Accounting Scandal Updates and Other
Fraud Between July 1 and September 30, 2013
Bob Jensen at
Trinity University
Bob Jensen's Main Fraud Document ---
http://www.trinity.edu/rjensen/fraud.htm
Bob Jensen's Enron Quiz (and answers) ---
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
Bob Jensen's Enron Updates are at ---
http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates
Other Documents
Many of the scandals are documented at
http://www.trinity.edu/rjensen/fraud.htm
Resources to prevent and discover fraud
from the Association of Fraud Examiners ---
http://www.cfenet.com/resources/resources.asp
Self-study training for a career in
fraud examination ---
http://marketplace.cfenet.com/products/products.asp
Source for United Kingdom
reporting on financial scandals and other news ---
http://www.financialdirector.co.uk
Updates on the leading books on the
business and accounting scandals ---
http://www.trinity.edu/rjensen/Fraud.htm#Quotations
I love Infectious Greed by Frank
Partnoy ---
http://www.trinity.edu/rjensen/Fraud.htm#Quotations
Bob Jensen's
American History of Fraud ---
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
Future of Auditing ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing
"What’s Your Fraud IQ? Think you
know enough about corruption to spot it in any of its myriad forms? Then rev up
your fraud detection radar and take this (deceptively) simple test." by Joseph
T. Wells, Journal of Accountancy, July 2006 ---
http://www.aicpa.org/pubs/jofa/jul2006/wells.htm
What Accountants Need to Know ---
http://www.trinity.edu/rjensen/FraudReporting.htm#AccountantsNeedToKnow
Richard Campbell notes a nice white collar crime blog edited by some law
professors ---
http://lawprofessors.typepad.com/whitecollarcrime_blog/
Lexis Nexis Fraud Prevention Site ---
http://risk.lexisnexis.com/prevent-fraud
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
Mortgage Fraud Task Force Stats: Did You See This? WOW ---
http://www.senseoncents.com/2013/08/mortgage-fraud-task-force-stats-did-you-see-this-wow/
"JPMorgan's $920 Million Admission of Guilt," by Nick Summers,
Blookmberg Businessweek, September 19, 2013 ---
http://www.businessweek.com/articles/2013-09-19/jpmorgans-920-million-admission-of-guilt
Bob Jensen's Rotten to the Core Threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Additional Child Tax Credit Fraud ---
http://videos2view.net/tax-fraud
So why does an IRS employee (Joe) want to work for
the Big Four.
The Treasury Inspector General for Tax Administration (TIGTA) Stumbled on the
the Another IRS Scandal
"TIGTA Finally Stumbles On The Real IRS Scandal," by Peter J. Reilly,
Forbes, September 21, 2013 ---
http://www.forbes.com/sites/peterjreilly/2013/09/21/tigta-finally-stumbles-on-the-real-irs-scandal/
. . .
Latest from TIGTA
I have to admit that I have not been very
scandalized by most of it. It is almost a relief that TIGTA is finally at
least alluding to something that really is scandalous. The latest report –
Chief Counsel Should Take Steps to Minimize the Risk of Outside Influence on
Its Letter Rulings - sounds pretty boring:
The
audit was initiated to assess Chief Counsel’s policy to limit the number
of letter ruling requests handled by its attorneys from the same
taxpayer or practitioner. Chief Counsel implemented this policy in
order to address the taxpayers’ and practitioners’ reported strategy to
increase their chances of obtaining expeditious and favorable letter
rulings by having their requests handled by a preferred attorney.
Think about that. There are people who have
“preferred attorneys” at the Chief Counsel’s, that they want to steer their
stuff to. Why is that ?
Because
of the fees associated with requesting a letter ruling (ranging from
$2,000 to $18,000), associated attorney costs to prepare a letter ruling
request (that can be as much as several hundred thousand dollars), and
the potential tax impact of a favorable ruling, many practitioners view
this strategy as a good business practice.
Apparently there is nothing surreptitious about the
practice:
The
basic strategy practitioners use to have their letter ruling requests
assigned to a preferred attorney in Chief Counsel includes making
direct, extended contact with an attorney whom they have a positive
relationship, including scheduling a presubmission conference. If the
Chief Counsel attorney indicates during the conference that a favorable
ruling is likely, the practitioner will reference the preferred attorney
in the letter ruling request for potential case assignment.
Is Anything Being Done ?
TIGTA found that there is almost no attempt to
exercise any control over rulings being directed to particular attorneys.
One of the six offices has a two-thirds rule. Attorneys are allowed to keep
two-thirds of the ruling requests that are directed to them from a single
firm. TIGTA found that there were really no systems in place to enforce
even this modest rule. One of the offices explained why they could not even
try to have a rule like that.
For example, one associate office’s
main source of letter ruling requests is from the four largest
accounting firms. As a result, management within this associate
office believes a policy of limiting letter ruling assignments from
the same source is impractical to implement.
So essentially, one of the six offices of the IRS
Chief Counsel is a Big 4 outpost. What is so scandalous about that ?
I have not had that much exposure to the most
ethereal levels of tax practice. I was on an AICPA national technical
committee – Partnership Taxation – for a couple of years and I finished my
career with seventeen undistinguished months in a not quite Big 4 firm. I’m
pretty hard to shock, but twice I was shocked.
The So-So Citizens At The AICPA
On the national technical committee, we made
recommendations to make things simpler and clearer. All in all, we were
behaving like good citizens. I remember one time a particularly obscure
question being discussed and one of the Big 4 guys on the committee saying
“You know what. We would be just as happy if that rule remained unclear.”
This was in the early nineties, when the Big 4 was engineering what Jack
Townsend called a “massive
raid on the treasury“. Towards the turn of the
millennium, someone like
Richard Egan of EMC rather than pay the
federal government 20% on a capital gain would pay KPMG 3%. It was all
based on hyper-technical misinterpretations of partnership provisions,
perhaps the very ones that my fellow committee member preferred remain
unclear.
Your Once And Future Boss
I had been the ultimate partnership tax geek in my
small part of the world for many years, so one of the great joys of working
for the national firm was having somebody I could call up every once in a
while to talk about 704(b) and 704(c) and the like.
One of those guys explained the other shocking
thing to me. When somebody at the chief counsel’s office, let’s call
him Joe, thinks about going out on a limb on some sort of ruling, he will
tend to want to run it by his former boss, call her Mary. Mary does not
work for the IRS Chief Counsel anymore. Mary works for Big4. Big4 is where
Joe wants to work in a couple of years. So Joe is getting intellectual
guidance from his once and future boss who now works for the other side.
Now thanks to TIGTA, we learn that Mary can with
relative ease route her ruling requests to Joe or, if she knows that Joe is
too smart and not inclined to play ball, to somebody else.
Why Does Joe Want To Work For Big 4 ?
Recently there was a list released of the 1,000 top
paid federal employees. Number 1,000 was Elizabeth Salini who works for the
SEC at a salary of $216,345. Nobody on the list worked for IRS. In the
regional firm where I worked we had a term for partners who made the kind of
money Ms. Salini made. We were called the bottom quartile.
Working for the IRS Joe gets a better work life
balance and a defined benefit pension plan. He also has ultimate bosses in
Congress who give him contradictory instructions and constantly bad mouth
him. In Big 4, he has bosses who give him contradictory instructions and
talk about how great he is. If he becomes a partner his pension will be one
Enron style debacle away from being obliterated. It still probably
beats
being a cowboy.
Continued in article
The IRS Scandal on Day 138 following the resignation of Lois Lerner
http://taxprof.typepad.com/taxprof_blog/2013/09/the-irs-21.html
Jensen Comment
The public will probably never know what taxpayers paid to pay off Lois Lerner.
She had it pretty good on paid leave all this time just to keep her mouth shut.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Interesting Twist: The victim is suing the casino on grounds that they
should have known this woman had to be gambling with stolen money
"Accountant who stole $4.1 million pleads guilty to tax evasion." by
Todd Cooper, Omah.com, September 27, 2013 ---
http://www.omaha.com/article/20130927/NEWS/130928932
A Gretna woman has pleaded guilty to three counts
of tax evasion in connection with $4.1 million she admitted stealing from an
Omaha tobacco and candy distributor.
Caroline K. Richardson, 54, will be sentenced in
December. She faces up to five years in prison.
In return for her pleas, Sarpy County prosecutors
dropped three counts of filing a false income tax return.
The World-Herald first reported on Richardson's
case in April. Court documents indicated she admitted to taking $4.1 million
over the 2½ years she worked as an accountant for Colombo Candy & Tobacco, a
distributor.
Instead of going after Richardson, Colombo and
owner Monte Brown sued Ameristar Casino. They said the casino should have
known that Richardson was making huge wagers with ill-gotten money. The
casino is fighting that lawsuit in federal court.
Colombo also sued Richardson's former boss — saying
the boss recommended that Colombo hire Richardson despite her alleged
history of theft. Richardson's former boss denied any knowledge of theft by
Richardson at her prior company.
Richardson also admitted to stealing $110,000 from
a La Vista business in 2009. However, Sarpy County sheriff's investigators
never referred that case for prosecution, and Richardson subsequently became
an accountant at Colombo.
Continued in article
21 Scams Used By Devious Car Dealers — And How To Avoid Them ---
http://www.businessinsider.com/how-to-avoid-21-car-dealer-scams-tricks-2013-9
Jensen Comment
When I was teaching the mathematics of finance one of my favorite illustrations
was not mentioned in the above "scams." Scam 22 should be understating the
annual percentage rate (APR) of a car financing contract. My bottom line advice
to my students is to never, never indicate that the purchase will be anything
other than a cash purchase until the very last moment before signing the
purchase contract.
Presumably a buyer is shrewd enough to have negotiated a rock-bottom cash
price. For new cars this is easy since there are various Web sites for comparing
new car purchases. It's bit more difficult for used cars since every used car is
unique.
"For Those Who Need Help Picking a Car, There Is CarZen," by Erick
Schonfeld, The Washington Post, October 19, 2008 ---
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/20/AR2008102000013.html?wpisrc=newsletter&wpisrc=newsletter
Are you compatible with your car? A new site set to
launch in a few days called
Carzen
(http://new.carzen.com/)
aims to help you find the car that is perfect for you. The main feature of
the site is a car consulting tool that asks you basic questions about the
qualities you are looking for in a car (price, size, fuel economy,
reliability) and then spits back a list with the best matches
CarZen is extremely detailed. You can narrow your
search by brand, options (sunroof, power seats), cargo capacity, safety, or
performance characteristics. Looking for a car with a high baby-seat score
or on ethat is particularly easy to park in tight city spots? No problem.
Once you finish answering the questions, which at times seem more like a
personality test, the site generates a list of cars that can be sorted by
best match, price, miles per gallon, or brand.
If you are looking for a new car and don't already
know what you want, it is a good way to generate an initial list. You can
drill down to get more details for each car. There is even a button to get a
price quote, although that doesn't seem to be working at the moment.
(Nevertheless, the business model is to create a trusted research tool for
car buyers and generate lead-generation fees). The site is still in private
beta, but you can check it out by clicking on the "learn more" button in the
widget below and then clicking through to the site.
Jensen Comment
There is also a page entitled "Advice" for advice on such things as lease vs.
buy ---
http://www.carzen.com/advice
After negotiating the rock-bottom cash price is the time to then ask about
financing alternatives. Devious dealers who report low APR financing rates often
do so on the basis of a car price higher than the rock-bottom cash price. Shrewd
car buyers will whip out a financial calculator, tablet computer, or laptop and
then verify the true annual percentage rate of the car dealer's financial deal.
Example calculations using Excel are provided in my EarlBob Car Salesman
file at
www.cs.trinity.edu/~rjensen/Excel/FraudEarlBob.xls
"61 PwC Partners Accused of Tax Crimes Over Bonuses in Spain," by
Charles Penty, Bloomberg Businessweek, September 25, 2013 ---
http://www.bloomberg.com/news/2013-09-25/61-pwc-partners-accused-of-tax-crimes-over-bonuses-in-spain.html
Spain’s anti-corruption prosecutor accused 61
PricewaterhouseCoopers LLP partners of committing tax crimes, saying they
failed to declare a total of 21 million euros ($28.4 million) in bonus
payments.
The PwC partners categorized the 2002 bonus
payments as part of the price of the sale of a consulting division to IBM
that carried a lower tax rate, the prosecutor said in an e-mailed statement
today. The agency presented a written accusation requesting a criminal
trial, according to the statement.
“The partners omitted to establish in their tax
returns that the sums were payments from work,” the prosecutor said.
PwC “roundly denies” the accusations against its
partners and is convinced that the case will be thrown out once the truth is
recognized, the firm’s Madrid office said in an e-mailed statement today.
“There has been no concealment or fraud,” PwC said.
“All the operations and amounts have been declared and formulated with all
the legal requirements.”
Spain is clamping down on tax evasion as part of
its drive to tackle a budget deficit that risks slipping from its target.
The budget shortfall, excluding municipalities, was 5.27 percent of gross
domestic product in the first seven months of the year, compared with a
full-year target of 6.5 percent.
The prosecutor is seeking jail terms of as much as
14 years and 10 months and fines of more than 102 million euros.
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's threads on PwC are at
http://www.trinity.edu/rjensen/Fraud001.htm
Dixon, Illinois will recover slightly less than 80% ($40 million) of the $53
million embezzled by Comptroller Rita
Crundwell
"Dixon to recoup $40 million after Crundwell thefts," by Derek
Barichello, Daily Chronicle, September 25, 2013 ---
http://goingconcern.com/post/cliftonlarsonallen-settles-dixon-36-million-over-crundwell-fraud
The city reached a $40 million out-of-court
settlement this morning with its former auditors and Fifth Third Bank, who
the city said were to blame for former Comptroller Rita Crundwell's theft of
nearly $54 million over two decades.
Mayor Jim Burke made the announcement this morning
during a special meeting of the Dixon City Council, during which the council
approved the settlement...
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Banks find appalling new way to cheat homeowners," by David Dayen,
Salon, September 24, 2013 ---
http://www.salon.com/2013/09/24/banks_find_appalling_new_way_to_cheat_homeowners_partner/
A few months ago, Ceith and Louise
Sinclair of Altadena, California, were told that their home had been sold.
It was the first time they’d heard that it was for sale.
Their mortgage servicer, Nationstar, foreclosed on
them without their knowledge, and sold the house to an investment company.
If it wasn’t for the Sinclairs going to a local
ABC affiliate and describing their horror story,
they would have been thrown out on the street, despite never missing a
mortgage payment. It’s impossible to know how many homeowners who didn’t get
the media to pick up their tale have dealt with a similar catastrophe, and
eventually lost their home.
Continued in article
Bob Jensen's threads on "Rotten to the Core" ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Corrupt — and Set for Life In New York, officials convicted of fraud
continue to draw taxpayer-funded pensions," by Jillian Kay Melchior,
National Review, September 24, 2013 ---
http://nationalreview.com/article/359333/corrupt-and-set-life-jillian-kay-melchior
A corruption conviction doesn’t necessarily stop
elected officials from profiting at the taxpayers’ expense. But a new effort
led by U.S. Attorney Preet Bharara aims to go after politicians’ public
pensions when the courts find them guilty.
“Our primary mission is to address and to undo
injustice, and, in the public-corruption context, a galling injustice that
sticks in the craw of every thinking New Yorker is the almost inviolable
right of even the most corrupt elected official — even after being convicted
by a jury and jailed by a judge — to draw a publicly funded pensionhttp://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
until his dying day,” Bharara, attorney for the Southern District of New
York, testified on September 17 at the Moreland Commission to Investigate
Public Corruption. He added that “convicted politicians should not grow old
comfortably cushioned by a pension paid for by the very people they betrayed
in office.”
National Review Online has found that since 2008,
at least four convicted politicians in New York have drawn pensions, all in
excess of $3,000 per month.
Continued in article
Bob Jensen's threads on why white collar crime pays big time even if you
know your going to get caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
Teaching Case
From The Wall Street Journal's Accounting Weekly Review on September 20,
2013
Deloitte Fined for Conflicts of Interest With Auto Maker
by:
Margot Patrick
Sep 10, 2013
Click here to view the full article on WSJ.com
TOPICS: Ethics
SUMMARY: In London, Big Four accounting and auditing firm Deloitte
was fined 14 million pounds ($22 million) for "failing to manage conflicts
of interest in advice it gave to MG Rover Group...." London's Financial
Reporting Council alleged that Deloitte "failed to consider the public
interest in a series of transactions."
CLASSROOM APPLICATION: The article may be discussed in an ethics or
auditing class to discuss conflicts of interests in services provided by
public accounting firms.
QUESTIONS:
1. (Introductory) From the article and/or other outside sources,
describe the work for which Deloitte is accused of "failing to manage
conflicts of interest" and therefore violating the public interest in its
work.
2. (Introductory) What is the public interest? What are conflicts
of interest?
3. (Advanced) Why do accounting firms have a duty to consider the
public interest in the work they do?
4. (Advanced) What self-regulatory mechanisms are used by the
public accounting profession to ensure this obligation is upheld?
Reviewed By: Judy Beckman, University of Rhode Island
"Deloitte Fined for Conflicts of Interest With Auto Maker," by Margot
Patrick, The Wall Street Journal, September 10, 2013 ---
http://online.wsj.com/article/SB10001424127887324549004579064873397832060.html?mod=djem_jiewr_AC_domainid
Accountancy firm Deloitte was fined £14 million
($22 million) on Monday for failing to manage conflicts of interest in
advice it gave to MG Rover Group and its owners before the British auto
maker entered administration in 2005.
A tribunal handed down the fine after upholding 13
allegations made by regulatory body the Financial Reporting Council against
Deloitte and one of its former partners, Maghsoud Einollahi The FRC's
allegations centered around Deloitte's failure to consider the public
interest in a series of transactions between the auto maker, its owners and
associated companies, and to address the potential conflicts of interest
between the parties.
A Deloitte spokeswoman said the firm is
disappointed with the outcome and disagrees with the tribunal's main
conclusions. It has 28 days to appeal the decision but the spokeswoman
declined to comment on whether it would take action.
The tribunal also issued "a severe reprimand" to
Deloitte, and presented Mr. Einollahi with a £250,000 fine and three-year
ban from working in the profession. A spokesman at Freshfields, the law firm
representing Deloitte and Mr. Einollahi, declined to comment.
The FRC said the tribunal's decision should "send a
strong and clear message to all members of the accountancy profession about
their responsibility to act in the public interest and comply with their
code of ethics."
MG Rover collapsed in 2005, five years after a
group of four businessmen bought the loss-making auto maker for £10.
Deloitte was auditor for MG Rover while also acting as corporate finance
adviser to companies controlled by or affiliated with the businessmen.
The fine came as Deloitte and other auditing firms
face pressure from regulators to sharpen their standards and act with
greater independence in questioning clients' activities.
Continued in article
Bob Jensen's threads on Deloitte's legal woes ---
http://www.trinity.edu/rjensen/Fraud001.htm
The Big Sting
"The Honey Launderers: Uncovering the Largest Food Fraud in U.S. History,"
by Susan Berfield, Blookmberg Businessweek, September 19, 2013 ---
Click Here
http://www.businessweek.com/articles/2013-09-19/how-germany-s-alw-got-busted-for-the-largest-food-fraud-in-u-dot-s-dot-history?campaign_id=DN092013
Magnus von Buddenbrock and Stefanie
Giesselbach arrived in Chicago in 2006 full of hope. He was 30, she was 28,
and they had both won their first overseas assignments at ALW Food Group, a
family-owned food-trading company based in Hamburg. Von Buddenbrock had
joined ALW—the initials stand for its founder, Alfred L. Wolff—four years
earlier after earning a degree in marketing and international business, and
he was expert in the buying and selling of gum arabic, a key ingredient in
candy and soft drinks. Giesselbach had started at ALW as a 19-year-old
apprentice. She worked hard, learned quickly, spoke five languages, and
within three years had become the company’s first female product manager.
Her specialty was honey. When the two colleagues began their new jobs in a
small fourth-floor office a few blocks from Millennium Park in downtown
Chicago, ALW’s business was growing, and all they saw was opportunity.
On March 24, 2008, von Buddenbrock came to the
office around 8:30 a.m., as usual. He was expecting a quiet day: It was a
holiday in Germany, and his bosses there had the day off. Giesselbach was on
holiday, too; she had returned to Germany to visit her family and boyfriend.
Sometime around 10 a.m., von Buddenbrock heard a commotion in the reception
area and went to have a look. A half-dozen armed federal agents, all wearing
bulletproof vests, had stormed in. “They made a good show, coming in with
full force,” he recalls. “It was pretty scary.”
The agents asked if anybody was hiding anywhere,
then separated von Buddenbrock and his assistant, the only two employees
there. Agents brought von Buddenbrock into a conference room, where they
questioned him about ALW’s honey business. After a couple of hours they
left, taking with them stacks of paper files, copies of computer hard
drives, and samples of honey.
Giesselbach returned from Germany three days later.
Her flight was about to land at O’Hare when the crew announced that everyone
would have to show their passports at the gate. As Giesselbach walked off
the plane, federal agents pulled her aside. She, too, answered their
questions about ALW’s honey shipments. After an hour, they let her leave.
The agents, from the U.S. Department of Commerce and the Department of
Homeland Security, had begun to uncover a plot by ALW to import millions of
pounds of cheap honey from China by disguising its origins.
Americans consume more honey than anyone else in
the world, nearly 400 million pounds every year. About half of that is used
by food companies in cereals, bread, cookies, and all sorts of other
processed food. Some 60 percent of the honey is imported from Argentina,
Brazil, Canada, and other trading partners. Almost none comes from China.
After U.S. beekeepers accused Chinese companies of selling their honey at
artificially low prices, the government imposed import duties in 2001 that
as much as tripled the price of Chinese honey. Since then, little enters
from China legally.
Von Buddenbrock and Giesselbach continued to
cooperate with the investigators, according to court documents. In September
2010, though, the junior executives were formally accused of helping ALW
perpetuate a sprawling $80 million food fraud, the largest in U.S. history.
Andrew Boutros, assistant U.S. attorney in Chicago, had put together the
case: Eight other ALW executives, including Alexander Wolff, the chief
executive officer, and a Chinese honey broker, were indicted on charges
alleging a global conspiracy to illegally import Chinese honey going back to
2002. Most of the accused executives live in Germany and, for now, remain
beyond the reach of the U.S. justice system. They are on Interpol’s list of
wanted people. U.S. lawyers for ALW declined to comment.
In the spring of 2006, as Giesselbach, who declined
requests for an interview, was preparing for her job in Chicago, she started
receiving e-mail updates about various shipments of honey moving through
ports around the world. According to court documents, one on May 3 was
titled “Loesungmoeglichkeiten,” or “Solution possibilities.” During a rare
inspection, U.S. customs agents had become suspicious about six shipping
containers of honey headed for ALW’s customers. The honey came from China
but had been labeled Korean White Honey.
Continued in article
Bob Jensen's threads on The 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
GAO Report
"Social Security Overpays $1.3 Billion in Benefits," by Joel Seidman,
CNBC, September 13, 2013 ---
http://www.cnbc.com/id/101032599
An upcoming GAO
report obtained by NBC News says the federal government may have paid
$1.29 billion in
Social Security
disability benefits to 36,000 people who had too much income from work
to qualify.
At least one recipient
collected a potential overpayment of $90,000 without being caught by the
Social Security Administration, according to the report, which will be
released Sunday, while others collected $57,000 and $74,000.
The GAO also said
its estimate of "potentially improper" payments, which was based on
comparing federal wage data to Disability Insurance rolls between 2010
and 2013, "likely understated" the scope of the problem, but that an
exact number could not be determined without case by case
investigations.
More from NBC News:
Protecting social security for the next generation
Is now the worst time to retire? Not even close
Obama's fix would trim Social Security checks
To qualify for
disability, recipients must show that they have a physical or mental
impairment that prevents gainful employment and is either terminal or
expected to last more than a year. Once approved, the average monthly
payment to a recipient is just under $1,000.
(Read more:
Social Security Benefits—10 Things You Must Know)
There is a five-month
waiting period during which monthly income cannot exceed $1,000 before
an applicant can qualify for disability, as well as a nine-month trial
period during which someone who is already receiving benefits can return
to work without terminating his or her disability payments.
The GAO said that its
analysis showed that about 36,000 individuals either earned too much
during the waiting period or kept collecting too long after their
nine-month trial period had expired. The report recommended that "to the
extent that it is cost-effective and feasible," the Social Security
Administration's enforcement operation should step up efforts to detect
earnings during the waiting period.
(Read more:
How to maximize your social security benefit)
In fiscal 2011, more
than 10 million Americans received disability benefits totaling more
than $128 billion. The GAO's report estimates that less than half of one
percent of recipients might be receiving improper payments.
A spokesperson for the
Social Security Administration said the agency had a "more than 99
percent accuracy rate" for paying disability benefits. "While our paymen
taccuracy rates are very high, we recognize that even small payment
errors cost taxpayers. We are planning to do an investigation and we
will recoup any improper payments from beneficiaries."
(Read more:
Medicare will be exhausted in 2026)
"It is too soon to
tell what caused these overpayments," said the spokesperson, "but if we
determine that fraud is involved, we will refer these cases to our
Office of the Inspector General for investigation."
Bob Jensen's threads on the sad state of governmental accounting and
auditing ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Fraud Beat: How Dirty are NASCAR Races?
"More Allegations Of Race “Fixing” At RIR," National Speed Sports News,
September 10, 2013 ---
http://www.nationalspeedsportnews.com/nascar/sprint-cup-nascar/more-allegations-of-race-fixing-at-rir/
Jensen Comment
The big unanswered question is the degree to which organized crime has
infiltrated the NASCAR races? We may never know.
An even bigger question is how much organized crime has infiltrated opera,
especially Italian opera.
A finance professor friend of mine said the following:
"I'm too dumb for opera and too smart for NASCAR."
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Fraud at Bank of America: Subprime Mortgage Fraud Allegations Hit
Bank of America," by Steven Mintz, Ethics Sage, August 9, 2013 ---
http://www.ethicssage.com/2013/08/fraud-at-bank-of-america-.html
Bob Jensen's Fraud Updates ---
http://www.ethicssage.com/2013/08/fraud-at-bank-of-america-.html
Bankers Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
"Accountants are vital to anti-corruption Compliance (in South
Africa), Accountancy SA, September 2013 ---
Click Here
http://www.accountancysa.org.za/resources/ShowItemArticle.asp?Article=SPECIAL+FEATURE%3A+Accountants+are+vital+to+anti-corruption+Compliance&ArticleId=2755&Issue=1130
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Undisclosed Pension Extras Cost Detroit Billions," by Mary Williams
Walsch, The New York Times, September 25, 2013 ---
http://dealbook.nytimes.com/2013/09/25/undisclosed-payments-cost-detroit-pension-plan-billions/?_r=0
Detroit’s municipal pension fund made undisclosed
payments for decades to retirees, active workers and others above and beyond
normal benefits, costing the struggling city billions of dollars, according
to an outside actuary hired to examine the payments.
The payments included bonuses to retirees,
supplements to workers not yet retired and cash to the families of workers
who died too young to get a pension, according to a report by the outside
actuary and other sources.
How much each person received is not known because
payments were not disclosed in the annual reports of the fund.
Detroit has nearly 12,000 retired general workers,
who last year received pensions of $19,213 a year on average — hardly enough
to drive a great American city into bankruptcy. But the total excess
payments in some years ran to more than $100 million, a crushing expense for
a city in steep decline. In some years, the outside actuary found, Detroit
poured more than twice the amount into the pension fund that it would have
had to contribute had it only paid the specified pension benefits.
And even then, the city’s contributions were not
enough. So much money had been drained from the pension fund that by 2005,
Detroit could no longer replenish it from its dwindling tax revenues.
Instead, the city turned to the public bond markets, borrowed $1.44 billion
and used that to fill the hole.
Even that didn’t work. Last June, Detroit failed to
make a $39.7 million interest payment on that borrowing — the first default
of what was soon to become the biggest municipal bankruptcy case in American
history.
Detroit said that making the interest payment would
have consumed more than 90 percent of its available cash. And besides, the
hole in its pension fund was growing again, and it needed yet another $200
million for that.
When Detroit turned to the bond market in 2005, it
acknowledged that it needed cash for its pension fund but did not explain
its long history of paying out more than the plan’s legitimate benefits,
including the bonuses, known as “13th checks,” which were reported earlier
this month by The Detroit Free Press. Nor did the city describe the pension
fund’s distributions to active workers, or that a 1998 shift to a
401(k)-style plan had been blocked and turned instead into a death benefit.
In its most recent annual valuation of the fund, the plan’s actuary said it
was still trying to determine the “effect of future retroactive transfers to
the 1998 defined contribution plan,” without mentioning that it had not been
carried out.
All of these things eroded the financial health of
the pension system, but neither the magnitude of the harm, nor its effect on
the city’s own finances, were disclosed to investors. German banks were big
buyers of Detroit’s pension debt; now, they are complaining that they were
told it was sovereign debt.
Finally, in 2011, the city hired the outside
actuary to get a handle on where all the money was going. The pension
system’s regular actuaries, with the firm of Gabriel Roeder Smith, would not
provide the information because they worked for the plan trustees, not the
city.
The outside actuary, Joseph Esuchanko, concluded
that the various nonpension payments had cost the struggling city nearly $2
billion from 1985 to 2008 because the city had to constantly replenish the
money, with interest. The trustees began making the payments even before
1985, but it appears that Mr. Esuchanko could not get data for earlier
years.
His calculations included only the extra payments
by Detroit’s pension fund for general workers. Detroit has a second pension
fund, for police officers and firefighters, which also made excess payments
in the past. But Mr. Esuchanko could not get the data he needed to calculate
those, either.
When Mr. Esuchanko reported his findings, Detroit’s
city council voted to halt all payments except legitimate pensions, as
described in plan documents. The police and firefighters’ plan trustees
appear to have discontinued the practice earlier.
Detroit’s pension trustees, and their lawyers, were
unavailable on Wednesday to comment on the extra payments.
Joseph Harris, who served as Detroit’s independent
auditor general from 1995 to 2005, said the payments were approved by the
pension board of trustees, and it would have been useless for the city to
have tried to stop them during his term.
“It was like dandelions,” he said. “You just accept
them. They were there, something you’ve seen all your life.”
Continued in article
Bob Jensen's threads on the sad state of pension accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#Pensions
Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Corporate Filers Beware: New “RoboCop” Is On Patrol (detecting
fraud)," by John Carney and Francesca Harker, BakerHostetler, Forbes,
August 9, 2013 ---
http://www.forbes.com/sites/janetnovack/2013/08/09/how-secs-new-robocop-profiles-companies-for-accounting-fraud/
It may not be the superhuman robotic police officer
who patrolled the lawless streets of Detroit in the 1987 sci-fi thriller,
but corporate filers should be every bit as concerned about the Securities
and Exchange Commission’s (“SEC”) new Accounting Quality Model (“AQM”),
labeled not-so-affectionately by some in the financial industry as “RoboCop.”
Broadly speaking, the AQM is an analytical tool which trawls corporate
filings to flag high-risk activity for closer inspection by SEC enforcement
teams. Use of the AQM, in conjunction with statements by recently-confirmed
SEC Chairman Mary Jo White and the introduction of new initiatives announced
July 2, 2013, indicates a renewed commitment by the SEC to seek out
violations of financial reporting regulations. This pledge of substantial
resources means it is more important than ever for corporate filers to
understand SEC enforcement strategies, especially the AQM, in order to
decrease the likelihood that their firm will be the subject of an expensive
SEC audit.
The Crack Down on Fraud in Accounting and
Financial Reporting
In his speech nominating Mary Jo White to take over
as chairman of the SEC, President Obama issued a warning: “You don’t want to
mess with Mary Jo.” That statement now seems particularly true for
corporate filers given the direction of the SEC under her command.
Previously a hallmark of the SEC, cases of accounting and
financial-disclosure fraud made up only 11% of enforcement actions brought
by the Commission in 2012. Since taking over as chairman, Ms. White has
renewed the SEC’s commitment to the detection of fraud in accounting and
financial disclosures.
“I think financial-statement fraud, accounting
fraud has always been important to the SEC,” Ms. White said during a June
interview “It’s certainly an area that I’m interested in and you’re going to
see more targeted resources in that area going forward.” She has backed that
statement up with a substantial commitment of resources. In July, the
commission announced new initiatives which aim to crack down on financial
reporting fraud through the use of technology and analytical capacity,
including the Financial Reporting and Audit Task Force and the Center for
Risk and Quantitative Analytics (“CRQA”). These initiatives will put
financial reports under the microscope through the use of technology-based
tools, the most important of which is RoboCop.
RoboCop: Corporate Profiler
RoboCop’s objective – to identify earnings
management – is not a novel one; rather, it is the model’s proficiency that
should worry filers. Existing models on earnings management detection
generally attempt to estimate discretionary accrual amounts by regressing
total accruals on factors that proxy for non-discretionary accruals. The
remaining undefined amount then serves as an estimate of discretionary
accruals. The fatal flaw in this approach is the inevitable high amount of
“false-positives”, rendering it useless to SEC examiners.
The AQM extends this traditional approach by
including discretionary accrual factors in its regression. This additional
level of analysis further classifies the discretionary accruals as either
risk indicators or risk inducers. Risk indicators are factors that are
directly associated with earnings management while risk inducers indicate
situations where strong incentives for earnings management exist. Based on a
comparison with the filings of companies in the filer’s industry peer group,
the AQM produces a score for each filing, assessing the likelihood that
fraudulent activities are occurring.
While the SEC will be keeping their
factor-composition cards close to the chest, the “builder of RoboCop”, Craig
Lewis, Chief Economist and Director of the Division of Risk, Strategy, and
Financial Innovation (“RSFI”) at the SEC, has offered several clues about
the types of information most likely to catch RoboCop’s attention (Is it
just a coincidence that RoboCop’s movie partner was an Officer Lewis?).
“An accounting policy that could be considered a
risk indicator (and consistently measured) would be an accounting policy
that results in relatively high book earnings, even though firms
simultaneously select alternative tax treatments that minimize taxable
income,” said Mr. Lewis. “Another accounting policy risk indicator might be
a high proportion of transactions structured as ‘off-balance sheet.’”
Frequent conflicts with independent auditors,
changes in auditors, or filing delays could also be risk indicators.
Examples of risk inducers include decreasing market share or lower
profitability margins. This factor-based analysis allows for model
flexibility, meaning examiners are able to add or remove factors to
customize the analysis to their specific needs. The SEC will be able to
continually update the model to account for the moves filers are taking to
conceal their frauds.
Next Generation RoboCop
One of the perceived weaknesses of RoboCop is its
dependence on financial comparisons between filers within an industry peer
group. As Lewis points out, “most firms that are probably engaging in
earnings management or manipulation aren’t doing it in a way that allows
them to stand out from everybody else. They’re actually doing it so they
blend in better with their peer group.”
To account for this, the SEC’s current endeavor is
expanding the model’s capabilities to include a scan of the “Management
Discussion & Analysis” (“MD&A”) sections of annual reports. Through a study
of past fraudulent filings, analysts at RSFI have developed lists of words
and phrasing choices which have been common amongst fraudulent filers in the
past. These lists have been turned into factors and incorporated into the
AQM
“We’re effectively going in and we’re saying: what
are the word choices that filers make that maximize our ability to
differentiate between fraudsters in the past and firms that haven’t had
fraud action brought against them yet?” Mr. Lewis explained during a June
conference in Ireland.
“So what we’re doing is taking the MDNA section,
we’re comparing them to other firms in the same industry group, and we’re
finding that in the past, fraudsters have tended to talk a lot about things
that really don’t matter much and they under-report all the risks that all
the other firms that aren’t having these same issues talk quite a bit
about.”
Firms engaged in fraudulent activity have tended to
overuse particular words and phrasing choices which are associated with
relatively benign activities. They have also tended to under-disclose risks
which are prevalent among a peer group. When a filer has engaged in similar
behavior, RoboCop will flag these types of unusual choices for examiner
review.
How the SEC Uses RoboCop
Although the SEC has cautioned that the AQM is not
the “robot police coming out and busting the fraudsters,” filers would be
wise to understand the power of this tool. RoboCop is a fully automated
system. Within 24 hours from the time a filing is posted to EDGAR, it is
processed by the AQM and the results are stored in a database. The AQM
outputs a risk score which informs SEC auditors of the likelihood that a
filing is fraudulent. The SEC then uses this score to prioritize its
investigations and concentrate review efforts on portions of the report most
likely to contain fraudulent information.
The results of RoboCop’s analysis will likely
become the basis for enforcement scheduling and direction of resources in
the near future. A filing’s risk score will determine whether a filing is
given a quick, unsuspecting review, or whether it is thoroughly dissected by
an SEC exam team, possibly leading to an expensive audit. The SEC has also
said it plans to use the risk scores as a means of corroborating (or
invalidating) the approximately 30,000 tips, complaints, and referrals
submissions it estimates will be received each year through its Electronic
Data Collection Systems or completed forms TCR.
Continued in article
Bob Jensen's threads on fraud are at
http://www.trinity.edu/rjensen/fraud.htm
From the CFO Journal's Morning Ledger on September 12, 2013
Where is Dick Fuld now?
Almost five years ago, Lehman
Brothers went into the largest bankruptcy in U.S. history, the
fission bomb trigger to the thermonuclear event we now call the financial
crisis. Since then, many former Lehman executives have found employment on
Wall Street. Not so former CEO Dick Fuld, a character so outsize—even for a
Wall Street filled with such types—that peers called him “the Gorilla” for
his “brutish manner and aggressiveness.” Post-Lehman, Mr. Fuld might as well
be called “the Dodo” because he has disappeared from his native habitat, the
big money Wall Street scene. Mr. Fuld has sold off real-estate properties
and art from his wife’s collection to pay for lawsuits filed by those
organizations that lost heavily when Lehman’s $40 billion real-estate
business went bust. True, he has pitched deals to Blackstone
and BlackRock, among others, but to no success Wall
Street insiders tell Businessweek’s Joshua Green.
Mr. Fuld and his wife are now major investors in a
tiny Phoenix-based chemical company that grew out a holding company for a
San Francisco strip club. “His real problem is that he’s forever associated
with the Lehman bankruptcy, and anyone who hires him, or even speaks up for
him, risks having this connection rub off on them,” writes Green. “Fuld has
become Wall Street’s Hester Prynne, forever branded.”
Jensen Comment
If the SEC had any guts this gorilla should be looking out through bars.
Bob Jensen's threads on Dick Fuld's wrong doings aided and abetted by a
Big Four auditing firm are at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
Scroll down to the Lehman Bros. fraudulent reporting.
From the CFO Journal's Morning Ledger on September 25, 2013
J.P. Morgan offers $3 billion to end mortgage probes
J.P.
Morgan
has offered to pay about $3 billion as it seeks to
settle criminal and civil investigations by
federal and state prosecutors into its mortgage-backed-securities
activities, the WSJ reports. The Justice Department rejected that sum as
billions of dollars too low for the number of cases involved, but the
discussions have widened to include other investigations of J.P. Morgan, and
the final tally could be larger. The offer from the bank shows that its top
executives and board are weighing the time and effort needed to fight, as
well as the impact on the bank’s reputation and employee morale.
Jensen Comment
$3 billion sounds like a big number but it's pennies on the dollar. In
reality J.P. Morgan should have gone the way of Lehman Brothers ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Three billion one day and $11 billion the
next: When will we be talking real money?
From the CFO Journal's Morning Ledger on September 26, 2013
J.P. Morgan
discussing $11 billion settlement
J.P. Morgan is in
discussions to settle probes related to
mortgage-backed securities for $11 billion,
the WSJ reports. The amount being discussed would
include $7 billion in cash and $4 billion in relief to consumers. As large
as the potential settlement may be, two people familiar with the matter
cautioned that even if a deal is reached, it may not resolve one of the
biggest dangers for the bank: the potential for criminal charges stemming
from the mortgage-backed securities probe.
"Trump University Made False Claims, Lawsuit Says." by Alan Feuer,
The New York Times, August 24, 2013 ---
http://www.nytimes.com/2013/08/25/nyregion/trump-university-made-false-claims-lawsuit-says.html?_r=1&
The
New York State attorney general’s office filed a
civil lawsuit on Saturday accusing Trump University,
Donald J. Trump’s
for-profit investment school, of engaging in illegal business practices.
The lawsuit, which seeks restitution of at least $40
million, accused Mr. Trump, the Trump Organization and others involved with
the school of running it as an unlicensed educational institution from 2005
to 2011 and making false claims about its classes in what was described as
“an elaborate bait-and-switch.”
In a statement,
Eric T. Schneiderman, the attorney general, said
Mr. Trump appeared in advertisements for the school making “false promises”
to persuade more than 5,000 people around the country — including 600 New
Yorkers — “to spend tens of thousands of dollars they couldn’t afford for
lessons they never got.”
The advertisements claimed, for instance, that Mr.
Trump had handpicked instructors to teach students “a systematic method for
investing in real estate.” But according to the lawsuit, Mr. Trump had not
chosen even a single instructor at the school and had not created the
curriculums for any of its courses.
“No one, no matter how rich or famous they are, has a
right to scam hardworking New Yorkers,” Mr. Schneiderman said in the
statement. “Anyone who does should expect to be held accountable.”
The inquiry into Trump University came to light
in May 2011 after dozens of people had complained
to the authorities in New York, Texas, Florida and Illinois about the
institution, which attracted prospective students with the promise of a free
90-minute seminar about real estate investing that, according to the
lawsuit, “served as a sales pitch for a three-day seminar costing $1,495.”
This three-day seminar was itself “an upsell,” the lawsuit said, for
increasingly costly “Trump Elite” packages that included so-called personal
mentorship programs at $35,000 a course.
On Saturday evening, Michael Cohen, a lawyer for Mr.
Trump, denied the accusations in the lawsuit and said the school had
received 11,000 evaluations, 98 percent of which rated students as
“extremely satisfied.”
George Sorial, another lawyer for Mr. Trump, called
the lawsuit politically motivated. He said that Mr. Schneiderman had asked
Mr. Trump and his family for campaign contributions and grew angry when
denied.
Continued in articoe
Five years
after Donald Trump
opened an online university --
called Trump University,
of course -- New York State's Education
Department is taking a dim view of the tycoon's
venture into higher education,
The Daily News
reported today. The university, which promises
to teach would-be plutocrats how to make
themselves rich if they will only make Mr. Trump
a bit richer first, is not a university at all,
say state officials. In a letter obtained by the
News, one official demanded that Mr.
Trump drop "University" from the unaccredited,
non-degree-granting institution's name. "Use of
the word 'university' by your corporation is
misleading and violates New York Education Law
and the Rules of the Board of Regents," the
letter says. Michael Sexton, president of Trump
U., told the News that, if necessary,
"we will change our name to Trump Education."
Interestingly,
the word “accounting” does not appear in the course catalog --- not even the
traditional first course in accounting ---
http://www.trumpuniversity.com/learn/index.cfm
The “courses”
appear to be mostly sales pitch seminars like con men/women put on in hotel
conference rooms.
Bob Jensen's threads on more legitimate distance education
training and education alternatives are at
http://www.trinity.edu/rjensen/crossborder.htm
Bob Jensen's threads on for-profit "schools" operating in the gray zone of
fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud
Bloomberg reports JP Morgan has agreed to pay a $410 penalty over
allegations it manipulated U.S. electricity markets ---
http://www.businessinsider.com/jpmorgan-ferc-settlement-2013-7
Under the agreement, JPMVEC will pay a civil
penalty of $285 million to the U.S. Treasury and disgorge $125 million in
unjust profits. The first $124 million of the disgorged profits will go to
ratepayers in the California Independent System Operator (California ISO),
which operates the California electricity market. The other $1 million will
go to ratepayers in the Midcontinent Independent System Operator (MISO).
Jensen Comment
I thought some traders at Enron went to prison for doing the same thing in
California. Where are the handcuffs?
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
Bob Jensen's threads on dirty rotten bankers ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
From the CFO Journal's Morning Ledger on August 16, 2013
Former Vitesse CFO pleads guilty to falsifying records
Two former executives of
Vitesse Semiconductor
pleaded guilty to charges of conspiring to destroy, alter or falsify records
with the intent of obstructing an SEC investigation, the Department of
Justice said.
Vitesse founder and former CEO Louis Tomasetta and
former CFO Eugene Hovanec pleaded guilty to
fabricating and altering records regarding the company’s April 2001 and
October 2001 stock-option grants, the WSJ reports. The count both men
pleaded guilty to carries a maximum sentence of five years in prison and a
maximum fine of $250,000. Jurors had twice previously failed to reach a
verdict in the case, most recently in 2012. Another former Vitesse CFO,
Yatin Mody, pleaded guilty in 2010 to charges of securities fraud. Mr. Mody
awaits sentencing.
New laws in India aim to tackle corporate fraud
Sweeping
legislation in India aims to reform auditing
practices, with stiffer penalties for fraud and
more government oversight of businesses, the DealBook’s Jen Swanson reports.
The Companies Bill sets tough sanctions for embezzlement, including
mandatory jail time and hefty fines. To prevent additional cases like that
of Satyam—in which Indian auditors failed to notice discrepancies despite
auditing the company for years—the measure calls for the mandatory rotation
of auditors and their firms. Businesses say problems are rife in corporate
India. In a 2012 report by
KPMG, more than half of respondents reported that their companies
had experienced fraud or theft in the previous two years. Most of the
respondents said they consider fraud an inevitable cost of doing business in
this country, and many Indian companies were setting aside a portion of
their turnover to offset anticipated losses.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
From CFO Journal's Morning Ledger on July 9, 2013
Accounting fraud cases are at a 10-year low, but that
could be lulling CFOs into complacency,
writes Emily Chasan in today’s Marketplace section.
Accounting experts and regulatory officials see
warning signs of a potential new round of fraud as the recovery continues.
“The next fraud’s going to happen, it’s just a matter of time,” said James
Walker, CFO of publisher
Walch Education and former chairman of the Institute of Management
Accountants’ ethics committee. Companies are also filing fewer
financial-statement revisions, but they’re making more small adjustments and
revisions,
Chasan notes.
The SEC, meanwhile, is making a big push to uncover
fraud at the earliest possible stage. Last week it launched a Financial
Reporting and Audit Task Force of about eight attorneys and accountants who
will act as an “incubator” to build accounting-fraud cases and hand them
over to bigger units for full investigations. They’ll focus on common
problem areas: revenue recognition, valuation, capitalized versus
noncapitalized expenses, reserves, acquisition accounting and other
performance benchmarks that don’t follow standard accounting principles.
The task force
is small, so it’s counting on some inside help from whistleblowers. “Frauds
in the accounting area are often difficult to detect without somebody from
the inside,” said David Woodcock, who will head the new task force. The SEC
is investigating several accounting-fraud cases referred by whistleblowers
that it wouldn’t have detected otherwise, he said.
Bob
Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Counterfeit Food More Widespread Than Suspected," by Stephen Castle
and Doreen Carvajal, The New Your Times, June 26, 2013 ---
http://www.nytimes.com/2013/06/27/business/food-fraud-more-widespread-than-suspected.html?_r=0
"Chase, Once Considered "The Good Bank," Is About to Pay Another Massive
Settlement," by Matt Taibbi, Rolling Stone, July 18, 2013 ---
http://www.rollingstone.com/politics/blogs/taibblog/chase-once-considered-the-good-bank-is-about-to-pay-another-massive-settlement-20130718
Bob Jensen's Rotten to the Core Threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Good Thing Apple is Sitting on a Mountain of Cash
"Apple Found Guilty of E-Book Price Fixing," by Leila Meyer, T.H.E.
Journal, July 10, 2013 ---
http://thejournal.com/articles/2013/07/10/apple-found-guilty-of-e-book-price-fixing.aspx?=THE21
A federal judge at the
Southern District of New York court has found
Apple guilty of violating United States antitrust
laws and colluding with five book publishing companies to inflate e-book
prices. The three-week trial concluded June 20, and the judge issued the
ruling July 9. The tech giant plans to appeal.
In a civil antitrust lawsuit, the U.S. Department
of Justice claimed that in January 2010 Apple and five publishers entered an
agency-model agreement, in which publishers, not retailers, set the price of
e-books. The publishers agreed to set higher prices for bestsellers and new
releases, resulting in a price increase from $9.99 to $12.99 and $14.99. As
part of the agreement, which preceded Apple's entry into the e-book market
with the launch of the iPad in April 2010, Apple received a 30 percent
commission on each e-book sold and required publishers to match competitors'
prices if they were lower. Because market-dominating Amazon sold e-books for
$9.99, publishers began withholding some bestsellers from Amazon for a
period of time after the release date.
“Understanding that no one Publisher could risk
acting alone in an attempt to take pricing power away from Amazon, Apple
created a mechanism and environment that enabled them to act together in a
matter of weeks to eliminate all retail price competition for their
e-books,” wrote U.S. District Judge Denise Cote, in a
160-page ruling. "The evidence is overwhelming
that Apple knew of the unlawful aims of the conspiracy and joined that
conspiracy with the specific intent to help it succeed."
The Justice Department initially sued Apple and
five of the country's largest publishing companies:
Hachette,
HarperCollins,
Macmillan,
Penguin, and
Simon & Schuster. Only Apple proceeded to trial,
while the publishers settled with the Department of Justice and agreed to
pay more than $166 million combined.
The Department of Justice may now seek injunctive
relief, which could prevent Apple from using the agency business model to
sell e-books for a two-year period and impose other requirements to prevent
the company from skewing the e-book market in its favor.
Because Apple was found guilty of violating U.S.
antitrust laws, 33 state attorneys general will now take the company to
trial to recover money on behalf of consumers who paid higher prices for
e-books.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"SEC Charges Texas Man in Bitcoin-Related Ponzi Fraud: Agency Warns
Investors to Be Wary of Schemes Tied to Virtual Currencies," by Robin Sidel,
The Wall Street Journal, July 23, 2013 ---
http://online.wsj.com/article/SB10001424127887324144304578624221093071466.html?mod=djemCFO_h
Regulators on Tuesday charged a Texas man with
running a Ponzi scheme promising big returns on the virtual currency bitcoin,
and warned individual investors to be wary of similar frauds.
The move by the Securities and Exchange Commission
is the latest action by regulators to rein in suspicious activity associated
with virtual currencies.
"We are concerned that the rising use of virtual
currencies in the global marketplace may entice fraudsters to lure investors
into Ponzi and other schemes in which these currencies are used to
facilitate fraudulent, or simply fabricated, investments or transactions,"
the SEC said in an investor alert.
In recent months federal and state agencies have
started to clamp down on exchanges that trade bitcoin, the most popular
virtual currency, by requiring them to follow the same guidelines as
traditional money-transmission companies like Western Union Co. WU -0.40%
and MoneyGram International Inc. MGI -1.25%
Bitcoin is a decentralized currency that can be
created or "mined" by users. It also can be traded on a number of exchanges
or swapped privately among users. Most of the currency is traded on a
Tokyo-based exchange called Mt. Gox, where one bitcoin was valued Tuesday at
roughly $95.
The SEC on Tuesday charged Trendon T. Shavers, 30
years old, with raising more than $4.5 million worth of bitcoin from
investors who were "falsely" promised a weekly interest rate of 7%. Mr.
Shavers, of McKinney, Texas, was the founder and operator of a website
called Bitcoin Savings and Trust.
Mr. Shavers couldn't be reached for comment.
The civil complaint, filed in federal court in
Texas, cites comments that Mr. Shavers posted on an online bitcoin forum.
They include messages posted by Mr. Shavers under the Internet name
"pirateat40" that played down risks associated with the investment.
Mr. Shavers offered and sold the investments from
at least September 2011 to September 2012, according to the complaint. Mr.
Shavers sold the investments to at least 66 investors, including those in
Connecticut, Hawaii, Illinois, Louisiana, Massachusetts, North Carolina and
Pennsylvania, according to the complaint.
The complaint describes Bitcoin Savings and Trust
as a "sham and a Ponzi scheme" in which Mr. Shavers used bitcoin raised from
new investors to pay the returns on the outstanding investments.
The SEC also accused Mr. Shavers of using nearly
$150,000 of the proceeds for personal expenses, including "rent, car-related
expenses, utilities, retail purchases, casinos and meals."
Mr. Shavers shut down the Bitcoin Savings and Trust
website last August.
Continued in article
Bob Jensen's threads on Ponzi schemes ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Teaching Case From The Wall Street Journal Accounting Weekly Review on
July 12, 2013
New Fraud Crackdown Looms
by:
Emily Chasen
Jul 09, 2013
Click here to view the full article on WSJ.com
TOPICS: Accounting, Accounting Fraud, Fraud, SEC, Securities and
Exchange Commission
SUMMARY: With accounting-fraud cases at nearly a 10-year low,
complacency might be the biggest fraud risk facing chief financial officers.
Large fraud-related restatements of corporate earnings reports have fallen
sharply since the financial crisis, but that doesn't mean that companies
aren't still vulnerable to them. In a push to try to catch corporate fraud
earlier, U.S. securities regulators laid out plans to sharpen their focus on
catching improper financial reporting and accounting fraud by creating two
new task forces and a new analytics center. The Securities and Exchange
Commission's Division of Enforcement is launching a so-called "Financial
Reporting and Audit Task Force" to boost the agency's policing of accounting
and disclosure fraud. The second task force will target fraud at microcap
companies, which often do not have to make full corporate reports to
regulators.
CLASSROOM APPLICATION: This article and the related articles offer
an opportunity to discuss the enforcement of accounting and fraud law, as
well as to serve as a warning to students that they must be alert to these
issues as they progress into their careers as business professionals.
QUESTIONS:
1. (Introductory) What is the SEC? What are its areas of
enforcement?
2. (Advanced) What SEC task force is being formed? What is its
purpose? Please give examples of types of activities that would be
prosecuted under these new initiatives.
3. (Advanced) Why is the SEC concerned about these issues at this
particular time? What factors are in play now, and what factors are
consistently a risk for businesses?
4. (Advanced) What lessons have you learned from this article? What
steps should businesses take to protect themselves from accounting fraud?
Reviewed By: Linda Christiansen, Indiana University Southeast
RELATED ARTICLES:
Accounting Fraud Targeted
by Jean Eaglesham
May 28, 2013
Page: C1
Where the SEC Action Will Be
by Francesco Guerrera
Jun 24, 2013
Page: R4
SEC Lays Out Plan To Fight Accounting Fraud
by Emily Chasan
Jul 02, 2013
Online Exclusive
"New Fraud Crackdown Looms," by Emily Chasen, The Wall Street Journal,
July 9, 2013 ---
http://online.wsj.com/article/SB20001424127887324260204578587771696582496.html?mod=djem_jiewr_AC_domainid
With accounting-fraud cases at nearly a 10-year
low, complacency might be the biggest fraud risk facing chief financial
officers.
Large fraud-related restatements of corporate
earnings reports have fallen sharply since the financial crisis, but that
doesn't mean that companies aren't still vulnerable to them.
"There still is financial-reporting fraud going on
out there," said Andrew Ceresney, the new co-director of the Securities and
Exchange Commission's Division of Enforcement.
And the agency is making a concerted push to
uncover it. Last week, the SEC announced the formation of a Financial
Reporting and Audit Task Force, which it hopes will catch accounting frauds
at earlier stages.
Of course, companies have made big strides in
improving their internal controls since the Enron-era accounting scandals,
in part because of the rules imposed by the Sarbanes-Oxley law in 2002. But
accounting experts and regulatory officials say there are warning signs that
a new round of fraud could be in the offing as the recovery continues.
While big restatements are less common these days,
a growing percentage of companies are making minor revisions to their
financial results. Auditor turnover is up. And long-term interest rates are
starting to rise, potentially squeezing some business deals and raising
temptations to cook the books.
"The next fraud's going to happen, it's just a
matter of time," said James Walker, CFO of publisher Walch Education and
former chairman of the Institute of Management Accountants' ethics
committee.
The financial crisis exposed the need for better
internal safeguards, more transparency and a thicker capital cushion at some
companies. But since the crisis began in 2007, the number of companies
making fraud-related restatements has fallen by almost half, compared with
the six preceding years, according to Audit Analytics. Last year, the
research firm's data show, auditors blamed fraud for a "material weakness"
in internal controls at just five public companies, down from a peak of 19
in 2005.
That drop-off may be partly why senior executives'
perceptions of risk have been declining faster than reported incidents of
fraud, according to a survey last fall by Kroll Advisory Solutions.
If so, the SEC may have delivered a wake-up call.
"We think there's a need to focus our attention to identify accounting
fraud," said Mr. Ceresney.
The new SEC task force of about eight attorneys and
accountants will act as an "incubator" to build accounting-fraud cases and
hand them over to bigger units for full investigations, he said. They will
focus on common problem areas: revenue recognition, valuation, capitalized
versus noncapitalized expenses, reserves, acquisition accounting and other
performance benchmarks that don't follow standard accounting principles.
While the task force is small, it is counting on
some inside help. Under the Dodd-Frank financial law, which lets the SEC
offer bounties to whistleblowers, the agency collected 547 tips related to
corporate disclosures and financial results last year.
"Frauds in the accounting area are often difficult
to detect without somebody from the inside," said David Woodcock, who will
head the new task force. The SEC is investigating several accounting-fraud
cases referred by whistleblowers that it wouldn't have detected otherwise,
he said.
He also said he is troubled by the spike in the
number of companies making minor revisions in financial statements. Those
adjustments now represent nearly 65% of all restatements, the highest
percentage since regulators changed the way companies report restatements in
2004, according to Audit Analytics.
Some of the changes may reflect the growing use of
big data and automated internal controls. Last month, at the Association of
Certified Fraud Examiners' conference in Las Vegas, one of best-attended
panel discussions was on how to set up accounting ratios—such as the
relationship between shipping costs and sales—to help spot irregularities
faster.
Years ago, forensic accountants were more likely to
analyze completed balance sheets, accounting firms including Ernst & Young
say they are increasingly fielding requests for forensic work on the raw
data employees collect, an option made possible by advances in computer
technology and analytic tools.
Meanwhile, automation and cost cutting have left
many companies with smaller financial and compliance staffs. "When companies
cut back the workforce, oftentimes internal controls suffer," said James
Ratley, president of the Association of Certified Fraud Examiners.
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Treasury's Fannie Mae Heist: The government asked investors to
shore up the two mortgage giants. Now those investors are being stiffed," by
Theodore B. Olson, The Wall Street Journal, July 23, 2013 ---
http://online.wsj.com/article/SB10001424127887323309404578617451897504308.html?mod=djemEditorialPage_h
The federal government currently is seizing the
substantial profits of the government-chartered mortgage firms, Fannie Mae
FNMA -4.35% and Freddie Mac, FMCC -1.36% taking for itself the property and
potential gains of private investors the government induced to help prop up
these companies. This conduct is intolerable.
Earlier this month I filed a lawsuit to stop it,
now known as Perry Capital v. Lew, and other lawsuits challenging the
government's authority to demolish private investment are stacking up.
Perhaps it's time for the government to change course.
When the nationwide mortgage crisis first took hold
in 2007 and 2008, Fannie and Freddie shored up their balance sheets with
some $33 billion in private capital, much of it from community banks, which
federal regulators encouraged to invest in the companies. As the crisis
deepened, the government determined that Fannie and Freddie also needed
substantial assistance from taxpayers. Congress passed the Housing and
Economic Recovery Act of 2008, and under that law the government ultimately
plowed $187 billion into the companies.
Taxpayers should get their investment back, but
once they do, so should the private investors who first came to Fannie and
Freddie's aid. The government's scheme to wipe out these investors is bad
policy and a plain violation of the law that respects private,
investment-backed expectations and our constitutional protection of property
rights.
When the government intervened in Fannie and
Freddie in 2008, it faced a choice: It could place the companies into a
receivership and liquidate them, or it could operate them in a
conservatorship and manage them back to financial health. Conservatorship,
the government agreed, offered the best chance of stabilizing the mortgage
market while repaying the taxpayers for their investment.
Today, Fannie and Freddie are back. Last quarter,
Fannie announced a quarterly profit of over $8 billion; Freddie made $7
billion.
Rather than allow private investors to share in
these profits, the federal government unilaterally decided to seize every
dollar for itself. Last summer the government changed the terms of its
investment from a fixed annual dividend of 10%—a healthy return in this
market—to a dividend of nearly every dollar of the companies' net worth for
as long as they remain in operation.
So, at the end of last month, Fannie and Freddie
sent a whopping $66 billion to the Treasury as a dividend. None of this
money went to pay down the government's investment. Whatever amount of money
the government takes out of Fannie and Freddie, the amount owed to the
government is never to be reduced, meaning there can never be any recovery
for private investors.
It's a splendid deal for the government: The
president's budget estimates, over the next 10 years, that the government
will recover $51 billion more than it invested in the companies—and that's
on top of tens of billions in dividends the government took out of the
companies from 2008-12. But it's a complete destruction of the investments
of private shareholders.
That is unlawful for at least three reasons. First,
the government's authority to revise its investments in Fannie and Freddie
expired more than three years ago. Its change in the payment structure was
utterly lawless.
Second, the Housing and Economic Recovery Act
expressly requires the government to consider how its actions affect private
ownership of the companies. The government has evidently given no attention
to that requirement.
Third, that same law requires the government,
operating Fannie and Freddie as a conservator, to safeguard their assets,
but the government's new dividend scheme conserves nothing. In fact, the
government has acknowledged it intends to facilitate the companies' ultimate
liquidation. That is the opposite of conservatorship and it violates
virtually every limitation that Congress imposed on the government's
authority to intervene in Fannie and Freddie.
Some have suggested that this illegal extinction of
private investment is justified by the extraordinary levels of support that
taxpayers provided to Fannie and Freddie during the financial crisis.
Certain recent legislative proposals even purport retroactively to legalize
the government's cash-grab in the name of ensuring the taxpayers are repaid.
But the companies' return to profitability means that taxpayers likely will
be repaid in full, with interest, by the end of next year.
In these circumstances the right thing to do is to
permit the companies to pay down what they owe to the government's
investment so that private investors also might have the opportunity to earn
returns on theirs. Yet, the "right thing" here is not just what the law
requires. It may benefit the taxpayers as well. If Fannie and Freddie ever
return to private ownership, the government has rights to 80% of the
companies' common stock.
The government's recent cash grab squanders that
opportunity, but it threatens even more serious harms. The United States has
the most liquid securities markets in the world only because of its strong
commitment to the rule of law and respect for private property. The
government's actions here are an affront to those commitments.
Mr. Olson, a former U.S. solicitor general, is a partner at Gibson,
Dunn & Crutcher.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
The Most Criminal Class Writes the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
Perhaps the title of the article should instead be:
"What Makes Rich and Powerful Executives (Continue to)
Commit Fraud?"
Jensen Comment
Perhaps they became rich and famous because they committed fraud all along. The
question is why they continue to commit fraud after they are multi-millionaires?
By all accounts most Ponzi scheme fraudsters eventually want to end their frauds
but find that it's impossible to do so without getting caught.
Frauds like inside traders that often involve partners who feed in the inside
information make it hard to shut down such frauds unless all the partners agree
to end the schemes.
I don't think that behind the facade arrogance that most fraudsters do not
daily live in tension and fear about getting caught. I think they continue to
commit fraud either because they still need the money to feed their bad habits
or that they cannot find an easy way out once they have their pot of gold.
Of course there are many successful fraudsters who get out before its too
late and live well on their stolen pot of gold
We often hear about the scores of Enron executives went to prison. But there are
also those who grabbed their pot of gold early on and were never punished. I
hesitate to call Rich Kinder a fraudster since I think he perhaps got out early
when he commenced to smell the rats at Enron. He earned his billions
legitimately after he left Enron without a pot of fraudulent gold.Some
fraudsters get out due to blind luck. Read about Lou Pai's timely divorce below.
Read about Rebecca Mack's timely firing that led to her very timely sale of her
Enron stock.
More questionable executives in Enron who departed early with their pot of
gold ahead of law enforcement include Rebecca Mack
and Lou Pai.
Lou Pai
First there's the soap opera of Lou Pai, his strip tease dancers, his Colorado
ranch bigger than Rhode Island, and the mountain he named after himself.
An obscure and incompetent trading executive named Lou Pai is the biggest
Enron stock sale winner (over $270 million) but that was sheer luck because he
was sued for divorce by his wife while Enron's share prices were still soaring.
Lou had an addiction for strippers to a point where he brought dancers back to
Enron HQ to prove that he really was a wealthy executive.
He didn't particularly want to sell his Enron stock at that time, but when he
got a strip tease dancer pregnant Lou's wife demanded a cash settlement in the
divorce. That turned out to be the luckiest timing in her or his life. I don't
know how much the dancer got in the end, but she did marry Lou immediately after
his divorce.
Rebecca Mark's timely selling of her Enron shares
yielded $82,536,737. You can read 1997 good stuff about
her in
http://www.businessweek.com/1997/08/b351586.htm and bad stuff about her
(with pictures) at
http://www.apfn.org/enron/mark.htm
Rebecca Mark-Jusbasche
has held major leadership positions with one of the world's largest
corporations. She was chairman and CEO of Azurix from 1998 to 2000.
Prior to that time, she joined Enron Corp. in 1982, became executive
vice president of Enron Power Corp. in 1986, chairman and CEO of Enron
Development Corp. in 1991, chairman and CEO of Enron International in
1996 and vice chairman of Enron Corp. in 1998. She was named to
Fortune's "50 Most Powerful Women in American Business" in 1998 and 1999
and Independent Energy Executive of the Year in 1994. She serves on a
number of boards and is a member of the Young President's Organization.
She is a
graduate of Baylor University and Harvard University. She is married
and has two children.
http://superwomancentral.com/panelists.htm
If Mark had taken
a bitter pleasure in Skilling’s current woes—the congressional grilling,
the mounting lawsuits, the inevitable criminal investigation—no one
would have blamed her. And yet she was not altogether happy to be out of
the game. Sure, she had sold her stock when it was still worth $56
million, and she still owns her ski house in Taos. Her battle with
Skilling, however, had been a wild, exhilarating ride.
TIME
TABLE AND THE REST OF THE STORY:
http://www.msnbc.com/news/718437.asp
Rebecca P. Mark-Jusbasche,
now listed as a director, bagged nearly $80 million for her 1.4 million
shares. Rebecca was just Rebecca P. Mark without the hyphenated flourish
in 1995, though I shouldn't say "just" because she was also Enron's CEO
at the time, busily trying to smooth huge wrinkles in the unraveling
Dabhol power project outside Bombay. That deal, projected to run to $40
billion and said to be the biggest civilian deal ever written in India,
hinged on a power purchase agreement between the Maharashtra State
Electricity Board (MSEB) and Enron's Dabhol Power Corp. (a JV led with
project manager Bechtel and generator supplier GE).
There had been a lot of
foot-dragging on the Indian side and Becky was there to light a fire. A
memorandum of understanding between Enron and the MSEB had been signed
in June '92 – only two weeks, as it happened, before the World Bank said
it couldn't back the project because it would make for hugely expensive
electricity and didn't make sense.
According to the state
chief minister's account given two years later, the phase-one $910
million 695 MW plant was to run on imported distillate oil till
liquefied natural gas became available. By the time the phase-two $1.9
billion 1320 MW plant was to be commissioned, all electricity would be
generated by burning LNG – a very sore point with World Bank and other
critics, given the availability of much cheaper coal.
In the event, by
December '93, the power purchase agreement was signed, but with an
escape clause for MSEB to jump clear of the second, much bigger plant.
State and union
governments in India came and went, and for every doubt that surfaced,
two were assuaged long enough for Indian taxpayers to sink deeper into
Enron's grip.
Soon they were bound up
in agreements to go ahead with the second phase of the project -- which
now promised electricity rates that would be twice those levied by Tata
Power and other suppliers. Unusually for this kind of project, the state
government, with Delhi acting as a back-up guarantor, backed not just
project loans but actually guaranteed paying the monthly power bill
forever -- all in U.S. dollars – in the event the electricity board,
DPC's sole customer, defaulted.
"The deal with Enron involves payments
guaranteed by MSEB, Govt. of Maharashtra and Govt. of India, which
border on the ridiculous," noted altindia.net on its Enron Saga pages.
"The Republic of India has staked all its assets (including those
abroad, save diplomatic and military) as surety for the payments due to
Enron."
http://www.asiawise.com/mainpage.asp?mainaction=50&articleid=2389
Key Lay and Rebecca Mark attempted to strong arm President Bush and Vice
President Cheney into holding back on U.S. Aid payments to India if India
defaulted on payments to India for the almost-useless power plant built by Enron
(because it was gas in coal-rich India). However, about the same time, the Gulf
War commenced. The U.S. needed all the allies it could get, including India.
Hence, the best laid political strong arm intentions of Lay and Mark failed.
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Ebix is a leading international supplier of software and e-commerce solutions
to the insurance industry ---
http://www.ebix.com/#
Global Offices ---
http://www.ebix.com/locations.aspx
"Ebix: Did Bad Writing Signal Bad Accounting?" by Anthony H. Catanach
Jr., Grumpy Old Accountants Blog July 5, 2013 ---
http://grumpyoldaccountants.com/blog/2013/7/5/ebix-did-bad-writing-signal-bad-accounting
Poor Ebix…the
Company and its flamboyant,
turnaround expert CEO have had a challenging ten
months. First, on
September 28, 2012, an Atlanta U.S. district court
ruled that an investor lawsuit alleging false statements by the Company in
its financial reports could proceed (see 2012 10-K, page 15). Next, came the
revelation in November 2012 that the U.S. Securities and Exchange Commission
(SEC) was investigating the Company for its accounting practices: revenue
recognition and financial reporting internal controls. This was followed by
news on June 14, 2013 that the U.S. Attorney in Atlanta is investigating the
Company for
intentional misconduct. And this last bit of news
not only
scuttled an offer by Goldman Sachs Group, Inc. to
buy the Company for $780 million, but also wiped out almost $300 million in
market capitalization. At least for the time being, Robin Raina’s dream of
owning 29 percent in the “new” company, and silencing the short-sellers who
have been hounding the Company for the past two years, is dead. But is bad
accounting really to blame for Ebix’s recent misfortunes? Or could it be
something else?
What you ask? Well, a recent column by Jean
Eaglesham titled “Accounting
Fraud Targeted” might just offer a clue. This
article mentions the SEC’s use of new software to analyze the 10-K’s
management discussion and analysis (MD&A) section looking for signs of
possible earnings manipulation and other financial reporting fraud
behaviors. So, could “bad writing” have tripped up the Company? After all,
on the surface, the Company’s numbers seem just fine: increasing revenue,
operating income, earnings per share, and assets. As you might expect, this
grumpy old accountant just had to conduct his own “textual analysis.”
Without any
fancy fraud detection software at my disposal, I decided to arm myself with
the latest
MBA jargon
as an “enabler,” so that I
might “drill down” into Ebix’s MD&A. I was not
disappointed at all. On page two of the Company’s 2012 10-K alone, I was
rewarded with such confusing and incomprehensible phrases as “powerhouse of
backend insurance transactions; complimentary accretive acquisitions;
carrying data from one end to another seamlessly; best of breed
functionality; integrates seamlessly; best of breed solution; resources and
infrastructure are leveraged; and acquisitive growth vs. organic revenue
growth becomes rather obscure.”
Continued in article
And there's unrelated fraud in terms of the Ebix customer base
From the CFO Journal's Morning Ledger on June 21, 2013
Insurance-accounting overhaul moves toward final phase
The IASB just issued its latest draft of proposed new rules for
accounting for insurance contracts,
Emily Chasan
reports. The proposal
this week revises a 2010 exposure draft to reduce the impact of artificial,
noneconomic volatility in insurance accounting and would change the way
companies present insurance-contract revenue in their financial statements.
New rules on insurance accounting are expected to make fundamental changes
to the way companies account for insurance contracts, and add more
principle-based rules to one of the most industry-specific areas of
accounting. Read
the exposure draft here (PDF).
"Insurers Inflating Books, New York Regulator Says," by Mary Williams
Walsh, The New York Times, June 11, 2013 ---
Bob Jensen's threads on creative accounting and earnings management ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Grant Thornton Coughs Up $8.5 Million for Not Detecting Fraud
"Koss settles claims against former auditor Grant Thornton," by Gary
Spivak, Milwaukee Sentinel Journal, July 5, 2013 ---
http://www.jsonline.com/business/koss-settles-claims-against-former-auditor-grant-thornton-b9948373z1-214372071.html
Koss Corp. collected $8.5 million from Grant
Thornton, the accounting firm that audited Koss' books during a portion of
the time that Sujata "Sue" Sachdeva was stealing millions from the company.
The payment made Wednesday settles a lawsuit filed
in Cook County, Ill., in which Koss charged Grant Thornton with negligence
for not discovering Sachdeva's thievery. Sachdeva's scheme ran for about 12
years and cost Koss, a maker of headphones, about $34 million. Her
embezzlement, which financed an extravagant lifestyle that included trips
and shopping sprees, intensified in the final years of the scheme.
Sachdeva, who had been the company's vice president
of finance, is serving an 11-year federal prison sentence and is expected to
be released in August 2020, according to the Federal Bureau of Prisons.
"I don't think it is possible to look at the size
of the settlement and conclude that Grant Thornton didn't see some risk if
this case came to trial," said Jeremy Levinson, a Milwaukee attorney not
involved in the case. "Every story that gets written on this case, including
this one, is bad for Grant Thornton."
Grant Thornton charged Koss nearly $700,000 for
work it performed from 2004 until it was fired shortly after Sachdeva was
arrested in December 2009, according to records filed with the U.S.
Securities and Exchange Commission. Baker Tilly, the auditing firm that
replaced Grant Thornton, collected $570,679 for its first year of work — a
time when the FBI, auditors and company officials scoured Koss' books to
determine the level of damages she caused.
Tracy Coenen, a Milwaukee forensic accountant who
criticized Koss management on her Fraud Files blog, said the company should
shoulder the blame for not detecting Sachdeva's crimes earlier.
"Upper management was at least negligent in not
properly overseeing what she was doing and for not having proper internal
controls," Coenen said. Koss "management bears the bulk of the
responsibility, if not all of it."
Continued in article
Grant Thornton
said in a statement that it had met "all of our professional obligations
and that our work complied with professional standards."
See below
"Koss embezzlement ran in spurts,
lawsuit says $478,735 spent over three days in summer 2006" by Cary
Spivak, Milwaukee Journal Sentinel, July 10, 2010 ---
http://www.jsonline.com/business/98152439.html
The $31 million
embezzlement at Koss Corp. included several spurts of rapid-fire
spending, according to a recent court filing - including one
three-day span in 2006 during which nearly $500,000 flew out of the
Milwaukee company's accounts and into the hands of three high-end
retailers and a credit card company.
The lists of checks
and wire transfers shed new light on the scheme for which Sujata
"Sue" Sachdeva, former vice president of finance for Koss, is facing
six federal felony charges. She was arrested by the FBI in December
and has pleaded not guilty.
The list, which
takes up the equivalent of about 10 single-spaced pages, is
contained in a lawsuit that Koss filed last month against Sachdeva
and its former auditor, Grant Thornton LLP.
The list shows that
in addition to expenditures at upscale clothing retailers, Koss
funds also were spent on smaller luxury items such as a personal
trainer and limousine rides. Koss charges that the payments listed
in the lawsuit were used to pay for Sachdeva's personal expenses.
The spending spurts
left some experts wondering how the scheme could have gone unchecked
for at least seven years.
"If they just looked
at a sample of the withdrawals, they would have found it," said Joel
Joyce, a forensic accountant at Reilly, Penner & Benton, referring
to Koss executives or outside auditors. "They might not have caught
it in the first month . . . but my guess is it would not have been
six to seven years."
A case in point was
a flurry of check-writing in the summer of 2006.
On Aug. 1 of that
year, two cashier's checks totaling $154,021 went to Valentina Inc.,
an exclusive Mequon clothing store.
The next day, an
$18,100 cashier's check was cut to Neiman Marcus and a $10,120 check
was made out to Saks Fifth Avenue.
Then, on Aug. 3,
three checks totaling $296,494 were written to American Express, the
credit card company that eventually blew the whistle on Sachdeva
last year.
Total over the
three-day span: $478,735.
The checks to
retailers identified the merchants by their initials, Koss said in
the lawsuit. For example Valentina was V Inc. and Saks Fifth Avenue
was S.F.A Inc.
Tony Chirchirillo,
owner of Valentina, said he saw nothing suspicious about the large
cashier's checks his company received from Sachdeva. He said he
assumed the checks were backed by her own funds.
It's believed that
over a five-year period Sachdeva spent more than $5 million at the
boutique, sources said, although Chirchirillo said that figure
"seemed high."
"I didn't know it
came from Koss," Chirchirillo said, explaining that unlike personal
checks, the cashier's checks did not list whose account the money
was being drawn from. "I was told by an FBI agent that the money
came from Koss. I would not have taken it if it said Koss."
The largest
withdrawals listed in the lawsuit went to upscale retailers and to
American Express, the target of an earlier lawsuit filed by Koss
that contended the credit card company should have raised suspicions
about the expenditures sooner.
The August spurt
wasn't the only one. On Feb. 3, 2006, two cashier's checks were
written to American Express, one for $102,836 and the other for
$101,451.
And from July 11 to
July 17 of 2003, a check for $20,182 was written to Marshall Fields,
a second for $26,420 went to Saks Fifth Avenue, and five checks
totaling $104,738 went to American Express.
The indictment
against Sachdeva charges that she spent most of the embezzled money
on luxury clothing and jewelry, furs, vacations and items for her
Mequon home. More than 22,000 items - some with price tags still
attached - have been seized by federal authorities in connection
with the investigation, including fur coats, designer clothing,
jewelry, art items and hundreds of pairs of shoes.
Among the payments
detailed in the latest lawsuit:
• Carey Limousine
received $16,706 from 2006 to 2008, with the bulk of the money
coming in 2007. The most expensive ride was for $4,460 in September
2007.
• Chris A. Aiello, a
personal trainer, was paid $770 in 2005. Aiello said he trained
Sachdeva two to three times a week, sometimes in a conference room
at Koss headquarters and sometimes at her Mequon home. Normally,
Aiello said, he was paid with personal checks by Sachdeva, although
he recalled that on a handful of occasions Sachdeva told him to get
his money from one of her assistants, Julie Mulvaney. He said he
thinks those few checks came from Koss.
"You question it in
your mind, but you don't say anything," said Aiello, who no longer
trains Sachdeva. "We weren't doing anything illegal."
• Several payments,
including one for $21,000 and another for $14,000, went to
individuals. Ongoing investigations include an effort to determine
what connection, if any, those people had to Sachdeva.
• Mulvaney was paid
a total of $14,000, and another Sachdeva assistant, Tracy Malone,
was paid about $1,800. Both employees were fired by Koss last year,
and attorneys for both women have said they did nothing wrong.
In addition, more
than $145,000 was taken from petty cash, in increments ranging from
$482 to $9,049, according to the Koss list.
"That's a lot of
distributions coming out of petty cash," said Richard Brown, the
retired head of accounting company KPMG's Milwaukee office. "But
petty cash doesn't get a lot of attention."
At the time of the
scheme, Michael Koss held five high-level titles in the company
including chief executive officer and chief financial officer. Koss,
the son of the company's founder, remains CEO but is no longer CFO.
"A CFO should have
been reviewing financial reports that might have raised questions,
which might have included 'Let me see the documents,' " said Brown,
who now teaches accounting. That review would have likely led to
question about why thousands, and in some cases millions, were being
paid to retailers, he said.
The suit, filed in
Cook County, Ill., seeks damages from Grant Thornton and alleges the
national accounting firm failed to spot the fraud and repeatedly
assured Koss that it had adequate internal controls.
Grant Thornton said
in a statement that it had met "all of our professional obligations
and that our work complied with professional standards."
Michael Koss and the
California attorney who filed the lawsuit did not return calls for
comment.
Brown said suits
filed against auditors by companies that are fraud victims often are
settled out of court.
"A full blown civil
lawsuit will bring out a lot of facts potentially embarrassing to
both the company and the accounting firm," Brown said, adding it was
impossible to say which side might prevail in litigation. "Both the
company and the audit firm will suffer continued embarrassing
publicity if the suit goes to completion. It is for this reason that
these types of suits often get settled out of court before a trial
The $31 million
embezzlement at Koss Corp. included several spurts of rapid-fire
spending, according to a recent court filing - including one
three-day span in 2006 during which nearly $500,000 flew out of the
Milwaukee company's accounts and into the hands of three high-end
retailers and a credit card company.
The lists of checks
and wire transfers shed new light on the scheme for which Sujata
"Sue" Sachdeva, former vice president of finance for Koss, is facing
six federal felony charges. She was arrested by the FBI in December
and has pleaded not guilty.
The list, which
takes up the equivalent of about 10 single-spaced pages, is
contained in a lawsuit that Koss filed last month against Sachdeva
and its former auditor, Grant Thornton LLP.
The list shows that
in addition to expenditures at upscale clothing retailers, Koss
funds also were spent on smaller luxury items such as a personal
trainer and limousine rides. Koss charges that the payments listed
in the lawsuit were used to pay for Sachdeva's personal expenses.
The spending spurts
left some experts wondering how the scheme could have gone unchecked
for at least seven years.
"If they just looked
at a sample of the withdrawals, they would have found it," said Joel
Joyce, a forensic accountant at Reilly, Penner & Benton, referring
to Koss executives or outside auditors. "They might not have caught
it in the first month . . . but my guess is it would not have been
six to seven years."
A case in point was
a flurry of check-writing in the summer of 2006.
On Aug. 1 of that
year, two cashier's checks totaling $154,021 went to Valentina Inc.,
an exclusive Mequon clothing store.
The next day, an
$18,100 cashier's check was cut to Neiman Marcus and a $10,120 check
was made out to Saks Fifth Avenue.
Then, on Aug. 3,
three checks totaling $296,494 were written to American Express, the
credit card company that eventually blew the whistle on Sachdeva
last year.
Total over the
three-day span: $478,735.
The checks to
retailers identified the merchants by their initials, Koss said in
the lawsuit. For example Valentina was V Inc. and Saks Fifth Avenue
was S.F.A Inc.
Tony Chirchirillo,
owner of Valentina, said he saw nothing suspicious about the large
cashier's checks his company received from Sachdeva. He said he
assumed the checks were backed by her own funds.
It's believed that
over a five-year period Sachdeva spent more than $5 million at the
boutique, sources said, although Chirchirillo said that figure
"seemed high."
"I didn't know it
came from Koss," Chirchirillo said, explaining that unlike personal
checks, the cashier's checks did not list whose account the money
was being drawn from. "I was told by an FBI agent that the money
came from Koss. I would not have taken it if it said Koss."
The largest
withdrawals listed in the lawsuit went to upscale retailers and to
American Express, the target of an earlier lawsuit filed by Koss
that contended the credit card company should have raised suspicions
about the expenditures sooner.
The August spurt
wasn't the only one. On Feb. 3, 2006, two cashier's checks were
written to American Express, one for $102,836 and the other for
$101,451.
And from July 11 to
July 17 of 2003, a check for $20,182 was written to Marshall Fields,
a second for $26,420 went to Saks Fifth Avenue, and five checks
totaling $104,738 went to American Express.
The indictment
against Sachdeva charges that she spent most of the embezzled money
on luxury clothing and jewelry, furs, vacations and items for her
Mequon home. More than 22,000 items - some with price tags still
attached - have been seized by federal authorities in connection
with the investigation, including fur coats, designer clothing,
jewelry, art items and hundreds of pairs of shoes.
Among the payments
detailed in the latest lawsuit:
• Carey Limousine
received $16,706 from 2006 to 2008, with the bulk of the money
coming in 2007. The most expensive ride was for $4,460 in September
2007.
• Chris A. Aiello, a
personal trainer, was paid $770 in 2005. Aiello said he trained
Sachdeva two to three times a week, sometimes in a conference room
at Koss headquarters and sometimes at her Mequon home. Normally,
Aiello said, he was paid with personal checks by Sachdeva, although
he recalled that on a handful of occasions Sachdeva told him to get
his money from one of her assistants, Julie Mulvaney. He said he
thinks those few checks came from Koss.
"You question it in
your mind, but you don't say anything," said Aiello, who no longer
trains Sachdeva. "We weren't doing anything illegal."
• Several payments,
including one for $21,000 and another for $14,000, went to
individuals. Ongoing investigations include an effort to determine
what connection, if any, those people had to Sachdeva.
• Mulvaney was paid
a total of $14,000, and another Sachdeva assistant, Tracy Malone,
was paid about $1,800. Both employees were fired by Koss last year,
and attorneys for both women have said they did nothing wrong.
In addition, more
than $145,000 was taken from petty cash, in increments ranging from
$482 to $9,049, according to the Koss list.
"That's a lot of
distributions coming out of petty cash," said Richard Brown, the
retired head of accounting company KPMG's Milwaukee office. "But
petty cash doesn't get a lot of attention."
At the time of the
scheme, Michael Koss held five high-level titles in the company
including chief executive officer and chief financial officer. Koss,
the son of the company's founder, remains CEO but is no longer CFO.
"A CFO should have
been reviewing financial reports that might have raised questions,
which might have included 'Let me see the documents,' " said Brown,
who now teaches accounting. That review would have likely led to
question about why thousands, and in some cases millions, were being
paid to retailers, he said.
The suit, filed in
Cook County, Ill., seeks damages from Grant Thornton and alleges the
national accounting firm failed to spot the fraud and repeatedly
assured Koss that it had adequate internal controls.
Grant Thornton said
in a statement that it had met "all of our professional obligations
and that our work complied with professional standards."
Michael Koss and the
California attorney who filed the lawsuit did not return calls for
comment.
Brown said suits
filed against auditors by companies that are fraud victims often are
settled out of court.
"A full blown civil
lawsuit will bring out a lot of facts potentially embarrassing to
both the company and the accounting firm," Brown said, adding it was
impossible to say which side might prevail in litigation. "Both the
company and the audit firm will suffer continued embarrassing
publicity if the suit goes to completion. It is for this reason that
these types of suits often get settled out of court before a trial
takes place."
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's threads on Grant Thornton are at
http://www.trinity.edu/rjensen/Fraud001.htm
Video
"How much has investment banking really changed?" by Fred Terell, Yale
Insights, July 2013 ---
http://qn.som.yale.edu/content/how-much-has-investment-banking-really-changed
From the CFO Journal's Morning Ledger on July 8, 2013
Thomson Reuters suspends early access to key surveys
Thomson Reuters is suspending early peeks at key economic data,
yielding to pressure from the New York attorney general,
the NYT reports.
Thomson Reuters pays the University of Michigan at
least $1 million a year to distribute its consumer-confidence data early to
its money-management customers on an exclusive basis. Legal experts have
said the tiered pricing arrangement Thomson Reuters has with its customers
does not violate federal insider-trading laws. But New York Attorney General
Eric Schneiderman’s office is exploring whether the advance look at the
consumer data is a violation of the Martin Act, a state securities-fraud law
that gives the attorney general broad powers to pursue either criminal or
civil actions against companies.
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
One Lie You Learned in School: "Crime Doesn't Pay" (Yeah Right!)
"Ex-Olympus Chairman Gets Suspended Sentence for Fraud," by Kanoko
Matsuyama & Takashi Amano, Bloomberg, June 3, 2013 ---
http://www.bloomberg.com/news/2013-07-03/ex-olympus-chairman-gets-suspended-sentence-for-accounting-fraud.html
Former Olympus Corp. (7733) Chairman Tsuyoshi
Kikukawa received a suspended sentence for his role in a $1.7 billion
accounting fraud that caused the Japanese camera maker’s market value to
plunge 80 percent.
Olympus itself, also the world’s largest maker of
endoscopes, was ordered to pay 700 million yen ($7 million) in fines by
Tokyo District Judge Hiroaki Saito today. Former Olympus Executive Vice
President Hisashi Mori and Hideo Yamada, a former auditing officer, also got
suspended sentences.
Judge Saito’s decision comes almost two years after
revelations that the company had falsified financial reports to conceal
losses on investments. The sentences reflect the defendants’ claims that
former Olympus presidents Masatoshi Kishimoto and Toshiro Shimoyama made the
decision to hide losses, while he inherited the aftermath.
“Kikukawa and Yamada succeeded in a negative legacy
and weren’t involved in the decision-making process to hide losses,” Saito
said in court today. “They were distressed and didn’t benefit personally
from hiding losses. Mori followed their orders.”
The camera maker still faces lawsuits by investors
including State Street Bank and Trust & Co. and Government of Singapore
Investment Corporation Pte Ltd. in a joint complaint seeking 19.1 billion
yen in damages. Suspended Years
Kikukawa and Yamada were given three years of jail
time suspended for five years, while Mori got two and a half years jail time
suspended for four years. Kishimoto and Shimoyama haven’t been charged
because the statute of limitations has expired, Kyodo News reported on April
23.
Prosecutors had asked for a five-year jail term for
Kikukawa and a 1 billion yen fine for Tokyo-based Olympus, Kyodo News
reported on March 26. Lawyers for the defendants said jailing them would be
unfair because other executives involved weren’t charged, the news service
reported.
The fraud, “destroyed the image of Japanese
companies internationally,” Kikukawa told the court in September when
pleading guilty along with the other executives.
Olympus fell 0.9 percent to 3,170 yen at the close
in Tokyo trading. The shares have more than doubled in the past 12 months,
compared with a 55 percent jump in the benchmark Nikkei 225 Stock Average.
Whistleblower Woodford
Kikukawa resigned in October 2011, weeks after the
board fired former President Michael Woodford, who uncovered the accounting
discrepancies and went public with them after the Olympus board declined to
take action. The company and three former executives eventually admitted
using fraudulent takeover deals to hide losses for 13 years starting in the
1990s.
Olympus restated five years of earnings results to
account for the bookkeeping fraud, wiping $1.3 billion off its balance sheet
and prompting speculation the company would seek a capital infusion. Reports
of the attempts to hide losses in mid-October 2011 triggered an 82 percent
drop in the company’s shares between Oct. 13 and Nov. 11, 2011.
The company said in July last year it would pay
191.8 million yen in fines to Japan’s financial regulators, while the camera
maker itself has sued 19 former executives for damages related to the cover
up of losses.
Founded in 1919 as a microscope and thermometer
maker, Olympus produced its first camera in 1936 and a predecessor to the
modern-day endoscope in 1950, according to its website. The company controls
75 percent of the global market for endoscopes, instruments doctors use to
peer inside the body to help diagnose disease.
Continued in article
Bob Jensen's thread on the Olympus accounting fraud ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search on the word "Olympus"
Bob Jensen's threads on why white collar crime pays even if you know you
will be caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
They say that
patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss.
What's a sweetheart like you doin' in a dump like this?
Lyrics of a Bob Dylan song forwarded by Amian Gadal
[DGADAL@CI.SANTA-BARBARA.CA.US]
KPMG signed off and then quit
on the way out the dooo: Did you ever wonder why?
Maybe they signed to save their fingers, toes, and knee caps!
"Questions Raised over Auditors’ Role in Olympus False Accounting
Scandal," by Michael Foster, Big Four Blog, December 9, 2011
---
http://www.big4.com/kpmg/questions-raised-over-auditors-role-in-olympus-false-accounting-scandal
Japan’s Financial Services Agency is to
determine whether auditors deliberately falsified Olympus’s
financial statements in a series of hearings. Both KPMG Azsa and
Ernst & Young ShinNihon could be forced to cease their business
operations. If either company’s activities are found to be negligent
or fraudulent by the agency, they could also face private suits for
damages.
Olympus has stated in a press conference
that it is investigating the two Big4 firms’ involvement in the
false accounting scandal, although Ernst & Young insists that an
internal probe concluded that nothing was wrong with its audit. KPMG
has said that it will cooperate with the investigations but insists
that its auditing was in line with Japanese auditing standards.
Both companies are under increasing
pressure as they are due to sign off on Olympus’s latest earnings
results due next week, although neither company exposed the $1.5
billion in investment losses incurred throughout the thirteen-year
long coverup.
Although auditors from both firms had given
an unqualified opinion when producing their reports of Olympus’s
accounts, KPMG had expressed concern over the four deals that are at
the center of the scandal in 2008. The Big4 firm said that it
thought Olympus had overpaid for Gyrus Group PLC, a British medical
company, and three Japanese venture firms. In January 2009, KPMG
conducted an on-site audit and warned Olympus that a shareholder
lawsuit could result from the acquisitions. In April of that year,
KPMG then threatened to notify authorities of the discrepancies.
By the middle of May, KPMG demanded the
resignation of then Olympus president Tsuyoshi Kikukawa and two
executives and threatened to resign as auditor. On May 7, 2009, KPMG
said that it would “be difficult to continue as your auditor” if
Olympus continued to insist that the deals were appropriate,
according to the firm’s report. Olympus then agreed to write down a
large portion of the value of the purchases and convened an external
panel, who concluded that Olympus’s executives had done nothing
wrong. Satisfied, KPMG Azsa signed off. Shortly thereafter, Kikukawa
and Olympus executive Hideo Yamada cancelled their contract with
KPMG.
"KPMG Scrutinized Over
Handling of Olympus Accounting Fraud Scandal," by Kalen Smith,
Big Four Blog, December 15, 2011 ---
http://www.big4.com/kpmg/kpmg-scrutinized-over-handling-of-olympus-accounting-fraud-scandal
KPMG’s
auditors in Tokyo are under scrutiny after signing off on reports
issued by Olympus Corp. Auditors found several accounting
irregularities when they reviewed financial statements provided by
Olympus executives. The auditors were particularly concerned over
$600 million worth of takeover advisory fees and payments on
acquisitions. Despite their concerns, auditors chose to sign off on
the reports after an outside consultant approved of the findings.
Although
the consultant said the takeover costs were justified, they were
also hired from Olympus Corp. This has raised some red flags over a
possible conflict of interest in the matter.
Olympus has
now been revealed to have engaged in financial fraud for more than
two decades. Following the revelation of the accounting scandal at
Olympus, regulators are looking closely at KPMG and Ernst & Young.
Regulators feel the auditors should have seen signs of the fraud and
taking measures to stop them.
According
to allegations, KPMG was Olympus’s auditor for years. They failed to
catch the discrepancies and Ernst & Young was called in as well.
According
to Yuuki Sakurai of Fukoku Capital Management, auditors work for the
companies that pay them. Auditors are going to have a hard time
staying in business if they get a reputation for being the kind of
company that goes to the regulators without solid evidence of
malfeasance.
Although
the manner in which KPMG handled the Olympus case created some
concern for regulators, it may signify greater concern over the
corporate culture that has created a serious conflict of interest
between auditors’ responsibilities for their clients and need to
uphold the law.
Bob Jensen's threads on KPMG
---
http://www.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's threads on the
the decline of professionalism and independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
Teaching Cases on Olympus and SPV Frauds
From The Wall Street Journal Accounting Weekly Review on December 2,
2011
Olympus Heat Rises
by:
Juro Osawa and Phred Dvorak
Nov 25, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: Audit Quality, Audit Report, Auditing, Auditor Changes,
Auditor/Client Disagreements, business combinations, Business Ethics,
Fraudulent Financial Reporting
SUMMARY: The series of events leading to questions about auditing
practices at Olympus that failed to uncover a decades-long coverup of
investment losses is highlighted in this review. The company must submit its
next financial statement filing to the Tokyo Stock Exchange by December 14,
2011 for the period ended September 30, 2011 or face delisting.
CLASSROOM APPLICATION: The review focuses on auditing questions
about sufficient competent evidence, change of auditors, and ability to
provide an audit report given knowledge of the length of time this coverup
has been ongoing.
QUESTIONS:
1. (Introductory) What fraudulent accounting and reporting
practices has Olympus, the Japanese optical equipment maker, admitted to
committing?
2. (Advanced) What services is Mr. Woodford calling for to
investigate the inappropriate payments and accounting practices by Olympus?
Specifically name the type of engagement for which Mr. Woodford thinks that
Olympus should contract with outside accountants.
3. (Introductory) Refer to the related articles. What questions
have been raised about outside accountants' examinations of Olympus's
financial statements for many years?
4. (Advanced) Based only on the discussion in the article, what
evidence did Olympus's auditors rely on to resolve their questions about the
propriety of accounting for mergers and acquisitions? Again, based only on
the WSJ articles, how reliable was that audit evidence?
5. (Advanced) What happened with Olympus's engagement of KPMG AZSA
LLC as its outside auditor? What steps must be taken under U.S. requirements
when a change of auditors occurs?
6. (Introductory) What challenges will Olympus face in meeting the
deadline of December 14 to file its latest financial statements? What will
happen to the company if it cannot do so?
Reviewed By: Judy Beckman, University of Rhode Island
From The Wall Street Journal Weekly
Accounting Review on December 9, 2011
Panel Calls Olympus "Rotten" at
Core
by: Daisuke Wakabayashi and Phred Dvorak
Dec 07, 2011
Click here to view the full article on WSJ.com
TOPICS: Auditing, Auditor/Client Disagreements, Fair Value
Accounting, Historical Cost Accounting, Investments
SUMMARY: This review continues coverage from last week of
the accounting scandal at Olympus Corp. The Investigation Report
into Olympus Corporation and its management, written by the "Third
Party Committee" hired by the Board of Directors on October 14,
2011, is available directly online at
http://online.wsj.com/public/resources/documents/third_party_olympus_report_english_summary.pdf
The report provides the clearest description yet of the investment
loss and accounting scandal that has brought the Japanese imaging
equipment maker to the brink of delisting from the Tokyo Stock
Exchange. As described in the opening page of the document, the
Olympus Corporation Board of Directors called for a third party
review because "the shareholders and others doubted that" payments
by Olympus to a financial advisor and acquisitions by Olympus, along
with subsequent recognition of impairment losses on those
investments, were appropriate. The findings in the report
essentially state that Olympus began incurring financial losses on
speculative investments that were originally hoped to bolster
corporate earnings when operating earnings declined due to a
strengthening yen in the late 1980s. "However, in 1990 the bubble
economy burst and the loss incurred on Olympus by the financial
assets management increased" (p. 6). Then, in 1997 to 1998, "when
the unrealized loss was ballooning," Japanese accounting standards
were changed to require fair value reporting of financial assets, as
did those in the U.S. "In that environment, Olympus led by Yamada
and Mori started seeking a measure to avoid the situation where the
substantial amount of unrealized loss would come up to the
surface..." because of this change in accounting standards. The
technique was so common in Japan that it was given a name, "tobashi."
As noted in the WSJ article, the Olympus auditors at the time, KPMG
AZSA LLC "...came across information that indicated the company was
engaged in tabshi, which recently had become illegal in Japan....[T]he
auditor pushed them...to admit to the presence of one [tobashi
scheme] and unwind it, booking a loss of 16.8 billion yen."
CLASSROOM APPLICATION: Questions relate to the accounting
environment under historical cost accounting that allows avoiding
recognition of unrealized losses and to the potential for audit
issues when management is found to have engaged in one unethical or
illegal act.
QUESTIONS:
1. (Introductory) For how long were investment losses
hidden by accounting practices at Olympus Corp?
2. (Advanced) What is the difference between realized and
unrealized investment losses? How are these two types of losses
shown in financial statements under historical cost accounting and
under fair value accounting methods for investments?
3. (Introductory) What accounting change in the late 1990s
led Olympus Corp. management to search for further ways to hide
their investment losses? In your answer, comment on the meaning of
the Japanese term "tobashi."
4. (Introductory) What happened in 1999 when KPMG AZSA
"came across information that indicated the company was engaged in
tobashi, which recently had become illegal in Japan"?
5. (Advanced) Given the result of the KPMG AZSA finding in
1999, what concerns should that raise for any auditor about overall
ability to conduct an audit engagement?
Reviewed By: Judy Beckman, University of Rhode Island
What's Right and What's
Wrong With (SPEs), SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"Olympus Probe Finds 5 Auditors Responsible," SmartPros,
January 17, 2012 ---
http://accounting.smartpros.com/x73270.xml
How can such a panel have this much
legal power?
"Ernst & Young, KPMG Cleared of Wrongdoing in Olympus Scandal,"
by Michael Foster, Big4.com, January 17, 2012 ---
http://www.big4.com/kpmg/breaking-ernst-young-kpmg-cleared-of-wrongdoing-in-olympus-scandal
An independent panel
has determined that KPMG Azsa LLC and Ernst & Young ShinNihon LLC
did not break the law and did not violate any legal obligations when
auditing Olympus. The panel determined that both Big4 firms were not
responsible for the accounting fraud scandal in which Olympus hid
$1.7 billion in assets over a 13-year long period.
The panel’s decision
clears KPMG and Ernst & Young from culpability, meaning that no
party has grounds to file a suit against either accounting firm.
The panel also
determined that five internal auditors, some of which are still with
Olympus, were responsible for hiding the assets. The panel concluded
that those auditors were responsible for 8.4 billion yen ($109
million) in damages.
Continued in article
Jensen Comment
I have no idea why this "panel" has the power "that
no party has grounds to file a suit against either accounting firm."
If this were a lower court decision,
there are generally routes of appeal in higher courts.
How does an appointed panel decide that
shareholders and creditors have no right to sue in lower or higher
courts?
Of course in the case of Olympus the
guilty executives were purportedly tied to organized crime. Well now I'm
beginning to understand. Organized crime members have their own ways of
determining that no lawsuits will ever be filed.
"How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus
Fraud," by Francine McKenna, re:TheAuditors, January 5, 2012 ---
http://retheauditors.com/2012/01/02/how-do-you-hide-a-multibillion-dollar-loss-accounting-for-the-olympus-fraud/
Bob Jensen's threads on the Olympus
scandal are at
http://www.trinity.edu/rjensen/Fraud001.htm
Question
What is worse than austerity on economic recovery and boom times?
Answer
Government honesty in economic reporting
"The Numbers Are Still Being Cooked In Buenos Aires," by Joe
Weisenthal, Business Insider, July 22, 2013 ---
http://www.businessinsider.com/the-numbers-are-still-being-cooked-in-buenos-aires-2013-7
The sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting
"Three Lies You Learned in School," Everyday Einstein, June 27,
2013 ---
http://everydayeinstein.quickanddirtytips.com/three-lies-you-learned-in-school.aspx
"How a Tiffany's Employee Stole $1.3
Million in Jewelry," by Eric Spitznagel, Business Week, July 8, 2013
---
http://www.businessweek.com/articles/2013-07-08/how-a-tiffanys-employee-stole-1-dot-3-million-in-jewelry
An executive at
Tiffany & Co. (TIF) allegedly
stole $1.3 million worth of jewelry from the
company. How did she do it?
Very slowly, it seems. Ingrid Lederhaas-Okun, 46,
worked as the vice president of product development at the jeweler’s Midtown
Manhattan headquarters from January 2011 to February of this year, when her
position was terminated due to downsizing. The
F.B.I. claims that between November 2012 and
her dismissal, 165 pieces of jewelry went poof, including “diamond
bracelets, platinum, or gold diamond drop and hoop earrings, platinum
diamond rings, and platinum and diamond pendants.” Lederhaas-Okun,
authorities say, would check out the jewelry for professional
reasons—marketing purposes, showing potential buyers, and so forth—and then
not return them.
“She was careful to only keep items that were
valued at under $10,000,” says Scott Selby, the co-author of Flawless:
Inside the Largest Diamond Heist in History. “Tiffany’s has a policy of
only investigating missing inventory that’s valued over $25,000. That’s what
enabled her to do this; it was slow and systematic.” Lederhaas-Okun has
since been charged by the F.B.I. with wire fraud and interstate
transportation of stolen property and she faces up to 30 years in prison if
convicted. Carson Glover, a spokesperson for Tiffany’s, says the company is
“not in a position to comment at this time.”
"A Daviess County (Kentucky) accountant
is facing theft and forgery charges Wednesday night," by Kara Mattingly,
Four News, July 10, 2013 ---
http://owensboro-daviesscounty.14news.com/news/news/133043-daviess-co-accountant-facing-theft-and-forgery-charges
Authorities say
51-year-old Dennis Keaton collected money from a client, and that money was
supposed to be forwarded to the Kentucky Department of Revenue and the IRS.
Keaton is accused of using the money for his own personal use. Investigators
seized computers, documents, and other evidence associated with his
accounting business. Keaton was taken to the Daviess County Detention Center
under a $10,000 cash bond.
Another Example of White Collar Crime Leniency
If she stole $100 from a convenience store she probably would be in jail
"Sioux City accountant gets probation," Souix City Journal,
July 1, 2013 ---
Click Here
http://siouxcityjournal.com/news/local/crime-and-courts/sioux-city-accountant-gets-probation-for-taking-from-client-accounts/article_80e537d0-6b51-5d26-9991-726372155091.html
SIOUX CITY
The owner of a Sioux City accounting firm was placed on probation Monday for
taking more than $150,000 from a client who had dementia.
Terry Lockie, 65, pleaded guilty in Woodbury County
District Court to one count of dependent adult abuse. According to the terms
of her plea agreement, a five-year prison sentence was suspended, and she
was placed on probation for two years. A charge of first-degree theft was
dismissed.
Lockie, who lives in Homer, Neb., owns Terry Lockie
& Associates, 704 Jackson St. She likely faces the loss of her certified
public accountant license, her attorney, Keith Rigg, said during court
proceedings.
Continued in article
Bob Jensen's threads on why white collar crime pays ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"IRS claims former Tyco subsidiaries racked up $1.03 billion in unpaid
taxes and penalties," The Washington Post, July 1, 2013 ---
Click Here
http://www.washingtonpost.com/business/irs-claims-former-tyco-subsidiaries-racked-up-103-billion-in-unpaid-taxes-and-penalties/2013/07/01/5b4605b4-e2ab-11e2-8657-fdff0c195a79_story.html
The IRS has informed Tyco International Ltd. that
it has disallowed roughly $2.86 billion in interest and deductions
recognized by the company in its U.S. tax returns for the 1997-2000 tax
years, according to a filing Monday with the Securities and Exchange
Commission.
The move stems from a finding by the IRS that
several of the Swiss fire protection and security company’s former
subsidiaries owe $883.3 million in taxes and $154 million in penalties.
Tyco noted that it has been able to resolve
substantially all of the issues raised by the IRS for periods beginning with
the 1997 tax year, but it has not been able to resolve matters related to
the treatment of intercompany debt transactions during that period.
The company said it strongly disagrees with the
IRS’ claims and intends to contest the proposed tax adjustments with the
U.S. tax court.
“We believe that we have meritorious defenses for
our tax filings, that the IRS positions with regard to these matters are
inconsistent with the applicable tax laws and existing Treasury regulations,
and that the previously reported taxes for the years in question are
appropriate,” Tyco said in the filing.
The company said it isn’t required to make any
payments until the dispute is definitively resolved, noting that could take
several years.
Even so, Tyco warned that the ultimate resolution
of the dispute is uncertain and could have a material impact on the
company’s financial condition.
For example, if the IRS’ claim prevails, it would
likely affect some $6.6 billion in interest deductions related to
intercompany debt and taken by the company in subsequent tax years.
Tyco said it shares obligations on the issue with
several companies that it spun off in recent years: Covidien PLC, TE
Connectivity, ADT and Pentair.
Tyco spun off its Covidien health care and Tyco
Electronics units in 2007 in a series of moves aimed at recovering from a
high-profile scandal that led to the convictions of its former CEO L. Dennis
Kozlowski and ex-Chief Financial Officer Mark Swartz for fraud. Tyco
Electronics subsequently changed its name to TE Connectivity Ltd.
In 2012, it again separated into three public
companies, forming The ADT Corp. and Pentair Ltd., along with Tyco
International.
The tax-sharing agreements calls for Covidien to
share 42 percent of any tax liabilities, while TE Connectivity’s share is 31
percent, Tyco said.
Under its agreement with Pentair and ADT, the
companies would also be responsible for covering a share of Tyco’s tax
liability. Pentair would share between 20 percent and 42 percent of the tax
liabilities, while ADT would be responsible for 27.5 percent to 58 percent,
Tyco added.
Pentair and ADT’s share depends upon whether Tyco’s
tax liability for 2012 exceeds $500 million or $725 million.
Tyco International moved its global headquarters to
Switzerland from Bermuda in 2009. It maintains its U.S. headquarters in
Princeton, N.J. Its stock ended regular trading up $1.45, or 4.4 percent, at
$34.40. Shares slipped 17 cents to $34.23 in extended trading.
Covidien moved its global headquarters to
Switzerland from Bermuda in 2008. Its U.S. headquarters is in Mansfield,
Mass. Covidien stock closed Monday up 25 cents at $57.41, then gained
another 13 cents after hours.
TE Connectivity is likewise Swiss-based, with its
main U.S. office in Berwyn, Pa. Its shares closed up 87 cents at $46.41.
Continued in article
Dennis Kozlowski ---
http://en.wikipedia.org/wiki/Dennis_Kozlowski
"UK Banks To Pay Out 1.3 Billion In Massive Credit Card Compensation
(for fraudulent ID theft insurance policies)," by Rupert Jones, Business
Insider, August 22, 2013 ---
http://www.businessinsider.com/uk-banks-to-pay-out-13-billion-in-massive-credit-card-compensation-2013-8
Jensen Comment
The pay outs are coming from the usual U.K. organized crime banks --- Barclays,
HSBC and Royal Bank of Scotland. These are the same banks paying out billions
because of LIBOR fraud conspiracies.
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
"The Best Way to Reform Libor: Scrap It: The market, and not a
single private entity, should determine this crucial interest-rate benchmark,"
by Richard S. Grossman, The Wall Street Journal, July 24, 2013 ---
http://online.wsj.com/article/SB10001424127887324348504578606041056905794.html?mod=djemEditorialPage_h
The British have learned nothing from the recent
Libor scandal. One year after the news broke that banks were manipulating
this vitally important interest rate, an independent committee appointed by
the government has decided to hand over responsibility for Libor to NYSE
Euronext . This is madness.
The London interbank offered rate, which is
calculated by averaging banks' self-reported estimated cost of borrowing
funds from other banks, plays a crucial role in the world financial system.
It serves as a benchmark for some $800 trillion in transactions—everything
from complex derivatives transactions to relatively simple adjustable-rate
home mortgages.
Because so much money is riding on Libor, banks
have an incentive to alter submissions—up or down, depending on the
situation—to improve their bottom lines. Many in the financial community had
long known about Libor manipulation. As early as 2008, then-president of the
Federal Reserve Bank of New York Timothy Geithner warned the Bank of England
that Libor's credibility needed to be enhanced. E-mails between bankers that
have come to light since the scandal broke almost a year ago prove
conclusively that cheating was commonplace.
And yet, knowing of Libor's troubled past and its
potential to be tampered with, British authorities earlier this month
granted a contract to run the index to NYSE Euronext, a company that owns
the New York Stock Exchange, the London International Financial Futures and
Options Exchange, and a number of other stock, bond, and derivatives
exchanges. NYSE Euronext is scheduled to be taken over by
IntercontinentalExchange, a firm which owns even more derivatives markets.
In other words, the company that will be
responsible for making sure that Libor is set responsibly and fairly will be
in a position to profit like no one else from even the slightest movements
in Libor.
British authorities have searched for ways to
rescue Libor, perhaps in a bid to maintain London's prestige as a financial
center. Last autumn, Martin Wheatley, a British financial regulator, issued
a report suggesting a number of reforms to how Libor is set. He suggested
some sensible reforms, including reducing the number of rates and currencies
represented, and increasing the number of firms contributing to the index.
But these were the equivalent of hunting big game with a water pistol.
NYSE Euronext is, of course, confident in its
ability to clean up the mess. Its press release following the announcement
trumpeted the firm as "uniquely placed to restore the international
credibility of Libor." The company argues that it "will be able to leverage
NYSE Euronext's trusted brand, long regulatory experience and market-leading
technical ability to return confidence to the administration of Libor."
That's all well and good, but coming just five
years after the eruption of the worst crisis in the financial system since
the Great Depression, there is a much better way to fix Libor: Scrap it.
The British government should announce that, six
months from today, Libor will cease to exist. The British Bankers'
Association, which technically owns the interest-rate index, has been so
wounded by the scandal that it has been willing to follow the government's
lead and will no doubt agree.
And how will markets react? The way they always do.
They will adapt.
Financial firms will have six months to devise
alternative benchmarks for their floating rate products. Given the low
repute in which Libor—and the people responsible for it—are held, it would
be logical for one or more market-determined rates to take the place of
Libor.
A number of alternative benchmarks exist or could
be easily created. One often mentioned candidate is the GCF Repo index
published by the Depository Trust & Clearing Corp. This index is based on
actual repurchase agreement transactions, and is thus a better indicator of
the cost of funds than banks' internal estimates—even if those estimates
were unbiased. Another option might be some newly constructed index based on
credit-default swaps transactions, corporate bonds and commercial paper.
Either of these alternatives would remove the possibility of cheating by
making the benchmark dependent on observable, market-determined rates,
rather than the "estimates" of a dozen or so bankers.
For already existing contracts that rely on Libor,
the British Bankers' Association should define some market-determined rate,
in consultation with the government, as the official successor to Libor
starting six months from now.
Most people still put their faith—rightly, in my
view—in market-based economies, believing that they are more likely to
deliver a higher standard of living than any other economic system that the
world has ever known. Politicians need to be aware that the public's faith
in—and patience with—the market has its limits.
The incentive to game an benchmark rate such as
Libor is just too high to risk putting it in the hands of a single private
entity, however committed that entity may be to restoring its credibility.
Replacing Libor with a transparent, fair, market-based alternative is the
only sensible solution.
Mr. Grossman is professor of economics at Wesleyan University in
Connecticut and a visiting scholar at Harvard. His book, "WRONG: Nine
Economic Policy Disasters and What We Can Learn from Them," will be
published by Oxford University press in November.
Who's Manipulating Derivative Indexes and Why: How to think about
the Libor scandal and its astonishingly proliferating offspring," by Holman
W. Jenkins Jr., The Wall Street Journal, June 21, 2013 ---
http://online.wsj.com/article/SB10001424127887323893504578559282047415410.html?mod=djemEditorialPage_h
Is Ewan McGregor, who played Nick Leeson in the
movie about the Barings bank bust, available for a sequel? He would find an
oddly similar character in Tom Hayes, the former UBS UBSN.VX -1.93% and
Citibank employee charged in this week's latest financial scandal of the
century.
Let's try to sort it out. As with Libor, or the
London interbank offered rate, a benchmark for loans world-wide, allegations
are floating that traders manipulated other widely used benchmarks. Three
big banks—Barclays, BARC.LN -2.26% UBS and Royal Bank of Scotland RBS.LN
-7.24% —have already paid $2.5 billion in fines and penalties in the Libor
caper. Now the focus has turned to suspected manipulation of fuel-market
indexes, loan-market indexes in Japan and Singapore, and indexes used in
pricing interest-rate swaps.
Said Europe's Competition Commissioner Joaquin
Almunia last month: "Huge damages for consumers and users would have been
originated by this."
Well, maybe. A basic schematic would go like this:
Some enterprising soul decides it would be useful to publish a daily price
benchmark by surveying market participants about certain transactions that
don't take place on a central exchange. Somebody else decides it would be
useful to create tradable derivatives whose price would vary based on
changes in these benchmarks—that is, would let participants bet on how a
survey of themselves in the future will come out.
Libor involved questioning bank traders about the
pricing of loans—and Libor derivatives let these same traders bet on the
answers they would give in the future. The invitation here now seems rather
obvious. Mr. Hayes, a baby-faced yen-derivatives trader in Tokyo at the
time, is charged with orchestrating attempts to rig a similar Tokyo-based
benchmark called Tibor.
All this proves one thing: Financial professionals
can't be counted on to do the right thing when self-interest beckons so we
must turn power over to government officials who always do the right thing
regardless of self-interest.
Or maybe not. The Libor scandal broke only because
London banks, in cahoots with regulators, put out transparently fake reports
about their borrowing costs during the 2008 panic. That led to the discovery
of a long history of everyday manipulation of their Libor borrowing costs.
Traders now fessing up say they learned the practice from their predecessors
who learned it from their predecessors, and so on.
As they drain this swamp, investigators like to
allege enormous damage to the public by multiplying small discrepancies by
the number of transactions in the market. Treat these claims with
skepticism. Whatever the extent of mispricing in downstream transactions, it
is a smidgeon compared to the rake-off brokers used to earn in
pre-electronic days. It is a smidgeon compared to the margins that middlemen
could extract before published surveys were available to shed light on
transactions previously invisible to most market participants.
It is also a smidgeon compared to the margins that
would have to be built into prices if not for Libor hedges and other
risk-sharing inventions.
A kick in the pants has been delivered to
publishers of price indexes. They need to make their products more
manipulation-proof. Where markets are thin and surveys are the only way to
glean market intelligence, publishers already exercise a visible hand to
expel questionable or anomalous data. A further solution might be to poll a
larger number of traders and randomly exclude most of their answers so no
trader would have any certainty of influencing the index.
To understand why such opportunities exist in the
first place is to understand something about a generic condition of our
world, in which technology has drastically reduced transaction costs and
cheap money has vastly increased leverage available even to low-ranking bank
employees, magnifying the return to small bits of illicit or licit
information, including insider information.
Continued in article
Bigger than Enron and Rotten to the Core: The LIBOR Scandal
Bob Jensen's threads on the LIBOR Scandal ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking