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

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

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

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

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

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

Investor Protection Trust --- http://www.investorprotection.org/
This site provides teaching materials.

The Investor Protection Trust provides independent, objective information to help consumers make informed investment decisions. Founded in 1993 as part of a multi-state settlement to resolve charges of misconduct, IPT serves as an independent source of non-commercial investor education materials. IPT operates programs under its own auspices and uses grants to underwrite important initiatives carried out by other organizations.

Bob Jensen's threads on fraud prevention and fraud reporting ---
http://www.trinity.edu/rjensen/FraudReporting.htm

Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

"Spotting a hoax using statistics," Understanding Uncertainty, August 3, 2011 --- Click Here
http://understandinguncertainty.org/spotting-hoax-using-statistics?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+UnderstandingUncertainty+%28Understanding+Uncertainty%29

"Embezzling Accountant Will Pay Back Stolen Money and Pay For the Audit That Caught Him," by Adrienne Gonzalez, Going Concern, August 23, 2011 ---
http://goingconcern.com/2011/08/embezzling-accountant-will-pay-back-stolen-money-and-pay-for-the-audit-that-caught-him/

Jensen Comment
This guy's employers must've had zero internal controls.

"Embezzling Accountant Will Pay Back Stolen Money and Pay For the Audit That Caught Him," by Adrienne Gonzalez, Going Concern, August 23, 2011 ---
http://goingconcern.com/2011/08/embezzling-accountant-will-pay-back-stolen-money-and-pay-for-the-audit-that-caught-him/

Jensen Comment
This guy's employers must've had zero internal controls.

August 26, 2011 reply from Anne Oppegard

Bob, On Tuesday you posted

"*Embezzling Accountant Will Pay Back Stolen Money and Pay For the Audit That Caught Him*," by Adrienne Gonzalez, Going Concern, August 23, 2011 --- http://goingconcern.com/2011/08/embezzling-accountant-will-pay-back-stolen-money-and-pay-for-the-audit-that-caught-him/  on the AECM board. I chucked to myself when I read your comment that "This guy's employer must've had zero internal controls."

Well ... if your employee serves in a volunteer capacity as the chair of the local municipality's audit committee and is on record speaking strongly in support of the city establishing a "1-800 whistle blower line" , and has exhibited concern for the continual strengthening of controls then you might think you have the paragon of accounting propriety working for you....

I'm painfully close to this situation here in Sioux Falls, South Dakota. I sit on that that City Audit Committee which Mr. Whitsell chaired! As they say ... "Could have knocked me over with a feather." when the news of his embezzlement broke. I'm pondering whether I should take my senior auditing class on a field trip to the local court house on the date of Mr. Whitsell's sentencing...

Best regards, Anne Oppegard

Anne M. Oppegard, Ph.D.
Associate Professor
Business Administration Department
Augustana College Sioux Falls, SD 57197

http://www.augie.edu/academics/business-accounting

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

"Crooked CFO: KPMG knows nothing about the character traits of criminals,” by Calib Newquist, Going Concern, August 19, 2011 ---
http://goingconcern.com/2011/08/crooked-cfo-kpmg-knows-nothing-about-the-character-traits-of-criminals/

Earlier this week we shared with you the latest analysis from KPMG that listed “key fraudster traits” and some of them seemed to describe a lot of the people you have worked or are currently working for. Things like “volatile,” “unreliability,” “unhappy,” and “self-interested” describes everyone I’ve ever been in around in the corporate world to one extent or another.

Since I was skeptical of this list, I asked Sam Antar what he thought of it. If you’ve been reading us for awhile, you’re familiar with Sam. If you’re new, I’ll do a quick refresher. Sam was the CFO of Crazy Eddie’s and was one of the masterminds behind one of the biggest financial frauds of the 1980s. While you (and I) were eating cereal in front of the TV on Saturday morning, Sam and his cousin Eddie were selling electronics and home appliances to our parents for rock bottom prices, while ripping off the government and investors for untold millions of dollars. In other words, the guy is a crook and knew/knows lots of crooks and knows their hopes (read: money), their dreams (read: money) all that crap (read: more money) and what they’ll do to get them. With that, Sam told me what he thought of KPMG’s analysis:

Continued in article

"Guest Post: Fraud Girl – Can We Detect Lying From Nonverbal Cues?" Simoleon Sense, June 20, 2010 ---
 http://www.simoleonsense.com/guest-post-fraud-girl-can-we-detect-lying-from-nonverbal-cues/
 This includes a video of Jeff Skilling's testimony:  Can you detect his lies?

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

Mary Schapiro --- http://en.wikipedia.org/wiki/Mary_Schapiro

It (the Report) says Ms. Schapiro agreed with a decision to keep Mr. Becker from testifying before Congress, where he would have disclosed his financial interest in the Madoff account.
See below

"S.E.C. Hid Its Lawyer’s Madoff Ties," by Louise Story and Gretchen Morgenson, The New York Times, September 20, 2011 ---
http://www.nytimes.com/2011/09/21/business/sec-refers-ex-counsels-actions-on-madoff-to-justice-dept.html?_r=1&ref=business

After Bernard L. Madoff’s giant Ponzi scheme was revealed, the Securities and Exchange Commission went to great lengths to make sure that none of its employees working on the case posed a conflict of interest, barring anyone who had accepted gifts or attended a Madoff wedding.

But as a new report made clear on Tuesday, one top official received a pass: David M. Becker, the S.E.C.’s general counsel, who went on to recommend how the scheme’s victims would be compensated, despite his family’s $2 million inheritance from a Madoff account.

Mr. Becker’s actions were referred by H. David Kotz, the inspector general of the S.E.C., to the Justice Department, on the advice of the Office of Government Ethics, which oversees the ethics of the executive branch of government.

The report by Mr. Kotz provides fresh details about the weakness of the agency’s ethics office and reveals that none of its commissioners, except for Mary L. Schapiro, its chairwoman, had been advised of Mr. Becker’s conflict.

It says Ms. Schapiro agreed with a decision to keep Mr. Becker from testifying before Congress, where he would have disclosed his financial interest in the Madoff account.

Mr. Kotz’s inquiry also produced evidence that at least one S.E.C. employee had been barred from working on Madoff-related matters because of a conflict, suggesting there was a double standard at the agency.

The findings are another black eye for an agency that has tried to be more aggressive in recent years after failing to uncover the Madoff fraud. More recently, the S.E.C. has been criticized for routine destruction of some enforcement documents that might have been useful in later investigations.

The agency has also been criticized for its slow pace in writing new financial regulations mandated by the Dodd-Frank law and for the dearth of cases brought against individuals at major financial companies that were involved in the mortgage crisis.

Federal conflict of interest law requires government employees to be disqualified from participating in a matter “if it would have a direct and predictable effect on the employee’s own financial interests.”

Nevertheless, Mr. Becker “participated personally and substantially in particular matters in which he had a personal financial interest,” Mr. Kotz wrote in his report.

Though the referral was made to the Justice Department’s criminal division, it could be handled as a civil matter. A Justice Department spokeswoman declined to comment, other than confirming the referral.

Mr. Becker’s tie to the Madoff situation came from a Madoff account held by his mother, who died in 2004. Her three sons inherited the account and closed it shortly thereafter, with a $1.5 million profit, based on Mr. Madoff’s fraud.

Mr. Madoff carried out an enormous Ponzi scheme for more than a decade, costing investors more than $20 billion in actual losses. He is now serving a 150-year sentence in a prison in North Carolina.

Mr. Becker’s lawyer, William R. Baker III, said in a statement that the report confirmed that Mr. Becker had notified seven senior S.E.C. officials about his late mother’s Madoff account, including Ms. Schapiro and the agency’s designated ethics officer.

“The inspector general concluded that ‘none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff liquidation,’ “ wrote Mr. Baker, a lawyer at Latham & Watkins who worked at the S.E.C. for 15 years, working alongside Mr. Becker at times. He said the report contained “a number of critical factual and legal errors,” but declined to enumerate them. Mr. Becker left the S.E.C. last February.

Continued in article

"The SEC's Ethics:  Washington's double standard on conflicts of interest," The Wall Street Journal, September 23, 2011 ---
http://online.wsj.com/article/SB10001424053111903703604576584620319633188.html#mod=djemEditorialPage_t

Who says partisanship rules Washington? House Republicans showed remarkable forbearance yesterday toward SEC Chairman Mary Schapiro over an ethics flap involving the Bernie Madoff case and conflict-of-interest laws.

"What is clear about this situation is that you did make a mistake. You admitted such and you said had you known then what you now know, you would have acted differently," Rep. Patrick McHenry (R., N.C.) told Ms. Schapiro at a public hearing. We doubt Ms. Schapiro and her SEC cops would have been so forgiving toward someone in private life who made the same "mistake."

We're referring to this week's remarkable report from SEC Inspector General David Kotz disclosing how the SEC's former top lawyer, David Becker, directly handled matters relating to the Madoff fraud case despite his mother's $2 million investment with the firm, to which he and his brothers were heirs.

Mr. Becker's involvement potentially influenced whether investors who got money out of the Madoff operation before it was exposed could be shielded from so-called "clawback" lawsuits brought by those liquidating the Madoff estate. Mr. Kotz says Mr. Becker "participated personally and substantially in particular matters in which he had a personal financial interest" through his inheritance of his mother's estate.

The conflict here would seem to be obvious, and Mr. Becker did at least disclose it—to Ms. Schapiro shortly after arriving at the SEC in February 2009. "I did precisely what I was supposed to do," he told Congress yesterday. "I identified a matter that required legal advice from the SEC's Ethics Office. I sought that advice, received it and followed it."

But that still leaves the role played by Ms. Schapiro, who never told her fellow commissioners about the conflict, going so far as to let them vote on how to divide up the Madoff assets, a change from which Mr. Becker stood to benefit. Only in February, after Mr. Becker was named in a clawback lawsuit by Madoff trustee Irving Picard, did the commissioners learn of the conflicts by reading the press.

Ms. Schapiro declined our request for an explanation this week, but she has said she would have had Mr. Becker recused if she had "understood that he had any financial interest in how this was resolved." But then why did she think he had informed her of his family's Madoff connection? She also said she would have wanted to disclose the Madoff connection if Mr. Becker had testified on the issue "so that we were completely forthcoming with Congress."

Hmmm. The same IG report also highlights that the SEC decided not to have Mr. Becker testify to Congress on Madoff issues lest his conflict become public. Mr. Becker told the IG under oath that after he mentioned the need to disclose the inheritance up front if he did go before Congress, the SEC's Office of Intergovernmental and Legislative Affairs Director Eric Spitler wrote that "now that I think about it, I think it would be better if someone else testified. My concern is not that there's anything wrong with it," but "when you're in a political environment . . . it would be a distraction."

Mr. Spitler has said that Ms. Schapiro agreed that Mr. Becker shouldn't appear before Congress, though she says she does not recall how the matter was settled.

The only word for all of this is astonishing. We don't think all conflicts-of-interest are disqualifying, and they can be managed to avoid trouble. But this one isn't a close call. Imagine how the SEC's enforcement cops would handle a private company that let a general counsel play such a role. For such a conflict to be passed off as inconsequential, and then covered up, by the agency that is supposed to investigate bad financial actors is more than a mistake. It's faulty judgment that suggests an ethical blind spot.

Continued in article

Bob Jensen's threads on the Madoff Ponzi Scandal ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

Jensen Comment
I just do not have an ounce of respect for any of the previous SEC directors who sold their souls to and integrity to protecting the tycoons by letting them off easy when they stole billions from investors.Mary Schapiro is no exception.

These two items say a lot (bad) about Mary Shapiro's SEC --- http://en.wikipedia.org/wiki/Mary_Shapiro

"Clawbacks Without Claws," by Gretchen Morgenson, The New York Times, September 10, 2011 ---
http://www.nytimes.com/2011/09/11/business/clawbacks-without-claws-in-a-sarbanes-oxley-tool.html?_r=2&emc=tnt&tntemail1=y

AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books.

Fair Game Clawbacks Without Claws By GRETCHEN MORGENSON Published: September 10, 2011

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AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books. Add to Portfolio

Diebold Inc New Century Financial Corp NutraCea

Go to your Portfolio »

Under the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission was encouraged to hit executives where it hurts — in the wallet — if they certified financial results that turned out to be, in a word, bogus.

SarbOx was supposed to keep managers honest. They would have to hand back incentive pay like bonuses, even if they didn’t fudge the accounts themselves.

That, anyway, was the idea. The record suggests a bark decidedly worse than its bite. The S.E.C. brought its first case under Section 304 of SarbOx in 2007. Since then, it has filed cases demanding that only 31 executives at only 20 companies return some pay.

In 2007 and 2008, most of the cases involved shenanigans with stock options and produced some big recoveries. In the wake of the financial crisis, the dollars recouped have amounted to an asterisk. Since the beginning of 2009, the S.E.C. has pursued 18 executives at 10 companies. So far, it has recovered a total of $12.2 million from nine former executives at five. The other cases are pending.

“It seems like a dormant enforcement tool,” Jack T. Ciesielski, president of R. G. Associates and editor of The Analyst’s Accounting Observer, says of the SarbOx provision. “It was supposed to be a deterrent, but it’s only really a deterrent if they use it.”

How assiduously the S.E.C. enforces this aspect of Sarbanes-Oxley is important. Only the S.E.C. can bring cases under Section 304. Companies can’t. Nor, it appears, can shareholders. In 2009, the Court of Appeals for the Ninth Circuit ruled that there was no private cause of action for violations of Section 304.

Half the companies pursued by the S.E.C. during the past three years have been small and relatively obscure.

For example, the commission sued executives at SpongeTech Delivery Systems (2008 revenue: $5.6 million), contending that the company had booked $4.6 million in phony sales that year. NutraCea, a maker of dietary supplements with 2008 sales of $35 million, was sued along with Bradley D. Edson, its former chief executive, over what the S.E.C. called its recording of $2.6 million in false revenue. An executive at Isilon Systems, a data storage company, was pursued because, the S.E.C. maintained, the company had inflated sales by $4.8 million during 2007.

No money has been recovered in the SpongeTech or Isilon matters, which are still pending. Mr. Edson, who could not be reached for comment, returned his 2008 bonus of $350,000.

In all cases when executives have returned money, they have neither admitted nor denied allegations.

The S.E.C. typically recovers more money from executives at bigger companies. But top executives are rarely compelled to return all their incentive pay.

In a case brought last year against Navistar, for example, the S.E.C. contended that the company had overstated its income by $137 million from 2001 through 2005. Daniel C. Ustian, who is Navistar’s chief executive and who was not charged with wrongdoing, returned common stock worth $1.32 million. He had received $2.2 million in incentive pay and restricted stock during the time that the S.E.C. says Navistar inflated its accounting. A company spokeswoman said Mr. Ustian would not comment.

Robert C. Lannert, Navistar’s former chief financial officer, who also was not charged, gave back stock worth $1.05 million. His incentive pay consisted of only $828,555 during the years that the S.E.C. said the company misstated its results. He didn’t return a phone call seeking comment.

ANOTHER case brought by the S.E.C. last year involved Diebold, a maker of automated teller machines. Contending that Diebold had overstated its results by $127 million between 2002 and 2007, the commission sued to recover money from three former executives. Walden W. O’Dell, who is a former C.E.O. and who was not charged, repaid $470,000 in cash, and 30,000 Diebold shares and 85,000 stock options. During the years that the S.E.C. alleged that results were overstated, he received bonuses totaling $1.9 million, in addition to restricted stock worth $261,000 and 295,000 stock options. Mr. O’Dell didn’t return a message seeking comment. The cases against the other Diebold executives are pending. A company spokesman said it had settled with regulators and declined to comment further.

Continued in article

"Commissioner slams SEC settlement," SmartPros, July 13, 2011 ---
http://accounting.smartpros.com/x72323.xml

One of the SEC's five commissioners has taken the extraordinary step of publicly dissenting from an enforcement action on the grounds that it was too weak.

Commissioner Luis A. Aguilar said the Securities and Exchange Commission should have charged a former Morgan Stanley trader with fraud in view of what he called "the intentional nature of her conduct."

The dissent comes weeks after the SEC took flak for negotiating a $153.6 million fine from J.P. Morgan Chase in another enforcement case but taking no action against any of the firm's employees or executives.

Under a settlement announced Tuesday, the SEC alleged that former Morgan Stanley trader Jennifer Kim and a colleague who previously settled with the agency had executed at least 32 sham trades to mask the amount of risk they had been incurring and to get around an internal restriction.

Their trading contributed to millions of dollars of losses at the investment firm, the SEC said.

Without admitting or denying the SEC's findings, Kim agreed to pay a fine of $25,000.

Aguilar said the settlement was "inadequate" and "fails to address what is in my view the intentional nature of her conduct."

"The settlement should have included charging Kim with violations of the antifraud provisions," Aguilar wrote.

Continued in article

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

Bob Jensen's threads on the Madoff Ponzi Scandal ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

"MF Global: Where Is The Missing Money?" by Francine McKenna, re:TheAuditors, November 10, 2011 ---
http://retheauditors.com/2011/11/10/mf-global-where-is-the-missing-money/

I put up a column on Tuesday at Forbes.com that explains, in theory, what I think happened to MF Global’s missing $600 million in customer assets. It’s hard to describe the reaction to the story without jumping up and down and clapping. There’s so much interest in the subject and so little information being provided by mainstream media.

Here in Chicago, everyone is mad and no one knows who has the answers.

MF Global’s auditor is PricewaterhouseCoopers, who inherited the client when Man Financial, also a client, spun off the brokerage firm in 2007.

Continued at Forbes Site
http://www.forbes.com/sites/francinemckenna/2011/11/09/mf-global-assets-have-left-the-building-how-when-where/

"MF Global : 99 Problems And Auditor PwC Warned About None," by Francine McKenna, re:The Auditors, October 28, 2011 ---
http://retheauditors.com/2011/10/28/mf-global-99-problems-and-pwc-warned-about-none-of-them/

"MF GLOBAL GOES BELLY UP, SO WHERE WAS THE GOING CONCERN OPINION?" by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, November 1, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/368

"Deloitte: MF Global’s Former Clients Overstating Claims," by Michael Foster, Big Four Blog, November 13, 2011 ---
http://www.big4.com/deloitte/deloitte-mf-globals-former-clients-overstating-claims

Deloitte’s investigations of claims against MF Global suggest that the defunct fund’s clients have overstated their claims. According to Deloitte partner Chris Campbell, a joint administrator of MF Global Australia, some clients of the brokerage have claimed “significantly in excess” what the firm really owed them.

“If clients continue to do that, there will be a shortfall in the full funds of those claims that are valid, because there’s a finite amount of cash that needs to be split between them all,” Campbell said of the claims.

In total, Deloitte believes that clients are owed a total of $313 million. Deloitte also believes that there is a total of $319 million in funds available for repaying clients.

If clients’ claims cannot be reconciled with Deloitte’s investigation, an application to the Australian Securities and Investments Commission and to a legal court may be necessary, according to Campbell.

The $319 million available for repayments consists of $167 million available to MF Global counterparties and $155 million held for clients in segregated accounts. $55 million of the total relates to a derivative that helps traders profit from price fluctuations in financial markets.

Deloitte was appointed as the voluntary administrators of MF Global’s Australian operations. Previously, clients were closed out of market positions when Deloitte began the administration.

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

"Chilean Banking Regulator Files Charges Against PwC," by Renee O’Farrell, Big Four Blog, September 22, 2011 ---
http://www.big4.com/pricewaterhousecoopers/chilean-banking-regulator-files-charges-against-pwc

Chile’s banking regulator, Superintendencia de Bancos e Instituciones Financieras, or SBIF, filed charges against PricewaterhouseCoopers (PwC) for deficiencies in its auditing practices of non-banking credit card issuers in the country, the regulator said in a statement posted on its website.

Chilean Securities and Insurance Supervisor (SVS) Fernando Coloma is in charge of the case. He explained, “Consumers complained about readjustments made on their accounts… Having never accepted these modifications, the changes included quotas and sums which had been defined by the company and made the debt less manageable. Some consumers remained unaware of these changes until receiving collection letters or showing up on DICOM [Chile’s credit rating agency].”

In July 2010, La Polar had gotten into trouble (123 complaints worth) after the Chilean National Customer Service (SERNAC) detected that the retail store had been making changes to its customers’ payment plans without prior notice, providing false information about its finances, and failing to abide by due diligence. All in all, La Polar executives are facing fines up to $714,000 USD and possible jail time. Charges were levied against them in July 2011.

However, as the Chilean government traces the root of the issue, it appears the circle of blame has widened. Bloomberg reported on September 21, 2011 that Chile’s banking regulator, Superintendencia de Bancos e Instituciones Financieras, or SBIF, would be filing formal charges against PwC. The company is accused of transferring shares of the ailing La Polar while knowing the company’s dire financial situation.

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

"U.S. Alleges Poker Site Stacked Deck," by Alexandra Berzon, The Wall Street Journal, September 21, 2011 ---
http://online.wsj.com/article/SB10001424053111904106704576582741398633386.html?grcc=88888&mod=WSJ_hps_sections_business

As professional poker players, Howard Lederer, Chris Ferguson and Rafael Furst got rich by bluffing players out of their money in televised tournaments. Now, the U.S. government alleges that they and their colleagues used this same approach in running one of the world's largest online poker sites.

On Tuesday, the U.S. Justice Department in a civil suit accused Messrs. Lederer, Ferguson and Furst, and another director of the company behind the Full Tilt Poker website, of defrauding thousands of online poker players out of more than $300 million that is still owed to them. The government said that, in total, the 23 owners of the site had taken out $444 million in distributions over the years.

The Justice Department's civil suit against Full Tilt alleges that in 2010, Full Tilt began having trouble accepting new bets from players, thanks to U.S. efforts to crack down on payment-processing services for online gambling. But the U.S. says that Full Tilt's owners kept paying themselves millions of dollars anyway, fraudulently depleting the player funds on deposit with the company.

"Full Tilt was not a legitimate poker company, but a global Ponzi scheme," said Manhattan U.S. Attorney Preet Bharara in a statement Tuesday. The U.S. government views online poker operations, at least those that cross state lines, as illegal.

In its civil suit filed in U.S. District Court in New York, the government alleged that Messrs. Lederer and Ferguson received $38 million and $24 million, respectively, in distributions from Full Tilt. It also alleged that a third poker player involved in the site, Mr. Furst, received $12 million and Raymond Bitar, who helped manage Full Tilt, got $40 million.

"Mr. Furst hasn't done anything wrong," said David Angeli, Mr. Furst's attorney. "He always acted in what he believed was the best interest of players and anyone associated with Full Tilt." Attorneys for Mr. Ferguson and for Mr. Bitar had no comment. Attempts to reach Mr. Lederer weren't successful.

In a statement in August, Full Tilt acknowledged that it was having problems processing player money and said it lost $115 million to government seizure and $42 million it says was stolen by a third-party payment processor.

"While the company was on the way to addressing the problems caused by these processors, Full Tilt Poker never anticipated that the DOJ would proceed as it did by seizing our global domain name and shutting down the site worldwide," the company said. It said it was seeking outside investment and was committed to paying players in full.

The accusations against Full Tilt are part of a crackdown that began in April when the Justice Department indicted executives at three major online poker companies, including Full Tilt, on charges of illegal gambling, bank fraud and money laundering. The government sought $3 billion from the companies, shut down their sites and stopped much of the online poker played in the U.S. It also filed a civil suit at the time, which it amended Tuesday to include much more detailed allegations against Full Tilt.

The Wall Street Journal has examined how the owners of Full Tilt played a cat-and-mouse game around the globe to process money from U.S. Internet poker players outside the purview of U.S. authorities.

The government charges have upended an industry that in the past decade became a behemoth online business as Full Tilt and other websites fueled a global poker boom. Full Tilt once hosted 54,000 people in a single online tournament.

The crackdown has shaken the large universe of poker fans. Before the April crackdown, researcher H2 Gambling Capital estimated there were 1.7 million active poker player accounts in the U.S. from players wagering around $14 billion a year online.

In London, Sebastian Fox, an aspiring music producer, said he could earn around $1,200 a month playing poker online. He racked up $8,000 in an account on Full Tilt. On June 29, he said that he tried to withdraw around $2,400 to pay for rent and other living expenses and discovered Full Tilt's website had been closed down, following the U.S. suit and a subsequent raid by authorities in the U.K.'s Channel Islands where Full Tilt is licensed to operate its website.

"I didn't even consider such a big company would be able to go bust just like that," Mr. Fox said.

The U.S. government has long argued that online gambling, including poker, is illegal under the Wire Act, a 1961 law that explicitly prohibits sports betting conducted over electronic communication. The law is less clear about other types of gambling that are outlawed by the Wire Act, say legal experts.

Online poker sites started popping up over a decade ago but took off in 2003 when an accountant named Chris Moneymaker entered an online tournament and later won $2.5 million in the World Series of Poker. His success enticed thousands of new players online and lured entrepreneurs hoping to capitalize on the boom.

Among them was a lanky poker player, Chris Ferguson, nicknamed "Jesus." Mr. Ferguson, who sported a thick, shaggy haircut and had a Ph.D in software engineering, and his colleague Mr. Bitar tinkered with their concept for web poker while they traded stocks in Los Angeles. The idea: recruit stars from the poker world to lure players to a new site.

Continued in article

Jensen Comment
It's hard for me to feel sorry for people that are ignorant enough to play online poker. That's just asking to be ripped off!

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

"Iran arrests 19 people in $2.6 billion bank fraud described as nation’s biggest financial scam," The Washington Post, September 19, 2011 ---
http://www.washingtonpost.com/world/middle-east/iran-arrests-19-people-in-26-billion-bank-fraud-described-as-nations-biggest-financial-scam/2011/09/19/gIQANmXNeK_story.html

Iran’s state prosecutor says authorities have arrested 19 suspects in a $2.6 billion bank fraud described as the biggest financial corruption scam in Iran’s history.

Several newspapers, including the pro-reform Shargh daily, quote Gholam Hossein Mohseni Ejehei as saying more people will be arrested.

Parliament summoned the finance minister and the central bank governor to discuss the case on Monday.

Officials say the fraud involved the use of forged documents to get credit at one of Iran’s top financial institutions to purchase assets including major state-owned companies.

Continued in article

College Business Officers Hear a Fraud Detective's Cautionary Tales of True Crime," by Scott Carlson, Chronicle of Higher Education, June 12, 2011 ---
http://chronicle.com/article/College-Business-Officers-Hear/128205/

It's not often that a conference session feels like a true-crime show. And yet Angela Morelock, a forensic accountant with the accounting firm BKD, delivered material like that and more in a talk here that detailed the bad, the really bad, and the mind-bogglingly bad in the fraud and embezzlement cases that her firm has investigated.

Her presentation was designed to educate administrators, gathered here at the annual meeting of the National Association of College and University Business Officers, about common fraud scams and patterns that might indicate something is wrong.

But before going into the statistics, she posted on a screen a ditty, scribbled out by, and found in the office of, a fraud perpetrator in the accounting office of a pharmacy chain: "Oh, what a tangled web we weave when first we practice to deceive. But once we've practiced for a while, oh my, how we've improved our style!"

"Fraud cases, every single time, are hindsight 20/20," she said. "It's a little bit amazing to me—the subtle clues, the small things, that we will miss. Tell me how this hangs in the cubicle of someone in an accounting department for an extended period of time without someone asking about it."

That was one of the big takeaways from Ms. Morelock's talk: Fraud perpetrators will leave lifestyle clues that they are up to no good. In her experience, criminals tend to follow recognizable patterns. They like to give gifts, and they are compulsive shoppers. Gambling problems are common among them.

They tend to be long-term employees, who start small and rationalize their thefts over time. They can be male or female, but statistics say that the big losses usually happen with more-educated, high-ranking employees. That is in part because there are all sorts of checks and controls on the financial transactions handled by low-level employees, whom some assume to be more prone to fraud and theft. However, the supervisors of those employees are often not subjected to the same controls and scrutiny, opening a window for abuse. Ms. Morelock told of a supervisor at one business who collected the cash drawers from various clerks, and took one home every day for 10 years, until she had collected $1.3-million.

And then there are the things that just don't add up, Ms. Morelock said, and she related another of her many war stories: A bookkeeper at a church organization went on vacation, and a diamond certificate in her name arrived at her work, which set off alarm bells. Right off the bat, Ms. Morelock found that the employee, who was making $45,000 a year, had purchased a $390,000 house, which her co-workers knew about.

The employee had paid for the house in cash, skimmed off of the organization. And she bought a lot more, like big-screen TV's, video games, and appliances. "These lifestyle clues are the best early warning signs," Ms. Morelock said. Schemes Involving Vendors

One common oversight, where fraud dwells, is where employees choose vendors. "That power, to be the one who chooses the vendor, is a significant power that we often don't focus on enough," Ms. Morelock said. "That is where fake vendors, conflicts of interests, kickback schemes, and straw-vendor schemes originate."

Here is how a straw-vendor scheme works, based on another real case: A graphic designer can pick a printer for his work with an organization. He sets up his friend, who is not a printer, as the vendor and places printing orders through the friend. The friend goes out and finds a real printer to handle the actual printing. The friend gets the job printed and bills the organization at an inflated price, and the organization pays. Then the graphic designer and his friend pay the printer's lower cost, and split the profits.

For Ms. Morelock, the case proves that you can find fraud in the most unlikely corners of an organization. "Most of us would look a graphic designer and think, What kind of fraud risk could that person possibly be?" she said. In the case Ms. Morelock uncovered, the graphic designer and his friend netted $600,000 in their five-year scam.

Fraud cases in higher education tend to be lower than in other organizations, she pointed out, but certain parts of higher education have been more troublesome. "We have seen a lot of athletic-department scams recently, that go everywhere from travel expenses and ATM cards to misuse of booster funds," she said. "Although many organizations consider booster funds to be separate from the college or university, guess whose name hits the front page of the paper when there is a problem?" she said. She also alluded to a ticket-scalping scandal that has plagued the University of Kansas.

Continued in this article

Jensen Comment

Frauds and thefts can take place even where we least expect ti.

Church and School Embezzlement --- http://churchembezzlement.blogspot.com/

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

"Defunct Colonial Bank Sues The Sh*t Out of Its Former Auditors, Including PwC," by Adrienne Gonzalez, Jr. Deputy Accountant Blog, August 26, 2011 ---
http://www.jrdeputyaccountant.com/2011/08/defunct-colonial-bank-sues-sht-out-of.html

A-ha! I hate to say I told you so (no I don't) but, uh, I told you so.

In August of 2009, I caught PwC digging around on my site to find out more about the Colonial Bank failure, a failure which PwC itself oversaw and maybe just participated in (if indirectly, naturally). The year before Colonial's epic failure, PwC auditors gave the bank the all clear.

"In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Colonial BancGroup, Inc. and its subsidiaries at December 31, 2008 and 2007 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America," read the opinion.

Anyway, fast-forward two years and here we are:

Continued in article

Bob Jensen's threads on accounting firm litigation woes ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Traders Gone Rogue: A Greatest-Hits Album," by Thomas Kaplan, The New York Times, September 15, 2011 ---
http://dealbook.nytimes.com/2011/09/15/traders-gone-rogue-a-greatest-hits-album/

Traders run amok are often sentenced to pay restitution, in addition to serving jail time or forgoing any future dealings in the securities industry. But few have been held responsible for an I.O.U. as large as the one a French court pinned on Jérôme Kerviel on Tuesday: $6.7 billion.

That works out to the amount his rogue trades ultimately cost Société Générale, The New York Times’s Nicola Clark reports. But how does it equate to other famous (or infamous) traders gone rogue through the years?

It depends how you look at it, said William K. Black, a professor of economics and law at the University of Missouri-Kansas City, who specializes in financial fraud.

“In terms of dollar losses caused, he’s No. 1,” Professor Black told DealBook. “In terms of crushing institutions, he’s not No. 1.”

That’s because Mr. Kerviel did not actually bring down his firm, which other rogue traders have done. While only four people in all of France would be rich enough to pay what Mr. Kerviel’s owes in restitution — according to Forbes magazine’s list of the world’s billionaires, at least — his bank lives on.

So, too, do several other famous miscreant traders.

¶Indeed, while Mr. Kerviel may have succeeded in amassing a fraud of historic magnitude, his rogue counterparts have brought distinction (or shame) upon themselves in other creative ways:.

¶¶ Creating fake identities. John M. Rusnak pleaded guilty in 2002 to faking trades in order to hide nearly $700 million in losses through rogue trades of Japanese yen for Allfirst Financial, which was then a subsidiary of Allied Irish Banks.

¶Mr. Rusnak worked hard to keep his wrongdoing a secret. At one point, in order to trick auditors, he was said to have posed as a fictitious trader, David Russell, with whom he supposedly had dealings. He pulled it off by renting a box at a Mail Boxes Etc. on the Upper West Side in Manhattan; when bank auditors wanted to verify his trades with the supposed Mr. Russell, Mr. Rusnak had them write to that mailbox, where he then replied as if he were the fictitious trader.

¶Allied Irish Banks sold Allfirst Financial to the M&T Bank Corporation of Buffalo shortly after the scandal came to light. Mr. Rusnak, for his part, was released from federal prison last year and has remained out of the headlines since then.

¶¶ Earning clever nicknames.The Sumitomo Corporation of Japan in 1996 lost $2.6 billion because of a rogue trader, Yasuo Hamanaka, the chief of the company’s copper trading operations. Before his rogue trades became public, he had earned the nickname “Mr. 5 Percent” — referring to the share of the world’s copper market he was said to control.

¶Mr. Hamanaka pleaded guilty to forgery and fraud and was jailed until 2005. Paying homage to what made him famous, he told Bloomberg News upon his release that he was “amazed” at how the price of copper had risen while he was incarcerated.

¶Making the best-seller list. In the mid-1990s, Daiwa Bank lost more than $1 billion as a result of a rogue New York-based bond trader, Toshihide Iguchi. Mr. Iguchi was sentenced to four years in prison, which he told The Wall Street Journal was less painful than the life of deceit he was living as a rogue trader trying to cover his tracks.

¶While in prison, he wrote a memoir, “The Confession,” that was widely read in Japan. But after settling in Georgia upon his release, the only work Mr. Iguchi could find was a $10-an-hour job at a furniture-building shop, so he eventually headed back to Japan, where he opened an English school, The Journal reported in 2008.

¶But Mr. Kerviel’s case brought back bad memories. Mr. Iguchi told The Journal that shortly after the French trader was accused, he had nightmares about his own rogue trading.

¶Going Hollywood. Nicholas W. Leeson, a trader for the British investment bank Barings, managed to topple his bank in 1995 as a result of his rogue trading. Based in Singapore, Mr. Leeson lost more than $1 billion through ill-fated bets on Japanese stock prices and interest rates.

¶Mr. Leeson pleaded guilty in Singapore to fraud and forgery and served four years in prison. He is now the chief executive of an Irish soccer club, Galway United.

¶But perhaps best of all, Mr. Leeson managed to carve for himself a place in popular culture. He commanded a reported $700,000 advance for a ghostwritten memoir, “Rogue Trader” (1997), and more recently published a self-help book, “Back from the Brink: Coping With Stress” (2005).

¶His first book was made into a 1999 film starring Ewan McGregor. The film, like Mr. Leeson’s trading practices, was widely panned.

Continued in article

Bob Jensen's threads on securities and trader fraud ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Teaching Case on How to Overstate Revenues
Auditor Ernst & Young is also named in the $7 billion lawsuit

Jensen Comment
I don't know what it is about The Wall Street Journal, but it is very common for me to be forced to go elsewhere to find the names of the audit firms included in client lawsuits. It's like the WSJ tries to protect audit firms.

From The Wall Street Journal Accounting Weekly Review on September 2, 2011

Sino-Forest CEO Gives Up Position
by: Isabella Steger
Aug 29, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Audit Quality, Auditing, Ethics, Financial Accounting, Financial Statement Analysis, Financial Statement Fraud, Fraud, Fraudulent Financial Reporting

SUMMARY: Sino-Forest Corp. is traded on the Toronto Stock Exchange (TSX) with the symbol TRE. The exchange suspended trading in the company's shares for 15 days beginning Friday, August 26. TSX also ordered the chief executive and other key managing executives to resign on Friday, though that order was then delayed to allow for a hearing first. The current article indicates the executives "resigned voluntarily" over the weekend of August 27 to 28 after "Canadian regulators said the company may have committed fraud." These proceedings began based on "allegations...published by short seller Muddy Waters LLC" (see the related article). This short-selling analyst alleged the company may have overstated revenues and timber holdings; the Ontario Securities Commission also said that the company "'appears to have engaged in significant non-arm's length transactions which may have been contrary to Ontario securities laws and the public interest.'"

CLASSROOM APPLICATION: The article is second in this week's coverage of accounting and auditing issues at Chinese companies traded on North American exchanges. This case involves accounting for revenues and natural resources-timber reserves-and highlights potential issues from non-arm's-length transactions conducted through subsidiaries. Questions on accounting and auditing these areas are posed, but the auditing questions may be deleted for instructors wishing to focus on only the accounting-related issues.

QUESTIONS: 
1. (Introductory) What steps has Sino-Forest undertaken in response to allegations that the company may have committed fraud? List all that you find described in the main and related articles.

2. (Introductory) What areas of accounting are specifically of concern at Sino-Forest Corp.?

3. (Advanced) Name some audit steps that are designed to detect potential accounting problems in these areas of specific concern at Sino-Forest. In your answer, state the audit objectives you would try to achieve by conducting these tests and identify whether they are transaction-related audit objectives or balance-related audit objectives.

4. (Advanced) If Sino-Forest and its management have committed fraud as alleged by analysts and Canadian regulators, are these audit steps that you list above designed to detect this fraud with absolute certainty? Explain your answer.

5. (Advanced) What is a "non-arm's-length transaction"? What is a subsidiary? What potential accounting measurement concerns arise if Sino-Forest has undertaken this type of transaction? Why does conducting the actions through a subsidiary potentially exacerbate these accounting measurement concerns?

6. (Advanced) Name some audit steps that are designed to detect these potential accounting measurement problems stemming from non-arm's-length transactions. In your answer, state the audit objectives you would try to achieve by conducting these tests and identify whether they are transaction-related audit objectives or balance-related audit objectives.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Regulator Challenges Sino-Forest Claims
by Caroline Van Hasselt
Aug 27, 2011
Online Exclusive

Special Report: The "Shorts" Who Popped a China Bubble
by Daniel Bases, Ryan Vlastelica, and Clare Bal of the International Business Times
Aug 05, 2011
Online Exclusive

"Sino-Forest CEO Gives Up Position," by: Isabella Steger, The Wall Street Journal, August 29, 2011 ---
http://professional.wsj.com/article/SB10001424053111904199404576536154293011240.html?mod=djem_jiewr_AC_domainid

HONG KONG—Sino-Forest Corp. said its chairman and chief executive resigned and three employees have been temporarily suspended, after Canadian regulators said the company may have committed fraud.

The forestry company said Sunday that Allen Chan voluntarily stepped down as chairman and CEO pending completion of the company's review of fraud allegations published two months ago by short seller Muddy Waters LLC.

Mr. Chan will assume the title of founding chairman emeritus of the Chinese-operated company, shares of which are listed in Toronto. He wasn't available for comment.

William Ardell, lead director and chairman of Sino-Forest's independent committee conducting the investigation, will succeed Mr. Chan as chairman. Sino-Forest Vice Chairman Judson Martin, an executive director, will become chief executive. Mr. Martin also is chief executive of Sino-Forest's Greenheart Group Ltd. unit, shares of which are listed in Hong Kong.

Sino-Forest said Mr. Chan would continue to assist the company's internal investigation and that he had planned to resign before the Ontario Securities Commission on Friday ordered a 15-day trading halt for the company's shares.

The commission issued the order after saying regulators had found that the company may have "misrepresented some of its revenue and/or exaggerated some of its timber holdings." The commission said the company, through its subsidiaries, also "appears to have engaged in significant non-arm's-length transactions which may have been contrary to Ontario securities laws and the public interest."

The commission on Friday ordered executives to resign but revoked the order the same day, saying it would require a hearing.

Sino-Forest's stock is down 72% for the year. The shares took a beating in June when Muddy Waters published its allegations of questionable accounting. The shares closed Thursday at 4.81 Canadian dollars (US$4.90), down 5.7%.

Continued in article

"Beleaguered Sino-Forest facing $7-billion lawsuit," Pulp & Paper Canada, September 1, 2011 ---
http://www.pulpandpapercanada.com/news/beleaguered-sino-forest-facing-7-billion-lawsuit/1000550204/

. . .

The lawsuit seeks money for those who bought Sino-Forest shares on the stock market and through the company's public offering.

The claim names several Sino-Forest executives, including former CEO Allen Chan, auditor Ernst & Young, and financial institutions that acted as underwriters for the company's 2009 prospectus offering. They include TD Securities, Dundee Securities, RBC Securities, Scotia Capital, and CIBC World Markets.

The lead plaintiffs in the suit are the Labourers' Pension Fund of Central and Eastern Canada and the International Union of Operating Engineers Local 793 pension plan.

If the suit is granted class-action status, any judgements or settlements would be available to all members of the class.

The allegations against Sino-Forest have not been proven in court.

Continued in Article

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

The August 2011 Edition of the Journal of Accountancy ---
http://www.journalofaccountancy.com/Issues/2011/Aug

Client Tax Fraud and the CPA

What's Your Fraud IQ?

Beyond Convergence

Asset-Based Financing Basics

Traps for the Unwary in CPA Firm Mergers and Acquisitions

Technology Q&A ----
http://www.journalofaccountancy.com/Issues/2011/Aug/TechnologyQA.htm

"U.K. Bribery Act Goes into Effect:  Similar to but broader than the U.S. Foreign Corrupt Practices Act, the new law exposes CFOs in the United States to more risk," by Sarah Johnson, CFO Blog, July 5, 2011 ---
http://www.cfo.com/article.cfm/14585377/c_14585851

"Who Will Be Held Responsible in the Atlanta Public School Cheating Scandal?" by Lori Drummer, Townhall, July 19, 2011 ---
http://townhall.com/columnists/loridrummer/2011/07/19/who_will_be_held_responsible_in_the_atlanta_public_school_cheating_scandal

Question
How do you stay in college semester after semester with a grade average of 0.0?

"Chicago State Let Failing Students Stay," Inside Higher Ed, July 26, 2011 ---
http://www.insidehighered.com/news/2011/07/26/qt#266185

Chicago State University officials have been boasting about improvements in retention rates. But an investigation by The Chicago Tribune  found that part of the reason is that students with grade-point averages below 1.8 have been permitted to stay on as students, in violation of university rules. Chicago State officials say that they have now stopped the practice, which the Tribune exposed by requesting the G.P.A.'s of a cohort of students. Some of the students tracked had G.P.A.'s of 0.0.

Jensen Comment
There is a bit of integrity at CSU. Professors could've just given the students A grades like some other high grade inflation universities or changed their examination answers in courses somewhat similar to the grade-changing practices of a majority of Atlanta K-12 schools. Now that CSU will no longer retain low gpa students, those other practices may commence at CSU in order to keep the state support at high levels. And some CSU professors may just let students cheat. It's not clear how many CSU professors will agree to these other ways to keep failing students on board.

Bob Jensen's threads on Professors Who Cheat and Allow Students to Cheat are at
http://www.trinity.edu/rjensen/Plagiarism.htm#RebeccaHoward

Bob Jensen's threads on grade inflation are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation

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

Francine Alleges that the Largest Audit Firms Were All  "Mixed Up in the Mortgage Fraud"

"Lehman, Bank of America Settlement Wins Court Approval," by Linda Sandler, Bloomberg, May 18, 2011 ---
http://www.bloomberg.com/news/2011-05-18/lehman-bank-of-america-settlement-wins-court-approval-1-.html

A bankruptcy judge approved a settlement between Lehman Brothers Holdings Inc. (LEHMQ) and Bank of America Corp. (BAC) today. Bank of America, previously ordered by U.S. Bankruptcy Judge James Peck to pay Lehman $500 million plus interest, said it would settle a remaining dispute by paying bankrupt Lehman $1.5 million, according to a court filing today.

"Bank of America Says $500 Million Lehman Order Was 'Error'." SF Gate, June 30, 2011 ---
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/06/30/bloomberg1376-LNNZ9D6JTSEE01-6AKHB4QI433DHSII5JCVQ4FK5U.DTL 

"Judge Clears $861 Million J.P. Morgan-Lehman Settlement," The Wall Street Journal, June 23, 2011 ---
http://blogs.wsj.com/deals/2011/06/23/judge-clears-861-million-j-p-morgan-lehman-settlement/

A judge on Thursday approved a settlement that calls for J.P. Morgan Chase to pay $861 million in cash and securities to customers of the defunct broker-deal business of Lehman Brothers Holdings.

The settlement is the largest to date reached by the trustee winding down’s Lehman’s former U.S. brokerage business.

“I’m satisfied that this is indeed an excellent result,” Judge James Peck of U.S. Bankruptcy Court in Manhattan said. He added, “This is obviously a very substantial step forward of the LBI liquidation.” LBI is the brokerage subsidiary, Lehman Brothers Inc.

Hughes Hubbard & Reed LLP’s Jeffrey Coleman, a lawyer for the trustee, said the avoidance of long litigation and the fact that most of the money will be paid in cash made it a great deal.

“The court’s approval of the J.P. Morgan agreement marks a milestone in the administration of the LBI Estate to recover assets to pay customer claims,” Giddens, also a Hughes Hubbard & Reed partner, said in a statement.

Former Lehman customers will receive all of the $861 million, $755 million of which is in cash. No parties objected to the settlement.

The deal largely settles the outstanding claims the trustee has against J.P. Morgan but doesn’t affect disputes between J.P. Morgan and Lehman Brothers Holdings. The holding company and J.P. Morgan are embroiled in two pending multibillion-dollar lawsuits.

Continued in article

"They’re Everywhere! Big Four Auditors Mixed Up In Mortgage Fraud," by Francine McKenna, Forbes Blog, June 30, 2011 ---
http://blogs.forbes.com/francinemckenna/2011/06/30/theyre-everywhere-big-four-auditors-mixed-up-in-mortgage-fraud/

When I’m not wondering, “Where is my coffee?”, I’m usually curled up in a ball in the corner of my little living room filled with Latin American art moaning, “Where were the auditors?”

Me insufficiently caffeinated. Not a pretty picture.

Ugly also are the blank stares from contorted faces glaring back at me when I talk about auditors and their “good crisis.”

The largest global audit firms are everywhere – in every public company and working for the government agencies that regulate them. They’re about as welcome as a hard rain and, yet, officially necessary.

Can anyone deny that there are four firms – KPMG, Deloitte, PricewaterhouseCoopers (PwC), and Ernst & Young (auditor to Lehman) – who knew all along what was going on and never told a soul, including the SEC?

The story Bloomberg’s Tom Schoenberg tells today of Fannie Mae’s complicity in the Taylor, Bean & Whitaker (TBW) $3 billion mortgage fraud scares the bejeezus out of me. That’s because, like the little boy in “The Sixth Sense” who sees dead people, I see complicit or, at the very least incompetent, auditors everywhere. What’s even more frightening is that there are only four firms of sufficient size to audit the largest public companies and they’re getting bigger and even more powerful.

PwC, one of the four largest global audit firms, audited TBW. TBW Chairman Lee Farkas, who was just sentenced to 30 years for his crimes, testified,  “he was only trying to help keep his company stay afloat and that he did not believe that what he was doing was wrong. What he was doing was essentially bundling and selling the same mortgages that his firm had originated twice.”

PwC was also the auditor of Colonial Bank, which Farkas and TBW wrapped into the the fraud that eventually led to the Colonial’s failure.

Continued in article

"Deloitte Touche sued for $7.6bn in mortgage fraud case," BBC, September 26, 2011 ---
http://www.bbc.co.uk/news/business-15069976
Thank you Hossein Nouri for the heads up.

Giant accounting and consulting firm Deloitte Touche Tohmatsu has been accused of failing to detect fraud during audits of a mortgage firm which failed during the US housing crash.

A trust overseeing now-defunct Taylor, Bean & Whitaker (TBW), and one of the company's subsidiaries, have filed complaints in a Florida court.

They are claiming a combined $7.6bn (£4.9bn) in losses.

TBW shut down after federal agents raided its headquarters in August 2009.

Deloitte spokesman Jonathan Gandal said the firm rejected the court claims, and that they were "utterly without merit". 'Red flags'

The fraud at Ocala-based TBW began in 2002 and continued until its collapse two years ago.

Seven TBW executives were convicted of federal criminal charges, with former chairman Lee B Farkas sentenced to 30 years in jail.

The lawsuits claim Deloitte's certifications of the TBW books were essential in giving it the appearance of a legitimate mortgage business.

However the lawsuits say TBW was selling false or highly overvalued mortgages, mis-stating its liabilities and hiding overdrawn bank accounts.

"They [Deloitte Touche Tohmatsu] certainly did not do their job," said attorney Steven Thomas, who represents those suing Deloitte.

"This is one of those cases where the red flags are staring you in the face, and you've got to do a lot, and they did not."

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

Bob Jensen's threads on "Where Were the Auditors?" ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 --- http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.

Wall Street Remains Congress to the Core
The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic problem. It is against the law to trade on inside information about an imminent merger, of course. But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.
Gretchen Morgenson, "Whispers of Mergers Set Off Suspicious Trading," The New York Times, August 27, 2006 ---
Click Here

Hmm --- JP (pronounced gyp) Morgan Chase legal settlements
$861 million +$154 million + $211 million and still counting up the frauds
And the Bush and Obama Administration bailed these crooks out

"JPMorgan Settles Bond Bid-Rigging Case for $211 Million," by Eric Dash, The New York Times, July 7, 2011 ---
http://www.nytimes.com/2011/07/08/business/jpmorgan-settles-bond-bid-rigging-case-for-211-million.html

JPMorgan Chase reached a $211 million settlement with federal and state authorities on Thursday to resolve allegations that it cheated governments in 31 states by rigging the bidding process for reinvesting the proceeds of dozens of municipal bond transactions.

Without admitting or denying wrongdoing, the bank settled accusations that it had improperly entered secret agreements with bidding agents that gave it a “last look” at bids submitted by its competitors. The bank has agreed to return about $129.7 million to the municipalities that were harmed.

In addition, the Securities and Exchange Commission said it would bar James L. Hertz, a former JPMorgan executive at the center of the bid-rigging scandal, from working in the municipal finance industry. Last December, Mr. Hertz pleaded guilty to conspiracy and wire fraud charges for his role in the improper deals.

JPMorgan Chase said in a statement that it “does not tolerate anticompetitive activity” and that the executives involved had concealed their behavior from management.

“The firm’s policies, both now and during the period in question, expressly prohibit the conduct that gave rise to these proceedings,” the statement said. The bank said the employees involved were no longer with the company and that it had improved its compliance program and increased ethics training for staff in the public finance group.

The $211 million pact is the largest of three major settlements that securities regulators have reached in an effort to clean up municipal finance.

In December, authorities struck a $137 million settlement with Bank of America to resolve similar fraud charges. In May, UBS agreed to pay more than $150 million to settle municipal bid-rigging charges. The JPMorgan settlement was reached amid public outrage toward Wall Street for its role in the financial crisis. Federal regulators are under increasing pressure to hold bankers accountable.

To resolve the charges, JPMorgan plans to pay $51.2 million to the Securities and Exchange Commission, $50 million to the Internal Revenue Service, $35 million to the Office of the Comptroller of the Currency and $75 million to a group of state attorneys general. The bank also reached settlements with the Federal Reserve Bank of New York and the antitrust division of the Justice Department.

Elaine C. Greenberg, the chief of the S.E.C.’s municipal securities unit, said that the settlement would send a message that undermining the fairness of the public sector bond market would not be tolerated. “Rather than playing by the rules, the rules got played,” she said in a statement.

Typically, when investors buy municipal bonds, local governments temporarily invest the tax-exempt proceeds until they are used. Banks help states and cities invest the money in so-called municipal reinvestment products and bid for the right by offering competitive interest rates. That process lets municipalities claim tax-exempt status for the money.

But regulators say JPMorgan undermined the competition. From 1997 to 2005, they say, members of the bank’s municipal derivatives desk made misrepresentations and omissions in at least 93 transactions. The moves affected the prices that governments paid and jeopardized the tax-exempt status of billions of dollars worth of those securities. JPMorgan marketers rigged the bids with help from at least 11 bidding agents.

At times, court documents said, the bank won investment business because it got information from bidding agents about what its competitors were bidding. In other cases it deliberately submitted nonwinning bids to satisfy tax requirements.

The case was settled on the heels of a JPMorgan settlement last month in which it agreed to pay $153.6 million to resolve federal civil accusations that it misled investors in a mortgage securities transaction in 2007.

Continued in article

"Judge Clears $861 Million J.P. Morgan-Lehman Settlement," The Wall Street Journal, June 23, 2011 ---
http://blogs.wsj.com/deals/2011/06/23/judge-clears-861-million-j-p-morgan-lehman-settlement/

A judge on Thursday approved a settlement that calls for J.P. Morgan Chase to pay $861 million in cash and securities to customers of the defunct broker-deal business of Lehman Brothers Holdings.

The settlement is the largest to date reached by the trustee winding down’s Lehman’s former U.S. brokerage business.

“I’m satisfied that this is indeed an excellent result,” Judge James Peck of U.S. Bankruptcy Court in Manhattan said. He added, “This is obviously a very substantial step forward of the LBI liquidation.” LBI is the brokerage subsidiary, Lehman Brothers Inc.

Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

Bob Jensen's Rotten to the Core Threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm

Financial Statement Fraud Casebook: Baking the Ledgers and Cooking the Books
Joseph T. Wells (Editor) ISBN: 978-0-470-93441-8 Hardcover 360 pages June 2011
Wiley --- http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470934417.html

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

"Online Search Ads Hijack Prospective Students, Former Employee Says," by Josh Keller, Chronicle of Higher Education, September 7, 2011 ---
http://chronicle.com/blogs/wiredcampus/online-search-ads-hijack-prospective-students-former-employee-says/33047?sid=at&utm_source=at&utm_medium=en

Last year, James Soloway called hundreds of prospective students per day on behalf of a company that placed advertisements on Google and Bing. The ads promised to help students contact the admissions offices of public colleges if they filled out an online form and included their phone number.

He told the students who responded that they would hear from their preferred public college, even though they almost never did. In the meantime, he said, they should consider attending a for-profit college—such as Kaplan University, Grand Canyon University, or the University of Phoenix.

Most of the prospective students were confused. Some hung up. But sometimes, the pitch worked, he says. Some people, especially high-school students, believed he was an educational counselor and gave weight to his recommendations, he says.

The entire process was designed to redirect students who wanted information on a public college to a for-profit college, Mr. Soloway says. “The expectation was that we were not to allow a call to end with a student until we had created three private-school leads.”

The account offers new details about the practices of lead-generation companies that place misleading search ads to lure prospective students. (Click here to download Mr. Soloway’s full description of the call center’s activities.) In July, The Chronicle found dozens of ads on Google and Bing that falsely implied relationships with public colleges in order to get students to give away information that can be sold to for-profits.

Mr. Soloway made calls on behalf of one of those lead-generation companies, Vantage Media, from March to December 2010. The company contracted with a call center run by Mr. Soloway’s employer, Inspyre Solutions.

Representatives of Vantage, Kaplan, and Westwood College did not respond to requests for comment. Vantage officials have previously said that they provide a free service to both colleges and students, and that the company does not mislead anybody.

Mr. Soloway said he is speaking publicly about his former work because he feels bad that he helped to deceive students. He estimates that Vantage’s online marketing efforts brought in at least 2,000 prospects per week to the Winnipeg, Manitoba, call center where he worked.

After learning that students never heard back from the public colleges they were trying to reach—and realizing that he might soon be fired for poor performance—he quit his job and filed a complaint with the Federal Trade Commission in February about Vantage’s practices.

“I feel bad that I was part of something that took advantage of people, a lot of them kids still in high school,” he says.

Mr. Soloway said he was given a single day of training before starting to work on behalf of Vantage, which made it difficult to advise students on their educational options. For instance, he says he started without knowing the differences between various nursing degrees.

Continued in article

"Colleges Fight Google Ads That Reroute Prospective Students," by Josh Keller, Chronicle of Higher Education, July 31, 2011 ---
http://chronicle.com/article/Colleges-Fight-Google-Ads-That/128414/?sid=wc&utm_source=wc&utm_medium=en

Misleading Promotional Sites for For-Profit Universities

For-profit universities provide some free Website services in an effort to lure people into signing up for for-profit programs without ever mentioning that in most instances the students would be better off in more prestigious non-profit universities such as state-supported universities with great online programs and extension services.


I'm bombarded with messages like the following one from ---
http://www.paralegal.net/


Then go to the orange box at http://www.paralegal.net/more/
If you feed in the data that you're interested in a bachelor's degree in business with an accounting concentration, the only choices given are for-profit universities. No mention is made of better programs at the Universities of Wisconsin, Maryland, Connecticut, Massachusetts, etc.


I've stopped linking to the many for-profit university sites like this.
My threads on distance education alternatives are at
http://www.trinity.edu/rjensen/Crossborder.htm

Bob Jensen's threads on for-profit universities operating in the gray zone of fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

Most, but certainly not all, colleges in danger of losing regional accreditation are for-profit colleges
Here's an illustration of some not-for-profit colleges that are also in trouble
You've really got to be in trouble before regional accreditors sound alarms, especially in terms of admission and grading standards

"Middle States Ends Accreditation for 1 College, Issues Probation to 4 and Warnings to 9," Inside Higher Ed, July 1, 2011 ---
http://www.insidehighered.com/news/2011/07/01/qt#263879

Bob Jensen's threads on accreditation are at
http://www.trinity.edu/rjensen/assess.htm#AccreditationIssues

Dangers in Relying Upon Regional Academic Accrediting Agencies
Standards for measuring credit hours and program length, and affirmed its earlier critique that the commission had been too lax in its standards for determining the amount of credit a student receives for course work.

Unreliability of Higher Education's Accrediting Agencies
"Mend It, Don't End It," by Doug Lederman, Inside Higher Ed, February 4, 2011 ---
http://www.insidehighered.com/news/2011/02/04/education_department_panel_hears_ideas_about_improving_higher_education_accreditation

About two-thirds of the way through the first day of the Education Department's two-day forum on higher education accreditation, something strange happened: a new idea emerged.

Not that the conversation that preceded it was lacking in quality and thoughtfulness. The discussion about higher education's system of quality assurance included some of the sharper minds and best analysts around, and it unfolded at a level that was quite a bit higher than you'd find at, say, the typical Congressional hearing.

The discussion was designed to help the members of the Education Department's National Advisory Committee on Institutional Quality and Integrity understand the accreditation system, so it included a wide range of voices talking about many aspects of quality, regulation and oversight in higher education. The exchanges served largely to revisit history and frame the issues in a way that probably seemed familiar, at least to those who follow accreditation closely.

The basic gist on which there was general agreement:

• Higher education accreditation is imperfect (seriously so, in the eyes of some), with many commentators citing how rarely the agencies punish colleges and how inscrutable and mysterious their process is to the public.
• Politicians and regulators are asking accrediting agencies to do things they were never intended to do, like make sure colleges don't defraud students.
• Despite those flaws, most seemed less than eager to try to create a wholly different system to assure the quality of America's colleges and universities, because they see it as either difficult or undesirable.

Yet given Education Secretary Arne Duncan's formal charge to the newly reconstituted panel, which was distributed at its first formal meeting in December, most of the higher education and accreditation officials who attended the policy forum said they had little doubt that the panel is strongly inclined to recommend significant changes, rather than just ruminating about how well the system is working.

Continued in article

Jensen Comment
On of the biggest abuses is the way for-profit universities buy out failing non-profit colleges for the main purpose of gaining accreditation by buying it rather than earning it. The scandal is that the accrediting agencies, especially the North Central accrediting agency, let for-profits simply buy this respectability. For-profit universities can be anywhere and still buy a North Central Association accreditation.

"Inspector General Keeps the Pressure on a Regional Accreditor," by Eric Kelderman, Chronicle of Higher Education, May 27, 2010 ---
http://chronicle.com/article/Inspector-General-Keeps-the/65691/?sid=at&utm_source=at&utm_medium=en

The inspector general of the U.S. Department of Education has reaffirmed a recommendation that the department should consider sanctions for the Higher Learning Commission of the North Central Association of Colleges and Schools, one of the nation's major regional accrediting organizations. In a report this week, the Office of Inspector General issued its final recommendations stemming from a 2009 examination of the commission's standards for measuring credit hours and program length, and affirmed its earlier critique that the commission had been too lax in its standards for determining the amount of credit a student receives for course work.

The Higher Learning Commission accredits more than 1,000 institutions in 19 states. The Office of Inspector General completed similar reports for two other regional accreditors late last year but did not suggest any sanctions for those organizations.

Possible sanctions against an accreditor include limiting, suspending, or terminating its recognition by the secretary of education as a reliable authority for determining the quality of education at the institutions it accredits. Colleges need accreditation from a federally recognized agency in order to be eligible to participate in the federal student-aid programs.

In its examination of the Higher Learning Commission, the office looked at the commission's reaccreditation of six member institutions: Baker College, DePaul University, Kaplan University, Ohio State University, the University of Minnesota-Twin Cities, and the University of Phoenix. The office chose those institutions—two public, two private, and two proprietary institutions—as those that received the highest amounts of federal funds under Title IV, the section of the Higher Education Act that governs the federal student-aid programs.

It also reviewed the accreditation status of American InterContinental University and the Art Institute of Colorado, two institutions that had sought initial accreditation from the commission during the period the office studied.

The review found that the Higher Learning Commission "does not have an established definition of a credit hour or minimum requirements for program length and the assignment of credit hours," the report says. "The lack of a credit-hour definition and minimum requirements could result in inflated credit hours, the improper designation of full-time student status, and the over-awarding of Title IV funds," the office concluded in its letter to the commission's president, Sylvia Manning.

More important, the office reported that the commission had allowed American InterContinental University to become accredited in 2009 despite having an "egregious" credit policy.

In a letter responding to the commission, Ms. Manning wrote that the inspector general had ignored the limitations the accreditor had placed on American InterContinental to ensure that the institution improved its standards, an effort that had achieved the intended results, she said. "These restrictions were intended to force change at the institution and force it quickly."

Continued in article

Jensen Comment
The most successful for-profit universities advertise heavily about credibility due to being "regionally accredited." In some cases this accreditation was initially bought rather than achieved such as by buying up a small, albeit still accredited, bankrupt not-for-profit private college that's washed up on the beach. This begs the question about how some for-profit universities maintain the spirit of accreditation acquired in this manner.

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

These two items say a lot (bad) about Mary Shapiro's SEC --- http://en.wikipedia.org/wiki/Mary_Shapiro

"Clawbacks Without Claws," by Gretchen Morgenson, The New York Times, September 10, 2011 ---
http://www.nytimes.com/2011/09/11/business/clawbacks-without-claws-in-a-sarbanes-oxley-tool.html?_r=2&emc=tnt&tntemail1=y

AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books.

Fair Game Clawbacks Without Claws By GRETCHEN MORGENSON Published: September 10, 2011

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AFTER the grand frauds at Enron, WorldCom and Adelphia, Congress set out to hold executives accountable if their companies cook the books. Add to Portfolio

Diebold Inc New Century Financial Corp NutraCea

Go to your Portfolio »

Under the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission was encouraged to hit executives where it hurts — in the wallet — if they certified financial results that turned out to be, in a word, bogus.

SarbOx was supposed to keep managers honest. They would have to hand back incentive pay like bonuses, even if they didn’t fudge the accounts themselves.

That, anyway, was the idea. The record suggests a bark decidedly worse than its bite. The S.E.C. brought its first case under Section 304 of SarbOx in 2007. Since then, it has filed cases demanding that only 31 executives at only 20 companies return some pay.

In 2007 and 2008, most of the cases involved shenanigans with stock options and produced some big recoveries. In the wake of the financial crisis, the dollars recouped have amounted to an asterisk. Since the beginning of 2009, the S.E.C. has pursued 18 executives at 10 companies. So far, it has recovered a total of $12.2 million from nine former executives at five. The other cases are pending.

“It seems like a dormant enforcement tool,” Jack T. Ciesielski, president of R. G. Associates and editor of The Analyst’s Accounting Observer, says of the SarbOx provision. “It was supposed to be a deterrent, but it’s only really a deterrent if they use it.”

How assiduously the S.E.C. enforces this aspect of Sarbanes-Oxley is important. Only the S.E.C. can bring cases under Section 304. Companies can’t. Nor, it appears, can shareholders. In 2009, the Court of Appeals for the Ninth Circuit ruled that there was no private cause of action for violations of Section 304.

Half the companies pursued by the S.E.C. during the past three years have been small and relatively obscure.

For example, the commission sued executives at SpongeTech Delivery Systems (2008 revenue: $5.6 million), contending that the company had booked $4.6 million in phony sales that year. NutraCea, a maker of dietary supplements with 2008 sales of $35 million, was sued along with Bradley D. Edson, its former chief executive, over what the S.E.C. called its recording of $2.6 million in false revenue. An executive at Isilon Systems, a data storage company, was pursued because, the S.E.C. maintained, the company had inflated sales by $4.8 million during 2007.

No money has been recovered in the SpongeTech or Isilon matters, which are still pending. Mr. Edson, who could not be reached for comment, returned his 2008 bonus of $350,000.

In all cases when executives have returned money, they have neither admitted nor denied allegations.

The S.E.C. typically recovers more money from executives at bigger companies. But top executives are rarely compelled to return all their incentive pay.

In a case brought last year against Navistar, for example, the S.E.C. contended that the company had overstated its income by $137 million from 2001 through 2005. Daniel C. Ustian, who is Navistar’s chief executive and who was not charged with wrongdoing, returned common stock worth $1.32 million. He had received $2.2 million in incentive pay and restricted stock during the time that the S.E.C. says Navistar inflated its accounting. A company spokeswoman said Mr. Ustian would not comment.

Robert C. Lannert, Navistar’s former chief financial officer, who also was not charged, gave back stock worth $1.05 million. His incentive pay consisted of only $828,555 during the years that the S.E.C. said the company misstated its results. He didn’t return a phone call seeking comment.

ANOTHER case brought by the S.E.C. last year involved Diebold, a maker of automated teller machines. Contending that Diebold had overstated its results by $127 million between 2002 and 2007, the commission sued to recover money from three former executives. Walden W. O’Dell, who is a former C.E.O. and who was not charged, repaid $470,000 in cash, and 30,000 Diebold shares and 85,000 stock options. During the years that the S.E.C. alleged that results were overstated, he received bonuses totaling $1.9 million, in addition to restricted stock worth $261,000 and 295,000 stock options. Mr. O’Dell didn’t return a message seeking comment. The cases against the other Diebold executives are pending. A company spokesman said it had settled with regulators and declined to comment further.

Continued in article

"Commissioner slams SEC settlement," SmartPros, July 13, 2011 ---
http://accounting.smartpros.com/x72323.xml

One of the SEC's five commissioners has taken the extraordinary step of publicly dissenting from an enforcement action on the grounds that it was too weak.

Commissioner Luis A. Aguilar said the Securities and Exchange Commission should have charged a former Morgan Stanley trader with fraud in view of what he called "the intentional nature of her conduct."

The dissent comes weeks after the SEC took flak for negotiating a $153.6 million fine from J.P. Morgan Chase in another enforcement case but taking no action against any of the firm's employees or executives.

Under a settlement announced Tuesday, the SEC alleged that former Morgan Stanley trader Jennifer Kim and a colleague who previously settled with the agency had executed at least 32 sham trades to mask the amount of risk they had been incurring and to get around an internal restriction.

Their trading contributed to millions of dollars of losses at the investment firm, the SEC said.

Without admitting or denying the SEC's findings, Kim agreed to pay a fine of $25,000.

Aguilar said the settlement was "inadequate" and "fails to address what is in my view the intentional nature of her conduct."

"The settlement should have included charging Kim with violations of the antifraud provisions," Aguilar wrote.

Continued in article

Jensen Comment
Maybe Jennifer also did porn. SEC enforcers like porn (daily).---
http://abcnews.go.com/GMA/sec-pornography-employees-spent-hours-surfing-porn-sites/story?id=10452544

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

"Cooley Law School Sues Bloggers and Lawyers," Inside Higher Ed, July 15, 2011 ---
http://www.insidehighered.com/news/2011/07/15/qt#265103

The Thomas M. Cooley Law School, a freestanding institution in Michigan, on Thursday sued four anonymous individuals who have posted critical comments online and lawyers who have started an investigation into Cooley's job placement rates. The suits charge defamation, interference with business interests and other violations of the law. "With ethics and professionalism at the core of our law school's values, we cannot – and will not – sit back and let anyone circulate defamatory statements about Cooley or the choices our students and alumni made to seek their law degree here," said Brent Danielson, chair of Cooley's board, in an announcement of the suits.

One of the anonymous bloggers being sued runs a site called Thomas M. Cooley Law School Scam "to bring truth and awareness to the students getting suckered in by this despicable excuse for a law school." The blog questions Cooley's academic quality and charges that very few of its graduates find jobs. (Cooley says 76 percent of graduates find jobs, and that the figure was higher before the economic downturn.)

The law firm being sued is Kurzon Strauss, in New York, which ran a notice on the J.D. Underground website stating (according to the complaint) that it was "conducting a broad, wide-ranging investigation of a number of law schools for blatantly manipulating their post-graduate employment data and salary information" to take advantage of "the blithe ignorance of naive, clueless 22-year olds who have absolutely no idea what a terrible investment obtaining a J.D. is." The notice specifically requests information about Thomas Cooley and, according to the law school, suggested that it was "perhaps one of the worst offenders" in manipulating the data. Currently the J.D. Underground website features a posting with some similar language (but not nearly as strong) to that cited in the complaint, and another posting from the law firm retracting some of its earlier statements, suggesting that "certain allegations ... may have been couched as fact."

Continued in article

Bob Jensen's threads on for-profit universities operating in the gray zone of fraud are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Graying

Finally, At Long Last, Why did it take so long?
"Standing Up to 'Accreditation Shopping'," by Scott Jaschik, Inside Higher Ed, July 1, 2010 ---
http://www.insidehighered.com/news/2010/07/01/hlc 

Bob Jensen's threads on accreditation are at
http://www.trinity.edu/rjensen/assess.htm#AccreditationIssues

August 12, 2011 message from Edith Orenstein

I thought this group may find a couple FEI blog posts of interest on the anti-fraud front.
Thank you,
Edith

COSO Exposure Draft, Updating Internal Control Framework, Expected Oct/Nov.

SEC’s New Whistleblower Program Open For Business; Takes Effect Today

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

Getting Away With Fraud
"Spitzer's Latest Loss An appeals court tosses convictions in the Gen Re-AIG case," The Wall Street Journal, August 2, 2011 ---
http://online.wsj.com/article/SB10001424053111903341404576482441499454516.html#mod=djemEditorialPage_t

Federal and state prosecutors have built a sorry record since the fall of Enron created a political incentive to pursue white-collar defendants, whether or not they've committed crimes. In the latest embarrassing episode, the abuses include prejudicial evidence, botched jury instructions and "compelling inconsistencies" suggesting that the government's star witness "may well have testified falsely."

Those were among the problems cited Monday by a three-judge panel of the Second Circuit Court of Appeals when it tossed out the convictions of four former executives of General Reinsurance and one former executive from AIG. The collapse of this case renders even more appalling the way that prosecutors used it to force both companies to fire their CEOs—Joseph Brandon at Gen Re and Hank Greenberg at AIG. In the latter case, the resulting loss of shareholder wealth—and creation of taxpayer risk—has been staggering.

The federal case was built on an obscure reinsurance transaction between the two companies in late 2000. The feds convinced a jury in 2008 to convict the executives of fraud and conspiracy on grounds that they had engineered the transaction as a sham simply to improve AIG's reported loss reserves and therefore juice its stock price.

Yesterday a unanimous three-judge panel vacated all of the convictions. Among other problems, the judges found that trial judge Christopher Droney had improperly defined for the jury what it means to "willfully cause" a crime. As a result, according to the appellate judges, "the court ended up with a charge that allowed the jury to convict without finding causation." Then there is the government's key witness, Richard Napier, whose story kept changing about who cooked up the allegedly fraudulent scheme.

The appeals court also found that Judge Droney allowed federal prosecutors a stolen legal base: displaying charts to the jury showing AIG's plunging stock price after details of the investigation appeared in the press in early 2005.

Oddly, the judge had realized that a chart with a continuous line moving downward would be prejudicial and disallowed it. But he nonetheless allowed similar charts with bar graphs and a series of dots. The appellate judges found "it is inevitable that jurors would connect them" and that "the charts suggested that this transaction caused AIG's shares to plummet 12% during the relevant time period, which is without foundation."

If news of an investigation and the resulting stock decline can be used as evidence of fraud, then prosecutors can simply manufacture damning evidence at will.

Along the way, prosecutors also used the investigation to force the two companies to fire their CEOs. Neither federal nor state prosecutors brought criminal cases against either man. But AIG's stock was losing altitude in early 2005 in part because New York Attorney General Eliot Spitzer was piggybacking on the federal case and demanding that AIG's board fire Mr. Greenberg. AIG's directors complied in March of that year. After Mr. Greenberg's firing, the company dramatically increased its mortgage exposure, and the rest is financial crisis history.

Continued in article

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

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

"Jury Finds Former Insurance Executives Guilty," The New York Times, February 25, 2008 ---
http://www.nytimes.com/aponline/us/AP-CT-GenRe-AIGTrial.html

A Connecticut jury found five former insurance company executives guilty Monday of a scheme to manipulate the financial statements of the world's largest insurance company.

The verdict came in the seventh day of jury deliberations following a month long trial in federal court.

The defendants, four former executives of General Re Corp. and a former executive of American International Group Inc., sat stone-faced as the verdict was read. They were accused of inflating AIG's (NYSE:AIG) reserves through reinsurance deals by $500 million in 2000 and 2001 to artificially boost its stock price.

The defendants were former General Re CEO Ronald Ferguson; former General Re Senior Vice President Christopher P. Garand; former General Re Chief Financial Officer Elizabeth Monrad; and Robert Graham, a General Re senior vice president and assistant general counsel from about 1986 through October 2005.

Also charged was Christian Milton, AIG's vice president of reinsurance from about April 1982 until March 2005.

Ferguson, Monrad, Milton and Graham each face up to 230 years in prison and a fine of up to $46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.

"This is a very sad day, not only for Ron Ferguson, but for our criminal justice system," Clifford Schoenberg, Ferguson's personal attorney, said in a statement distributed at U.S. District Court in Hartford. "I and the rest of Ron's legal team will not rest until we see him -- and justice -- vindicated."

Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.

Prosecutors said AIG Chief Executive Maurice "Hank" Greenberg was an unindicted coconspirator in the case. Greenberg has not been charged and has denied any wrongdoing, but allegations of accounting irregularities, including the General Re transactions, led to his resignation in 2005.

Continued in article

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

"Accounting for the Abuses at AIG," Insurance and Pensions at the Wharton School of Business," --- http://knowledge.wharton.upenn.edu/index.cfm?fa=viewfeature&id=1180

Improper Use of Finite Policies But in practice, finite policies have sometimes been used improperly. In 2000 and 2001, AIG's Greenberg asked General Re to do an unusual deal involving a bundle of finite contracts General Re had written for clients. AIG took over the obligation to pay up to $500 million in claims on the contracts. At the same time, General Re passed to AIG $500 million in premiums the clients had paid. AIG paid General Re a $5 million fee for moving these contracts to AIG's books.   Last year, General Re reported the deal to investigators who were questioning a number of reinsurers about finite policies. This deal carried a red flag because it was backwards: Typically, it would be AIG seeking a finite policy to shift risk to General Re. Because the $500 million in premiums had to be paid back to General Re, AIG seemed to be losing money on the deal, not making it. So why had Greenberg asked to take over those contracts?   In accounting for the deal, AIG tallied the premiums as $500 million in revenue and applied that amount to its reserve funds used to pay potential claims. This helped satisfy shareholders who had been concerned AIG did not have enough in reserve.   The issue in this deal, as in many finite insurance contracts, is whether AIG was providing insurance coverage or receiving a loan. To be insurance, AIG would have to assume a risk of loss. An industry rule of thumb known as "10/10" says the insurer should face, at a minimum, a 10% chance of losing 10% of the policy amount for the contract to be considered insurance.   In the absence of that degree of risk, the premiums transferred from General Re to AIG, and repayable later, would be a loan. AIG would then not be able to count the $500 million in premiums as additional reserves, as it had.   On March 30, AIG directors announced that: "Based on its review to date, AIG has concluded that the General Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance."   As a result, the company said it would reduce its reserve figure by $250 million and show that liabilities had increased by $245 million. However, it added, these changes would have "virtually no impact" on the company's financial condition. Bottom line: The AIG-General Re deal was an accounting gimmick to make AIG's reserves look healthier than they were -- an apparent effort to deceive regulators, analysts and shareholders.   More Cases of Questionable Accounting The directors then surprised observers by announcing they had uncovered a number of additional cases of questionable accounting.   The most serious involved reinsurance contracts AIG had taken with a Barbados reinsurer, Union Excess, allowing AIG's risk to pass to the other company and off AIG's books. AIG found that Union did business exclusively with AIG subsidiaries, and that Union was partially owned by Starr International Company Inc. (SICO), a large AIG shareholder controlled by a board made up of current and former AIG managers. Hence, the AIG statement said, SICO could be viewed as an AIG unit, or "consolidated entity," and SICO's risks were therefore actually AIG's. As a result, AIG had to reduce its shareholders' equity by $1.1 billion.   Another case involved a Bermuda insurer, Richmond Insurance Company, that the directors found to be secretly controlled by AIG. A third concerned Capco Reinsurance Company, another Barbados insurer, and "involved an improper structure created to recharacterize underwriting losses as capital losses," the directors said. Fixing this meant listing Capco as a consolidated entity and converting $200 million in capital losses to underwriting losses.   Yet another case involved $300 million in income AIG improperly claimed for selling outside investors covered calls on bonds in AIG's portfolio. Covered calls are supposed to give their owners the option to buy bonds at a set price for a given period, but AIG used other derivatives transactions to assure it could retain the bonds.   The directors also stated that certain debts owed to AIG might be unrecoverable, resulting in after-tax charges of $300 million. And they noted that the company was revising accounting for deferred acquisition costs and other expenses involving some AIG subsidiaries, resulting in as much as $370 million in corrections.   Some of the revelations seemed eerily similar to ones raised in the Enron case, which included use of little known offshore subsidiaries to hide liabilities, although the scale of the abuse so far appears to be far smaller at AIG.   The scandal highlights one of the dilemmas of American accounting, says Catherine M. Schrand, professor of accounting at Wharton. "We have one-size-fits-all accounting for firms in this country. If the standard-setters try to make it too specific and take out all the gray areas, then they would have a problem creating financial statements that are relevant."   The degree of risk assumed by a company that takes out a finite insurance policy is difficult to measure, so it may not be absolutely clear, even to the most well intentioned accountant, whether the policy should be counted as insurance or a loan. Companies like AIG are so big, and their accounting so complex, that it's impossible to write regulations to prevent all abuse, Strand suggests. "They will just find another way to do it.... Flexibility gives companies the opportunity to make their financial statements better. But it also gives them the opportunity to abuse the rules." his article is continued at   http://knowledge.wharton.upenn.edu/index.cfm?fa=viewfeature&id=1180

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

TITLE: SEC Brings New Federal Oversight to Insurance Industry with Probes
REPORTER: Deborah Solomon
DATE: Apr 01, 2005
PAGE: A1
LINK: http://online.wsj.com/article/0,,SB111230901945894804,00.html 
TOPICS: Insurance Industry, Regulation, Securities and Exchange Commission, Accounting

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES ---
TITLE: AIG Admits 'Improper' Accounting
REPORTER: Ian McDonald, Deborah Solomon, and Theo Francis
PAGE: A1
ISSUE: Mar 31, 2005
LINK: http://online.wsj.com/article/0,,SB111218569681893050,00.html 

Bob Jensen's Rotten to the Core Threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm

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

"Cheating: The Experts Weigh In," by: Louis Lavelle, Business Week, July 26, 2011 ---
http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2011/07/cheating_the_experts_weigh_in.html
Thanks to David Albrecht for the heads up.

On July 18, the Bloomberg Businessweek Getting In blog publicized the story of NYU Stern Professor Panos Ipeirotis, who caught 20 percent of his class cheating and found the effort he put into rooting out the cheaters was not worth it. In the future, Ipeirotis said he would assign projects requiring more original thought to creatively channel the energies of his highly competitive students.

Some of those who commented on the blog faulted Ipeirotis, blamed the cheating on the Stern grading curve, or said that cheating was common at many schools. Bloomberg Businessweek asked two ethics experts about the views they expressed.

David Callahan is a senior fellow at Demos, a public policy organization in New York. He has a Ph.D. in politics and has written extensively about ethics on his blog for years and in his book, The Cheating Culture, published in 2004.

John Gallagher is an associate dean for the executive MBA program at Duke University’s Fuqua School of Business, where one of his responsibilities is to prosecute honor code violations. Duke dealt with its own cheating scandal in 2007. It’s use of the episode to reinforce the honor code was applauded by many.

Below is an edited transcript of their interview with reporter Kiah Lau Haslett.

What was your reaction to this story?

David Callahan: I’m not surprised at the high level of cheating among business students; research tells us that business students cheat at among the highest rates of students. I think that a lot of professors often get a lot of pushback for exposing cheating. A professor at the University of Central Florida reported a lot of cheating and he was subjected to a lot of attacks to him as a teacher, that it was somehow his fault. I think there’s a lot of rationalization of students about cheating: They don’t find it surprising and people are cynical. They assume there’s a lot of cheating and it’s not a big deal.

Why do students plagiarize?

David Callahan: I think you have to look at the real, underlying causes. Students are extremely anxious today, they’re incurring record levels of debt to go to college, and they’re relying on scholarships and grants dependent upon maintaining a certain GPA. College is no longer the last stop; now it’s a stepping-stone to a professional school and graduate school. College transcripts and GPA really matter. On the one hand, there’s more pressure than ever before to cheat, and on the other hand there’s a tremendous amount of cynicism. When a professor complains about cheating and points it out, students push back in a cynical way and say, “This is commonplace. What’s the big deal?” Or they push back in a defensive way and say, “The pressure’s on me to get good grades and cheating is one way to do it.”

What are some assignments that make it easy for students to cheat or plagiarize? What are some assignments where it's harder to cheat?

John Gallagher: If you are giving a proctored exam in a closed room, there's going to be far less opportunity than if you are giving an assignment that requires people to do analysis and make recommendations. Many institutions use case studies, so it's likely that somewhere you can find someone who has done an analysis of the case. I think that any time you ask students to personalize their work, talking about its applications and concept, it's very much more difficult. No one has written that material and it's unique.

What is the professor's role or responsibility to ensure students don't cheat?

David Callahan: The responsibility on professors in this day and age is to teach in such a way that makes it harder for students to cheat. They need to take seriously the responsibility to reduce the amount of cheating. It doesn't just fall on students to not cheat. Lots of professors feel overburdened as it is, in terms of their teaching obligations. Many don't want to make the extra effort in reducing cheating, and unfortunately they have to make that effort.

Is this the curve's fault?

David Callahan: A zero-sum game where students have to compete against other students exacerbates the situation. Nobody wants to be the chump who's honest when everyone else is cheating and you're in direct competition for grades.

John Gallagher: I don't think so. [At Fuqua] we have a recommended grade distribution that our professors follow, but they are never required to give a low pass or a failing grade. There's no need for students to cheat. There are all kinds of people who cheat for all kinds of reasons. I don't think that you would ever say that the primary factor or force that leads students to cheat is there's some kind of a curve.

What should the punishment be for students caught cheating? Maximum? Minimum?

David Callahan: For the most part there's typically very little punishment for cheaters, which is one reason why there's so much cheating. You typically get punished with a slap on the wrist: flunk a paper, flunk a class. Rarely are they suspended or expelled. Of course, there are different gradations of punishment. But I think there needs to be more. One incentive to cheat is that the punishment is lax or minimal. If there's no punishment there's no deterrent.

John Gallagher: For us, the maximum punishment is rescinding the degree. We've had five cases of alumni where it was later discovered they cheated in one of their courses and their degrees were revoked. The next is that people are simply expelled from the university and there is a notation on their official university transcript stating they were dismissed from the university because of a cheating conviction.

The least severe punishment I have ever seen is mandatory failing of the course, but in our particular world that has significant ramifications. Anyone who fails a course must take a mandatory one-year leave of absence before being allowed to return to retake the failed course and finish the program. Everyone who graduates must have a minimum 3.0 GPA. If you can imagine a five-semester program with a conviction of cheating the fourth semester and you were given a grade of F in a course, looking at the number of courses remaining, it might be mathematically impossible to maintain a GPA and you'd be academically dismissed.

What do you do when a cheating conviction happens? What happens to the student?

John Gallagher: I never speak to companies [who sponsor EMBA students] because of student privacy issues, but I have witnessed the impact of convictions on students. In my experience, companies treat this very severely. It's a severe violation of ethics and it is not something that I would ever expect a company would ignore or have a wink-wink-nudge-nudge attitude toward at all. In many cases, these companies are paying students' tuition and if they're not financially involved, then they've given them the time they need. They are stakeholders in the student's education, and now the student is caught in an extremely awkward situation having to explain the circumstances. It is very serious. It can destroy someone's career and professional reputation.

What should a school do when this happens?

Continued in article

Bob Jensen's threads on Professors Who Let Students Cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#RebeccaHoward

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

Good News
"Grant Thornton Dodges the Koss Bullet, Is Dismissed From Shareholder Lawsuit," by Adrienne Gonzalez, Going Concern, August, August 3, 2011 ---
http://goingconcern.com/2011/08/grant-thornton-dodges-the-koss-bullet-is-dismissed-from-shareholder-lawsuit/

U.S. District Judge Lynn Adelman has dismissed Grant Thornton as a defendant in a class-action shareholder lawsuit against GT, Koss Corp. and CEO Michael J. Koss, filed in January 2010 on behalf of plaintiff David Puskala and other Koss shareholders.

In his ruling, Adelman stated that the plaintiffs failed to make a case for GT’s epic failure to detect former Koss executive Sue Sachdeva’s $34 million embezzlement/hoarding scheme. Reasonable, considering GT auditors scared the crap out of old Sue, even though they were sticking newbies on the gig.  “Fear was one thing. I thought it was imminent,” she said in a court deposition last year. “Their auditors, every time they walked in, I’d say, ‘This is it. They’re going to catch me.’” Shareholders’ issue – we assume – is that they didn’t. Year after year after year after year until 2009 rolled around and the whole house of cards came tumbling down.

The judge also dismissed claims of willful or reckless behavior against Michael Koss, saying “I conclude that the innocent explanations are more compelling than the inference of recklessness.” Meaning Mike couldn’t possibly have known Sue had been siphoning off millions in company money over a six year period, absent hanging out at her house and noticing all the fancy new shit she had strewn everywhere. And stashed in closets. And bursting out of her garage.

As for Grant Thornton, the judge wrote that the occurrence of fraud and failure to detect it doesn’t imply recklessness on the part of the accounting firm, but rather that the firm was negligent. While it is clear that Sachdeva used her position with Koss to bypass the company’s not-rock-solid internal controls, it is also believed that the controls were sufficient so as not to be obviously unreliable to a reasonable person (or auditor fresh out of accounting school). We’re looking forward to hearing how audit professors use this decision to emphasize the cavernous depth between “negligence” and “recklessness” on the part of auditors.

Continued in article

Also see
http://www.jsonline.com/business/126590353.html

This outcome contradicts Francine's indictment of "Grant Thornton’s self-serving defense to the Koss fraud."
I must admit I tended to agree with Francine on this one in terms of the audit firm's gross negligence, although I see nothing wrong is principle with a "self-serving defense."

"Defending Koss And Their Auditors: Just Loopy Distorted Feedback," by Francine McKenna, re: TheAuditors, January 16, 2010 ---
http://retheauditors.com/2010/01/16/defending-koss-and-their-auditors-just-loopy-distorted-feedback/

My objective in writing this story was to handily contradict Grant Thornton’s self-serving defense to the Koss fraud.

The defense supported by some commentators:

Audits are not designed to uncover fraud and Koss did not pay for a separate opinion on internal controls because they are exempt from that Sarbanes-Oxley requirement.

But punching holes in that Swiss-cheese defense is like shooting fish in a barrel.  Leading that horse to water is like feeding him candy taken from a baby. The reasons why someone other than American Express should have caught this sooner are as numerous as the acorns you can steal from a blind pig…

Ok, you get the gist.

Listing standards for the NYSE require an internal audit function.  NASDAQ, where Koss was listed, does not.  Back in 2003, the Institute of Internal Auditors (IIA) made recommendations post- Sarbanes-Oxley that were adopted for the most part by NYSE, but not completely by NASDAQ. And both the NYSE and NASD left a few key recommendations hanging.

In addition, the IIA has never mandated, under its own standards for the internal audit profession, a direct reporting of the internal audit function to the independent Audit Committee. The SEC did not adopt this requirement in their final rules, either.

However, Generally Accepted Auditing Standards (GAAS), the standards an external auditor such as Grant Thornton operates under when preparing an opinion on a company’s financial statements – whether a public company or not, listed on NYSE or NASDAQ, whether exempt or not from Sarbanes-Oxley – do require the assessment of the internal audit function when planning an audit.

Grant Thornton was required to adjust their substantive testing given the number of risk factors presented by Koss, based on SAS 109 (AU 314), Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.  If they had understood the entity and assessed the risk of material misstatement fully, they would have been all over those transactions like _______. (Fill in the blank)

If they had performed a proper SAS 99 review (AU 316), Consideration of Fraud in a Financial Statement Audit, it would have hit’em smack in the face like a _______ . (Fill in the blank.) Management oversight of the financial reporting process is severely limited by Mr. Koss Jr.’s lack of interest, aptitude, and appreciation for accounting and finance. Koss Jr., the CEO and son of the founder, held the titles of COO and CFO, also.  Ms. Sachdeva, the Vice President of Finance and Corporate Secretary who is accused of the fraud, has been in the same job since 1992 and during one ten year period worked remotely from Houston!

When they finished their review according to SAS 65 (AU 322), The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements, it should have dawned on them: There is no internal audit function and the flunky-filled Audit Committee is a sham.  I can see it now. The Grant Thornton Milwaukee OMP smacks head with open palm in a “I could have had a V-8,” moment but more like, “Holy cheesehead, we’re indigestible gristle-laden, greasy bratwurst here! We’ll never be able issue an opinion on these financial statements unless we take these journal entries apart, one-by-one, and re-verify every stinkin’ last number.”

But I dug in and did some additional research – at first I was just working the “no internal auditors” line – and I found a few more interesting things.  And now I have no sympathy for Koss management and, therefore, its largest shareholder, the Koss family.  Granted there is plenty of basis, in my opinion, for any and all enforcement actions against Grant Thornton and its audit partners.  And depending on how far back the acts of deliciously deceptive defalcation go, PricewaterhouseCoopers may also be dragged through the mud.

Yes.

I can not make this stuff up and have it come out more music to my ears. PricewaterhouseCoopers was Koss’s auditor prior to Grant Thornton. In March of 2004, the Milwaukee Business Journal reported, “Koss Corp. has fired the certified public accounting firm of PricewaterhouseCoopers L.L.P. as its independent auditors March 15 and retained Grant Thornton L.L.P. in its place.” The article was short with the standard disclaimer of no disputes about accounting policies and practices.  But it pointedly pointed out that PwC’s fees for the audit had increased by almost 50% from 2001 to 2003, to $90,000 and the selection of the new auditor was made after a competitive bidding process.  PwC had been Koss’s auditor since 1992!

The focus on audit fees by Koss’s CEO should have been no surprise to PwC.  Post-Sarbanes-Oxley, Michael J. Koss the son of the founder, was quoted extensively as part of the very vocal cadre of CEOs who complained vociferously about paying their auditors one more red cent. Koss Jr. minced no words regarding PwC in the Wall Street Journal in August 2002, a month after the law was passed:

“…Sure, analysts had predicted a modest fee increase from the smaller pool of accounting firms left after Arthur Andersen LLP’s collapse following its June conviction on a criminal-obstruction charge. But a range of other factors are helping to drive auditing fees higher — to as much as 25% — with smaller companies bearing the brunt of the rise.

“The auditors are making money hand over fist,” says Koss Corp. Chief Executive Officer Michael Koss. “It’s going to cost shareholders in the long run.”

He should know. Auditing fees are up nearly 10% in the past two years at his Milwaukee-based maker of headphones. The increase has come primarily from auditors spending more time combing over financial statements as part of compliance with new disclosure requirements by the Securities and Exchange Commission. Koss’s accounting firm, PricewaterhouseCoopers LLP, now shows up at corporate offices for “mini audits” every quarter, rather than just once at year-end.”

A year later, still irate, Mr. Koss Jr. was quoted in USA Today:

“Jeffrey Sonnenfeld, associate dean of the Yale School of Management, said he recently spoke to six CEO conferences over 10 days. When he asked for a show of hands, 80% said they thought the law was bad for the U.S. economy.

When pressed individually, CEOs don’t object to the law or its intentions, such as forcing executives to refund ill-gotten gains. But confusion over what the law requires has left companies vulnerable to experts and consultants, who “frighten boards and managers” into spending unnecessarily, Sonnenfeld says.

Michael Koss, CEO of stereo headphones maker Koss, says it’s all but impossible to know what the law requires, so it has become a black hole where frightened companies throw endless amounts of money.

Companies are spending way too much to comply, but the cost is due to “bad advice, not a bad law,” Sonnenfeld says.”

It’s interesting that Koss Jr. has such minimal appreciation for the work of the external auditor or an internal audit function. By virtue, I suppose, of his esteemed status as CEO, COO and CFO of Koss and notwithstanding an undergraduate degree in anthropology, according to Business Week, Mr. Koss Jr. has twice served other Boards as their “financial expert” and Chairman of their Audit Committees.  At Genius Products, founded by the Baby Genius DVDs creator, Mr. Koss served in this capacity from 2004 to 2005. Mr. Koss Jr. has also been a Director, Chairman of Audit Committee, Member of Compensation Committee and Member of Nominating & Corporate Governance Committee at Strattec Security Corp. since 1995.

If I were the SEC, I might take a look at those two companies…Because I warned you about the CEOs and CFOs who are pushing back on Sarbanes-Oxley and every other regulation intended to shine a light on them as public company executives.

No good will come of this.

I don’t want you to shed crocodile tears or pity poor PwC for their long-term, close relationship with another blockbuster Indian fraudster. Nor should you pat them on the back for not being the auditor now. PwC never really left Koss after they were “fired” as auditor in 2004.  They continued until today to be the trusted “Tax and All Other” advisor, making good money filing Koss’s now totally bogus tax returns.

Continued in article

Bob Jensen's threads on Grant Thornton litigation ---
http://www.trinity.edu/rjensen/fraud001.htm#GrantThornton

Bob Jensen's threads on PwC and other large auditing firms
http://www.trinity.edu/rjensen/fraud001.htm

Jensen Comment
You may want to compare Francine's above discussion of audit fees with the following analytical research study:

In most instances the defense of underlying assumptions is based upon assumptions passed down from previous analytical studies rather than empirical or even case study evidence. An example is the following conclusion:

We find that audit quality and audit fees both increase with the auditor’s expected litigation losses from audit failures. However, when considering the auditor’s acceptance decision, we show that it is important to carefully identify the component of the litigation environment that is being investigated. We decompose the liability environment into three components: (1) the strictness of the legal regime, defined as the probability that the auditor is sued and found liable in case of an audit failure, (2) potential damage payments from the auditor to investors and (3) other litigation costs incurred by the auditor, labeled litigation frictions, such as attorneys’ fees or loss of reputation. We show that, in equilibrium, an increase in the potential damage payment actually leads to a reduction in the client rejection rate. This effect arises because the resulting higher audit quality increases the value of the entrepreneur’s investment opportunity, which makes it optimal for the entrepreneur to increase the audit fee by an amount that is larger than the increase in the auditor’s expected damage payment. However, for this result to hold, it is crucial that damage payments be fully recovered by the investors. We show that an increase in litigation frictions leads to the opposite result—client rejection rates increase. Finally, since a shift in the strength of the legal regime affects both the expected damage payments to investors as well as litigation frictions, the relationship between the legal regime and rejection rates is nonmonotonic. Specifically, we show that the relationship is U-shaped, which implies that for both weak and strong legal liability regimes, rejection rates are higher than those characterizing more moderate legal liability regimes.
Volker Laux  and D. Paul Newman, "Auditor Liability and Client Acceptance Decisions," The Accounting Review, Vol. 85, No. 1, 2010 pp. 261–285
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics

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

From The Wall Street Journal Accounting Weekly Review on August 4, 2011

Ex-E&Y Auditors Barred by PCAOB
by: Michael Rapoport
Aug 02, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Audit Firms, Audit Quality, Auditing, PCAOB, Public Accounting, Public Accounting Firms

SUMMARY: The Public Company Accounting Oversight Board (PCAOB) barred two former Ernst & Young LLP employees, Peter C. O'Toole and Darrin G. Estella, "...from auditing public companies, alleging they provided misleading documents to inspectors who were evaluating the accounting firm's work... [The men also have been barred] from associating with public accounting firms for at least three years and at least two years, respectively."

CLASSROOM APPLICATION: The article is useful to cover ethics, the function of the PCAOB, and the reputational foundation for the public accounting profession-typical topics in an opening chapter of an auditing text.

QUESTIONS: 
1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)? What are the organization's responsibilities?

2. (Introductory) According to the PCAOB, what did Peter C. O'Toole and Darrin G. Estella do to some audit workpapers?

3. (Advanced) What options for action are available to the PCAOB when finding something such as Messrs. O'Toole and Estella did? What actions did the PCAOB take and what has been the result?

4. (Advanced) An attorney for Mr. O'Toole "...noted that the PCAOB didn't allege any deficiencies in the audit, nor...[that] the men were trying to hid any audit failure or lie about the work that was actually done...." Then how has the announcement of these men's actions by the PCAOB harmed the accounting and auditing profession?

5. (Advanced) Do you think what Messrs. O'Toole and Estella did was ethically acceptable? Support your answer.
 

SMALL GROUP ASSIGNMENT: 
Question for small group discussion: Suppose you are asked by a superior to introduce an audit workpaper or alter an audit workpaper after completing an audit engagement. What would you do? What impact will your decision have on your immediate future? On your potential long term future?

Reviewed By: Judy Beckman, University of Rhode Island

"Ex-E&Y Auditors Barred by PCAOB," by: Michael Rapoport, The Wall Street Journal, August 2, 25011 ---
http://professional.wsj.com/article/SB20001424053111904292504576482550957477580.html?mod=djem_jiewr_AC_domainid

The government's audit overseer barred two former Ernst & Young LLP employees from auditing public companies, alleging they provided misleading documents to inspectors who were evaluating the accounting firm's work.

The Public Company Accounting Oversight Board barred Peter C. O'Toole and Darrin G. Estella, a former partner and former senior manager in E&Y's Boston office, from associating with public accounting firms for at least three years and at least two years, respectively. Mr. O'Toole also was fined $50,000.

The PCAOB said Mr. O'Toole's three-year bar was the longest it had ever imposed on a partner of a Big Four accounting firm. The two men agreed to settlements with the PCAOB but didn't admit or deny the board's findings. Mr. O'Toole and Mr. Estella may apply to remove their bars after three and two years, respectively.

The PCAOB said that shortly before its inspectors were to scrutinize an E&Y audit of an unidentified company in 2010 as part of its regular inspections of the firm, Mr. O'Toole and Mr. Estella created, backdated and placed in the audit file a document concerning the valuation of one of the audit client's investments, the most important issue in the audit. Mr. O'Toole also allegedly authorized other members of the audit team to alter other working papers in advance of the inspection. The changes weren't disclosed to the PCAOB, the board said.

Ernst & Young said in a statement that it had "separated" both men from the firm after it determined that its policy prohibiting supplementing or changing audit documents had been violated. E&Y said it cooperated fully with the PCAOB's investigation, and that Mr. O'Toole's and Mr. Estella's conduct had no impact on the client's financial statements or on E&Y's audit conclusions.

Continued in article

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