Accounting Scandal Updates and Other Fraud Between July 1 and September 30, 2009
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- 

Bob Jensen's Enron Quiz (and answers) ---

Bob Jensen's Enron Updates are at --- 

Other Documents

Many of the scandals are documented at 

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

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

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

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

I love Infectious Greed by Frank Partnoy --- 

Bob Jensen's American History of Fraud ---

Future of Auditing --- 

"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 ---

What Accountants Need to Know ---

Richard Campbell notes a nice white collar crime blog edited by some law professors --- 

Lexis Nexis Fraud Prevention Site ---

Global Corruption (in legal systems) Report 2007 ---

Tax Fraud Alerts from the IRS ---,,id=121259,00.html

White Collar Fraud Site ---
Note the column of links on the left.

Bob Jensen's threads on fraud are at

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---

Being Honest About Being Dishonest
Democrats openly admit that most of the stimulus money is going to counties that voted for Obama

A new study released by USA Today also finds that counties that voted for Obama received about twice as much stimulus money per capita as those that voted for McCain. "The stimulus bill is designed to help those who have been hurt by the economic downturn.... Do you see disparity out there in where the money is going? Certainly," a Democratic congressional staffer knowledgeable about the process told
John Lott, "ANALYSIS: States Hit Hardest by Recession Get Least Stimulus Money," Fox News, July 19, 2009---,2933,533841,00.html

FBI Corporate Fraud Chart in August 2008 ---

What to do if you suspect identity theft ---

Identity Theft Resource Center ---

Why doesn't some of the information below appear prominently on Hannaford's Website?
Fortunately, there are no Hannaford stores close to where I live.
Hannaford cut corners when protecting customer privacy information.

Hannaford is a large New England-based supermarket chain with a good reputation until now.
Recently, Hannaford compromised credit card information on 4.2 million customers at all 165 stores in the eastern United States.
When over 1,800 of customers started having fraudulent charges appearing on credit card statements, the security breach at Hannaford was discovered.
Hannaford made a press announcement, although the Hannaford Website is seems to overlook this breach entirely ---
My opinion of Hannaford dropped to zero because there is no help on the company's Website for customers having ID thefts from Hannaford.
I can't find any 800 number to call for customer help directly from Hannaford (even recorded messages might help)

Hannaford's is going to belatedly get a firewall and improve encryption of networked credit card information (the company remains tight lipped regarding whether it followed encryption rules up to now) --- 

And when the Vice President of Marketing gets quoted in the press talking about the security breach, it means that there is no CIO (Chief Information Officer) at the company.  It means their network was designed haphazardly with only a minimal thought to security.  What, they couldn’t get a quote from the President of Marketing?  How does the dairy stocker in store 413 feel about the breach?  He probably knows as much about network security as the Marketing VP.

All of this means that as the days go on, you will see more and more headlines talking about this breach being much worse than originally thought. The number of fraud cases will climb precipitously… and no one will be fired from Hannaford.

If you shop there and have used a credit card, get a copy of your credit report ASAP.

By law, you get one free credit report per year. You can contact them below.

Equifax: 800-685-1111;

Experian: 888-EXPERIAN (888-397-3742);

TransUnion: 800-916-8800;

Also see

Bob Jensen's threads on computing and networking security are at

What to do if you suspect identity theft ---

Identity Theft Resource Center ---

FBI Corporate Fraud Chart in August 2008 ---

From Smart Stops of the Web, Journal of accountancy, October 2008 ---


Search no further than the AICPA’s offering of antifraud and forensic accounting resources. Click “Tools and Aids” to download Managing the Business Risk of Fraud: A Practical Guide, which outlines principles for establishing effective fraud risk management. The paper was released jointly by the AICPA, the Association of Certified Fraud Examiners and The Institute of Internal Auditors (see “Highlights,” page 16). The site also offers fraud detection and prevention tips, including an “Indicia of Fraud” checklist and case studies. There’s also information on the newly created Certified in Financial Forensics (CFF) credential (see “News Digest,” Aug. 08, page 30) and upcoming Web seminars.

Think of the most outrageous business fraud scheme you’ve ever heard of— you’re likely to find it, plus hundreds of other white-collar crime cases—at this site from the FBI. Look under “Don’t Be Cheated” for a fraud awareness test or click on “Know Your Frauds” for access to the FBI’s analysis of common fraud schemes, including the prime bank note scheme, telemarketing fraud and up-and-coming Internet scams. CPAs and financial professionals can access details on options backdating, securities scams and investment fraud under “Interesting Cases” or learn about the FBI’s major programs involving corporate, hedge fund and bankruptcy fraud.

Jim Kaplan, a government auditor and author of The Auditor’s Guide to Internet Resources, 2nd Edition, hosts this Internet portal for auditors, which provides fraud policies, procedures, codes of ethics and articles on a range of topics, including internal auditing, fraud risk mitigation and preventing embezzlement. The site also features a newsfeed, piping in daily fraud news from around the world..

Bob Jensen's threads on fraud are at

Fraud Among Top Democrats and Their Lobbies
It may not be Talk Like a Pirate Day, but this story is guaranteed to make you say, “Aaaaargh!” The Obama administration will
pay a British distiller almost $3,000,000,000 (billion) in subsidies in order to move its operation from Puerto Rico to St. Croix in the Virgin Islands. The makers of Captain Morgan’s Spiced Rum, Diageo PLC, won’t be complaining about their booty, but the people on Puerto Rico feel pillaged — and so should American taxpayers . .
Ed Morrissey, "Obama administration putting billions into British distiller; Update: DNC member/lobbyist behind push?" Hot Air, September 1, 2009 ---

What is hyperbolic discounting?

"Psychology of poverty and temptation," by Chris Blattman, September 2009 ---

Some people are impulsive and impatient; they prefer a dollar or a donut today far more than a dollar or a donut tomorrow, so much so that they’re willing to give up shocking amounts of dollars and donuts tomorrow for just one today. This is one reason, some say, that we see such high interest rates for short-term borrowing, from New York to Calcutta.

Some people are not only impulsive and impatient, but inconsistently so. they care a lot about a dollar today versus tomorrow, but could care less between getting a dollar either 10 or 11 days from now. Economists call this ‘hyperbolic discounting’.

Both behaviors–impatience and time inconsistency–could be a source of persistent poverty.

Or not. Abhijit Banerjee presented a new paper here yesterday, written with MIT colleague Sendhil Mullainathan. They look at a number of seemingly unusual behaviors by the very poor–from exorbitant rates of short-term borrowing to the low take-up of small, high-return investments. Impatience cannot explain the patterns, they say. The impatience approach also requires the poor think differently than the rest of the population.

Another view: we’re all impulsive and impatient in the same way, but over a narrow range of goods that are quickly and cheaply satisfied. If you’re poor, these temptations are a big fraction of your income. If you’re even somewhat wealthy, they are not. Temptations are declining in income.

The paper runs through half a dozen perplexing patterns of behavior, and shows that these simple assumptions can explain a great deal.

This approach has a great deal in common with hyperbolic discounting, but is empirically distinct (and has very different policy implications). Parsing out and testing these subtleties strikes me as one of the most important frontiers in the study of poverty. Declining temptation, if true, could explain all sorts of odd behaviors. With more than a few Uganda and Liberia surveys on the horizon, I’m now scheming ways to test whether it’s true.

It’s a difficult paper, especially for those uninitiated in micro-economic theory. Even if that sounds like you: the subtle points are worth the slog.

For an intro to the subfield, see Senthil’s essay, Development economics through the lens of psychology. Another great resource is Stefano Dellavigna’s recent JEL article on evidence from the field. Both are ungated.

 Behavioral and Cultural Economics and Finance ---

78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
Championship Rings in pawn shops, IRS vaults, Ponzi schemer stashes offshore, or in the clutches of ex-wives

What on earth did athletes learn in college?

Pros seem especially susceptible to Ponzi schemes. Some recent examples --- Click Here

10 Ways Sports Stars (multi-millionaires) Go From Riches To Rags," by Lawrence Delevingne, Business Insider, September 18, 2009 ---

 Sports Illustrated article this year showed how shockingly common financial ruin is:

If that's not bad enough, the recession has made things even worse. Too much money in real estate; investments in Ponzi schemes; and poor financial advising have been exposed with the down economy.

A sign of the times? More former stars are selling their championship rings for money than ever. "It's amazing that I heard the recession was over," says Timothy Robins, owner of, who buys bling from current and former pros and has seen a 36% increase in sales during the past year. "I'm getting more calls from players than ever. They're having a really hard time."

While just about everyone has lost money over the past year, athletes tend to make particularly bad financial decisions, and it's not just reckless spending.

How they lose their wealth --- Click Here

The 10 ways sports pros blow their cash >>

Jensen Comment
The same goes for many, many movie stars like Debbie Reynolds who, very late in their lives, are "willing to work for food."

The boots in Hollywood's Boot Hill are not stuffed with savings.

Bob Jensen's helpers in personal finance ---

How to avoid losing your money to fraud ---

Behavioral and Cultural Economics and Finance ---

Those really expensive 18 (nearly empty) flights per week at Murtha Airport
In 20 years, Mr. Murtha has successfully doled out more than $150 million of federal payments to what is now being called the airport for no one. I took a trip to southwestern Pennsylvania to explore how this small town received so much money and whether the John Murtha Airport is a legitimate federal investment . . . The airport has an $8.5 million, taxpayer-funded radar system that has never been used. The runway was paved with reinforced concrete at a cost of more than $17 million. The latest investment was $800,000 from the $787 billion American Recovery and Reinvestment Act to repave half of the secondary runway. (Never mind that the first one is hardly ever in use.)  Airport Director Scott Voelker admitted in an interview that having a never-used unmanned radar system is "dumber than dirt." But he says the airport is necessary and blames its current shortcomings on the economy. "To get more passengers, we need more flights. To get more flights, we need more passengers," he says. Mr. Voelker believes the "economy has dictated to the airlines to cut back on flights." In other words: The airport was not built in response to passenger or airline needs.
Tyler Grimm, "John Murtha's Airport for No One:  A monument to earmarks in Johnstown, Pa.," The Wall Street Journal, September 3, 2009 ---

"Rating agencies lose free-speech claim," by Jonathon Stempel, Reuters, September 3, 2009 ---

Credit rating agencies may find it harder to argue that their opinions deserve free speech protection after a judge rejected efforts by Moody's Investors Service and Standard & Poor's to dismiss a fraud lawsuit.

In a case alleging that inflated ratings on risky mortgages led to investment losses, U.S. District Judge Shira Scheindlin said on Wednesday that ratings on notes sold privately to a group of investors were not "matters of public concern" deserving broad protection under the First Amendment of the U.S. Constitution.

The Manhattan judge said investors may pursue their lawsuit accusing Moody's, S&P and Morgan Stanley (MS.N), which marketed the notes, of issuing false and misleading statements about the notes, which were backed by subprime mortgages and other debt.

Scheindlin's ruling may affect lawsuits by pension funds -- including the nation's largest, the California Public Employees' Retirement System, or CalPERS -- and other investors that want to hold banks and rating agencies responsible for exaggerating the value and safety of debt in order to win fees.

"This is potentially a very significant opinion," said Joseph Mason, a finance professor at Louisiana State University's business school in Baton Rouge.

"It seems they have found a hole in the First Amendment defense, the agencies' primary line of defense," he said. "There is a feeling throughout the investment industry that agencies committed an egregious breach, but the issue is how to gain traction under the law. This opinion seems to give hope."

Rating agencies typically get broad free-speech protection similar to that afforded journalists and plaintiffs must often show that ratings reflect "actual malice" before they can recover. That protection, of course, is not absolute.

"The First Amendment doesn't allow anyone to commit fraud," said George Cohen, a professor at the University of Virginia School of Law.

Sean Egan, managing director of Egan-Jones Ratings Co, an independent agency critical of how rivals are compensated, called Scheindlin's ruling "a watershed event. This is the first major breach in the First Amendment defense, and makes it substantially easier for other plaintiffs."


The ruling concerned the Cheyne Structured Investment Vehicle, a package of debt that included subprime mortgages.

Scheindlin said Cheyne issued some notes with "triple-A" ratings, the same as the U.S. government, and others that won "the highest credit ratings ever given to capital notes."

Meanwhile, the rating agencies were paid more than three times their normal rate and their fees were "contingent upon the receipt of desired ratings," she said.

Desirable ratings did nothing to save the Cheyne SIV. It went bankrupt in August 2007.

"You can't yell fire in a crowded theater, but here it seems the agencies were doing the opposite," said Jonathan Macey, a professor at Yale Law School. "There was a fire, but they were saying there was nothing to worry about and taking money for saying that."

Continued in article

Jensen Comment
Expert Financial Predictions (John Stewart's hindsight video scrapbook) ---
You have to watch the first third of this video before it gets into the scrapbook itself
The problem unmentioned here is one faced by auditors and credit rating agencies of risky clients every day:  Predictions are often self fulfilling

If an auditor issues going concern exceptions in audit reports, the exceptions themselves will probably contribute to the downfall of the clients

The same can be said by financial analysts who elect to trash a company's financial outlook
Hence we have the age-old conflict between holding back on what you really secretly predict versus pulling the fire alarm on a troubled company

There are no easy answers here except to conclude that it auditors and credit rating agencies appeared to not reveal many of their inner secret predictions in 2008

Auditing firms and credit rating agencies lost a lot of credibility in this economic crisis, but they've survived many such stains on their reputations in the past

By now we're used to the fact that the public is generally aware of the fire before the auditors and credit rating agencies pull the alarm lever

On the other hand, financial wizards who pull the alarm lever on nearly every company all the time lose their credibility in a hurry

Bob Jensen's threads on fraud in the subprime lending scandals ---

Bob Jensen's threads on fraud in credit rating agencies are at 

Where were the auditors ---

Mortgage Fraud Increasing
Despite the attention paid to mortgage fraud committed by borrowers and lenders since declines in the real estate values and the subprime loan crisis triggered severe problems in the banking industry, the number of Federal Bureau of Investigation’s (FBI) investigations of mortgage fraud and associated financial crimes is increasing. “The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations,” John Pistole, Deputy Director, told the Senate Judiciary Committee in April.
AccountingWeb, August 18, 2009 ---
Jensen Comment
I think mortgage fraud will continue to rise as long as remote third parties like Fannie Mae, Freddie Mac, and FHA continue to buy up mortgages negotiated by banks and mortgage companies basking in moral hazard. The biggest hazards are fraudulent real estate appraisals and lies about income in mortgage applications. We need to bring back George Bailey (James Stewart) in It's a Wonderful Life ---
The banks that negotiate the mortgages should have to hang on to those mortgages.
Watch the video at

PJ O’Rourke’s Parliament of Whores ---   

"They Left Fannie Mae, but We Got the Legal Bills," by Grechen Morgenson, The New York Times, September 5, 2009 --- morgensen&st=cse

PRECISELY one year ago, we lucky taxpayers took over Fannie Mae and Freddie Mac, the mortgage finance giants that contributed mightily to the wild and crazy home-loan-boom-turned-bust. In that rescue operation, the Treasury agreed to pony up as much as $200 billion to keep Fannie in the black, coughing up cash whenever its liabilities exceed its assets. According to the company’s most recent quarterly financial statement, the Treasury will, by Sept. 30, have handed over $45 billion to shore up the company’s net worth.

It is still unclear what the ultimate cost of this bailout will be. But thanks to inquiries by Representative Alan Grayson, a Florida Democrat, we do know of another, simply outrageous cost. As a result of the Fannie takeover, taxpayers are paying millions of dollars in legal defense bills for three top former executives, including Franklin D. Raines, who left the company in late 2004 under accusations of accounting improprieties. From Sept. 6, 2008, to July 21, these legal payments totaled $6.3 million.

With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and generate $115 million in bonus compensation. Fannie had to restate its financial results by $6.3 billion.

Almost two years later, in 2006, Fannie’s regulator concluded an investigation of the accounting with a scathing report. “The conduct of Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity,” it said.

That year, the government sued Mr. Raines, Mr. Howard and Leanne Spencer, Fannie’s former controller, seeking $100 million in fines and $115 million in restitution from bonuses the government contended were not earned. Without admitting wrongdoing, Mr. Raines, Mr. Howard and Ms. Spencer paid $31.4 million in 2008 to settle the litigation.

When these top executives left Fannie, the company was obligated to cover the legal costs associated with shareholder suits brought against them in the wake of the accounting scandal.

Now those costs are ours. Between Sept. 6, 2008, and July 21, we taxpayers spent $2.43 million to defend Mr. Raines, $1.35 million for Mr. Howard, and $2.52 million to defend Ms. Spencer.

“I cannot see the justification of people who led these organizations into insolvency getting a free ride,” Mr. Grayson said. “It goes right to the heart of what people find most disturbing in this situation — the absolute lack of justice.”

Lawyers for the three executives did not returns calls seeking comment.

An additional $16.8 million was paid in the period to cover legal expenses of workers at the Office of Federal Housing Enterprise Oversight, Fannie’s former regulator. These costs are associated with defending the regulator in litigation against former Fannie executives.

This tally of taxpayer legal costs took several months for Mr. Grayson to extract. On June 4, after Congressional hearings on the current and future status of Fannie and Freddie, he requested the information from the Federal Housing Finance Agency, now their regulator. He got its response on Aug. 26.

A spokeswoman for the agency said it would not comment for this article.

THE lawyers’ billable hours, meanwhile, keep piling up. As the F.H.F.A. explained to Mr. Grayson, the $6.3 million in costs generated by 10 months of legal defense work for Mr. Raines, Mr. Howard and Ms. Spencer includes not a single deposition for any of them. Instead, those bills covered 33 depositions of “other parties” relating to the shareholder suits and requiring the presence of the three executives’ counsel.

One of Mr. Grayson’s questions about these payments remains unanswered — whether placing Fannie Mae into receivership, rather than conservatorship, would have negated the agreement to cover the former executives’ legal costs. Choosing conservatorship allowed Fannie to stabilize and meant that it was going to continue to operate, not wind down immediately.

But, Mr. Grayson pointed out: “If these companies had gone into receivership instead of conservatorship, the trustee in bankruptcy or the receiver would have been free, legally, to reject these contracts that called for indemnification. Raines, Howard and Spencer would have had to pay their own fees.”

When asked about this, Fannie’s regulator, the F.H.F.A., waffled. “Whether these costs could have been avoided would depend on the facts and circumstances surrounding any receivership,” it said. “It is possible that receiverships could have reduced the costs of the litigation, but by no means certain.”

Mr. Grayson said he intended to find out whether there are any legal options under the conservatorship to stop paying for the defense of the Fannie Mae three. “When did Uncle Sam become Uncle Sap?” he said. “In a situation where billions of losses have already occurred, is it really asking too much that people pay their own legal fees?”

While the $6.3 million paid to defend Mr. Raines, Mr. Howard and Ms. Spencer is a pittance compared with other bills coming due in the bailout binge, it is still disturbing for these costs to be covered by those who had nothing to do with the problems and certainly did not benefit from them. The money may be small, but the episode’s message looms large: those who presided over this debacle aren’t being held accountable.

“It is wrong in a very deep sense,” Mr. Grayson said. “The essence of our society is that people who do good things are rewarded and people who do bad things are punished. Where is the punishment for Raines, Howard and Spencer? There is none.”

Barney's Rubble ---

The Disastrous Bailout ---

"Large money laundering schemes often go undetected," AccountingWeb, August 12, 2009 ---

Identifying and then unraveling money laundering schemes in a global financial network where as much as one trillion dollars is circulating each day amounts to “finding a needle in a haystack of needles,” says Michael Zeldin, global leader, anti-money laundering/trade sanctions services for Deloitte Financial Advisory Services. Adding to the difficulty of tracking illegal asset transfers, he says, is the sophistication of the people for whom money laundering is a business, who charge as much as 20 percent in payment for their services. “They are very clever people who are paid a lot of money to make sure that the source of money goes undetected. As soon as the government or banks identify one activity as suspicious, they stop using it and come up with something else.”

Still, prosecutions for this complex crime are initiated daily by authorities around the world, Zeldin says. Data collected from mandatory financial institution reports combined with law enforcement stings and undercover operations bring money laundering activities to trial. A conviction in the felony crime of money laundering brings a sentence of 20 years in prison.

Financial companies are required by the Bank Secrecy Act (BSA), to file Currency Transaction Reports (CTRs) for transactions in currency that exceed $10,000, and Suspicious Activity Reports (SARs) for suspicious transactions that in aggregate exceed $5,000. The money laundering schemes uncovered in New Jersey recently with the help of an FBI informant involved small sums of money paid to charities by check with sponsors of the charities receiving a percentage of the proceeds, which was then returned in cash.

Financial companies that must submit the CTR and SAR reports now include brokers and dealers in securities, under the USA Patriot Act, and under recent Treasury Department rulings, casinos and money services businesses (MSBs), including money exchangers, sellers of traveler's checks and money transmitters.

These reports, which are filed with the Treasury Department, are “the backbone of money laundering prosecutions,” Zeldin says. Data gathered from numerous reports can point to criminal activity. Foreign Bank Account Reporting (FBAR), also required by the BSA, and currently a focus of the Internal Revenue Service primarily as a source of revenue, can provide important information in money laundering cases.

Most financial institutions have systems that automatically generate CTRs, but SARs are based on observation or red flags. Institutions need to develop Know Your Client (KYC) profiles and risk/rank their clients, Zeldin says. They should have systems that monitor transactional activity. They should be able to investigate any red flag that the system generates, and perform appropriate due diligence to determine whether the activity is true and reportable or false.

Banks and other money service businesses need to audit and test their CTR and SAR systems and train their employees in BSA compliance and reporting. Deloitte Financial Advisory Services Group provides support for financial services clients that are developing or refining their BSA reporting capability.

But not all money laundering schemes are designed by professionals. Some of the problems would-be money launderers face when trying to hide their cash are almost the stuff of comedy. Ex-representative William Jefferson of Louisiana, convicted last week of 11 counts of bribery, racketeering, and money laundering, famously hid $90,000 in cash in his freezer. The informant in the recent case in New Jersey agreed to cooperate with the FBI when he was charged with bank fraud in May 2006. He was arrested when he deposited two $25 million checks, one of them at the drive-up window of a PNC bank, and immediately withdrew $22 million. One check bounced, and the bank refused to accept the second deposit.

Bob Jensen's threads on professionalism in auditing are at

Professor Henry Louis Gates has been and still proves, in my opinion, to be a ego centric opportunist who uses his skin color to advance himself and his wealth. He maintains his own non-profit organization that skirts on the edge of fraud as a "bogus charity" --- Click Here
This is not the first time Gates used the N-word (video) ---

A foundation created and led by Henry Louis Gates Jr. is amending its federal tax form after questions were raised about $11,000 paid to foundation officers -- funds that the original tax form called research grants, but that should have been classified as compensation, ProPublica reported. When the payments are accounted for accurately, the foundation's administrative expenses will account for 40 percent of its spending in 2007, not 1 percent as originally reported to the Internal Revenue Service. Gates created the Inkwell Foundation with the goal of supporting work on African and African-American literature, history and culture, the article said. The report by ProPublica also noted that some of the actual grants went to people close to Gates. Gates told ProPublica that the foundation's second-largest grant, for $6,000, went to his fiancée, Angela DeLeon. DeLeon was formerly on the foundation board and Gates said he recused himself from a vote on the grant. A grant of $500 went to Evelyn Higginbotham, chair of the foundation's board and chair of Harvard University's Department of African and African-American studies. Gates said she didn't vote on the grant. ProPublica is an organization that conducts investigative journalism. The article noted that Gates -- the Harvard scholar who is a leading figure in African-American studies whose arrest at his home has set off a national debate about the way black men are treated by law enforcement -- also serves on ProPublica's board..
"Scrutiny for Foundation Run by Henry Louis Gates," Inside Higher Ed, July 28, 2009 ---

"Dirty Secrets:  Companies may be burying billions more in environmental liabilities than their financial statements show," by Marie Leone and Tim Reason,, September 1, 2009 ---

  • Today the financial world is up in arms over "toxic assets," the bad loans and securities that have wreaked so much havoc on bank balance sheets. But few investors understand the true magnitude of the threat that toxic liabilities — environmental liabilities, that is — pose to the financial health of some U.S. businesses. In large part that's because accounting rules enable companies to conceal the full extent of these costs, encouraging minimal disclosure — even when management knows the total bill will be far higher.

    It's no secret that many companies have expensive toxic liabilities — asbestos, heavy-metal pollution, oil and gas leaks, contaminated groundwater, and more. Since the 1970s, Superfund and other laws have required companies to clean up their environmental liabilities and undo the damage they caused. Nor is the primary accounting guidance for toxic liabilities new. FAS 5, the accounting standard governing so-called contingent liabilities, such as pending litigation and environmental hazards, went into effect in 1975; Statement of Position 96-1, which tells firms how to apply FAS 5 to mandated environmental remediation, was issued in 1996. In brief, companies with toxic liabilities must take a one-time charge to earnings and create a reserve of funds devoted to environmental remediation. As a cleanup progresses, the reserve should shrink.

    Yet companies are regularly topping up their environmental reserves with new accruals. Some reserves are even growing. In a recent study of 24 oil, gas, and chemical companies, the vast majority reduced their reserves less than 50 cents for each dollar spent on cleanup, says environmental attorney Greg Rogers, a CPA and president of consulting firm Advanced Environmental Dimensions. (See "The Truth about Reserves" at the end of this article.)

    As a result, investors are left in the dark about the full extent of toxic liabilities. Rogers compares environmental reserves to a bathtub full of water: once the environmental problems are resolved, the tub should be drained. But by adding new accruals each year, companies are effectively leaving the faucet on. "What we don't know is the true capacity of the tub, the cost to fully resolve these liabilities," says Rogers, whose study attempts to estimate those costs using publicly available data.

    Whatever a never-ending cleanup bill implies about actual damage done to the environment, such recurring drains on cash flow certainly hurt investors. "Unlike nearly every other income-statement line item, there is very little if any visibility into the annual charge for 'probable and reasonably estimable environmental liabilities,'" complained JPMorgan analyst Stephen Tusa, who downgraded Honeywell for this reason in 2006.

    "It's Scandalous." Companies typically cite three reasons why their legacy cleanup reserves never drain: the difficulty of estimating cleanup costs, new discoveries of contamination, or new costs acquired through mergers. At some companies, however, those claims are belied by the steady rate at which they funnel money into environmental reserves, suggesting, critics say, that managerial discretion plays a large part in reserve calculations. (One company, ConAgra, paid $45 million in 2007 to settle Securities and Exchange Commission charges that it used environmental reserves as a "cookie jar.") At best, the explanations mean that companies are themselves blind to a major internal drain on cash.

    Despite what companies say, it isn't difficult to accurately estimate the future cost of environmental liabilities, asserts Gayle Koch, a principal with The Brattle Group in Cambridge, Massachusetts. Koch says her firm regularly does so for both corporate and government clients. "Companies estimate liabilities all the time for insurance recovery, to get insurance, for mergers and acquisitions, and in divestitures," she says. "Transactions go forward based on those estimates." The problem isn't the estimates, she says, but the disclosure.

    "I've been in court cases where I've seen detailed cost recovery with very detailed distributions of costs," says Koch. "And those same companies will disclose in their annual reports [only] the known minimum cost."

    Sanford Lewis, an attorney with the Investor Environmental Health Network (IEHN), an advocacy group, agrees that companies can and do produce accurate estimates of environmental costs — for internal use. A company that tells investors that it expects liabilities of $200 million during the next 5 years may advise its insurer to expect liability claims of $2 billion over a 50-year period, wrote Lewis in a recent report. "It is happening, it's scandalous, and investors should be outraged," Lewis told CFO.

    Increasingly, lawsuits, bankruptcy proceedings, regulatory investigations, and independent research are revealing that companies often know far more about the cost of their environmental liabilities than they tell investors. For example, New York Attorney General Andrew Cuomo is currently investigating whether Chevron misled investors — including New York State's pension plan — about the extent of its liability in a $27 billion lawsuit tied to "massive oil seepage" in Ecuador. Chevron is widely expected to lose the case in Ecuador but fight payment in the United States, and Cuomo has demanded that the company disclose estimates of potential damages and its cash reserves.

    Continued in article

    Bob Jensen's fraud updates are at

    Bob Jensen's threads about audit professionalism ---


  • So much for the veil of secrecy surrounding money hidden in Swiss bank accounts. We've been hearing about those clandestine arrangements for decades, where wealthy Americans could stash their cash away from the prying eyes of the Internal Revenue Service. It was almost romantic. But after a protracted fight between U.S. authorities and the Swiss banking giant, UBS, the veil is about to be pierced. UBS agreed on Wednesday to turn over identifying information on 4,450 accounts which the IRS believes hold undeclared assets belonging to Americans. Those accounts were believed to hold about $18 billion at one time, though some may have been closed since the battle began.
    UBS bank caves in to the IRS

    The last penny

    A father walks into a restaurant with his young son. He gives the young boy 3 pennies to play with to keep him occupied.

    Suddenly, the boy starts choking, going blue in the face. The father realizes the boy has swallowed the pennies and starts slapping him on the back..

    The boy coughs up 2 of the pennies, but keeps choking. Looking at his son, the father is panicking, shouting for help.

    A well dressed, attractive, and serious looking woman, in a blue business suit is sitting at a coffee bar reading a newspaper and sipping a cup of coffee. At the sound of the commotion, she looks up, puts her coffee cup down, neatly folds the newspaper and places it on the counter, gets up from her seat and makes her way, unhurried, across the restaurant.

    Reaching the boy, the woman carefully drops his pants; takes hold of the boy's testicles and starts to squeeze and twist, gently at first and then ever so firmly. After a few seconds the boy convulses violently and coughs up the last penny, which the woman deftly catches in her free hand.

    Releasing the boy's testicles, the woman hands the penny to the father and walks back to her seat at the coffee bar without saying a word.

    As soon as he is sure that his son has suffered no ill effects, the father rushes over to the woman and starts thanking her saying, "I've never seen anybody do anything like that before, it was fantastic. Are you a doctor?"

    "No, IRS"

    Now you know why UBS bankers are hunched over and not smiling ---

    Instead of adding more regulating agencies, I think we should simply make the FBI tougher on crime and the IRS tougher on cheats

    Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
    One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

    "Statement by SEC Chairman: Statement on the Inspector General's Report Regarding the Bernard Madoff Fraud," by SEC Chairman Mary Shapiro, SEC Speech, September 4, 2009 ---

    Inspector General's Report ---

    Swanson Acknowledged in Testimony that If He Had Carefully Reviewed the Complaint, He Would Have Investigated

    Additional Red Flags That Were Raised Swanson stated the Hedge Fund Manager’s complaint and the 2001 articles mean something different to him today than they did at the time of the examination in 20032004, noting, “I didn’t know anything, very little anyway, about hedge funds and mutual funds and how they operated.” Id. at p. 39. Swanson admitted that to someone who understood the hedge fund world, Madoff’s failure to charge money management fees “would probably be a little surprising.” Id. at p. 37. Swanson now reads the Hedge Fund Manager’s complaint to “indicate to me … [BMIS] may be not trading as much in options as they’re saying they’re doing,” and the red flag about the auditor to “signal some level of a lack of independence with respect to the auditor.” Id. at pgs. 37-38. Swanson testified that if he had reviewed the complaint, he would have wanted to look into the auditor issue. Swanson Testimony Tr. at p. 50. McCarthy and Donohue also thought that the allegation that the auditor was a related party to the principal was noteworthy and something that should have been followed up upon. Donohue Testimony Tr. at p. 42; McCarthy Testimony Tr. at p. 58. As Donohue explained, “His statement that the auditor of the firm is a related party to the principal would indicate that there are potential conflicts with the firm and the auditor.” Donohue Testimony Tr. at p. 42. However, during the course of the examination, the exam team did not examine whether the auditor of the firm was a related party to the principal.

    . . .


    After his sworn testimony on June 19, 2009, Swanson provided supplemental information to the Office of the Inspector General, stating that he had a vague recollection that, “prior to 2005, he and Mr. McCarthy discussed the appropriateness of working on matters involving Madoff in light of their participation in the compliance breakfasts, and that neither he nor McCarthy determined that they should be recused.” Letter dated June 19, 2009 from Michael Wolk, Counsel to Swanson, to IG Kotz, at p. 2, at Exhibit 183. Swanson also stated that he “took comfort in the fact that Lori Richards, Director, Office of Compliance Inspections and Examinations, was aware that the breakfasts were sponsored by the Securities Industry Association (SIA).” Id.

    Jensen Comment
    This part of the Inspector General's report relies a lot upon Eric Swanson's claims of not being able to remember much about his early-on relationships with Shana Madoff. About this part of the Report I am very suspicious. However, early news accounts are also somewhat inconsistent.

    "Ponzi Schemer's Label-Whoring Niece Married SEC Lawyer," by Owen Thomas, December 16, 2008 ---

    Shana Madoff, whose uncle Bernie Madoff stands accused of defrauding investors of $50 billion (later raised to over $65 billion), is the wife of Eric Swanson, a former top lawyer at the Securities and Exchange Commission. A goy, but well-placed!

    So well-placed that SEC chairman Christopher Cox is now elaborately raising his eyebrows about the relationship — especially since Shana Madoff worked as the compliance lawyer at Bernard L. Madoff Investment Securities, and met Swanson at a trade association event. . . . 

    Swanson resigned from the SEC in 2006, and the couple married in 2007. But they clearly dated for a while before that.

    Some have suggested that Shana Madoff is a "shopaholic." So not technically true! Why, she married the manager of a men's clothing store in 1997, but that didn't work out. A 2004 New York profile detailed her simultaneous affection for Narciso Rodriguez and aversion to actually going out and shopping. Instead of trying on clothes at the store, she had salespeople messenger the entire collection to her office, and charge her only for what she didn't return. The article mentions her having a boyfriend. Was that Swanson, whom one SEC colleague said conducted a review of Madoff's firm in 1999 and 2004?

    A spokesman for Swanson — they get flacks quickly these days, don't they — told ABC News that he "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved" (it was later shown that he was very involved in the Madoff "investigation" while at the SEC) with Shana Madoff. How convenient!

    But that could be said about pretty much all of his coworkers. The SEC first fielded complaints about the Madoff firm in 1999, but never opened a formal investigation that would have allowed it to subpoena records. In 2006, Bernard Madoff registered as an investment advisor with the SEC, but the agency never conducted a standard review. Are you beginning to get a picture of why Shana Madoff, who was charged with keeping the company out of trouble with regulators, was so busy she couldn't even go shopping?

    Swanson was at the commission in 2003 when the agency was examining the Madoff firm. More importantly, he was also part (leader) of the SEC team that was conducting the actual inquiry into the firm . . .  What does all this mean? Nothing, according to Shana Madoff or her husband, whom she married in 2007. A spokesman for Shana Madoff and one for Swanson confirm that both knew each other professionally during the time of the examination.
    "Madoff Victims Claim Conflict of Interest at SEC," CNBC, December 15, 2008 ---

    Madoff Timeline ---

    Bob Jensen's threads on the Madoff fraud and the current economic crisis are at


  • Deloitte to Pay $1M in Beazer Suit
    Deloitte & Touche has agreed to pay investors of Beazer Homes USA nearly $1 million to settle claims the firm should have noticed the homebuilder was issuing inaccurate financial statements as the housing market began to decline earlier this decade. The audit firm, Beazer, and former Beazer executives have settled the class-action lawsuit for a total of $30.5 million, pending approval by the U.S. District Court for the Northern District of Georgia. Deloitte is scheduled to pay $950,000.
    Sarah Johnson, "Deloitte to Pay $1M in Beazer Suit,", May 7, 2009 ---

    Bob Jensen's threads on Deloitte & Touche are at

    "Beazer to Pay Up to $53 Million in Fraud Case," by Brett Kendall and Sarah H. Lynch, The Wall Street Journal, July 3, 2009 ---

    Beazer Homes USA Inc. will pay up to $53 million to settle mortgage fraud charges related to federally insured mortgage loans the company made to buyers of its homes.

    The U.S. Department of Justice said Wednesday that Beazer will pay $5 million to the federal government and up to $48 million to victimized homeowners.

    The settlement is tied to an agreement with federal prosecutors in North Carolina that will allow the Atlanta-based company to avoid criminal prosecution on the mortgage-fraud charges, and on other accounting-fraud charges related to the manipulation of company earnings.

    In a separate action, the Securities and Exchange Commission filed civil charges Wednesday against Beazer's former chief accounting officer, accusing him of conducting a fraudulent earnings scheme and hiding his wrongdoing from outside auditors and other company accountants.

    In the mortgage fraud case, prosecutors said Beazer ignored income requirements in making loans to unqualified buyers, and sought to hide from the Federal Housing Administration that some company branches had excessive default rates on their loans.

    Prosecutors also said Beazer charged home buyers interest "discount points" at closing but kept the money and didn't reduce interest rates on the loans. They added that the home builder provided buyers with cash gifts so they could come up with minimum down payments, only to add the gift price onto the purchase price of the house.

    Beazer said in a statement that it has fully cooperated with governmental authorities since irregularities in its mortgage origination business and its financial reporting came to light.

    "We deeply regret these matters and have used what we have learned to strengthen our control and compliance culture," said Beazer Chief Executive Ian J. McCarthy.

    In the SEC's accounting fraud case, the agency said Beazer's former chief accountant, Michael T. Rand, wrongfully understated the company's income between 2000 and 2005 by setting aside a reserve or rainy-day fund for land development and house construction costs.

    Mr. Rand's lawyer didn't return a call for comment.

    When home sales slowed in 2006, Beazer tapped into a reserve for land development and house construction and improperly boosted its slumping earnings, the agency said.

    In the end, the SEC said, Beazer understated the company's income in SEC filings by $63 million between fiscal years 2000 through 2005. In addition, the company overstated its income and understated losses by a total of $47 million in fiscal year 2006 and the first two quarters of fiscal year 2007.


    Corrections & Amplifications The Securities and Exchange Commission accused the former chief accounting officer of Beazer Homes USA Inc. of engaging in an accounting scheme that caused the company to understate its income between 2000 and 2005. A previous version of this article incorrectly said the company had overstated its income during those years.

    History of Litigation of Beazer Homes ---

    SEC Sues Ex-CAO of Beazer Homes in Earnings Scheme ---

    Beazer Accountant Fired in Document Destruction Try ---

    Outside auditors informed Beazer the appreciation interest in the homes violated accounting principles, and would not allow the company to record the revenue and profit from the home sales to the outside investors. In order to deceive its auditor, the SEC states, Beazer circumvented the accounting rules by entering into new agreements in 2006 that omitted the appreciation interest, but then entered oral side agreements with the investors for the company to receive a portion of that appreciation. Beazer is one of the country's 10 largest single-family home builders with operations in Arizona, California, Delaware, Florida, Georgia, Indiana, Maryland, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, and Virginia.
    "Beazer Homes settles SEC investigation," Entrepreneur, September 24, 2008 ---


    Deloitte & Touche has agreed to pay investors of Beazer Homes USA nearly $1 million to settle claims the firm should have noticed the homebuilder was issuing inaccurate financial statements as the housing market began to decline earlier this decade. The audit firm, Beazer, and former Beazer executives have settled the class-action lawsuit for a total of $30.5 million, pending approval by the U.S. District Court for the Northern District of Georgia. Deloitte is scheduled to pay $950,000.
    Sarah Johnson, "Deloitte to Pay $1M in Beazer Suit,", May 7, 2009 ---

    Bob Jensen's threads on Deloitte & Touche are at

    SEC says:  "GE bent the accounting rules beyond the breaking point"

    "GE Settles Civil-Fraud Charges:  Fine of $50 Million Resolves SEC Probe Into Firm's Accounting Practices," by Paul Glader and Kara Scannell, The Wall Street Journal, August 5, 2009 ---

    General Electric Co. agreed to pay a $50 million fine to the Securities and Exchange Commission to settle civil fraud and other charges that GE's financial statements in 2002 and 2003 misled investors.

    The fine settles a probe that started in 2005 into GE's accounting procedures, including financial hedges and revenue recognition. In a complaint filed with U.S. District Court in Connecticut, the SEC said the Fairfield, Conn., conglomerate used improper accounting methods to boost earnings or avoid disappointing investors.

    "GE bent the accounting rules beyond the breaking point," said Robert Khuzami, director of the SEC's Division of Enforcement, in a prepared statement. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."

    GE agreed to pay the fine without admitting or denying the SEC's allegations. The SEC noted efforts by GE's audit committee to correct and improve the company's accounting during the probe. GE twice restated its financial results and disclosed other errors. The probe led to several employees being disciplined or fired.

    "We are committed to the highest standards of accounting," said GE spokeswoman Anne Eisele. "While this has been a difficult and costly process, our controllership processes have been strengthened as a result, and GE is a stronger company today." GE said it doesn't need to further correct or revise its financial statements related to the investigation.

    The SEC complaint focused on GE's accounting for four items over various periods: derivatives, commercial-paper funding, sales of spare parts and revenue recognition. The commission said GE in 2002 and 2003 reported locomotive sales that hadn't yet occurred in order to boost revenue by $370 million. A 2002 change in accounting for spare parts in its aircraft-engine unit increased that year's net income by $585 million, the commission said.

    In early 2003, the SEC alleges, GE changed how it accounted for hedges on its issuances of short-term borrowings known as commercial paper. The commission said the change boosted GE's pretax earnings for 2002 by $200 million. Had it not changed the methodology, the commission said, GE would have missed analysts' earnings estimates for the first time in eight years, by 1.5 cents.

    "Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective," said David P. Bergers, director of the commission's Boston office, which led the investigation. "GE misapplied the accounting rules to cast its financial results in a better light."

    The settlement resolves the GE accounting inquiry, but Mr. Bergers said similar SEC investigations of other companies continue.

    GE's shares were up 10 cents to $13.82 in 4 p.m. composite trading on the New York Stock Exchange. Investors and analysts said the settlement represented closure.

    "I feel as though the company has corrected its practices," said David Weaver, a portfolio manager at Adams Express in Baltimore, which owns about 1.5 million GE shares. "Going forward, I feel a little more comfortable with the cleanliness of [GE's earnings] numbers."

    Matt Collins, an industrial analyst at Edward Jones in St. Louis, said the accounting issues had been "frustrating for investors, but they were never material." He said investors are now focused on the recession and losses at GE's finance unit.

    The SEC under enforcement chief Mr. Khuzami is trying to close cases older than three years unless they are critical to the agency's program. The goal is to clear out the pipeline so attorneys can work on current cases, although one person familiar with the matter said that wasn't a consideration in this case.

    Jensen Comment
    GM's auditor, KPMG, is not named in the court paper such that the role auditors played in allowing GE to push these alleged accounting abuses is not disclosed.

    When will auditors learn about complexities of financial risk?

    "Did Wells Fargo's Auditors Miss Repurchase Risk?" by Francine McKenna|, ClusterStock, September 20, 2009 ---

    On Friday, the Business Insider worried that Wells Fargo may be making the same fatal mistake AIG did underestimating, or worse, naively ignoring Collateral Call Risk. 

    The concern was focused on potential exposure from the credit default swaps portfolio they inherited from Wachovia. In WFC's annual report the Buiness Insider saw limited discussion of this risk and no details of the reserves for it.

    There are two possible ways to account for the lack of discussion of Collateral Call Risk.  Either Wachovia wrote its derivative contracts in ways that don’t permit buyers to demand more collateral or Wells Fargo is not disclosing this risk. (A third possibility—that they don't even seem aware that they have this risk — seems remote after AIG.)

    When I read that, I saw eerie parallels with New Century, all the more so because of the auditor connection – both Wells Fargo and Wachovia and New Century (now in Chapter 11) are audited by KPMG.  New Century was not too transparent either and, as a result, many people, including some very sophisticated investors were caught with their pants down. KPMG is accused in a $1 billion dollar lawsuit of not just being incompetent, but of aiding, abetting, and covering up New Century’s fraudulent loan loss reserve calculations just so they could keep their lucrative client happy and viable.

    From the lawsuit:

    KPMG’s audit and review failures concerning New Century’s reserves highlights KPMG’s gross negligence, and its calamitous effect — including the bankruptcy of New Century.  New Century engaged in admittedly high risk lending.  Its public filings contained pages of risk factors…New Century’s calculations for required reserves were wrong and violated GAAP. For example, if New Century sold a mortgage loan that did not meet certain conditions, New Century was required to repurchase that loan.  New Century’s loan repurchase reserve calculation assumed that all such repurchases occur within 90 days of when New Century sold the loan, when in fact that assumption was false.

    In 2005 New Century informed KPMG that the total outstanding loan repurchase requests were $188 million.  If KPMG only considered the loans sold within the prior 90 days, the potential liability shrank to $70 million.  Despite the fact that KPMG knew the 90 day look-back period excluded over $100 million in repurchase requests, KPMG nonetheless still accepted the flawed $70 million measure used by New Century to calculate the repurchase reserve.  The obvious result was that New Century significantly under reserved for its risks.

    How does the New Century situation and KPMG’s role in it remind me of Wells Fargo now?  Well, in both cases, there’s no disclosure of the quantity and quality of the repurchase risk to the organization. Back in March of 2007, I wrote about the lack of disclosure of this repurchase risk in New Century’s 2005 annual report:

    There are 17 pages of discussion of general and REIT specific risk associated with this company, but no mention of the specific risk of the potential for their banks to accelerate the repurchase of mortgage loans financed under their significant number of lending arrangements….it does not seem that reserves or capital/liquidity requirements were sufficient to cover the possibility that one of or more lenders could for some reason decide to call the loans. Did the lenders have the right to call the loans unilaterally? It does say that if one called the loans it is likely that all would. Didn’t someone think that this would be a very big number (US 8.4 billion) if that happened.

    Some have been writing since 2005 about the elephant in the room that is mortgage loan repurchase risk:

    Even if a lender sells most of the loans it originates, and, theoretically, passes the risk of default on to the buyer of the loan, there remains an elephant lurking in the room: the risk posed to mortgage bankers from the representations and warranties made by them when they sell loans in the secondary market… in bad times, the holders of the loans have been known to require a second "scrubbing" of the loan files, looking for breaches of representations and warranties that will justify requiring the originator to repurchase the loan. …A "pure" mortgage banker, who holds and services few loans, may think he's passed on the risk (absent outright fraud). Sophisticated originators know better…When the cycle turns (as it always does) and defaults rise, those originating lenders who sacrificed sound underwriting in return for fee income will find the grim reaper knocking at their door once again, whether or not they own the loan.

    Clusterstock quoted Wells Fargo from page 127 of their 2008 Annual Report (emphasis added):

    In certain loan sales or securitizations, we provide recourse to the buyer whereby we are required to repurchase loans at par value plus accrued interest on the occurrence of certain credit-related events within a certain period of time. The maximum risk of loss…In 2008 and in 2007, we did not repurchase a significant amount of loans associated with these agreements.

    But earlier, on page 114, there is a footnote to a chart representing loans in their balance sheet that have been securitized--including residential mortgages and securitzations sold to FNMA and FHLMC--where servicing is their only form of continuing involvement. 

    However, the delinquencies and charge off figures do not include sold loans. Wells Fargo tells us these numbers do not represent their potential obligations for repurchase if FNMA and FHLMC decide their underwriting standards were not up to par.

    Delinquent loans and net charge-offs exclude loans sold to FNMA and FHLMC. We continue to service the loans and would only experience a loss if required to repurchasea delinquent loan due to a breach in original representations and warranties associated with our underwriting standards.

    So where are those numbers?  Where is the number that correlates to the $8.4 billion dollar exposure that brought down New Century?  Wells Fargo saw an almost 300% increase from 2007 to 2008 in delinquencies and 200% increase in charge offs from commercial loans and a 300% increase in delinquencies and 350% increase in charge offs on residential loans they still hold. Can anyone say with certainty that we won’t see FNMA and FHLMC come back and force some repurchases on Wells Fargo for lax underwriting standards?

    This is all we get from Wells Fargo in the 2008 Annual Report:  

    During 2008, noninterest income was affected by changes in interest rates, widening credit spreads, and other credit and housing market conditions, including… 

    The lack of disclosure of this issue here mirrors the lack of disclosure in New Century and perhaps in other KPMG clients such at Citigroup, Countrywide ( now inside Bank of America) and others.  How do I know there could be a pattern? Because the inspections of KPMG by the PCAOB, their regulator, tell us they have been called on auditing deficiencies just like this.  Do we have to wait for a post-failure lawsuit to bring some sense, and some sunshine, to the system?

    Francine McKenna is Editor of Re: The Auditors.

    Will auditors survive the huge lawsuits concenring their negligence in estimating loan losses in the subprime mortgage and CDO crisis ---

    Bob Jensen's threads on auditing firm lawsuits ---

    Bob Jensen's fraud updates are at

    Bob Jensen's threads on earnings management and creative accounting are at

    "SEC Charges Terex Corporation With Accounting Fraud," SEC News, August 12, 2009 ---

    The Securities and Exchange Commission today charged Terex Corporation, a Westport, Conn.-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.

    Terex has agreed to settle the SEC's charges and pay a penalty of $8 million. The SEC previously charged URI with fraud as well as officers of URI and Terex.

    "Terex is being charged with helping United Rentals pull off a sophisticated accounting scheme," said Fredric D. Firestone, Associate Director in the SEC's Division of Enforcement. "These two public companies inflated year-end results in order to mislead investors during a period of industry recession."

    The SEC's complaint, filed in U.S. District Court for the District of Connecticut, alleges that Terex aided and abetted the fraudulent accounting by URI for two year-end transactions that were undertaken to allow URI to meet its earnings forecasts. These fraudulent transactions also allowed Terex to prematurely recognize revenue from its sales to URI. The fraud occurred through URI's sales of used equipment to a financing company and its lease-back of that equipment for a short period. As part of the scheme, Terex agreed to sell the equipment at the end of the lease period and guarantee the financing company against any losses. URI separately guaranteed Terex against losses it might incur under the guarantee it had extended to the financing company.

    The SEC's complaint also alleges that from 2000 through June 2004, Terex's accounting staff failed to resolve imbalances arising from certain intercompany transactions. Instead of investigating and correcting the imbalances, Terex offset the imbalances with unsupported and improper entries. As a result, costs were not recorded as expenses, and, on a consolidated basis, Terex appeared to be more profitable than it was.

    Without admitting or denying the SEC's charges, Terex agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying the $8 million penalty. The settlement is subject to court approval.

    The Commission acknowledges the assistance of the U.S. Attorney's Office for the District of Connecticut and the New Haven Field Office of the Federal Bureau of Investigation in this matter.

    What does Bernie Madoff have in common with Terex?

    At one time, Madoff and Terex used unregistered auditors.

    Terex restated its financial statements in 2005 ---

    Terex Resources Inc. (TSX VENTURE:TRR) ("Terex" or the "Company") announces that it is filing on SEDAR today new financial statements in respect of its year ended December 31, 2003 that have been audited by Parker Simone LLP. The new financial statements have been prepared and are being filed on SEDAR today as a result of the former financial statements in respect of its year ended December 31, 2003 having been audited by an auditor that was not registered with the Canadian Public Accountability Board.

    "Audit Overseer Faults BDO, Grant Thornton:  The PCAOB says BDO had trouble testing revenue-recognition controls, while Grant Thornton did not adequately identify GAAP errors. Both firms complain that the board criticized judgment calls," by Marie Leone,, July 13, 2009 --- 

    Annual inspection reports for BDO Seidman and Grant Thornton, released last Thursday by the Public Company Accounting Oversight Board, criticized some of the audit testing procedures and practices at the two large accounting firms.

    The review of BDO focused mainly on issues related to testing controls around revenue recognition, while Grant Thornton was chastised for not identifying or sufficiently addressing errors in clients' application of generally accepted accounting principles with respect to pension plans, acquisitions, and auction-rate securities.

    With regard to BDO, the inspection staff reviewed seven of the company's audits performed from August 2008 through January 2009 as a representation of the firm's work.

    The report highlighted several deficiencies tied to what it said were failures by BDO to perform audit procedures, or perform them sufficiently. According to the reports, the shortcomings were usually based on a lack of documentation and persuasive evidence to back up audit opinions. For example, the board said, BDO did not test the operating effectiveness of technology systems that a client used to aggregate revenue totals for its financial statements. The systems were used by the client company for billing and transaction-processing purposes.

    The inspection team also reported that BDO's audit of a new client failed to "appropriately test" the company's recognition of revenue practices. Specifically, the audit firm noted that sales increased in the last month of the year but it failed to get an adequate explanation from management. Also, the report concluded that BDO reduced its "substantive" revenue testing of two other clients, although more thorough testing was needed.

    And while BDO identified so-called "channel stuffing" as a risk of material misstatement due to fraud, at another client, its testing related to whether the client engaged in the act was not adequate, said the inspectors. (Channel stuffing is the practice of accelerating revenue recognition by coaxing distributors to hold excess inventory.)

    Other alleged problem spots for BDO included a failure to design and perform sufficient audit procedures to test: journal entries and other adjustments for evidence of possible material misstatement due to fraud; valuation of accrued liabilities related to contra-revenue accounts; a liability for estimated sales returns in connection with an acquisition; and assumptions related to a client's goodwill impairment of a significant business unit.

    In response to the inspection report, BDO performed additional procedures or supplemented its work papers as necessary. It also noted in a letter that was attached to the report that none of the clients cited had to restate their financial results.

    In the letter, BDO acknowledged the importance of the inspection exercise, commenting that "an inherent part of our audit practice involves continuous improvement." However, the firm also said the report does not "lend itself to a portrayal of the overall high quality of our audit practice," since it reviews only a tiny sampling of audits. What's more, BDO pointed out that many of the issues reviewed "typically involved many decisions that may be subject to different reasonable interpretations."

    Deficiencies highlighted in the inspection report on Grant Thornton, meanwhile, included failures to "identify or appropriately address errors" in clients' application of GAAP. In addition, inadequacies were said to have been found with respect to performing necessary audit procedures, or lacking adequate evidence to support audit opinions. The Grant Thornton inspections were performed at on eight audits conducted between July 2008 and December 2008.

    In five audits, the PCAOB said inspectors found deficiencies in testing benefit plan measurements and disclosures. In four of those audits, Grant Thornton was said to have failed to test the existence and valuation of assets held in the issuer's defined-benefit pension plan. In one audit, the board said, the accounting firm failed to test the valuation of real estate and hedge fund investments and a guaranteed investment contract held by the client's defined-benefit pension plan.

    One client amended three of its post-retirement benefit plans to eliminate certain benefits, and Grant Thornton "failed to evaluate whether the issuer's accounting" was appropriate, said the report. In another audit, the accounting firm allegedly did not perform sufficient procedures to evaluate whether the assumptions related to the discount rate and long-term rate of return on plan assets — provided by the client's actuary — were reasonable.

    In a separate audit, a client acquired a public company that was described as having six reporting units. The client recorded the fair values of the net assets of each reporting unit according to the valuations provided by a specialist. But according to the inspection report, Grant Thornton did not audit the acquisition transaction sufficiently.

    In particular, the firm neglected to evaluate which of the fair-value estimates represented the "best estimate" with regard to two units that were hit with an economic penalty for having a lower total fair value than their net assets, the inspectors said. They also concluded that Grant Thornton did not do a sufficient auditing job when it failed to note whether it was appropriate for the specialist to use liquidation values for two other units.

    Continued in article

    Bob Jensen's threads on BDO and Grant Thornton are at

    Bob Jensen's threads on professionalism and independence in auditing are at

    Ghost writers for the halls of academe
    Sen. Charles E. Grassley, an Iowa Republican who has been investigating financial conflicts of interest in medicine, is now urging the National Institutes of Health to combat the practice of university researchers' signing their names to scientific papers that were actually prepared by ghostwriters working for drug companies. At least three Columbia University researchers signed their names to articles financed by the pharmaceutical maker Wyeth, The New York Times reported.
    Chronicle of Higher Education, August 19, 2009 ---

    Update about a professor of psychology
    "Professor at Canada's McGill U. Admits Signing Research Generated by Drug Maker," by Paul Basken, Chronicle of Higher Education, August 24, 2009 ---

    Bob Jensen's threads on Professors Who Cheat are at |

    Bob Jensen's threads on ghost students on campus are at

    The Russians are Scamming; The Russians are Scamming
    "Bank-fraud scam alleged in Denver and Aurora:  Investigators say 700 people were involved in a Denver-based scheme run by Russian immigrants, with losses topping $80 million," by Felisa Cardona, The Denver Post, August 15, 2009 ---

    A alleged massive organized bank-fraud scheme involving 16 Russian immigrants was busted by federal agents Friday, with 15 raids at several locations, including an Aurora auto dealership and a Denver medical-marijuana business.

    Federal agents said the Denver-based scheme led to losses of more than $80 million and involved 700 people — mostly students in the U.S. on visas who were recruited by the criminal enterprise.

    Described by authorities as a "bust out" scam, the allegations involved using the identity and credit line of a business to obtain loans and goods with no intention of repaying the money or paying for the merchandise, according to the case affidavit unsealed Friday. Additionally, some of the 700 obtained credit cards to buy luxury items with no intention of paying for them, while others took out cash loans without repaying, it is alleged.

    As part of the investigation, federal agents searched CannaMed, a medical-marijuana dispensary on Leetsdale Drive in Denver. But medical marijuana was not the focus of the search or the investigation, said Jeff Dorschner, spokesman for the Colorado U.S. attorney's office.

    "The focus of the investigation is fraud and has nothing to do with medical marijuana, and there is no link to the initial investigation and medical marijuana," he said.

    Medical marijuana is legal in Colorado. But under federal law, once a federal agent comes in contact with marijuana, the plants must be seized because the drug is illegal.

    A person involved with the medical-marijuana dispensary is potentially involved in unrelated criminal conduct, according to a source close to the investigation.

    Federal Bureau of Investigation agents also came in contact with a marijuana-growing operation at another home that was searched Friday.

    Maaliki Motors on South Havana Street in Aurora was raided as well, but the business was searched solely because some of the suspect credit cards were used there to purchase vehicles, according to the affidavit.

    Valeria Igorevna Glukhova, 22, used a Washington Mutual credit card on Sept. 22, 2008, at the dealership and spent $10,000 on a 2005 Lexus RX 330, court records say. Glukhova has not been arrested.

    Four women were arrested during the bust, but only two were in U.S. District Court in Denver on Friday for an initial appearance.

    Natallia Vishnevskaya, 26, and Nadezda Nikitina, 23, remained in custody and through a Russian interpreter were told by U.S. Magistrate Judge Michael Hegarty that they have a detention hearing Wednesday to determine whether they should be released on bail.

    Vishnevskaya and Nikitina are each charged with bank fraud and submitting a false and fraudulent application for credit. The charges carry maximum terms of 30 years in prison.

    The court documents say that Nikitina formed a business, A&N Enterprises, and filed articles of organization with the Colorado Secretary of State.

    However, the Colorado Department of Labor reported that she did not have any employment income at the time she filled out applications for credit on which she said she earned $180,000 a year.

    In May 2008, Nikitina tried to buy Jet Skis at Vickery Motorsports, and the store denied her loan application when it saw the number of loans on her credit reports.

    Susan Ghardashyan, 69, and Seda Sahakyan, 77, were taken to a medical facility after their arrests. They may make an initial appearance in court next week, but the charges against them were unavailable Friday.

    Court documents say Ghardashyan spent $20,300 at Maaliki Motors from February to April using a Target National Bank Card and another $10,000 on a Nordstrom card at the dealership. In late February, two attempts were made at charging another $21,000 to the Nordstrom card at Maaliki, but the charges were declined, the records show.

    Dorschner declined to comment on whether anyone involved in the businesses knew that the cards were being used fraudulently.

    Bob Jensen's fraud updates are at

    Bank of America pays $33M SEC fine over Merrill bonuses
    Bank of America Corp. has agreed to pay a $33 million penalty to settle government charges that it misled investors about Merrill Lynch's plans to pay bonuses to its executives, regulators said Monday. In seeking approval to buy Merrill, Bank of America told investors that Merrill would not pay year-end bonuses without Bank of America's consent. But the Securities and Exchange Commission said Bank of America had authorized New York-based Merrill to pay up to $5.8 billion in bonuses. That rendered a statement Bank of America mailed to 283,000 shareholders of both companies about the Merrill deal "materially false and misleading," the SEC said in a statement.
    Yahoo News, August 3, 2009 ---

    Bank of America Not Punished Enough
    "Judge Rejects Bank of America's $33M Fine," SmartPros, August 11, 2009 ---

    A federal judge in New York refused to accept a $33 million fine imposed on Bank of America for deceiving investors in its purchase of Merrill Lynch.

    Bank of American did not admit to any wrongdoing in the pre-trial settlement with the Securities and Exchange Commission. But judge Jed Rakoff not only said the fine was too small, but told the SEC to name the executives responsible for the deception, The New York Times reported Tuesday.

    Rakoff said the two financial firms "effectively lied to their shareholders," by paying Merrill Lynch employees $3.6 billion in bonuses after the deal closed in January.

    Rakoff said the fine was "strangely askew" given the multi-billion-dollar deal and the $45 billion in government bailout funds Bank of America has accepted, much of it to help the bank absorb Merrill Lynch's losses.

    "Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?" Rakoff asked.

    SEC and Bank of America attorneys defended their position, but Rakoff refused to budge, ordering a new hearing on the issue in two weeks, the newspaper said.

    Bob Jensen's threads on the banking crisis are at

    "13 Indicted In $100 Million Mortgage Fraud Case,"  by Lisa Chow, NPR (audio), July 9, 2009 --- 

    Prosecutors in New York have charged 13 people with running a massive mortgage fraud scheme. They say everyone was in on the alleged scheme: lawyers, appraisers and mortgage brokers.

    According to the indictment, mortgage company AFG Financial Group, based on Long Island, targeted properties whose owners were starting to default on their mortgages.

    The company recruited "straw buyers" — people with good credit scores — to apply for a loan to buy the target property, while promising the distressed owners that they'd get to stay in the home.

    The indictment says they paid appraisers to inflate the value of the property. Then they allegedly paid off lawyers to represent all parties: the seller, the buyer and the bank at the closing.

    Manhattan District Attorney Robert Morgenthau says the group fraudulently obtained $100 million in mortgage loans.

    "One of the morals of this case is there is no free lunch," Morgenthau says. "People with distressed properties thought they were being bailed out. They didn't look carefully at all at what the transaction was."

    Morgenthau says 25 people were involved in the scheme, and 12 already have pleaded guilty.

    Bob Jensen's fraud updates are at

    Bob Jensen's threads on mortgage lending Greed, Sleaze, Bribery, and Lies ---

    New York's Pretty Young Things Are Turning to Crime
    Robin Katz is a "sexy 25-year-old financial planner working at Chase's Midtown headquarters," according to the New York Post, who allegedly ripped off a client to the tune of $110,000 so she could spend it "shopping" and "going out." Katz is a graduate of Smith College, and to judge by her Facebook friends—who hail from Yale, Harvard, Wellesley, Princeton, the Phillips Exeter Academy, etc.—she is pretty firmly ensconced in the ranks of America's elite youth. She certainly seemed pedigreed and trustworthy enough for her clients to entrust her with hundreds of thousands of dollars. Mistake!
    John Cook,, July 21, 2009 --- Click Here

    Bob Jensen's fraud updates are at

    Why did Bob Jensen cut up his "free airlines mileage" credit cards?

    Using such cards is now a bad deal relative to cards that provide cash discounts on nearly all purchases. In the past this added mileage from credit cards was a good deal and helped Erika and I get a number of free trips to Europe and elsewhere. Now these airline-miles credit cards are more of a scam, especially cards that charge an annual fee. The problem is the increased barriers airlines are putting up for redemption of the miles, especially the almost certain likelihood that one or more legs of your planned itinerary will not have free seating available.

    My advice:  Get a free credit card that offers cash discounts on almost all purchases. Shop around! There are some good deals in this regard and bad deals for airline miles. The airlines now have so many billions in outstanding liabilities for free miles that they are increasingly being creative on how to avoid providing free redemptions. Also the huge reduction in the numbers of flights scheduled by most all airlines is another bummer.

    About the only good deal remaining for free miles, at least for me, is the Southwest Airlines free ticket deal, and you don't need any particular credit card to get this deal. Southwest Airlines, to my knowledge, is the only major airline to consistently earn a profit year-to-year. There are a lot of reasons why!

    "Gauging the Worth of a Frequent-Flier Credit Card," by Ron Lieber, The New York Times, August 16, 2008 --- Click Here

    One after the other in recent weeks, airlines have altered their frequent-flier mile programs, adding fees, taking away bonuses and raising the number of miles you need for some free tickets.

    But lost in fliers’ frustration over the changes is this: It may make more sense to change the credit card you use, not the airline you fly.

    Consumers are currently holding about 45 million credit cards issued by United States banks that reward their users with frequent-flier miles, according to The Nilson Report, a payments systems newsletter. That number has held steady for three years.

    This may be the year that number starts dropping. After a certain point, it will no longer make sense for many people to pay the annual fees that mileage cards usually charge and pay new fees to book tickets or upgrades. Will they also want to spend tens or hundreds of thousands of dollars on a card just so they can try to redeem miles for a single free plane ticket?

    I’ve come up with five questions to ask yourself if you’ve still got a mileage credit card at the top of your wallet, and a number of alternatives for different types of cards. But first, some snippets from the program changes, just in case you’ve missed them:

    US Airways has stopped giving bonus miles to members of its Dividend Miles program who have elite status, and the airline also added reward booking fees that range from $25 to $50.

    American added a new online booking fee for rewards tickets and is about to raise the number of miles required for many flights. Moreover, its customers will soon have to pay new or increased co-payments much of the time, along with their frequent-flier miles, for upgrades to the front of the plane.

    Delta added its own surcharges and also raised the number of miles customers will need to redeem for many free flights. Perhaps most interestingly, it introduced a three-tier price chart. For flights to 49 states (not including Hawaii) and Canada, for example, you could end up trading 25,000, 40,000 or 60,000 miles for a round-trip flight.

    That 25,000-mile price for a free ticket has become somewhat sacred. The major airlines have increased the prices in miles for many other tickets, but not this one. How many people will give up on finding available seats at the 25,000 level, then hand over 40,000 or 60,000 miles? It’s hard to say, but Delta probably hopes that it is a lot.

    The availability question gets to the heart of the matter. How hard is it to get free seats? And is it getting harder? The frustrating thing about this whole game is that we don’t really know the answers.

    We don’t know how often average fliers get their first (or 10th) choice of flight or destination when trying to use their miles or just give up and buy the ticket. The airlines don’t tell us how many seats are available on any given flight or if more will become available later. Joe Brancatelli, proprietor of the business travel site, refers to frequent-flier programs as unregulated lotteries, which gets it about right.

    Are fewer seats available for reasonable amounts of miles? Well, most major airlines are reducing the number of seats they fly, often by double-digit percentages. Flights are extremely crowded. But the airlines keep selling their miles to credit card companies and others that want to give them away to their own customers.

    That means more miles are chasing fewer seats, even if the airlines aren’t reducing the number of seats on each flight that customers can book with a reasonable amount of miles.

    It’s tempting to throw up your hands in despair at the lack of information. But there are several questions that can help you determine whether you want to keep adding miles from credit card spending to the miles you earn on the plane. Start with these:

    DO YOU CARRY A BALANCE? If you don’t pay your bill in full each month, you’re excused from this discussion. You’ll do better by using cards with lower interest rates than frequent-flier mile cards, which generally have pretty high rates.

    ARE YOUR CHILDREN IN SCHOOL? If they are, you’ll be fighting everyone else who wants to travel at the same time. The airlines, knowing your desperation to get out of town, may make fewer free seats available during school vacations, since the airline will probably sell all the seats on those flights anyway.

    DO YOU HAVE ELITE STATUS? Some airlines — like American, Northwest, United and Continental — carve out additional inventory of free seats at their lower mileage levels for some or all customers with elite status. That inventory, plus the bonus miles that most airlines still offer to elite members, make a mileage credit card more attractive.

    ARE YOU A BIG SPENDER? If you’re wealthy, or can run business expenses through your card, you can earn six figures in miles from card spending alone each year. A huge mileage balance gives you the ability to exchange those miles for premium-class overseas tickets, which could cost $10,000 or more if you bought them with cash. Miles are worth a lot more if you redeem them for this sort of travel.

    Continued in article

    Bob Jensen's threads on the dirty secrets of credit card companies are at

    "A Timeline of the Madoff Fraud," The New York Times, June 29, 2009 ---

    New Hints at Why the SEC Failed to Seriously Investigate Madoff's Hedge Fund
    After being repeatedly warned for six years that this was a criminal scam
    It's beginning to look like a family "affair"

    (The SEC's) Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported. Swanson, no longer with the agency, declined to comment, the Post said.
    "SEC lawyer raised alarm about Madoff: report," Reuters, July 2, 2009 ---
    The Washington Post account is at --- Click Here

    A U.S. Securities and Exchange Commission lawyer warned about irregularities at Bernard Madoff's financial management firm as far back as 2004, The Washington Post reported on Thursday, citing agency documents and sources familiar with the investigation.

    Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, sent emails to a supervisor saying information provided by Madoff during her review didn't add up and suggesting a set of questions to ask his firm, the report said.

    Several of the questions directly challenged Madoff activities that turned out to be elements of his massive fraud, the newspaper said.

    Madoff, 71, was sentenced to a prison term of 150 years on Monday after he pleaded guilty in March to a decades-long fraud that U.S. prosecutors said drew in as much as $65 billion.

    The Washington Post reported that when Walker-Lightfoot reviewed the paper documents and electronic data supplied to the SEC by Madoff, she found it full of inconsistencies, according to documents, a former SEC official and another person knowledgeable about the 2004 investigation.

    The newspaper said the SEC staffer raised concerns about Madoff but, at the time, the SEC was under pressure to look for wrongdoing in the mutual fund industry. Walker-Lightfoot was told to focus on a separate probe into mutual funds, the report said.

    One of Walker-Lightfoot's supervisors on the case was Eric Swanson, an assistant director of her department, the Post reported, citing two people familiar with the investigation.

    Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported.

    Swanson, no longer with the agency, declined to comment, the Post said.

    SEC spokesman John Nester also declined to comment, citing the ongoing investigation by the agency's inspector general, the newspaper said.

    Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
    One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

    CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at;cbsCarousel
    The title of the video is “The Man Who Would Be King.”
    Also see

    Between 2002 and 2008 Harry Markopolos repeatedly told (with indisputable proof) the Securities and Exchange Commission that Bernie Madoff's investment fund was a fraud. Markopolos was ignored and, as a result, investors lost more and more billions of dollars. Steve Kroft reports.

    Markoplos makes the SEC look truly incompetent or outright conspiratorial in fraud.

    I'm really surprised that the SEC survived after Chris Cox messed it up so many things so badly.

    As Far as Regulations Go

    An annual report issued by the Competitive Enterprise Institute (CEI) shows that the U.S. government imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the $1.2 trillion generated by individual income taxes, and amounts to $3,849 for every American citizen. According the 2009 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, the government issued 3,830 new rules last year, and The Federal Register, where such rules are listed, ballooned to a record 79,435 pages. “The costs of federal regulations too often exceed the benefits, yet these regulations receive little official scrutiny from Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report. “The U.S. economy lost value in 2008 for the first time since 1990,” Crews said. “Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on Americans beyond the $3 trillion officially budgeted” through the regulations.
     Adam Brickley, "Government Implemented Thousands of New Regulations Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---

    Jensen Comment
    I’m a long-time believer that industries being regulated end up controlling the regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur Levitt to Chris Cox do absolutely nothing to change my belief ---

    How do industries leverage the regulatory agencies?
    The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

    Bob Jensen's fraud updates are at

    "Executive Overconfidence and the Slippery Slope to Fraud," by Catherine M. Schrand University of Pennsylvania - Accounting Department  and Sarah L. C. Zechman University of Chicago Booth School of Business, SSRN, May 1, 2009 ---

    We propose that executive overconfidence, defined as having unrealistic (positive) beliefs about future performance, increases a firm’s propensity to commit financial reporting fraud. Moderately overconfident executives are more likely to “borrow” from the future to manage earnings thinking it will be sufficient to cover reversals. On average, however, they are wrong, and the managers are compelled to engage in greater earnings management or come clean. Using industry, firm, and executive level proxies for overconfidence, we provide evidence consistent with this hypothesis. Additional analysis suggests a distinction between moderately and extremely overconfident executives. The extremely overconfident executives are simply opportunistic. We find no evidence that non-fraud firms have stronger governance to mitigate fraud.

    Keywords: executive overconfidence, fraud, earnings management

    Bob Jensen's threads on earnings management are at

    "Public Pensions Cook the Books:  Some plans want to hide the truth from taxpayers," by Andrew Biggs, The Wall Street Journal, July 6, 2009 ---

    Here's a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don't want to raise contributions. Cutting benefits is out of the question. To be honest, you'd really rather not even admit there's a problem, lest taxpayers get upset.

    What to do? For the administrators of two Montana pension plans, the answer is obvious: Get a new actuary. Or at least that's the essence of the managers' recent solicitations for actuarial services, which warn that actuaries who favor reporting the full market value of pension liabilities probably shouldn't bother applying.

    Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion.

    The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That's nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.

    Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that "If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration."

    Scott Miller, legal counsel of the Montana Public Employees Board, was more straightforward: "The point is we aren't interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory."

    While corporate pension funds are required by law to use low, risk-adjusted discount rates to calculate the market value of their liabilities, public employee pensions are not. However, financial economists are united in believing that market-based techniques for valuing private sector investments should also be applied to public pensions.

    Because the power of compound interest is so strong, discounting future benefit costs using a pension plan's high expected return rather than a low riskless return can significantly reduce the plan's measured funding shortfall. But it does so only by ignoring risk. The expected return implies only the "expectation" -- meaning, at least a 50% chance, not a guarantee -- that the plan's assets will be sufficient to meet its liabilities. But when future benefits are considered to be riskless by plan participants and have been ruled to be so by state courts, a 51% chance that the returns will actually be there when they are needed hardly constitutes full funding.

    Public pension administrators argue that government plans fundamentally differ from private sector pensions, since the government cannot go out of business. Even so, the only true advantage public pensions have over private plans is the ability to raise taxes. But as the Congressional Budget Office has pointed out in 2004, "The government does not have a capacity to bear risk on its own" -- rather, government merely redistributes risk between taxpayers and beneficiaries, present and future.

    Market valuation makes the costs of these potential tax increases explicit, while the public pension administrators' approach, which obscures the possibility that the investment returns won't achieve their goals, leaves taxpayers in the dark.

    For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, "it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors."

    Nevertheless, the National Association of State Retirement Administrators, an umbrella group representing government employee pension funds, effectively wants other public plans to take the same low road that the two Montana plans want to take. It argues against reporting the market valuation of pension shortfalls. But the association's objections seem less against market valuation itself than against the fact that higher reported underfunding "could encourage public sector plan sponsors to abandon their traditional pension plans in lieu of defined contribution plans."

    The Government Accounting Standards Board, which sets guidelines for public pension reporting, does not currently call for reporting the market value of public pension liabilities. The board announced last year a review of its position regarding market valuation but says the review may not be completed until 2013.

    This is too long for state taxpayers to wait to find out how many trillions they owe.

    Bob Jensen's threads on Off-Balance-Sheet Financing (OBSF) are at

    Bob Jensen's threads about fraud in government are at

    By analogy, this is why corporations selling securities to the public are required to have independent audits

    From MIT
    "NY AG: Facelift firm placed bogus online reviews," MIT's Technology Review, July 14, 2009 ---

    The online journal gave a chatty account of a problem-free face lift. "You will never regret it," the patient wrote.

    But the seemingly satisfied customer actually was an employee of the firm behind the Lifestyle Lift, writing as part of a company campaign to plant plugs for the procedure online, state Attorney General Andrew Cuomo said in announcing a $300,000 settlement with the company Tuesday.

    His office said the settlement appeared to be one of the first to address so-called astroturf marketing, or creating a bogus grassroots buzz about a product.

    Troy, Mich.-based Lifestyle Lift Inc. said its informational material now accurately reflects actual patients' comments and is clearly labeled as coming from the company.

    "We want to be acknowledged as a model of integrity and accuracy," company President Gordon Quick said in a statement.

    Widely advertised through television infomercials as a relatively quick and inexpensive form of face lift, the Lifestyle Lift has been performed on more than 100,000 people since 2001, according to the company. It's affiliated with a network of doctors in New York and 21 other states.

    The company has aggressively guarded its online reputation. In 2007, it sued an Arizona man who maintained a consumer-oriented Web site that included criticisms of Lifestyle Lift, saying the site's use of the procedure's name infringed on the company's trademark and amounted to false advertising. A federal judge in Michigan dismissed the case last year, saying the site was commentary protected by the First Amendment.

    But Lifestyle Lift also came up with another new way to fight back: Having staffers post glowing reviews, comments and testimonials that appeared to come from clients.

    "I need you to devote the day to doing more postings on the Web as a satisfied client," employees were told in one internal e-mail, according to the attorney general's office. Another internal message directed a worker to "put your wig and skirt on and tell them about the great experience you had."

    The disguised workers did that and more, sometimes pushing to get message boards to remove critical posts and even setting up pro-Lifestyle Lift Web sites that masqueraded as independent views, Cuomo's office said. The postings dated back to early 2007, the attorney general's office said.

    One such site featured a detailed "journal," stretching from a first consultation to two months after the procedure, and included photos and an exhortation to "GO FOR IT." Another supposed first-person account came complete with the names of the writer's children.

    "This company's attempt to generate business by duping consumers was cynical, manipulative and illegal," Cuomo said in a release. He said the tactics violated consumer protection laws.

    Lifestyle Lift said Tuesday the disputed endorsements were "representative of" real patients' comments but acknowledged they weren't rendered verbatim or labeled as coming from the company.

    The company, which said it has since changed management, will pay the state $300,000 in penalties and costs. The settlement came as the attorney general's office investigated the company's practices, without any litigation in court.

    The Federal Trade Commission is working on revising its nearly 30-year-old guidelines on the use of testimonials and endorsements to reflect the growth of online marketing. The review comes amid heightened attention to the role blogs and Internet comments can now play in a product's fortunes.

    In the meantime, the American Advertising Federation, an industry group, has its own guidelines specifying that testimonials "shall be limited to those of competent witnesses who are reflecting a real and honest opinion or experience."

    "We think the consumer has the right to know that an advertisement is an advertisement," spokesman Clark Rector said.

    Bob Jensen's threads on professionalism in auditing are at

    CPA auditors will undoubtedly be drawn into the Calpers lawsuit because of the way auditors went along with absurd underestimations of bad debt and loan loss reserves. For claims that auditors knew these reserves were badly underestimated see the citations at

    "Calpers Sues Over Ratings of Securities," by Leslie Wayne, The New York Times, July 14, 2009 ---

    The nation’s largest public pension fund has filed suit in California state court in connection with $1 billion in losses that it says were caused by “wildly inaccurate” credit ratings from the three leading ratings agencies.

    The suit from the California Public Employees Retirement System, or Calpers, a public fund known for its shareholder activism, is the latest sign of renewed scrutiny over the role that credit ratings agencies played in providing positive reports about risky securities issued during the subprime boom that have lost nearly all of their value.

    The lawsuit, filed late last week in California Superior Court in San Francisco, is focused on a form of debt called structured investment vehicles, highly complex packages of securities made up of a variety of assets, including subprime mortgages. Calpers bought $1.3 billion of them in 2006; they collapsed in 2007 and 2008.

    Calpers maintains that in giving these packages of securities the agencies’ highest credit rating, the three top ratings agencies — Moody’s Investors Service, Standard & Poor’s and Fitch — “made negligent misrepresentation” to the pension fund, which provides retirement benefits to 1.6 million public employees in California.

    The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied.”

    Calpers is seeking damages, but did not specify an amount. Steven Weiss, a spokesman for McGraw Hill, the parent company of Standard and Poor’s, said the company could not comment until it had been served and seen the complaint. Moody’s and Fitch did not respond to a request for comment.

    As the Obama administration considers an overhaul of the financial regulatory system, credit rating agencies have come in for their share of the blame in the recent market collapse. Critics contend that, rather than being watchdogs, the agencies stamped high ratings on many securities linked to subprime mortgages and other forms of risky debt.

    Their approval helped fuel a boom on Wall Street, which issued billions of dollars in these securities to investors who were unaware of their inherent risk. Lawmakers have conducted hearings and debated whether to impose stricter regulations on the agencies.

    While the lawsuit is not the first against the credit rating agencies, some of which face litigation not only from investors in the securities they rated but from their own shareholders, too, it does lay out how an investor as sophisticated as Calpers, which has $173 billion in assets, could be led astray.

    The security packages were so opaque that only the hedge funds that put them together — Sigma S.I.V. and Cheyne Capital Management in London, and Stanfield Capital Partners in New York — and the ratings agencies knew what the packages contained. Information about the securities in these packages was considered proprietary and not provided to the investors who bought them.

    Calpers also criticized what contends are conflicts of interest by the rating agencies, which are paid by the companies issuing the securities — an arrangement that has come under fire as a disincentive for the agencies to be vigilant on behalf of investors.

    In the case of these structured investment vehicles, the agencies went one step further: All three received lucrative fees for helping to structure the deals and then issued ratings on the deals they helped create.

    Calpers said that the three agencies were “actively involved” in the creation of the Cheyne, Stanfield and Sigma securitized packages that they then gave their top credit ratings. Fees received by the ratings agencies for helping to construct these packages would typically range from $300,000 to $500,000 and up to $1 million for each deal.

    These fees were on top of the revenue generated by the agencies for their more traditional work of issuing credit ratings, which in the case of complex securities like structured investment vehicles generated higher fees than for rating simpler securities.

    “The ratings agencies no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible,” according to the Calpers suit.

    The suit also contends that the ratings agencies continued to publicly promote structured investment vehicles even while beginning to downgrade them. Ten days after Moody’s had downgraded some securitized packages in 2007, it issued a report titled “Structured Investment Vehicles: An Oasis of Calm in the Subprime Maelstrom.”

    Bob Jensen's threads on the bad behavior of credit ratings agencies see

    September 2, 2009 message from Paul Bjorklund [PaulBjorklund@AOL.COM]


    Today, the Securities and Exchange Commission charged a Las Vegas-based CPA and his public accounting firm with securities fraud for issuing false audit reports that failed to comply with Public Company Accounting Oversight Board ("PCAOB") Standards and were often the product of high school graduates hired with little or no education or experience in accounting or auditing. The Commission's lawsuit, filed in federal district court in Las Vegas, Nevada, names Michael J. Moore ("Moore"), CPA, age 55, of Las Vegas, Nevada, and Moore & Associates Chartered ("M&A"), a Nevada corporation headquartered in Las Vegas, Nevada. Moore and M&A have agreed to settle the charges without admitting or denying the allegations.

    According to the SEC's complaint, Moore and M&A issued audit reports for more than 300 clients who consist of primarily shell or developmental stage companies with public stock quoted on the OTCBB or the Pink Sheets. The SEC alleges that Moore and M&A violated numerous auditing standards, including a failure to hire employees with adequate technical training and proficiency. The SEC further alleges that Moore and M&A did not adequately plan and supervise the audits, failed to exercise due professional care, and did not obtain sufficient competent evidence. Despite the audit failures, M&A issued and Moore signed audit reports falsely stating that the audits were conducted in accordance with PCAOB Standards. By issuing and signing these false audit reports, Moore and M&A violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and Regulation S-X Rule 2-02(b)(1).

    The SEC's complaint also alleges that Moore and M&A violated Sections 10A(a)(1) and10A(b)(1) of the Exchange Act by failing to include audit procedures designed to detect and report likely illegal acts. The complaint further alleges that Moore and M&A improperly modified audit documentation in violation of Regulation S-X Rule 2-06.

    To settle the Commission's charges, Moore and M&A consented to the entry of a final judgment permanently enjoining them from future violations of Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Regulation S-X Rules 2-02(b)(1) and 2-06 and ordering them to disgorge $179,750 plus prejudgment interest of $10,151.59. Moore separately agreed to pay a $130,000 penalty. Moore and M&A also consented to the entry of an administrative order that makes findings and suspends them from appearing or practicing before the Commission as an accountant pursuant to Rule 102(e)(3) of the Commission's Rules of Practice.


    "Study Tallies Corporations Not Paying Income Tax," by Lynley Browning, The New York Times, August 12, 2008 ---

  • Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress.

    The study, which is likely to add to a growing debate among politicians and policy experts over the contribution of businesses to Treasury coffers, did not identify the corporations or analyze why they had paid no taxes. It also did not say whether they had been operating properly within the tax code or illegally evading it.

    The study covers 1.3 million corporations of all sizes, most of them small, with a collective $2.5 trillion in sales. It includes foreign corporations that do business in the United States.

    Among foreign corporations, a slightly higher percentage, 68 percent, did not pay taxes during the period covered — compared with 66 percent for United States corporations. Even with these numbers, corporate tax receipts have risen sharply as a percentage of federal revenue in recent years.

    The G.A.O. study was done at the request of two Democratic senators, Carl Levin of Michigan and Byron L. Dorgan of North Dakota. In recent years, Senator Levin has held investigations on tax evasion and urged officials and regulators to examine whether corporations were abusing tax laws by shifting income earned in higher-tax jurisdictions, like the United States, to overseas subsidiaries in low-tax jurisdictions.

    Senator Levin said in written remarks on Tuesday that “this report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

    But the G.A.O. said that it did not have enough data to address the role of what some policy experts say is a crucial factor in profits sent overseas.

    That factor, known as transfer pricing, involves corporations’ charging their overseas subsidiaries lower prices for goods and services, a common move that lowers a corporation’s tax bill. A number of corporations are in transfer-pricing disputes with the Internal Revenue Service.

    Either way, the nearly 1,000 largest United States corporations were more likely than smaller ones to pay taxes.

    In 2005, one in four large United States corporations paid no taxes on revenue of $1.1 trillion, compared with 66 percent in the overall pool. Large corporations are those with at least $250 million in assets or annual sales of at least $50 million.

    Joshua Barro, a staff economist at the Tax Foundation, a conservative research group, said that the largest corporations represented only 1 percent of the total number of corporations but more than 90 percent of all corporate assets.

    The vast majority of the large corporations that did not pay taxes had net losses, he said, and thus no income on which to pay taxes. “The notion that there is a large pool of untaxed corporate profits is incorrect.”

    In 2004, a G.A.O. study said that 7 in 10 of all foreign corporations doing business in the United States, or foreign-controlled corporations, paid no taxes from 1996 through 2000, compared with 6 in 10 United States corporations.

    This article has been revised to reflect the following correction:

    Correction: August 14, 2008
    An article on Wednesday about a Government Accountability Office study reporting on the percentage of corporations that paid no federal income taxes from 1998 through 2005 gave an incorrect figure for the estimated tax liability of the 1.3 million companies covered by the study. It is not $875 billion. The correct amount cannot be calculated because it would be based on the companies’ paying the standard rate of 35 percent on their net income, a figure that is not available. (The incorrect figure of $875 billion was based on the companies’ paying the standard rate on their $2.5 trillion in gross sales.)


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    Bob Jensen's threads on pro forma frauds are at 

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    The Saga of Auditor Professionalism and Independence ---

    Incompetent and Corrupt Audits are Routine ---

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    Future of Auditing --- 




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