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

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

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

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

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

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

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

Election Gaming "Fraud" in Primary Elections in the USA:  Making Sure Your General Election Opponent is a Real Loser
http://faculty.trinity.edu/rjensen/FraudulentElections.htm

Table of Contents

Funding Losers

 Communications Juggernauts in Crossover Voting Frauds

Funding Opponent Scandals

"Wal-Mart to Stop Selling Semiautomatic Rifles, Citing Declining Demand," by Paul Ziobro, The Wall Street Journal, August 26, 2015 ---
http://www.wsj.com/articles/wal-mart-to-stop-selling-semiautomatic-rifles-citing-declining-demand-1440616954?mod=djemCFO_h

What big USA government program has not been a piñata for enormous fraud?
September 4, 2015 message from Dennis Huber

The nation's premier federal program that provides work for people who are severely disabled is mired in widespread corruption, financial fraud and violations of the law, numerous sources tell CNN. And instead of helping the severely disabled find work, the taxpayer-funded agency is at times allowing jobs to be taken away from the disabled, the sources say.

http://www.cnn.com/2015/07/27/us/disabled-work-program-investigation/ 

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

How to Mislead With Statistics:  Surely the government does not lie about it's own performance
"Study by law professor says U.S. SEC pads enforcement statistics," by Sarah N. Lynch, Reuters, September 24, 2015 ---
http://www.reuters.com/article/2015/09/24/us-sec-enforcement-study-idUSKCN0RO2EH20150924

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

Encyclopedia Size Comparisons --- https://en.wikipedia.org/wiki/Wikipedia:Size_comparisons

Jensen Comment
Open source encyclopedias that let the people of the world write and edit modules are more likely to have errors if for no reason other than they have so many more modules. Allowing the world to make edits is both an advantage and a disadvantage in terms or error and bias. It's a disadvantage in that the paid and volunteer editors of these encyclopedias cannot possible find and correct all errors and egregious bias. They do their best on controversial topics like hot political topics and biographies.

The advantage of open sharing and editing is that errors on popular topics (those topics having the most hits) are likely to be corrected quickly by experts. The disadvantage is that the least popular topics (those having almost no hits) are may go uncorrected for decades such as in the biography of John Doe who is only of interest to his only two friends in life. Fortunately millions of experts are willing to examine and correct popular topics very quickly.

"Is Wikipedia More Biased Than Encyclopædia Britannica?" by Michael Blanding, Harvard Business School, August 31, 2015 ---
http://hbswk.hbs.edu/item/7689?item=7689.html

Jensen Comment
The finding that Wikipedia is more "left leaning" is hardly surprising. Professors and students worldwide are overwhelmingly left leaning and they tend to write a lot of the modules in Wikipedia and edit modules in that enormous encyclopedia.
Liberal Bias in Academe --- http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#LiberalBias

However, academe also saves Wikipedia in many respects. For example, the above article does not mention that some medical schools deem it a public service to to have professors and students update and correct Wikipedia modules on diseases, treatments, medications, etc. This makes Wikipedia more likely rather than less likely to be of great service to users.

September 4, 2015 message from Scott Bonacker

The Wikimedia Foundation, the non-profit organization that sponsors but does not operate Wikipedia, announced Monday that at least 381 accounts 
have been suspended for “black hat” editing, in which editors charge and accept money for “to promote external interests.”
 

Continued --- https://blog.wikimedia.org/2015/08/31/wikipedia-accounts-blocked-paid-advocacy/ 

"Ex-Arkansas treasurer gets 2 ½ years in prison," by Claudia Lauer, Yahoo News, August 28, 2015 ---
http://news.yahoo.com/ex-arkansas-treasurer-gets-2-years-prison-171447506.html

Former Arkansas Treasurer Martha Shoffner was sentenced to 2 ½ years in prison on Friday following her conviction last year on federal bribery and extortion charges.

The Democrat was accused of steering state investments to a broker who gave her $36,000 in cash, some of which was delivered in a pie box. The 71-year-old resigned in 2013, days after she was arrested by FBI agents in a sting operation.

"It was wrong, it was unethical and it was a violation of the public's trust," Shoffner told U.S. District Judge Leon Holmes, as she read a statement apologizing for her actions.

Continued in article

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

A former HP executive assistant charged her $100,000 spa vacation to the company ... and will go to prison ---
http://www.businessinsider.com/a-former-hp-executive-assistant-charged-her-100000-spa-vacation-and-apple-shopping-spree-to-the-company-and-is-now-going-to-jail-2015-8

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

"The US Air Force made a $25 billion accounting error," by Blake Stilwell, Business Insider, August 31, 2015 ---
http://www.businessinsider.com/the-us-air-force-made-a-25-billion-accounting-error-2015-8

In a report to Congress last year, the Air Force estimated the cost of the new Long Range Strike Bomber (LRSB) to be $33.1 billion for the next 10 years. This year, that price ballooned to $58.2 billion.

The amount of the gap is so large that it caught the attention of Rep. Jackie Speier (D-California), who demanded answers from Secretary of the Air Force Deborah Lee James and Gen. Mark Welsh, the Air Force chief of staff. How does the Air Force explain the $25 billion error? It says the cost should have actually been $41.7 billion, but human error was the explanation for the discrepancy.

Welsh insists he was caught off guard as well. It was just a multibillion-dollar oopsie, people.

"We were surprised by the number when we saw it as well once it had been pointed out to us that it looked like the number had grown, because we've been using the same number," Welsh said.

The Air Force has a history of bait-and-switch budgeting when it comes to developing new aircraft. The Air Force's F-35 Joint Strike Fighter program is notoriously over budget (it's the most expensive weapons program ever) and underperforming.

The Air Force's most recent fighter program, the dogfighting-optimized F-22 Raptor, produced 187 units between 1996 and 2011 at the cost of $157 million each. The Raptor wasn't used in combat until 2014.

Read more: http://www.businessinsider.com/the-us-air-force-made-a-25-billion-accounting-error-2015-8#ixzz3ky6C0SIi

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

Alice Goffman --- https://en.wikipedia.org/wiki/Alice_Goffman

Controversy About Alice's Academic Integrity --- https://en.wikipedia.org/wiki/Alice_Goffman#Controversy

"Alice Goffman's Implausible Ethnography," by Paul Campos, Chronicle of Higher Education, August 21, 2015 ---
http://chronicle.com/article/Alice-Goffmans-Implausible-/232491/?cid=at

'On the Run’ reveals the flaws in how sociology is sometimes produced, evaluated, and rewarded.

. . .

Those words make a moving statement, spoken as they are by a man who has worked hard all his life to overcome the racism that blights American society, and who has seen his daughter and his grandchildren fall victim to drug addiction, chronic unemployment, and a criminal-justice system that imprisons an astonishingly high percentage of African-American men.

Unfortunately, it’s difficult to know if George Taylor actually said those things. Indeed, Taylor’s speech raises the possibility that Goffman embellished or conflated some of the most compelling material in her book.

Attentive readers will have noticed that Taylor’s remarks appear to have been made after Barack Obama became president. Yet Goffman dates her interview with Taylor to the fall of 2007, when Obama was just emerging as a serious candidate for the Democratic nomination, and did not yet herald the coming of "a new era" to anyone.

Even more inexplicably, readers will discover two pages later that Chuck, whom Goffman says she has just visited in the county jail before meeting his grandfather, was no longer alive in the fall of 2007, since, as the book recounts, he was murdered in the summer of that year. As far as I’ve been able to determine, none of the book’s many enthusiastic reviewers — not to mention its editors or the academic referees who vetted the manuscript for the University of Chicago Press — seem to have noticed this incongruity. (Douglas Mitchell, an executive editor at the press, declined to answer questions about On the Run.)

Standing alone, this kind of mistake might not be particularly significant. Perhaps Goffman misread her field notes, and the interview with Taylor took place in 2008 or 2009. Perhaps the reference to visiting Chuck several months after his murder can be explained in similar terms, although that seems improbable; Goffman describes Chuck’s death as a shattering emotional event for her personally, so it’s hard to imagine how she could have made such an error.

But this incident is just one of numerous and significant incongruities, contradictions, inaccuracies, and improbable incidents scattered throughout On the Run. (Goffman declined interview requests, and decided not to answer most questions by email. The Chronicle Review has invited Goffman to respond to this article.)

Continued in a very long article

Bob Jensen's threads on professors who cheat ---
http://faculty.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

From the CFO Journal's Morning Ledger on July 15, 2015

Broker settles over pricing on muni bonds
http://www.wsj.com/articles/edward-jones-to-pay-20-million-to-settle-sec-muncipal-bond-charges-1439474284?mod=djemCFO_h
Brokerage firm Edward Jones has agreed to pay $20 million to settle charges that it overcharged clients in new municipal-bond sales, the SEC said. The agency said the firm’s practice cost customers at least $4.6 million. It is the SEC’s first pricing-related case against an underwriter selling new municipal securities.

Jensen Comment
One of the most unethical things stock brokers and investment advisors can do is to steer naive customers into mutual funds that pay the brokers kickbacks rather than suitable funds for the investors.  The well known and widespread brokerage firm of Edward Jones & Co. to pay $75 million to settle charges that it steered investors to funds without disclosing it received payments.

The sad part is that many people who want mutual funds can get straight forward information from reputable mutual funds like Vanguard and avoid having to pay a financial advisor anything and avoid the risk of unethical advice from that advisor.
Blast from the Past
"Edward Jones Agrees to Settle Host of Charges," by Laura Johannes and John Hechinger, and Deborah Solomon, The Wall Street Journal, December 21, 2004, Page C1 --- http://online.wsj.com/article/0,,SB110356207980304862,00.html?mod=home_whats_news_us

Edward D. Jones & Co. agreed to pay $75 million to settle regulatory charges that it steered investors to seven "preferred" mutual-fund groups, without telling the investors that the firm received hundreds of millions of dollars in compensation from those funds.

The settlement, tentatively agreed to by the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange, represents the largest regulatory settlement to date involving revenue sharing at a brokerage house, an industry practice in which mutual-fund companies pay brokerage houses to induce them to push their products.

Even so, California Attorney General Bill Lockyer called the settlement "inadequate" given payments from the funds that he said totaled about $300 million since January 2000, and declined to join it and filed a civil lawsuit against Edward D. Jones yesterday in Sacramento County Superior Court.

Mr. Lockyer called Edward D. Jones "the most egregious example we have reviewed so far" of secret revenue-sharing arrangements. California's suit, if it reaches trial, could seek repayment of the entire amount the brokerage house received, plus the "hundreds of millions" lost by investors who were sold inferior funds, Mr. Lockyer said.

Edward D. Jones, of St. Louis, has nearly 10,000 sales offices nationally, comprising the largest network of brokerage outlets in the U.S. Its revenue-sharing practices were the subject of a page-one article in The Wall Street Journal in January. In a statement yesterday, the company said it will "take immediate steps to revise customer communications and disclosures." Edward D. Jones said it has neither admitted nor denied the regulators' claims. The company added it "intends to vigorously defend itself" against the charges brought by the California attorney general.

Continued in article

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

Trump's Higher Ed Fraud:  No Accreditations, No Degrees, and No Trump in the Fake Trump University
"Trump University: How Donald Trump persuaded students to pay $35,000 to become just like him,"  by Libby Nelson, Vox, July 29, 2015  ---
http://www.vox.com/2015/7/29/9067429/trump-university

From 2005 to 2010, Trump offered what he called "Trump University," which was supposed to offer instruction on becoming a real estate investor.

This was a generous — and, New York officials claim, illegal — use of the term "university." Trump's institution wasn't chartered as a university; he later renamed it the Trump Entrepreneur Initiative. New York's attorney general sued Trump in 2013, saying the operation was a fraud, and former students have filed a class-action suit asking for their money back.

Continued in article

Jensen Comment
This gets more and more bizarre as you read deeper into the article.

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

Brazil's President could be brought down by a massive accounting scandal ---
http://www.businessinsider.com/r-fiscal-probe-for-brazils-rousseff-poses-impeachment-threat-2015-8#ixzz3iWwU1D2H

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

Nine charged in U.S. insider trading scheme involving hackers ---
http://www.reuters.com/article/2015/08/11/us-cybercybersecurity-hacking-stocks-arr-idUSKCN0QG1EY20150811

An alliance of U.S.-based stock traders and computer hackers in Ukraine made as much as $100 million in illegal profits over five years after stealing confidential corporate press releases, U.S. authorities said on Tuesday.

The charges mark the first time that U.S. prosecutors have brought criminal charges for a securities fraud scheme that involved hacked inside information, in this case 150,000 press releases from distributors Business Wire, MarketWired and PR Newswire.

"This is the story of a traditional securities fraud scheme with a twist - one that employed a contemporary approach to a conventional crime," FBI Assistant Director-in-Charge Diego Rodriguez said in a statement.

Prosecutors said that hackers based in Ukraine infiltrated press releases before they were due to be released by the distributors. They included those that traders had put on "shopping lists" of releases that they wanted, prosecutors said.

The hackers created a "video tutorial" to help traders view the stolen releases, and were paid a portion of the profits from trades based on information contained there, prosecutors said.

Continued in article

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

Teaching Case
From The Wall Street Journal Accounting Weekly Review on August 7, 2015

Hackers Trick Email Systems Into Wiring Them Large Sums
by: Ruth Simon
Jul 30, 2015
Click here to view the full article on WSJ.com
 

TOPICS: Cybercrime, Internal Controls

SUMMARY: Cybercriminals are exploiting publicly available information and weaknesses in corporate email systems to trick small businesses into transferring large sums of money into fraudulent bank accounts, in schemes known as "corporate account takeover" or "business email fraud." Companies across the globe lost more than $1 billion from October 2013 through June 2015 as a result of such schemes, according to the Federal Bureau of Investigation. The estimates include complaints from businesses in 64 countries, though most come from U.S. firms. Both "organized crime groups from overseas and domestic-based actors" are typical perpetrators.

CLASSROOM APPLICATION: This is a great example to show students the dangers of cyber and other crime, as well as showing the importance of having internal controls or prevent or reduce losses.

QUESTIONS: 
1. (Introductory) What are the facts of the Mega Metals Inc. situation? Was the company able to recover any of the funds?

2. (Advanced) What are internal controls? Please give some examples of several internal controls commonly used in businesses.

3. (Advanced) How could a good internal control system prevent or reduce losses from schemes like the ones discussed in the article? What specific internal controls could have prevented the Mega Metal loss?

4. (Advanced) In what situations can missing funds be recovered? How are they recovered?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"Hackers Trick Email Systems Into Wiring Them Large Sums," by Ruth Simon, The Wall Street Journal, July 30, 2015 ---
http://www.wsj.com/articles/hackers-trick-email-systems-into-wiring-them-large-sums-1438209816?mod=djem_jiewr_AC_domainid

Scrap processor thought it paid $100,000 to its vendor: ‘We in fact had sent a wire to who knows where.’

Cybercriminals are exploiting publicly available information and weaknesses in corporate email systems to trick small businesses into transferring large sums of money into fraudulent bank accounts, in schemes known as “corporate account takeover” or “business email fraud.”

Companies across the globe lost more than $1 billion from October 2013 through June 2015 as a result of such schemes, according to the Federal Bureau of Investigation. The estimates include complaints from businesses in 64 countries, though most come from U.S. firms. Both “organized crime groups from overseas and domestic-based actors” are typical perpetrators, said Patrick Fallon, a section chief in the FBI’s Criminal Investigative Division.

Their targets are businesses such as Mega Metals Inc., a 30-year-old scrap processor. In April, the company wired $100,000 to a German vendor to pay for a 40,000-pound container load of titanium shavings. Mega Metals typically buys three to four loads of titanium a week from suppliers in Europe and Asia, for anywhere from $50,000 to $5 million or more per transaction. Mega Metals crushes and washes the titanium scrap before selling it to mills that remelt the scrap into new products.

But following the recent transaction, the vendor complained that it hadn’t received payment. A third party had infected the email account used by a broker working for Mega Metals, the company said. “We got tricked,” said David Megdal, vice president of the family-owned business in Phoenix, which has 30 employees. “We, in fact, had sent a wire to who knows where.”

George Kurtz, chief executive of CrowdStrike Inc., an Irvine, Calif., cybersecurity firm that investigated the loss, said it appears that malicious software implanted on the broker’s computer allowed the crooks to collect passwords that provided access to the broker’s email system, and then to falsify wire-transfer instructions for a legitimate purchase. “Given that the money has been moved out several times, there is no hope of recovering it,” said Mr. Kurtz.

Continued in article

Liar Loans:  Canadians Taking Cheating Lessons from USA Mortgage Lenders
"Liar loans' are popping up in Canada's housing bubble," by Wolf Richter, Business Insider, July 31, 2015 ---
http://www.businessinsider.com/liar-loans-pop-up-canada-housing-bubble-2015-7

For a long time, the conservative mortgage lending standards in Canada, including a slew of new ones since 2008, have been touted as one of the reasons why Canada’s magnificent housing bubble, when it implodes, will not take down the financial system, unlike the US housing bubble, which terminated in the Financial Crisis.

Canada is different. Regulators are on top of it. There are strict down payment requirements. Mortgages are full-recourse, so strung-out borrowers couldn’t just mail in their keys and walk away, as they did in the US. And yada-yada-yada.

But Wednesday afterhours, Home Capital Group, Canada’s largest non-bank mortgage lender, threw a monkey wrench into this theory.

Through its subsidiary, Home Trust, the company focuses on “alternative” mortgages: high-profit mortgages to risky borrowers with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime borrowers.

So it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September: “falsification of income information.” Liar loans.

Liar loans had been the scourge of the US housing bust. Lenders were either actively involved or blissfully closed their eyes. And everyone made a ton of money.

Read more:
http://wolfstreet.com/2015/07/30/canadas-highly-touted-conservative-mortgage-standards-sink-into-liar-loan-scandal/#ixzz3hYmb4Jr6
 

Subprime: Borne of Greed, Sleaze, Bribery, and Lies (including the credit rating agencies) ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm#Sleaze

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

"Miller Energy executives charged with accounting fraud," by Jordan Blum, FuelFix, August 6, 2015 ---
http://fuelfix.com/blog/2015/08/06/miller-energy-executives-charged-with-accounting-fraud/#31744101=0&31510103=0 

The U.S. Securities and Exchange Commission is charging a small Houston-based oil company with accounting fraud and falsely inflating the values of its assets.

The SEC is levying the charges at current Miller Energy’s Chief Operating Officer David M. Hall and former Chief Financial Officer Paul W. Boyd, who left the company in 2011. The audit team leader at the company’s former independent auditor also was charged.

The financially struggling company, which focuses its exploration and production in Alaska, was delisted from the New York Stock Exchange after July 30 because its stock was trading under $1 a share since April 22. Miller Energy relocated from Tennessee to Houston earlier this year.

The SEC’s Division of Enforcement alleges that, after acquiring assets in Alaska’s Cook Inlet area in late 2009, Miller Energy overstated their value by more than $400 million, boosting the company’s net income and total assets. The allegedly inflated valuation turned a penny-stock company into one that reached a 2013 high of nearly $9 per share, the SEC stated.

Continued in article

Jensen Comment
Miller Energy is audited by KPMG.

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

"The enemy within Rogue employees can wreak more damage on a company than competitors," The Economist, July 25, 2015 ---
http://www.economist.com/news/business/21659776-rogue-employees-can-wreak-more-damage-company-competitors-enemy-within

. . .

The most familiar type of enemy within is the fraudster. The Economist Intelligence Unit, a sister organisation of The Economist, conducts a regular poll of senior executives on the subject of fraud committed by insiders. In 2013 the poll discovered that about 70% of companies had suffered from at least one instance of fraud, up from 61% in the previous survey. Fraud is often petty: a survey of British employees for YouGov in 2010 found that a quarter of staff eligible for expenses admitted to inflating claims. But fraud can also be more audacious and more harmful: think of former employees setting up rivals using stolen technology and purloined client lists.

Even more dangerous than the fraudster is the vandal. Thieves at least have a rational motive. Vandals are driven by a desire for revenge that can know no limits. David Robertson of K2 Intelligence, a company that specialises in corporate investigation, recounts the story of a British manufacturing company that was undergoing restructuring. A member of the information-technology department discovered that his name was on the list of people whose services would no longer be required. He built a “backdoor” into the company’s IT system from his home computer and set about wreaking damage—deleting files, publishing the chief executive’s e-mails and distributing pornographic pictures.

Some enemies-within start out as star employees. A striking number of the worst corporate scandals in recent years have been the work of high-flyers who bend and then break the rules in order to please their bosses. Barings, a collapsed British investment bank, showered Nick Leeson with rewards before it discovered that he had produced his outsized results because he took outsized (and unauthorised) risks.

Other enemies-within are the very opposite of high-flyers. The HSBC execution squad are only the latest example of low-level employees who have either wittingly or unwittingly used the power of the internet to blacken their employer’s reputation. In April 2009 two employees of Domino’s, a fast-food chain, posted videos of themselves “abusing takeaway food”. And in July 2012 a Burger King employee posted photos of himself online which showed him standing in a tub of lettuce in filthy shoes along with the caption “This is the lettuce you eat at Burger King”.

Continued in article

Jensen Comment
If employees do not get greedy and limit themselves to relatively small damages to the company they are almost impossible to detect --- such as those that pad expense accounts, use business vehicles for personal use, take home office supplies, etc. The greater the greed the greater the risk.

Probably the most effective way to detect employee misdeeds is to reward or at least encourage whistle blowing. This of course is no panacea "if everybody is doing it." For example, if a lot of professors are attending phony research conferences in Europe in order to partly fund family vacations it becomes less likely that they will rat on each other.

Almost everything boils down to having internal controls. Universities are notorious for lack of controls on most everything concerning faculty behavior and performance. Professors do not check up on each other to see of data is faked. Administrators generally do not inspect submitted receipts with a magnifying glass. We pride ourselves on trust even though, as accounting professors, we preach otherwise when it comes to internal controls that we teach to our students.

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

Bob Jensen's threads on managerial accounting and controls ---
http://faculty.trinity.edu/rjensen/Theory02.htm#ManagementAccounting

From the CFO Journal's Morning Ledger on September 5, 2015

Toshiba slashes earnings for past seven years.
http://www.wsj.com/articles/toshiba-slashes-earnings-for-past-7-years-1441589473?mod=djemCFO_h
Toshiba Corp., hoping to close the books on one of Japan’s biggest accounting scandals, said it had overstated its earnings by $1.9 billion over seven years, more than four times the initial estimate. The company said Monday that it was taking steps to avoid a repeat of the scandal, which an independent panel said was caused by managers setting aggressive profit targets that subordinates couldn’t meet without inflating divisional results.

Ernst & Young trying to figure out how it's auditors missed  a multi-year $1+ billion accounting fraud in Toshiba's financial statements
"E&Y Japan arm launches internal probe of Toshiba audit," Reuters Technology, July 31, 2015 ---
http://www.reuters.com/article/2015/08/01/us-toshiba-accounting-e-y-idUSKCN0Q62UD20150801

The Japanese affiliate of Ernst & Young LLC has launched an in-house investigation (using over 150 investigators) into its audit of Toshiba Corp in the wake of the electronics maker's $1.2 billion accounting scandal, a person with knowledge of the matter said.

Ernst & Young ShinNihon LLC has established a team of about 20 executives to investigate whether there were any problems with how it conducted its audits of Toshiba, the person said.

The person spoke on condition of anonymity. No one could be reached at the company's offices in Tokyo on Saturday.

Continued in article

Jensen Comment
Audit firms traditionally defend themselves that they're not hired to be fraud detectors unless the frauds materially affect financial statements. The Toshiba accounting fraud had a monumental impact on financial statements.

From the CFO Journal's Morning Ledger on July 15, 2015

Toshiba executives likely to step down over accounting scandal
http://www.wsj.com/articles/toshiba-executives-expected-to-step-down-over-accounting-scandal-1436870307?mod=djemCFO_h
Toshiba Corp. President Hisao Tanaka and several other executives are likely to step down soon over an accounting scandal at the Japanese company involving profit inflated by more than $1 billion. The other executives that people familiar with the situation expect to leave Toshiba include Norio Sasaki, a former president who is currently vice chairman. The board is also likely to undergo significant membership changes.

. . .

Toshiba has detailed a number of cases in which business units failed to book adequate costs for executing contracts, causing the company to overstate profit. Toshiba said in June that it would need to reduce operating profit for the 2009 through 2013 fiscal years by a total of ¥54.8 billion. People familiar with the matter said the figure has now ballooned to at least ¥150 billion ($1.2 billion). Toshiba declined to comment.

During those years, the company’s combined operating profit totaled ¥1.05 trillion, so even at the higher level, the reduction would amount to less than 15% of the company’s operating profit over the five years.

Continued in WSJ article

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

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

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

"Hacker Pleads Guilty to Stealing Tax Filings from 4 CPA Firms," by Michael Cohen, Accounting Today, July 7, 2015 ---
http://www.accountingtoday.com/news/tax-practice/hacker-pleads-guilty-to-stealing-tax-filings-from-4-cpa-firms-75123-1.html

A Bulgarian hacker has admitted to participating in a $6 million fraudulent tax return scheme in which he used tax-filing information stolen from at least four major CPA firms in the U.S.

Vanyo Minkov, 32, pleaded guilty Monday before U.S. District Judge Jose L. Linares in a Newark, N.J., federal court to a superseding information charging him with one count of conspiring to file false and fraudulent tax return.

In late 2012, Minkov and other conspirators allegedly hacked into the networks of at least four accounting firms and stole the 2011 tax filings for over 1,000 of the firms’ clients. The names of the accounting firms were not publicly identified by prosecutors, but according to the 2013 indictment and the more recent superseding information, one CPA firm was based in Connecticut, two of the others were in California, and the fourth was in Pennsylvania.

Continued in article

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

"IRS Gets Happy (Pizza)," by Roger Russell, Accounting Today, July 17, 2015 ---
http://www.accountingtoday.com/news/tax-practice/irs-gets-happy-pizza-75227-1.html?utm_campaign=daily-jul%2020%202015&utm_medium=email&utm_source=newsletter&ET=webcpa%3Ae4784366%3A2722275a%3A&st=email
Thank you Elliot Kamlet for the heads up.

Happy Asker, the founder of a pizza chain based in Farmington Hills, Mich., that operated restaurants throughout Michigan, Ohio and Illinois, was sentenced last week to 50 months in prison for income and employment tax fraud.

He was also ordered to pay $2.5 million to the Internal Revenue Service as restitution.

Asker was convicted of three counts of filing false income tax returns for the years 2006 through 2008, 28 counts of aiding and assisting in the filing of false income and payroll tax returns for several of Happy’s Pizza franchise restaurants for the years 2006 through 2009, and corruptly endeavoring to obstruct and impede the administration of the Internal Revenue Code.

Continued in article

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

Collateral --- https://en.wikipedia.org/wiki/Collateral_%28finance%29

The CFO, eventual felon Andy Fastow, of Enron had over 3,000 SPEs doing the same thing --- using Enron's stock as collateral for Enron's loans
That's a bit like putting on a few more pounds so you can borrow more money using  more of yourself as collateral.
The USA courts banned corporations from using their own stock as collateral or otherwise profiting from their own stock following the great railroad frauds of the 1800s.
When the price of Enron's shares crashed so did Andy's SPEs for which there were lousy accounting rules before the Enron implosion ---
http://faculty.trinity.edu/rjensen//theory/00overview/speOverview.htm

"This Is Why So Many Chinese Companies Are Suspended," by Tracey Alloway, Bloomberg Business, July 8, 2015 ---
http://www.bloomberg.com/news/articles/2015-07-08/this-is-why-so-many-chinese-companies-are-suspended?cmpid=BBD070815_BIZ

At least 1,331 companies have halted trading on China's mainland exchanges, freezing $2.6 trillion of shares, or about 40 percent of the country’s market value, Bloomberg reported on Wednesday.

The Shanghai Composite Index fell 5.9 percent on Wednesday. It's now about 32 percent below the peak of 5,166 it reached on June 12. The unwinding of margin loans is adding fuel to the fire. Individual investors in China, as we all know by now, have used generous margin financing terms to enter the stock market and then build up their portfolios. Less-known is that Chinese companies have been doing the same thing by using their own corporate stock to secure loans from banks.

This means that they stand to lose a lot when those share prices start trending dramatically lower.

Continued in article

The Enron Fraud Was Much More Complicated Than the Above Chinese Corporate Frauds
Testimony of Frank Partnoy
Professor of Law, University of San Diego School of Law
Hearings before the United States Senate
Committee on Governmental Affairs, January 24, 2002
http://faculty.trinity.edu/rjensen/fraudEnron.htm

. . .

The critical piece of this puzzle, the element that made it all work, was a derivatives transaction – called a “price swap derivative” – between Enron and Raptor.  In this price swap, Enron committed to give stock to Raptor if Raptor’s assets declined in value.  The more Raptor’s assets declined, the more of its own stock Enron was required to post.  Because Enron had committed to maintain Raptor’s value at $1.2 billion, if Enron’s stock declined in value, Enron would need to give Raptor even more stock.  This derivatives transaction carried the risk of diluting the ownership of Enron’s shareholders if either Enron’s stock or the technology stocks Raptor held declined in price.  Enron also apparently entered into options transactions with Raptor and/or LJM1.

                Because the securities Raptor issued were backed by Enron’s promise to deliver more shares, investors in Raptor essentially were buying Enron’s debt, not the stock of a start-up telecommunications company.  In fact, the performance of Rhythms Net Connections was irrelevant to these investors in Raptor.  Enron got the best of both worlds in accounting terms: it recognized its gain on the technology stocks by recognizing the value of the Raptor loan right away, and it avoided recognizing on an interim basis any future losses on the technology stocks, were such losses to occur.

                It is painfully obvious how this story ends: the dot.com bubble burst and by 2001 shares of Rhythms Net Communications were worthless.  Enron had to deliver more shares to “make whole” the investors in Raptor and other similar deals.  In all, Enron had derivative instruments on 54.8 million shares of Enron common stock at an average price of $67.92 per share, or $3.7 billion in all.  In other words, at the start of these deals, Enron’s obligation amounted to seven percent of all of its outstanding shares.  As Enron’s share price declined, that obligation increased and Enron’s shareholders were substantially diluted.  And here is the key point: even as Raptor’s assets and Enron’s shares declined in value, Enron did not reflect those declines in its quarterly financial statements.

                B.                Using Derivatives to Hide Debts Incurred by Unprofitable Businesses
                A second example involved Enron using derivatives with two special purpose entities to hide huge debts incurred to finance unprofitable new businesses.  Essentially, some very complicated and unclear accounting rules allowed Enron to avoid disclosing certain assets and liabilities.

                These two special purpose entities were Joint Energy Development Investments Limited Partnership (JEDI) and Chewco Investments, L.P. (Chewco).  Enron owned only 50 percent of JEDI, and therefore – under applicable accounting rules – could (and did) report JEDI as an unconsolidated equity affiliate.  If Enron had owned 51 percent of JEDI, accounting rules would have required Enron to include all of JEDI’s financial results in its financial statements.  But at 50 percent, Enron did not.

                JEDI, in turn, was subject to the same rules.  JEDI could issue equity and debt securities, and as long as there was an outside investor with at least 50 percent of the equity – in other words, with real economic exposure to the risks of Chewco – JEDI would not need to consolidate Chewco.

                One way to minimize the applicability of this “50 percent rule” would be for a company to create a special purpose entity with mostly debt and only a tiny sliver of equity, say $1 worth, for which the company easily could find an outside investor.  Such a transaction would be an obvious sham, and one might expect to find a pronouncement by the accounting regulators that it would not conform to Generally Acceptable Accounting Principles.  Unfortunately, there are no such accounting regulators, and there was no such pronouncement.  The Financial Accounting Standards Board, a private entity that sets most accounting rules and advises the Securities and Exchange Commission, had not – and still has not – answered the key accounting question: what constitutes sufficient capital from an independent source, so that a special purpose entity need not be consolidated?

Since 1982, Financial Accounting Standard No. 57, Related Party Disclosures, has contained a general requirement that companies disclose the nature of relationships they have with related parties, and describe transactions with them.  Accountants might debate whether Enron’s impenetrable footnote disclosure satisfies FAS No. 57, but clearly the disclosures currently made are not optimal.  Members of the SEC staff have been urging the FASB to revise No. 57, but it has not responded.  In 1998, FASB adopted FAS No. 133, which includes new accounting rules for derivatives.  Now at 800-plus pages, FAS No. 133’s instructions are an incredibly detailed – but ultimately unhelpful – attempt to rationalize other accounting rules for derivatives.

                As a result, even after two decades, there is no clear answer to the question about related parties.  Instead, some early guidance (developed in the context of leases) has been grafted onto modern special purpose entities.  This guidance is a 1991 letter from the Acting Chief Accountant of the SEC in 1991, stating: “The initial substantive residual equity investment should be comparable to that expected for a substantive business involved in similar [leasing] transactions with similar risks and rewards.  The SEC staff understands from discussions with Working Group members that those members believe that 3 percent is the minimum acceptable investment.  The SEC staff believes a greater investment may be necessary depending on the facts and circumstances, including the credit risk associated with the lessee and the market risk factors associated with the leased property.” 

Based on this letter, and on opinions from auditors and lawyers, companies have been pushing debt off their balance sheets into unconsolidated special purpose entities so long as (1) the company does not have more than 50 percent of the equity of the special purpose entity, and (2) the equity of the special purpose entity is at least 3 percent of its the total capital.  As more companies have done such deals, more debt has moved off balance-sheet, to the point that, today, it is difficult for investors to know if they have an accurate picture of a company’s debts.  Even if Enron had not tripped up and violated the letter of these rules, it still would have been able to borrow 97 percent of the capital of its special purpose entities without recognizing those debts on its balance sheet. 

Transactions designed to exploit these accounting rules have polluted the financial statements of many U.S. companies.  Enron is not alone.  For example, Kmart Corporation – which was on the verge of bankruptcy as of January 21, 2002, and clearly was affected by Enron’s collapse – held 49 percent interests in several unconsolidated equity affiliates.  I believe this Committee should take a hard look at these widespread practices.

                In short, derivatives enabled Enron to avoid consolidating these special purpose entities.  Enron entered into a derivatives transaction with Chewco similar to the one it entered into with Raptor, effectively guaranteeing repayment to Chewco’s outside investor.  (The investor’s sliver of equity ownership in Chewco was not really equity from an economic perspective, because the investor had nothing – other than Enron’s credit – at risk.)  In its financial statements, Enron takes the position that although it provides guarantees to unconsolidated subsidiaries, those guarantees do not have a readily determinable fair value, and management does not consider it likely that Enron would be required to perform or otherwise incur losses associated with guarantees.  That position enabled Enron to avoid recording its guarantees.  Even the guarantees listed in the footnotes are recorded at only 10 percent of their nominal value.  (At least this amount is closer to the truth than the amount listed as debt for unconsolidated subsidiaries: zero.)

                Apparently, Arthur Andersen either did not discover this derivatives transaction or decided that the transaction did not require a finding that Enron controlled Chewco.  In any event, the Enron derivatives transaction meant that Enron – not the 50 percent “investor” in Chewco – had the real exposure to Chewco’s assets.  The ownership daisy chain unraveled once Enron was deemed to own Chewco.  JEDI was forced to consolidate Chewco, and Enron was forced to consolidate both limited partnerships – and all of their losses – in its financial statements.

Continued in article

Bob Jensen's threads on the Enron and WorldCom sagas ---
http://faculty.trinity.edu/rjensen/fraudEnron.htm

Teaching Case on Channel Stuffing
From The Wall Street Journal Accounting Weekly Review on July 31, 2015

SEC Investigating Smirnoff Maker Diageo
by: Tripp Mickle and Saabira Chaudhuri
Jul 24, 2015
Click here to view the full article on WSJ.com
 

TOPICS: Revenue Recognition

SUMMARY: The Securities and Exchange Commission is investigating whether Diageo PLC has been shipping excess inventory to distributors in an effort to boost the liquor company's results. By sending more cases to distributors than wanted, the British-based owner of Smirnoff and Johnnie Walker would be able to report increased sales and shipments. That allows Diageo to report shipments as sales, leaving distributors with a bitter taste as sales of the company's brands have waned. The company has already changed the way it accounts for those shipments, and that will almost certainly lead to lower inventory levels even as Diageo responds to securities investigators. In the U.S., liquor producers follow a three-tier system to market. Producers like Diageo ship to wholesalers, who then ship to retailers. Liquor companies can record shipments as sales when they ship them to the wholesaler.

CLASSROOM APPLICATION: This is a great article for a discussion regarding when to recognize sales. The Securities and Exchange Commission probe raises important questions over not only who owns inventory as it moves through distribution channels but who makes decisions about supply.

QUESTIONS: 
1. (Introductory) What is the SEC? What is its area of authority?

2. (Advanced) Why is the SEC investigating Diageo PLC? How does this investigation relate to the SEC's responsibilities?

3. (Advanced) What are the accounting rules regarding revenue recognition? What are possible times sales can be recognized in the business transaction described in the article? When should the sales be recognized?

4. (Advanced) What is cash basis accounting? What is accrual basis accounting? How does revenue recognition differ when a company is cash basis vs. accrual basis?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"SEC Investigating Smirnoff Maker Diageo." by Tripp Mickle and Saabira Chaudhuri, The Wall Street Journal, July 24, 2015 ---
http://www.wsj.com/articles/sec-investigating-smirnoff-maker-diageo-1437678975?mod=djem_jiewr_AC_domainid

Agency probing whether Diageo has shipped excess inventories to distributors.

The Securities and Exchange Commission is investigating whether Diageo PLC has been shipping excess inventory to distributors in an effort to boost the liquor company’s results, according to people familiar with the inquiry.

By sending more cases to distributors than wanted, the British-based owner of Smirnoff and Johnnie Walker would be able to report increased sales and shipments, according to these people.

Diageo confirmed Thursday to The Wall Street Journal that it received an inquiry from the SEC regarding its distribution in the U.S.

“Diageo is working to respond fully to the SEC’s requests for information in this matter,” a company spokeswoman said.

Diageo’s American depositary receipts fell 5% Thursday afternoon, following the Journal’s report on the inquiry, and ended the day down $4.99, or 4.2%, to $114.67.

The inquiry coincides with a period of tumult in Diageo’s executive ranks. The company announced in June that North American President Larry Schwartz would be retiring by the end of the year. Since then, the company has also announced the departures of its chief marketing officer for North America and a president of national accounts in the U.S.

Continued in article

Bob Jensen's threads on channel stuffing scandals ---
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm#ChannelStuffing

"For-Profit Chain Settles with Feds for $13 Million," Inside Higher Ed, June 30, 2015 ---
https://www.insidehighered.com/quicktakes/2015/06/30/profit-chain-settles-feds-13-million

Education Affiliates, a for-profit chain with 50 campuses, has settled with the federal government over false-claim allegations, the U.S. Department of Justice said. The Maryland-based company agreed to pay $13 million in response to allegations that it received aid payments from unqualified students, some of whom the for-profit admitted by creating false or fraudulent high school diplomas. Education Affiliates also referred prospective students to diploma mills, according to the feds, and falsified students' federal aid applications.

“The various cases that were settled here include numerous allegations of predatory conduct that victimized students and bilked taxpayers,” said Under Secretary of Education Ted Mitchell, in a written statement. “In particular, the settlement provides for repayment of $1.9 million in liabilities ordered by Secretary of Education Arne Duncan that resulted from EA awarding federal financial aid to students at its Fortis-Miami campus based on invalid high school credentials issued by a diploma mill.

Continued in article

"Police: Accountant stole $423K from client," by Eric Veronikis, PennLive, June 29, 2015 ---
http://www.pennlive.com/midstate/index.ssf/2015/06/police_accountant_stole_423k_f.html

Police arrested a Red Lion accountant Monday for allegedly pilfering $423,000 from a client, police said.

Shirley Cottrell, owner of Complete Business Accounting, stole the money during the past 12 years from a company she handled accounting duties for, according to police.

Police encouraged anyone who has hired Complete Business Accounting to audit their accounts thoroughly and to contact their local police department should they find any discrepancies.

Continued in article

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

P&G Settles Suit on Puffed-Up Packaging:   Olay containers raised eyebrows of California prosecutors, who called them deceptive ---
http://www.wsj.com/articles/p-g-settles-suit-on-puffed-up-packaging-1436305037?mod=djemCFO_h

Olay is getting a makeover, though not entirely of its own accord.

Procter & Gamble Co. will change the packaging of some Olay skin-care products as part of a settlement with California prosecutors, who had accused the company of misleading consumers by selling jars of face cream in packaging that was at times much larger than the contents. The company also agreed to pay $850,000 in civil penalties and costs.

The civil protection lawsuit stems from an investigation that began in 2012, according to a spokesman for the district attorney’s office in California’s Riverside County, which was one of four counties that handled the case. Inspections of Olay containers and packages led to allegations that P&G was violating the state’s so-called slack-fill law, which prohibits the use of oversize packaging to make products appear larger.

Continued in article

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

Commodities trader (Noble Group) has faced criticism for accounting irregularities ---
http://www.wsj.com/articles/noble-group-launches-accounting-review-1436229173

SINGAPORE—Commodities trader Noble Group Ltd. will launch an independent review into its accounting, which has come under some scrutiny this year, the company said Tuesday.

The Hong Kong-based company will appoint four nonexecutive directors and accounting consultant PricewaterhouseCoopers LLC to conduct the review, it said in the statement.

Noble Group has faced heavy criticism this year from several research firms, including U.S. short seller Muddy Waters, which accused it of accounting irregularities. The company has denied any wrongdoing.

The review will focus on Noble’s so-called mark-to-market of fair value accounting, the company said. Mark-to-market calculations, which are used to value assets, can include an element of subjectivity when estimating future commodity prices and production, for example. Noble’s critics say this practice led the company to report stronger results than it should have in the past.

Coninued in article

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

When Benefits of Corporate Inversions Exceed Tax Benefits

From the CFO Journal's Morning Ledger on July 8, 2015

For U.S. firms that relocated abroad before regulators cracked down on tax inversions, the benefits have turned out to be greater than just a residence in a lower-tax jurisdiction. Companies that got out while the getting was good have since enjoyed a competitive advantage with regard to corporate takeovers, in part due to the very regulations intended to block the inversions, the WSJ’s Liz Hoffman reports. Since the Treasury rules went into effect last fall, 55 U.S. companies have been sold to or targeted by foreign buyers, many of those acquirers formed by inversions themselves.

Take the case of Horizon Pharma PLC, which completed its takeover of a small, closely held Irish drug company last fall and then redomiciled in Dublin. On Tuesday, Horizon went public with a $1.75 billion, all-stock takeover bid for Depomed Inc. Horizon CEO Timothy Walbert said that buying Depomed, would generate “significant operating and tax synergies,” or savings. Depomed paid 38% of its profits in taxes last year, according to regulatory filings. Horizon is targeting a tax rate in the low 20s over the longer term. Ireland has a corporate tax rate of 12.5%.

LIBOR Reliability and Scandal --- https://en.wikipedia.org/wiki/Libor

From the CFO Journal's Morning Ledger on July 8, 2015

No fix for Libor: benchmark still broken, regulators say
http://www.wsj.com/articles/libor-reform-has-not-gone-far-enough-says-regulator-1436195584?mod=djemCFO_h
A top U.K. regulator says efforts to overhaul the London interbank offered rate, or Libor, haven't gone nearly far enough. The U.S. Federal Reserve says Libor is no longer fit to serve as the market’s main benchmark. And Intercontinental Exchange Inc.,  which is in charge of reforming Libor, says it is struggling to get enough support from the industry to make the benchmark better.

Jensen Comment
This is an enormous problem for hedge accounting, especially when implementing FAS 138
Illustrations in Bob Jensen's Tutorials --- http://www.cs.trinity.edu/~rjensen/138EXAMPLES.htm
 

MF Global --- https://en.wikipedia.org/wiki/MF_Global

John Corzine --- https://en.wikipedia.org/wiki/Jon_Corzine

From the CFO Journal's Morning Ledger on July 8, 2015

Corzine, other ex-MF Global officials settle suit for $64.5 million
http://www.wsj.com/articles/SB10597066333209974492404581094100260070050?mod=djemCFO_h
Jon S. Corzine and other former MF Global officials will pay $64.5 million to settle an investor lawsuit, according to a court filing. The money from Mr. Corzine and former CFO Henri J. Steenkamp will come from directors’ and officers’ insurance policies they had while working at MF Global. The Tuesday filing said the insurance money is “being rapidly and continually depleted” by the litigation. Messrs. Corzine and Steenkamp must provide proof of their reported net worth or the plaintiffs can cancel the settlement, according to the filing.

Bob Jensen's threads on the MF Global Scandal
Search for "MF Global" at
http://faculty.trinity.edu/rjensen/Fraud001.htm