatile and hard-working anti-bribery law. On April 22, Ralph Lauren paid an $882,000 penalty in a non-prosecution agreement that resolved FCPA allegations of bribing a customs official in Argentina to permit the import of Ralph Lauren products. On May 7, prosecutors in Manhattan unsealed a criminal complaint accusing two Florida brokers of paying kickbacks to a Venezuelan state bank official who directed the bank's financial trading business to them. The FCPA has taken some recent lumps from judges, and last year prosecutions fell off slightly from their blistering pace in 2009, 2010 and 2011. But as Gibson, Dunn & Crutcher noted in its January report on FCPA enforcement, bribery prosecution has become routine. "This is a marathon, not a sprint," the report said, warning businesses not to let down their guard.

In between the reports of new Justice Department FCPA actions, The New York Times had a corker of a story about "ghost money" payments by the Central Intelligence Agency to Afghan president Hamid Kharzai. The Times reported that the CIA has passed tens of millions of dollars to Kharzai over the course of a decade, in cash packed into suitcases and shopping bags and dropped off at his office. The Afghan president subsequently confirmed the payments (though he called them "small amounts") and, according to the Times, said he expected the CIA to continue providing him with ready cash that he could, in turn, use to bribe warlords in the political elite.

Do you see a double standard here? The CIA and other government entities are not, of course, subject to the FCPA, which targets corruption with a commercial motive. The CIA declined to comment to The New York Times, but it would surely contend that any support for Kharzai is in the interest of the security of the United States and Americans in Afghanistan. But in a provocative post at his blog, The FCPA Professor, Michael Koehler of the Southern Illinois University School of Law argues that it's troubling to see the CIA sanctioning enormous cash payments to foreign officials while the Justice Department prosecutes businesses for similar behavior on a much smaller scale. The U.S. presents itself as the world's most vigorous enforcer of anti-corruption laws, Koehler said, but such proclamations seem hollow when the government sanctions bribery.

"During this era of FCPA enforcement, enforcement actions frequently include allegations of corporate payments to 'foreign officials' for such items as wine, watches, cameras, kitchen appliances, business suits, television sets, laptops, tea sets and office furniture," he wrote. "This conduct pales in relation to the conduct described in the NY Times article and is made even more egregious given that FCPA enforcement actions invariably involve use of private shareholder/owner funds, whereas the campaign of bribery in Afghan is using public funds."

Similarly, Richard Cassin of The FCPA Blog told me in an email that if the payments to Kharzai were sheer graft, "then everyone who's subject to the FCPA has a legitimate complaint." (If the payments are properly categorized as foreign aid, Cassin said, then there should have been a public accounting of how they were spent.) "Afghanistan is one of the world's most corrupt countries," Cassin said in the email. "By delivering cash to the president's office for ten years, the U.S. government certainly did nothing to end the corruption. And it probably did plenty to reinforce the corrupt culture among the country's leaders. If Afghanistan's leaders are taught to expect bribes from outsiders, that makes it harder for anyone to do legitimate business there."

In a phone interview, Koehler said prosecutors would probably laugh in the face of a defense lawyer who tried to argue that her client shouldn't face FCPA charges because the CIA is permitted to pass shopping bags full of cash to Hamid Kharzai. And almost all companies facing FCPA charges end their defense at the Justice Department, because they'd rather pay fines and receive non- or deferred-prosecution deals than face trial. As a result, Koehler said, the government's "black-and-white" view of corporate payments to foreign officials goes unchallenged.

But judges passing sentence on convicted FCPA defendants are more inclined to sense hypocrisy in the government's double standard, according to Koehler. He wrote about two different sentencing hearings in 2010 in which judges referred to the relative impunity of intelligence agents when they went easy on FCPA defendants. In one instance, U.S. District Judge William Pauley of Manhattan sentenced James Giffen to no jail time and said charges shouldn't have been brought after Giffen asserted that the CIA knew about and encouraged his contacts with Kazakh officials. In the other, U.S. District Judge Jackson Kiser of West Virginia cited the CIA's routine bribes to Afghan warlords and questioned the "morality" of prosecuting Bobby Jay Elkin for paying a bribe to a public official in Kyrgyzstan after being threatened with firing.

Continued in article

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


"The Many Ways That Cities Cook Their Bond Books:  The $3 trillion municipal debt market is rife with creative accounting," by Steve Malanga, The Wall Street Journal, May 31, 2013 ---
http://online.wsj.com/article/SB10001424127887324659404578501241181682894.html?mod=djemEditorialPage_h

It has been a busy few weeks for the Securities and Exchange Commission. In May, the SEC charged two cities—Harrisburg, Pa., and South Miami, Fla.—with securities fraud for allegedly deceiving investors in their municipal bonds.

This follows similar fraud charges against states, New Jersey in 2010 and Illinois in March, after SEC investigators uncovered what they called "material omissions" and "false statements" in bond documents related to those state's pension funds.

With Harrisburg, however, the SEC has gone further and charged the city government with "securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated." The SEC says this is the first time the regulator has "charged a municipality for misleading statements made outside of its securities disclosure documents."

The Harrisburg charges are part of a broader SEC effort to scrutinize state and local government issuers in the nation's $3 trillion municipal-bond market. "Anyone who follows municipal finance knows that budgets can sometimes be a work of fiction," says Anthony Figliola, a vice president at Empire Government Strategies, a Long Island-based consulting firm to local governments. "Harrisburg is the tip of the iceberg."

And a mighty iceberg it is. The 2012 State of the States report, released in November by Harvard's Institute of Politics, the University of Pennsylvania's Fels Institute of Government and the American Education Foundation, found state and local governments are carrying more than $7 trillion in debt, an amount equal to nearly half the federal debt. Often, the report said, "States do not account to citizens in ways that are transparent, timely or accessible."

Consider the practices of Stockton, Calif., which last June became the nation's biggest city to file for bankruptcy. In 2011, Stockton's new financial managers issued a blistering critique of past accounting practices and acknowledged that the city's previous financials had hidden significant costs, including the real cost of employee compensation and retirement obligations. Bob Deis, the new city manager, declared that Stockton's financials bore "eerie similarities to a Ponzi scheme."

If so, the city's bondholders have been taken for a ride. In bankruptcy court earlier this year, a judge ruled that Stockton could suspend payments on its bonds even while continuing to fund its employee retirement system.

Similarly, when another California city, San Bernardino, went bust last year, some city officials alleged that it had been filing inaccurate financial records for nearly 16 years. At best, officials said, the city's bookkeeping had been "unprofessional." The SEC began an investigation last fall. Meanwhile, the city has defaulted on bond payments, leaving investors in the lurch.

One area that has come under special scrutiny is pension-fund accounting, because states have latitude in choosing how to value their retirement debts. The SEC noted that Illinois used accounting that funds a larger percentage of an employee's pension costs near the end of his career, a method that increases the risks that the system could go bust. The SEC said Illinois didn't properly reveal the risks posed by this sophisticated accounting wrinkle.

The SEC accused New Jersey of failing to disclose to investors that it wasn't sticking to a plan to adequately fund its pension system. In this, the Garden State isn't alone. Many states underfund their pension systems, even by their own accounting standards.

A June 2012 study by the Pew Center on the States found that 29 states didn't make their annual required contribution for pensions in 2010, the last year for which data were available. It isn't clear how many of the more than 3,000 local government pension systems follow the same practice, although a survey this January by Pew of 61 large cities found nearly half didn't make their full contributions.

In the South Miami case the SEC zeroed in on a complex bond deal that changed over time in a way that threatened the tax-free status of the securities. The SEC essentially warned South Miami that municipalities that employ such schemes need to fully understand the consequences for investors. In this particular case, South Miami paid $260,000 to the Internal Revenue Service to preserve the tax-free status of the bonds for investors.

Municipal investors have often ignored such questionable practices thanks to a generation of low default rates. Many also assume that even when a local government gets into financial trouble, bondholders are always first in line to be paid.

But officials in some troubled cities are pushing back against the notion that investors should get the best deal among creditors. Harrisburg City Council members have balked at a state-proposed bailout plan because they claim it places much of the burden on taxpayers without penalizing investors. Last year, City Councilman Brad Koplinski called the plan's 1% increase in the state-imposed income tax on Harrisburg residents "a bad decision for the people of Harrisburg, people who did nothing to get our city into our fiscal crisis.''

Investors will hear more of this talk as municipalities face growing budget pressures. Recently, former New York Lt. Gov. Richard Ravitch warned the municipal bond industry that the promises governments have made to repay investors may not take precedent over other obligations. States and cities face "a unique challenge," he said, "in trying to maintain services and meet their retirement commitments to workers," emphasizing that this was "not necessarily a good message" for investors.

Continued in article

Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

Bob Jensen's threads on creative accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

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


Teaching Case
From  The Wall Street Journal Accounting Weekly Review on June 14, 2013

CRU, After LIBOR Scandal, Audits Steel Prices Index
by: John W. Miller
Jun 05, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Assurance Services, Auditing, Auditing Services

SUMMARY: CRU Group compiles steel prices and issues a report every Wednesday. "The compiler...said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. The move is believed to be a first by a commodity-price-index firm to audit information provided to it."

CLASSROOM APPLICATION: The article may be used in an auditing or other assurance services class to discuss non-audit services, audit planning for a first-of-its-kind engagement, and determination of materiality in such a setting.

QUESTIONS: 
1. (Introductory) What does Commodity Research Unit Group (CRU) do? Who uses the information that the group prepares?

2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be specific in stating a type of service to be provided and the type of report that you think may be issued under U.S. assurance service requirements.

3. (Advanced) What is the significance for assurance work planning of the fact that this engagement is apparently the first by a commodity-price-index firm to audit information provided to it?

4. (Advanced) Suppose you are an audit manager planning an engagement for KPMG to examine steel prices. What factors will you consider in deciding on materiality of amounts to examine?
 

Reviewed By: Judy Beckman, University of Rhode Island

"CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller, The Wall Street Journal, June 5, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid

A key price compiler in the global steel industry said it will begin auditing its data providers, part of an effort to address concerns about transparency in price indexes following the Libor rate-fixing scandal.

The compiler, Commodity Research Ltd., said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. Much of these steel types are destined for the U.S automotive market.

The move is believed to first by a commodity-price-index firm to audit information provided to it. CRU, based in London and Pittsburgh, has hired KPMG LLP to conduct the audits, according to a person familiar with the matter. KPMG didn't respond to a request for comment.

Glenn Cooney, London-based head of operations for CRU Indices, which publishes price data on 75 commodities in metals, mining and fertilizers, said it would look at auditing other data providers in other sectors to bolster industry transparency.

Currently, CRU collects price and volume data on spot transactions from steel producers and buyers, who submit their prices voluntarily to a CRU website. CRU publishes an index price based on the submissions every Wednesday.

CRU officials say they hope the move will lend it added credibility at a time of concern about indexes. Three banks in Europe have agreed to pay over $2 billion in settlement fees to U.S. and U.K. regulators after they were caught manipulating the London interbank offered rate, or Libor, the interest rate banks charge to borrow from each other. Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company started receiving more requests for improved transparency after the Libor scandal.

The company also hopes it will be able to reassure several major U.S. steel mills, which in April said they would no longer link some contracts to CRU's steel indexes because they felt prices quoted weren't an accurate reflection of the market. The steelmakers that stopped using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23% and Nucor Corp. NUE +3.01%

Grant Davidson, general manager for sales at ArcelorMittal's Dofasco mill in Canada, said big steel companies would welcome more transparency. "We're for what's most accurately reflecting the price in the market," he said.

Michael Steubing, vice president of global procurement for Mauser USA LLC, which makes steel drums and barrels, said an audited index would help guarantee that he can sell his product at a competitive price. He sells barrels to big chemical companies that use CRU to help determine how much they will pay for the barrels. "So we'd like that (CRU) to be as accurate as possible," he said.

CRU, which is used by the Chicago Mercantile Exchange and says its prices are used to settle steel contracts with an annual global value of over $20 billion, faces more competition from Platts, a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago bought price compiler The Steel Index.

Joe Innace, Platts's editorial director for metals, said Platts would continue its phone survey for its Platts industry newsletter independently of The Steel Index and wouldn't use audits because he said it has enough verifications, such as checking that prices match the types and volumes of steel appropriate to the index, in place.

Steve Randall, who founded The Steel Index in 2006, said it had no plans to audit data providers. "We run all our data through a series of screenings," he said. He declined to provide details about the screening procedure.

Continued in article

Bob Jensen's LIBOR fraud threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's threads on LIBOR are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

Bob Jensen's threads on LIBOR and other derivative financial instruments frauds (timeline) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
This is so huge it's better to do a word search for LIBOR


From the CFO Journal's Morning Ledger on June 19, 2013

SEC Chairman Mary Jo White: SEC seeks admissions of fault
SEC Chairman Mary Jo White said her agency intends to make companies and individuals admit wrongdoing as a condition of settling civil charges in certain cases, or be forced to fight the charges in court. That would mark a watershed change to the SEC’s decades-old policy of allowing companies and individuals to settle charges without admitting or denying liability,
the WSJ’s Jean Eaglesham and Andrew Ackerman note. The new policy, which came out of a review Ms. White began when she joined the agency, will be applied in “cases where…it’s very important to have that public acknowledgment [of wrongdoing] and accountability.” Decisions will be made “case by case,” Ms. White said. But she added the agency intends to target cases of egregious intentional conduct or widespread harm to investors. Watch a video of the interview here.

 


June 3, 2013 message from Dennis Huber

The former president of the Beth El Synagogue pleaded guilty on Friday to mail fraud in the embezzlement of more than $500,000 in synagogue funds, according to a statement from the U.S. Attorney.

http://www.courant.com/community/southbury/hc-southbury-synagogue-embezzlement-0601-20130531,0,4628524.story


Halifax Health To Pay Between $350-$600 Million In Whistleblower Suit --- Click Here
http://standuptofraud.com/site/2013/06/05/1266halifax-health-to-pay-whistleblower-suit/?goback=.gde_3453910_member_247082893


"GSA Blows Quarter Billion Dollars on Breaking Lease; Lies to Congress About It," by John Ransom, Townhall, June 3, 2013 --- Click Here
http://finance.townhall.com/columnists/johnransom/2013/06/03/gsa-blows-quarter-billion-dollars-on-breaking-lease-lies-to-congress-about-it-n1611531?utm_source=thdaily&utm_medium=email&utm_campaign=nl

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

Bob Jensen's threads on the sad state of governmental accounting and accountability ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


Teaching Case from The Wall Street Journal Accounting Weekly Review on May 31, 2013

Accounting Fraud Targeted
by: Jean Eaglesham
May 28, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Fraud, Auditor Changes, Auditor/Client Disagreements, Disclosure, Ethics, SEC, Securities and Exchange Commission

SUMMARY: "As the volume of [financial] crisis-related cases ebbs, top SEC officials are expected to announce soon a broad shuffling of resources in the agency's enforcement division that will include an increased focus on accounting fraud...[T]he SEC already is developing a computer program to sift language in financial reports for clues that executives might be misstating results, agency officials say."

CLASSROOM APPLICATION: The article may be used in a financial accounting or auditing class given that the enforcement-related topics fall into each of these areas. It also could be used in an ethics class.

QUESTIONS: 
1. (Advanced) Define fraudulent financial reporting. Cite your source for this information but write the description in your own words.

2. (Introductory) What proportion of SEC enforcement actions in the year ended September 30, 2012 related to accounting fraud? How does that rate compare to past history?

3. (Introductory) What reason could be behind reduced numbers of accounting fraud occurrences in more recent years as compared to the early 2000s?

4. (Advanced) According to the article, what types of factors may associate with fraudulent financial reporting? In your answer, identify which of these factors relate to numerical reporting and which relate to discussion and descriptive components of financial reports.

5. (Advanced) How does the SEC expect to become "more proactive in looking for" accounting fraud?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Accounting Fraud Targeted," by Jean Eaglesham, The Wall Street Journal, May 28, 2013 ---
https://mail.google.com/mail/u/0/?shva=1#inbox/13ef8dbd829b353e

U.S. securities regulators are turning back toward Main Street, renewing their focus on accounting fraud and other financial-disclosure failings.

Such cases were long a staple of the Securities and Exchange Commission's enforcement efforts, leading to more than 25% of civil-enforcement actions filed by the agency in its 2003 to 2005 financial years. The financial crisis shifted attention and money elsewhere. In the year ended last September, accounting fraud and financial-disclosure problems made up just 11% of SEC enforcement actions.

But as the volume of crisis-related cases ebbs, top SEC officials are expected to announce soon a broad shuffling of resources in the agency's enforcement division that will include an increased focus on accounting fraud, according to people close to the agency.

The decision to hunt for wrongdoing by Main Street, as well as Wall Street, puts America's corporations in the SEC's cross hairs.

The move is led by SEC Chairman Mary Jo White and co-enforcement chiefs George Canellos and Andrew Ceresney, said the people close to the agency. It isn't clear how much money or manpower will be devoted to the effort, though the SEC already is developing a computer program to sift language in financial reports for clues that executives might be misstating results, agency officials say.

Mr. Ceresney, a former federal prosecutor who joined the SEC in April, and Mr. Canellos have told employees there are no plans to get rid of five specialized enforcement units started in 2009 that are devoted to market abuse, asset management, foreign corrupt practices, municipal securities and structured products. People close to the SEC expect changes to some of the units, though, which they say could give the agency more leeway to make accounting fraud a top priority.

"We have to be more proactive in looking for it," Scott Friestad, a senior SEC enforcement official, told a legal conference last month. "There's a feeling internally that the issue hasn't gone away."

During and after the financial crisis, SEC enforcement officials devoted much of their energy to reining in alleged crisis-related malfeasance, such as misleading investors about the risks of subprime loans or mortgage bonds. Few crisis-era enforcement cases remain.

The falloff in accounting-fraud crackdowns by the SEC also may reflect improved financial reporting by companies because of Sarbanes-Oxley rules that took effect in 2002 after the Enron Corp. and WorldCom Inc. scandals.

An initial step in the SEC's new effort is software that analyzes the "management's discussion and analysis" section of annual reports where executives detail a company's performance and prospects.

Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds "look very promising," said Harvey Westbrook, head of the SEC's office of quantitative research.

Companies that bend or break accounting rules tend to play a "word shell game," said Craig Lewis, the SEC's chief economist and head of the division developing the model. Such companies try to "deflect attention from a core problem by talking a lot more about a benign" issue than their competitors, while "underreporting important risks."

If the word-analysis program works, officials say it will be added to a new "Accounting Quality Model" that SEC enforcement staff started using recently. The model trawls data from nearly 9,000 publicly traded companies. A similar computer-powered search for unusual performance patterns at hedge funds has led to seven enforcement actions in recent years.

Success won't be easy, partly because suspicious language or numbers in securities filings aren't necessarily illegal. Some companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency's computers.

"As soon as the SEC suggests it's going to look at this in terms of the numbers of words, lawyers will be more loquacious," said John Coffee, a law professor at Columbia University.

The fraud-detection software looks for big differences between net income and actual cash outflows available to investors, according to officials. It then looks for other warning signs, such as declining market share or weak profitability compared with rivals.

The system also looks for companies with an unusually high number of off-balance sheet transactions. Enron, Adelphia Communications Corp. and other large accounting frauds involved the use of such transactions to hide debt and inflate earnings.

Another sign of possible trouble: auditor changes. About 9% of companies that file financial reports with the SEC had their auditor leave last year, according to research firm Audit Analytics. Of the 866 companies that lost their auditor, 66 had two auditors depart, while two companies went through three auditors.

Sounding an alarm at the SEC "doesn't necessarily mean the company's done anything wrong," Mr. Lewis said. But his aim is that something "kicked out of our model as being unusual" is "much more likely to be associated with a fraud" than having a benign explanation.

Jacob Frenkel, a former SEC enforcement lawyer now at law firm Shulman, Rogers, Gandal, Pordy & Ecker PA, said computer power might help the agency refocus attention on financial-reporting issues that were "the bread and butter of the agency's enforcement program" for decades.

Continued in article

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


"Where Should SEC Start A Fraud Crack Down? Maybe Look At Fake Restatements," by Francine McKenna, Forbes, June 18, 2013 --- Click Here
http://www.forbes.com/sites/francinemckenna/2013/06/18/where-should-sec-start-a-fraud-crack-down-maybe-look-at-fake-restatements/

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


Just Horsing Around Again
"My Latest Forbes Magazine Article: 'The Madoff of Munis'," by Francine McKenna, re:TheAuditors, June 11, 2013 ---
http://retheauditors.com/2013/06/11/my-latest-forbes-magazine-article-the-madoff-of-munis/


"Benjamin Lawsky Fills in for AWOL Feds," by Jonathan Weil, Bloomberg, June 20, 2013 ---
http://www.bloomberg.com/news/2013-06-20/benjamin-lawsky-fills-in-for-awol-feds.html

The superintendent of the New York State Department of Financial Services today said Bank of Tokyo Mitsubishi-UFJ Ltd. agreed to pay $250 million to settle allegations that it violated state banking laws when it carried out transactions with Iran and other countries subject to international sanctions. You have to wonder, too, what's going on over at the Treasury Department's Office of Foreign Assets Control.

In December, the Treasury division concluded a parallel investigation of Bank of Tokyo and settled for only $8.5 million. The contrast reinforces the perception that the feds are going light on large financial institutions, and that Lawsky is out to fill the vacuum where he can using New York state laws.

It's the second big case for Lawsky this week. On June 18, Lawsky said Deloitte Financial Advisory Services would pay $10 million to resolve the agency's investigation into its consulting work for Standard Chartered Plc, the London-based bank that paid $340 million to the state to settle money-laundering claims last year. The agreement with Deloitte included a one-year ban on accepting new consulting work related to matters pending before the New York agency.

The Deloitte agreement had one feature that was particularly striking -- and rare for a regulator. The consulting firm, which is an affiliate of the Big Four accounting firm Deloitte & Touche LLP, admitted to violations of state banking law.

In the settlement agreement, Deloitte admitted that it broke state law by "knowingly disclosing confidential supervisory information to'' Standard Chartered about other banking clients.
Admissions such as these should be a model for all regulators. The New York department's consent order with Bank of Tokyo didn't include any direct acknowledgements, but at least it didn't have the dreaded language saying the company "neither admits nor denies" the allegations.

The way the consent order with Bank of Tokyo was structured, representatives for both the company and the regulator signed their names to a list of the agency's findings, which made it seem that Bank of Tokyo agreed they were true. One of the provisions said Bank of Tokyo "estimates that it cleared approximately 28,000 U.S. dollar payments through New York worth close to $100 billion involving Iran, and additional payments involving Sudan and Myanmar."

There's a glimmer of hope that other regulators may change their usual "no-admit" approach, at least on the margins. Securities and Exchange Commission Chairman Mary Jo White this week said the agency's enforcement division will seek more admissions of wrongdoing from defendants as a condition of settling cases. The agency's default position for decades has been for defendants to neither admit nor deny its claims.

Continued in article

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


"DEAL REACHED: Former Enron CEO Jeff Skilling Could Get Out Of Prison 10 Years Early," by Erin Fuchs, Business Insider,  May 8, 2013 ---
http://www.businessinsider.com/jeffrey-skilling-plea-deal-2013-5

Former Enron CEO Jeff Skilling has reached a deal with federal prosecutors to get out of prison a decade before his 24-year prison sentence is up.

Under the deal Skilling — who was convicted of fraud for his role in the collapse of Enron — would get out of prison in 2017, the Justice Department announced. Skilling has agreed to forfeit more than $40 million and give up the right to appeal his conviction.

A Justice Department spokesman said the deal ensures Skilling is "appropriately punished" and that Enron victims get restitution. A judge will have to sign off on the deal.

Skilling has served six years of his sentence so far. In October 2006, Skilling got the 24-year sentence for his role in the massive accounting fraud that caused Enron's downfall.

Continued in article


Read more: http://www.businessinsider.com/jeffrey-skilling-plea-deal-2013-5#ixzz2SjY5iMMb
 

Bob Jensen's threads on Enron's frauds, including a timeline of the major events ---
http://www.trinity.edu/rjensen/FraudEnron.htm


"The Fix Was In Crime in College Hoops," FBI, May 20, 2013 ---
http://www.fbi.gov/news/stories/2013/may/crime-in-college-hoops/crime-in-college-hoops

It’s a cautionary tale for college and professional athletes alike.

Following a three-year FBI investigation dubbed Operation Hook Shot, eight people—including former University of San Diego (USD) basketball star Brandon Johnson, the school’s all-time point and assist leader—were convicted and sentenced to federal prison terms for taking part in a sports bribery conspiracy. The eighth and final defendant, illegal bookmaker Richard Francis Garmo, was sentenced last month.

The case began—as most of our sports bribery matters do—as an organized crime investigation. In 2009, we began looking into the activities of a criminal enterprise operating in the San Diego area. Along with selling marijuana, the group was operating an illegal online gambling business. A related criminal activity, Bureau investigators discovered, was a scheme to fix USD men’s basketball games.

Playing a pivotal role in the scheme was Thaddeus Brown, an assistant basketball coach at USD during the 2006-2007 season. Brown had placed bets with the illegal gambling business operated by Garmo and two partners-in-crime. Though no longer with the team, he still had contacts among the USD players. During the 2009-2010 season, he recruited Johnson—USD’s starting point guard—to influence the outcome of basketball games in exchange for money. Brown was paid handsomely for his role in the conspiracy—up to $10,000 per game.

During that season, it’s believed that at least four games were “fixed” with Johnson’s assistance. Perhaps the senior point guard would miss a free throw now and then or draw a technical foul. Or he would just pass up a shot—at one point Johnson was heard on electronic surveillance talking about how he wouldn’t shoot at the end of a particular game because it would have cost him $1,000.

Continued in article


Is this charity scalping donors?
"$6 Million Worth Of Hair Donations To Locks Of Love Have Gone Missing," by Megan Willett, Business Insider, May 14, 2013 ---
http://www.businessinsider.com/locks-of-love-could-be-missing-hair-2013-5

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


University of Mary Hardin-Baylor reported an acceptance rate of 27.4 percent. It was really 89.1 percent ---
"Another College Fesses Up," by Scott Jaschik, Inside Higher Ed, May 15, 2013 ---
http://www.insidehighered.com/news/2013/05/15/another-college-admits-it-gave-us-news-incorrect-data

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


"Greek Crackdown on Tax Evasion Yields Little Revenue," by Landon Thomas Jr. and Eleni Varvitsiotsioti, The New York Times, May 12, 2013 --- Click Here
http://www.nytimes.com/2013/05/13/business/global/greek-tax-crackdown-yields-little-revenue.html?ref=todayspaper&nl=business&emc=edit_dlbkam_20130513&_r=0

If ignominy were tax revenue, Greece might be a big step closer to ending its budget problems.

¶ Politicians, business executives and bankers are being raked through the headlines or incarcerated in a white-collar crackdown as the Greek government goes after people suspected of tax dodging. Those under questioning include the former finance minister George Papaconstantinou, in a highly charged parliamentary investigation into his handling of a list of Greeks with foreign bank accounts.

¶ “Why do you think they are catching all these people?” Mr. Papaconstantinou said in a recent interview, in the suffer-no-fools manner that defined his two years as finance minister until the current government took power last June. “Because we changed the laws to allow the government to do this.”

¶ But those changed laws, and the populist pursuit of supposed deadbeat fat cats, have yielded little in additional tax revenue.

¶ Tax evasion lies at the heart of the Greek financial collapse, which has resulted in international bailout loans exceeding 205 billion euros, or $266 billion, the size of Greece’s depressed economy. In fact, Greece’s international creditors have made revamping its notoriously lax tax system a primary condition for any additional bailout financing.

¶ But even after an overhaul of Greece’s tax collection apparatus — and a politically charged campaign to pursue delinquents — government officials have collected only a tiny fraction of what is owed and potentially collectible.

¶ Rather than capture a lot of extra money, the crusade seems mainly to have captured prominent quarry. The net cast by newly empowered prosecutors has snared the former mayor of Salonika, the leader of the Greek national statistical agency and several former cabinet members.

¶ Lawyers and tax officials estimate that hundreds of people have been locked up in the last year, suspected of tax evasion. Under the new laws, someone who owes the government more than 10,000 euros in taxes can be arrested on the spot and given the choice between paying up or being put behind bars. While held, the suspect can wait as long as 18 months before the prosecutor decides on a formal charge.

¶ Despite those efforts, of the estimated 13 billion euros that government officials say is owed by Greece’s 1,500 biggest tax debtors, only about 19 million euros has been collected in the last two and a half years.

¶ Among the few to benefit from the crackdown have been criminal defense lawyers specializing in tax law. Among them is Michalis A. Dimitrakopoulos, who represents many of the top political and business figures under government investigation or behind bars. His clients include the daughter and the former wife of Akis Tsohatzopoulos, a former defense minister and Pasok party official, all of whom are on trial on charges of money laundering and taking kickbacks.

¶ Mr. Dimitrakopoulos, who proudly shows visitors to his office a wall covered with framed clippings of his courtroom exploits, says business has never been better. But he also says he has clients with many billions of euros overseas who will never bring their money back to Greece as long as — as he contends — killers have better legal rights than tax offenders.

¶ By any measure, that is hyperbole.

¶ Legal specialists note, for example, that Mr. Papaconstantinou, the former finance minister, is awaiting the outcome of the parliamentary inquiry in his case from the comfort of his suburban Athens home. They say it is unlikely he will ever serve time.

¶Mr. Papaconstantinou declined to discuss the allegations against him: that he doctored the so-called Lagarde list, named for Christine Lagarde. Ms. Lagarde, now managing director of the International Monetary Fund, was the French finance minister in 2010 when she gave Mr. Papaconstantinou a computer disk containing the names of Greeks who had Swiss accounts with HSBC Bank. The file had been stolen by a French former employee of the bank and ended up in the hands of France’s government.

Continued in article

Jensen Comment
The same problem arises from the billions of tax dollars being confiscated in the USA by ID theft. Until the law imposes serious deterrents that are effective in discouraging obtaining of illegal tax refunds the criminals are going to win this game with the hapless IRS.

 


Earnings Misstatements, Restatements and Corporate Governance
Working Paper 07-01, 2007
http://www.scu.edu/business/faculty/research/2006-07-papers/upload/wp07-01-kim-y-earnings-misstate.pdf
 
Sandeep Nabar
Spears School of Business
Oklahoma State University
nabar@okstate.edu
 
Yongtae Kim
Leavy School of Business
Santa Clara University
500 El Camino Real
Santa Clara, CA 95053 
y1kim@scu.edu
 
William G. Heninger
Marriott School of Management
Brigham Young University
heninger@byu.edu 

Abstract
We investigate the corporate governance characteristics of firm s that restate previously-reported accounting data. Unlike other stud ies that focus on either the misstatement or the restatement only, we examine changes in the governance characteristics of restating firms from the initial misstatement to the restatement. While the other studies are concerned with the causes of financial misreporting, we endeavor to obtain insight s into the changes that lead to the detection and correction of such misreporting. We find that prior to the misstatement, misstating firms are more likely to have CEOs who sit on nominating committees, less independent boards of directors, and less independent audit committees, relative to control firms. Our results indicate that pre-misstatement agency conflicts are not resolved prior to restatements. Boards and audit committees of restating firms continue to be re latively less independent at the time of the restatement. We also find that restating firms are more likely to experience CFO turnover than control firms. Based on the results, we conclude that the restatements, which constitute an admission and correction of accounting irregulari ties, are not attribut able to governance improvements in firms.

. . .

When a company restates its financial statements it is admitting to a material error or irregularity in previously issued financial statements. In 2004, 414 public companies restated their financial statements due to accounting errors This represents a 28% increase over 2003 restatements and, except for a 2% decrease in 2 003, it also represents the e continuation of an increasing trend in the number of restated financial statements by an average of 16% since 2000. In addition, 15% of the companies s restating their financial statements in 2004 had restated their financial statements at least one other time times since 1997. However, even more troubling is the finding that nearly 40% of the 2004 restatements re ported errors in at least three prior annual reports (Huron Consulting Group, 2005). These multi-year restatements point to recurring accounting errors. Recurring errors and repeated restatements suggest that, in many cases, it is difficult to resolve agency conflicts that lead to misreporting of financial statements.

. . .

Our results also suggest that restating firms are more likely to be audited by Big-6 auditors than are control firms. This result calls into question the belief that audit quality is always positively related to audit firm size (e.g., Palmrose 1988), and is consistent with regulators’ concerns (Roman 2002) that conflicts of interest ma y often impair the independence of large audit firms. Finally our examination of how firms change over the misstatement- restatement period indicates that restating firms ar e more apt to change their CFOs than are the control firms. While this result is consiste nt with new-CFO diligence, we cannot exclude the possibility that accounting problems cause the old-CFO departures. The latter explanation, nevertheless, underscores the impor tant role that corporate gove rnance plays in the financial reporting process.

Jensen Comment
It's important to remember that correlation is not necessarily causation. My wife's superstar spine surgeon in Boston has a somewhat higher record of surgical "errors" because he's willing to take on many referrals that other spine surgeons will not touch due to high risks such as older patients that are lousy candidates for 15-hour surgeries and otherwise high risk delicate surgeries that can lead to complications or death.

This guy is very, very good and has a lot of guts.

In a somewhat similar manner the "Big 6" audit firms take on clients that smaller audit firms will not or cannot touch. The medical analogy only goes so far. I don't think it's so much "guts" as it is having the capability to do complicated audits. The "Big 6" may be the only auditor firms with needed experts in specialized global operations, derivative financial instruments experts, etc. where audit mistakes have a higher probability of happening in spite of having the needed experts around the world.

The "Big 6" are also sought out by some clients because they have the deepest pockets when the audits get screwed up as when KPMG performed a horrid audit of Fannie Mae that required Deloitte to make over a million correcting journal entries.


Jensen Comment
KMPG was fired from what was arguably its largest client in history. Fannie Mae under a bonus-seeking CEO perpetrated one of the largest earnings management frauds in history ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

"Fannie, KPMG Settle Class-Action Suit," by Michael Rapoport and Nick Timiraos, The Wall Street Journal, May 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324326504578469591902348434.html?mod=WSJ_Markets_LEFTTopStories

Fannie Mae FNMA +9.76% and its former auditor KPMG LLP agreed Tuesday to pay $153 million to settle a long-running class-action lawsuit in which Ohio public pension funds and other shareholders accused the company of issuing false and misleading financial reports in the early 2000s.

The settlement was reached through mediation, according to documents filed in federal court in Washington, and is subject to court approval. Fannie and KPMG will each pay half of the $153 million.

"We are satisfied with the outcome and pleased to put the matter behind us," said Bradley Lerman, general counsel at Fannie Mae.

Seth Oster, a KPMG spokesman, said that it was in the firm's best interest to "avoid the significant additional costs and the distraction and inherent uncertainty of protracted litigation." A person familiar with the situation said KPMG has already accounted for the settlement.

The litigation began in 2004 after federal regulators accused Fannie of violating accounting rules, partly in a bid to boost executives' bonuses, and ordered the company to restate four years' worth of earnings. The regulators said Fannie had incorrectly applied the rules relating to derivatives contracts to allow it to spread out losses over a long period of time instead of recognizing them upfront.

The class-action suit had also named Franklin Raines, Fannie's former chief executive, as a defendant, but last year U.S. District Judge Richard Leon dismissed the suit against Mr. Raines and two other senior executives. The judge said the plaintiffs hadn't produced any direct evidence showing that executives intended to deceive investors or even that executives knew their statements were false.

The Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio were the lead plaintiffs in the lawsuit. Ohio Attorney General Mike DeWine, who announced the settlement, said in a statement that he was "pleased to see this litigation finally resolved" and that it "brings closure to this matter."

The settlement "represents a reasonable agreement to end this long-standing dispute," said Alfred Pollard, general counsel for the Federal Housing Finance Agency, which regulates Fannie.

Fannie Mae sued KPMG in 2006 alleging negligence and breach of contract. The two sides reached a settlement in 2010; details of that settlement weren't disclosed.

Fannie and its smaller sibling, Freddie Mac, FMCC +9.05% have spent tens of millions of dollars beating back securities class-action lawsuits on behalf of former executives as a result of the accounting scandals, even after the companies were seized by the U.S. government through a legal process known as conservatorship in 2008.

You can read the following at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
 
. . . flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.

Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie's executives -- whose bonus plan is linked to earnings-per-share -- to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull's-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.

That same year Fannie installed software that allowed management to produce multiple scenarios under different assumptions that, according to a Fannie executive, "strengthens the earnings management that is necessary when dealing with a volatile book of business." Over the years, Fannie designed and added software that allowed it to assess the impact of recognizing income or expense on securities and loans. This practice fits with a Fannie corporate culture that the report says considered volatility "artificial" and measures of precision "spurious."

This disturbing culture was apparent in Fannie's manipulation of its derivative accounting. Fannie runs a giant derivative book in an attempt to hedge its massive exposure to interest-rate risk. Derivatives must be marked-to-market, carried on the balance sheet at fair value. The problem is that changes in fair-value can cause some nasty volatility in earnings.

So, Fannie decided to classify a huge amount of its derivatives as hedging transactions, thereby avoiding any impact on earnings. (And we mean huge: In December 2003, Fan's derivatives had a notional value of $1.04 trillion of which only a notional $43 million was not classified in hedging relationships.) This misapplication continued when Fannie closed out positions. The company did not record the fair-value changes in earnings, but only in Accumulated Other Comprehensive Income (AOCI) where losses can be amortized over a long period.

Fannie had some $12.2 billion in deferred losses in the AOCI balance at year-end 2003. If this amount must be reclassified into retained earnings, it might punish Fannie's earnings for various periods over the past three years, leaving its capital well below what is required by regulators.

In all, the Ofheo report notes, "The misapplications of GAAP are not limited occurrences, but appear to be pervasive . . . [and] raise serious doubts as to the validity of previously reported financial results, as well as adequacy of regulatory capital, management supervision and overall safety and soundness. . . ." In an agreement reached with Ofheo last week, Fannie promised to change the methods involved in both the cookie-jar and derivative accounting and to change its compensation "to avoid any inappropriate incentives."

But we don't think this goes nearly far enough for a company whose executives have for years derided anyone who raised a doubt about either its accounting or its growing risk profile. At a minimum these executives are not the sort anyone would want running the U.S. Treasury under John Kerry. With the Justice Department already starting a criminal probe, we find it hard to comprehend that the Fannie board still believes that investors can trust its management team.

Fannie Mae isn't an ordinary company and this isn't a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie's implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That's quite a confidence game -- and it's time to call it.

 

**********************************

:"Sometimes the Wrong 'Notion':   Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio," by Michael MacKenzie, The Wall Street Journal, October 5, 2004, Page C3 

Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio

What exactly did Fannie Mae do wrong?

Much has been made of the accounting improprieties alleged by Fannie's regulator, the Office of Federal Housing Enterprise Oversight.

Some investors may even be aware the matter centers on the mortgage giant's $1 trillion "notional" portfolio of derivatives -- notional being the Wall Street way of saying that that is how much those options and other derivatives are worth on paper.

But understanding exactly what is supposed to be wrong with Fannie's handling of these instruments takes some doing. Herewith, an effort to touch on what's what -- a notion of the problems with that notional amount, if you will.

Ofheo alleges that, in order to keep its earnings steady, Fannie used the wrong accounting standards for these derivatives, classifying them under complex (to put it mildly) requirements laid out by the Financial Accounting Standards Board's rule 133, or FAS 133.

For most companies using derivatives, FAS 133 has clear advantages, helping to smooth out reported income. However, accounting experts say FAS 133 works best for companies that follow relatively simple hedging programs, whereas Fannie Mae's huge cash needs and giant portfolio requires constant fine-tuning as market rates change.

A Fannie spokesman last week declined to comment on the issue of hedge accounting for derivatives, but Fannie Mae has maintained that it uses derivatives to manage its balance sheet of debt and mortgage assets and doesn't take outright speculative positions. It also uses swaps -- derivatives that generally are agreements to exchange fixed- and floating-rate payments -- to protect its mortgage assets against large swings in rates.

Under FAS 133, if a swap is being used to hedge risk against another item on the balance sheet, special hedge accounting is applied to any gains and losses that result from the use of the swap. Within the application of this accounting there are two separate classifications: fair-value hedges and cash-flow hedges.

Fannie's fair-value hedges generally aim to get fixed-rate payments by agreeing to pay a counterparty floating interest rates, the idea being to offset the risk of homeowners refinancing their mortgages for lower rates. Any gain or loss, along with that of the asset or liability being hedged, is supposed to go straight into earnings as income. In other words, if the swap loses money but is being applied against a mortgage that has risen in value, the gain and loss cancel each other out, which actually smoothes the company's income.

Cash-flow hedges, on the other hand, generally involve Fannie entering an agreement to pay fixed rates in order to get floating-rates. The profit or loss on these hedges don't immediately flow to earnings. Instead, they go into the balance sheet under a line called accumulated other comprehensive income, or AOCI, and are allocated into earnings over time, a process known as amortization.

Ofheo claims that instead of terminating swaps and amortizing gains and losses over the life of the original asset or liability that the swap was used to hedge, Fannie Mae had been entering swap transactions that offset each other and keeping both the swaps under the hedge classifications. That was a no-go, the regulator says.

"The major risk facing Fannie is that by tainting a certain portion of the portfolio with redesignations and improper documentation, it may well lose hedge accounting for the whole derivatives portfolio," said Gerald Lucas, a bond strategist at Banc of America Securities in New York.

The bottom line is that both the FASB and the IASB must someday soon take another look at how the real world hedges portfolios rather than individual securities.  The problem is complex, but the problem has come to roost in Fannie Mae's $1 trillion in hedging contracts.  How the SEC acts may well override the FASB.  How the SEC acts may be a vindication or a damnation for Fannie Mae and Fannie's auditor KPMG who let Fannie violate the rules of IAS 133.

 

Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
http://www.youtube.com/watch?v=1RZVw3no2A4

 

May 31, 2011 message from Roger Collins

Of possible interest...

http://www.nytimes.com/2011/05/29/books/review/book-review-reckless-endangerment-by-gretchen-morgenson-and-joshua-rosner.html?ref=books

"It’s hardly news that the near meltdown of America’s financial system enriched a few at the expense of the rest of us. Who’s responsible? The recent report of the Financial Crisis Inquiry Commission blamed all the usual suspects — Wall Street banks, financial regulators, the mortgage giants Fannie Mae and Freddie Mac,
and subprime lenders — which is tantamount to blaming no one. “Reckless Endangerment” concentrates on particular individuals who played key roles.

The authors, Gretchen Morgenson, a Pulitzer Prize-winning business reporter and columnist at The New York Times, and Joshua Rosner, an expert on housing finance, deftly trace the beginnings of the collapse to the mid-1990s, when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying. The mortgage agencies’ government backing was, in effect, a valuable subsidy, which was used by Fannie’s C.E.O.,
James A. Johnson, to increase home ownership while enriching himself and other executives. A 1996 study by the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. Over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated no less lavishly...."

continued in article...

Roger

Bob Jensen's threads on earnings management fraud at Fanny Mae ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


"An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998–2010"
Mark S. Beasley North Carolina State University
Joseph V. Carcello University of Tennessee Dana R. Hermanson Kennesaw State University
Terry L. Neal University of Tennessee
Center for Audit Quality, May 2013
http://www.thecaq.org/resources/pdfs/CAQ_deficienciesMay2013.pdf

EXECUTIVE SUMMARY
This study examines U.S. Securities and Exchange Commission (SEC) sanctions against auditors over the period 1998–2010 that are related to instances of alleged fraudulent financial reporting by U.S. publicly traded companies. During that time period, there were 87 separate instances where the SEC imposed such sanctions, and this report summarizes our analysis of alleged auditor deficiencies noted by the SEC in these 87 cases.

In considering the results contained in this report, it is important to appreciate that SEC allegations of fraudulent financial reporting are rare, with 347 cases examined by the SEC from 1998–2007 out of thousands of U.S. public companies. 1 Despite the small number of fraud-related SEC enforcement actions, we believe that analysis of these 87 cases involving auditor sanctions by the SEC provides important insights for auditors and others concerned with improving audit quality, especially in the context of detecting material financial statement misstatements due to fraud. Thus, we highlight key findings related to the audits underlying these 87 cases.

The primary results of our analysis are as follows:

• From 1998–2010, we identified 87 instances of SEC investigations of fraudulent financial reporting leading to sanctions against auditors. Based on companies with available information for these 87 SEC investigations, the associated registrant companies were primarily small (median revenues and assets under $40 million) and concentrated in four key industries (over 40 percent of the sample is in financial services / insurance, general manufacturing, telecommunications, or consumer goods manufacturing).

• Based on available information for these 87 SEC investigations involving auditors, 58 percent of the audit reports issued for the last fraudulently reported financial statements included an unqualified opinion with no additional report modifications.  The other 42 percent of the companies received unqualified audit opinions on the last fraudulently reported financial statements, but those reports included explanatory paragraphs that addressed other issues noted by the auditor, such as highlighting changes in accounting principle or going concern issues.

 • For purposes of our study, we categorized the Big Six/Big Four international firms and the next tier of global network or national firms as “national firms.” 2 Here is a summary of the 87 instances we examined:

-Total instances of SEC investigations examined in this study 87

-SEC sanctions involving audits performed by non-national firms 46

-SEC sanctions involving audits performed by national firms 35

-Bogus audits 3 where auditor did not perform procedures 6

Of the 35 national firm cases, nine involved audits performed by Arthur Andersen. There were six instances where the auditor prepared the financial statements or did not perform any meaningful level of audit procedures. We refer to these six instances as “bogus audits

An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998–2010 3

• In Accounting and Auditing Enforcement Releases (AAERs) involving sanctions against auditors, the SEC typically alleges that the auditor either (a) violated the anti-fraud statutes (e.g., by participating in the fraud) or (b) performed a negligent audit that allowed the fraud to occur (without the auditor actively participating in the fraud). Among the 81 cases examined (excluding the six bogus audits noted above), the SEC charged the auditor for violating the anti-fraud statutes in 24 cases. The remaining 57 cases were limited to allegations of deficient audits unrelated to anti-fraud statutes. • Among these 81 cases, the SEC issued sanctions against individual auditors in 80 cases and sanctions against the audit firm in 27 instances (26 cases involved sanctions against both individual auditors and the audit firm, with the SEC sanctioning only the audit firm in one case).

• The top five areas cited by the SEC in these 81 cases involved the following:

1. Failure to gather sufficient competent audit evidence (73 percent of the cases)
2. Failure to exercise due professional care (67 percent)
3. Insufficient level of professional skepticism (60 percent)
4. Failure to obtain adequate evidence related to management representations (54 percent)
5. Failure to express an appropriate audit opinion (47 percent)

• Most of the 81 cases involved multiple alleged deficiencies. For example, 58 of the cases cited more than one of the top three deficiencies, and 42 cases cited the top three deficiencies.

• The most common deficiencies were quite similar for national firms and non-national firms. The top four issues are consistent across these two groups (with a slightly different ranking), and 11 of the top 14 deficiencies appear in both the national firm and non-national firm lists. Based on findings contained in this report, we explore implications for the audit process centered around four key themes. To that end, we explore challenges associated with each of the four themes found in the analysis:

1. Failure to Exercise Due Professional Care: Some of the deficiencies cited suggest a failure on the part of the auditor to discharge responsibilities with competence and diligence to the best of the auditor’s ability, including the performance of procedures generally expected to be performed in an audit. This suggests that there may be opportunities for additional training and education on the fundamentals of the audit process. Also, there may be opportunities for additional analysis to better understand root causes that led to failures in the execution of those fundamentals in a particular audit engagement, so as to strengthen the competence and diligence of the performance of the audit.

2. Insufficient Levels of Professional Skepticism: Similarly, some of the cases examined highlight challenges in maintaining appropriate levels of professional skepticism that affect the auditor’s mindset. Interestingly, the concept of professional skepticism has been embedded in auditing standards for decades; however, in some cases auditors may have struggled in maintaining an appropriate mindset throughout the various stages of the audit process. This challenge has implications for training and helps to motivate analyses such as the present study to understand root causes of failures in applying professional skepticism consistently. Additional research is needed to determine if these challenges may be exacerbated by differences in cultural norms that will be increasingly realized as the audit process continues to be affected by globalization or as new generations of audit professionals emerge who may apply professional skepticism differently than today’s audit professionals.

3. Inadequate Identification and Assessment of Risks: The findings noted in this report also have implications regarding the risk assessment process, given that all cases examined in the study involved undetected instances of fraudulent financial reporting. While auditing standards have been risk-based for a number of years, more recent developments in the risk management arena, 5 including the emerging discipline of enterprise risk management, Beasley, Carcello , Hermanson, and Neal. 2013. are revealing a number of complexities associated with any risk identification and risk assessment task. Any improvement in risk assessment skills that can be identified will help enhance audit quality and improve the recognition of fraud risk. The audit profession, including undergraduate and graduate accounting programs, may want to leverage insights that are emerging in other risk management disciplines to better train and educate audit professionals in risk identification and risk assessment tasks.

4. Failure to Respond to Identified Risks with Appropriate Audit Responses to Gather Sufficient Competent Audit Evidence: In some cases, the auditor failed to adjust audit procedures to gather sufficient competent evidence in light of risks identified and documented by the audit team. While this type of deficiency may be the result of the first three concerns noted above, it may also be triggered by failure to adequately link audit procedures to underlying risks. Because prior research has shown that this type of linkage can be a difficult task, perhaps greater emphasis on quality control review of these linkages may be beneficial, or new tools and techniques may be needed to facilitate this difficult linkage task. Training and education on the use of those tools may be warranted as well. The next section discusses the research approach, and Section 3 presents the results of our analysis. Section 4 develops the implications of the analysis, and Section 5 profiles the research team. The Appendix presents the detailed findings underlying the tables presented in the monograph.

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


Control Fraud --- "cases where the officers who control what look like legitimate entities use them as “weapons” to commit crimes. Each time, Alan Greenspan, former chairman of the Federal Reserve, played a catastrophic role. First, his policies created the fraud-friendly (criminogenic) environment that produces epidemics of control fraud, then he failed to identify those epidemics and incipient crises, and finally, he failed to counter them."

"The Age of Fraud," by Bill Black, by Barry Ritholtz, June 14, 2013 ---
http://www.ritholtz.com/blog/2013/06/the-age-of-fraud/

. . .

At the heart of Greenspan’s failure lies an ethical void in the brand of economics that has dominated American universities and policy circles for the last several decades, a brand known as “free market fundamentalism” or the “neoclassical school.” (I call it “theoclassical economics” for its quasi-religious belief system.) Mainstream economists who follow this school assert a deeply flawed and controversial concept known as the “efficient market hypothesis,” which holds that financial markets magically regulate themselves (they automatically “self-correct”) and are thus immune to fraud. When an economist starts believing in that kind of fallacy, he is bound to become blind to reality. Let’s take a look at what blinded Greenspan:

  1. Greenspan knew that markets were “efficient” because the efficient market hypothesis is the foundational pillar underlying modern finance theory.
  2. Markets can’t be efficient if there is control fraud, so there must not be any.
  3. Wait, there are control frauds! Tens of thousands of them.
  4. Then control fraud must not really be harmful, or markets would not be efficient.
  5. Control fraud, therefore, must not be immoral. As crime boss Emilio Barzini put it in The Godfather, “It’s just business.”

As delusional and immoral as this “logic” chain is, many elite economists believe it. This warped perspective has spawned policies so perverse that they turn the world of finance into the optimal environment for criminals. The upshot is that most of our elite financial leaders and professionals have thrown integrity out the window, and we end up with recurrent, intensifying financial crises, de factoimmunity for our most elite criminals, and the rise of crony capitalism. Let’s do a little time travel to see exactly how this plays out.

. . .

How to create a regulatory black hole

Alan Greenspan was Ayn Rand’s protégé, but he moved radically to the wacky side of Rand on the issue of financial fraud. And that, friends, is pretty wacky. Greenspan pushed the idea that preventing fraud was not a legitimate basis for regulation, and said so in a famous encounter [3] with Commodities Futures Trading Commission (CFTC) Chair Brooksley Born. “I don’t think there is any need for a law against fraud,” Born recalls Greenspan telling her. Greenspan actually believed the market would sort itself out if any fraud occurred. Born knew she had a powerful foe on any regulation.

She was right. Greenspan, with the rabid support of the Rubin wing of the Clinton administration, along with Republican Chairman of the Senate Banking Committee Phil Gramm, crushed Born’s effort to regulate credit default swaps (CDS). The plutocrats and their political allies deliberately created what’s known as a regulatory black hole – a place where elite criminals could commit their crimes under the cover of perpetual night.

Greenspan chose another Fed economist, Patrick Parkinson, to testify on behalf of the bill to create the regulatory black hole for these dangerous financial instruments. Parkinson offered the old line that efficient markets easily excluded fraud — otherwise, they wouldn’t be efficient markets! (Parkinson would later tell the Financial Crisis Inquiry Commission in 2011 that the “whole concept” of a related financial instrument known as an “ABS CDO” had been an “abomination”). Greenspan’s successor richly rewarded Parkinson for being stunningly wrong in his belief: Ben Bernanke appointed Parkinson — who had no experience as a supervisor or examiner — as the Fed’s head of supervision.

Lynn Turner, former chief accountant of the SEC, told me of Greenspan’s infamous question to his group of senior officials who met at the Fed in late 1998 or early 1999 (roughly the same time as Greenspan’s conversation with Born): “Why does it matter if the banks are allowed to fudge their numbers a little bit?” What’s wrong with a “little bit” of fraud?

Conservatives often support the “broken windows” theory of criminal activity, which asserts that you stop serious blue-collar crime by cracking down on minor offenses. Yet mysteriously, they never apply the concept to white-collar financial crimes by elites. The little-bit-of fraud-is-ok concept got made into law in the Commodities Futures Modernization Act of 2000, which created the regulatory black hole for credit default swaps. That black hole was compounded by the Commodity Futures Trading Commission under the leadership of Wendy Gramm, spouse of Senator Phil Gramm.

Enron’s fraudulent leaders were delighted to exploit that black hole, because they were engaged in a massive control fraud. They appointed Wendy Gramm to their board of directors and proceeded to use derivatives to manipulate prices and aid their cartel in driving electricity prices far higher on the Pacific Coast. In a bizarre irony, the massive increase in prices led to the defeat of California Governor Gray Davis (the leading opponent of the cartel) and his replacement by Governor Schwarzenegger – a man who was part of the group that met secretly with Enron’s leadership to try to defeat Davis’s efforts to get the federal regulators to kill the cartel.

How damaging was Greenspan’s dogmatic and delusional defense of elite financial frauds in the case of Enron? If you look closely, you can see that Enron brought together all the critical elements of a financial crisis: big-time accounting control fraud, derivatives, cartels, and the use of off-balance sheet scams to inflate income and hide real losses and leverage. On top of all that, many of the world’s largest banks aided Enron and its extremely creative CFO Andrew Fastow to create frauds. The Fed could have responded by adopting and enforcing mandates to end the criminal practices that were driving the epidemic, but it didn’t. Instead, Greenspan and other Fed economists championed Enron’s leadership and cited the company as proof that regulation was unnecessary to prevent control fraud. They were so extreme that they attacked their own senior supervisors for daring to criticize the banks’ role in aiding and abetting Enron’s activities.

Later, when risky derivatives activities and control frauds at large financial institutions were pushing us toward the catastrophic crash of 2007-2008, the Fed took no meaningful action based on the lessons learned from Enron. Greenspan and the senior leadership of the Fed had learned absolutely nothing, which shows how disabling economic dogma is to regulators – making them worse than simply useless. They become harmful, again attacking their supervisors for criticizing the banks’ fraudulent “liar’s” loans. When Bernanke placed Patrick Parkinson (an economist blind to fraud by elite banksters) in a supervisory role at the Fed, he sealed the fate of millions of Americans whose financial well-being would be sucked right into that regulatory black hole – and removed the ability of the accursed supervisors to criticize the largest banks.

How to protect predatory lenders

Finally, we come to the mortgage meltdown of 2008, when the entire housing industry went into freefall. Central to this crisis is the story of the liar’s loan — mortgage-industry slang for a mortgage that a lender gives without checking tax returns, employment history, or anything else that might reliably indicate that the borrower can make the payments.

The Fed, and only the Fed, had authority under the Home Ownership and Equity Protection Act (HOEPA) to ban liar’s loans by all lenders. At a series of hearings mandated by Congress, dozens of witnesses representing home mortgage borrowers and state and local criminal investigators urged the Fed to do this. The testimony included a study that found a 90 percent incidence of fraud in liar’s loans.

What did Greenspan and Bernanke do? Exactly nothing. They consistently refused to act.

Greenspan went so far as to refuse pleas to send Fed examiners into bank holding company affiliates to find the facts and collect data on liar’s loans. Simultaneously, the Fed’s economists dismissed the warnings from progressives about fraudulent liar’s loans as “merely anecdotal.” In 2005, the desperate Fed regulators, blocked by Greenspan from sending in the examiners to get data from the banks, resorted to simply sending a letter to the largest banks requesting information. The Fed supervisor who received the banks’ response to that letter termed the data “very alarming.”

If you suspect that the banks would typically respond to such requests by understating their problem assets significantly, then you have the right instincts to be a financial regulator.

. . .

We did not have to suffer this crisis. Economists who were not blinded by neoclassical theory, like George Akerlof (who won the Nobel Prize in 2001) and Christina Romer (adviser to President Obama from 2008-2010), had warned their colleagues about accounting control fraud and liar’s loans, as did criminologists and regulators like me. But Greenspan (and Timothy Geithner) refused to see the obvious truth.

Alan Greenspan had no excuse for assuming fraud out of existence, and his exceptionally immoral position on fraud and regulation proved catastrophic to America and much of the world. We cannot afford the price, measured in many trillions of dollars, over 10 million jobs, and endless suffering, of unethical economists.

Bob Jensen's threads on the Efficient Market Hypothesis ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH


From the CFO Journal's Morning Ledger on June 4, 2013

Ex-Porsche CFO convicted of credit fraud
Former Porsche CFO Holger Härter was convicted by a German court of credit fraud in a case over the refinancing of a €10 billion loan during the 2009 failed Volkswagen takeover bid,
Bloomberg reports. Mr. Härter downplayed the company’s liquidity needs and failed to disclose the correct number of put options on VW shares Porsche held when negotiating with BNP Paribas about the lender’s €500 million share of the syndicated loan, presiding Judge Roderich Martis said when delivering the verdict. Mr. Härter, who doesn’t face jail, will be fined, the judge said.

Bob Jensen's timeline on derivative financial instruments frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

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


"Insurers Inflating Books, New York Regulator Says," by Mary Williams Walsh, The New York Times, June 11, 2013 ---

New York State regulators are calling for a nationwide moratorium on transactions that life insurers are using to alter their books by billions of dollars, saying that the deals put policyholders at risk and could lead to another taxpayer bailout.

Insurers’ use of the secretive transactions has become widespread, nearly doubling over the last five years. The deals now affect life insurance policies worth trillions of dollars, according to an analysis done for The New York Times by SNL Financial, a research and data firm.

These complex private deals allow the companies to describe themselves as richer and stronger than they otherwise could in their communications with regulators, stockholders, the ratings agencies and customers, who often rely on ratings to buy insurance.

Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance,” according to an investigation conducted by his department. He issued a report about the investigation late Tuesday.

The transactions are so opaque that Mr. Lawsky said it took his team of investigators nearly a year to follow the paper trail, even though they had the power to subpoena documents.

Insurance is regulated by the states, and Mr. Lawsky said his investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators.

Insurance regulation is based squarely on the concept of solvency — the idea that future claims can be predicted fairly accurately and that each insurer should track them and keep enough reserves on hand to pay all of them. The states have detailed rules for what types of assets reserves can be invested in. Companies are also expected to keep a little more than they really expect to need — called their surplus — as a buffer against unexpected events. State regulators monitor the reserves and surpluses of companies and make sure none fall short.

Mr. Lawsky said that because the transactions made companies look richer than they otherwise would, some were diverting reserves to other uses, like executive compensation or stockholder dividends.

The most frequent use, he said, was to artificially increase companies’ risk-based capital ratios, an important measurement of solvency that was instituted after a series of life-insurance failures and near misses in the 1980s.

Mr. Lawsky said he was struck by similarities between what the life insurers were doing now and the issuing of structured mortgage securities in the run-up to the financial crisis of 2008.

“Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices,” Mr. Lawsky said. “And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multitrillion-dollar taxpayer bailout.”

The transactions at issue are modeled after reinsurance, a business in which an insurance company pays another company, a reinsurer, to take over some of its obligations to pay claims. Reinsurance is widely used and is considered beneficial because it allows insurers to spread their risks and remain stable as they grow. Conventional reinsurance deals are negotiated at arm’s length by independent companies; both sides understand the risk and can agree on a fair price for covering it. The obligations drop off the original insurer’s books because the reinsurer has picked them up.

Mr. Lawsky’s investigators found, though, that life insurance groups, including some of the best known, were creating their own shell companies in other states or countries — outside the regulators’ view — and saying that these so-called captives were selling them reinsurance. The value of policies reinsured through all affiliates, including captives, rose to $5.46 trillion in 2012, from $2.82 trillion in 2007.

Continued in article

Also see
"World Needs More Hardheads Like Benjamin Lawsky," by Jonathan Weil, Bloomberg News, June 13, 2013 ---
http://www.bloomberg.com/news/2013-06-13/world-needs-more-hardheads-like-benjamin-lawsky.html

Bob Jensen's threads on creative accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

 


Most likely he never had an accounting and finance ethics course in college
"KPMG says fired a partner in Los Angeles for role in insider trading," Sakthi Prasad, Reuters, April 9, 2013 ---
http://www.reuters.com/article/2013/04/09/us-kpmg-partner-idUSBRE93803420130409

KPMG KPMG.UL said late on Monday it had fired a senior partner in the accounting firm's Los Angeles office for allegedly providing inside information to an unnamed third party, who then used that information to trade in stocks of several West Coast companies.

KPMG, one of the "Big Four" accounting and audit firms, said it has resigned as the auditor for two clients upon discovery of the individual's action.

"We have informed those companies it is necessary to withdraw our auditor reports. We have no reason to believe that the financial statements of these companies have been materially misstated," KPMG spokesman Tim Connolly said in a statement.

KPMG did not name the client firms in its statement. The firm also did not identify the West Coast companies whose stocks were traded by the unnamed third party.

The accounting firm did not name the partner nor did it say how it learned of the individual's alleged activity.

KPMG spokesman Tim Connolly declined to comment beyond the statement when contacted by Reuters.

This hurt Francine a bit. She's seemingly gone easy on KPMG (compared to me) over the years relative to her despised Deloitte.
"Another 'Rogue' Audit Partner; Another 'Duped' Audit Firm," by Francine McKenna, Forbes, April 10, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/04/10/another-rogue-audit-partner-another-duped-audit-firm/

There are things you anticipate, worry about, know will be troublesome once they happen. It’s safe to say global audit firm KPMG wasn’t worrying it would someday hear the leader of its Los Angeles audit practice was passing confidential client information to someone else who then traded on it.

KPMG announced late Monday via press release that the firm had “separated” a senior partner, one with a very visible role, from the firm. The firm had” “been informed” about his “rogue” actions and “regrets” the impact his actions may have had.

I was half-expecting, “He’s not our kind”.

That’s a lot of passive construction. Who informed the firm about the illegal and unethical activity?  The firm clearly did not discover Scott London’s betrayal on its own. If London was not trading on the information himself, the anomalies wouldn’t show up in the information he’s required to provide to the firm to prove his independence from audit clients each year.

Deloitte wasn’t the one who discovered that its Vice Chairman and Chicago charity circuit regular Tom Flanagan was trading on the inside information of several Fortune 500 companies including Berkshire Hathaway. In that case it was FINRA, the securities self-regulatory organization, that saw trading activity by an audit firm partner in a company with M&A activity.

When Deloitte tax partner Arnie McClellan’s wife “eavesdropped” on her husband’s phone calls where he discussed his client’s M&A targets and then called her sister in London, Deloitte didn’t know until London authorities called. McClellan’s wife said her husband was innocent and everyone believed her. She did serve time for initially lying about her own involvement.

It wasn’t Ernst & Young that uncovered tax partner James Gansman passing M&A tips to his lover who, in turn, passed them to hers. Gansman’s “swinging” partner ended up on an SEC watch list and Gansmen went to jail based on her testimony against him. He did not profit from his breach of client confidentiality other than in ways some men might prefer to the discounted watch, dinners, and few thousand dollars Scott London, the KPMG partner we heard about yesterday, says he received.

Surely more information will come out over the next few week, from KPMG, from additional  companies affected and from the media, who will pursue this story like pit bulls. One reporter who emailed me yesterday said these stories of have “legs”. Hubris, and stupidity in unexpected places, are great media fodder.

KPMG said in its press release that the firm resigned as auditor from two of London’s clients, Herbalife and Skechers, although it did not name them. He was the top partner on those audits. The time and money those companies will have to spend to appoint a new auditor, re-audit years of financial statements and fend off media attention will probably be subsidized, one-way or another, by KPMG. In the Flanagan case, Deloitte paid for the necessary independent investigations to support the firm’s claim to clients that it was still independent as an auditor. None of them – Berkshire Hathaway, Walgreens, Sears Holdings among the victims – fired the firm.

The SEC and PCAOB did not fine or sanction Deloitte or Ernst & Young in any of the cases.

But surely Scott London, KPMG’s “rogue”, had access to confidential information about more clients of the firm than just the ones he was directly responsible for. He was the partner in charge of the audit practice for a huge market, Los Angeles. He has the right, and the responsibility, to know about every interesting or problematic thing going on at the audit clients in his practice group.  He may be a “concurring” or quality review partner on more companies’ audits and can “drop by” audit committee and other client meetings on a relationship-building basis. The exposure to KPMG and to the clients of this practice unit, and perhaps others, may be larger than what’s been admitted by the firm so far.

Scott London is making statements to the press. He’s wealthy enough to afford a lawyer and PR – but obviously not wealthy enough to resist the temptation of a “discount” on a watch and a few bucks. (London didn’t even get a watch. He got a discount. Looking for the tippee? Go look for a prominent LA jeweler in financial trouble who’s too cheap to pay well for stealing a man’s career, professional reputation and, possibly, his freedom.)

My sources tell me KPMG is not paying for London’s defense. Deloitte sued Flanagan to assuage its clients. I would expect that’s next. If KPMG’s behavior during the 2005 tax shelter scandal is any indication, Scott London will be completely abandoned, not just fired, as long as he’s not needed to absolve the firm of any guilt or accountability for his actions. KPMG has been “duped”, betrayed by its own, and that’s a tragedy, for sure.

Continued in article

Bob Jensen's threads on the "Two Faces" of KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm

 

April 9, 2013 reply from Dennis Beresford

Bob, Maybe if the KPMG Los Angeles partner ultimately is sentenced to 45 years in prison (such as Attica) it would actually put an end to this kind of "white collar" crime.

Denny

April 10, 2013 reply from Bob Jensen

Hi Denny,

It will never happen. The biggest problem with white collar crime is that it pays even if you know you're going to get caught (at least if you know the rudiments of hiding the loot off shore or with friends and understand time value of money) ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss. 
What's a sweetheart like you doin' in a dump like this?

Lyrics of a Bob Dylan song forwarded by Amian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US]



The law does not pretend to punish everything that is dishonest. That would seriously interfere with business
.
Clarence Darrow --- Click Here  

 

Why white collar crime pays for Chief Financial Officer: 
Andy Fastow's fine for filing false Enron financial statements:  $30,000,000
Andy Fastow's stock sales benefiting from the false reports:     $33,675,004
Andy Fastow's estimated looting of Enron cash:                         $60,000,000
That averages out to winnings, after his court fines, of $10,612,500 per year for each of the six years he spent in prison.
You can read what others got at http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales 
Nice work if you can get it:  Club Fed's not so bad if you earn $29,075 per day plus all the accrued interest over the past 15 years (includes years where he got away with it).

 

If you aren’t now, you will by the time you finish the new Bebchuk and Fried paper on executive compensation.  They paint a fairly gloomy picture of managers exerting their power to “extract rents and to camouflage the extent of their rent extraction.”  Rather than designed to solve agency cost problems, the paper makes the case that executive pay can by an agency cost in and of itself.  Let’s hope things aren’t this bad. 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364220

 

They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss. 
What's a sweetheart like you doin' in a dump like this?

Lyrics of a Bob Dylan song forwarded by Amian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US]

The law does not pretend to punish everything that is dishonest. That would seriously interfere with business.
Clarence Darrow --- Click Here

Teaching Case from The Wall Street Journal Accounting Weekly Review on June 27, 2013

Ex-KPMG Partner to Plead Guilty in Insider Case
by: Michael Rapoport
Jun 21, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting

SUMMARY: Scott London, the former KPMG LLP partner who has admitted to an insider-trading scheme, will plead guilty to fraud. Mr. London, who had been a senior partner in charge of KPMG's Pacific Southwest audit practice, had previously agreed to plead guilty to one count of securities fraud. Mr. London has admitted passing confidential information about KPMG clients to a friend, Bryan Shaw, who prosecutors say made $1.27 million in illegal profits by trading on the information and paid Mr. London at least $60,000 in cash and gifts. Mr. Shaw has already pleaded guilty.

CLASSROOM APPLICATION: This article would be an excellent addition to an auditing class for part of a discussion regarding the importance of ethics and independence when dealing with client information. The stakes are high for those who violate rules, as illustrated in the downfall of this KPMG partner. You can combine this article with the attached Related Articles to serve as a case study of the case.

QUESTIONS: 
1. (Introductory) Who is Scott London? What was his professional position? What are the accusations against him?

2. (Advanced) For what reasons might Mr. London have decided to enter a guilty plea? What would be his other options?

3. (Advanced) What is insider trading? Why is it prohibited? How was Mr. London able to access information to use to commit this crime? What auditing rules has Mr. London violated?

4. (Introductory) What is KPMG? What was KPMG's response to the discovery of Mr. London's activities? How was the firm impacted?

5. (Advanced) What, if anything, could KPMG have done to prevent this situation from happening? How should KPMG proceed going into the future? What additional internal controls or procedures could the firm implement?

6. (Advanced) How likely is it that similar activities occur in the public accounting industry? How could these activities be prevented or detected earlier?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Trading Case Embroils KPMG
by Jean Eaglesham, Juliet Chung, and Hannah Karp
Apr 10, 2013
Page: A1

KPMG Finds Its Safeguards 'Sound and Effective'
by Michael Rapoport
Jun 05, 2013
Page: C1

Question in KPMG Case: Why?
by Justine Baer, Hannah Karp and Ben Fritz
Apr 13, 2013
Page: B1

Jeweler Pleads Guilty in KPMG Insider-Trading Case
by Hannah Karp
May 20, 2013
Page: C3

KPMG Adds to the Big Four's Troubles
by Michael Rapoport
Apr 09, 2013
Online Exclusive

How to Solve a Problem Like Scott London
by Michael Rapoport
Apr 12, 2013
Online Exclusive

Secret Recordings, Cash in Insider Sting
by Jean Eaglesham, Reed Albergotti, and Hannah Karp
Apr 12, 2013
Page: A1

Meet KPMG's Scott London, the Alleged 'Rogue' Partner
by David Benoit
Apr 09, 2013
Online Exclusive

Herbalife Auditor Hunt Hampered by Small Pool, Big Needs
by Maxwell Murphy
Apr 30, 2013
Online Exclusive

 

"Ex-KPMG Partner to Plead Guilty in Insider Case," by Michael Rapoport, The Wall Street Journal, June 21, 2013 ---
http://online.wsj.com/article/SB10001424127887323393804578560160409788432.html?mod=djem_jiewr_AC_domainid

Scott London, the former KPMG LLP partner who has admitted to an insider-trading scheme, will plead guilty to fraud on July 1, according to a court docket and his attorney.

Mr. London, who had been a senior partner in charge of KPMG's Pacific Southwest audit practice, had previously agreed to plead guilty to one count of securities fraud. At his arraignment earlier this week, a not-guilty plea was automatically entered for him, but he had been expected to change that plea once some procedural matters were resolved.

According to an entry filed Friday on the court docket in his case, a "change of plea" hearing has been set for July 1 before U.S. District Judge George H. Wu in Los Angeles.

"We're going to go in and plead guilty on July 1," Harland Braun, Mr. London's attorney, said Friday.

Mr. London has admitted passing confidential information about KPMG clients to a friend, Bryan Shaw, who prosecutors say made $1.27 million in illegal profits by trading on the information and paid Mr. London at least $60,000 in cash and gifts. Mr. Shaw has already pleaded guilty.

Continued in article

Question
Will Scott London get off Scott free under the lenient Federal Sentencing Guidelines?
Sentencing is set for September 16, 2013

From CFO Journal's Morning Ledger on June 18, 2013

KPMG ex-partner Scott London is arraigned
Former KPMG senior partner Scott London was arraigned in federal court, where a not-guilty plea was entered on his behalf, although he is expected to plead guilty once certain procedural matters are resolved,
the WSJ reports. Mr. London is accused of securities fraud for providing confidential information about KPMG clients to a friend as part of an insider-trading scheme. Mr. London faces up to 20 years in prison, though he is likely to receive a lesser sentence under federal sentencing guidelines. Mr. London told reporters that he hopes to move past the scandal and get a new job. “I won’t be practicing before the SEC, but it’ll be something,” he said. “I’ll wait tables.”

Bob Jensen's threads on why white collar crime pays bigtime even if you know you will be caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

Bob Jensen's threads on this insider trading crime committed by the KPMG audit engagement managing partner ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search for "Scott London".

 

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


Criminals in Charge:  Rampant Fraud in New York Government
"Corruption in Albany," by the NYT Editorial Board,"  The New York Times, May 6, 2013 ---
http://www.nytimes.com/2013/05/07/opinion/corruption-in-albany.html?hp&_r=0

For all the talk among Gov. Andrew Cuomo and other leaders about cleaning up New York’s rancid state government, it is the F.B.I. that is doing the cleaning — indictment by indictment. State Senator John Sampson is the latest Albany politician to face corruption charges. On Monday, he was taken into custody by federal agents on charges of embezzling about $440,000 from the sale of foreclosed properties, obstruction of justice and witness tampering.

¶ Mr. Sampson, who pleaded not guilty, is the former leader of the Democratic caucus in the Senate, a big catch for prosecutors and another huge embarrassment for New Yorkers. He also becomes the 32nd state politician to be indicted or convicted of a crime, censured or otherwise accused of misbehaving in the last seven years. Alan Hevesi, the former state comptroller, went to jail as part of a pension scandal. Former Gov. Eliot Spitzer resigned in disgrace. Nearly two dozen state senators and Assembly members have been accused and convicted. Assemblyman Vito Lopez, once the Democratic power broker in Brooklyn, was censured for harassing young women on his staff.

¶ Mr. Sampson, who led the Senate Democrats from June 2009 to December 2012, is the fourth top Senate power broker to be indicted on a charge of misusing his office. The others were: Joseph Bruno, the Republican leader who is being retried on public corruption charges; Pedro Espada Jr., a Democrat, who was convicted of stealing from his nonprofit health care network; and, most recently, Malcolm Smith, a Democrat, who is now fighting charges of trying to bribe Republicans to put his name on their ballot for New York City mayor.

¶ New York’s ever-expanding gallery of rogue politicians makes one wonder what can be done to keep the remaining unindicted lawmakers in line. The numerous arrests and convictions are certainly one way to weed out the worst of the bunch. No less helpfully, at least two former legislators in trouble with federal investigators — Nelson Castro, a Bronx assemblyman, and Shirley Huntley, a Queens senator — were secretly taping their colleagues. Wiring politicians as part of a plea deal is an unsavory business. But it may be exactly what is required to create an atmosphere of fear and paranoia necessary to break the cycle of temptation.

¶ The indictment in Mr. Sampson’s case outlines a scheme to embezzle money from the sale of forfeited property in Brooklyn where he had been appointed a court referee. He is also accused of trying to conceal the public records involving this scheme.

¶ It will take more than public shaming to get the Albany crowd to do things right. Our list of proposals includes, foremost, the public financing of campaigns in order to provide competition for those entrenched in state office. That would be especially helpful in New York City, where voters have elected too many of the worst malefactors in Albany. Meanwhile, we encourage the prosecutors to keep probing — and listening

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


"Wheelchair-bound woman, son accused of massive retail theft scheme," by Marie Saavedra, azfamily, April 22, 2013 ---
http://www.azfamily.com/news/Wheelchair-bound-woman-son-accused-of-massive-retail-theft-scheme-204205781.html

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


I wonder if this financial fraud will ever be reported in our liberal media?  I doubt it.
"A Socialist Lawmaker's Fiscal Double Life," by Rachel Marsden, Townhall, April 9, 2013 ---
http://townhall.com/columnists/rachelmarsden/2013/04/09/a-socialist-lawmakers-fiscal-double-life-n1562588?utm_source=thdaily&utm_medium=email&utm_campaign=nl

PARIS -- The left revels in sex scandals involving preachy conservative moralists, but when members of the left get caught up in seedy financial scandals, so perverted and twisted is their relationship with money that the effect can be equally jaw-dropping and salacious.

Former French Budget Minister Jerome Cahuzac, who left his Socialist government post earlier this year amid allegations of a secret Swiss bank account, now faces a formal investigation for allegedly laundering the proceeds of tax evasion.

This would be less of a big deal if Cahuzac himself hadn't been one of the loudest supporters of French President Francois Hollande's plan to tax income above 1 million euros at a 75 percent rate. After the French Constitutional Council rejected the proposed measure in December as being unconstitutional, Cahuzac proclaimed to the media that it would be reworked and back on the table by fall. "That measure had the objective of encouraging a bit of prudence and decency in a certain, very rare, number of leaders," Cahuzac said.

Speaking of fall, could there have been a better setup for one? Cahuzac's biggest problem is that he tried to shoehorn himself into a socialist ideology with which his own life path was destined to come into conflict. His talents -- he was previously a cardiologist, then a plastic surgeon and hair-transplant specialist -- made him well-off. Why shouldn't he have been entitled to keep his earnings? Instead, Cahuzac decided to adopt the Socialist label that inherently stands for the notion that your own talent-driven wealth isn't yours to keep, but rather everyone else's to share regardless of merit. At some point, Cahuzac must have felt that he was getting a raw deal.

It's not difficult to understand the appeal of sending your hard-earned cash on a vacation to a place where it won't be put upon by oppressive taxation -- particularly when you're in France. You just have to look around to see all the ways in which the state can fritter away your earnings -- from propping up a bloated government bureaucracy and political class to paying universal health care for far too many chain smokers and unproductive beneficiaries of state generosity.

But rather than announce that he'd had an epiphany and had decided to leave the Socialist Party for the more free-market-friendly alternative, Cahuzac apparently decided to lead a fiscal double life. Worse, as budget minister, he spoke out in favor of increased wealth confiscation of productive citizens like himself.

Continued in article

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


"Federal Tax Crimes, 2013," by John A. Townsend , SSRN, February 5, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2212771

Abstract:     
This is the 2013 01 edition of the Federal Tax Crimes book that I started many years ago for use in a Tax Fraud and Money Laundering course at the University of Houston Law School. With some colleagues, we substantially revised that earlier version into a separately targeted book, titled Tax Crimes published by LEXIS-NEXIS. The full title of the LEXIS-NEXIS book is John Townsend, Larry Campagna, Steve Johnson and Scott Schumacher, Tax Crimes (LEXIS-NEXIS Graduate Tax Series 2008).

This pdf text offered here is a self-published version of my original text that I have kept up since publication of the LEXIS-NEXIS book. The LEXIS-NEXIS book is more suitable for students in a classroom setting and is targeted specifically for graduate tax students. This pdf book I make available here is not suitable for students in a class setting, but is more suitable for lawyers in practice, covering far more topics and with far more detail and footnotes that may be helpful to the busy practitioner. It cannot be used fruitfully for the target audience of the LEXIS-NEXIS book.

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


Fraud Beat:
Canadians Massively Screwed by Their City, Province, and Local Governments ---
http://www.businessinsider.com/the-three-reasons-canada-is-in-big-trouble-2013-6

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


The New Yorker:
From maids to roofers to drug dealers the underground economy resulted in an estimated $2 Trillion (with a T) of underreported taxable income in 2012
Unemployment and Welfare Fraud
"The Underground Recovery," by James Surowiecki," The New Yorker, April 29, 2013 ---
http://www.newyorker.com/talk/financial/2013/04/29/130429ta_talk_surowiecki

When we all finished filing our tax returns last week, there was a little something missing: two trillion dollars. That’s how much money Americans may have made in the past year that didn’t get reported to the I.R.S., according to a recent study by the economist Edgar Feige, who’s been investigating the so-called underground, or gray, economy for thirty-five years. It’s a huge number: if the government managed to collect taxes on all that income, the deficit would be trivial. This unreported income is being earned, for the most part, not by drug dealers or Mob bosses but by tens of millions of people with run-of-the-mill jobs—nannies, barbers, Web-site designers, and construction workers—who are getting paid off the books. Ordinary Americans have gone underground, and, as the recovery continues to limp along, they seem to be doing it more and more.

Measuring an unreported economy is obviously tricky. But look closely and you can see the traces of a booming informal economy everywhere. As Feige said to me, “The best footprint left in the sand by this economy that doesn’t want to be observed is the use of cash.” His studies show that, while economists talk about the advent of a cashless society, Americans still hold an enormous amount of cold, hard cash—as much as seven hundred and fifty billion dollars. The percentage of Americans who don’t use banks is surprisingly high, and on the rise. Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly (despite a dip in March). Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you’d expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we’re stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy. “It’s typical that during recessions people work on the side while collecting unemployment,” Baumohl told me. “But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer.”

The increasing importance of the gray economy isn’t only a reaction to the downturn: studies suggest that the sector has been growing steadily over the years. In 1992, the I.R.S. estimated that the government was losing $80 billion a year in income-tax revenue. Its estimate for 2006 was $385 billion—almost five times as much (and still an underestimate, according to Feige’s numbers). The U.S. is certainly a long way from, say, Greece, where tax evasion is a national sport and the shadow economy accounts for twenty-seven per cent of G.D.P. But the forces pushing people to work off the books are powerful. Feige points to the growing distrust of government as one important factor. The desire to avoid licensing regulations, which force people to jump through elaborate hoops just to get a job, is another. Most important, perhaps, are changes in the way we work. As Baumohl put it, “For businesses, the calculus of hiring has fundamentally changed.” Companies have got used to bringing people on as needed and then dropping them when the job is over, and they save on benefits and payroll taxes by treating even full-time employees as independent contractors. Casual employment often becomes under-the-table work; the arrangement has become a way of life in the construction industry. In a recent California survey of three hundred thousand contractors, two-thirds said they had no direct employees, meaning that they did not need to pay workers’-compensation insurance or payroll taxes. In other words, for lots of people off-the-books work is the only job available.

Sudhir Venkatesh, a sociologist at Columbia and the author of a study of the underground economy, thinks that many workers, particularly younger ones, have become comfortable with casual work arrangements. “We have seen the rise of a new generation of people who are much more used to doing things in a freelance way,” he said. “That makes them more amenable to unregulated work. And they seem less concerned about security, which they equate with rigidity.” The growing importance of services in the economy is also crucial. Tutors, nannies, yoga teachers, housecleaners, and the like are often paid in cash, which is hard for the I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that between eighty and ninety-seven per cent of nannies were paid under the table.

Continued in article

Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm


"Do You Trust Banks? Country by County Comparison," by Mike Shedlock, Townhall, June 15, 2013 --- Click Here
http://finance.townhall.com/columnists/mikeshedlock/2013/06/15/do-you-trust-banks-country-by-county-comparison-n1620658?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Jensen Comment
Corruption in banking is so common that the public hardly takes notice anymore. For example, the LIBOR fraud committed by large U.K. banks was a much bigger deal than Enron. However, the media coverage of the LIBOR fraud is miniscule compared the the massive media coverage of the Enron fraud.

Also in the case of Enron, criminal executives eventually served prison terms. To my knowledge, no banking executive in the LIBOR fraud even was charged with a felony.

 


Teaching Case from The Wall Street Journal Accounting Weekly Review on May 9, 2013

City (Harrisburg, Pa.) Hit by SEC Fraud Charges
by: Kris Maher and Michael Corkery
May 07, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Disclosure, Disclosure Requirements, Governmental Accounting, Municipal Bonds, SEC, Securities and Exchange Commission

SUMMARY: The SEC has charged the city of Harrisburg, Pennsylvania, for insufficient disclosures of importance to their municipal bond investors. "The SEC found that the city's 2009 budget misstated Harrisburg's credit as being rated Aaa by Moody's Investors Service even though Moody's had downgraded the city's general obligation rating to Baa1. The city didn't disclose a subsequent downgrade by Moody's in February 2010 until March 2011. ...Moreover, the SEC said the city didn't submit annual financial information or audited financial statements between January 2009 and March 2011...[so that] '...financial information and notices available to the market were incomplete and outdated'...." The article quotes the CEO of a private-equity firm saying that "'this isn't just Harrisburg, there are lots more issuers like it....'" The related article discusses the new Commonwealth of Massachusetts investor web site and the last several questions provide an opportunity for students to investigate that web site.

CLASSROOM APPLICATION: The article may be used to introduce the critical nature of government reports for investors in state and municipal bonds.

QUESTIONS: 
1. (Introductory) In what report(s) do city and town governments describe their fiscal health?

2. (Advanced) With what charge did the Securities and Exchange Commission (SEC) fault the city of Harrisburg, Pennsylvania? What specific actions by the city led to this SEC action?

3. (Advanced) Why does the SEC have influence over the financial reporting actions of the City of Harrisburg?

4. (Introductory) Refer to the related article. What has Massachusetts done to provide information to investors in its state-government issued bonds?

5. (Introductory) Access the Massachusetts disclosure web site at http://www.massbondholder.com/ What is the purpose of this web site?

6. (Introductory) Again refer to the Massachusetts web site. Under KEY INITIATIVES, click on "Ratings Report Archive." What is available there? How does this archive address an issue raised by the SEC in relation to Harrisburg, PA?

7. (Introductory) Again refer to the Massachusetts web site. Under KEY RESOURCES, click on "Investor Tools and Resources." Then click on "Bond Secondary Market Trading Activity." This page is also available directly at http://www.massbondholder.com/investor-resources/bond-secondary-market-trading-activity Click on the first year listed (2013) and then select the first CUSIP number. What information is available there? How does this information provide "transparency" about the market for Massachusetts bonds? In your answer, be sure to discuss the meaning of "transparency."
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
MoneyBeat: Massachusets Sees Itself as the Anti-Harrisburg
by Andrew Ackerman
May 07, 2013
Online Exclusive

"City (Harrisburg, Pa.) Hit by SEC Fraud Charges," by Kris Maher and Michael Corkery, The Wall Street Journal, May 8, 2013 ---
http://online.wsj.com/article/SB10001424127887324326504578467121184204706.html?mod=djem_jiewr_AC_domainid

The Securities and Exchange Commission has put local government officials on notice that it is closely monitoring the way they describe their cities' fiscal health, charging Harrisburg, Pa., with securities fraud for allegedly failing to disclose information on its financial troubles.

Harrisburg agreed to settle the charges without admitting or denying the findings, and no fine was levied against it or city officials. The SEC faulted Harrisburg for allegedly making misleading financial statements from 2009 to 2011 outside its securities disclosure documents related to bond offerings, including in the city's budget report and a mayor's state-of-the-city address.

t is the first time the regulator has brought such charges, and investors say other municipalities could face sanctions for issuing incomplete or misleading information about their finances.

As much as 20% of the nearly 50,000 issuers of municipal debt in the U.S. don't supply timely disclosures after their bonds have been issued, according to analyst estimates.

"This isn't just Harrisburg, there are lots more issuers like it,'' said Laurence Gottlieb, chairman and CEO of Fundamental Advisors, a private-equity firm that invests in distressed municipal debt.

The Pennsylvania capital has been mired in debt for years. Its fiscal woes stem largely from years of cost overruns related to a troubled incinerator project. The city of 49,500 was nearly pushed into bankruptcy in 2011. Republican Gov. Tom Corbett declared a state of fiscal emergency, and a state court appointed a receiver to oversee the city's finances.

The SEC found that the city's 2009 budget misstated Harrisburg's credit as being rated Aaa by Moody's Investors Service MCO +0.52% even though Moody's had downgraded the city's general obligation rating to Baa1. The city didn't disclose a subsequent downgrade by Moody's in February 2010 until March 2011.

The SEC also took issue with Harrisburg officials for doing what many public officials often do: Putting a good face on a difficult situation. For example, in the state of the city address in 2009, Harrisburg's then-mayor described the incinerator as an "additional challenge'' and an "issue that can be resolved." In its order on Monday, the SEC called the address misleading because it didn't go into detail about the impact the incinerator debt was having on the city's finances.

Moreover, the SEC said the city didn't submit annual financial information or audited financial statements between January 2009 and March 2011. "Harrisburg's financial information and notices available to the market were incomplete and outdated," the SEC said.

"I would expect the SEC is going to be inquiring of other financially troubled cities: Are they lipsticking the pig?" said Matt Fabian, a managing director at Municipal Market Advisors.

Mayor Linda Thompson, who has held office since 2010, said in a prepared statement Monday she was happy to have the matter concluded and called the settlement "a turning point" for the troubled city.

Ms. Thompson said the SEC's charges "are what they are," and added that the city has "completely revamped its policies and procedures…to ensure that accurate and complete financial information" is made available to investors and the public in a timely manner.

In recent years, the SEC has been stepping up its investigations in the $3.7 trillion municipal-debt market. In an interview, Elaine Greenberg, chief of the SEC's Municipal Securities and Public Pensions unit, said policing financial disclosures by cities, states and other municipal borrowers is a priority.

Earlier this year, the SEC charged the state of Illinois for failing to adequately disclose in bond documents the shaky condition of the state pension system.

The agency brought a similar case against New Jersey in August 2010. The states agreed to settle the charges without admitting wrongdoing.

But with the Harrisburg case, the SEC is going even further by policing the accuracy of speeches and presentations of government officials. "Public officials should take steps to avoid misleading investors,'' Ms. Greenberg said.

In deciding not to fine Harrisburg, Ms. Greenberg said the SEC considered the city's difficult financial condition. She declined to discuss the specific reasons why the SEC didn't cite individual Harrisburg officials, but noted that the agency issued a separate report on Monday that was meant to be a broad warning to public officials in the U.S. about their disclosure obligations.

"We're glad to see that the SEC didn't levy any fines on the city. That could have made it more challenging," said Cory Angell, a spokesman for Harrisburg's current receiver, William Lynch.

Continued in article

Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

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

 

 


"Ex-Goldman Trader Pleads Guilty to Fraud," by Chad Bray and Justin Baer, The Wall Street Journal, April 3, 2013 ---
http://online.wsj.com/article/SB10001424127887324600704578400332210938670.html

In late 2007, with a seven-figure bonus and his reputation at Goldman Sachs Group Inc. GS -2.28% on the line, Matthew Taylor placed an $8.3 billion futures bet and hid it from his bosses. Now, he faces a possible long prison sentence.

On Wednesday, Mr. Taylor pleaded guilty to a single count of wire fraud for concealing the trades, which cost Goldman $118.4 million to unwind. He told a federal judge he made the big bets to boost his reputation and bonus at the bank.

"I accumulated this trading position and concealed it for the purpose of augmenting my reputation at Goldman and increasing my performance-based compensation," Mr. Taylor said at a hearing in Manhattan federal court on Wednesday. "I am truly sorry for my actions." Related

U.S. Attorney's Case Against Taylor Plea Agreement CFTC Complaint Against Trader Taylor's Response to CFTC Complaint Ex-Trader's Gambit Bites Goldman CFTC Charges Trader With Concealing $8.3 Billion Trade

Prosecutors recommended a sentencing-guidelines range of two years and nine months to three years and five months in prison. The range was based in part on Mr. Taylor's compensation for 2007—$150,000 in salary and an expected $1.6 million bonus—rather than the loss suffered by Goldman.

But the judge in the case sent a signal that the ex-trader might face an even stiffer sentence. U.S. District Judge William Pauley III questioned why prosecutors, in negotiating a plea agreement, didn't seek a longer potential sentence. "He cooked the books," the judge said.

Sentencing is set for July 26.

Wednesday's plea is the latest twist in the case of a young trader whose career went off track in the final days of 2007, just as the securities industry was bracing for the looming crisis.

It also comes as time is running out for prosecutors and regulators to bring actions related to the events that occurred in the months leading up to and during the downturn.

Mr. Taylor attended high school in suburban Boston, where his guidance counselor, Adelaide Greco, remembers him as the class valedictorian once named "most likely to succeed." While enrolled at the Massachusetts Institute of Technology, he returned to his high school to talk to students about achieving one's dreams, Ms. Greco said. "Kids looked up to him," she said.

From MIT, Mr. Taylor headed to Wall Street. He worked for Morgan Stanley MS -2.72% from 2001 until 2005, then landed at Goldman.

By November 2007, Mr. Taylor was an equity-derivatives trader on Goldman's Capital Structure Franchise Trading desk and had lost a "significant portion" of the trading profits he had accumulated earlier that year, according to criminal charging documents filed by prosecutors Wednesday.

Because of his lost profits and the general market conditions, his supervisors ordered him to rein in the risks he was taking. By December, they had told him his annual bonus would decline "significantly," according to the document.

In mid-December, Mr. Taylor ratcheted up the size of his bet on electronic futures contracts tied to the Standard & Poor's 500-Stock Index, accumulating a position with a face value of $8.3 billion.

That figure, court records show, exceeded the risk limits for his entire desk at Goldman, a group of about 10 traders.

At the same time, Mr. Taylor also made false trade entries that appeared to take the opposite side of that bet. The purpose, according to court records: "to conceal and understate the true size" of his long position on so-called S&P 500 E-mini futures.

Goldman fired Mr. Taylor on Dec. 21, 2007, for "alleged conduct related to inappropriately large proprietary futures positions in a firm trading account," the bank wrote in a filing submitted to the Financial Industry Regulatory Authority, which oversees broker-dealers.

Goldman agreed to pay $1.5 million in December to settle civil charges by the CFTC that it failed to supervise Mr. Taylor. The agency also said in its complaint against the bank that it wasn't fully forthcoming with regulators when Mr. Taylor was fired. Goldman settled the charges without admitting or denying wrongdoing.

The bank cooperated in the probe, according to a person familiar with the investigation. "We are very disappointed by Mr. Taylor's unauthorized conduct and betrayal of the firm's trust in him," a Goldman spokeswoman said Wednesday.

The episode didn't bring an immediate end to Mr. Taylor's Wall Street career. In March 2008, he returned to Morgan Stanley as trader in the firm's equities division. He left Morgan Stanley a second time last August, according to Finra.

Continued in article

Banking and investment banking have become rotten to the core ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

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


Francine's Not Going to Like This (time and time again audit firms dodge the bullet)
"Deloitte Not Liable For Mortgage Execs' Fraud, 9th Circ. Says," by Sindhu Sundar, Law360, April 22, 2013
http://www.law360.com/securities/articles/434838/deloitte-not-liable-for-mortgage-execs-fraud-9th-circ-says

Deloitte & Touche LLP on Monday dodged claims that it allowed insiders at USA Commercial Mortgage Co. to steal from the now-bankrupt mortgage company and defraud investors when the Ninth Circuit affirmed a lower court ruling for the auditing giant.

A three-judge panel affirmed a summary judgment ruling for the mortgage company’s erstwhile external auditor, ruling that the lower court was correct to file that under the Nevada’s so-called sole actor rule, only the mortgage company is at fault for the fraud of its owners CEO...

The full articles from Law360 are not free (except for a free trial)

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

"Deloitte Achieves Another Unflattering Milestone in Audit Quality," by Caleb Newquist, Going Concern, July 16, 2012 ---
http://goingconcern.com/post/deloitte-achieves-another-unflattering-milestone-audit-quality

PCAOB "Time Bomb" says Bloomberg's Jonathon Weil
"Bigger, Stronger, Faster: The PCAOB After The Supreme Court Ruling," by Francine McKenna, re:TheAuditors, June 26, 2012 ---
http://retheauditors.com/2010/06/26/bigger-stronger-faster-the-pcaob-after-the-supreme-court-ruling/

Francine wishing that the courts would bring Deloitte to its knees (litigation, Bear Sterns, JP Morgan, audit, auditing, Deloitte, lawsuits, Independence, Litigation, PCAOB)
citation:
 "Big Four Auditors and Jury Trials: Not In The U.S.," by Francine McKenna, re:TheAuditors, June 19, 2012 ---
 
http://retheauditors.com/2012/06/19/big-four-auditors-and-jury-trials-not-in-the-u-s/

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

 


Beneish M-Score Model for Fraud Detection and Portfolio Selection

April 5, 2013 message from Tom Selling

I'm writing some study materials for CFA Institute and need to include one example of the Beneish fraud (M) score calculation. I haven't run any numbers yet, but I was thinking of doing it for Dell — both before its restatement of 2006 financials and on a restated basis.

Before I run the Dell numbers, I was wondering if anyone had a better example, hopefully showing dramatic results for illustrative purposes, that I should run?

Best, Tom

April 6, 2013 reply from Bob Jensen
Hi Tom,

Joe Wells discusses some of the history and details and provides some warnings in a paper called "Irrational Ratios" ---
http://www.buec.udel.edu/jenkinsd/Articles/Irrational Ratios.htm

. . .

THE NUMBERS DON’T LIE

The most basic analytical techniques (vertical, horizontal and ratio analyses) might have given the auditors for ZZZZ Best some important clues. Since these techniques compare changes in the numbers from year to year, they can point out significant discrepancies. In the ZZZZ Best case, look at what a simple ratio analysis would have revealed (see exhibit 1, below).

Exhibit 1: Selected Ratios From ZZZZ Best
  1985 1986
Current ratio of assets to liabilities 36.552 .0977
Working capital: Total assets 0.5851 (0.0080)
Collection ratio N/A 26.131
Asset turnover .144 1.041
Debt to equity ratio .017 1.486
Receivables turnover N/A 6.984
Times interest earned N/A 43.136
Cost of sales: Sales .465 .423
Gross margin percentage 53.51% 57.68%
Return on equity 183.75% 46.58%

These numbers make no sense at all—they are all over the place. Particularly revealing are the current ratio and the debt to equity and return on equity ratios. The current ratio shows a company with no cash in 1986 despite record “revenues.” The 1986 debt to equity ratio is up 8600% from the prior year; return on equity has dropped by more than 75%. These are not indicators of a legitimate business.

A NEW (1999) APPROACH?

Since the ZZZZ Best case, there have been attempts to develop new analytical techniques to better assist the auditor. In his 1999 article, “The Detection of Earnings Manipulation,” (Financial Analysts Journal, Sep./ Oct.99), Messod D. Beneish—an associate professor at the Kelly School of Business, Indiana University—researched the quantitative differences between public companies that had committed financial statement manipulations and those that had not.

Beneish theorized there may be up to five useful predictors of earnings manipulation, which he defined as “an instance in which a company’s managers violate generally accepted accounting principles (GAAP) to favorably represent a company’s financial performance.” Beneish’s ratios, which he labeled “indexes,” used figures he obtained from financial statements.

Continued in article

Joe goes on to explain the ratios that are instead used in the Benish index.

You might find the following article to be more concise ---
http://articles.businessinsider.com/2011-05-24/markets/30078297_1_earnings-manipulation-financial-ratios-gmi

. . .

Does the Beneish M-Score work?

Beneish used all the companies in the Compustat database between 1982-1992. In his out of sample tests, Beneish found that he could correctly identify 76% of manipulators, whilst only incorrectly identifying 17.5% of non-manipulators. You can read the Cornell University Enron paper referred to above here. 

In a 2007 paper -  The Predictable Cost of Earnings Manipulation - Beneish examines the use of the M score as a stock selection technique (over the period 1993-2003). The M-score strategy apparently generated a hedged return of nearly 14% per annum.  A subsequent paper titled quot;Identifying Overvalued Equityquot; showed that an overvaluation score (O-Score) combining proxies for earnings overstatement, merger activity, stock issuance, and the manipulation of operating activities was able to identify firms with one-year-ahead abnormal price declines averaging -27%.

The  Source:

This is the link to the original paper on the Detection of Earnings Manipulation - as well as to a subsequent paper by Beneish - The Relation between Accruals and the Probability of Earnings Manipulation.

Other Sources

 

Jensen Comment
I have not studied this literature enough to pass judgment and am glad to see you delving into this model.

My reaction to any such models is to apply Darwin's Theory on Survival of the Fittest. If the M-Score was really a great portfolio selection model I think there would be more evidence of it catching on in the investment world.

If the M-Score was really a great fraud detection model I think the SEC and FBI would be employing it widely today. I don't see any evidence of this, but your contacts within the SEC are better than my contacts (virtually zero at this point).

As the saying goes in biology, the proof is in what survives. It's probably too early to write the M-Score off, but I'm not really optimistic. There are too many important variables in both fraud detection and portfolio selection that are not even disclosed in financial statements let alonge booked into the ledger. Hence ratios derived from financial statements are limited at the starting line.

I have my doubts about some of the components of this model. For example, are receivables really a big deal at Dell? I've not looked at Dell's financial statements, but I thought Dell generally collected the money before building a customer's computer. Dell certainly had my money in the bank before building my two fine computers.

One thing that fraudsters might keep in mind is the M-Score model when working up their phony financial statements. ZZZZ Best could easily have invented financial statements that had a pretty good M-Score if the M-Score had been invented and was a big deal at the time.

Fraudsters are really clever at getting around barriers that stand in their way. That's why most of them don't get caught at all or don't get caught until after the damage is done.


Remember those tiresome and frequent adds on television from "The Scooter Store"

"Scooter Store Files For Bankruptcy After Overbilling Medicare At Least $47 Million," by Laura Northrup, Consumerist, April 15, 2013 ---
http://consumerist.com/2013/04/15/scooter-store-files-for-bankruptcy-after-fbi-raid-and-medicare-fraud-allegations/

If you watch daytime TV or have been stuck watching daytime TV while visiting your parents, surely you’re familiar with The Scooter Store. The power wheelchair vendor has had some trouble lately, including accusations of Medicare and Medicaid fraud, a raid by the FBI, and even a lawsuit from the company’s hometown, of New Braunfels, Texas. The company laid off most of its employees, and plans to deal directly with health care providers, rather than blanketing the airwaves and selling directly to consumers.

Those investigations came after a a scathing investigative piece by CBS News about the company.  (Warning: the video at that link plays automatically.) Former salesmen and doctors who prescribed chairs in the past explained the company’s tactics: contact doctors’ offices incessantly to wear them down and convince them to prescribe scooters and power chairs whether the patient really needed one or not, and to depend on bureaucratic incompetence and error to get them approved by Medicare and Medicaid.

That got the attention of the federal government, and led to a raid by the Federal Bureau of Investigation. The company’s CEO insists that The Scooter Store itself wasn’t accused of fraud. Just a few weeks later, the company furloughed all employees, then permanently laid off about 1,000.

An independent audit found that the company had overbilled Medicare and Medicaid somewhere between $46.8 million and $87.7 million. The company had agreed to pay back $19.5 million. The Centers for Medicare and Medicaid Services is one of the largest creditors listed in the company’s bankruptcy petition, which details about $50 million in debt.

Just a few short years ago, in 2009, the city of New Braunfels gave the Scooter Store economic development money to convert a former Kroger store into their sparkling new headquarters. On Friday, the city filed a lawsuit to to get $2.6 million of that money back.

Continued in article

Jensen Comment
Milking Medicare and Medicaid seems to be the rule rather than the exception.

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


"Two Spanish men chopped off their own HANDS in £2million insurance scams - but get found out because they did it too well," by Matt Blake, Daily Mail, April 26, 2013 ---
http://www.dailymail.co.uk/news/article-2315346/Two-Spanish-men-chopped-HANDS-2million-insurance-scams--did-well.html

Jensen Comment
Surely these guys will each get a Darwin award. This is almost as bad as the USA couple who swallowed razor blades for a product lawsuit scam.

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


"New York Times: : Breitbart was right about Pigford," by Ed Morrissey, HotAir, April 26, 2013 ---
http://hotair.com/archives/2013/04/26/nyt-breitbart-was-right-about-pigford/

It’s rare to get this kind of vindication, so let’s enjoy it in memory of Andrew Breitbart for as long as possible.  For more than two years, Andrew and Lee Stranahan have investigated the Pigford settlement and the fraudulent claims that not only have cost taxpayers billions, but have left the original black farmers who sued the USDA over discrimination in the lurch.  Today the New York Times reports what Andrew and Lee have been saying all along — that the Pigford settlement was a political hack job by Tom Vilsack’s Department of Agriculture, and that it’s a magnet for fraud (via Twitchy):

The compensation effort sprang from a desire to redress what the government and a federal judge agreed was a painful legacy of bias against African-Americans by the Agriculture Department. But an examination by The New York Times shows that it became a runaway train, driven by racial politics, pressure from influential members of Congress and law firms that stand to gain more than $130 million in fees. In the past five years, it has grown to encompass a second group of African-Americans as well as Hispanic, female and Native American farmers. In all, more than 90,000 people have filed claims. The total cost could top $4.4 billion.

From the start, the claims process prompted allegations of widespread fraud and criticism that its very design encouraged people to lie: because relatively few records remained to verify accusations, claimants were not required to present documentary evidence that they had been unfairly treated or had even tried to farm. Agriculture Department reviewers found reams of suspicious claims, from nursery-school-age children and pockets of urban dwellers, sometimes in the same handwriting with nearly identical accounts of discrimination.

Yet those concerns were played down as the compensation effort grew. Though the government has started requiring more evidence to support some claims, even now people who say they were unfairly denied loans can collect up to $50,000 with little documentation.

As a senatorBarack Obama supported expanding compensation for black farmers, and then as president he pressed for $1.15 billion to pay those new claims. Other groups quickly escalated their demands for similar treatment. In a letter to the White House in September 2009, Senator Robert Menendez of New Jersey, a leading Hispanic Democrat, threatened to mount a campaign “outside the Beltway” if Hispanic farmers were not compensated.

Career litigators, who had successfully defended the Agriculture Department all the way to the Supreme Court, were aghast:

The payouts pitted Mr. Vilsack and other political appointees against career lawyers and agency officials, who argued that the legal risks did not justify the costs.

Beyond that, they said it was legally questionable to sidestep Congress and compensate the Hispanic and female farmers out of a special Treasury Department account, known as the Judgment Fund. The fund is restricted to payments of court-approved judgments and settlements, as well as to out-of-court settlements in cases where the government faces imminent litigation that it could lose. Some officials argued that tapping the fund for the farmers set a bad precedent, since most had arguably never contemplated suing and might not have won if they had.

Be sure to read it all, but it’s difficult to argue with Byron York’s assessment of the story:

https://twitter.com/ByronYork/status/327724337232760832

Perhaps now that the New York Times has exposed this, a few lawmakers might get shamed into doing something about it.  That would really put a smile on Andrew’s face.

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


"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:   The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world's largest banks may be fixing the prices of, well, just about everything.

You may have heard of the Libor scandal, in which at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that's trillion, with a "t") worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it "dwarfs by orders of magnitude any financial scam in the history of markets."

That was bad enough, but now Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world's largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world's largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps.

Interest-rate swaps are a tool used by big cities, major corporations and sovereign governments to manage their debt, and the scale of their use is almost unimaginably massive. It's about a $379 trillion market, meaning that any manipulation would affect a pile of assets about 100 times the size of the United States federal budget.

It should surprise no one that among the players implicated in this scheme to fix the prices of interest-rate swaps are the same megabanks – including Barclays, UBS, Bank of America, JPMorgan Chase and the Royal Bank of Scotland – that serve on the Libor panel that sets global interest rates. In fact, in recent years many of these banks have already paid multimillion-dollar settlements for anti-competitive manipulation of one form or another (in addition to Libor, some were caught up in an anti-competitive scheme, detailed in Rolling Stone last year, to rig municipal-debt service auctions). Though the jumble of financial acronyms sounds like gibberish to the layperson, the fact that there may now be price-fixing scandals involving both Libor and ISDAfix suggests a single, giant mushrooming conspiracy of collusion and price-fixing hovering under the ostensibly competitive veneer of Wall Street culture.

The Scam Wall Street Learned From the Mafia

Why? Because Libor already affects the prices of interest-rate swaps, making this a manipulation-on-manipulation situation. If the allegations prove to be right, that will mean that swap customers have been paying for two different layers of price-fixing corruption. If you can imagine paying 20 bucks for a crappy PB&J because some evil cabal of agribusiness companies colluded to fix the prices of both peanuts and peanut butter, you come close to grasping the lunacy of financial markets where both interest rates and interest-rate swaps are being manipulated at the same time, often by the same banks.

"It's a double conspiracy," says an amazed Michael Greenberger, a former director of the trading and markets division at the Commodity Futures Trading Commission and now a professor at the University of Maryland. "It's the height of criminality."

The bad news didn't stop with swaps and interest rates. In March, it also came out that two regulators – the CFTC here in the U.S. and the Madrid-based International Organization of Securities Commissions – were spurred by the Libor revelations to investigate the possibility of collusive manipulation of gold and silver prices. "Given the clubby manipulation efforts we saw in Libor benchmarks, I assume other benchmarks – many other benchmarks – are legit areas of inquiry," CFTC Commissioner Bart Chilton said.

But the biggest shock came out of a federal courtroom at the end of March – though if you follow these matters closely, it may not have been so shocking at all – when a landmark class-action civil lawsuit against the banks for Libor-related offenses was dismissed. In that case, a federal judge accepted the banker-defendants' incredible argument: If cities and towns and other investors lost money because of Libor manipulation, that was their own fault for ever thinking the banks were competing in the first place.

"A farce," was one antitrust lawyer's response to the eyebrow-raising dismissal.

"Incredible," says Sylvia Sokol, an attorney for Constantine Cannon, a firm that specializes in antitrust cases.

All of these stories collectively pointed to the same thing: These banks, which already possess enormous power just by virtue of their financial holdings – in the United States, the top six banks, many of them the same names you see on the Libor and ISDAfix panels, own assets equivalent to 60 percent of the nation's GDP – are beginning to realize the awesome possibilities for increased profit and political might that would come with colluding instead of competing. Moreover, it's increasingly clear that both the criminal justice system and the civil courts may be impotent to stop them, even when they do get caught working together to game the system.

If true, that would leave us living in an era of undisguised, real-world conspiracy, in which the prices of currencies, commodities like gold and silver, even interest rates and the value of money itself, can be and may already have been dictated from above. And those who are doing it can get away with it. Forget the Illuminati – this is the real thing, and it's no secret. You can stare right at it, anytime you want.

Continued in article

Bob Jensen's Rotten to the Core threads on the banking industry ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

 


From the FBI on April 7, 2013

04.05.13 Philadelphia: Woman sentenced to more than 28 years for kidnapping 14-year-old victim.
04.05.13 Miami: Three sentenced to prison for roles in $50 million Medicare fraud scheme.
04.05.13 Headquarters: Hate crime case, $100 million SBA loan fraud among week’s Top Ten stories.

Today’s FBI: Facts and Figures 2013-2014—which provides an in-depth look at the FBI and its operations—is now available ---
http://www.fbi.gov/stats-services/publications/todays-fbi-facts-figures/facts-and-figures-031413.pdf/view

04.10.13 Newark: Cardiologist pleads guilty in $19 million health care fraud scheme.

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


 


 


 




  • Accounting and finance professors should use this video every semester in class!
    The best explanation ever of the sub-prime (meaning lending to borrowers with much less than prime credit ratings) mortgage greed and fraud.
    The best explanation ever about securitized financial instruments and worldwide banding frauds using such instruments.
    The best explanation ever about how greedy employees will cheat on their employers and their customers.

    "House Of Cards: The Mortgage Mess Steve Kroft Reports How The Mortgage Meltdown Is Shaking Markets Worldwide," Sixty Minutes Television on CBS, January 27, 2008 --- http://www.cbsnews.com/stories/2008/01/25/60minutes/main3752515.shtml
    For a few days the video may be available free.
    The transcript will probably be available for a longer period of time.

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





    Other Links
    Main Document on the accounting, finance, and business scandals --- http://www.trinity.edu/rjensen/Fraud.htm 

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

    Bob Jensen's threads on professionalism and independence are at  file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#Professionalism 

    Bob Jensen's threads on pro forma frauds are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma 

    Bob Jensen's threads on ethics and accounting education are at 
    http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation

    The Saga of Auditor Professionalism and Independence ---
    http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
     

    Incompetent and Corrupt Audits are Routine ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

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

    Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing 

     

     


     

    The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm 

     

     

     

     

    Bob Jensen's home page is at http://www.trinity.edu/rjensen/