Accounting Scandal Updates on September 10, 2002
Bob Jensen at Trinity University

Bob Jensen's main document on the Enron scandal and other accounting frauds is at 

As Miklos pointed out on September 5 in a message to me, Andersen promised to stop shredding evidence in the "SEC vs. Sunbeam Case."  That was long before the shredding of documents in the Enron Case --- Miklos A. Vasarhelyi [

"Former Sunbeam Chief Agrees to Ban and a Fine of $500,000," by Floyd Norris, The New York Times, September 5, 2002 

Albert J. Dunlap, the former chief executive of the Sunbeam Corporation, agreed yesterday to pay a $500,000 fine and to accept being banned from ever serving as an officer or director of a public company. Mr. Dunlap, who earlier agreed to pay $15 million to settle a shareholder suit, neither admitted nor denied allegations by the Securities and Exchange Commission that he engineered a large accounting fraud that inflated the profits of Sunbeam after he was hired to turn the company around in 1996, when he was viewed as a star on Wall Street. Russell A. Kersh, 48, the former chief financial officer of Sunbeam, and Mr. Dunlap's top aide before that at the Scott Paper Company, also settled charges by the S.E.C., agreeing to pay $200,000. He previously agreed to pay $250,000 to settle the shareholder suit. Mr. Dunlap, who embraced the nickname Chainsaw Al, became famous in the 1990's as he laid off thousands of workers at Scott Paper in what he said was a necessary move to cut costs. His autobiography, "Mean Business," became a best seller after he joined Sunbeam. "Most C.E.O.'s are ridiculously overpaid," he wrote in the book, "but I deserved the $100 million I took away when Scott merged with Kimberly-Clark." Mr. Dunlap, now 65, presumably still has most of that money, although, as his lawyer noted yesterday, he did not make any money from selling Sunbeam stock before those shares collapsed and the company went into bankruptcy last year. Justice Department officials would not comment yesterday on whether Mr. Dunlap might still face criminal charges. The S.E.C. said the fraud continued into 1998, so the five-year statute of limitations has yet to expire. When Mr. Dunlap was hired at Sunbeam, the company's share price leaped nearly 50 percent on the announcement, and it rose further after the company reported a turnaround in 1997. Sunbeam's board responded by agreeing to double Mr. Dunlap's base salary to $2 million a year.

E"x Official of Vatican Pleads Guilty in Conspiracy," by Paul Zielbauer, The New York Times, September 6, 2002 

A retired Vatican official who is an expert on Catholic canon law pleaded guilty today to a federal conspiracy charge for his role in an international insurance swindle run by Martin R. Frankel, the Greenwich financier who is now in prison. 

In a signed statement, Msgr. Emilio Colagiovanni, 82, whose career included sitting on the board that provides legal counsel to Pope John Paul II, pleaded guilty to conspiracy to commit wire fraud and launder money. He faces a maximum of five years in prison and a $250,000 fine. 

In the six-page statement, Monsignor Colagiovanni, an Italian citizen and a priest for 60 years, said that in 1998 and 1999 he helped Mr. Frankel defraud American insurance companies that Mr. Frankel wanted to buy. His contribution, he said, was allowing his own Rome-based foundation, the Monitor Ecclesiasticus Foundation, which publishes a journal of canon law edited by the monsignor, to siphon $50 million of Mr. Frankel's money into a second foundation. It had been created by Mr. Frankel specifically to acquire the companies, the monsignor acknowledged.

Bob Jensen's threads on fraud are at 

New York State Attorney General Eliot Spitzer has become the most feared man on Wall Street. What he wants is change--top to bottom. 

"The Enforcer:  Forget the perp walks. What he wants is change--top to bottom," by MNark Gimein,  FORTUNE, September 16, 2002 ---

On Wall Street right now, there may be no person as feared as the attorney general of New York State. This is in some ways an utterly banal statement, one that probably won't surprise anybody who has been following press coverage of Eliot Spitzer's campaign against corruption in the financial world, a crusade that has already netted a $100 million fine from Merrill Lynch and is now continuing with an investigation of Citigroup's Salomon Smith Barney. But in another way it is quite extraordinary, really kind of unbelievable, because of one very striking fact: Spitzer has become the most feared man on Wall Street without arresting a single executive and, amazingly, without so much as indicting one investment bank, or a single employee of an investment bank.

In this fact is encapsulated what might be the essence of Spitzer's character, and the reason this unlikely enforcer might be the pivotal figure in the broad-ranging rethinking of American business. If any single person has goaded U.S. corporations to change most vigorously in the last months (well, any single person besides Jeffrey Skilling), it has been Spitzer. He has done it with a staff of no more than 15 or 20 lawyers working on securities law, a legal staff smaller than that of a third-tier investment bank. And he has done it without yet prosecuting a single big securities case.

Spitzer has been criticized for this as an arrogant meddler and an opportunist with an eye on New York's 2006 race for governor (he's almost certain to win a second term as attorney general this fall). But he has persevered in his mission of shaming and compelling the investment banks and their executives--right up to Sandy Weill, the head of conglomerate Citigroup--to end the despicable practice of giving their clients investment advice so dishonest and fraught with conflicts of interest that it has become worthless.

At first glance, Spitzer, 43, hardly seems a prime candidate for the job of articulating the anger over corporate corruption that has gripped ordinary Americans. "Articulate" is an Eliot Spitzer word, as are "rearticulate" and "recalibrate" and "critique." He is a policy enthusiast who drags friends to lectures and seminars on public affairs in his spare time. He is a product of Princeton and Harvard Law School, and even spent a couple of years working on mergers and acquisitions at top-tier law firm Skadden Arps. Thanks to his family's real estate fortune (he owns a string of Manhattan properties), he can afford to live with his wife, Silda Wall, and three daughters in exactly the kind of Fifth Avenue building favored by financial barons. He quips that half his friends are investment bankers and the other half are lawyers who represent investment bankers.

The last time we went through a spasm of greed and retribution on Wall Street, in the late 1980s, the iconic figure in law enforcement was U.S. Attorney Rudolph Giuliani. It was Giuliani who was responsible for putting Ivan Boesky and Michael Milken in jail. But it was also Giuliani who was responsible for pulling an investment banker off the floor of Kidder Peabody in handcuffs--on charges that were dropped because the U.S. Attorney's office never amassed enough evidence for a trial. Giuliani, by the way, now represents Merrill Lynch in private practice.

Spitzer, by contrast, is the antithesis of that stock character of law-enforcement legend, the street-brawling prosecutor. "Prosecutors have classically done a very good job of putting people in jail, but it doesn't change anything," says Michael Cherkasky, Spitzer's former boss in the Manhattan D.A.'s office racketeering unit. For Spitzer, putting people in jail is not the point of the prosecutor's job. Look at his biggest case at the Manhattan D.A.'s office, in which he showed both his creativity and his penchant for thinking big. Instead of using a mole to penetrate New York City's closed garment world, he opened a full-fledged garment factory (and in classic Spitzerian fashion, made sure his workers had health insurance). He wound up shutting down gangster Tommy Gambino's extortion business by prosecuting the mob boss, who was already facing the prospect of jail on other charges, on (of all things!) antitrust grounds and exacting a $12 million civil penalty. That paid for five years of intensive oversight and led to wholesale reform of the trucking business in Manhattan.

Continued at

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

"How Star CSFB Banker Pressed For Shares in IPOs for Friends," by Randall Smith and Susan Pulliam, The Wall Street Journal, September 5, 2002.  An excerpt is quoted below:


For weeks, Salomon Smith Barney has been probed for directing hot new stocks to executives whose firms did business with the Wall Street firm.

Soon, the big unit of Citigroup Inc. may have company in the spotlight.

Frank Quattrone, the star technology-industry investment banker at Credit Suisse First Boston, pressed for greater allocations of IPOs for corporate executives whose companies had hired his firm to do investment-banking work, according to e-mail records and people familiar with the firm.

The e-mail records and other accounts of Mr. Quattrone's efforts are likely to become part of a probe by securities regulators into whether Wall Street firms improperly used the lure of quick profits on initial public offerings of stock to win investment-banking business during the 1990s stock boom.

Investigators for the National Association of Securities Dealers recently sought to interview John Schmidt, former chief of the brokerage group that worked with Mr. Quattrone, about how CSFB doled out hot IPOs to tech-group clients as part of a probe into so-called spinning, according to people familiar with the request. And just Wednesday, congressional investigators said they were broadening their probe into Wall Street's IPO practices to CSFB and Goldman Sachs Group Inc.


CSFB and Mr. Quattrone didn't have any immediate comment Wednesday; the NASD also declined to comment. Goldman said the firm would cooperate, but was "surprised to have been asked" for IPO data, saying it allocates IPOs properly.


Mr. Quattrone's actions in the tech IPO market long have been widely watched. His technology group helped CSFB lead-manage the largest number of hot IPOs in the dot-com boom, according to Thomson Financial. The brokers who worked with him, led by Mr. Schmidt, ran a group of accounts for more than 160 investment-banking clients, most of whom received between a few hundred and 1,000 shares of every CSFB-linked IPO, according to people familiar with the accounts. Each of the clients participated on a proportional basis in all the IPOs.


The accounts' performance was sizzling, rising by an estimated 600% in 1999 and 100% in 2000, according to one person familiar with their operation. The clients generally were offered the chance to open such accounts -- known as "Friends of Frank" accounts -- only after they had selected CSFB to lead their IPOs or arrange other transactions, the people familiar with them said.


The number of these plum accounts grew to 160 in early 2000 from 26 in January 1999, according to one CSFB e-mail. And the total size of the accounts grew to a peak of $150 million from $50 million in early 1999, according to a person familiar with them. Broker who managed accounts in the group routinely would sell about one-third of its allocation a few days after the IPO, another third about a month later and the rest at some subsequent point, the same person said.


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

From FEI Express of September 6, 2002

One aspect of the Sarbanes-Oxley Act seeks to inspire good corporate behavior rather than impose it. Section 406 of the bill's Title IV (Enhanced Financial Disclosures) directs the SEC to issue rules that require issuers to disclose whether or not (and if not, why not), an "issuer has adopted a code of ethics applicable to its principal financial officer and comptroller or principal accounting officer, or persons performing similar functions." Moreover, public companies will also be required to disclose any change in or waiver of the code of ethics for senior financial officers.

Indeed, many companies already have a code of conduct that employees are expected to sign. The key change from the Sarbanes-Oxley provision is that companies should have a specialized code of ethics for financial officers. Under the Act, a "code of ethics" for financial officers should include "such standards as are reasonably necessary to promote- (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the issuer; and (3) compliance with applicable governmental rules and regulations."

FEI has developed a model code for companies to use, based on FEI's Code of Ethics for members. The model is on our website at: 

We're proud to say that industry leaders like United Technologies and Dow Chemical have already adopted the model. We trust this model will be helpful to you in complying with Sarbanes-Oxley and in our collective efforts to restore investor confidence and improve corporate governance.

Ridge Braunschweig 
Phil Livingston Chairman 
Chief Executive Officer


From SmartPros on August 29=8, 2002 --- 

Investors in the failed energy group Enron Corp. said Tuesday they had secured a $40 million settlement from Andersen Worldwide, SC.

The deal was announced by University of California, the lead plaintiff in a class action suit against the accountant, which audited Enron's flawed books.

Andersen Worldwide is the Swiss-based coordinating entity of the Andersen accounting firms. Arthur Andersen, the US company that actually examined Enron's accounts, is not covered by the settlement.

"This substantial settlement is a favorable result for the class in light of the limited role of the non-US Andersen entities," University of California general counsel James Holst said.

It was one of the biggest recoveries from an accounting firm, he said in a statement.

"We regard this settlement as only a first step in obtaining recovery for the class, and will continue to pursue damages from the remaining defendants, most of whom had far deeper involvement in the Enron debacle than the overseas Andersen firms," Holst said.

Andersen Worldwide did not admit liability or wrongdoing, the university said. The settlement was subject to court approval.

The division of the Andersen Worldwide settlement between shareholders and pension holders had yet to be determined.

Enron filed for bankruptcy in December last year, its reputation shattered by a slew of accounting scandals.

The settlement, worked out over the past few weeks, included $15 million to finance costs -- but not attorney's fees -- of the continuing litigation.

The University of California said total losses experienced by all Enron shareholders were estimated at more than 25 billion dollars.

Arthur Andersen, the US accounting firm, was convicted in June of obstruction of justice for destroying tonnes of documents related to its former client Enron.

The verdict effectively ended the audit business for Andersen, which had been one of the Big Five global firms.

Prosecutors only now are narrowing in on Enron.

Last week, a former Enron executive , 37-year-old Michael Kopper, pleaded guilty in a court in Houston, Texas, to conspiracy to commit wire fraud and money laundering.

Prosecutors said it was a milestone in their efforts to build a criminal case against the energy trader's former management.

September 3, 2002 message from FinanceProfessor [

Attention returned to Worldcom this week and what it showed was not flattering. In what could be called a smoking email (giving a new definition to flames), Worldcom officials told employees to not cooperate with auditors. (in hindsight that may be a very costly mistake!)

In a related note, Scott Sullivan the former CFO of the struggling telecommunications firm was indicted for trying to hide debt from regulators and auditors.

If that wasn’t bad enough, Salomon Brothers admitted to giving WorldCom officials advantages in IPOs in order to court WorldCom’s investment banking business. The total amount the executives made on these deals is uncertain but Ebbers alone is reported to have made $11 million. Ebbers and Salomon are going to have much explaining to do as evidenced already by the SEC demanding records of their past IPOs.

The main purpose of this message is to note the link forwarded by George Krull that provides a great series on Andersen. George is a professor (MSU PhD) who became an executive research partner for many years in Grant Thornton. He has been a long-time dedicated member of the American Accounting Association and is now teaching at Bradley.

However, I thought the old Michigan State University faculty and alumni might appreciate publicizing his entire message. For some of us, those were the good old days of academe --- we thought we knew the answers in those days.

Bob Jensen

-----Original Message----- 
From: Krull, George []  
Sent: Monday, September 02, 2002 12:02 PM 
To: Jensen, Robert Subject: The Fall of Andersen Four-part Series in the Chicago Tribune

September 2, 2002 12:02 CDT


Here is a link to an excellent series that appears in the Chicago Tribune (  ). The series started yesterday and concludes on Wednesday, September 4.

It was good to see you in San Antonio. I was running to a meeting when we chatted for a brief moment. Let me add my congratulations to the many you received for your Outstanding Accounting Educator Award. Your remarks were moving 
(  ).

I do remember those great discussions and conversations in the Teak room at the east end of Eppley Center. I was blessed to be a member of a truly great bunch of graduate students at MSU. Those students considered the faculty ( you, Arens, Miller,Salmonson, Edwards, Windal, etc.) as our friends and our professors. That created a very special learning environment, the likes of which I have not experienced many times since.

Best regards,


Bob Jensen's threads on the Andersen explosion are at 

"The fall of Andersen," Chicago Tribune --- 

Chicago's Andersen accounting firm must stop auditing publicly traded companies following the firm's conviction for obstructing justice during the federal investigation into the downfall of Enron Corp. For decades, Andersen was a fixture in Chicago's business community and, at one time, the gold standard of the accounting industry. How did this legendary firm disappear?

Civil war splits Andersen
September 2, 2002.  Second of four parts

The fall of Andersen
September 1, 2002.  This series was reported by Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts and E.A. Torriero. It was written by McRoberts.

Greed tarnished golden reputation
September 1, 2002.  First of four parts

'Merchant or Samurai?'
September 1, 2002.  Dick Measelle, then-chief executive of Andersen's worldwide audit and tax practice, explores a corporate cultural divide in an April 1995 newsletter essay to Andersen partners.

"Last Task at Andersen Turning Out the Lights, by Jonathan D. Glater, The Wall Street Journal, August 30, 2002

After 89 years, Arthur Andersen will cease to be an auditor of public companies tomorrow.

The remaining tasks of the once-proud firm  which was convicted in June of obstructing the government's investigation into the collapse of Enron, an Andersen client  are to deal with obligations and shut itself down. Of its roughly 28,000 employees, fewer than 3,000 are left; of more than 1,200 public-company audit clients, none will remain.

The remarkable decline of the firm, from its announcement in January that it had discovered improper shredding of documents related to its audit of Enron, has occurred in less than nine months. The employees who are left will have the thankless task of coping with lawsuits and leases.
"It's like a family member who has terminal cancer," said Gary Brentlinger, the human resources director for Andersen's offices in Houston, Austin, San Antonio and New Orleans. "We're watching the firm die."

Today at the firm's office in Houston, the epicenter of the Enron debacle, Mr. Brentlinger will most likely shut off the lights on one more of the 15 floors that the firm occupied when it had nearly 1,700 active employees there, instead of the fewer than 100 now. The offices in the other cities he oversees have already closed.

Partners who are at the firm and some who have recently left say that it will not file for bankruptcy protection but will continue to wind down its affairs, negotiating with landlords to get out of leases, operating Andersen's training center, arguing with former clients' new accountants about the accuracy of past audits, and, of course, defending itself in lawsuits. The liability of current and former partners in those lawsuits remains uncertain.
The firm will be supported by revenue earned from the audit season that concluded this spring, the sale of different practices and payments from partners getting out of their agreements not to compete against Andersen, partners say.

Little information is available about the financial condition of Andersen, a private partnership, but partners who have seen the financial statements for last year said that given its reduced payroll, it should be able to operate until it has to pay judgments or settlements in lawsuits. Some also said the firm would convert itself from a partnership to a corporation, providing those who remain at the firm more protection against any future liabilities.

The only significant, certain revenue source for Andersen in the future will come from its onetime sister consulting firm, now known as Accenture, which was separated from Andersen by an arbitrator's decision two years ago. Partners on the consulting side did not want to share profits with their less-profitable accountant brethren.

Accenture now has more than three years left on a five-year contract to send more than 10,000 employees each year to what is called Andersen University, the Andersen training campus in St. Charles, Ill. A spokeswoman for Accenture did not disclose the value of the contract.

Winding down Andersen's business is a tremendously messy and complicated task. Even as many employees left or were laid off in recent months, others had to sort through audit work papers and other client files and make sure that they could be understood not only by another auditor but also by the operator of a document storage center, said Lisa T. Fair, a former Andersen partner in Atlanta who now works for Deloitte & Touche.

"We hold documents that clients have for audits, for lawsuits, for anything like that," Ms. Fair said, adding that the Atlanta office of Andersen had entrusted all its documents to a storage center. "We had to make sure that those things were easily found" by a client's new auditor, she said.
The process converted Andersen's offices into a nightmare of paper and storage boxes, several employees recalled.

"You end up doing a lot more things that you wouldn't normally do," said David C. Meyer, a former Andersen partner who landed at PricewaterhouseCoopers in Houston. There were fewer people to help organize documents, make copies or even carry boxes, he said.

"We probably had 20,000 files in our office alone," Mr. Brentlinger said. As people have left and the files have gone into storage, he said, Andersen staff members have removed papers from floors of its offices in a downtown Houston skyscraper and turned off the lights, leaving only furniture and artwork. Office supplies were donated to charities. Negotiations over leases remain.
Mr. Brentlinger said about 80 percent of the professional staff members from his office had found new jobs.

The support that Andersen managed to give to its people was impressive, said Dean McMann, chief executive of Ransford, an executive recruiter and adviser to consulting and accounting firms. "This has been the most professional winding down of a firm that I've ever seen," he said. "The sad thing is a great firm went away, but they did it in style."

The exit process has been difficult emotionally and logistically for people trying to put Andersen's paperwork in order while conducting job searches. Joseph J. Floyd, an Andersen partner in the Boston office, and some colleagues managed to set up their own consulting firm in less than two months, even as the Andersen office was closing down.

"We were all struggling with what to do with our practices," Mr. Floyd said. Packing up the Andersen office and setting up office space for the Huron Consulting Group, his new firm, "was seven days a week and probably most waking hours of those days," he said.
While setting up a new business or negotiating with another firm for a job, partners leaving the firm or their new employer had to pay hundreds of thousands of dollars to get out of provisions of their partnership agreement that prohibited them from competing with Andersen. Those amounts, which had to be negotiated, could reach $500,000 a partner, one former partner said.

"It was very dynamic, and there were a lot of moving parts," said E. J. Huntley, a former Andersen partner in Houston who helped found Avail, a 35-memberconsulting firm. The firm has been operating for barely two months. The different negotiations to set up the new firm took place as Andersen was making the transition from incredibly busy to eerily quiet, he said. "It was a surreal experience."

No piece of the shutdown, even physically closing offices, has been simple. Andersen has had to disconnect from its e-mail system, update its conference-calling operations to take into account offices that closed, and sell all the computers and other hardware in the closed offices.
Perhaps the most daunting task for those who remain at Andersen in the coming months will be coping with lawsuits. There are suits filed by angry shareholders and creditors of former clients like Enron and suits filed by retired partners worried about pension financing, none of which have yet been settled. The suits seek billions of dollars  far more money than Andersen has.

Andersen's lawyers say they still plan to appeal the firm's criminal conviction by a Houston jury as soon as possible. Sentencing is scheduled for Oct. 16.

Bob Jensen's threads on Andersen are at 

The North American Securities Administrators Association provides a listing of the top 10 investment scams being investigated by state securities regulators. Some of the examples published by NASAA have involved accountants and may serve as current examples to use in ethics teaching --- 

"Top 10" Investment Scams Listed by State Securities Regulators

WASHINGTON (August 26, 2002) – State securities regulators today released a list of the “Top 10” scams, risky investments or sales practice abuses they’re fighting. New to the third annual list are unscrupulous brokers, conflicts of interest in analyst research, charitable gift annuities, and oil and natural gas scams.

“Record-low interest rates and a bear market on Wall Street have created a bull market in fraud on Main Street,” said Joseph Borg, president of the North American Securities Administrators Association (NASAA)¹ and director of the Alabama Securities Commission. “Con artists know investors are concerned about the volatile stock market and low yields on bonds and bank deposits, so they pitch their scams as safe alternatives and promise high returns – an impossible combination.”

The 2002 list was again topped by independent insurance agents selling risky or fraudulent securities. Borg said that while most independent insurance agents are honest professionals, too many are letting high commissions lure them into selling high risk or fraudulent investments.

The federal war on terror and large budget deficits at the state level are diverting or pinching resources to fight investment fraud, Borg warned.

“Putting people in jail gives investors the biggest bang for their regulatory buck,” said Borg. “So legislators at all levels need to ensure that regulators and prosecutors have sufficient resources to successfully bring securities fraud cases.”

Here are the “Top 10” investment scams, ranked roughly in order of prevalence or seriousness:

1. Unlicensed individuals, such as independent insurance agents, selling securities.  
In hundreds of cases from Washington state to Florida, scam artists are using high commissions to entice independent insurance agents into selling investments they may know little about. The person running the scam instructs the independent sales force – usually insurance agents but sometimes investment advisers and accountants – to promise high returns with little or no risk. For example:
· In an alleged scam sold almost entirely by independent insurance agents, investors in at least 14 states lost close to $30 million. According to Ohio securities regulators, money raised from the sale of fictitious limited partnerships was used to make interest payments to another group of promissory note investors. Both groups were promised double-digit returns. In April a court issued a preliminary injunction and appointed a receiver in connection with the allegations. 
(The NASAA says the persons running these scams are usually independent insurance agents, but some have been investment advisers or accountants.)

· Earlier this month, an Arizona insurance agent was sentenced to 10 years in prison for selling $1.8 million in worthless stock and bogus promissory notes to investors. Another Arizona insurance agent was sentenced in May to five years in prison for scamming 32 elderly investors out of nearly $2 million by first soliciting them to purchase ‘living trusts’ and then switching them into annuities and finally into bogus promissory notes. A third Arizona insurance agent, working with his two sons, scammed $16.2 million by selling high risk brokered CDs, viatical contracts, real estate deals and equipment leases. They were ordered to repay all $16.2 million and fined another $133,000.

To verify that a person is licensed or registered to sell securities, call your state securities regulator. If the person is not registered, don’t invest.

2. Unscrupulous stockbrokers. 
The declining stock market has caused some brokers to cut corners or resort to outright fraud, say state securities regulators. At the same time, some investors have grown more cautious and are scrutinizing their brokerage statements for unexplained fees, unauthorized trades or other irregularities. In North Dakota, regulators investigated a complaint from an investor who received conflicting account statements. They discovered that two brokers working for H.D. Vest Investment Securities Inc. issued phony account statements to cover up losses from hundreds of unauthorized trades. The brokers had also made unsuitable recommendations such as risky options contracts. Under a settlement with state securities regulators, H.D. Vest agreed to repay clients’ out-of-pocket losses plus 6 percent, totaling over $3.2 million.

In New York, the attorney general’s office took action against seven brokers and two firms for bilking hundreds of elderly investors out of more than $12.5 million through a pay telephone scam. The brokers pressured investors into liquidating their CDs, annuities and IRAs, sometimes at significant penalty, and promised them “risk-free” 14 percent returns. So far one firm has agreed to pay $5.9 million in restitution.

3. Analyst research conflicts. 
In May, the New York Attorney General’s office concluded a 10-month investigation into whether Merrill Lynch had issued misleading research reports by entering into a settlement agreement with the firm. Under the agreement, Merrill Lynch agreed to pay a $100 million fine and make significant changes to way it does business. NASAA is assisting a multi-state task force investigating conflict of interest issues at Wall Street firms. The primary focus of the ongoing investigation is to determine whether analysts issued glowing research reports and made “buy” recommendations in order to win investment-banking business. State investigators are now reviewing materials provided by a dozen firms for possible securities law violations.

In June NASAA learned of an attempt by Morgan Stanley Dean Witter to amend an early version of the Sarbanes-Oxley Act with language that would have ended the states’ probe into whether Wall Street analysts intentionally misled investors. NASAA held a press conference and met with lawmakers; the draft amendment was ultimately not included in the bill.

4. Promissory notes. 
These are short-term debt instruments often sold by independent insurance agents and issued by little known or non-existent companies promising high returns – upwards of 15 percent monthly – with little or no risk.

In June, four Georgia-based scam artists were each sentenced to 17 ½ years in prison for recruiting independent insurance agents to sell millions of dollars worth of bogus promissory notes. While investors were promised nine-month returns as high as 21 percent, half of each investment went straight to commissions that were divided among company principals and sales agents. Acting on a tip from the Better Business Bureau, Georgia securities regulators seized nearly $5 million of the $8 million stolen from local investors and, together with federal investigators, used the evidence uncovered to broaden their investigation and prepare criminal charges. In the end, the Federal Bureau of Investigation, working with Georgia regulators, found the ringleader – Virgil Womack – had scammed over $150 million from investors nationwide. Of the $150 million, nearly $90 million was seized and returned to investors. The average age of the victims was 68.

In another case, a Maine court sentenced an insurance agent to seven years in prison for running a promissory note scam that took 25 investors for more than $1 million. The agent, who was sentenced in June, told investors the notes were “better than certificates of deposit and life insurance policies,” regulators said, and that they would yield 10 percent to 12 percent returns annually.

“A 12 percent return may not seem over-the-top by bull market standards, but it’s far more than banks are offering now for insured deposits,” said Chris Bruenn, administrator for the Maine Office of Securities and NASAA’s president-elect.

5. “Prime bank” schemes. 
Scammers promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. Purveyors of these schemes often target conspiracy theorists, promising access to the “secret” investments used by the Rothschilds or Saudi royalty.

In Texas, a Harlingen-based con artist promised returns of 6 percent to 8 percent a month through a secretive web of money dealers supposedly set up by a coalition of governments in 1914 to pay for World War I debt. In videotape shown at Monday’s press conference, the promoter claimed that seven “world traders” control the entire global money supply. In the end, the scam took over 300 investors for roughly $6 million.

6. Viatical settlements. 
Originated as a way to help the gravely ill pay their bills, these interests in the death benefits of terminally ill patients are always risky and sometimes fraudulent. The insured gets a percentage of the death benefit in cash and investors get a share of the death benefit when the insured dies. Because of uncertainties predicting when someone will die, these investments are extremely speculative. In a new twist, Pennsylvania regulators say “senior settlements” – interests in the death benefits of healthy older people – are now being offered to investors.

In June, 15 individuals were indicted in connection with a scam that cost hundreds of investors nationwide at least $100 million. State securities and insurance regulators, together with federal regulators, allege the individuals, employed by Liberte Capital Group, were involved in a scheme to buy life insurance policies from terminally ill individuals who lied to insurance companies about their medical conditions. Liberte managers used investor funds to support lavish lifestyles, including investments and the purchase of large homes and dozens of boats and cars. A receiver has been appointed in the case.

7. Affinity fraud. 
Many scammers use their victim’s religious or ethnic identity to gain their trust – knowing that it’s human nature to trust people who are like you – and then steal their life savings. From “gifting” programs at some churches to foreign exchange scams targeted at Asian Americans, no group seems to be without con artists who seek to take advantage of the trust of others.

In Alabama, nine individuals have been charged with scamming parishioners at the Daystar Assembly of God church in Prattville out of more than $3 million. Investors were told their money would be used to purchase retirement properties in Florida. The income generated by the Florida properties would be used to payoff the mortgage of the Prattville church and build a religious theme park, investors were told. In reality, state securities regulators allege, the money went to pay off investors in a previous scam and to purchase equipment for unrelated businesses.

8. Charitable gift annuities. 
As an example, NASAA describes a Ponzi scheme ran through a network of independent insurance agents, financial planners and accountants.)
These annuities are transfers of cash or property to a charitable organization. The value of the annuity is less than the value of the cash or property, with the difference constituting a charitable donation. While most annuities offered by charitable organizations are legitimate investments, investors should be cautious of little-known organizations or those that provide only sketchy information.

In Arizona, regulators uncovered a scam that took 430 investors nationwide for an average of $133,000. The scam involved the purchase of charitable gift annuities from the Mid-America Foundation. According to regulators, Robert Dillie, founder of Mid-America, ran what amounted to a $54 million Ponzi scheme through a network of independent insurance agents, financial planners and accountants. Dillie used investors’ funds to purchase three homes in Las Vegas, a ranch in South Dakota, pay child support, book charter flights and support his extensive gambling.

Magdalena Scheller, 68, of Phoenix, invested more than $400,000 in Mid-America. A life insurance agent approached her after her husband died.

“It makes you wonder if there are any honest people out there,” Scheller said at Monday’s press conference.

“Unfortunately, Mid-America is not an isolated scam,” Mark Sendrow, director of securities for the Arizona Corporation Commission told reporters Monday. “We are looking at two more foundations in the Phoenix area which have issued millions of dollars of charitable gift annuities in the last few years, and both were basically penniless before they began issuing them.”

9. Oil and gas schemes. 
These scams follow the headlines, rising in frequency with predictions of oil shortages or a rise in natural gas prices. In Arkansas, securities regulators forced Energy Consultants and Ark-La-Tex Consulting Co., L.L.C. to discontinue their marketing efforts after finding a natural gas well touted to investors as a ‘can’t lose’ opportunity hadn’t produced in years.

10. Equipment leasing. 
While the majority of equipment leasing deals are legitimate, thousands of investors have been scammed by individuals selling interests in payphones, ATMs or Internet kiosks. In a typical equipment leasing scam, a company sells a piece of equipment through a middleman. As part of the sale, the company agrees to lease back and service the equipment for a fee. Investors are promised high returns with little or no risk. But state regulators say high commissions paid to salesmen and promised returns that are unrealistically high doom many projects. In North Carolina, regulators took action against an individual who sold an Internet kiosk to an investor for $24,950, promising a 17 percent return. The individual had previously sold payphone leases to investors from a company that later filed for bankruptcy.

Before investing, state securities regulators urge investors to call their offices and ask if the individual selling the investment is licensed to do so. Regulators say investors can also save themselves a lot of grief by asking a second question – whether the investment itself is registered. To check out an investment or salesperson, contact your state securities regulator. Their phone number is in the white pages of your phone book under “government” or available online at

Bob Jensen's threads on securities frauds are at 

Andersen Worldwide has agreed to pay $60 million to settle claims in a class-action suit relating to the organization's role in Andersen U.S.'s audit of Enron Corp. The settlement resolves all Enron audit-related claims against Andersen Worldwide, however additional actions against Andersen U.S. will be forthcoming. 

KPMG-U.S. (August 28, 2002) has been caught in the net of shareholder lawsuits that will relate to accounting work performed for voice recognition software company Lernout & Hauspie. The company's auditor, KPMG-Belgium, will share defendant status with its U.S. counterpart as the shareholder suits alleging fraud go to trial. 

KPMG-U.S. has been caught in the net of shareholder lawsuits that will relate to accounting work performed for voice recognition software company Lernout & Hauspie. The company's auditor, KPMG-Belgium, will share defendant status with its U.S. counterpart as the shareholder suits alleging fraud go to trial. It is anticipated that shareholders will band together to file a class action lawsuit alleging that KPMG auditors should have been aware of problems with the software company's accounts.

U.S. District Court Judge Patti Saris, who ruled that KPMG-U.S. was eligible to be included in the legal action, stated that "an escalating pageant of red flags" in the software company's financial statements "strongly support the inference that KPMG-U.S. acted with recklessness or actual knowledge" in helping prepare the 1999 Form 10-K for Lernout & Hauspie. The form was subsequently found to be fraudulent.

Learnout & Hauspie filed for Chapter 11 bankruptcy protection in November, 2000 after restating financial reports for 1998, 1999, and the first half of 2000. Originally, KPMG issued a clean opinion of the 1998 and 1999 financials, later stating that the opinions "could no longer be relied upon."

KPMG has said that the lawsuit is "completely without merit."

New, tougher laws enacted in California this week may signal a move towards individual states taking more control of reforms in the accounting profession. 

Key provisions of the new laws:

An announcement was also made that the state board is trying to take action to suspend Andersen's license to practice. Media accounts say Gov. Davis hopes to gain political leverage from these steps, combined with an advertising campaign focused on the business practices of his opponent in the upcoming gubernatorial election.

Gov. Davis's campaign advertisements blast his opponent, Bill Simon, for participating in an offshore tax shelter now under investigation by the IRS. This matter became public knowledge after the Justice Department released the names of accounting firm KPMG's tax clients. A Treasury spokesperson later admitted the IRS erred in failing to protect the confidentiality of these clients.

From The Wall Street Journal Accounting Educators' Review on August 29, 2002

TITLE: California Measures to Tighten Accounting Rules Become Law 
REPORTER: Cassell Bryan-Low 
DATE: Aug 26, 2002 
TOPICS: Accounting Law, Audit Quality, Corporate Governance, Accounting, Regulation, Securities and Exchange Commission

SUMMARY: In light of recent accounting debacles and corporate reform at the federal level, California has passed legislation to tighten accounting rules at the state level. Questions deal with the differences between federal and state law.

1.) Describe the three accounting rule changes adopted by California. Discuss the major implications of these changes. Why do you think California is the first state to tighten accounting rules at the state level?

2.) Compare the California laws described in the article to the related federal laws. If the laws differ, which laws apply?

3.) Compare and contrast the roles of the California State Board of Accountancy, National Association of State Boards of Accountancy, Financial Accounting Standards Board, and Securities and Exchange Commission? Be sure to include a discussion on the the requirements for membership and the reasons for the membership requirements.

4.) What are audit work papers? How does the California law change the importance of work papers?

5.) What potential sanctions does Arthur Andersen LLP face in California? How do these sanctions differ from those faced by Arthur Andersen LLP at the federal level?

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

TITLE: Bush Signs Sweeping Legislation Aimed at Curbing Business Fraud 
REPORTER: Greg Hitt 
ISSUE: Jul 31, 2002 

From The Wall Street Journal Accounting Educators' Review on August 29, 2002

TITLE: Group Urges Enforcing Rules Of Environmental Disclosures 
REPORTER: David Bank 
DATE: Aug 22, 2002 
PAGE: B2 LINK:,,SB1029970295524720635,00.html  
TOPICS: Disclosure Requirements, Legal Liability, Managerial Accounting

SUMMARY: Bank reports on a group of investment managers (unnamed) and philanthropic foundations calling for the SEC to "enforce regulations requiring companies to more fully (emphasis added) disclose environmental liabilities." Evidently, the group is worried that undisclosed liabilities threaten the values of their portfolios.


1.) How would a firm go about estimating its liability for environmental costs? How objective and reliable would its estimates be for pending asbestos litigation? Potential asbestos litigation? Would there be any difference in the estimates? Why or why not? What about toxic cleanup costs? How would any estimates of the previous examples differ from governmental fines?

2.) These groups mention "corporate accounting tricks" and "environmental accounting loopholes." Argue that the treatment of estimable environmental liabilities amount to so-called loopholes. Argue that treating them otherwise could harm shareholders of a firm.

3.) Do phrases like "hard-earned savings at risk," "corporations cook their books," and "keeping environmental costs off their books" suggest that these groups are objective? Would their treatment of these liabilities be any more accurate than the treatment they evidently do not understand very well?

4.) Explain how paying a fine of $100,000, or $1,000,000 for that matter, might not appear in the financials of the firm. Is that possible using "accounting tricks?" If the payment were made, wouldn't any effect of that payment already impact the value of the shares of a publicly-traded firm? Do you think these groups understand the concept of materiality?

5.) The report from these groups states that "environmental initiatives can cut costs and boost share prices." While this sounds plausible, is there any evidence of this effect?

6.) In the related article, how have the estimates of cleaning up the Hudson River changed over the last 30 years? What sort of accounting "tricks" has GE used to "hide" this liability?

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

TITLE: GE Suit Charges Superfund Process Is Unconstitutional 
REPORTER: Matt Murray 
ISSUE: Jan 29, 2000 

Bob Jensen's threads on accounting theory are at 

From SmartPros on August 28, 2002 ---

The Securities and Exchange Commission's investigation of the financial dealings of the Anderson-based Church Extension of the Church of God Inc. did not end last. month when it filed a federal lawsuit accusing the not-for-profit and two former top officers of an $85 million fraud.

The SEC says it is still probing a range of matters, including the roles of accountants who blessed flawed financial statements and appraisers who overvalued the extension's real estate.

"We continue to look at other people or other entities who are involved, but at this point no determination has been made" whether to pursue enforcement actions against additional parties, SEC official Scott Hlavacek said.

The SEC's suit accuses Church Extension, an investment affiliate of the Anderson-based Church of God, and former top executives J. Perry Grubbs and S. Louis Jackson of fraudulently raising more than $80 million from 7,000 U.S. investors.

While telling investors the bulk of their money would go to a low- risk and noble cause-building and renovating churches-the organization instead funneled millions of dollars into speculative real estate deals and other ventures. The SEC said the speculative investments were part of a scheme to conceal severe financial problems at the 81-yearold organization.

The suit says that from at least 1996 into this year, Church Extension received unqualified audit reports from its outside accountants. During that same period, however, the SEC alleges the extension overstated reserves by double-counting assets and masked $26 million in losses by reporting income that didn't exist.

Church Extension's outside auditor for all but the first year of that period was Indianapolis-based Ent & Imler CPA Group. Managing Partner Steven Imler last week said: "All I can tell you is...we have had no contact from the SEC and no complaints from anyone about our work."

A draft letter Ent & Imler prepared for Church Extension management in March 2000 did raise some concerns about its business practices. It noted, for instance, that the organization was "experiencing short-term cash-flow challenges" and that "more emphasis could be directed to the consequences of certain acquisitions and expansions in the real estate area."

Though the tone of the letter was relatively tentative, it angered Jackson, who threatened to replace Ent & Imler, said former Chief Financial Officer Larry Sloan, one of six high-level employees who quit in August 2000 because of concerns over Church Extension's business practices.

"From that point on," Sloan said, "I thought the auditors seemed intimidated."

Ent & Imler was Church Extension's fourth outside auditor since 1991, rapid turnover that ex-employees chalked up to frequent accounting disputes between Jackson and auditors. The prior auditor, Crowe Chizek & Co., served just one year.

Some of the concerns of those earlier auditors now seem prescient. In 1991, Ernst & Young wrote Church Extension was in a "critical financial condition.... Accordingly we caution management on undertaking new ventures or activities that are not closely linked to the [Extension's] main business."

And in 1993, the accounting firm Capin & Crouse identified "significant deficiencies in the design and operation of internal controls," and said investors did not receive "complete and consistent" information about how their money would be used.

The success of any SEC enforcement action against Ent & Imler would hinge on whether the firm was sufficiently diligent in conducting its audits, accounting experts with no ties to Church Extension said.

Continued at 

From The Wall Street Journal Accounting Educators' Review on September 5, 2002

TITLE: Wages of Corporate Sin: Tax Breaks 
REPORTER: John D. McKinnon 
DATE: Sep 03, 2002 
TOPICS: Accounting Fraud, Accounting, Tax Avoidance, Tax Laws, Tax Regulations, Taxation

SUMMARY: The current wave of accounting scandals has resulted in huge payments being made by the offenders. However, these payments may be tax deductible under current tax laws.

1.) What determines if a payment that results from corporate wrongdoing is tax deductible? What is the logic underlying the deductibility of payments for corporate wrongdoing?

2.) Do you agree with the current tax laws governing the deductibility of payments that result from corporate wrongdoing? Support your answer.

3.) Why are costs associated with settlements considered an "ordinary and necessary" expense? Does the guilt or innocence of the alleged offender determine the deductibility of the payment?

4.) If a company is fined $100 million and the payment is tax deductible, what is the net loss to the company? Assume of 40% tax bracket. Who assumes the loss from the company's tax savings?

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


Three Political Commentaries by Craig Polhemus

I have been relatively close to Craig across all the years he served as Executive Director of the American Accounting Association. As Director, he worked closely with leading executives from universities, public accounting, and industry. We all quickly learned to respect his leadership, his technical skills, his poise, his self confidence, his judgment, and his integrity. With the limited resources of the AAA, he turned this organization into a smooth-running and effective association serving accounting educators around the world.

Craig has executive experience in the Federal Government, State Government, and the private sector. He was chosen from among a list of impressive candidates to head up the American Accounting Association (AAA) in 1995. He lived up to our expectations of him in dealing with some enormous problems. Firstly, he had some great ideas for reversing membership decline. Secondly, he supervised networked computerization of the AAA. I am especially proud of his work in that area. He hired an excellent staff who ventured off in to new programs such as faculty development.

I saved the following DOC files as HTML files for your convenience, but some formatting was changed in the process.

In a speech made to the Yale Graduate School of Management in New York on September 4, 2002, AICPA President Barry C. Melancon announced that the American Institute of CPAs is committing to fulfilling six leadership roles to help restore confidence in the accounting profession. 

AccountingWEB US - Sep-5-2002 -  In a speech made to the Yale Club in New York on September 4, 2002, AICPA President Barry C. Melancon announced that the American Institute of CPAs (AICPA) is committing to fulfilling six leadership roles to help restore confidence in the accounting profession.

Highlights of the six roles:

  1. Obtain greater involvement of users of financial statements in setting auditing standards, while developing new guidance on such topics as auditor rotation requirements and compensation policies for audit partners.
  2. Serve as a liaison between market institutions and corporations, finding new ways to communicate anti-fraud controls and programs to the public and facilitating input on these measures from stock exchanges and others, (e.g., in the form of a "summit" meeting).
  3. Promote academic research into such topics as how investors can help protect themselves against fraud through alliances, such as one with the Association of Certified Fraud Examiners.
  4. Change the continuing education rules for CPAs to include more credits on fraud detection and help develop educational and training materials for inclusion in college courses and textbooks, as well as training courses for management and directors.
  5. Initiate debates on such topics as big GAAP/little GAAP, (i.e., use of the same or different generally accepted accounting principles for big and small companies), and work with other standard-setters in improving transparency of financial and business reporting.
  6. Revise standards so the public will be put on notice when an auditor communicates internal control weaknesses to an audit committee.

Continued at  

A survey by the National Whistleblower Center finds that most whistleblowers are male, and many still lack the legal rights to protect themselves from retaliation by their employers. 

AccountingWEB US - Sep-4-2002 -  Despite recent publicity given high profile female whistleblowers, a survey by the National Whistleblower Center finds that most whistleblowers are male and many still lack the legal rights to protect themselves from retaliation by their employers.

The survey was based on a random review of 200 cases reported to the National Whistleblower Center in 2002. Key findings:

Some but not all whistleblowers were accountants. Others worked in a variety of other occupations ranging from computer programmers and social workers to doctors, teachers, and airline pilots.

To help whistleblowers gain the legal rights needed to protect themselves from retaliation, the National Whistleblower Center supports additional measures ranging from legislative relief to tax relief and prohibitions against unfair pre-employment agreements.

Continued at  

Contrary to his public denials, the chief executive of the scandal-ridden United Way in the Washington area was aware of improper financial practices, was involved in them and disregarded those who tried to stop them, one of the charity's top executives has written in a memorandum. Norman O. Taylor, the beleaguered chief executive of the United Way of the National Capital Area, has repeatedly said he was unaware that expense accounts had been abused, that donations had been inflated to make the agency appear more efficient and that only 52 percent of the gifts from some donors had been passed on to social services charities.
David Cay Johnston, The New York Times, September 3, 2002

The slew of companies caught red-handed in this year of corporate sleaze face potentially colossal legal claims, but they may enjoy pleasant reprieves next year -- huge tax breaks from Uncle Sam. Corporations that pay large sums to atone for their sins usually can write off the money on their tax returns, substantially softening the financial blow. This year's crop of alleged financial fabricators -- including Enron Corp. and WorldCom Inc. -- likely will try to structure any settlements so that they are tax deductible under Internal Revenue Service rulings, including one issued four months ago. Tax experts say the IRS allows such deductions because companies can write off any "ordinary and necessary" expense. Settling lawsuits long has been viewed as a cost of doing business -- whether they involve truck accidents or highflying accounting schemes. Even settlements with government regulators can be deducted in many circumstances, experts say. Merrill Lynch & Co., for instance, reached a $100 million settlement with the New York attorney general's office in May related to an investigation of whether the company promoted stocks that it expected to underperform in order to please corporate clients. Several tax experts say Merrill's payment is probably tax deductible because it was characterized in the agreement as a civil settlement and not as a fine. It couldn't be determined whether the brokerage firm specifically requested such wording. Merrill Lynch declined to comment. A spokeswoman for the attorney general said, "We negotiated a settlement and we don't comment on negotiations. Nor do we write the tax laws." Merrill has said in Securities and Exchange Commission filings that it has an effective tax rate of about 30%, which means it could save $30 million on its federal tax bill as a result of the settlement.
John D. McKinnon, The Wall Street Journal, September 3, 2002

Bob Jensen's threads on the Enron/Andersen scandals are at 

Bob Jensen's SPE threads are at 

Bob Jensen's threads on accounting theory are at 


Bob Jensen's main document on the Enron scandal and other accounting frauds is at 


In March 2000, Forbes named as the Best Website on the Web ---
Some top accountancy links ---


For accounting news, I prefer AccountingWeb at 


Another leading accounting site is at 


Paul Pacter maintains the best international accounting standards and news Website at

How stuff works --- 


Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at 
Accompanying documentation can be found at and 


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