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Please spread this word among older folks

"Watchdogs Warn About Scams Alongside Medicare Drug Benefit," by Kelly Greene, The Wall Street Journal, October 18, 2005; Page D2 --- http://online.wsj.com/article/SB112959925370771490.html?mod=todays_us_personal_journal

Government and consumer watchdogs are bracing for the marketing scams likely to spring up alongside the long-awaited Medicare drug benefit. Already, the Centers for Medicare and Medicaid Services, the federal agency overseeing the new drug program, says it has enlisted help from law-enforcement officials to investigate two possible scams in which beneficiaries were asked for bank-card numbers and other personal information. Enrollment for the plans starts Nov. 15, and coverage begins Jan. 1. Drug-plan marketers are allowed to make calls to describe benefits and offers, and to solicit requests for pre-enrollment information. Yet it's illegal for marketers of Medicare drug plans to visit your home unless you invite them in advance, or to send you unsolicited emails, says Deane Beebe, spokeswoman for the Medicare Rights Center, a New York advocacy group. Although marketers can make unsolicited phone calls, they aren't allowed to sign you up during those calls. Several advocacy groups, including the National Consumers League (www.fraud.org/tips/internet/medicare.htm), are offering tips for protecting yourself from being victimized by a Medicare-related scam. Among the tips: Check the list of Medicare-approved prescription plans by calling the Centers for Medicare and Medicaid Services at 800-633-4227. If you're contacted by a plan that isn't on the list, it could be a scam. Make sure the plan is licensed. Call your state insurance department; there's a directory of these departments at www.naic.org/state_web_map.htm. Guard personal information, such as Social Security or bank-account numbers. Legitimate plans may ask for a Social Security number -- but not until you actually enroll. And they can't ask for your credit-card or bank data unless you're arranging automatic payments. No one can enroll in a drug plan before Nov. 15, though the plans can start advertising this month. If a plan asks for payment before that date, it could be fraudulent. Enrolling in a drug plan is voluntary. If someone says you must join a plan to avoid losing your other Medicare benefits, you're getting false information. For free advice, call your State Health Insurance Program or your local area agency on aging. For a state-by-state directory of state programs, visit www.medicare.gov/contacts/Static/SHIPs.asp or call Medicare's hotline. To find your local aging agency, go to eldercare.gov or call 800-677-1116. Even with legitimate plans, advocates for Medicare recipients urge seniors to study and compare several drug plans before choosing. "What incentive does a salesperson have to inform a senior that a competitor's plan might be better for them?" asks Shannon Benton, executive director of the TREA Senior Citizens League, an Alexandria, Va., advocacy group. The Medicare Rights Center developed a flow chart to help sort through drug-benefit options. To use it, go to medicareinteractive.org/aarp, then click on the yellow box on the right side of the screen labeled "New! Medicare Drug Coverage Information."

Bob Jensen's threads on consumer frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm

 

Jensen Comment:
Note that the traditional Medicare Supplement Plans (A, B, F, J, etc) are going to cease.  The trusted place to start for information about new alternative is http://www.cms.hhs.gov/default.asp?

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Dance with the one who brought (bought?) you!

Financial performance reporting transparency or in this case lack thereof in accounting
A growing number of companies are paying extra sums to cover executives' personal tax bills, even as CEO compensation continues to soar. Details of the "tax gross-ups" are often buried in impenetrable footnotes or obscure filings.

"Latest Twist in Corporate Pay: Tax-Free Income for Executives," by Mark Maremont, The Wall Street Journal, December 22, 2005 --- http://online.wsj.com/article/SB113521937434129170.html?mod=todays_us_page_one

Amid soaring CEO compensation, a number of companies are paying extra sums to cover executives' personal tax bills. Many companies are paying taxes due on core elements of executive pay, such as stock grants, signing bonuses and severance packages. Others are reimbursing taxes on corporate perquisites, which are treated as income by the Internal Revenue Service. They run the gamut from personal travel aboard corporate jets to country-club memberships and shopping excursions.

"This smacks of Leona Helmsley-like treatment, that only little people pay taxes," says Patrick McGurn, an executive vice president of Institutional Shareholder Services Inc., an influential adviser to big investors that often critiques companies' corporate-governance practices. For these top executives, he says, companies "are removing taxes from the list of inevitable life experiences, leaving only death." Details of the little-known payments, called "tax gross-ups," are often buried in impenetrable footnotes or obscure filings. In its 2005 proxy statement, Home Depot didn't disclose many of the perks it must give Mr. Nardelli, or that the company is required to reimburse him for taxes related to those perks. The company provided specifics of these benefits and the gross-ups in his employment agreement, which was attached to a 2001 regulatory filing. (Read Home Depot's filing.) Continued in article

 

The question is:  Why don't the auditors insist on transparent disclosures?

COMPANY DIRECTORS - WHOM DO THEY SERVE? --- http://www.ragm.com/archpub/ragm/company_directors.html 

“Dance with the one who brought you”

Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

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On the heels of damaging audit inspection outcomes by the PCAOB in the U.S., the Canadian CPAB finds serious deficiencies in Canadian audits
The CPAB report also called for firms to improve audit quality after it found five of 87 engagements chosen for review suffered "serious deficiencies," and were not conducted in accordance with Generally Accepted Auditing Standards. "In each of the cases, we felt the firm had not done enough audit work to support its opinion given the financial statements," he said.
"Many accounting firm managers break policy: audit:  CPAB review finds over half did not report all their investments, securities of clients." Shirley Won, The Globe and Mail, December 20, 2005 ---  http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20051220/RACCOUNTING20/TPBusiness/Canadian 

Bob Jensen's threads on fraudulent and incompetent audits are at http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

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How can one man receive a $1.45 billion award in a lawsuit?
Mr. Perelman, chairman of cosmetics giant Revlon Inc., was awarded $604.3 million in compensation and a further $850 million in punitive damages against Morgan Stanley to punish the bank for its misconduct in defrauding the financier when he sold his camping-gear company to the bank's client, Sunbeam Corp., in 1998. Trial Judge Elizabeth Maass allowed Mr. Perelman's allegation of fraud against the bank to be put to the jury as fact, as a sanction for the bank's continued failure to provide documents in the litigation, a process known as discovery.
"Morgan Stanley Appeals Decision To Award Perelman $1.45 Billion," by Marietta Cauchi, The Wall Street Journal, December 13, 2005; Page C4 ---
http://online.wsj.com/article/SB113441679728820385.html?mod=todays_us_money_and_investing

Bob Jensen's threads on Morgan Stanley and other investment banking frauds are at http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Also see Derivative Financial Instruments frauds at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

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Corporate Fraud Still Widespread, Difficult to Detect,
The number of companies around the world that reported incidents of fraud increased 22 percent in the last two years, according to a new Big Four survey. While layers of new controls have been implemented to improve corporate governance, fraud is still widespread, difficult to prevent, and detected many times by chance, according to the biennial survey by PricewaterhouseCoopers (PWC), which interviewed more than 3,000 corporate officers in 34 countries.
"Corporate Fraud Still Widespread, Difficult to Detect," AccountingWeb, December 5, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=101540

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New Tech Tools to Combat Corporate Fraud
A new tech sector has sprung up to provide that software. Virtually every computer and software maker is eager to tap one of the few high-growth markets in technology -- the best thing to happen in the sector since the Y2K panic caused thousands of big businesses to remake their computer rooms in 1998 and 1999. Storage companies like EMC Corp. stress the need to save audit-related materials for seven years. Security experts like RSA Security Inc. and Computer Associates International Inc. argue that companies can't prevent deficiencies if they can't pinpoint who is using the systems. A host of private companies have shifted their business models to promote their software as a cure for compliance woes.
William M. Bulkeley and Charles Forelle, "How Corporate Scandals Gave Tech Firms a New Business Line: Sarbanes-Oxley, Other Rules Aimed at Fighting Fraud Create Market for Software," The Wall Street Journal, December 9, 2005; Page A1 --- http://online.wsj.com/article/SB113409818808818144.html?mod=todays_us_page_one 

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Yet another example of how fraud works in high finance
It was a prudent move. While LandAmerica CFO G. William Evans says the review turned up nothing irregular at the Richmond, Virginia-based company, it appears some pension consultants have been recommending money managers based on self-interest, and not on the needs of their clients. Indeed, a study of 24 pension consultants conducted by the Securities and Exchange Commission found that more than half of the advisory firms earned money from both retirement-plan clients and money-management funds. According to the SEC study, issued in May, most of these pension advisers had relationships with unaffiliated broker-dealers or operated their own broker-dealers — thus providing themselves with an easy way to receive indirect payments from money managers.
Randy Myers, "Games They Play:  The other shoe has yet to drop on pension consultants' possible conflicts of interest. But companies can't afford to wait," CFO Magazine, December 1, 2005 --- http://www.cfo.com/article.cfm/5193393/c_5243641?f=magazine_alsoinside

Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

In particular, the "Pension Fund Consulting Racket" is discussed at
http://www.trinity.edu/rjensen/FraudRotten.htm#PensionFundConsulting

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"Lawsuit Accuses AOL of Illegal Billing," The New York Times, December 2, 2005 --- http://www.nytimes.com/aponline/technology/AP-AOL-Lawsuit.html

A lawsuit seeking to potentially cover hundreds of thousands of America Online Inc. subscribers accuses the Time Warner Inc. unit of illegally billing customers by creating secondary accounts for them without their consent.

The lawsuit, filed last month in St. Clair County Circuit Court on behalf of 10 AOL customers in six states, claims the company confused and deceived customers about the charges, stalled them from canceling unauthorized accounts and refused to return questioned fees.

''AOL exploits its subscribers' confidential billing information to unlawfully generate additional revenue by charging subscribers for additional membership accounts that they neither order nor request,'' the lawsuit alleges, calling the scheme ''common, uniform and continuing.''

Continued in article

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Sickening:  Congressman's Betrayal Of Troops Called Greatest Sin
Rep. Randy Cunningham's dramatic fall from power represents more than just a historic case of personal corruption unprecedented in the long history of the Congress. It is also betrayal on a grand scale. Cunningham betrayed his friends, his constituents, his colleagues and, certainly most important, the U.S. combat troops he so loudly championed. By steering contracts vital to the Iraq war effort to cronies, he may have put those troops at greater risk by judging contracts more for what they would do for him than for the military. That - even more than his manifest dishonesty, personal bullying of opponents and slight legislative record - may turn out to be the most shameful legacy of the now-disgraced Republican. "This is nauseating at so many levels," said Norm Ornstein, a veteran congressional scholar at the American Enterprise Institute. What Cunningham, a highly decorated Vietnam veteran, did, said Ornstein, "is worse than just taking money. It is taking money and undermining everything he presumably stood for." In the end, Cunningham was a portrait of contradictions and inconsistencies. The ever-macho tough guy, he took bribes to buy two 19th-century commodes, or chests of drawers. The family man, he liked to invite women to his yacht. There, two women told Copley News Service, he would change into pajama bottoms and a turtleneck sweater to entertain them with chilled champagne by the light of a lava lamp.
"Congressman's Betrayal Of Troops Called Greatest Sin," by George E. Condon Jr., San Diego Union-Tribune, December 1, 2005 --- http://www.freerepublic.com/focus/f-news/1533271/posts

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"Economists Caution Investors on Hidden Risks of Hedge Funds," Stanford News, November 2005 --- http://www.gsb.stanford.edu/news/headlines/vanhorne_hedgefunds.shtml The link below was forwarded by David Fordham at James Madison University

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Four PricewaterhouseCoopers auditors arrested in Tokyo on criminal charges
Four certified public accountants at a Japanese unit of the PricewaterhouseCoopers Group were arrested Tuesday for allegedly collaborating with former executives at Kanebo Ltd. to falsify accounting reports. The special investigation department of the Tokyo District Public Prosecutor's Office also searched the offices of ChuoAoyama PricewaterhouseCoopers in Chiyoda Ward, Tokyo, and the suspects' homes jointly with the Securities and Exchange Surveillance Commission, prosecutors said. Pursuing criminal responsibility of certified public accountants in connection with window-dressing is unusual, and the arrests have blemished the credibility of those assigned auditing responsibilities, observers say. The accountants under arrest were identified as Kuniaki Sato, 63, Seiichiro Tokumi, 58, Kazutoshi Kanda, 55, and Kazuya Miyamura, 48.
The Japan Times, Sept. 14, 2005
This article was forwarded to me by Miklos A. Vasarhelyi [miklosv@andromeda.rutgers.edu]

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

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S.E.C. Settles ImClone Insider Trading Suit,
Two friends of Samuel D. Waksal, the former chief executive of ImClone Systems, have agreed to pay a total of $2.77 million to settle a lawsuit accusing them of insider trading in the company's shares. Zvi Fuks, a department chairman at Memorial Sloan-Kettering Cancer Center in New York, and Sabina Ben-Yehuda sold their ImClone shares in late 2001 after Mr. Waksal tipped them off that regulators were probably going to reject the company's cancer drug Erbitux, the Securities and Exchange Commission said yesterday. The settlement covers the losses they avoided when the shares subsequently fell 16 percent.
Bloomberg News, "S.E.C. Settles ImClone Insider Trading Suit," The New York Times, November 4, 2005 --- http://www.nytimes.com/2005/11/04/technology/04imclone.html
Jensen Comment
Martha got hard time for less dough.

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Financial fraud by signing and returning materially false audit confirmations sent to them by the auditors
The Securities and Exchange Commission has filed enforcement actions against seven individuals alleging they aided and abetted a massive financial fraud by signing and returning materially false audit confirmations sent to them by the auditors of the U.S. Foodservice, Inc. subsidiary of Royal Ahold (Koninklijke Ahold N.V.). All of the individuals charged, Brian Crowley, Robert Henuset, Ritchie Langfield, Frank Lysiak, Ernie Rosenberg, Dale Schulz, and Larry Stone, were employees of or agents for vendors that supplied U.S. Foodservice. The Commission's complaints allege that U.S. Foodservice personnel contacted vendors and urged them to sign and return the false confirmation letters. In some cases U.S. Foodservice pressured the vendors; in other cases they provided side letters to the vendors assuring the vendors that they did not owe U.S. Foodservice the amounts reflected as outstanding in the confirmation letters. The letters clearly stated that the confirmations were being used in connection with the annual audit and the letters directed the defendants to return the confirmations directly to the company's auditors.
"SEC CHARGES SEVEN INDIVIDUALS WITH AIDING AND ABETTING FINANCIAL FRAUD AT ROYAL AHOLD'S U.S. FOODSERVICE SUBSIDIARY," AccountingEducation.com, November 3, 2005 --- http://accountingeducation.com/index.cfm?page=newsdetails&id=141729

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Improper pricing of stock options?
Three top executives of Silicon Valley software company Mercury Interactive Corp. resigned amid disclosures about improper pricing of employee stock options, an issue under increased scrutiny lately by the Securities and Exchange Commission. The management shakeup, which included the resignations of Mercury's chief executive and chief financial officer, caused shares of the Mountain View, Calif., company to plunge 27% in 4 p.m. composite trading on the Nasdaq Stock Market.
Rebecca Buckman, Mark Maremont, and Karen Richardson, "Mercury Interactive Executives Resign in Wake of Probe," The Wall Street Journal, November 3, 2005; Page A7 ---
http://online.wsj.com/article/SB113093861785486289.html?mod=todays_us_page_one

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Tyco is in the news again, this time for reneging on a contract
More than five years have passed since Ms. Orlowitz, 51, bought Accurate Forming. During that time, she has spent thousands of hours and millions of dollars trying to bring the company into compliance with environmental rules. She has also tried to persuade Tyco to set things right either by buying back Accurate or by paying for the necessary remediation to ensure that its operations comply with emissions regulations. With the exception of a $270,000 payment that Tyco made last April to cover what it said was enough to put the plant into compliance with federal laws and a check for $27,500 to pay for fines levied by New Jersey, Tyco has declined her pleas. Ms. Orlowitz said she was bewildered by the hardball that Tyco has played with Accurate, especially because the purchase agreement stated specifically that the seller would be responsible for any losses arising out of environmental cleanups, fines or penalties.
Gretchen Morgenson, "Memo to Tyco: I Won't Back Down," The New York Times, October 31, 2005 --- http://www.nytimes.com/2005/10/30/business/yourmoney/30tyco.html

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WorldCom defendants in $651 million deal
A group of investment banks and other defendants agreed on Thursday to pay a combined $651 million to a coalition of institutional investors that lost money in WorldCom Inc.'s collapse. . . . More than 65 institutional investors are part of the pact, including the largest U.S. pension fund, the California Public Employees' Retirement System. Others set to get payments include the California State Teachers' Retirement System and pension funds in Illinois, Washington state and Tennessee. The bulk of the settlement will be paid by WorldCom's former investment banks -- primarily Citigroup and JP Morgan Chase & Co -- that underwrote WorldCom Inc. securities, according to plaintiffs' law firm Lerach Coughlin Stoia Geller Rudman & Robbins of San Diego.
Martha Graybow, "WorldCom defendants in $651 mln deal," The Washington Post, October 27, 2005 --- http://snipurl.com/wpOct27

Bob Jensen's threads on the Worldcom/Andersen scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm#WorldCom

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Internal Revenue Service Offers Settlement Over Tax Shelters
The Internal Revenue Service proposed a new settlement offer for some 4,000 small businesses, wealthy individuals and large corporations that participated in a variety of tax shelters. The settlement covers 21 types of transactions, 16 of which include tax shelters the IRS classified as abusive. Under terms of the settlement, individuals and corporations will pay all taxes and interest owed. Penalties will be reduced to half or one-quarter of the normal amount, according to the type of transaction. IRS Commissioner Mark Everson told reporters. "We're offering taxpayers a quick, quiet cost-effective way to put these deals behind them."
Rob Wells, "Internal Revenue Service Offers Settlement Over Tax Shelters," The Wall Street Journal, October 28, 2005; Page C2 --- http://online.wsj.com/article/SB113045348752081810.html?mod=todays_us_money_and_investing

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SEC instigates probe of General Motors' Accounting
General Motors Corp. said on Wednesday it had been subpoenaed by the U.S. Securities and Exchange Commission as part of a probe into its accounting practices and other matters. It was the latest blow to the world's largest automaker, which is bleeding money from its core North American automotive operations and confronting its biggest financial crisis since a narrow brush with bankruptcy 13 years ago. GM said the subpoenas related to its financial reporting for pension and other post-employment benefits, and to transactions between the company and auto parts supplier Delphi Corp. (Other OTC:DPHIQ - news). They also relate to the SEC's interest in GM's recovery of various costs from suppliers and supplier price credits, and any obligations to fund pension and post-employment benefits costs related to Delphi's Chapter 11 bankruptcy proceedings, the company said in a statement.
"GM subpoenaed in accounting probe," The New York Times, October 26, 2005

From The Wall Street Journal Accounting Weekly Review on November 18, 2005

TITLE: GM Will Restate Results for 2001 in Latest Stumble
REPORTER: Joseph B. White and Lee Hawkins, Jr.
DATE: Nov 10, 2005
PAGE: A1
LINK: http://online.wsj.com/article/SB113158081329892910.html 
TOPICS: Accounting, Accounting Changes and Error Corrections, Advanced Financial Accounting, Financial Accounting, Impairment

SUMMARY: GM inappropriately recorded credits from suppliers in 2001, boosting earnings in that year by about 100%, rather than recording them in later periods. "The practice of suppliers making payments to customers, effectively rebating projected cost savings up front, is a touchy one in the auto industry."

QUESTIONS:
1.) Describe the issue of "supplier credits" as described in this article. For further information, you may examine GM's 10-Q for the quarter ended September 30, 2005, filed on November 9, 2005 and available at
http://www.sec.gov/Archives/edgar/data/40730/000004073005000097/0000040730-05-000097-index.htm
Open the document, then search for "supplier credit".

2.) What was the total impact on GM's 2001 net income of the "supplier credits" issue described in this article? What will be the ultimate impact on the company's shareholder's equity through today? Explain your answer.

3.) What factors, particularly related to actions following September 11, 2001, negatively affected GM's 2001 and later earnings?

4.) How does GM's management argue that their 2001 and later results would have been even worse had they not undertaken programs to maintain sales following the September 11, 2001, tragic events? In your answer, make reference to the concepts of fixed and variable costs, defining each of these terms.

5.) Using the related article as well as the main article for this review, describe GM's strategy with investments in foreign entities. What is the issue regarding impairment reviews for those investments? In your answer, define "impairment review" and cite the authoritative accounting literature requiring those reviews.

6.) What controls do you think might have been put in place given the statement, quoted in the main article, that "GM said it is 'confident' that it now 'has substantially completed the process of fully remediating its related controls and procedures.' In answering this question, rely on specific requirements for timing of impairment reviews from authoritative accounting literature.

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES ---
TITLE: At General Motors, Troubles Mount for Man Behind the Wheel
REPORTER: Joseph B. White and Lee Hawkins, Jr.
PAGE: A1 ISSUE: Nov 11, 2005
LINK: http://online.wsj.com/article/SB113167989835994535.html

"GM Will Restate Results for 2001 In Latest Stumble:  Auto Maker Says It Booked 'Erroneous' Supplier Credits; Stock Price Hits 13-Year Low," by Joseph B. White and Lee Hawkins, Jr., The Wall Street Journal, November 10, 2005; Page A1 --- http://online.wsj.com/article/SB113158081329892910.html

DETROIT -- General Motors Corp., whose accounting is under scrutiny by the Securities and Exchange Commission, said it must restate financial results for 2001 and possibly subsequent years, the latest blow to the beleaguered auto giant and its chairman and chief executive, Rick Wagoner.

Late yesterday, after the close of New York Stock Exchange trading, GM said it overstated income for 2001 by as much as $300 million to $400 million -- equivalent to about 50% of the profit it reported at the time -- by "erroneously" booking credits from suppliers. The company said its accounting for credits from suppliers is "one of the matters" being investigated by the SEC.

GM's admission ended a day in which its shares fell to their lowest level since November 1992 -- during the company's last financial and management crisis -- in 4 p.m. Big Board trading, closing down $1.23, or nearly 5%, at $24.63. Also yesterday, Fitch Ratings cut its already junk-level rating on GM's debt by another two notches.

GM spokeswoman Toni Simonetti said GM's audit committee had met earlier this week to discuss the accounting issue.

"The issue here was that we basically booked the income in the wrong period," Ms. Simonetti said. "We're going to restate it rather than taking it all in 2001. That income still exists. It's not like that income shouldn't have been booked, it just shouldn't have been booked in all of 2001."

Still, the disclosure that GM materially overstated 2001 income from continuing operations -- and may have to make what it said would likely be "immaterial" adjustments to earnings reported for subsequent years -- likely will add pressure on Mr. Wagoner. He has been battling to turn around losses that have totaled more than $3 billion for the company so far this year.

Mr. Wagoner, who was CEO in 2001, has spent his five years at the company's helm trying to expand its global footprint while propping up North American sales to generate revenue to cover burgeoning U.S. health-care and pension costs. But this year, intensified competition coupled with rising gas prices, which have dented demand for GM's most profitable models, have undermined Mr. Wagoner's strategy for keeping GM in the black.

The company's falling stock price -- shares are down 39% this year -- and the downgrading of its debt to junk status by all the major credit-rating agencies symbolize the declining confidence in Mr. Wagoner, who became GM's chief financial officer in 1992 in a boardroom coup that swept out top management.

Neither GM nor Mr. Wagoner or any GM officer has been accused by the SEC of any wrongdoing.

Continued in article

Bob Jensen's threads on revenue accounting controversies are at http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

Bob Jensen's threads on GM auditors, Deloitte and Touche, are at http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

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Canadian white collar criminals can almost wait until their in nursing homes before going to trial
Canadian authorities say they want to clamp down on corporate crime. They seem to be having a hard time. Take Livent Inc. In 1998 -- before Enron, WorldCom, Tyco International, Adelphia and other high-profile U.S. accounting scandals unfolded -- the Toronto-based producer of "Phantom of the Opera" and other Broadway shows went into a tailspin. Its U.S.-listed shares became worthless. The company, under new U.S. management, accused founder Garth Drabinsky and other executives of a fraud that disguised the company's financial problems for years . . . The "right to mount a proper defense" can stretch out a "difficult, complex fraud" case, said a spokesman for the attorney general of Ontario. About two years ago, Canadian authorities vowed to get tougher on alleged corporate wrongdoers. While some recent moves show stiffer resolve, critics say cases are still taking too long, if they are pursued at all, and penalties remain light by U.S. standards.
Mark Heinzl, "Slow Canada: Fraud Cases Can Drag On," The Wall Street Journal, October 27, 2005; Page C1 --- http://online.wsj.com/article/SB113037467355480761.html?mod=todays_us_money_and_investing

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It's hard to drop executive's luxurious golden parachutes
American University may pay Benjamin Ladner, who was recently fired as president, a settlement of up to $4 million, according to an article in The Washington Post. Many students are outraged by the plan, which Ladner has still not agreed to, and another member quit American’s board to avoid having to sign off on such a deal.
Inside Higher Ed, October 24, 2005 --- http://www.insidehighered.com/news/2005/10/24/qt

For a follow up, see http://www.insidehighered.com/news/2005/10/25/american

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Holy Fraud Batman
"Payouts Before the Fall: Refco Insiders Received $1 Billion in Cash ," SmartPros, October 21, 2005 --- http://accounting.smartpros.com/x50306.xml

Oct. 21, 2005 (International Herald Tribune) — In the year before Refco sold shares to the public and then made the fourth-largest bankruptcy filing in U.S. history, insiders at the company received more than $1 billion in cash, according to Refco's financial statements.

Also, one insider, Robert Trosten, received $45 million when he left his post as chief financial officer a year ago, according to an arbitration hearing this year.

Mystery still surrounds the collapse this month of Refco, a decades-old Wall Street firm that conducted billions of dollars in trades in commodities, currencies and U.S. Treasury securities for more than 200,000 client accounts last year. But investors and customers who are facing losses in Refco's bankruptcy will certainly want to understand how insiders could drain $1.124 billion from the company's coffers in the year or so leading up to its demise.

To some degree, the money that insiders took out is not surprising, given that Refco's executives sold a big stake in the company to Thomas H. Lee Partners, a private equity firm in Boston, in August 2004.

Most of the money that insiders received $1.057 billion was paid upon the completion of that deal. Two Refco insiders were on the receiving end of those payouts: Phillip Bennett, the former chief executive who has been charged with defrauding investors by concealing a $435 million loan he arranged with the firm, and Tone Grant, Refco's longtime chief executive before Bennett.

Bennett has denied the securities fraud charges but has declined to comment further. Grant could not be reached for comment Wednesday.

Creditors of Refco will almost certainly try to recover what they can from payments made by the company to its top executives in the months leading up to its demise.

While compensation like salaries is typically not recoverable, payments made in the sale of a company or dividends paid to its owners are fair game if the company is insolvent, said Denis Cronin, a specialist in bankruptcy law at the New York firm Cronin & Vris.

The $1.057 billion came in two chunks, according to the Refco prospectus. First, Bennett and Grant appear to have shared in a $550 million cash payment in the transaction with Thomas Lee Partners. Then, Bennett appears to have received $507 million more from the deal.

Bennett did not cash out of Refco completely. At the time of the Lee deal, he agreed to roll over an equity stake in Refco worth $383 million, the prospectus said.

-- Gretchen Morgenson and Jenny Anderson, The New York Times

The question ex post when fraud is discovered is always:  How high were the "red flags?"

In court, the plaintiffs and the auditors generally filter down to a dispute over the auditor's failure to discover or take action on known "red flags" that signaled fraud or poor internal controls.  In the Refco case, the fraud was both financial (stealing money) and an enormous GAAP violation ($430 million unbooked loan).

"Spotlight on Grant Thornton in Refco Bankruptcy," AccountingWeb, October 25, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=101415

“The odds are high that the auditors were hoodwinked, but it’s an open question as to the size of any red flags which were missed,” Christopher Bebel, a former U.S. securities and Exchange Commission (SEC) attorney told Reuters. “The plaintiffs [in the shareholder lawsuits] are going to argue that these deficiencies which existed at Refco . . . served as red flags and a more thorough investigation was warranted once these flags were discovered,” he said. But these same disclosures can provide a way out for the auditors and underwriters, he added.

Refco said in its August SEC filing that its auditors had warned it in February of deficiencies in internal controls due to inadequate resources at its finance department, Reuters reports.

In fact, a new hire in the finance department, Peter F. James, initially questioned the interest spike from Liberty, according to a report Monday in the New York Times. James brought it to the attention of the company’s chief financial officer, Gerald M. Sherer, who had joined Refco in January. Answering James’ questions led to the discovery of the unacknowledged debt and subsequent collapse of the company.

GTI is standing by its U.S member firm, Global Chief Executive David McDonnell announced on Thursday, according to Reuters. “There is absolutely no question of separation and I don’t believe there will be,” McDonnell said. GTI broke with its Italian arm in the wake of the Parmalat scandal in 2003. “We separated from our Italian unit because they were unable, unwilling to cooperate with us,” said McDonnell, who said that he believed Grant Thornton LLP was investigating the problems at Refco thoroughly, Reuters reports.

Continued in article

Bob Jensen's threads on the legal troubles of Grant Thornton are at http://www.trinity.edu/rjensen/fraud001.htm#GrantThornton

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The Diamond Rating Scandals:  Did you pay to much for a diamond?
I'll just bet your finance also bought you those phony Lean Macleans pawned off at McDonalds Restaurants.
The still-unfolding scandal over diamond ratings is fueling anxiety among both jewelers and jewelry customers. Laboratory workers at the leading rater of diamonds in the world, the Gemological Institute of America, are being accused of taking bribes to give higher-than-deserved ratings to stones. The GIA, which in October fired four lab workers after a four-month internal investigation, says only a handful of rogue dealers and a relatively small number of stones were involved. But the institute isn't saying how many stones may have bogus ratings. The incident has diamond buyers around the world wondering if they overpaid for their purchase.
Ann Zimmerman and Raymud Flandez, "Getting a Second Opinion On Your Diamond:  Bogus Ratings on Some Gems Fuel Anxiety Among Buyers; GIA Offers Free Reappraisals," The Wall Street Journal,  December 21, 2005; Page D1

. . .

Diamonds are graded by the GIA after being inspected under a microscope for internal flaws, and the color is measured against a set of master stones reflecting the spectrum of color ratings. Three graders look at the diamond independently and then the stone is given a grading report, or certificate, that lists its color and clarity rating, in addition to its weight and cut.

Of course, getting an accurate rating is only part of the challenge. Consumers need to make sure they aren't paying too much for a stone that has been properly rated. They can turn to resources such as Diamondhelpers.com, a consumer-focused Web site that doesn't sell diamonds. It has a price finder where consumers can enter information from the diamond's certificate -- such as color, cut, carat weight and clarity grade -- and get an idea of its value.

The diamond-grading scandal erupted after a prominent diamond dealer filed a lawsuit earlier this year charging that workers at the GIA lab in New York had improperly graded stones sold in 2001 for $15 million to members of the Saudi royal family. The Saudis later had an independent evaluation done and got their money back. The GIA is on the brink of settling the lawsuit, say people familiar with the situation.

Joseph Tacopina, the attorney representing the diamond dealer in the lawsuit, says that he has gotten calls from dozens of consumers worried about the accuracy of the grading certificates on their diamonds. He understands their concern. "A difference in just two levels of a grade can mean a lot of money and the average consumer, of course, can't tell the difference," says Mr. Tacopina.

Jonathan Grella, a Washington PR executive, says he has definitely taken note of the scandal. He became engaged just two weeks ago, after months of learning the ropes about buying a diamond.

"I learned that a certificate is a must," he says, adding that he isn't sure whether he will get the ring reevaluated by another lab.

"This could send shock waves, not just through the jewelry and insurance industries," he says. "Can you imagine, going back to your bride-to-be and saying, 'I don't mean to alarm you, but the ring may not be what the certificate says it is.' That could make for some interesting holiday conversation."

Bob Jensen's threads on consumer frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm

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"Embedded Audit Modules in Enterprise Resource Planning Systems: Implementation and Functionality," by Roger S. Debreceny, Glen L. Gray, Joeson Jun-Jin Ng, Kevin Siow-Ping Lee, and Woon-Foong Yau, Journal of Information Systems, Fall 2005, pp. 7-28 --- http://aaahq.org/ic/browse.htm

Embedded Audit Modules (EAMs) are a potentially efficient and effective compliance and substantive audit-testing tool. Early examples of EAMs were implemented in proprietary accounting information systems and production systems. Over the last decade, there has been widespread deployment of Enterprise Resource Planning (ERP) systems that provide common business process functionality across the enterprise. These application systems are based upon a common foundation provided by large-scale relational database-management systems. No published research addresses the potential for exploiting the perceived benefits of EAMs in an ERP environment. This exploratory paper seeks to partially close this gap in the research literature by assessing the level and nature of support for EAMs by ERP providers.

We present five model EAM-use scenarios within a fraud-prevention and detection environment. We provided the scenarios to six representative ERP solution providers, whose products support "small," "medium," and "large" scale clients. The providers then assessed how they would implement the scenarios in their ERP solution. Concurrent in-depth interviews with representatives of the ERP providers address the issue of implementing EAMs in ERP solutions.

The research revealed limited support for EAMs within the selected ERP systems. Interviews revealed that the limited support for EAMs was primarily a function of lack of demand from the user community. Vendors were consistent in their view that EAMs were technically feasible. These results have a number of implications for both practice and future research. These include a need to understand the barriers to client adoption of EAMs and to build a framework for integrating EAMs into firm risk-management environment.

Bob Jensen's threads on ERP education are at http://www.trinity.edu/rjensen/245glosap.htm
Also see http://www.trinity.edu/rjensen/FraudConclusion.htm#ERP

Bob Jensen's threads on audit bots are at http://www.trinity.edu/rjensen/FraudConclusion.htm#ContinuousAuditing

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"Don't Shred on Me The U.N. must not be allowed to destroy the Volcker investigation's archives," by Claudia Rosett, The Wall Street Journal, Novembe4r 30, 2005 --- http://www.opinionjournal.com/columnists/cRosett/?id=110007613  

Paul Volcker's findings on Oil for Food have been widely received as the final word on the United Nations relief program for Saddam Hussein's Iraq. Far from it--as Mr. Volcker himself has admitted. In reporting that Saddam, along with his smuggling and oil graft, diverted $1.8 billion in kickbacks from U.N.-approved relief contracts under the program, Mr. Volcker underestimates, quite probably by billions, the amount the U.N. allowed Saddam Hussein and many of his favored business partners to graft out of Oil for Food deals for goods such as oil parts, milk, laundry soap and baby food. In low-balling the total, Mr. Volcker understates the negligence of the U.N., and overlooks some of the most potentially virulent links in Oil for Food.

The most urgent implication of Mr. Volcker's incomplete findings is that his huge and expensively assembled archives must be preserved intact well beyond the Dec. 31 deadline by which Mr. Volcker now plans to start disposing of them. Above all, they must not be handed back to the U.N., where too much related to the corrupt Oil for Food program has already vanished--including, to a fascinating extent, Secretary-General Kofi Annan's own powers of recollection. The former head of the program, Benon Sevan, alleged to have taken bribes from Saddam, was allowed to skip town, U.N. pension in hand. Mr. Annan is even now resurrecting, via a new $4 million U.N. program called the Alliance of Civilizations, the career of his former chief of staff, Iqbal Riza, who officially retired earlier this year after it came to light that during Mr. Volcker's investigation Mr. Riza had overseen the shredding of three years' worth of documents that might have better illuminated the oil-for-fraud shenanigans of the U.N.'s executive 38th floor.

As it happens, Rep. Henry Hyde, who has led the main investigation into Oil for Food in the House, introduced a bill on Nov. 17 urging that the U.S. withhold $100 million from its U.N. dues for each of the next four fiscal years, or until the secretary of state certifies to Congress that the Volcker investigation's archives have been transferred, intact and uncensored by the U.N., "to an entity other than the [Volcker] Committee or the United Nations"--and made available for public inspection, at the very least by law-enforcement authorities.

Continued in article

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"Lavish Spending, Little Reward D.C. Agencies Gave Contractor Millions for Projects but Scant Oversight," by David S. Fallis and Dan Keating, The Washington Post, November 28, 2005 --- http://snipurl.com/LavishSpending

With the District's approval, he gave himself an $82,000 salary and paid his brother $8,000 as a consultant. He spent $25,000 for signature artwork and a matching stainless steel table. He bought $6,000 chairs, a new blue sport-utility vehicle and a silver van, personalized with vanity tags. He spent $143 to settle debts at a florist and rush a "Happy Birthday" bouquet to the D.C. Council member who approved his grants. He billed taxpayers for it all.

Over seven years, District officials sank nearly $5.4 million into his projects. Three city agencies gave him multiple contracts, and four others had a role in making sure he was paid.

But when Prioleau's foundation collapsed last year, the city's investment evaporated. Most of the furnishings had been sold at public auction after languishing in a warehouse for almost two years. About $195,000 worth of equipment was sold for slightly less than $9,000, just to pay a storage bill. Prioleau closed his training center.

Prioleau defended his work in interviews over the course of a year and reported to the D.C. government that his center had trained thousands of disadvantaged people. But city officials say there are no records to verify that number.

The story of Archie Prioleau and his dealings with the District is one of broader failings -- the propensity across city agencies to violate their policies as they dispense public funds with little attention to how the money is spent.

Continued in article

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"GM Will Restate Results for 2001 In Latest Stumble:  Auto Maker Says It Booked 'Erroneous' Supplier Credits," by Joseph B. White and Lee Hawkins, Jr., The Wall Street Journal, November 10, 2005; Page A1 --- http://online.wsj.com/article/SB113158081329892910.html?mod=todays_us_page_one

General Motors Corp., whose accounting is under scrutiny by the Securities and Exchange Commission, said it must restate financial results for 2001 and possibly subsequent years, the latest blow to the beleaguered auto giant and its chairman and chief executive, Rick Wagoner.

Late yesterday, after the close of New York Stock Exchange trading, GM said it overstated income for 2001 by as much as $300 million to $400 million -- equivalent to about 50% of the profit it reported at the time -- by "erroneously" booking credits from suppliers. The company said its accounting for credits from suppliers is "one of the matters" being investigated by the SEC.

Continued in article

Jensen Comment
GM's stock price hit a 13-year low and is a huge component of many investment and trust funds that are hoping GM can end this free fall.

The outside independent auditor for GM that apparently did not detect this huge error is Deloitte and Touche --- http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

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From The Wall Street Journal Accounting Weekly Review on November 4, 2005

TITLE: Letter to the Editor: I Don�t Deserve Tarring With Refco Debts Brush
REPORTER: Victor Niederhoffer
DATE: Nov 02, 2005
PAGE: A15
LINK: http://online.wsj.com/article/SB113090229816986057.html 
TOPICS: Accounting, Bad Debts, Bankruptcy

SUMMARY: This letter was submitted in reaction to an article about Refco that was covered by this Review last week.

QUESTIONS:
1.) What is the tainting that Mr. Niederhoffer associates with the previous WSJ article? To provide your answer, you may refer to the original article, which is presented as a related item.

2.) What loss would Refco have hidden under monitoring �by regulators, clearing houses, and exchange officials� in order to have resulted in the issues leading to Refco�s downfall and bankruptcy?

3.) Does Mr. Niederhoffer say that his firm completely discharged its liabilities to Refco in October 1997? If not, then what would have been the resulting impact on Refco�s financial statements?

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES ---
TITLE: Refco�s Debts Started with Several Clients
REPORTERS: Deborah Solomon, Peter A. McKay, Jonathan Weil, and Carrick Mollenkamp
PAGE: C1
ISSUE: Oct 21, 2005
LINK: http://online.wsj.com/article/SB112986306329075408.html

I Don't Deserve Tarring With Refco Debts Brush," by Victor Niederhoffer, The Wall Street Journal, November 2, 2005; Page A15 --- http://online.wsj.com/article/SB113090229816986057.html

Your Oct. 21 article "Refco's Debts Started With Several Clients -- Bennett Secretly Intervened to Assume Some Obligations; Return of Victor Niederhoffer" (Money & Investing) reported that some familiar with Refco's accounts stated that the company's troubles with bad debts dated back to the late 1990s and included losses that the firm supposedly incurred as the result of the collapse of my hedge fund in 1997, when Refco was my broker. While I had used Refco for 15 years prior to my firm's collapse, I have had no contact with or obligations to Refco for seven years. However, the use of my name in the headline, and the display of my picture may have given the casual reader the impression that I was a major cause of Refco's collapse.

The events that took place in 1997 were so closely monitored by regulators, clearing houses and exchange officials that it is inconceivable to me that Refco could have hidden a loss. In any case, such a loss would have been microscopic compared with the approximately $2 billion in cash and equity taken out by Refco officials and shareholders last year before the firm's IPO. I turned over what I considered very substantial assets to Refco as part of our mutual releases. Perhaps there were fictitious accounting entries later, but I shouldn't be tarred with this brush.

I have recovered from the devastating blow my firm suffered when stock prices collapsed amid the Asian financial crisis in October 1997, but the "return of Victor Niederhoffer" has nothing to do with Refco. It relates to building up my firm to some 25 outstanding employees, establishing and acting as trading adviser for several highly successful hedge funds, including the Matador Fund, and recovering money at my own expense for clients involved in my 1997 debacle.

Victor Niederhoffer
Chairman Manchester Trading, LLC
Weston, Conn.

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October 24, 2005 message from Lois Garza, Lois [lgarza@trinity.edu]

I am writing this to inform as many people as possible and hope that you will pass this information along to everyone that you know.

Just as I began to put air in the front tire on the passenger side of my car, I felt my car move and looked up (thinking that someone had possibly backed into my car) as I stood up a Hispanic male was running from my vehicle and jumped into what looked like a Tan 4 door Tahoe with darkly tinted windows and slammed the rear door and sped away. I looked into my car and realized that he had just stolen my purse. It happened in a matter of seconds and I was unable to get a license plate or a facial description of the person. I was able to call the police from inside the Exxon station located at Marbach and Loop 410. They arrived about 30 minutes later and took a report. The officer then asked if we wanted the car finger printed, we said yes and unfortunately waited about 2 1/2 hours. When the second officer arrived, she indicated that there were a few prints but they were smudged. They did take two prints off the outside of the car. She did inform us that they were unable to get any prints from inside the vehicle because the interior is textured.

The only good thing is that my car, house and work keys were not in my purse

I spoke with one of the gas station attendants who said that I was not the first person to have my purse stolen. He also informed me that there was a gentleman who had his vehicle stolen while he was putting air into the tires. Another woman turned her back on her car and someone reached in and stole her purse.

The first officer told me that you should never leave your vehicle unlocked, even if you are standing next to it. Even if you are getting gas, they can open the passenger side if your back is turned and get away in a matter of seconds.

Unfortunately, I learned the hard way and hopefully this will help in deterring the criminals who seek to steal what each of us has worked so very hard for.

Lois L. Garza
Trinity University
Conferences and Special Programs

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People continuing to fall for hurricane victim scams
If you see an e-mail this weekend asking you to donate to the victims of Hurricane Wilma, be careful. A scammer may be "phishing" in your e-mail inbox. "Phishing" scams, in which e-mails and Web sites made to look official are used to trick people out of their credit card numbers or other personal information, are on the rise. And with people continuing to fall victim and new opportunities to put a different face on the same scam -- the hurricane relief efforts among the latest -- it appears that phishing attacks are here to stay.
Mike Musgrove, "'Phishing' Keeps Luring Victims, The Washington Post, October 22, 2005 --- http://www.washingtonpost.com/wp-dyn/content/article/2005/10/21/AR2005102102113.html?referrer=email

Bob Jensen's phishing hole is at http://www.trinity.edu/rjensen/ecommerce/000start.htm#Phishing

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A Marine's Book on How to Commit Fraud and Make Money With a Pack of Atrocity Lies
What is sad is how the media did not try to confirm his claims before reporting them as facts!

"Marine who confessed to abuses lied to gain celebrity," by Ron Harris," St. Louis Post-Dispatch via Salt Lake Tribune, November 6, 2005 --- http://www.sltrib.com/nationworld/ci_3188630

WASHINGTON - For more than a year, former Marine Staff Sgt. Jimmy Massey has been telling anybody who would listen about the atrocities that he and other Marines committed in Iraq. In scores of newspaper, magazine and broadcast stories, at a Canadian immigration hearing and in numerous speeches across the country, Massey told how he and other Marines recklessly, sometimes intentionally killed dozens of innocent Iraqi civilians.

Among his claims: Marines fired on and killed peaceful Iraqi protesters. Americans shot a 4-year-old Iraqi girl in the head. Tractor-trailers were filled with the bodies of civilian men, women and children killed by American artillery. Massey's claims have gained him celebrity. Last month, Massey's book, Kill, Kill, Kill, was released in France.

His allegations have been reported in nationwide publications such as Vanity Fair and USA Today, as well as numerous broadcast reports. Earlier this year, he joined the anti-war bus tour of Cindy Sheehan and he's spoken at Cornell and Syracuse universities, among others. News organizations worldwide published or broadcast Massey's claims without any corroboration and in most cases without investigation. Outside of the Marines, almost no one has seriously questioned whether Massey, a 12-year veteran who was honorably discharged, was telling the truth.

He wasn't.

Each of his claims is either demonstrably false or exaggerated - according to his fellow Marines, Massey's own admissions, and the five journalists who were embedded with Massey's unit, including a reporter and photographer from the St. Louis Post-Dispatch and reporters from the Associated Press and the Wall Street Journal.

Massey, 34, was discharged in December 2003, shortly after returning from Iraq due to depression and post-traumatic stress syndrome. He began turning up in the press and broadcast last spring with stories about military atrocities. Massey's primary thrust has been that Marines from his battalion - some of whom, he told a Minneapolis audience were ''psychopathic killers'' - recklessly shot and killed Iraqi civilians, sometimes, he said, upon orders from their commanders.

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The majority of CPAs "are still ignorant about fraud
The majority of CPAs "are still ignorant about fraud," said Joseph Wells, founder and chairman of the Association of Certified Fraud Examiners. He provided three reasons accountants are having trouble catching frauds --- http://accounting.smartpros.com/x50171.xml

Wells said there are three reasons CPAs cannot catch all material misdeeds: The first is the dichotomy of fraud. "Trust is an essential element of business -- and an essential element of fraud," he said. "Absent trust, it is impossible to con anyone. But absent trust, it is also impossible to conduct business."   Second, fraud is a crime without unique clues, making it easy to miss. While it is hard to mistake a robbery, an embezzlement may be marked merely by numbers that don't add up.   Finally, CPAs can only audit what is presented to them. "Under-the-table deals, sham transactions and the like can be easily concealed," Wells stated. "Holding CPAs to a standard that requires them to detect all material fraud puts them in a no-win situation and they know it. Still, auditors can certainly do a much better job than they've done in the past." Wells pointed out that key insiders are often the first to divulge corporate misdeeds. Sharron Watkins of Enron and Cynthia Cooper of WorldCom are only the latest in a long line of employees tarred as whistleblowers. But auditors typically react to these tips rather than seeking them out in time to avoid major financial disasters. "Accountants don't currently learn what motivates fraudulent conduct, how to spot the signals, how to prevent fraud from occurring and much more," said Wells. "As it stands now, auditors are fighting a war without being taught how to recognize the enemy. Until that changes, expect more heavy casualties."

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Nothing like admitting defeat before the charges are filed
The chief executive of Refco Inc.'s outside auditor, Grant Thornton LLP, said the accounting firm has ample resources to withstand the government probes and investor lawsuits it will face as a result of the brokerage firm's meltdown last week. In his first interview since Refco's scandal broke a week ago, Grant Thornton's Edward Nusbaum said the firm is well capitalized and has outside liability insurance it can tap if necessary to cover legal expenses, including potential settlements. "We anticipate the legal costs will be expensive, as they are in every case," Mr. Nusbaum said. "But Grant Thornton is very sound financially, and we anticipate any legal costs will be absorbed by the firm. We have insurance, if it is needed."
Jonathan Weil, "Grant Thornton Expects to Weather Scandal of Client," The Wall Street Journal, October 17, 2005; Page C1 --- http://online.wsj.com/article/SB112951490246670395.html?mod=todays_us_money_and_investing

A Who Done it?:  Grant Thornton's Case of the Unknown Debt
Some of the IPO underwriters had previous experience with Refco. Two of those three firms, CSFB and Bank of America, also played lead roles, along with Deutsche Bank AG, in arranging an $800 million term loan for the Lee buyout, as well as a related $600 million debt sale, according to Thomson Financial. Bank of America, Deutsche Bank and Sandler O'Neill & Partners, a smaller firm that specializes in financial services, all were advisers on the Lee firm's investment in Refco . . . Those companies' extensive experience with Refco, together with the fees they collected, is sure to be scrutinized in court claims brought by aggrieved investors. The role of Refco's outside auditors Grant Thornton LLP in failing to discover the chief executive's debt sooner will come under the microscope. For now, the Wall Street firms aren't publicly discussing the matter, but some people familiar with their executives' thinking say they believe both they and the auditors were duped. A Grant Thornton spokesman said in a statement issued yesterday, "We are continuing our investigation related to the matters reported by Refco." The accounting firm likely will argue that its auditors were lied to, people familiar with the matter said. Executives at Thomas H. Lee won't discuss the matter publicly, but people familiar with its thinking say the buyout shop relied on underwriters and two auditing firms when it made the investment.
Randall Stith, Robin Sidel, and Kara Scannell, "From Wall Street Pros To Auditors, Who Knew? Refco Disclosures Raise 'Due Diligence' Issues; Why Thomas Lee Invested," The Wall Street Journal, October 12, 2005; Page C3 --- http://online.wsj.com/article/SB112908133517166268.html?mod=todays_us_money_and_investing

Ed Ketz sums it up pessimistically at http://accounting.smartpros.com/x50181.xml

Accounting frauds are here to stay. When the prophet said "the heart is deceitful above all things," he included the hearts of corporate managers. Whatever one's religious beliefs, one has to admit that the empirical evidence in the world of corporate accounting confirms Jeremiah's insight. Managers don't employ accounting; they bend, twist, and distort it to display the set of numbers that helps them look good. Who cares about truth?

Continued in article

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

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SEC Accuses Two Deloitte Auditors in Adelphia Fraud
Federal regulators on Friday accused two Deloitte & Touche accountants who audited the books of cable TV operator Adelphia Communications Corp. of aiding the company's accounting fraud in 2000. The Securities and Exchange Commission announced the administrative action against auditors Gregory Dearlove and William Caswell for alleged improper professional conduct. Caswell agreed to settle the case by being barred for at least two years from auditing a public company. He neither admitted nor denied the allegations. The SEC is seeking an injunction against Dearlove and restitution to investors, with the case to be heard by an administrative law judge at the agency. His attorney, Joseph Sedita, disputed the allegations and said his client would contest them. Sedita said that they had told the SEC lawyers, "You've got your facts wrong, you've got your accounting wrong." Deloitte & Touche, a Big Four accounting firm, in April agreed to pay $50 million to settle the SEC's charges in relation to its audit of Adelphia, which filed for bankruptcy protection in 2002 after founder John Rigas and others were accused of using the company as their private piggy bank and cheating investors out of millions. Rigas and his son, Timothy, were convicted of conspiracy, bank fraud and securities fraud last year. Also in April, Adelphia avoided criminal fraud charges in a deal with the Justice Department in which the company received $1.5 billion in cable television systems and other assets from John Rigas and family members and agreed to pay the government just under half that amount.
"SEC Accuses Two Deloitte Auditors in Adelphia Fraud." SmartPros, October 3, 2005 --- http://accounting.smartpros.com/x49950.xml

Bob Jensen's threads on the Adelphia fraud and other legal woes of Deloitte and Touche are at http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte
 

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Enhancing Auditors’ Capabilities to Detect Fraud
EY Faculty Connection
Fall 2005 --- http://www.ey.com/global/content.nsf/US/EY_Faculty_Connection_(Issue_11)  

SAS 99 (AU 316) states, “The auditor has the responsibility to plan and to perform the audit to provide reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” PCAOB Chairman William McDonough stated it differently when asked the question, “How do you respond to auditor’s insistence that it isn’t their job to detect fraud? He replied, “We have a very clear view that it is their job. If we see fraud that wasn’t detected and should have been, we will be very big on the tough and not so big on the love.” As I read these two quotes, it appears to me that, the bar is being raised. Regulators, audit committees, management, and auditors all play a vital role in preventing or detecting fraud . As educators, how can we do a better job of training tomorrow’s business leaders–and especially auditors--to detect material fraud?

Over my career, I have both taught auditing and have been an expert witness in numerous cases where auditors were sued for negligence because of not detecting fraud. In one such case, the fraud had been going on for 16 years and the perpetrator has embezzled over 10% of the company’s assets. Several times, while conducting annual audits, the auditors had identified real fraud symptoms but had dismissed them based on client representations. In another case, auditors sent confirmations to addresses that were really only rental mail boxes that appeared to be physical addresses only to have the perpetrators fly to the location, complete the confirmations and confirm that everything was okay. In a multi-billion dollar case, it was alleged that auditors not only saw fraud symptoms but must have been participants in the fraud not to recognize those symptoms.

Detecting and proving fraud are extremely difficult. Recent cases where CEOs have been acquitted attest to the difficulty of proving fraud. However, given that auditors may be held liable for failing to detect material fraud, it is incumbent upon all of us who prepare tomorrow’s auditors to make them better fraud detectors.

People who commit fraud do not fit the profile of typical criminals. Instead, they look just like us. They have rationalized committing fraud either because (1) they lack basic ethical values, (2) they have basic ethical values but don’t know how to translate those values to business settings and decisions, (3) they know how to translate their ethical values to business settings but they lack the ethical courage to make the right decision even when it is costly or (4) they work in an environment where ethical leadership is absent and they are taught to be dishonest through unethical modeling and labeling. They have also perceived an opportunity to commit and conceal the dishonest acts and, most often, they have some kind of firm or individual pressure that is motivating them to take advantage of the perceived opportunity and to rationalize the dishonesty.

Given that most fraud perpetrators look like us and are first-time offenders, how can auditors better detect fraud? I believe that both the firms and educators must do a better job in teaching fraud detection. Most of our students and firms’ young staff members wouldn’t recognize a fraud if it hit them between the eyes. Here are some ways educators can better teach our students fraud detection techniques:

We should use major fraud cases to teach accounting principles throughout our curriculum. Students will understand accounting principles better when they see how they have been abused. For example, the difference between assets and expenses can be effectively taught using WorldCom. Our students need to know that throughout their careers they will be exposed to fraud, as an auditor, consultant, coworker or victim. Fraud is now so common that all of us will witness it in one form or another. We must force our students to face ethical and fraud dilemmas in every course in our accounting curricula. Most good textbooks now contain ethical dilemmas or cases related to the subject matter being taught. Unfortunately, most professors don’t use these or other fraud and ethics cases. Students should be exposed to and learn to recognize potential conflicts of interest, fraudulent behavior, illegal activities and “shrewd” business practices that push the limits of propriety.

We can teach a dedicated fraud course where students learn why and how fraud is committed and how to prevent, detect and investigate fraud. Regardless of the careers our students choose, learning how to skeptically examine records, conduct better interviews and use technology to detect fraud are skills that will be valuable to them.

In our classes, we should use pedagogical tools such as inquiry, data mining and brainstorming that our students will be using as professionals to detect fraud.

To establish a proper tone, our business schools should establish a code of ethical conduct and invite all students, staff, and faculty to pledge to honor it. The code should be discussed and made a prominent part of our business schools.

The firms, too, must become better in training their auditors to detect fraud. They must spend time in both separate and integrated training sessions and on the job teaching auditors about deception, the nature of fraud, how to conduct fraud risk assessments, how to analyze journal entries for fraud, common fraud schemes, how to mine data, how to better conduct interviews and brainstorming sessions, and in working through fraud case studies. Auditing firms must continuously reinforce the fact that they are in the business of detecting fraud, regardless of what the standards say. The purpose of an audit has come full circle. The first edition of the Montgomery auditing text, published in 1917, states that an audit had three objectives: (1) detection of fraud, (2) detection of technical errors, and (3) detection of errors in principle. Through a series of frauds (e.g. McKesson Robbins, etc.) and issuance of new standards, the responsibility to detect fraud evolved from “…the ordinary examination…is not designed and cannot be relied upon to disclose defalcations and other similar irregularities” (SAP 1) to “…an audit gives consideration to the possibility of fraud” (SAP 30) to “…auditors must plan the audit to search for material errors or irregularities” (SAS 16) to “…auditors must design the audit to provide reasonable assurance of detecting material fraud,” (SAS 53) to “the auditor must plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement whether caused by error or fraud (SAS 82 & 99) to “…it is their job to detect fraud.” (William McDonough, PCAOB)

Given this renewed responsibility, both educators and firms must be more diligent and pro-active in teaching students and employees how to detect fraud. We can no longer say it is someone else’s responsibility. Not doing so will result in increased regulation, litigation, and lesser esteem and respect for our profession.

W. Steve Albrecht
Professor of Accounting
Brigham Young University

Links to Bob Jensen’s fraud documents --- http://www.trinity.edu/rjensen/Fraud.htm

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Other Links

Main Document on the accounting, finance, and business scandals --- http://www.trinity.edu/rjensen/Fraud.htm  Scandal Updates --- file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#ScandalUpdates  What's Right and What's Wrong With SPEs, SPVs, and VIEs --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm  Revenue Accounting Controversies --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm  Electronic Business Controversies --- http://www.trinity.edu/rjensen/ecommerce/000start.htm Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm  The Virginia Tech Overview:  What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm  Bob Jensen's American History of Fraud ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm Fraud References --- http://www.trinity.edu/rjensen/fraud.htm#References  Fraudulent Dealer Tricks:  An Interactive DHTML Illustration ---  http://www.trinity.edu/rjensen/FraudDealerTricks.htm  This includes a summary of ten unethical tricks of the trade by automobile dealers. Selected Scandals in the Largest Remaining Public Accounting Firms --- file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#others    Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation  Bob Jensen's Enron Quiz --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm Bob Jensen's threads on professionalism and independence are at  file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#Professionalism  Bob Jensen's threads on pro forma frauds are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma  Bob Jensen's threads on ethics and accounting education are at  http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation The Saga of Auditor Professionalism and Independence --- http://www.trinity.edu/rjensen/fraud001.htm#Professionalism  Incompetent and Corrupt Audits are Routine --- http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm  Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing

 

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The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm  Important Links for Reporting Frauds and Important Things to Know in Avoiding Fraud   Automobile Financing and Cheating I have a Web document on automobile financial fraud and dirty tricks at http://www.trinity.edu/rjensen/FraudDealers.htm   Online (Internet) Frauds, Consumer Frauds, and Credit Card Scams    Computer Security --- http://www.trinity.edu/~rjensen/245glosf.htm#Security1    Danger, danger: 5 tips for using a public PC   IDENTITY THEFT:  How to Guard Against Theft of Your Identity     http://www.trinity.edu/rjensen/FraudReporting.htmHow can you restore your identity if it has been stolen?   Vegetarian Food Frauds    Deed Swapping and Other Home Equity Scams    Diploma Mill Frauds and Gray Zone Borderline Education Frauds    Academic fraud and plagiarism threads are at http://www.trinity.edu/rjensen/plagiarism.htm    How Technology Can Be Used to Reduce Fraud   I love Infectious Greed by Frank Partnoy ---  http://www.trinity.edu/rjensen/Fraud.htm#Quotations

Bob Jensen's home page is at http://www.trinity.edu/rjensen/