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

I'm giving thanks for many things this Thanksgiving Day on November 22, 2012, including our good friends who invited us over to share in their family Thanksgiving dinner. Among the many things for which I'm grateful, I give thanks for accounting fraud. Otherwise there were be a whole lot less for me to study and write about at my Website ---

• http://www.trinity.edu/rjensen/FraudAmericanHistory.htm
   
• http://www.trinity.edu/rjensen/Fraud.htm
   
• http://www.trinity.edu/rjensen/FraudUpdates.htm
   
• http://www.trinity.edu/rjensen/FraudEnron.htm
   
• http://www.trinity.edu/rjensen/Fraud001.htm
   
• http://www.trinity.edu/rjensen/FraudRotten.htm
   
• http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
  
  http://www.trinity.edu/rjensen/Fraud001c.htm
   
• http://www.trinity.edu/rjensen/AccountingNews.htm
   
• http://www.trinity.edu/rjensen/FraudConclusion.htm

"With Autonomy, H-P Bought An Old-Fashioned Accounting Scandal. Here's How It Worked," by Daniel Fisher, Forbes, November 20, 2012 ---
http://www.forbes.com/sites/danielfisher/2012/11/20/with-autonomy-h-p-bought-an-old-fashioned-accounting-scandal/

The story was first told to me late last year, and like a lot of stories of financial impropriety inside a huge company, it was almost impossible to nail down. Hewlett-Packard‘s Autonomy division, my source told me, was vaporware writ large: An $11 billion software company with an overhyped flagship product that was literally being given away because customers didn’t have a use for it.

Today, Meg Whitman admitted as much. H-P announced it was writing off 80% of the purchase price for Autonomy and accused “some former members of Autonomy’s management team” of using “accounting improprieties, misrepresentations and disclosure failures” to hide the software company’s true performance and value.

In the release, H-P identified one of the oldest accounting tricks in the book, a variation on the one “Chainsaw Al” Dunlap used to accelerate revenue at Sunbeam — by getting customers to “buy” products now, under terms that really just borrowed from the future.

I spoke to my source again this morning and he detailed what he saw at H-P, from his position deep within the 300,000-employee company.

“What I saw was exactly what Meg Whitman wrote in her internal memo to employees,” my source said. “There was really sketchy accounting going on.”

Autonomy was founded as Cambridge Neurodynamics in 1991 by Michael Lynch, a Cambridge-educated computer scientist, according to this flattering profile by the Guardian after he left H-P in May. The company was based on the then-hot concept of Bayesian search, named after 18th-century mathematician Thomas Bayes, and ultimately developed an all-encompassing software package it called IDOL — Intelligent Data Operating Layer.

H-P today said it stands behind IDOL and well it should. Otherwise it would have to write off the entire $11 billion it paid for Autonomy last year. But my source doesn’t think much of the product, which is supposed to find all of a company’s data, wherever it resides, and whether or not it can be identified by specific words. (Typical example: Finding documents that contain the phrase “flightless bird” when you’re looking for “penguin.”)

“It’s the primary smoke and mirrors that Autonomy has used to make people think they’ve got something very impressive,” he told me. “It’s a fancy search engine.”

I attempted to reach Lynch this morning, unsuccessfully. His spokeswoman told Reuters he is still reviewing H-P’s allegations. H-P said it has referred the information it uncovered in a forensic accounting to fraud officials in the U.S. and the U.K.

Here’s what my source observed personally. Autonomy grew through acquisitions, buying everything from storage companies like Iron Mountain to enterprise software firms like Interwoven. They’d then go to customers and offer them a deal they couldn’t refuse. Say a customer had $5 million and four years left on a data-storage contract, or “disk,” in the trade. Autonomy would offer them, say, the same amount of storage for $4 million but structure it as a $3 million purchase of IDOL software, paid for up front, and $1 million worth of disk. The software sales dropped to the bottom line and burnished Autonomy’s reputation for being a fast-growing, cutting-edge software company a la Oracle, while the revenue actually came from the low-margin, commodity storage business.

“They would basically give them software for free but shift the costs around to make it look like they got $3 million in software sales,” said my source, who directly observed such deals.

Lynch’s management team also was practiced at the art of wringing attractive-looking growth out of a string of ho-hum acquisitions. The typical strategy was to bolt IDOL and other software onto a company’s existing products and try and convince customers to pay more for the “new” products. If that failed, they’d milk the existing customer base by halting development and outsourcing support, my source says, using the cash from the runoff business to fund more acquisitions.

“Mike Lynch was famous for saying Autonomy never put an end of life on any product,” said my source. “But the customers were screaming.”

Now, my source has never been a Mike Lynch fan. In sales meetings, he says, Lynch “loved to do vague and theoretical academic-type presentations to show what a visionary he was.”

And Autonomy may have some powerful features my source didn’t appreciate. The Defense Department reportedly is a customer. But from his perch within the company, it looked like a lot of vaporware wrapped up in fancy Cambridge talk and the kind of accounting tricks managers have engaged in since the dawn of publicly traded stock.

With its announcement today, H-P seems to agree. The company accused former managers of “a willful effort” “to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers. These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal.”

Calling customers wouldn’t necessarily have uncovered the problem, my source says.

“I think these companies are embarrassed to admit they spent $10 million on software that doesn’t actually work,” he said.

 

Q&A With Autonomy Founder Mike Lynch on H-P Allegations ---
http://blogs.wsj.com/digits/2012/11/20/qa-with-autonomy-founder-mike-lynch-on-h-p-allegations/

Question
Why couldn't Autonomy's auditor, Deloitte, see those red flags?

Read Deloitte's Glowing Audit Report on Autonomy
"H.P. Takes Huge Charge on ‘Accounting Improprieties’," by Michael J. De La Merced and Quentin Hardy, The New York Times, November 20, 2012 ---
http://dealbook.nytimes.com/2012/11/20/h-p-takes-big-hit-on-accounting-improprieties-at-autonomy/

"Long Before H-P Deal, Autonomy's Red Flags," by Ben Worthen, Paul Sonne, and Justin Scheck, The Wall Street Journal, November 26, 2012 ---
http://professional.wsj.com/article/SB10001424127887324784404578141462744040072.html?mod=WSJ__LEFTTopStories&mg=reno-wsj

When Autonomy Corp. was starting up in this historic university town, founder Mike Lynch stuck a sign on an office door that read "Authorized Personnel Only." Behind the door, he told visitors, were 500 engineers working on "hush-hush" projects.

The door, in fact, led to a broom closet, Mr. Lynch recounted in a 2010 speech. By then, Autonomy had grown from its founding in 1996 to one of Europe's largest and fastest-growing software companies. Hewlett-Packard Co. HPQ +2.35% bought it in October 2011 for more than $11 billion.

Now, following allegations last week by H-P that Autonomy made "outright misrepresentations" to inflate its financial results, U.S. authorities are trying to establish whether much of the company's business may also have been a facade. Meanwhile, questions are mounting about how H-P failed to uncover the alleged irregularities ahead of buying Autonomy, particularly as some outside analysts raised concerns about Autonomy's accounting for years.

In May, H-P fired Mr. Lynch, citing poor performance by his unit. Last week, the company wrote down the value of Autonomy by $8.8 billion, blaming more than half the charge on what it said was Autonomy's misleading accounting.

Mr. Lynch has come out swinging, denouncing H-P's assertions as "completely and utterly wrong." In an interview Monday, he defended Autonomy's practices and said that many of the allegations stem from the difference between U.S. accounting standards and the international ones Autonomy followed. He said it mostly amounted to "a lot of nitty-gritty about small amounts of revenue on certain deals." He said every sale valued at more than $100,000 would have been reviewed by Autonomy's auditors.

"H-P made a series of assertions without providing any evidence. We'd like to see some evidence," Mr. Lynch said. "Where's the beef in this?" he added.

Interviews in California and England with former Autonomy employees, business partners and attorneys close to the case paint a picture of a hard-driving sales culture shaped by Mr. Lynch's desire for rapid growth. They describe him as a domineering figure, who on at least a few occasions berated employees he believed weren't measuring up.

Along the way, these people say, Autonomy used aggressive accounting practices to make sure revenue from software licensing kept growing—thereby boosting the British company's valuation. The firm recognized revenue upfront that under U.S. accounting rules would have been deferred, and struck "round-trip transactions"—deals where Autonomy agreed to buy a client's products or services while at the same time the client purchased Autonomy software, according to these people.

"The rules aren't that complicated," said Dan Mahoney of accounting research business CFRA, who covered Autonomy until it was acquired. He said that Autonomy had the hallmarks of a company that recognized revenue too aggressively. He said neither U.S. nor international accounting rules would allow companies to recognize not-yet collected revenue from customers that might be at risk not to pay, which he said appears to be the case in some of Autonomy's transactions.

A person familiar with H-P's investigation said the company is confident the deals are improper even under the international accounting standards Mr. Lynch cites. "We've looked at this very closely," this person said.

In a statement issued Saturday, H-P said its "ongoing investigation into the activities of certain former Autonomy employees has uncovered numerous transactions clearly designed to inflate the underlying financial metrics of the company before its acquisition" including several using the tactics and techniques described in this article.

Autonomy's practices are being reviewed at H-P's urging by the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation. Meg Whitman, H-P's CEO, said she expects the process will prompt a "multiyear journey through the courts" in both the U.S. and the U.K.

On Monday, Mr. Lynch said he hasn't been formally notified of any lawsuits or investigations.

Mr. Lynch was raised in England, the son of a firefighter. He went on to study engineering at Cambridge University and obtain a Ph.D. in mathematical computing.

Autonomy, founded at a startup incubator in Cambridge, developed a computer program to sift through documents, Web pages, presentations, videos, phone conversations and emails. The technology could understand words' meanings and find data accordingly, Mr. Lynch has said. A search within a company's servers for "profanity," for instance, would turn up results featuring a variety of swear words, not just the term itself.

Dow Jones & Co., publisher of The Wall Street Journal, has used Autonomy's search software on its consumer websites.

Mr. Lynch was as effective at selling and marketing as he was at software development, recall former employees, customers and business partners. "It was a very sales-oriented culture with a very business-savvy CEO," contrary to the norm in Cambridge, says Simon Galbraith, the founder and CEO of Red Gate Software Ltd., which is based across the street from Autonomy.

Mr. Lynch named Autonomy's conference rooms after references from James Bond movies—one of the big ones was called "GoldenEye"—and found ways to mention the spy in speeches or presentations. He drove an Aston Martin, a quintessential Bond car.

In another touch worthy of Ian Fleming, Autonomy stocked piranhas for a while in the office fish tank. At times, Autonomy's culture was combative as a Bond movie and at other times demeaning, former employees say.

One former marketing employee was sent outside the Cambridge office to collect cigarette butts from the ground, according to two people familiar with the incident. Another former marketing employee recalled being asked to buy Sushovan Hussain, Autonomy's finance chief, underwear during a company trip to Miami, because he had failed to pack a sufficient supply. Turnover on the sales and marketing staffs was high. A spokeswoman for Mr. Hussain acknowledged the incident had happened, but said the CFO was simply late for a meeting and had lost his luggage.

On Monday, Mr. Lynch said many people thrived on Autonomy's aggressive atmosphere, while others did not.

According to legal filings and former employees, senior members of Autonomy's management sometimes would swoop in at the last minute and complete deals—an arrangement that, in some cases, cut salespeople's commissions and in other cases allowed the senior executives to negotiate other arrangements with clients.

A spokeswoman for Mr. Lynch said the deal-making didn't result in cut commissions.

At times, Autonomy salespeople appeared to close deals by offering to buy customers' products. In July 2009, Autonomy sold $9 million in software to New York-based data provider VMS Information, according to ex-VMS Chief Executive Peter Wengryn and three former Autonomy employees. At the same time, Autonomy agreed to buy about $13 million worth of licenses for data from VMS, say Mr. Wengryn and the ex-Autonomy employees.

Continued in article

"Deloitte, HP And Autonomy: You Lose Some But You Win Some More, Much More," by Francine McKenna, re:TheAuditors, December 1, 2012 ---
http://retheauditors.com/2012/12/01/deloitte-hp-and-autonomy-you-lose-some-but-you-win-some-more-much-more/

When HP announced its intention to acquire Autonomy, the British data analysis firm now mired in accusations of serious fraud, Deloitte probably shed some enormous tears of joy. Deloitte was more than happy, I’m sure, to rid itself of the Autonomy audit albatross. That may surprise some of you, since Deloitte UK was the long time auditor of Autonomy, and would lose that job and its nice fees, to HP’s auditor Ernst & Young.

To the victor’s auditor go the audit spoils.

But that’s not how the Big Four audit industry game is played now that consulting is again King. What Deloitte would lose in audit fees – reportedly £5.422m for Autonomy’s audits during the last four years  – the firm could now openly replace with guilt-free consulting.

According to filings, Deloitte earned an additional £4.44m from Autonomy in the last four years for services such as tax compliance, due diligence for acquisitions and other services “pursuant to legislation”. As the preeminent Big Four tax services provider, HP’s auditor Ernst & Young, HP’s auditor, would likely start doing everything tax related for Autonomy. However, Deloitte was now free to team with Autonomy and all of its technology products as an alliance partner for systems integration engagements. That could be worth billions in consulting revenue that Deloitte’s UK firm, at least, had given up to be the auditor of a fast growing, highly acquisitive technology “Fast 50” firm.

There are differences in the legislation enacted to restore confidence in audits by the United States after Arthur Andersen’s Enron piggishness – Sarbanes-Oxley – and the regulations that govern UK listed companies and their auditors. For example, the UK does not bar an auditor from also providing internal audit services to a company it audits.

Regulations in the US and UK do prohibit business alliance relationships between an auditor and its audit client.  The Financial Reporting Council (FRC) is the UK’s lead audit regulator. APB Ethical Standard 2, Financial, Business, Employment and Personal Relationships, states:

Audit firms, persons in a position to influence the conduct and outcome of the audit and immediate family members of such persons shall not enter into business relationships with an audited entity, its management or its affiliates except where they involve the purchase of goods and services from the audit firm or the audited entity in the ordinary course of business and on an arm’s length basis and which are not material to either party or are clearly inconsequential to either party.

Business relationships, says the FRC, may create self-interest, advocacy or intimidation threats to the auditor’s objectivity and perceived loss of independence.

Examples of prohibited business relationships include “arrangements to combine one or more services or products of the audit firm with one or more services or products of the audited entity and to market the package with reference to both parties or distribution or marketing arrangements under which the audit firm acts as a distributor or marketer of any of the audited entity’s products or services, or the audited entity acts as the distributor or marketer of any of the products or services of the audit firm.”

In 2010 Autonomy was named a Deloitte UK Technology Fast 50 company, one of the UK’s fastest growing technology companies. Deloitte UK was officially prohibited from jointly marketing its consulting services with Autonomy or reselling Autonomy’s products such as IDOL or popular products acquired while it was the auditor of Autonomy.  Popular Autonomy software includes Interwoven, Verity, and Meridio for government and defense contractors.  That must have been tough.

But that didn’t stop the consulting practices of other Deloitte member firms all over the world from taking advantage of the popularity of Autonomy products to boost their revenues. In March of 2011, less than six months before HP announced its acquisition of Autonomy, Deloitte Luxembourg announced it had selected Autonomy’s Intelligent Data Operating Layer (IDOL) as a vendor  “to better manage information and knowledge within the firm to increase productivity.” In addition, Autonomy would further collaborate with Deloitte to “fast-track its technology to Deloitte Luxembourg’s extensive customer base…”

Deloitte UK, and its fellow Deloitte firms all over the world, are allowed to be customers of an audit client of one of them such as Autonomy “in the ordinary course of business”. They are customers of Autonomy. Autonomy lists Deloitte entities and Ernst & Young, HP’s auditor, as customers on numerous websites and in marketing materials and case studies. In 2011, digital agency Roundarch, founded in June 2000 by Deloitte and WPP, also selected Autonomy’s cloud-based comprehensive data backup and recovery solutions for its own operation. This privately owned company was operated by its senior management until February 2012 when Aegis Group plc acquired the digital agency. The Aegis Group plc auditor is Ernst & Young.

But were Deloitte non-UK member firms allowed to sign marketing and reselling contracts as Autonomy alliance partners while Deloitte UK audited this multinational company with customers all over the world? For example, given Autonomy’s extensive US operations and customer base including the US government, it’s likely Deloitte’s US audit firm supported the UK firm with the Autonomy audit. Email requests for comment from HP and Deloitte were not returned. When it comes to irresistible consulting revenue growth, an audit firm’s “network of seamless service providers” bound by independence and objectivity regarding the audit of a multinational listed company stops at each border.

In the largest market for Deloitte’s consulting services, the United States, Deloitte Consulting’s US arm and Autonomy worked together prior to HP’s acquisition and after on one of the most high profile e-discovery and document management cases ever – the litigation over the BP Gulf oil spill. Autonomy, or rather a version of an Autonomy acquisition called Introspect, was used for the enormous BP Deepwater Horizon review, which employed more than 800 review attorneys at one point.

The BP Deepwater Horizon review started in the summer of 2010, after the explosion in April of that year. Deloitte was the case management consultant working between the client (BP), the review team and the hosting vendor (Autonomy). It is not clear if this was a joint project between Deloitte and Autonomy, with Deloitte acting as a systems integrator for the software, or if the parties contracted separately.

According to a source close to the BP engagement, the Autonomy software was a total disaster. The larger the review got, the worse the software performed. “Searches would hang up for long periods of time, document images would get out of synch with their corresponding coding records, the entire system would crash or have to be taken offline to be reset.  You name it – when it came to software problems, Autonomy had them all at one time or another.”

Continued in article

Bob Jensen's threads on Autonomy ---
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte
Search for "Autonomy"

Bob Jensen's threads on Autonomy ---
http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte
Search for "Autonomy"

"Ohio State Researcher Guilty of Falsifying Federal Studies," Inside Higher Ed, December 24, 2012 ---
http://www.insidehighered.com/quicktakes/2012/12/24/ohio-state-researcher-guilty-falsifying-federal-studies

The federal Office of Research Integrity has concluded that an Ohio State University pharmacology professor fabricated data in studies sponsored by the National Institutes of Health. The agency announced last month that two investigations by the university and its own inquiry had uncovered evidence that Terry S. Elton falsified data in five published papers, all of which the university recommended be retracted. Elton has been barred from participation in federal studies for three years.

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

For Jim Hunton maybe the world did end on December 21, 2012

"Following Retraction, Bentley Professor Resigns," Inside Higher Ed, December 21, 2012 ---
http://www.insidehighered.com/quicktakes/2012/12/21/following-retraction-bentley-professor-resigns

James E. Hunton, a prominent accounting professor at Bentley University, has resigned amid an investigation of the retraction of an article of which he was the co-author, The Boston Globe reported. A spokeswoman cited "family and health reasons" for the departure, but it follows the retraction of an article he co-wrote in the journal Accounting Review. The university is investigating the circumstances that led to the journal's decision to retract the piece.

An Accounting Review Article is Retracted

One of the article that Dan mentions has been retracted, according to
http://aaajournals.org/doi/abs/10.2308/accr-10326?af=R 

Retraction: A Field Experiment Comparing the Outcomes of Three Fraud Brainstorming Procedures: Nominal Group, Round Robin, and Open Discussion

James E. Hunton, Anna Gold Bentley University and Erasmus University Erasmus University This article was originally published in 2010 in The Accounting Review 85 (3) 911–935; DOI: 10/2308/accr.2010.85.3.911.

The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.

 

November 15, 2012 reply from Bob Jensen

Hi Richard,

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s?

 

 

Thank you for the heads up on the Hinton and Gold article. This is sad, because Steve Kachelmeier pointed out this article to me last year as an example of where the researchers used real-world experimentation data using subjects from a large CPA firm as opposed to students. Another factor that surprised me was was sample size of  supposedly 2,614 auditors.

 

 

Bob Kaplan wrote the following in
"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373

 

Some scholars in public health schools also intervene in practice by conducting large-scale field experiments on real people in their natural habitats to assess the efficacy of new health and safety practices, such as the use of designated drivers to reduce alcohol-influenced accidents. Few academic accounting scholars, in contrast, conduct field experiments on real professionals working in their actual jobs (Hunton and Gold [2010] is an exception). The large-scale statistical studies and field experiments about health and sickness are invaluable, but, unlike in accounting scholarship, they represent only one component in the research repertoire of faculty employed in professional schools of medicine and health sciences.  

 

 

One thing I note is that the article has not been removed from the TAR database. The article still exists with a large "Retracted" stamp that appears over every page of the article

http://aaajournals.org/doi/pdf/10.2308/accr.2010.85.3.911

 

 

I attached the picture of a sample page.

 

 

Would the Techies on the AECM explain this:
The "Retracted" stamp is transparent in terms of copying any passage or table in the article. In other words, the article can be quoted as easily by copy and paste as text without any interference from the "Retracted Stamp." It cannot, however, be copied as a picture without interference from the "Retracted Stamp." 

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s

 

 

Years ago Les Livingstone was the first person to detect a plagiarized article in TAR (back in the 1960s when we were both doctoral students at Stanford). This was long before digital versions articles could be downloaded. The TAR editor published an apology to the original authors in the next edition of TAR. The article first appeared in Management Science and was plagiarized in total for TAR by a Norwegian (sigh).

 

 

Not much can be done to warn readers about hard copy articles if they are subsequently "retracted." One thing that can be done these days is to have an AAA Website that lists retracted publications in all AAA journals. The Hunton and Gold article may be the only one since the 1960s.

 

Respectfully,
Bob Jensen

 

November 28, 2012 forward from Dan Stone

Anna Gold sent me the following statement and also indicated that she had no objections to my posting it on AECM:

Explanation of Retraction (Hunton & Gold 2010)

On November 9, 2012, The Accounting Review published an early-view version of the voluntary retraction of Hunton & Gold (2010). The retraction will be printed in the January 2013 issue with the following wording:

“The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.”

The following statement explains the reason for the authors’ voluntary retraction. In the retracted article, the authors reported that the 150 offices of the participating CPA firm on which the study was based were located in the United States. In May 2012, the lead author learned from the coordinating partner of the participating CPA firm that the 150 offices included both domestic and international offices of the firm. The authors apologize for the inadvertently inaccurate description of the sample frame.

The Editor and the Chairperson of the Publications Committee of the American Accounting Association subsequently requested more information about the study and the participating CPA firm. Unfortunately, the information they requested is subject to a confidentiality agreement between the lead author and the participating firm; thus, the lead author has a contractual obligation not to disclose the information requested by the Editor and the Chairperson. The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.

The authors offered to print a correction of the inaccurate description of the sample frame; however, the Editor and the Chairperson rejected that offer. Consequently, in spite of the authors' belief that the inaccurate description of the sample does not materially impact either the internal validity of the study or the conclusions set forth in the Article, the authors consider it appropriate to voluntarily withdraw the Article from The Accounting Review at this time. Should the participating CPA firm change its position on releasing the requested information in the future, the authors will request that the Editor and the Chairperson consider reinstating the paper.

Signed:

James Hunton Anna Gold

References: Hunton, J. E. and Gold, A. (2010), “A field experiment comprising the outcomes of three fraud brainstorming procedures: Nominal group, round robin, and open discussions,” The Accounting Review 85(3): 911-935.

 

December 1, 2012 reply from Harry Markopolos <notreallyharry@outlook.com> 

Harry Markopolos <notreallyharry@outlook.com>

The explanation provided by the Hunton and Gold regarding the recent TAR retraction seems to provide more questions than answers. Some of those questions raise serious concerns about the validity of the study.

1. In the paper, the audit clients are described as publically listed (p. 919), and since the paper describes SAS 99 as being applicable to these clients, they would presumably be listed in the U.S. However, according to Audit Analytics, for fiscal year 2007, the Big Four auditor with the greatest number of worldwide offices with at least one SEC registrant was PwC, with 134 offices (the remaining firms each had 130 offices). How can you take a random sample of 150 offices from a population of (at most) 134?

Further, the authors state that only clients from the retail, manufacturing, and service industries with at least $1 billion in gross revenues with a December 31, 2007 fiscal year-end were considered (p. 919). This restriction further limits the number of offices with eligible clients. For example, the Big Four auditor with the greatest number of offices with at least one SEC registrant with at least $1 billion in gross revenues with a December 31, 2007 fiscal year end was Ernst & Young, with 102 offices (followed by PwC, Deloitte and KPMG, with 94, 86, and 83 offices, respectively). Limiting by industry would further reduce the pool of offices with eligible clients (this would probably be the most limiting factor, since most industries tend to be concentrated primarily within a handful of offices).

2. Why the firm would use a random sample of their worldwide offices in the first place, especially a sample including foreign affiliates of the firm? Why not use every US office (or every worldwide office with SEC registrants)? The design further limited participation to one randomly selected client per office (p. 919). This design decision is especially odd. If the firm chose to sample from the applicable population of offices, why not use a smaller sample of offices and a greater number of clients per office? Also, why wouldn’t the firm just sample from the pool of eligible clients? Finally, would the firm really expect its foreign affiliates to be happy to participate just because the US firm is asking them to do so? Would it not be much simpler and more effective to focus on US offices and get large numbers of clients from the largest US Offices (e.g., New York, Chicago, LA) and fill in the remaining clients needed to reach 150 clients from smaller offices?

3. Given the current hesitancy of the Big Four to allow any meaningful access to data, why would the international offices be consistently willing to participate in the study, especially since each national affiliate of the Big Four is a distinct legal entity? The coordination of this study across the firm’s international offices seems like a herculean effort, at least. Further, even if the authors were not aware that the population of offices included international offices, the lead author was presumably aware of the identity of the partner coordinating the study for the firm. Footnote 4 of the paper and discussion on page 919 suggest that the US national office coordinated the study. It seems quite implausible that the US national office alone would be able to coordinate the study internationally.

4. In the statement that has been circulated among the accounting research community, the authors state:

“The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.”

However, this statement is inconsistent with language in the paper suggesting that both authors had access to the data and were involved in discussions with the firm regarding the design of the study (e.g. Footnote 17). Also, isn’t this kind of arrangement quite odd, at best? Not even the second author could verify the data. We are left with only the first author’s word that this study actually took place with no way for anyone (not even the second author or the journal editor) to obtain any kind of assurance on the matter. Why wouldn’t the firm be willing to allow Anna or Harry Evans to sign a confidentiality agreement in order to obtain some kind of independent verification? If the firm was willing to allow the study in the first place, it seems quite unreasonable for them to be unwilling to allow a reputable third party (e.g. Harry) to obtain verification of the legitimacy of the study. In addition, assuming the firm is this extremely vigilant in not allowing Harry or Anna to know about the firm, does it seem odd that the firm failed to read the paper before publication and, therefore, note the errors in the paper, including the claim that is made in multiple places in the paper that the data came from a random sample of the firm’s US offices?

5. Why do the authors state that the paper is being voluntarily withdrawn if the authors don’t believe that the validity of the paper is in any way questioned? The retraction doesn’t really seem voluntary. If the authors did actually offer to retract the study that implies that the errors in the paper are not simply innocent mistakes.

Given that most, if not all US offices would have had to be participants in the study (based on the discussion above), it wouldn’t be too hard to obtain some additional information from individuals at the firms to verify whether or not the study actually took place. In particular, if we were to locate a handful of partners from each of the Big Four who were office-managing partners in 2008, we could ask them if their office participated in the study. If none of those partners recall their office having participated in the study, the reported data would appear to be quite suspect.

Sincerely,

Harry Markopolos

For Jim Hunton maybe the world did end on December 21, 2012

"Following Retraction, Bentley Professor Resigns," Inside Higher Ed, December 21, 2012 ---
http://www.insidehighered.com/quicktakes/2012/12/21/following-retraction-bentley-professor-resigns

James E. Hunton, a prominent accounting professor at Bentley University, has resigned amid an investigation of the retraction of an article of which he was the co-author, The Boston Globe reported. A spokeswoman cited "family and health reasons" for the departure, but it follows the retraction of an article he co-wrote in the journal Accounting Review. The university is investigating the circumstances that led to the journal's decision to retract the piece.

An Accounting Review Article is Retracted

One of the article that Dan mentions has been retracted, according to
http://aaajournals.org/doi/abs/10.2308/accr-10326?af=R 

Retraction: A Field Experiment Comparing the Outcomes of Three Fraud Brainstorming Procedures: Nominal Group, Round Robin, and Open Discussion

James E. Hunton, Anna Gold Bentley University and Erasmus University Erasmus University This article was originally published in 2010 in The Accounting Review 85 (3) 911–935; DOI: 10/2308/accr.2010.85.3.911.

The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.

 

November 15, 2012 reply from Bob Jensen

Hi Richard,

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s?

 

 

Thank you for the heads up on the Hinton and Gold article. This is sad, because Steve Kachelmeier pointed out this article to me last year as an example of where the researchers used real-world experimentation data using subjects from a large CPA firm as opposed to students. Another factor that surprised me was was sample size of  supposedly 2,614 auditors.

 

 

Bob Kaplan wrote the following in
"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373

 

Some scholars in public health schools also intervene in practice by conducting large-scale field experiments on real people in their natural habitats to assess the efficacy of new health and safety practices, such as the use of designated drivers to reduce alcohol-influenced accidents. Few academic accounting scholars, in contrast, conduct field experiments on real professionals working in their actual jobs (Hunton and Gold [2010] is an exception). The large-scale statistical studies and field experiments about health and sickness are invaluable, but, unlike in accounting scholarship, they represent only one component in the research repertoire of faculty employed in professional schools of medicine and health sciences.  

 

 

One thing I note is that the article has not been removed from the TAR database. The article still exists with a large "Retracted" stamp that appears over every page of the article

http://aaajournals.org/doi/pdf/10.2308/accr.2010.85.3.911

 

 

I attached the picture of a sample page.

 

 

Would the Techies on the AECM explain this:
The "Retracted" stamp is transparent in terms of copying any passage or table in the article. In other words, the article can be quoted as easily by copy and paste as text without any interference from the "Retracted Stamp." It cannot, however, be copied as a picture without interference from the "Retracted Stamp." 

 

Is this the first example of a retracted TAR, JAR, and JAE article in since the 1960s

 

 

Years ago Les Livingstone was the first person to detect a plagiarized article in TAR (back in the 1960s when we were both doctoral students at Stanford). This was long before digital versions articles could be downloaded. The TAR editor published an apology to the original authors in the next edition of TAR. The article first appeared in Management Science and was plagiarized in total for TAR by a Norwegian (sigh).

 

 

Not much can be done to warn readers about hard copy articles if they are subsequently "retracted." One thing that can be done these days is to have an AAA Website that lists retracted publications in all AAA journals. The Hunton and Gold article may be the only one since the 1960s.

 

Respectfully,
Bob Jensen

 

November 28, 2012 forward from Dan Stone

Anna Gold sent me the following statement and also indicated that she had no objections to my posting it on AECM:

Explanation of Retraction (Hunton & Gold 2010)

On November 9, 2012, The Accounting Review published an early-view version of the voluntary retraction of Hunton & Gold (2010). The retraction will be printed in the January 2013 issue with the following wording:

“The authors confirmed a misstatement in the article and were unable to provide supporting information requested by the editor and publisher. Accordingly, the article has been retracted.”

The following statement explains the reason for the authors’ voluntary retraction. In the retracted article, the authors reported that the 150 offices of the participating CPA firm on which the study was based were located in the United States. In May 2012, the lead author learned from the coordinating partner of the participating CPA firm that the 150 offices included both domestic and international offices of the firm. The authors apologize for the inadvertently inaccurate description of the sample frame.

The Editor and the Chairperson of the Publications Committee of the American Accounting Association subsequently requested more information about the study and the participating CPA firm. Unfortunately, the information they requested is subject to a confidentiality agreement between the lead author and the participating firm; thus, the lead author has a contractual obligation not to disclose the information requested by the Editor and the Chairperson. The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.

The authors offered to print a correction of the inaccurate description of the sample frame; however, the Editor and the Chairperson rejected that offer. Consequently, in spite of the authors' belief that the inaccurate description of the sample does not materially impact either the internal validity of the study or the conclusions set forth in the Article, the authors consider it appropriate to voluntarily withdraw the Article from The Accounting Review at this time. Should the participating CPA firm change its position on releasing the requested information in the future, the authors will request that the Editor and the Chairperson consider reinstating the paper.

Signed:

James Hunton Anna Gold

References: Hunton, J. E. and Gold, A. (2010), “A field experiment comprising the outcomes of three fraud brainstorming procedures: Nominal group, round robin, and open discussions,” The Accounting Review 85(3): 911-935.

 

December 1, 2012 reply from Harry Markopolos <notreallyharry@outlook.com> 

Harry Markopolos <notreallyharry@outlook.com>

The explanation provided by the Hunton and Gold regarding the recent TAR retraction seems to provide more questions than answers. Some of those questions raise serious concerns about the validity of the study.

1. In the paper, the audit clients are described as publically listed (p. 919), and since the paper describes SAS 99 as being applicable to these clients, they would presumably be listed in the U.S. However, according to Audit Analytics, for fiscal year 2007, the Big Four auditor with the greatest number of worldwide offices with at least one SEC registrant was PwC, with 134 offices (the remaining firms each had 130 offices). How can you take a random sample of 150 offices from a population of (at most) 134?

Further, the authors state that only clients from the retail, manufacturing, and service industries with at least $1 billion in gross revenues with a December 31, 2007 fiscal year-end were considered (p. 919). This restriction further limits the number of offices with eligible clients. For example, the Big Four auditor with the greatest number of offices with at least one SEC registrant with at least $1 billion in gross revenues with a December 31, 2007 fiscal year end was Ernst & Young, with 102 offices (followed by PwC, Deloitte and KPMG, with 94, 86, and 83 offices, respectively). Limiting by industry would further reduce the pool of offices with eligible clients (this would probably be the most limiting factor, since most industries tend to be concentrated primarily within a handful of offices).

2. Why the firm would use a random sample of their worldwide offices in the first place, especially a sample including foreign affiliates of the firm? Why not use every US office (or every worldwide office with SEC registrants)? The design further limited participation to one randomly selected client per office (p. 919). This design decision is especially odd. If the firm chose to sample from the applicable population of offices, why not use a smaller sample of offices and a greater number of clients per office? Also, why wouldn’t the firm just sample from the pool of eligible clients? Finally, would the firm really expect its foreign affiliates to be happy to participate just because the US firm is asking them to do so? Would it not be much simpler and more effective to focus on US offices and get large numbers of clients from the largest US Offices (e.g., New York, Chicago, LA) and fill in the remaining clients needed to reach 150 clients from smaller offices?

3. Given the current hesitancy of the Big Four to allow any meaningful access to data, why would the international offices be consistently willing to participate in the study, especially since each national affiliate of the Big Four is a distinct legal entity? The coordination of this study across the firm’s international offices seems like a herculean effort, at least. Further, even if the authors were not aware that the population of offices included international offices, the lead author was presumably aware of the identity of the partner coordinating the study for the firm. Footnote 4 of the paper and discussion on page 919 suggest that the US national office coordinated the study. It seems quite implausible that the US national office alone would be able to coordinate the study internationally.

4. In the statement that has been circulated among the accounting research community, the authors state:

“The second author was neither involved in administering the experiment nor in receiving the data from the CPA firm. The second author does not know the identity of the CPA firm or the coordinating partner at the CPA firm. The second author is not a party to the confidentiality agreement between the lead author and the CPA firm.”

However, this statement is inconsistent with language in the paper suggesting that both authors had access to the data and were involved in discussions with the firm regarding the design of the study (e.g. Footnote 17). Also, isn’t this kind of arrangement quite odd, at best? Not even the second author could verify the data. We are left with only the first author’s word that this study actually took place with no way for anyone (not even the second author or the journal editor) to obtain any kind of assurance on the matter. Why wouldn’t the firm be willing to allow Anna or Harry Evans to sign a confidentiality agreement in order to obtain some kind of independent verification? If the firm was willing to allow the study in the first place, it seems quite unreasonable for them to be unwilling to allow a reputable third party (e.g. Harry) to obtain verification of the legitimacy of the study. In addition, assuming the firm is this extremely vigilant in not allowing Harry or Anna to know about the firm, does it seem odd that the firm failed to read the paper before publication and, therefore, note the errors in the paper, including the claim that is made in multiple places in the paper that the data came from a random sample of the firm’s US offices?

5. Why do the authors state that the paper is being voluntarily withdrawn if the authors don’t believe that the validity of the paper is in any way questioned? The retraction doesn’t really seem voluntary. If the authors did actually offer to retract the study that implies that the errors in the paper are not simply innocent mistakes.

Given that most, if not all US offices would have had to be participants in the study (based on the discussion above), it wouldn’t be too hard to obtain some additional information from individuals at the firms to verify whether or not the study actually took place. In particular, if we were to locate a handful of partners from each of the Big Four who were office-managing partners in 2008, we could ask them if their office participated in the study. If none of those partners recall their office having participated in the study, the reported data would appear to be quite suspect.

Sincerely,

Harry Markopolos

 

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

Hi Dan,

You really should verify everything I wrote below with Les Livingstone, my partner in crime in the accounting doctoral program at Stanford. By the way, even though there were three of us in that doctoral program in the 1960s, I don't think Bob Jensen, Les Livingstone, and Jay Smith ever took a course together. I was more the quant guy and took most of my courses outside the business school in mathematics, statistics, and operations research. Les from South Africa started in the MBA program and then delved more deeply into economics. Jay Smith was more the BYU accountant of the bunch. Jay and Les were both married with young children. I was the single gadfly chasing wild women (not really). To chase wild women it takes money, and I certainly did not have much of that. I did, however, have a cool 1956 pinkish and white Oldsmobile convertible that I wish I still owned. I think we all had Ford Foundation Fellowships that were money laundered by Stanford University. I taught in the Economics Department for a little extra money.

As I recall, the article you asked about is as follows:

"Using Mathematical Probability to Estimate the Allowance for Doubtful Accountants," by Goran Schroderheim, The Accounting Review, Vol. 39, No. 3, July 1964 ---
http://www.jstor.org/discover/10.2307/242463?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101586066737

The first page of the article (Page 679) states "Goran Schroderheim is Chief Chemist for materials development and mechanical rubber goods manufacturing in an industrial concern."

My colleague in the accounting doctoral program at Stanford University, Les Livingstone, was the person who first discovered the plagiarism. In communications with the TAR Editor at the time, it was later disclosed to Les that the plagiarist was from Norway. Purportedly, the plagiarist's excuse is that he wanted the article originally published in Management Science to be available to accounting professors. However, he did not cite or reference the article in Management Science. The title and some early paragraphs were modified. Other than that it's the same article as the one cited below:

"Estimation of the Allowance for Doubtful Accounts by Markov Chains," by R.M. Cyert, H.J. Davidson, and G.L Thompson, Management Science 1962 8:287-303; doi:10.1287/mnsc.8.3.287
http://mansci.journal.informs.org/content/8/3/287.full.pdf+html?sid=8d91d926-0557-4675-a9dd-a8288b50b429

The above article is one of the all-time classics published by Management Science. I taught this article for years as a theory article when I was teaching operations research at Michigan State first and then the University of Maine later on. It was not, however, a very practical article due to difficulties in estimating robust transition probabilities in the Markov transition matrix.

Les may remember more details about this incident. There were no electronic versions of articles back in 1964. At best the article could've been typed onto IBM cards and transferred to magnetic tape. Main frame omputers could be telephone networked somewhat between universities in those days, but this type of data transmission was not at all reliable. My guess is that Goran Schroderheim retyped the article before he submitted it to TAR in 1964.

"The Data Vigilante:  Students aren’t the only ones cheating—some professors are, too. Uri Simonsohn is out to bust them. inShare48," by Christopher Shea, The Atlantic, December 2012 ---
http://www.theatlantic.com/magazine/archive/2012/12/the-data-vigilante/309172/

Uri Simonsohn, a research psychologist at the University of Pennsylvania’s Wharton School, did not set out to be a vigilante. His first step down that path came two years ago, at a dinner with some fellow social psychologists in St. Louis. The pisco sours were flowing, Simonsohn recently told me, as the scholars began to indiscreetly name and shame various “crazy findings we didn’t believe.” Social psychology—the subfield of psychology devoted to how social interaction affects human thought and action—routinely produces all sorts of findings that are, if not crazy, strongly counterintuitive. For example, one body of research focuses on how small, subtle changes—say, in a person’s environment or positioning—can have surprisingly large effects on their behavior. Idiosyncratic social-psychology findings like these are often picked up by the press and on Freakonomics-style blogs. But the crowd at the restaurant wasn’t buying some of the field’s more recent studies. Their skepticism helped convince Simonsohn that something in social psychology had gone horribly awry. “When you have scientific evidence,” he told me, “and you put that against your intuition, and you have so little trust in the scientific evidence that you side with your gut—something is broken.”

Simonsohn does not look like a vigilante—or, for that matter, like a business-school professor: at 37, in his jeans, T-shirt, and Keen-style water sandals, he might be mistaken for a grad student. And yet he is anything but laid-back. He is, on the contrary, seized by the conviction that science is beset by sloppy statistical maneuvering and, in some cases, outright fraud. He has therefore been moonlighting as a fraud-buster, developing techniques to help detect doctored data in other people’s research. Already, in the space of less than a year, he has blown up two colleagues’ careers. (In a third instance, he feels sure fraud occurred, but he hasn’t yet nailed down the case.) In so doing, he hopes to keep social psychology from falling into disrepute.

Simonsohn initially targeted not flagrant dishonesty, but loose methodology. In a paper called “False-Positive Psychology,” published in the prestigious journal Psychological Science, he and two colleagues—Leif Nelson, a professor at the University of California at Berkeley, and Wharton’s Joseph Simmons—showed that psychologists could all but guarantee an interesting research finding if they were creative enough with their statistics and procedures.

The three social psychologists set up a test experiment, then played by current academic methodologies and widely permissible statistical rules. By going on what amounted to a fishing expedition (that is, by recording many, many variables but reporting only the results that came out to their liking); by failing to establish in advance the number of human subjects in an experiment; and by analyzing the data as they went, so they could end the experiment when the results suited them, they produced a howler of a result, a truly absurd finding. They then ran a series of computer simulations using other experimental data to show that these methods could increase the odds of a false-positive result—a statistical fluke, basically—to nearly two-thirds.

Just as Simonsohn was thinking about how to follow up on the paper, he came across an article that seemed too good to be true. In it, Lawrence Sanna, a professor who’d recently moved from the University of North Carolina to the University of Michigan, claimed to have found that people with a physically high vantage point—a concert stage instead of an orchestra pit—feel and act more “pro-socially.” (He measured sociability partly by, of all things, someone’s willingness to force fellow research subjects to consume painfully spicy hot sauce.) The size of the effect Sanna reported was “out-of-this-world strong, gravity strong—just super-strong,” Simonsohn told me over Chinese food (heavy on the hot sauce) at a restaurant around the corner from his office. As he read the paper, something else struck him, too: the data didn’t seem to vary as widely as you’d expect real-world results to. Imagine a study that calculated male height: if the average man were 5-foot‑10, you wouldn’t expect that in every group of male subjects, the average man would always be precisely 5-foot-10. Yet this was exactly the sort of unlikely pattern Simonsohn detected in Sanna’s data.

Simonsohn launched an e-mail correspondence with Sanna and his co-authors; the co-authors later relayed his concerns to officials at the University of North Carolina, Sanna’s employer at the time of the study. Sanna, who could not be reached for comment, has since left Michigan. He has also retracted five of his articles, explaining that the data were “invalid,” and absolving his co-authors of any responsibility. (In a letter to the editor of Psychological Science, who had asked for more detail, Sanna mentioned “research errors” but added that he could say no more, “at the direction of legal counsel.”)

Not long after the exchange with Sanna, a colleague sent Simonsohn another study for inspection. Dirk Smeesters of Erasmus University Rotterdam, in the Netherlands, had published a paper about color’s effect on what social psychologists call “priming.” Past studies had found that after research subjects are prompted to think about, say, Albert Einstein, they are intimidated by the comparison, and perform poorly on tests. (Swap Einstein out for Kate Moss, and they do better.) Smeesters sought to build on this research by showing that colors can interact with this priming in strange ways. Simultaneously expose people to blue (a soothing hue), for example, and the Einstein and Moss effects reverse. But a strange thing caught Simonsohn’s eye: the outcomes that Smeesters had predicted ahead of time were eerily similar, across the board, to his actual outcomes.

Simonsohn ran some simulations using both Smeesters’s own data and data found in other papers, and determined that such a data array was unlikely to occur naturally. Then he sent Smeesters his findings, launching what proved to be a surreal exchange. Smeesters admitted to small mistakes; Simonsohn replied that those mistakes couldn’t explain the patterns he’d identified. “Something more sinister must have happened,” he recalled telling Smeesters. “Someone intentionally manipulated the data. This may be difficult to accept.”

“I was trying to give him any out,” Simonsohn said, adding that he wasn’t looking to ruin anyone’s career. But in June, a research-ethics committee at Smeesters’s university announced that it had “no confidence in the scientific integrity” of three of his articles. (The committee noted that it had no reason to suspect Smeesters’s co-authors of any wrongdoing.) According to the committee’s report, Smeesters said “he does not feel guilty” and also claimed that “many authors knowingly omit data to achieve significance, without stating this.” Smeesters, who could not be reached for comment, resigned from the university, prompting another Dutch scholar to publicly remark that Simonsohn’s fraud-detecting technique was “like a medieval torture instrument.”

That charge disturbs Simonsohn, who told me he would have been content with a quiet retraction of Smeesters’s article. The more painful allegation, however, is that he is trying to discredit social psychology. He adores his chosen field, he said, funky, counterintuitive results and all. He studied economics as an undergrad at Chile’s Universidad Católica (his father ran a string of video-game arcades in Santiago; Simonsohn initially hoped to go into hotel management), but during his senior year, an encounter with the psychologist Daniel Kahneman’s work convinced him to switch fields. He prefers psychology’s close-up focus on the quirks of actual human minds to the sweeping theory and deduction involved in economics. (His own research, which involves decision making, includes a recent study titled “Weather to Go to College,” which finds that “cloudiness during [college] visits has a statistically and practically significant impact on enrollment rates.”)

So what, then, is driving Simonsohn? His fraud-busting has an almost existential flavor. “I couldn’t tolerate knowing something was fake and not doing something about it,” he told me. “Everything loses meaning. What’s the point of writing a paper, fighting very hard to get it published, going to conferences?”

Continued in article

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

Those Deceptive For-Profit University Promotional Websites

Almost daily I get requests to link to commercial sites disguised to be academic helper sites. Over half these requests are on behalf of for-profit universities, although the sites themselves are getting more and more clever about hiding the fact that they are promotional sites for for-profit universities. At the same time, I'm getting smarter about detecting these sites and no longer link to them on my Website or on the AECM.

I think that for-profit universities pay people to promote their sites on some basis such as pay-per-click.

To get more eyeballs, these for-profit university promotion sites are adding so called helpers that I've discovered in some cases have simply plagiarized material from other sites such as the History of Pacioli. In some instances the efforts to provide helpers are more legitimate. Nevertheless it galls me to link to these deceptive for-profit university sites. By "deceptive" I mean such thinks as providing links to distance education programs in selected fields like accounting, nursing, pharmacy, etc. Even though there are better and nearly always cheaper distance education degree programs from state-supported universities, those universities are excluded from the for-profit distance education promotional sites. For example, the only distance education degree programs in accounting will those degree programs available from for-profit universities.

Having said this there are some useful for-profit university promotion sites. For example, the "40 Essential Links for CPA Exam Prep & Practice" is a rather helpful site at AccountingDegree.com ---
http://www.accountingdegree.com/blog/2012/40-essential-links-for-cpa-exam-prep-practice/

At the same time, there is much misleading information at this AccountingDegree.com site. For example, consider the various rankings of online universities at
http://oedb.org/rankings
In most cases the various better and cheaper non-profit colleges and universities are not even mentioned by AccountingDegree.com.

Hence I am torn about posting links to for-profit university Websites. It's helpful to have the "40 Essential Links for CPA Exam Prep & Practice" is a rather helpful site at AccountingDegree.com ---
http://www.accountingdegree.com/blog/2012/40-essential-links-for-cpa-exam-prep-practice/

But it's deceptive when those sites never mention that there are cheaper and better distance education degree programs from nonprofit state universities. Some of the better and cheaper non-profit distance education programs have been highlighted by US News are listed below. You will never find these programs mentioned by AccountingDebree.com or most any for-profit university promotional Website.

"'U.S. News' Sizes Up Online-Degree Programs, Without Specifying Which Is No. 1," by Nick DeSantis, Chronicle of Higher Education, January 10, 2012 ---
http://chronicle.com/article/US-News-Sizes-Up/130274/?sid=wc&utm_source=wc&utm_medium=en

U.S. News & World Report has published its first-ever guide to online degree programs—but distance-education leaders looking to trumpet their high rankings may find it more difficult to brag about how they placed than do their colleagues at residential institutions.

Unlike the magazine's annual rankings of residential colleges, which cause consternation among many administrators for reducing the value of each program into a single headline-friendly number, the new guide does not provide lists based on overall program quality; no university can claim it hosts the top online bachelor's or online master's program. Instead, U.S. News produced "honor rolls" highlighting colleges that consistently performed well across the ranking criteria.

Eric Brooks, a U.S. News data research analyst, said the breakdown of the rankings into several categories was intentional; his team chose its categories based on areas with enough responses to make fair comparisons.

"We're only ranking things that we felt the response rates justified ranking this year," he said.

The rankings, which will be published today, represent a new chapter in the 28-year history of the U.S. News guide. The expansion was brought on by the rapid growth of online learning. More than six million students are now taking at least one course online, according to a recent survey of more than 2,500 academic leaders by the Babson Survey Research Group and the College Board.

U.S. News ranked colleges with bachelor's programs according to their performance in three categories: student services, student engagement, and faculty credentials. For programs at the master's level, U.S. News added a fourth category, admissions selectivity, to produce rankings of five different disciplines: business, nursing, education, engineering, and computer information technology.

To ensure that the inaugural rankings were reliable, Mr. Brooks said, U.S. News developed its ranking methodology after the survey data was collected. Doing so, he said, allowed researchers to be fair to institutions that interpreted questions differently.

Some distance-learning experts criticized that technique, however, arguing that the methodology should have been established before surveys were distributed.

Russell Poulin, deputy director of research and analysis for the WICHE Cooperative for Educational Technologies, which promotes online education as part of the Western Interstate Commission for Higher Education, said that approach allowed U.S. News to ask the wrong questions, resulting in an incomplete picture of distance-learning programs.

"It sort of makes me feel like I don't know who won the baseball game, but I'll give you the batting average and the number of steals and I'll tell you who won," he said. Mr. Poulin and other critics said any useful rankings of online programs should include information on outcomes like retention rates, employment prospects, and debt load—statistics, Mr. Brooks said, that few universities provided for this first edition of the U.S. News rankings. He noted that the surveys will evolve in future years as U.S. News learns to better tailor its questions to the unique characteristics of online programs.

W. Andrew McCollough, associate provost for information technology, e-learning, and distance education at the University of Florida, said he was "delighted" to discover that his institution's bachelor's program was among the four chosen for honor-roll inclusion. He noted that U.S. News would have to customize its questions in the future, since he found some of them didn't apply to online programs. He attributed that mismatch to the wide age distribution and other diverse demographic characteristics of the online student body.

The homogeneity that exists in many residential programs "just doesn't exist in the distance-learning environment," he said. Despite the survey's flaws, Mr. McCollough said, the effort to add to the body of information about online programs is helpful for prospective students.

Turnout for the surveys varied, from a 50 percent response rate among nursing programs to a 75 percent response rate among engineering programs. At for-profit institutions—which sometimes have a reputation for guarding their data closely—cooperation was mixed, said Mr. Brooks. Some, like the American Public University System, chose to participate. But Kaplan University, one of the largest providers of online education, decided to wait until the first rankings were published before deciding whether to join in, a spokesperson for the institution said.

Though this year's rankings do not make definitive statements about program quality, Mr. Brooks said the research team was cautious for a reason and hopes the new guide can help students make informed decisions about the quality of online degrees.

"We'd rather not produce something in its first year that's headline-grabbing for the wrong reasons," he said.

---

'Honor Roll' From 'U.S. News' of Online Graduate Programs in Business

Institution	Teaching Practices and Student Engagement	Student Services and Technology	Faculty Credentials and Training	Admissions Selectivity
Arizona State U., W.P. Carey School of Business	24	32	37	11
Arkansas State U.	9	21	1	36
Brandman U. (Part of the Chapman U. system)	40	24	29	n/a
Central Michigan U.	11	3	56	9
Clarkson U.	4	24	2	23
Florida Institute of Technology	43	16	23	n/a
Gardner-Webb U.	27	1	15	n/a
George Washington U.	20	9	7	n/a
Indiana U. at Bloomington, Kelley School of Business	29	19	40	3
Marist College	67	23	6	5
Quinnipiac U.	6	4	13	16
Temple U., Fox School of Business	39	8	17	34
U. of Houston-Clear Lake	8	21	18	n/a
U. of Mississippi	37	44	20	n/a

Source: U.S. News & World Report

Type I and Type II Errors ---
http://en.wikipedia.org/wiki/False_positive#Type_I_error
Also see http://www.stats.gla.ac.uk/steps/glossary/hypothesis_testing.html 

"Psychopathy, Academic Accountants’ Attitudes towards Ethical Research Practices, and Publication Success," by Charles D. Bailey, SSRN, December 8, 2012 ---
 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=218690

"The Data Vigilante:  Students aren’t the only ones cheating—some professors are, too. Uri Simonsohn is out to bust them. inShare48," by Christopher Shea, The Atlantic, December 2012 ---
http://www.theatlantic.com/magazine/archive/2012/12/the-data-vigilante/309172/

Uri Simonsohn, a research psychologist at the University of Pennsylvania’s Wharton School, did not set out to be a vigilante. His first step down that path came two years ago, at a dinner with some fellow social psychologists in St. Louis. The pisco sours were flowing, Simonsohn recently told me, as the scholars began to indiscreetly name and shame various “crazy findings we didn’t believe.” Social psychology—the subfield of psychology devoted to how social interaction affects human thought and action—routinely produces all sorts of findings that are, if not crazy, strongly counterintuitive. For example, one body of research focuses on how small, subtle changes—say, in a person’s environment or positioning—can have surprisingly large effects on their behavior. Idiosyncratic social-psychology findings like these are often picked up by the press and on Freakonomics-style blogs. But the crowd at the restaurant wasn’t buying some of the field’s more recent studies. Their skepticism helped convince Simonsohn that something in social psychology had gone horribly awry. “When you have scientific evidence,” he told me, “and you put that against your intuition, and you have so little trust in the scientific evidence that you side with your gut—something is broken.”

Simonsohn does not look like a vigilante—or, for that matter, like a business-school professor: at 37, in his jeans, T-shirt, and Keen-style water sandals, he might be mistaken for a grad student. And yet he is anything but laid-back. He is, on the contrary, seized by the conviction that science is beset by sloppy statistical maneuvering and, in some cases, outright fraud. He has therefore been moonlighting as a fraud-buster, developing techniques to help detect doctored data in other people’s research. Already, in the space of less than a year, he has blown up two colleagues’ careers. (In a third instance, he feels sure fraud occurred, but he hasn’t yet nailed down the case.) In so doing, he hopes to keep social psychology from falling into disrepute.

Simonsohn initially targeted not flagrant dishonesty, but loose methodology. In a paper called “False-Positive Psychology,” published in the prestigious journal Psychological Science, he and two colleagues—Leif Nelson, a professor at the University of California at Berkeley, and Wharton’s Joseph Simmons—showed that psychologists could all but guarantee an interesting research finding if they were creative enough with their statistics and procedures.

The three social psychologists set up a test experiment, then played by current academic methodologies and widely permissible statistical rules. By going on what amounted to a fishing expedition (that is, by recording many, many variables but reporting only the results that came out to their liking); by failing to establish in advance the number of human subjects in an experiment; and by analyzing the data as they went, so they could end the experiment when the results suited them, they produced a howler of a result, a truly absurd finding. They then ran a series of computer simulations using other experimental data to show that these methods could increase the odds of a false-positive result—a statistical fluke, basically—to nearly two-thirds.

Just as Simonsohn was thinking about how to follow up on the paper, he came across an article that seemed too good to be true. In it, Lawrence Sanna, a professor who’d recently moved from the University of North Carolina to the University of Michigan, claimed to have found that people with a physically high vantage point—a concert stage instead of an orchestra pit—feel and act more “pro-socially.” (He measured sociability partly by, of all things, someone’s willingness to force fellow research subjects to consume painfully spicy hot sauce.) The size of the effect Sanna reported was “out-of-this-world strong, gravity strong—just super-strong,” Simonsohn told me over Chinese food (heavy on the hot sauce) at a restaurant around the corner from his office. As he read the paper, something else struck him, too: the data didn’t seem to vary as widely as you’d expect real-world results to. Imagine a study that calculated male height: if the average man were 5-foot‑10, you wouldn’t expect that in every group of male subjects, the average man would always be precisely 5-foot-10. Yet this was exactly the sort of unlikely pattern Simonsohn detected in Sanna’s data.

Simonsohn launched an e-mail correspondence with Sanna and his co-authors; the co-authors later relayed his concerns to officials at the University of North Carolina, Sanna’s employer at the time of the study. Sanna, who could not be reached for comment, has since left Michigan. He has also retracted five of his articles, explaining that the data were “invalid,” and absolving his co-authors of any responsibility. (In a letter to the editor of Psychological Science, who had asked for more detail, Sanna mentioned “research errors” but added that he could say no more, “at the direction of legal counsel.”)

Not long after the exchange with Sanna, a colleague sent Simonsohn another study for inspection. Dirk Smeesters of Erasmus University Rotterdam, in the Netherlands, had published a paper about color’s effect on what social psychologists call “priming.” Past studies had found that after research subjects are prompted to think about, say, Albert Einstein, they are intimidated by the comparison, and perform poorly on tests. (Swap Einstein out for Kate Moss, and they do better.) Smeesters sought to build on this research by showing that colors can interact with this priming in strange ways. Simultaneously expose people to blue (a soothing hue), for example, and the Einstein and Moss effects reverse. But a strange thing caught Simonsohn’s eye: the outcomes that Smeesters had predicted ahead of time were eerily similar, across the board, to his actual outcomes.

Simonsohn ran some simulations using both Smeesters’s own data and data found in other papers, and determined that such a data array was unlikely to occur naturally. Then he sent Smeesters his findings, launching what proved to be a surreal exchange. Smeesters admitted to small mistakes; Simonsohn replied that those mistakes couldn’t explain the patterns he’d identified. “Something more sinister must have happened,” he recalled telling Smeesters. “Someone intentionally manipulated the data. This may be difficult to accept.”

“I was trying to give him any out,” Simonsohn said, adding that he wasn’t looking to ruin anyone’s career. But in June, a research-ethics committee at Smeesters’s university announced that it had “no confidence in the scientific integrity” of three of his articles. (The committee noted that it had no reason to suspect Smeesters’s co-authors of any wrongdoing.) According to the committee’s report, Smeesters said “he does not feel guilty” and also claimed that “many authors knowingly omit data to achieve significance, without stating this.” Smeesters, who could not be reached for comment, resigned from the university, prompting another Dutch scholar to publicly remark that Simonsohn’s fraud-detecting technique was “like a medieval torture instrument.”

That charge disturbs Simonsohn, who told me he would have been content with a quiet retraction of Smeesters’s article. The more painful allegation, however, is that he is trying to discredit social psychology. He adores his chosen field, he said, funky, counterintuitive results and all. He studied economics as an undergrad at Chile’s Universidad Católica (his father ran a string of video-game arcades in Santiago; Simonsohn initially hoped to go into hotel management), but during his senior year, an encounter with the psychologist Daniel Kahneman’s work convinced him to switch fields. He prefers psychology’s close-up focus on the quirks of actual human minds to the sweeping theory and deduction involved in economics. (His own research, which involves decision making, includes a recent study titled “Weather to Go to College,” which finds that “cloudiness during [college] visits has a statistically and practically significant impact on enrollment rates.”)

So what, then, is driving Simonsohn? His fraud-busting has an almost existential flavor. “I couldn’t tolerate knowing something was fake and not doing something about it,” he told me. “Everything loses meaning. What’s the point of writing a paper, fighting very hard to get it published, going to conferences?”

Continued in article

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

"USDA Inflated the Number of Jobs Created by Stimulus, IG Says," by Patrick Burke, CNS News, December 21, 2012 ---
http://cnsnews.com/news/article/usda-inflated-number-jobs-created-stimulus-ig-says

Department of Agriculture improperly inflated the numbers of jobs created or saved by the 2009 economic stimulus, according to the agency’s own Office of Inspector General (OIG).

“[We] identified job numbers that were inflated because award recipients reported cumulative job numbers instead of the number of jobs created or saved during the quarter being reported. In other instances, job numbers were underreported,” according to an OIG audit released Dec. 13.

The report claims that without accurate job figures, it is “difficult” to know whether the 2009 2009 American Recovery and Reinvestment Act was effective in creating or saving jobs.

“Without accurate data about the number of jobs USDA agencies retained or created through the use of Recovery Act Funds, it is difficult to measure how effective the Department was in accomplishing a main Recovery Act objective, which was to create and retain jobs.”

Individual reporting errors were not identified because of the inadequate “analytical tools” that USDA agencies were using to corroborate job numbers, the IG said. In addition to inflating job numbers, there were also instances of underreporting.

Before posting job data on Recovery.gov  -- the government transparency Web site -- award recipients provide information via FederalReporting.gov, where information is verified by government agencies.

As of March 31, 2011, USDA agencies had posted 4,960 awards amounting to $9.29 billion to Recovery.gov.

However, USDA agencies did not properly verify information received by award recipients, who did not always provide accurate job numbers, according to the inspector general.

“OIG determined that inaccurate job numbers were reported to FederalReporting.gov because recipients did not always report correct information and USDA agencies did not adequately analyze the number of jobs that award recipients were reporting,” the report said. “Not all recipients were aware of the OMB-required methodology for calculating jobs; consequently, they made errors when they reported.”

Moreover, USDA agency representatives told the OIG that errors were overlooked and there was inadequate analysis to recognize errors.

The OIG told CNSNews.com that it is “possible” that some job reporting errors occurred in other quarters as well.

“It is possible: some of the recipients explained that the errors were caused due to their misunderstanding the requirements for reporting the number of jobs created,” the OIG said in a statement.

“If recipients incorrectly reported the number of jobs created in the quarter ending March 31, 2011, and they used the same process to compute the number of jobs created in previous quarters, then errors would probably exist in the reporting for previous quarters.”

The report analyzed a sample of 99 stimulus awards for the quarter between Jan.1 , 2011 and March 31, 2011 –which accounted for approximately 375 of the 1,200 jobs that were reportedly saved or created in that same quarter.

From the sample of 99 awards, 33 contained job reporting errors.

During the quarter ended March 31, 2011, USDA reported 10,600 jobs were created or saved due to Stimulus funding.

To properly review data analysis procedures, OIG interviewed USDA agency representatives, reviewed laws and regulations and then conducted a “detailed review” of the 99 awards in the sample.

The report recommends that USDA agencies ensure that job numbers correctly correspond to awards, and award recipients only report job numbers for individual quarters.

“Direct agencies to develop data tests and guidance to improve their reviews of the jobs information reported on FederalReporting.gov,” the report said.

“This includes, but is not limited to, ensuring that the project description fields match the number of jobs reported, recipients with multiple awards are reporting accurately, and recipients are reporting only the jobs created or saved during the quarter being reported.”

Continued in article

Governmental Accounting is Done With Smoke and Mirrors ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

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

Mary S. Stone is listed in the University of Alabama Website as the Current Director of the Culverhouse School of Accounting
http://cba.ua.edu/academics/departments/accountancy#Faculty%20and%20Staff
Mary is also a former President of the American Accounting Association

More About the  Mary Stone Controversy
"Other House of Morgan Spawns a Web of Scandals," by Jonathan Weil, Bloomberg News, December 13, 2012 ---
http://www.bloomberg.com/news/2012-12-13/other-house-of-morgan-spawns-a-web-of-scandals.html

It has been more than five years since a group of mutual funds run by Morgan Keegan & Co. crashed in an accounting debacle, costing investors about $1.5 billion. Now the scandal has reached the boardroom at one of the U.S. accounting profession’s highest bodies.

This week the Securities and Exchange Commission accused eight former Morgan Keegan fund directors of shirking their oversight responsibilities when it came to the funds’ asset valuations. One former director, Mary Stone, is a trustee for the Norwalk, Connecticut-based Financial Accounting Foundation, which oversees the board that sets U.S. accounting standards.

After the SEC’s enforcement division filed its claims on Dec. 10, the foundation issued a news release saying Stone had requested and been granted a leave of absence from its board of trustees. It didn’t say why. The SEC previously had accused the funds of fraudulently overstating their asset values.

That the foundation appointed Stone to its board in the first place was a serious lapse. It was a matter of public record when Stone was selected that she had been the funds’ audit-committee chairman during the time when the SEC said the fraud occurred. The SEC filed its complaint accusing Morgan Keegan and two employees of accounting fraud in April 2010. Stone was named a trustee of the accounting foundation in November 2010, while the SEC’s investigation was ongoing. Settlement Terms

Stone, who is an accounting professor at the University of Alabama in Tuscaloosa, didn’t return phone calls. Through their attorneys, the eight former directors have denied the SEC’s allegations, saying they acted diligently and in good faith. Morgan Keegan agreed to pay $200 million in June 2011 to settle fraud claims by the SEC and other regulators. The two employees at the Memphis, Tennessee-based securities firm also paid fines.

The SEC’s order this week said the fund directors “delegated their responsibility to determine fair value to a valuation committee without providing any meaningful substantive guidance on how those determinations should be made.” Additionally, it said “they made no meaningful effort to learn how fair values were actually being determined” for illiquid securities.

You have to wonder what the accounting foundation’s trustees were thinking when they selected Stone. Of all the people they might have tapped, surely they could have found someone who hadn’t been on the audit committee of an outfit accused by the SEC of accounting fraud. The foundation should be setting a positive example when choosing its leaders. Trustees’ backgrounds should be pristine.

Stone’s job as an audit-committee member was to oversee the financial integrity of the Morgan Keegan funds. Regardless of whether the funds’ violations were Stone’s fault, they happened on her watch. Stone already was a defendant in numerous investor lawsuits when she was named a trustee.

So how did Stone, 62, manage to get picked? Robert Stewart, a spokesman for the foundation, said he “can’t comment on any specific case.” Speaking generally, he said candidates are interviewed by members of the trustees’ appointments committee, and that names of finalists are submitted to the SEC chief accountant’s office. He also said that the foundation conducts background checks on finalists, and that SEC commissioners have the opportunity to express their views.

Obviously, the foundation’s trustees knew or should have known about Stone’s role at the Morgan Keegan funds before hiring her. All anyone had to do was a Google search. Likewise, they should have realized there was a risk the SEC would file claims against her individually, as it did this week. It isn’t clear what the SEC told the foundation about Stone, if anything, or what the board’s rationale was for choosing her.

An SEC spokesman, John Nester, declined to answer questions about Stone’s appointment process. Different Animal

The accounting foundation is no ordinary private party. It oversees the Financial Accounting Standards Board, which sets U.S. generally accepted accounting principles, as well as the Governmental Accounting Standards Board, which determines accounting rules for state and local governments. It’s up to the SEC to decide whether the FASB continues as a designated standard-setter for U.S. companies.

The foundation’s 17-member board is filled with luminaries from the worlds of accounting and finance. Its chairman when Stone was appointed was John Brennan, the former chief executive officer of the investment manager Vanguard Group Inc. Brennan, who remains a trustee, was succeeded as chairman this year by Jeffrey Diermeier, the former CEO of the CFA Institute, which is the global accreditation body for chartered financial analysts.

Continued in article

Message from Denny Beresford on December 11, 2012

I happened to stumble across this SEC enforcement action - http://www.sec.gov/litigation/admin/2012/ic-30300.pdf 

The Financial Accounting Foundation just announced that Trustee Mary S. Stone, who is named in the SEC enforcement release and is a former AAA President, is taking a leave of absence from the Foundation

Denny

SEC Release 2012-259

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation

FOR IMMEDIATE RELEASE
2012-259

Washington, D.C., Dec. 10, 2012 — The Securities and Exchange Commission today announced charges against eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds for violating their asset pricing responsibilities under the federal securities laws.

---

Additional Materials

• SEC Order

---

The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.

Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.

“Investors rely on board members to establish an accurate process for valuing their mutual fund investments. Otherwise, they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned assets.”

The SEC Enforcement Division’s Asset Management Unit continues to prioritize asset valuation investigations, with recent enforcement actions including charges against three top executives at New York-based KCAP Financial and two executives at former $1 billion hedge fund advisory firm Yorkville Advisors LLC.

The eight fund directors named in today’s SEC enforcement action are:

• J. Kenneth Alderman of Birmingham, Ala.
• Jack R. Blair of Germantown, Tenn.
• Albert C. Johnson of Hoover, Ala.
• James Stillman R. McFadden of Germantown
• Allen B. Morgan Jr. of Memphis
• W. Randall Pittman of Birmingham
• Mary S. Stone of Birmingham
• Archie W. Willis III of Memphis

According to the SEC’s order, the eight directors’ failure to fulfill their fair value-related obligations was particularly inexcusable given that fair-valued securities made up the majority of the funds’ net asset values – in most cases more than 60 percent. The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.

The SEC Enforcement Division alleges that the directors caused the funds to violate the federal securities laws by failing to adopt and implement meaningful fair valuation methodologies and procedures and failing to maintain internal control over financial reporting. For example, the funds’ valuation procedures did not include any mechanism for identifying and reviewing fair-valued securities whose prices remained unchanged for weeks, months, and even entire quarters.

“While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used,” said William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.

According to the SEC’s order, the funds’ valuation procedures required that the directors be given explanatory notes for the fair values assigned to securities. However, no such notes were ever provided to the directors, and they never followed up to request such notes or any other specific information about the basis for the assigned fair values. In fact, Morgan Keegan’s Fund Accounting unit, which assigned values to the securities, did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the net asset values of the funds were materially misstated in 2007 from at least March 31 to August 9. Consequently, the prices at which one open-end fund sold, redeemed, and repurchased its shares were inaccurate. Furthermore, other reports and at least one registration statement filed by the funds with the SEC contained net asset values that were materially misstated.

The SEC’s order alleges that the fund directors caused the funds’ violations of Rules 22c-1, 30a-3(a) and 38a-1 under the Investment Company Act of 1940.

The SEC’s investigation was conducted by members of the SEC’s Atlanta Regional Office and the Asset Management Unit.

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

Theft in the State of Georgia (the one that's north of Florida)
"Postal employees stole millions in federal checks:  Georgia supervisor, coworkers and four others cashed 1,300 U.S. Treasury checks before authorities caught them. More than 171 Postal workers arrested in 2012," by Phillip Swarts, Washington Guardian, December 19, 2012 ---

Neither snow nor rain nor heat nor gloom of night could stop these postal employees from stealing checks.

The former supervisor at an Atlanta mail distribution facility, a coworker and four others pled guilty this month to stealing $3 million in U.S. Treasury checks, including veterans benefits, tax refunds and Social Security checks. By the time authorities figured out the scheme, the small theft ring had stolen or cashed 1,300 federal checks, officials said.

And the Georgia workers aren't alone. Between April and September of this year, 171 Postal Service employees were arrested for theft, willful delay or destruction of mail, according to a new report by the USPS inspector general. The Service has about 546,000 employees. "We have taken two corrupt postal workers, including a supervisor, off the streets who were responsible for stealing thousands of checks worth over $3 million," U.S. Attorney Sally Quillian Yates in Atlanta said. "We will continue to target these theft rings, both those on the inside and their network of check cashers, to address this serious problem.”

Gerald Eason, 47, pled guilty to stealing more than 1,300 checks while working at the postal facility. His accomplice, mail handler Deborah Fambro-Echols, 49, has also pled guilty.

The two employees pled guilty to conspiracy and theft of government money. Eason pleaded guilty to several other charges including possession of stolen Treasury checks. There's a wide range of jail time they could be serving, though. Each charge carries anywhere from five to 30 years in prison.

Investigators became aware there was a problem in December 2010, USPS Office of Inspector General spokeswoman Agapi Doulaveris said. Federal agents watched and investigated Eason and his accomplices before they were arrested in early March, Doulaveris said.

"Eason and Fambro-Echols reflect just a very small percentage of employees who failed to uphold the trust and integrity placed in them," said Paul Bowman, the U.S. Postal Service Office of Inspector General's special agent in charge. "The majority of Postal Service employees are honest, hardworking, and committed to providing the timely and reliable service that customers expect and deserve."

Four other defendants also pled guilty to helping the Atlanta scheme, including cashing the stolen checks, acting as brokers and using fake ID's. Two were arrested in a Georgia bank when they tried to impersonate the intended recipient of the check. None of the four are U.S. Postal Service employees.

In 2011, Georgia "ranked third in the country in the number of federal tax refund, Social Security, and Veterans checks reported stolen by their intended recipients," Yates said, prompting the creation of the U.S. Attorney's Stolen Treasury Check Task Force, a coalition of 14 federal, state and local law enforcement agencies to investigate the problem of stolen checks in northern Georgia.

The Post Office is facing a multi-billion dollar budget deficit and is looking for ways to save money, but Doulaveris said any measures aren't expected to affect investigations and the service's ability to respond to illegal behavior.

Continued in article

TheStreet gets caught with accounting fraud on Wall Street

SEC Charges Financial Media Company and Executives Involved in Accounting Fraud

SEC Charges Financial Media Company and Executives Involved in Accounting Fraud FOR IMMEDIATE RELEASE 2012-270 Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a digital financial media company and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors. Additional Materials SEC complaint v. TheStreet SEC complaint v. Ashman SEC complaint v. Alwine and Barnett The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year.  The co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance.  They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting.  Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services.  The SEC also alleges that TheStreet’s former chief financial officer Eric Ashman caused the company to report revenue before it had been earned.   The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges. “Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “The SEC will continue to root out accounting fraud and punish the executives responsible.” According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes.  After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud.  The SEC alleges that through the actions of Ashman, Alwine, and Barnett, TheStreet: Improperly recognized revenue based on sham transactions. Used the percentage-of-completion method of revenue recognition without meeting fundamental prerequisites to do so, including reliably estimating and documenting progress toward the completion of relevant contracts. Prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue.  According to the SEC’s complaint, when the subsidiary’s financial results were consolidated with TheStreet’s financial results for financial reporting purposes, the improper revenue on the subsidiary’s books resulted in material misstatements in the company’s quarterly and annual reports for fiscal year 2008.  On Feb. 8, 2010, TheStreet restated its 2008 Form 10-K and disclosed a number of improprieties related to revenue recognition at its subsidiary, including transactions that lacked economic substance, internal control deficiencies, and improper accounting for certain contracts.  Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision (Section 304) of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years.  Barnett and Alwine agreed to pay penalties of $130,000 and $120,000 respectively, and to be barred from serving as officers or directors of a public company for 10 years.  Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws.  The SEC’s investigation was conducted by Senior Counsel Maureen P. King and Staff Accountant Nandy Celamy of the New York Regional Office.  Aaron Arnzen served as Senior Trial Counsel in the matter.  http://www.sec.gov/news/press/2012/2012-270.htm

Other Alleged Frauds as of December 19, 2012

• SEC Revokes Registration of Toronto-Based Broker and Bans Two Executives from U.S. Securities Industry for Allowing Layering
• SEC Charges Financial Media Company and Executives Involved in Accounting Fraud
• SEC Charges Connecticut-Based Adviser for “Skin in the Game” Misstatements About CDOs
• SEC Charges Germany-Based Allianz SE with FCPA Violations

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

"Psychopathy, Academic Accountants’ Attitudes towards Ethical Research Practices, and Publication Success," by Charles D. Bailey, SSRN, December 8, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2186902

Abstract:
Psychopathy is one of the “Dark Triad” of personality variables, along with Machiavellianism and narcissism. It has received no attention, to my knowledge, in accounting literature, yet it has powerful implications for fraud in many areas. Psychopathy is characterized by deficits of conscience and empathy, rendering the rationalization of fraud easy or completely moot. Empirical research is an area in which two sides of the “Fraud Triangle,” motive and opportunity, are in place, awaiting only rationalization. Widespread fraud has been uncovered in scientific research, and studies indicate that accounting is not exempt. Using a sample of 545 accounting faculty who have published in leading accounting research journals, I find a positive effect of psychopathy on publication count. The effect is fully mediated (via an indirect-only mediation) through the influence of psychopathy on attitudes about the ethicality of questionable or blatantly unethical acts in the research and publication process. Implications and limitations are discussed.

"How London became the money-laundering capital of the world," by Rowan Bosworth-Davies, IanFraser.org, July 15, 2012 ---
http://www.ianfraser.org/how-london-became-the-money-laundering-capital-of-the-world/
Note that this article first appeared on Roway's blog in March 26, well in advance of the revelations of LIBOR fixing scandals by U.K. banks

. . .

This article was written by Rowan Bosworth-Davies and first posted on his blog on March 26th 2012. It is reused with permission. Since then, it has emerged that HSBC faces a $1 billion penalty in the United States for weak anti money laundering controls by the US government. At a hearing in Washington this Tuesday, the US Senate Permanent Subcommittee on Investigations is poised to deliver a blistering attack on the London-headquartered bank’s anti-money laundering systems and controls, highlighting its role in transactions tied to Iran, terrorist financing and drug cartels. In a Reuters Special Report published July 13th 2012, Carrick Mollenkamp and Brett Wolf have detailed how the bank’s Delaware-based anti-money laundering hub pays lip-service to tackling the problem of money laundering.

The lure of money laundering for Iran and the big drug cartels and Bernie Madoff
"UK banks hit by record $2.6bn US fines," by Shahien Nasiripour and Kara Scannell, Financial Times, December 11, 2012 ---
http://www.ft.com/intl/cms/s/0/643a6c06-42f0-11e2-aa8f-00144feabdc0.html#axzz2EkcnrVk3

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/643a6c06-42f0-11e2-aa8f-00144feabdc0.html#ixzz2EkdS3jxh

HSBC and Standard Chartered, the two biggest UK banks by market value, have agreed to pay almost $2.6bn in fines as part of record settlements with US authorities over money laundering allegations.

HSBC announced on Tuesday that it would pay $1.92bn and enter a deferred-prosecution agreement to settle accusations it allowed itself to be used by money launderers in Mexico and terrorist financiers in the Middle East.

More On this story

Business blog Virtue and vice at HSBC and StanChart UK ready to ‘trust’ US over failing banks HSBC sells some Central American units Lex HSBC / StanChart – rap on the knuckles FT’s Year in Finance

On this topic

Fitch downgrades HSBC over expansion push HSBC sells Ping An stake to Thai group HSBC left holding Amadeus stake Lombard Ocado / HSBC and Ping An

IN Banks

Tokyo loses out as foreign banks refocus KBC to sell €1.23bn in shares US and UK unveil failing banks plan US banks in fresh structured finance spree

Stuart Gulliver, HSBC’s chief executive, said: “We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes.

“Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters.”

StanChart agreed on Monday to pay $327m to several authorities in the US to settle allegations it violated US sanctions law and impeded government inquiries. That sum comes on top of the $340m the UK bank agreed to pay in August to New York state’s Department of Financial Services.

Until the HSBC settlement was reached, StanChart’s total $667m was to be the largest combined penalty paid to US authorities by a financial institution for allegedly breaching sanctions policy.

The broad allegations against HSBC were detailed in a July report by the Senate permanent subcommittee on investigations. The bank was alleged to have stripped details from transactions that would have identified Iranian entities, which may have put the bank in breach of US sanctions against that country.

The bank was said to have also moved billions of dollars in cash from its affiliate in Mexico to the US – more than any other Mexican bank – despite concerns raised with HSBC by authorities that such sums could only involve proceeds from illegal narcotics.

Since then, HSBC has increased its reserves to some $1.5bn to cover an agreement with US regulators that would settle the allegations.

As noted in its agreement with US Department of Justice, HSBC said its US subsidiary had increased its spending on anti-money laundering approximately ninefold between 2009 and 2011, and increased its anti-money laundering staffing almost 10-fold since 2010.

HSBC also said it had revamped its Know Your Customer programme, including treating non-US HSBC group affiliates as third parties subject to the same due diligence as all other customers; ended 109 correspondent relationships for risk reasons; clawed back bonuses for a number of senior executives and spent more than $290m on remedial measures.

StanChart was accused in August of defrauding regulators, falsifying records and obstructing government inquiries after New York state’s banking supervisor alleged the bank hid from regulators key details involving transactions with entities in countries including Iran.

After settling with New York – following the regulator’s threat to revoke StanChart’s state banking licence – the bank settled on Monday with the Federal Reserve, Department of Justice, Treasury Department and the Manhattan district attorney.

Lanny Breuer, assistant US attorney-general, said: “The United States expects a minimum standard of behaviour from all financial institutions that enjoy the benefits of the US financial system. Standard Chartered’s conduct was flagrant and unacceptable.”

The bank was accused of stripping identifying information from hundreds of billions of dollars of transactions involving Iran. Benjamin Lawsky, New York state’s banking regulator, had called StanChart a “rogue institution”.

Continued in article

"HSBC auditor talks on career opportunities," by Kathleen Buechel, The Ticker, October 10, 2011 ---
http://www.theticker.org/about/2.8218/hsbc-auditor-talks-on-career-opportunities-1.2650560#.UMc7NfJXfDM

During the month of September, EOC Jobsmart Career Hour hosted Mark Martinelli as he spoke on emerging issues in the finance industry as well as some career opportunities in HSBC. The event was co-sponsored by the Baruch College Accounting Society.

Martinelli is Chief Auditor at HSBC North American Holding Inc., as well as the Chief Auditor at HSBC Bank USA, N.A. He is also a Certified Public Accountant and is a member of the Baruch College Board of Trustees which he was elected to in April 2010.

Getting straight to the pint, Martinelli immediately opened the floor up for student questions instead of spending more time talking about himself. Now and then though he used himself as an example.

He comes to Baruch because it gives students some exposure to opportunity as well as having someone external to give a different perspective on the things that he sees, as well as to give back.

"There is a real advantage of doing a diversity of different things," said Martinelli in his regard to the various finance careers he has held.

Martinelli believes it is extremely important to have a strong grasp of technology. If he had the chance to go back and get his Masters degree he would get the degree in a technology concentration.

There is a common thread in that area, whether someone goes into marketing, managing or another area, stated Martinelli.

Martinelli worked 10 years in public accounting, even though he made a decision early on that he wanted to work in financial services. This is because he enjoyed it and there was a lot of growth in financial services when he left school.

When it comes to public accounting he stated that a person will know a lot of public audit and won't know real accounting until they become a CFO. To be an effective CFO you need to know the product and service, which is how the company grows, not just debits and credits in Martinelli's opinion.

"Have a sight of what jobs you want. You can't wait for people to offer you a job. Ideally you want to know what your skillsets are, what you're strong at, what you're weak at and have a list of jobs you want to do in an organization. The goal is simple, keep yourself as financially marketable as possible," said Martinelli.

In being financial marketable as possible, he stated that if you don't land a job with a Big 4 firm you are not a failure. There are at least 100 firms within a few miles around Baruch that are considered large firms.

Through networking and keeping a short term plan, 18 months to three years, and a long term plan Martinelli himself figured out where he wanted to be in Republic National Bank (now HSBC).

According to Martinelli HSBC has about 300,000 employees, is in eight different countries and has been around for 200 years. Much of HSBC's growth has always been in emerging markets because of HSBC's want to be a global competitor.

Its international marketing employees have come to be known as international managers. The program is a high entry level position where members are trained for two years in different world locations. Martinelli stated these managers are groomed to be future leaders of HSBC.

When gaining a presence in other countries, HSBC will send international managers as well as hire local persons. This is because local people know the local markets.

"You'll be in Greece today as a deputy CEO and you'll decide to make an acquisition in Turkey and pretty much in 48 hours notice you'll fly to Turkey," said Martinelli of the challenges of being an International Manager.

Areas of interest for HSBC worldwide are in these emerging markets such as China, Singapore, Malasiya as well as some other countries. As for the United States growth areas are in commercial space, middle markets and small business lending. HSBC is looking for retail space for premier banking and moving away from credit cards.

Continued in article

HSBC's auditor KPMG had twice reported serious risks regarding Madoff's investment funds, but Picard alleged that the bank chose to ignore its accountant's warnings.
"HSBC sued for $9bn over Madoff fraud:  Banking giant accused of being "wilfully and deliberately" blind to Madoff's Ponzi scheme," New Statesman, December 2010 ---
http://www.newstatesman.com/banking-and-insurance/2010/12/ponzi-scheme-madoff-hsbc-bank

Europe's biggest bank HSBC is being sued for $9bn (£5.7bn) for being "wilfully and deliberately" blind to Bernard Madoff's multibillion-pound Ponzi scheme despite warnings from its own auditor.

Irving Picard, the court-appointed trustee charged with recouping assets for victims of the fraudster, has filed a lawsuit with the US Bankruptcy Court in New York, alleging that HSBC ignored "red flags" that could have brought the scam to light years earlier.

David J Sheehan, the lawyer representing Picard, said the bank "possessed a strong financial incentive to participate in, perpetuate, and stay silent about Madoff's fraudulent scheme."

But HSBC stated it would "defend itself vigorously" against the allegations and said the trustee's claims of wrongdoing were "unfounded". In the lawsuit, Picard has accused the bank of indulging in 24 counts of fraud and misconduct.

HSBC's auditor KPMG had twice reported serious risks regarding Madoff's investment funds, but Picard alleged that the bank chose to ignore its accountant's warnings.

HSBC is the third major bank to be named in the lawsuit over the fraudulent Ponzi scheme that has landed Bernard Madoff in jail for 150 years. Earlier, similar suits had been filed against JPMorgan and Swiss lender UBS for $6.4bn and $2bn respectively.

 

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

Sarbanes-Oxley Legislation --- http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act

SOX Down Rather Than Sox Up
"Eyebrows Go Up as Auditors Branch Out," by Michael Rapoport, The Wall Street Journal, December 6, 2012 ---
http://professional.wsj.com/article/SB10001424127887324705104578149222319470606.html?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno64-wsj

Auditing wasn't all Deloitte LLP did for Autonomy Corp., the software firm recently accused of accounting improprieties by its parent company. To many observers, that sort of multitasking is potentially an industry problem.

As auditor, the U.K. unit of Deloitte Touche Tohmatsu was in charge of signing off on Autonomy's financial statements before Hewlett-Packard Co. HPQ +0.07% bought the company in 2011. But Deloitte also was paid significant fees for other work it did for Autonomy, like due-diligence work on a potential acquisition. In 2010, Deloitte received $1.2 million from Autonomy for nonaudit work, close to the $1.5 million the firm was paid for the audit itself.

Nonaudit businesses form a steadily increasing portion of Deloitte's business, with 39.6% of revenue now coming from consulting or financial advisory, up nearly a third since 2006.

The rise in Deloitte's nonaudit revenue spotlights a recent resurgence in consulting and other nonaudit work by the Big Four accounting firms, a decade after conflict-of-interest concerns and corporate scandal sharply limited such work.

The firms—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—say that their nonaudit businesses operate within legal boundaries, and that their growth isn't cause for concern. They focus their nonaudit work on U.S. companies they don't audit, and on foreign companies that aren't U.S.-listed and thus aren't subject to the U.S. restrictions on nonaudit work.

Even so, the move has revived fears that an increased focus on nonaudit work compromises companies' capacity to sniff out fraud.

"If firms become too preoccupied with consulting, I think it hurts the authenticity of the audit," said former Federal Reserve Chairman Paul Volcker in an interview. Mr. Volcker spoke last week at a New York University roundtable on the comeback of consulting by accounting firms.

Plunging too far into nonaudit services can "distract" firms' attention from auditing and "weakens the public trust" in audits, Paul Beswick, the Securities and Exchange Commission's acting chief accountant, said at an accounting conference Monday. Even if it's only a matter of perception, "negative perceptions can undermine confidence in audits," he said.

The growing focus on consulting and other nonaudit services "threatens to weaken the strength of the audit practice in the firm overall," James Doty, chairman of the Public Company Accounting Oversight Board, the U.S. government's auditing regulator, said at the conference.

H-P alleged last week that Autonomy is riddled with accounting improprieties, though it hasn't alleged any wrongdoing by Deloitte and hasn't cited the firm's dual role as a problem.

Deloitte said much of its nonaudit fees for Autonomy were for "audit-related services" typically carried out by the auditor and actually classified by Deloitte as audit revenues. The firm says it didn't do any consulting work for Autonomy, and that Autonomy had procedures to ensure that any nonaudit services provided by Deloitte didn't compromise its independence.

A decade ago, there was widespread concern that the Big Four would get too cozy with their audit clients because the same companies also were paying them lucrative consulting fees. Those fears peaked when Arthur Andersen imploded after shredding company documents related to Enron Corp.; the auditor made more consulting for Enron than it did for auditing.

The Sarbanes-Oxley Act subsequently barred most consulting for audit clients, and all of the Big Four except Deloitte divested themselves of their consulting businesses.

The firms have since rebuilt those businesses by providing nonaudit services to other companies, within the new prescribed limits. Demand for Sarbanes-Oxley compliance, forensic investigations and merger-and-acquisition work have helped the growth in nonaudit services.

Consulting and other nonaudit lines of business are growing at rates far outpacing auditing. At PwC, for instance, advisory revenue rose 16.9% in fiscal 2012, versus 3.4% for auditing.

"The auditing market is pretty much saturated," said Martin G.H. Wu, an associate professor of accounting at the University of Illinois at Urbana-Champaign. "Consulting, on the other hand, is pretty unlimited."

If consulting growth continues to boom, the Big Four effectively could become consulting firms that "dabble" in auditing, said Joseph Carcello, a University of Tennessee accounting professor. "I think if we get to that point, we'd have a major, major problem."

The firms disagree. "We wouldn't jeopardize audit quality for anything," said Greg Garrison, clients and markets leader at PwC. "I don't think there's any chance we'd take our eye off the ball, and I don't think our competition would either."

At PwC, 90% of advisory work is for nonaudit clients, said Dana Mcilwain, PwC's U.S. advisory leader. The Big Four also argue that consulting provides synergies even if they don't consult for and audit the same companies. Offering consulting gives them expertise they can draw upon when related issues arise at their audit clients, they say.

"We believe the services we're in actually help us on the front of audit quality," said John Ferraro, Ernst & Young's global chief operating officer.
Jensen Question:  Did Andersen say the same thing about Enron when Andersen's billings were $25 million for auditing and #25 million for consulting?

Continued in article

Jensen Comment
Asking audit firms to resist consulting is like kids and senior citizens in the Littleton, NH downtown store that has the "world's longest candy counter." Even though parents, teachers, dentists, and physicians have warned them over and over again about the evils of candy, it's virtually impossible to leave that store without bags of candy both arms. Even though the SEC, the AICPA, the Courts, the laws like Sarbanes Oxley, and the professors all warn auditors over and over again, it's hard to leave an audit without bags of money in both arms from additional consulting. The buzz word is "rebranding" amongst auditing firms.

Video of the World's Longest Candy Counter ---
http://www.youtube.com/watch?v=hSxpebM6SUA

Bob Jensen's threads on auditing independence and professionalism ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Lastly, I mention the post-Andersen speech of a former Andersen executive research partner:

Art Wyatt admitted:
"ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" --- http://aaahq.org/AM2003/WyattSpeech.pdf

And they Still Don't Get It!

"PwC and Thomson Reuters: Too Close For Comfort," by Francine McKenna, re:TheAuditors, December 26, 2012 ---
http://retheauditors.com/2012/12/26/pwc-and-thomson-reuters-too-close-for-comfort/

A few days ago I reported at Forbes.com on a new business alliance between PwC China and Thompson Reuters, a PwC audit client. The three-year agreement is a license to use Thomson Reuters tax software exclusively – in an ironic twist of fate the software was originally developed by Deloitte – for client service in China. PwC UK already uses the software for its clients.

PwC US is also a “Certified Implementer” of Thomson Reuters One Source software. That means PwC consulting professionals implement Thomson Reuters for third-parties, perhaps at times in joint engagements with Thomson Reuters. Are there incentives paid? There must be a joint marketing and training arrangement at least. There is a certainly a shared benefit to teaming up to sell software and consulting services. You can agree or disagree whether such arrangements should be prohibited, but under existing rules in the UK and for US listed audit clients of the global firms, they are prohibited.

Why isn’t the SEC and PCAOB enforcing auditor independence rules prohibiting business alliances between auditors and their audit clients?

PwC and Thomson Reuters would not comment for Forbes.com.

Professor Paul Gillis, a PCAOB SAG member and author of the China Accounting Blog, thinks I “jumped the shark” with this one.

Here’s the thing… According to the SEC’s Final Rule: Revision of the Commission’s Auditor Independence Requirements effective February 5, 2001, the perception of auditor of independence is as important, or maybe even more important, than the fact of auditor independence.

This is not new.

The independence requirement serves two related, but distinct, public policy goals. One goal is to foster high quality audits by minimizing the possibility that any external factors will influence an auditor’s judgments. The auditor must approach each audit with professional skepticism and must have the capacity and the willingness to decide issues in an unbiased and objective manner, even when the auditor’s decisions may be against the interests of management of the audit client or against the interests of the auditor’s own accounting firm.

The other related goal is to promote investor confidence in the financial statements of public companies. Investor confidence in the integrity of publicly available financial information is the cornerstone of our securities markets. Capital formation depends on the willingness of investors to invest in the securities of public companies. Investors are more likely to invest, and pricing is more likely to be efficient, the greater the assurance that the financial information disclosed by issuers is reliable. The federal securities laws contemplate that that assurance will flow from knowledge that the financial information has been subjected to rigorous examination by competent and objective auditors.

The two goals — objective audits and investor confidence that the audits are objective — overlap substantially but are not identical. Because objectivity rarely can be observed directly, investor confidence in auditor independence rests in large measure on investor perception. For this reason, the professional literature, such as the AICPA’s Statement on Auditing Standards (SAS) No. 1, has long emphasized that auditors “should not only be independent in fact; they should also avoid situations that may lead outsiders to doubt their independence.” The Supreme Court has emphasized the importance of the connection between investor confidence and the appearance of independence:

The SEC requires the filing of audited financial statements in order to obviate the fear of loss from reliance on inaccurate information, thereby encouraging public investment in the Nation’s industries. It is therefore not enough that financial statements be accurate; the public must also perceivethem as being accurate. Public faith in the reliability of a corporation’s financial statements depends upon the public perception of the outside auditor as an independent professional. . . . If investors were to view the auditor as an advocate for the corporate client, the value of the audit function itself might well be lost.

Here’s my column at Forbes.com.

Apparently, PwC ad Thomson Reuters believe what happens in China stays in China.

Thomson Reuters announced it signed a three-year contract with PwC, the company’s auditor, to provide use of the Thomson Reuters ONESOURCE Corporate Tax solution for China. PwC U.K. also uses this Thomson Reuters software for its tax clients. Business alliances between a company and its auditor are prohibited under U.S. law and U.K. auditor regulations. Thomson Reuters, headquartered in New York, has its shares listed on the Toronto and New York Stock Exchanges.

Rule 2-01(b) of Regulation S-X (17 CFR 210.2-01.), amended under the Sarbanes-Oxley Act of 2002 to enhance auditor independence after the Enron and Arthur Andersen failures, provides the standard used to judge a business relationship between a company and its auditor or services provided  to an audit client:

• Does the relationship create a mutual or conflicting interest between the accountant and the audit client?
• Does the relationship place the accountant in the position of auditing his or her own work?
• Does the relationship result in the accountant acting as management or an employee of the audit client?
• Does the relationship place the accountant in a position of being an advocate for the audit client?

For business relationships specifically, the law allows contracts between a auditor and its client only if the auditor is a consumer in the normal course of business and receives no incentives, special pricing or other advantage that other customers would not receive.

Continued in article

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

From CBS Sixty Minutes
Goldman Sachs VP explains why he quit --- http://www.cbsnews.com/video/watch/?id=50133578n&tag=api
You might also note the wide-ranging comments that follow --- comments to please all sides of the political spectrum

It is exceptionally difficult -- for all practical purposes, impossible," writes Eberstadt, "for a medical professional to disprove a patient's claim that he or she is suffering from sad feelings or back pain. In other words, many people are gaming or defrauding the system. This includes not only disability recipients but health care professionals, lawyers and others who run ads promising to get you disability benefits. Between 1996 and 2011, the private sector generated 8.8 million new jobs, and 4.1 million people entered the disability rolls.
Michael Barone, "Men Find Careers in Collecting Disability," --- Click Here
http://townhall.com/columnists/michaelbarone/2012/12/03/men_find_careers_in_collecting_disability?utm_source=thdaily&utm_medium=email&utm_campaign=nl
 Jensen Comment
 Even after one or more spine surgeries it is virtually impossible to determine whether remaining pain is real or faked. I can claim first hand that after 15 spine surgeries and metal rods from neck to hip that my wife's suffering is real. However, I know of at least two instances where the disability careers are faked in order to get monthly lifetime disability payments and access to Medicare long prior to age 65. This seems to be one of the unsolvable problems in society that becomes even more problematic when a disability career is easier to enter than a job-like career

Ted Talk:  Heather Brooke: My battle to expose government corruption --- Click Here
http://www.ted.com/talks/heather_brooke_my_battle_to_expose_government_corruption.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TEDTalks_video+%28TEDTalks+Main+%28SD%29+-+Site%29

"The Budget Baseline Con:  How Washington fools the public about spending 'cuts.'," The Wall Street Journal, December 4, 2012 ---
http://professional.wsj.com/article/SB10001424127887323401904578157233680080150.html?mod=djemEditorialPage_t&mg=reno64-wsj

If the fiscal cliff talks make Lindsay Lohan look like a productive member of society, perhaps it's because President Obama and John Boehner are playing by the dysfunctional Beltway rules. The rules work if you like bigger government, but Republicans need a new strategy, which starts by exposing the rigged game of "baseline budgeting."

Both the White House and House Republicans are pretending that their goal is "reducing the deficit," which they suggest means making real spending choices. They are talking about a "$4 trillion plan," or something, regardless of how that number is reached.

Here's the reality: Those numbers have no real meaning because they are conjured in the wilderness of mirrors that is the federal budget process. Since 1974, Capitol Hill's "baseline" has automatically increased spending every year according to Congressional Budget Office projections, which means before anyone has submitted a budget or cast a single vote. Tax and spending changes are then measured off that inflated baseline, not in absolute terms.

The most absurd current example is Mr. Obama's claim that his "$4 trillion" plan reduces the deficit by about $800 billion over 10 years by ending the wars in Iraq and Afghanistan. But those "savings," as he calls them, are measured against a White House budget office spending baseline that is fictional. Those wars are already being unwound and everyone knows the money will never be spent. But they are called "savings" to gull the public and make the deficit reduction add up to a large-sounding $4 trillion.

The baseline scam also exists in many states, and no less a Democrat than New York Governor Andrew Cuomo denounced it in 2011 as a "sham" and "deceptive." He wrote in the New York Post that state spending was "dictated by hundreds of rates and formulas that are marbleized throughout New York State laws that govern different programs—formulas that have been built into the law over decades, without regard to fiscal realities, performance or accountability." Then he proceeded to continue baseline budgeting.

In Washington, Democrats designed this system to make it easier to defend annual spending increases and to portray any reduction in the baseline as a spending "cut." Chris Wallace called Timothy Geithner on this "gimmick" on "Fox News Sunday" this week, only to have the Treasury Secretary insist it's real.

Republicans used to object to this game, but in recent years they seem to have given up. In an October 2010 speech at the American Enterprise Institute, House Speaker Boehner proposed that "we ought to start at square one" and rewrite the 1974 budget act. But he then dropped the idea, and in the current debate the GOP is putting itself at a major disadvantage by negotiating off the phony baseline. In a press release Tuesday, his own office advertised the need for "spending cuts" that aren't even cuts.

If Republicans really want to slow the growth in spending, they need to stop playing by Beltway rules and start explaining to America why Mr. Obama keeps saying he's cutting spending even as spending and deficits keep going up and up and up.

Bob Jensen's threads on how governmental accounting is all done with smoke and mirrors ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

The Wonk (Professor) Who Slays Washington

Insider trading is an asymmetry of information between a buyer and a seller where one party can exploit relevant information that is withheld from the other party to the trade. It typically refers to a situation where only one party has access to secret information while the other party has access to only information released to the public. Financial markets and real estate markets are usually very efficient in that public information is impounded pricing the instant information is made public. Markets are highly inefficient if traders are allowed to trade on private information, which is why the SEC and Justice Department track corporate insider trades very closely in an attempt to punish those that violate the law. For example, the former wife of a partner in the auditing firm Deloitte & Touche was recently sentenced to 11 months exploiting inside information extracted from him about her husband's clients. He apparently did was not aware she was using this inside information illegally. In another recent case, hedge fund manager Raj Rajaratnam was sentenced to 11 years for insider trading.

Even more commonly traders who are damaged by insiders typically win enormous lawsuits later on for themselves and their attorneys, including enormous punitive damages. You can read more about insider trading at
http://en.wikipedia.org/wiki/Insider_trading

Corporate executives like Bill Gates often announce future buying and selling of shares of their companies years in advance to avoid even a hint of scandal about exploiting current insider information that arises in the meantime. More resources of the SEC are spent in tracking possible insider information trades than any other activity of the SEC. Efforts are made to track trades of executive family and friends and whistle blowing is generously rewarded.

Question
Trading on insider information is against U.S. law for every segment of society except for one privileged segment that legally exploits investors for personal gains by trading on insider information. What is that privileged segment of U.S. society legally trades on inside information for personal gains?

Hints:
Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television --- CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider" is the most depressing segment I've ever watched on television ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
Also see http://financeprofessorblog.blogspot.com/2011/11/congress-trading-stock-on-inside.html

Jensen Comment

• It came as no surprise that many (most?) members of the U.S. House of Representatives and the U.S. Senate that writes the laws of the land made it illegal for to trade in financial and real estate market by profiting personally on insider information not yet available, including pending legislation that they will decide, wrote themselves out of the law making it legal for them to personally profit from trading on insider information. What came as a surprise is how leaders at the very top of Congress make millions trading on inside information with impunity and well as immunity.
   
• The Congressional  leader that comes off the worst in this Sixty Minutes "Insider" segment is former House Speaker and current Minority leader Nancy Pelosi. When confronted with specific facts on how she and her husband made some of their insider trading millions she fired back at reporter Steve Kroft with an evil glint saying what is tantamount to:  "How dare you question me about insider trades that are perfectly legal for members of Congress. Who are you to question my ethics about exploiting our insider trading privileges. Back off Steve or else!" Her manner can be extremely scary. Other Democratic Party members of Congress come off almost as bad in terms of insider trading for personal gain.
   
• Current Speaker of the House, John Boehner, is more subtle. He denies making any of his personal portfolio investment decisions and denies communicating with the person he hires to make such decision. However, that trust investor mysteriously makes money for Rep. Boehner using insider information obtained mysteriously. Other Republican members of Congress some off even worse in terms of insider trading.
   
• Members of Congress on powerful committees regularly make insider profits on legislation currently being written into the law that is still being held secret from the public. One of my heroes, former Senator Judd Gregg, is no longer my hero.
   
• Everybody knows that influence peddling in Congress by lobbyists, many of them being former members of Congress, is a dirty business of showering gifts on current members of Congress. What is made clear, however, is that these lobbyists are personally getting something in return from friendly members of Congress who pass along insider information to lobbyists. The lobbyists, in turn, peddle this insider information back to the private sector, such as hedge fund managers, for a commission. Moral of story:  Voters do not stop insider trading by a member of Congress by voting him or her out of office if they become peddlers of insider information obtained, as lobbyists, from their old friends still in the Congress.
   
• Five out of 435 members of the House of Representatives are seeking to sponsor a bill to make it illegal for representatives and senators to profit from trading on inside information. The Sixty Minutes show demonstrates how Nancy Pelosi, John Boehner, and other House leaders have buried that effort so deep in the bowels of the legislative process that there's no chance in hell of stopping insider trading by members of Congress. Insider trading is a privilege that attracts unethical people to run for Congress.

Watch the "Insider" Video Now While It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody

"They have legislated themselves as untouchable as a political class . . . "
"The Wonk (Professor) Who Slays Washington," by Peter J. Boyer, Newsweek Magazine, November 21, 2011, pp. 32-37 ---
http://www.thedailybeast.com/newsweek/2011/11/13/peter-schweizer-s-new-book-blasts-congressional-corruption.html

In the Spring of 2010, a bespectacled, middle-aged policy wonk named Peter Schweizer fired up his laptop and began a months-long odyssey into a forbidding maze of public databases, hunting for the financial secrets of Washington’s most powerful politicians. Schweizer had been struck by the fact that members of Congress are free to buy and sell stocks in companies whose fate can be profoundly influenced, or even determined, by Washington policy, and he wondered, do these ultimate insiders act on what they know? Yes, Schweizer found, they certainly seem to. Schweizer’s research revealed that some of Congress’s most prominent members are in a position to routinely engage in what amounts to a legal form of insider trading, profiting from investment activity that, he says, “would send the rest of us to prison.”

Schweizer, who is 47, lives in Tallahassee with his wife and children (“New York or D.C. would be too distracting—I’d never get any writing done”) and commutes regularly to Stanford, where he is the William J. Casey research fellow at the Hoover Institution. His circle of friends includes some bare-knuckle combatants in the partisan frays (such as conservative media impresario Andrew Breitbart), but Schweizer himself comes across more as a bookish researcher than the right-wing hit man liberal critics see. Indeed, he sounds somewhat surprised, if gratified, to have attracted attention with his findings. “To me, it’s troubling that a fellow at Stanford who lives in Florida had to dig this up.”

It was in his Tallahassee office that Schweizer began what he thought was a promising research project: combing through congressional financial-disclosure records dating back to 2000 to see what kinds of investments legislators were making. He quickly learned that Capitol Hill has quite a few market players. He narrowed his search to a dozen or so members—the leaders of both houses, as well as members of key committees—and focused on trades that coincided with big policy initiatives of the sort that could move markets.

While examining trades made around the time of the 2003 Medicare overhaul, Schweizer experienced what he calls his “Holy crap!” moment. The legislation, which created a new prescription-drug entitlement, promised to be a huge boon to the pharmaceutical industry—and to savvy investors in the Capitol. Among those with special insight on the issue was Massachusetts Sen. John Kerry, chairman of the health subcommittee of the Senate’s powerful Finance Committee. Kerry is one of the wealthiest members of the Senate and heavily invested in the stock market. As the final version of the drug program neared approval—one that didn’t include limits on the price of drugs—brokers for Kerry and his wife were busy trading in Big Pharma. Schweizer found that they completed 111 stock transactions of pharmaceutical companies in 2003, 103 of which were buys.

“They were all great picks,” Schweizer notes. The Kerrys’ capital gains on the transactions were at least $500,000, and as high as $2 million (such information is necessarily imprecise, as the disclosure rules allow members to report their gains in wide ranges). It was instructive to Schweizer that Kerry didn’t try to shape legislation to benefit his portfolio; the apparent key to success was the shaping of trades that anticipated the effect of government policy.

Continued in article

Jensen Questions
If all these transactions were only by chance profitable, why is it that the representatives, senators, and their trust investors always profited and never lost in dealings connected to inside information?

More importantly why did representatives and senators who write the laws have to write themselves in as exempt from insider trading laws?

Why aren't national leaders like Nancy Pelosi, John Kerry, and John Boehner who vigorously deny inside trading actively seeking to overturn laws that exempt representatives and senators from insider trading lawsuits? Why do they still hold themselves above their own law?

Why have representatives and senators buried reform legislation concerning their insider trading exemption so deep in the legislative process that there's zero hop of reforming themselves against abuses of insider trading and exploitation of other investors?

Watch the "Insider" Video Now While It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody

THIS IS HOW YOU FIX CONGRESS!!!!!
If you agree with the above, pass it on.
Warren Buffett, in a recent interview with CNBC, offers one of the best quotes about the debt ceiling:"I could end the deficit in 5 minutes," he told CNBC. "You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election. The 26th amendment (granting the right to vote for 18 year-olds) took only 3 months & 8 days to be ratified! Why? Simple! The people demanded it. That was in1971...before computers, e-mail, cell phones, etc. Of the 27 amendments to the Constitution, seven (7) took 1 year or less to become the law of the land...all because of public pressure.Warren Buffet is asking each addressee to forward this email to a minimum oftwenty people on their address list; in turn ask each of those to do likewise. In three days, most people in The United States of America will have the message. This is one idea that really should be passed around.*Congressional Reform Act of 2011......
1. No Tenure / No Pension. A Congressman collects a salary while in office and receives no pay when they are out of office.

2.. Congress (past, present & future) participates in Social Security. All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system,and Congress participates with the American people. It may not be used for any other purpose..

3. Congress can purchase their own retirement plan, just as all Americans do...

4. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.

5. Congress loses their current health care insurance and participates in the same health care plan as the American people.

6. Congress must equally abide by all laws they impose on the American people..

7. All contracts with past and present Congressmen are void effective 1/1/12. The American people did not make this contract with Congressmen. Congressmen made all these contracts for themselves. Serving in Congress is an honor,not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and back to work.


If each person contacts a minimum of twenty people then it will only take
three days for most people (in the U.S.) to receive the message. Maybe it is
time.

PLEASE PASS THIS ON

Read more: http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
 

Holman Jenkins of The Wall Street Journal contends that in total representatives and senators do not perform better (possibly even worse) than average investors in the stock market ---
http://online.wsj.com/article/SB10001424052970204190504577039834018364566.html?mod=djemEditorialPage_t
What he does not mention is that opportunities to trade on inside information is generally infrequent and often limited to a few members of a particular legislative committee receiving insider testimony or preparing to release committee recommendations to the legislature.

Jenkins misses the entire point of insider trading. If it was a daily event in the public or private sector it would be squashed even harder than it is now being squashed, because rampant insider trading would drive the public away from the financial and real estate markets. The trading markets survive this cancer because it is relatively infrequent when it does take place among corporate executives (illegally) or our legislators (legally).

If the law passes in its current form, insider trading by Congress will not become illegal.
"Congress's Phony Insider-Trading Reform:  The denizens of Capitol Hill are remarkable investors. A new law meant to curb abuses would only make their shenanigans easier," by Jonathan Macey, The Wall Street Journal, December 13, 2011 ---
http://online.wsj.com/article/SB10001424052970203413304577088881987346976.html?mod=djemEditorialPage_t

Members of Congress already get better health insurance and retirement benefits than other Americans. They are about to get better insider trading laws as well.

Several academic studies show that the investment portfolios of congressmen and senators consistently outperform stock indices like the Dow and the S&P 500, as well as the portfolios of virtually all professional investors. Congressmen do better to an extent that is statistically significant, according to studies including a 2004 article about "abnormal" Senate returns by Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski in the Journal of Financial and Qualitative Analysis. The authors published a similar study of the House this year.

Democrats' portfolios outperform the market by a whopping 9%. Republicans do well, though not quite as well. And the trading is widespread, although a higher percentage of senators than representatives trade—which is not surprising because senators outperform the market by an astonishing 12% on an annual basis.

These results are not due to luck or the financial acumen of elected officials. They can be explained only by insider trading based on the nonpublic information that politicians obtain in the course of their official duties.

Strangely, while insider trading by corporate insiders has long been the white collar crime equivalent of a major felony, the Securities and Exchange Commission has determined that insider trading laws do not apply to members of Congress or their staff. That is because, according to the SEC at least, these public officials do not owe the same legal duty of confidentiality that makes insider trading illegal by nonpoliticians.

The embarrassing inconsistency was ignored for years. All of this changed on Nov. 13, 2011, after insider trading on Capitol Hill was the focus of CBS's "60 Minutes." The previously moribund "Stop Trading on Congressional Knowledge Act" (H.R. 1148), first introduced in 2006, was pulled off the shelf and reintroduced. The bill suddenly had more than 140 sponsors, up from a mere nine before the show.

The "Stock" Act, as it is called, would make it illegal for members of Congress and staff to buy or sell securities based on certain nonpublic information. It would toughen disclosure obligations by requiring congressmen and their staffers to report securities trades of more than $1,000 to the clerk of the House (or the secretary of the Senate) within 90 days. And it would bring the new cottage industry in Washington, the so-called political intelligence consultants used by hedge funds, under the same rules that govern lobbyists. These political intelligence consultants are hired by professional investors to pry information out of Congress and staffers to guide trading decisions.

Publicly, House members echo bill sponsor Rep. Louise Slaughter (D., N.Y) in saying things like: "We want to remove any current ambiguity" about whether insider trading rules apply to Congress. Or as co-sponsor Rep. Timothy Walz (D., Minn.) put it: "We are trying to set the bar higher for members of Congress."

On closer examination, it appears that what Congress really wants is to keep making the big bucks that come from trading on inside information but to trick those outside of the Beltway into believing they are doing something about this corruption. For one thing, the rules proposed for Capitol Hill are not like those that apply to the rest of us. Ours are so broad and vague that prosecutors enjoy almost unfettered discretion in deciding when and whom to prosecute.

Congress's rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered.

At a Dec. 6 House hearing, SEC enforcement chief Robert Khuzami opined that any new rules for Congress should not apply to ordinary citizens. He worried that legislators might "narrow current law and thereby make it more difficult to bring future insider trading actions against individuals outside of Congress."

This don't-rock-the-boat approach serves the interests of the SEC because it maximizes the commission's power and discretion, but it's not the best approach. The sensible thing to do would be to rationalize the rules by creating a clear definition of what constitutes insider trading, and then apply those rules to everyone on and outside Capitol Hill.

If the law passes in its current form, insider trading by Congress will not become illegal. I predict such trading will increase because the rules of the game will be clearer. Most significantly, the rule proposed for Congress would not involve the same murky inquiry into whether a trader owed or breached a "fiduciary duty" to the source of the information that required that he refrain from trading.

Continued in article

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

Patent Troll --- http://en.wikipedia.org/wiki/Patent_troll

"Intellectual Ventures: Don't Mind Our 2000 Shell Companies, That's Totally Normal from the nothing-nefarious-at-all dept," TechDirt, December 20, 2012 ---
http://www.techdirt.com/articles/20121220/02365821447/intellectual-ventures-dont-mind-our-2000-shell-companies-thats-totally-normal.shtml

Back in 2010, we wrote about a report suggesting that Intellectual Ventures was using somewhere around 1000 shell companies to hide many of its patent shakedown attempts. For years, IV itself liked to say that it wasn't involved in any patent litigation directly (that changed not so long ago), but we had seen some IV patents showing up from some small patent trolls, where it was impossible to determine who actually controlled the patent or the lawsuits. However, at times, other companies have argued that the shell lawsuits were really IV in disguise.

A few months ago, we wrote about an attempt to crowdfund an investigation into all of IV's shell companies. While that attempt to raise money did not reach its goal, it has helped put renewed attention on IV's use of a massive number of shell companies. In response, IV has been trying very hard to play down the whole thing. It published a ridiculous blog post arguing that the use of thousands of shell companies is just a normal business procedure:

This is a common practice for asset management firms, and it’s just common sense. Do stock brokers broadcast tips to their competitors? Does Warren Buffet tell the world where he’s investing next? Does Disney broadcast which plots of land it is planning to buy for its next theme park? Of course not, and IV takes a similar approach to our investments.

Ah, sure, this is all to throw other companies off the scent of what IV is "investing" in. That makes sense if IV were actually an investment company, rather than a shakedown play. The idea that publicly stating what patents it owns would somehow "broadcast tips" to "competitors" is ridiculous. Who out there is really an IV competitor? No, what IV is almost certainly worried about is that, if the extent of its activities were known, there would be more fodder for real and necessary reform against trolling -- and, more importantly, it's worried about tipping off the companies it's about to go after. It's not about competition -- it's about avoiding a smart company going to court to get a declaratory judgment against IV, which they admit later on in the post:

Moreover, were we to publish the entirety of our holdings we, or any other company for that matter, could find ourselves mired down in a series of tactical declaratory judgments and reexaminations.

Shocking. Perhaps if you didn't go around demanding huge sums of money from companies with a giant stack of vague and overly-broad patents you wouldn't face a series of declaratory judgments and re-exams.

In fact, no one has ever suggested that transparency is needed in the real estate world, yet properties are routinely held in the name of holding companies. When it comes to property ownership, patents shouldn’t be held to a different of set of rules

Well, if property holding companies routinely used their assets to shake down every other real estate owner out there, perhaps there would be calls for the practice to end. Plus, sorry, patents are not "property" like real estate is property. And, in fact, this is the key to IV's entire business model. If patents properly delineated the boundaries of what the patents covered, there wouldn't be much room for trolling. But, instead, IV relies on the fact that patents are broad and vague and "might" apply to all sorts of things.

In response to an article about all of this, IV also claimed that anyone who wanted to know about what patents IV holds can simply "search the USPTO's public database." Of course, this is a snarky and misleading answer for a number of reasons. First, it ignores the shell company patents. Second, it assumes that the USPTO's search actually works well (it does not).

Thankfully, however, the good folks at PlainSite, who try to shine some light on the hidden corners of the legal system, decided to take Intellectual Ventures up on its offer -- and actually went through the data to see what was lurking:

Like all of the USPTO's on-line systems, the assignment database is a technological abomination--sadly ironic for the agency that effectively manages the nation's technology rights. (The USPTO does deserve credit for making raw XML data available through Google, which is where our project began.) It must be noted that Intellectual Ventures would have had a much harder time lurking in the shadows all these years if government information technology systems, such as the USPTO assignment database and different states' corporation databases, were kept up to par. In fact, its business model would likely be impossible, as the courts would be likely to label the company as a vexatious litigant if they only knew how many lawsuits it filed.

In the end, after digging through the database, PlainSite has identified -- and released for all your enjoyment -- the names of what appear to be over 2,000 shell companies, though they admit that some of them may be fully independent. But... many of them apparently had "some obvious overlaps" like sharing "managing corporations, telephone numbers, and other factors." Oops. They're hoping not to "crowdfund" the efforts here, but rather to crowdsource the data. As they note, they're spreading this information, because "we hope that Congress and the courts take notice of one of the largest racketeering schemes ever perpetrated on the nation, with some of its richest billionaires acting more like thugs than visionaires."

Continued in article

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

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

"Profitable not-for-profits," New York Post, December 7, 2012 ---
http://www.nypost.com/p/news/opinion/editorials/profitable_not_for_profits_6tIH1u57fmmFSAW1SPJkMN

. . .

* Shirley Huntley, a state senator from Queens, founded an empty-shell nonprofit called The Parents Network right before she took office in 2006. She steered $30,000 in taxpayer money to her niece, who ran the group, and tried to send even more before she was arrested this year.

* Larry Seabrook, a former city councilman from Brooklyn, was convicted of funneling $1.5 million in taxpayer funds to his mistress, his sister, two brothers and other pals through a network of nonprofit groups he controlled. He faces up to 180 years in prison.

* Pedro Espada, the former state senator from The Bronx, was convicted of looting $545,000 from his federally funded nonprofit health clinic to pay for vacations, lavish birthday parties and theater tickets. He then tapped the nonprofit for another $1 million to cover his legal fees.

* Brian McLaughlin, a former Queens assemblyman and powerful labor leader, steered $95,000 meant for a local nonprofit Little League to pals of his, just one piece of the $3.1 million he stole from public and private enterprises. He got 10 years in prison for his crimes.

Weberman, of course, holds no elective office — but he is a leader in his community and has abused its trust.

Just like the others.

Happily, Gov. Cuomo has noticed the pattern, promoting legislation that would cap the often sky-high salaries at nonprofits that benefit from state funds.

But that won’t solve the whole problem.

Attorney General Eric Schneiderman has pursued abusers like Huntley, but since religious charities don’t have to register with the state, Weberman’s nonprofit wasn’t on the AG’s radar before this week.

That needs to change — fast.

Time to get cracking, Albany.

Question
What recent WSJ article reminds us of Hillary Clinton's great luck in cattle futures trading when her husband was Governor of Arkansas?

Background Reading
Hillary Rodham cattle futures controversy ($1,000 down yields $100,000 rake in) --- http://en.wikipedia.org/wiki/Hillary_Rodham_cattle_futures_controversy

"Executives' Good Luck in Trading Own Stock," by Susan Pulliam and Rob Barry, The Wall Street Journal, Noember 27, 2012 ---
http://professional.wsj.com/article/SB10000872396390444100404577641463717344178.html?mod=djemCFO_h

A timely share sale by two insiders at retailer Body Central Corp. BODY -1.44% this spring spared them a nearly $1.4 million drop in the value of their holdings in the chain.

Founder Jerrold Rosenbaum and chief merchandising officer Beth Angelo, his daughter, sold a combined $2.9 million of Body Central stock on May 1, May 2 and May 3. Later on May 3, after the market close, the company cut its 2012 earnings estimate. The next trading day, the stock plunged 48.5%.

A Body Central official said both executives' trades were part of preordained trading plans. The official said that Ms. Angelo set up a new plan for her father in March, a time when she wasn't aware of the trend that led to the lower estimate. The company wouldn't make either one available for an interview. Mr. Rosenbaum, who the company said is ailing, resigned from the board in May.

Corporate executives long have bought and sold shares of their own companies, and outside investors have long tracked such trades, in the belief that insiders have a particularly good feel for how companies are faring.

Executives can trade for entirely legitimate reasons, such as to raise money to meet a tax bill or simply to diversify. But of course they must avoid trading on nonpublic information, and that can lead to sticky situations, since executives do possess just such information much of the time.

Regulatory efforts to find a way around this conundrum and allow executives to trade, a Wall Street Journal analysis suggests, are so flawed they have left a confusing landscape that can both raise suspicions about trades that are innocent, and provide cover for others that are less so.

The Journal examined regulatory records on thousands of instances since 2004 when corporate executives made trades in their own company's stock during the five trading days before the company released material, potentially market-moving news.

Among 20,237 executives who traded their own company's stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much. Most executives have a mix of trades, some that look good in retrospect and others that do not.

The Journal also compared the trading of corporate executives who buy and sell their own companies' stock irregularly, dipping in and out, against executives who follow a consistent yearly pattern in their trading. It found that the former were much likelier to record quick gains.

Looking at executives' trading in the week before their companies made news, the Journal found that one of every 33 who dipped in and out posted average returns of more than 20% (or avoided 20% downturns) in the following week. By contrast, only one in 117 executives who traded in an annual pattern did that well.

"We've found a lot of evidence that these insiders do statistically much better than we'd expect," said Lauren Cohen, an associate professor of business administration at Harvard University who co-wrote a study published this year about the performance of insiders who time their trades. "The perch that they have—they not only have proximity to this private information, but they can actually affect the outcomes."

A Securities and Exchange Commission rule requires executives to report trades in their own company's stock within 48 hours. But getting a bead on trading by corporate executives has become more complicated, not less, in recent years, thanks to a proliferation of trading plans that provide for periodic buying or selling.

The arrangements, known as 10b5-1 plans, spell out certain times of the year, or certain target prices, when corporate executives intend to buy or sell shares of their own company. Executives who use such plans can trade even while they possess material nonpublic information about the company. And in the event they face suspicions of improper trading, having followed such a pre-established plan is a strong defense.

But the system has numerous shortcomings. Companies and executives don't have to file these trading plans with any federal agency. That means the plans aren't readily available for regulators, investors or anyone else to examine.

Moreover, once executives file such trading plans, they remain free to cancel or change them—and don't have to disclose that they have done so.

Finally, even when executives have such a preset plan, they are free to trade their companies' stock at other times, outside of it.

"Sometimes a 10b5-1 plan is legitimate and other times it's not, but there is no way of knowing because there is no disclosure of anything to investors," said a hedge-fund manager, David Berman of Berman Capital Management.

The SEC, asked for comment on the plans' limitations, cited the requirement for insiders to report trades within two days and added: "If the Commission were to consider requiring insiders to make disclosure ahead of trades, there would need to be careful consideration of the costs and benefits."

Continued in article

"Harvard Doctor Turns Felon After Lure of Insider Trading," by Bryan Gruley & David Voreacos, Bloomberg News, November 27, 2012 ---
http://www.bloomberg.com/news/2012-11-27/harvard-doctor-turns-felon-after-lure-of-insider-trading.html

From the age of six, Joseph F. “Chip” Skowron III aspired to be a doctor. At Yale, he earned both a medical degree and a doctorate in molecular and cellular biology, then qualified for Harvard’s elite, five-year residency program. Three years in, Skowron quit medicine for Wall Street. He and two partners started a group of health-care investment funds under the auspices of FrontPoint Partners LLC (MS), a hot new property in the exploding world of hedge funds.

Skowron was soon making millions of dollars a year. He built a gabled, 10,000-square-foot home on three acres in the nation’s hedge-fund capital, Greenwich, Connecticut. He assembled a small fleet of pricey cars, including a 2006 Aston Martin Vanquish and a 2009 Alfa Romeo Spider 8C. He also spent vacation time engaged in Third World humanitarian causes.

Today, Skowron, 43, is serving a five-year term for insider trading at the federal prison at Minersville, Pennsylvania. At FrontPoint, Skowron lied to his bosses and law enforcement authorities, cost more than 35 people their jobs and stooped to slipping envelopes of cash to an accomplice. FrontPoint is gone. Morgan Stanley, which once owned FrontPoint, is seeking more than $65 million from Skowron, whose net worth a year ago was $22 million. Until he’s a free man, his wife of 16 years will have to care for their four children and Rocky, their golden retriever, on her own.

Never Satisfied
“I always detected that he was reaching for something to gratify him,” said his half-sister, Cindi Kinney, in an interview. “It was always something else, whether it was going to medical school or learning the financial industry. He was always setting goals and reaching them -- and never being satisfied.”

Skowron himself told the judge who sentenced him in November 2011: “I was not aware of the changes that were happening in me that blurred the lines between right and wrong. They came very slowly, over many years.”

Continued in article

Read Deloitte's Glowing Audit Report o Autonomy
"H.P. Takes Huge Charge on ‘Accounting Improprieties’ by Michael J. De La Merced and Quentin Hardy, The New York Times, November 20, 2012 ---
http://dealbook.nytimes.com/2012/11/20/h-p-takes-big-hit-on-accounting-improprieties-at-autonomy/

Hewlett-Packard said on Tuesday that it had taken an $8.8 billion accounting charge, after discovering “serious accounting improprieties” and “outright misrepresentations” at Autonomy, a British software maker that it bought for $10 billion last year.

It is a major setback for H.P., which has been struggling to turn around its operations and remake its business.

The charge essentially wiped out its profit. In the latest quarter, H.P. reported a net loss of $6.9 billion, compared with a $200 million profit in the period a year earlier. The company said the improprieties and misrepresentations took place just before the acquisition, and accounted for the majority of the charges in the quarter, more than $5 billion.

Shares in H.P. plummeted nearly 11 percent in early afternoon trading on Tuesday, to less than $12.

Hewlett-Packard bought Autonomy in the summer of 2011 in an attempt to bolster its presence in the enterprise software market and catch up with rivals like I.B.M. The takeover was the brainchild of Léo Apotheker, H.P.’s chief executive at the time, and was criticized within Silicon Valley as a hugely expensive blunder.

Mr. Apotheker resigned a month later. The management shake-up came about one year after Mark Hurd was forced to step down as the head of H.P. after questions were raised about his relationship with a female contract employee.

“I’m both stunned and disappointed to learn of Autonomy’s alleged accounting improprieties,” Mr. Apotheker said in a statement. “The developments are a shock to the many who believed in the company, myself included. ”

Since then, H.P. has tried to revive the company and to move past the controversies. Last year, Meg Whitman, a former head of eBay, took over as chief executive and began rethinking the product lineup and global marketing strategy.

But the efforts have been slow to take hold.

In the previous fiscal quarter, the company announced that it would take an $8 billion charge related to its 2008 acquisition of Electronic Data Systems, as well as added costs related to layoffs. Then Ms. Whitman told Wall Street analysts in October that revenue and profit would be significantly lower, adding that it would take several years to complete a turnaround.

“We have much more work to do,” Ms. Whitman said at the time.

Hewlett-Packard continues to face weakness in its core businesses. Revenue for the full fiscal year dropped 5 percent, to $120.4 billion, with the personal computer, printing, enterprise and service businesses all losing ground. Earnings dropped 23 percent, to $8 billion, over the same period.

“As we discussed during our securities analyst meeting last month, fiscal 2012 was the first year in a multiyear journey to turn H.P. around,” Ms. Whitman said in a statement. “We’re starting to see progress in key areas, such as new product releases and customer wins.”

The strategic troubles have weighed on the stock. Shares of H.P. have dropped to less than $12 from nearly $30 at their high this year.

The latest developments could present another setback for Ms. Whitman’s efforts.

When the company assessed Autonomy before the acquisitions, the financial results appeared to pass muster. Ms. Whitman said H.P.’s board at the time – which remains the same now, except for the addition of the activist investor Ralph V. Whitworth – relied on Deloitte’s auditing of Autonomy’s financial statements. As part of the due diligence process for the deal, H.P. also hired KPMG to audit Deloitte’s work.

Neither Deloitte nor KPMG caught the accounting discrepancies. Deloitte said in a statement that it could not comment on the matter, citing client confidentiality. “We will cooperate with the relevant authorities with any investigations into these allegations,” the accounting firm said.

Hewlett-Packard said it first began looking into potential accounting problems in the spring, after a senior Autonomy executive came forward. H.P. then hired a third-party forensic accounting firm, PricewaterhouseCoopers, to conduct an investigation covering Autonomy sales between the third quarter 2009 and the second quarter 2011, just before the acquisition.

The company said it discovered several accounting irregularities, which disguised Autonomy’s actual costs and the nature of the its products. Autonomy makes software that finds patterns, data that is used by companies and governments.

H.P. said that Autonomy, in some instances, sold hardware like servers, which has higher associated costs. But the company booked these as software sales. It had the effect of underplaying the company’s expenses and inflating the margins.

“They used low-end hardware sales, but put out that it was a pure software company,” said John Schultz, the general counsel of H.P. Computer hardware typically has a much smaller profit margin than software. “They put this into their growth calculation.”

An H.P. official, who spoke on background because of ongoing inquiries by regulators, said the hardware was sold at a 10 percent loss. The loss was disguised as a marketing expense, and the amount registered as a marketing expense appeared to increase over time, the official said.

H.P. also contends that Autonomy relied on value-added resellers, middlemen who sold software on behalf of the company. Those middlemen reported sales to customers that didn’t actually exist, according to H.P.

H.P. also claims that that Autonomy was taking licensing revenue upfront, before receiving the money. That improper assignment of sales inflated the company’s gross profit margins.pfront, before receiving the money. It had the effect, the company said, of significantly bolstering Autonomy’s gross margin.

Continued in the article

"Deloitte's 2011 Autonomy Independent Auditor "All Clear" Sign Off," by Tyler Durden, Zero Hedge, November 20, 2012 ---
http://goingconcern.com/post/accounting-news-roundup-accounting-improprieties-hit-hp-deloittes-all-clear-sign-stanford
Thank you Caleb Newquist for the heads up.

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF AUTONOMY CORPORATION PLC

"Analysts Had Questioned Autonomy’s Accounting Years Ago," by Holly Ellyatt and Deepanshu Bagchee, CNBC, November 21, 2012 ---
http://www.cnbc.com/id/49914072

Hewlett Packard’s surprising announcement of accounting irregularities at Autonomy caught the market by surprise on Tuesday and led to a nearly 12 percent decline in the company’s stock. But Autonomy’s accounting had been questioned by analysts years ago.

Paul Morland, technology research analyst at broking and advisory house Peel Hunt, told CNBC that he had noticed three red flags in Autonomy’s accounts in the years leading up to the HP [HPQ 11.71 ] acquisition: poor cash conversion, an inflated organic growth rate, and the categorizing of hardware sales as software.

Indeed, Morland said that in the six reports he had produced since 2008 in which he had mentioned Autonomy, the U.K.-based maker of data analysis software, he had mostly recommended selling the stock.

“There were periods when I wasn’t a seller,” he told CNBC on Wednesday, saying that his work as an analyst meant he had to be mindful of what the share price was discounting at the particular time of analysis — but his opinion changed in 2008.

“Sometime in 2009, I began to find out about the things we’ve been talking about and I moved towards a more negative stance. … I had a ‘sell’ recommendation on the stock for most of the three years leading up to the deal.”

Continued in article

"In HP-Autonomy debacle, many advisers but little good advice," by Nadia Damouni and Nicola Leske, Reuters, November 21, 2012 ---
http://www.chicagotribune.com/business/sns-rt-us-hp-results-advisersbre8ak0hl-20121121,0,1336024.story

. . .

HP Chief Executive Meg Whitman, who was a director at the company at the time of the deal, said the board had relied on accounting firm Deloitte for vetting Autonomy's financials and that KPMG was subsequently hired to audit Deloitte.

HP had many other advisers as well: boutique investment bank Perella Weinberg Partners to serve as its lead adviser, along with Barclays. Banking advisers on both sides of the deal were paid $68.8 million, according to data from Thomson Reuters/Freeman Consulting.

Barclays pocketed the biggest banker fee of the transaction at $18.1 million and Perella was paid $12 million. The company's legal advisers included Gibson, Dunn & Crutcher; Freshfields Bruckhaus Deringer; Drinker Biddle & Reath; and Skadden, Arps, Slate, Meagher & Flom, which advised the board.

On Autonomy's side of the table were Frank Quattrone's Qatalyst Partners, which specializes in tech deals and which picked up $11.6 million.

UBS, Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America were also advising Autonomy and were paid $5.4 million each. Slaughter & May and Morgan Lewis served as the company's legal advisers.

Continued in article

Jensen Question
Where have AECMers encountered the name "Frank Quattrone" in the past?

Answer
Largely in my postings concerning his trials on fraud charges ---
http://en.wikipedia.org/wiki/Quattrone

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

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

What a surprise. I thought she could gallop faster than the posse.
"U.S. Attorney: Ex-Dixon comptroller to plead guilty," Chicago Tribune, November 13, 2012 ---
http://www.chicagotribune.com/news/local/breaking/chi-us-atorney-exdixon-comptroller-to-plead-guilty-20121113,0,227018.story

Former Dixon comptroller Rita Crundwell plans to plead guilty Wednesday to a federal fraud charge that alleges she siphoned more than $53 million from the small northwestern Illinois city’s coffers, according to the U.S. Attorney's office.

The office released a statement saying Crundwell will change her plea to guilty at a hearing Wednesday morning before U.S. District Judge Philip G. Reinhard in federal court in Rockford.

It was unclear from the release how Crundwell’s guilty plea to the federal charge will impact separate state charges she faces for the same wrongdoing. She also faces 60 counts of theft tied to her alleged embezzlement from the city's accounts.

Crundwell is accused of stealing the money over two decades and using it to sustain a lavish lifestyle and a nationally renowned horse-breeding operation.

Federal authorities have auctioned off about 400 horses and a luxury motor home that Crundwell allegedly bought with the stolen city funds. If Crundwell is convicted, much of the money will be returned to Dixon – after the federal government takes its cut for caring for the horses for months.

"SEC Says Big Four Audit China-Affiliates Blocked Probe," by Joshua Gallu, Bloomberg News, December 3, 2012 ---
http://www.bloomberg.com/news/2012-12-03/sec-says-big-four-audit-china-affiliates-blocked-probe.html

"Auditors reject EU spending 18th year in a row," by Valentina Pop, EU Observer, 2012 ---
http://euobserver.com/institutional/118108

The EU's top auditing body has for the 18th year in a row said there are too many errors in how EU money is spent, particularly in subsidies going to farmers and fishermen.

"A farmer was granted a special premium for 150 sheep. On inspection the European Court of Auditors found that the beneficiary did not have any sheep," the annual report on EU spending released on Tuesday (6 November) said in a typical case.

The auditors also found an alleged fruit processing factory built with EU aid to the tune of €0.2 million which turned out to be a private residence in northern Italy.

Based on such on-the-spot tests, the auditors concluded that spent EU money in 2011 has an overall error rate of 3.9 percent, which is above the threshold needed for a clean bill of health to be recommended by the court.

A spokeswoman for the European Commission on Tuesday said the error rate does not mean the money is lost, because when fraud or irregularities are detected, the EU claims the money back from the member state.

Still, the report is welcome ammunition for spending hawks among member states who want to contribute less to the next EU budget, as negotiations are enter the final week ahead of a special summit on this topic.

"We all need confidence in how EU money spent. Today's EU Court of Auditors report undermines credibility of EU's financial management," the British representation to the EU wrote on its Twitter page.

The auditors' report is not binding on the European Parliament, the EU institution which signs off the EU's accounts year by year.

Still, political groups reacted according to national and ideological lines.

The British-dominated Conservatives and Reformists group said it made "risible" the EU commission's call for a five-percent rise in the next seven-year budget.

A dedicated commissioner for budgetary control was needed, British Conservative MEP Martin Callanan said - for instance by splitting the current portfolio which pools several tasks - once Croatia joins next year and has the right to put forward an extra commissioner.

The Socialist Group in the European Parliament took a milder stance, even though it noted it is the 18th year in a row the auditors find too many errors.

"We need to make sure that EU money is spent more effectively. But we won't achieve this goal by cutting spending. We need better controls," German Social-Democrat MEP Jens Geier said in a press statement.

"Theft of EU funds greater than reported," By Nikolaaj Nielsen, EU Observer, 2012 ---
http://euobserver.com/justice/117618

EU funds fraud is considerably higher than the €600 million reported by member states in 2010.

“The extent of the illicit activities that lead to losses in the EU budget is really shocking […] we assume that the real figure is considerably higher,” EU justice commissioner Viviane Reding told euro deputies in the civil liberty committee on Thursday (20 September).

Last year’s EU budget amounted to €125.5 billion but a large amount is allegedly stolen primarily in the areas of EU agricultural and regional development programmes. Member states manage 80 percent of the EU budget with national authorities in charge of how it is spent and who and how to prosecute suspected fraudsters.

But patchy judicial systems and low recovery rates prompted the commission to table an anti-fraud directive in July that would provide for an EU response to the problem. Those who commit the crime, she noted, often simply go to member states where prosecution is extremely low or non-existent.

Reding told deputies that the EU needs a “federal law” to ensure the money is better spent and deter criminals from seeking refuge in certain member states.

“If we have a federal budget with money coming from EU-27 member states then we also need a federal law to protect this budget,” she said.

The commissioner wants an automatic minimum six-month sentence and up to 5-years for the most serious offences. Fines would top €100,000 for stealing EU funds and €30,000 for money laundering. Member states would also have to extend time limitations on investigations that in some cases “are too short” and allow suspects to slip away.

A European public prosecutor, a position that the Lisbon Treaty allows to be created, would coordinate national prosecutors in tracking down and jailing suspects. The position has yet to be created and his or her role would be limited to coordinating member states primarily in anti-fraud cases.

But Reding supported the view of eventually expanding the powers of the future prosecutor even if it entails re-writing the treaty.

“I am favourable to have a treaty change but we need a step-by-step approach and do solely what the treaty allows us to do,” said Reding.

Some MEPs voiced their reservations over the plans.

British Liberal MEP Sarah Ludford said the automatic minimum sentence “undermines the freedom of national justice systems.”

She called for judicial discretion and warned that a required minimum sentence could force a judge to impose a six-month sentence even in the most minor of offences.

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

A jailhouse interview with Steve Washak, (otherwise known as the Cincinnati Boner King) who made millions selling “natural male enhancement” pills ---
http://longform.org/2012/10/09/the-rise-and-fall-of-the-cincinnati-boner-king/
Click on either the "Now" or "Later" hot words to read the article (not to be enhanced)

I respectfully decline to answer based on my constitutional rights.
Edith O'Brien taking the Fifth

MF Global
"A Year Later, All Eyes Still on 'Edie' ," by Aaron Lucchettl, Julie Steinberg, and Mike Spector, The Wall Street Journal, October 30, 2012 ---
http://professional.wsj.com/article/SB10001424052970204789304578088892963139264.html?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno-wsj

Who broke the law by raiding customer accounts at MF Global Holdings MFGLQ 0.00% Ltd.?

Investigators seem no closer to the answer than they were when the New York brokerage firm filed for bankruptcy exactly a year ago Wednesday, owing thousands of farmers and ranchers, hedge funds and other investors an estimated $1.6 billion. Their money was supposed to be stashed safely at MF Global, but company officials used much of it for margin calls and other obligations.

The last, best hope for a breakthrough in the probe is Edith O'Brien, the former assistant treasurer at MF Global. Working in the company's Chicago office, she was the go-to person for emergency money transfers as MF Global flailed for its life.

"She really kept the place running," says Matthew Gopin, MF Global's former head of internal audit for North America, referring to her everyday duties approving money transfers.

One transfer in particular has drawn outsize attention.

Ms. O'Brien hasn't budged from her refusal to cooperate with investigators unless she is shielded from prosecution, and in March she cited her constitutional right against self-incrimination in refusing to testify before a congressional panel.

Earlier this year, her lawyers told the government what she would testify to in exchange for an immunity deal. Those talks didn't go anywhere, and prosecutors subsequently signaled that she isn't a target of the criminal probe, according to a person involved in the case. She still could face civil charges from regulators.

It isn't clear if Ms. O'Brien knew that the transfers she approved in MF Global's final days violated U.S. rules on the use of customer funds or deepened a deficit in customer accounts. In some cases, Ms. O'Brien has told friends, she relied on calculations prepared by other MF Global employees that turned out to be wrong. In others, employees bungled transactions that she approved.

Friends say she has been worried about becoming the "fall guy" in the probe, especially since former MF Global Chief Executive Jon S. Corzine told lawmakers in December that she assured him the $175 million transfer was proper.

In private conversations, Ms. O'Brien has bristled at and disagreed with Mr. Corzine's comments. "They may have thought they had a chump, but they've got the wrong chump," she told several friends while drinking Chardonnay at a bar in Chicago, according to someone who was there.

One email from Ms. O'Brien reviewed by the Journal shows her informing Mr. Corzine of an MF Global account the money came from, as opposed to providing explicit assurances that the transfer was proper. The email didn't note, however, that the funds originated from a customer account.

Mr. Corzine declined to comment. Bankruptcy lawyers winding down the company have since found money to cover most of the estimated $1.6 billion customers couldn't get.

Continued in article

Lehman Repo 105/109 Scandal Involving Ernst & Young --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo

"Lehman Troubles Not Over For Ernst & Young," by Francine McKenna, Forbes, December 13, 2012 ---
http://www.forbes.com/sites/francinemckenna/2012/12/13/lehman-troubles-not-over-for-ernst-young/

Ernst & Young chalked up one small victory in New York State Supreme Court this week over claims by the New York Attorney General that the firm committed fraud leading to the failure of Lehman Brothers in 2008. Justice Jeffrey Oing said the New York Attorney General cannot claim $150 million in fees that Ernst & Young earned from Lehman Brothers Holdings from 2001-2008, when the firm filed bankruptcy.

Attorney David Ellenhorn of the NYAG claimed the fees represented “disgorgement” of “ill gotten gains” since the Attorney General says Ernst & Young repeatedly committed “fraudulent acts” as auditor of Lehman Brothers all those years. When Ellenhorn tried to explain this to the judge, Oing told Ellenhorn he had the wrong remedy.

Not good when you have to explain too much to the judge.

Fortunately for the New York Attorney General, the fees disgorgement strategy is Plan B. (It’s literally “Letter B” in the list of remedies the NYAG seeks for Ernst & Young’s alleged fraudulent acts.)  The New York Attorney General can still pursue its request that Ernst & Young “pay restitution, disgorgement and damages caused, directly or indirectly, by the fraudulent and deceptive acts and repeated fraudulent acts and persistent illegality complained of herein plus applicable pre-judgment interest.”

The New York Attorney General, you may recall from my previous reports, has the powerful Martin Act on its side. Back in December of 2010, The Wall Street Journal’s Ashby Jones at the Law Blog explained just how powerful this law is.

In the lawsuit filed against accounting firm Ernst & Young, Andrew Cuomo brought four claims, three of them under New York’s Martin Act, one of the most powerful prosecutorial tools in the country. Technically speaking, the Martin Act allows New York’s top law enforcer to go after wrongdoing connected to the sale or purchase of securities. Nothing too noteworthy there.

But what is noteworthy is the power the act confers upon its user. It enables him to subpoena any document from anyone doing business in New York and, if he so desires, keep an investigation entirely secret. People subpoenaed in Martin Act cases aren’t afforded a right to counsel or the right against self-incrimination. “Combined, the act’s powers exceed those given any regulator in any other state,” wrote Nicholas Thompson in this 2004 Legal Affairs article.

And we haven’t even gotten to the kicker. Courts in civil Martin Act cases have held that “fraud” under the Martin Act “includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or mislead the public, whether or not the product of scienter or intent to defraud.” In other words, in order to prove a Martin Act violation, the attorney general is not required to prove that the defendant intended to defraud anyone, only that a defrauding act was committed…

Mr. Ellenhorn, however, is all, “We’ll never make it…”, like Glum in Gulliver’s Travels. He worried aloud to the judge, according to Reuters, that the private class action litigation still facing Ernst & Young over Lehman will beat him to the punch in claiming compensation for investor losses.

In July of 2011, New York Federal Court Judge Lewis Kaplan decided to allow substantially all of the allegations against Lehman executives and at least one of the allegations against Ernst & Young to move forward to discovery and trial. That case is proceeding.

The remaining allegation in the class action litigation against Ernst & Young? That Ernst & Young had reason to know that Lehman’s 2Q 2008 financial statements could be materially misstated because of the extensive use of Repo 105 transactions.

Ellenhorn is worried because the NYAG’s remaining remedy is for investors’ damages. Investors, however, have their own ongoing lawsuits against Ernst & Young to recover the same damages. If the investors are successful first in their lawsuits, the state cannot pursue a double recovery for the same damages.

Ernst & Young claimed victory at the time of Judge Kaplan’s decision, too. To me, however, the threat of a trial is formidable. It’s costing Ernst & Young a lot of time and money to address.

Continued in article

Bob Jensen's threads on the Repo 105/109 scandal ---
 http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo 

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

MF Global Was Another Repo Scandal
"FASB WILL TAKE ANOTHER LOOK AT REPO ACCOUNTING," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, March 22, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/585
The FASB subsequently decided that most repos are to be booked as secured borrowings rather than repo sales.

"MF Global Mystery: The Beginning of the End or the End of The Beginning?" by Francine McKenna, re:TheAuditors, January 10, 2011 ---
http://retheauditors.com/2012/01/10/mf-global-mystery-the-beginning-of-the-end-or-the-end-of-the-beginning/

Bob Jensen's threads on the MF Global scandal ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search on the phrase "MF Global"

Teaching CaseFrom The Wall Street Journal Accounting Weekly Review on November 9, 2012

PricewaterhouseCoopers Added As Defendant in MF Global Customer Lawsuit
by: Aaron Lucchetti and Michael Rapoport
Nov 06, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Assurance Services, Audit Quality, Auditing, Auditing Services, Internal Controls

SUMMARY: "Lawyers representing customers of MF Global Holdings Ltd. added accounting firm PricewaterhouseCoopers LLP to a civil lawsuit against former executives of the failed securities firm, saying PwC failed to adequately audit MF Global's internal controls....PwC said it 'will defend this lawsuit vigorously,' and that its review of MF Global's internal controls was 'in accordance with professional standards.' The audit evidence confirmed that MF Global maintained customer assets in accordance with regulators' requirements as of the date of PwC's audit, the firm said...."

CLASSROOM APPLICATION: The article may be used in auditing classes to discuss business risk versus audit risk, engagements to audit financial reports versus reports on internal controls, litigation risks in attestation engagements, and internal control weaknesses.

QUESTIONS: 
1. (Introductory) Refer to the related article. What is MF Global? What internal control issues are associated with its bankruptcy?

2. (Introductory) Why has PriceWaterhouseCoopers (PwC) been included as a defendant in a lawsuit "against former executives of the failed securities firm" MF Global Holdings Ltd?

3. (Introductory) What is the specific claim against the work done by PwC and the resulting reports issued by the firm?

4. (Advanced) Define the terms business risk and audit risk.

5. (Advanced) Is there any evidence, as described in this article, that might have led PwC to increase its assessment of the business risk associated with its client MF Global? Would such an assessment impact the firm's assessment of audit risk and, therefore, audit procedures applied in the engagement? Explain.

6. (Advanced) Is it conceivable that PwC could conclude that MFGlobal's internal controls were adequate even after having been "copied on several MF Global internal-audit reports that indicated there were deficiencies in the firms' internal controls"? Explain your answer.

7. (Advanced) Is there a difference in responsibility associated with PwC's audit of MF Global's financial statements as compared to its report on MF Global's internal controls? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
MF Global Problems Started Years Ago
by Aaron Lucchetti and Julie Steinberg
Oct 29, 2012
Page: C1

 

"PricewaterhouseCoopers Added As Defendant in MF Global Customer Lawsuit," by Aaron Lucchetti and Michael Rapoport, The Wall Street Journal, November 6, 2012 ---
http://professional.wsj.com/article/SB10001424052970203846804578100663911321342.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Lawyers representing customers of MF Global Holdings Ltd. MFGLQ -5.56% added accounting firm PricewaterhouseCoopers LLP to a civil lawsuit against former executives of the failed securities firm, saying PwC failed to adequately audit MF Global's internal controls.

The amended suit, filed in Manhattan federal court Monday, reiterated accusations that Jon S. Corzine, MF Global's former chief executive, and other officials at the firm breached their fiduciary duty to MF Global customers and violated the Commodity Exchange Act. The suit also added a player with deep pockets to the mix as customers continue to try to recover an estimated $1.6 billion that went missing from their accounts when MF Global filed for bankruptcy Oct. 31, 2011.

PwC said it "will defend this lawsuit vigorously," and that its review of MF Global's internal controls was "in accordance with professional standards." The audit evidence confirmed that MF Global maintained customer assets in accordance with regulators' requirements as of the date of PwC's audit, the firm said, and both congressional testimony and a report from the bankruptcy trustee overseeing MF Global "support this conclusion."

Mr. Corzine is expected to contest the claims.

The suit, which seeks class-action status, detailed many of the same findings as a bankruptcy trustee, James Giddens, in a June report. The trustee has assigned his claims against former MF Global officers to plaintiffs' law firms to reduce the legal costs of recovering money.

The latest move comes as civil regulatory investigations continue. A criminal probe hasn't resulted in any charges.

About 36,000 customers of MF Global's U.S. brokerage have filed claims with Mr. Giddens's office. Many have received about 80 cents on the dollar of cash owed to them, while customers who invested on foreign exchanges have received only about five cents on the dollar, due to disputes about how the money should be treated under U.K. bankruptcy law.

"I'm optimistic we'll recover all the customer money and hopefully a good chunk of money for the general estate," said Andrew Entwistle, managing partner at Entwistle & Cappucci, one of the two firms leading the representation of MF Global's commodities customers.

The complaint alleges that PwC, as MF Global's auditor, said the firm's internal controls for safeguarding customer assets were adequate when in fact they weren't and that PwC should have known they weren't.

The complaint alleges PwC breached a fiduciary duty to MF Global and its customers and was negligent in its work at the firm. "If they had made sure the internal controls were adequate, there never would have been an invasion of customer funds," said Merrill Davidoff, a managing principal at Berger & Montague, which also is representing the commodities customers.

In 2010 and 2011, according to the complaint, PwC was copied on several MF Global internal-audit reports that indicated there were deficiencies in the firm's internal controls.

In 2010, according to an internal review by MF Global cited in the complaint, there were five instances in which the firm drew on customer funds to such a degree that it was "funded by clients."

That isn't necessarily against federal commodities rules, but it exposed the firms' clients to risks.

Continued in article

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

Bob Jensen's threads on MF Global ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search on the phrase "MF Global"

Question
Why do even prestigious colleges universities fudge upward when reporting where new students ranked in their high school or undergraduate classes?

Hint
It has to do with media rankings of universities and Lake Woebegone

"Another Rankings Fabrication," by Scott Jaschik, Inside Higher Ed, November 9, 2012, ---
http://www.insidehighered.com/news/2012/11/09/george-washington-u-admits-submitting-false-data-class-rank

George Washington University on Thursday became the third private university this year to admit that it has been reporting incorrect information about its new students -- both on the university's website and in information provided to U.S. News & World Report for rankings.

In the case of GW, the university -- for at least a decade -- has been submitting incorrect data on the class rank of new students. For the most recent class of new students, George Washington reported that 78 percent of new students were in the top 10 percent of their high school classes. The actual proportion of such students is 58 percent.

According to the university, the problem was identified over the summer when a new provost reorganized admissions functions, and reviewed admissions statistics. The university found that for applicants whose high schools don't calculate ranks (a growing trend among high schools), the university estimated the class rank, based on grades and other factors. That policy is not permitted by U.S. News. After finding out what had been going on with class rank, the university had an outside audit done of all admissions data that is reported (including SAT scores) and found no other problems.

George Washington's announcement follows the news this year that Claremont McKenna College and Emory University also reported incorrect data for years.

The guide that U.S. News sends to colleges specifically states that the institutions -- in calculating the percentage of students in the top 10 percent of their classes -- should include only students for whom the information is supplied by high schools.

In an interview, Forrest Maltzman, the senior vice provost who has been overseeing admissions since July, said that the university believes that the submission of incorrect class rank scores started more than a decade ago. but that the impact of this approach was minimal at first. Over the last 10 years, more high schools have stopped producing class ranks. Further, as GW has become more competitive in admissions, so more admitted students would have had high class ranks (or the grades that would have led GW to estimate that they were in the top 10 percent of their classes).

Continued in article

Bob Jensen's threads about media rankings of colleges and universities ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

Another Lake Woebegone Issue
"Is Grade Integrity a Fairness Issue?" by Jane Robbins, Inside Higher Ed, November 8, 2012 ---
http://www.insidehighered.com/blogs/sounding-board/grade-integrity-fairness-issue

A few weeks ago I received a survey invitation through an association listserve asking for information on faculty experiences with and responses to student requests for special treatment. Beyond a raw request for a grade change, many other types of request would affect grades: requests for extra credit, do-overs, late submissions, and so on that are outside of stated course policy.  Some survey questions asked about institutional attitudes toward offering/denying student requests.

I was glad to see this because its emphasis on policy and behavior—student, faculty, and institution—highlights that grades (and grade inflation) may be grounded in decisions that have little do with student performance or a belief in grading systems as a set of standards for differentiation. We’ve all heard anecdotal stories about adjuncts who give good grades to get good evaluations, or of an administrator changing a professor’s grade for a complaining student (or parent) who made no headway with the professor; there are several studies and books that provide support for these stories. Many schools allow students to “appeal” their grade, as if a grade is a punishment or a clear wrong to be righted (a not impossible, but likely rare, occurrence). At the extreme, law schools have retroactively raised grades for all students—or softened their grading parameters—in an effort to make students from their schools look, hmm, what?  As good as those from less rigorous schools?  The remarkable thing in this form of grade inflation is the sense that they “had” to do this to make students more competitive—that students were at an “unfair” disadvantage without easier grades.

Some schools, like Princeton, Cornell, and University of Minnesota, have made efforts in the opposite direction to try to curb grade inflation. Within these efforts is recognition of some of the many pressures, internal and external, that affect grades. You may have others to add, but at a minimum they include related pressure to:

• attract paying students
• retain paying students
• increase completion rates
• maintain a student’s eligibility for an extra-curricular role
• compensate for diverse levels of preparedness
• get good evaluations—for self-satisfaction, self-protection (avoid  retaliation for not raising grades), or job retention
• make students look more attractive to employers
• please people in a position to affect one’s welfare: funders, parents, students, politicians, colleagues
• minimize time and energy to uphold standards

Resisting pressure to let go of values is at the heart of all challenges to integrity. It can seem like more trouble than it’s worth, especially when the “cost” seems small (a B+ to an A-?) and the return seems high. Or it can seem like an insurmountable effort: many challenges to integrity, including to grade integrity, can look like no-win collective action problems when they are placed in the context of the larger, competitive environment. So it is helpful to come back to the question, is it fair?

Of course, fair to whom? Or, put another way, does grade integrity matter?

It seems that when we stop looking at our own (internal) interests for raising grades—and this would include all the pressures listed above­—it becomes harder to justify grade inflation because the benefits to us become a cost to others. If we lower the bar so that our students are in a more competitive position, does that make it unfair to those who earned the higher grades, or who went to schools that maintain higher standards? To employers who can no longer rely on us for an authentic—fair—representation of relative student achievement? To funders or policymakers who want graduates not merely in name? To students who will be left with an unrealistic sense of accomplishment, an arrogant sense of entitlement, or both, which may be a barrier to them in the future? To faculty themselves, who may feel coerced by the pressures to be lenient?

Behavior is the measure of integrity. We can say we have high standards, or the best students, but if we cheat on that for own interest, and don’t defend our standards, then our behavior conflicts with our espoused values, and is bound to harm others. Eventually, we may harm ourselves, in the form of lost trust from those who count on us for the very things we are set up—and claim—to do.

Continued in article

A Professor Asks Former Students to Pump Up His RateMyProfessor Scores
"UNC Law Prof Sends a ‘Rather Embarrassing’ Request, Asks Former Students to Help His Online Rating," by Christopher Danzig, Above the Law, February 23, 2012 ---
http://abovethelaw.com/2012/02/unc-law-prof-sends-a-rather-embarrassing-request-asks-former-students-to-help-his-online-rating/ 

With the proliferation of online rating sites, an aggrieved consumer of pretty much anything has a surprising range of avenues to express his or her discontent.

Whether you have a complaint about your neighborhood coffee shop or an allegedly unfaithful ex-boyfriend, the average Joe has a surprising amount of power through these sites.

Rating sites apparently even have the power to bring a well-known UNC Law professor to his electronic knees.

It’s not every day that a torts professor sends his former students a “rather embarrassing request” to repair his online reputation. It’s also certainly not every day that the students respond en masse….

On Tuesday, Professor Michael Corrado sent the following email to 2Ls who took his torts class last year, basically pleading for their help (the entire email is reprinted on the next page):

Continued in article

RateMyProfessor Site ---
http://www.ratemyprofessors.com/

The Number One Scandal in Higher Education is Grade Inflation
And RateMyProfessor is one of the main causes of grade inflation
http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor

Teaching Case from The Wall Street Journal Weekly Accounting Review on October 19, 2012

Broadway Show Was Duped, Prosecutors Say
by: Chad Bray and Jennifer Maloney
Oct 15, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Factoring, Fraud

SUMMARY: "In one of the biggest fraud accusations in Broadway history, a former stockbroker was charged Monday with duping the producers of "Rebecca: The Musical" into believing he had secured $4.5 million from a group of overseas investors-all of whom he had invented, federal prosecutors said....Mr. Hotton has been accused of...a separate alleged scheme to induce companies to advance $3.7 million to buy a portion of the purported accounts receivable for businesses run by Mr. Hotton and his wife...."

CLASSROOM APPLICATION: The article may be used in an accounting or MBA class to discuss fraud and factoring accounts receivable.

QUESTIONS: 
1. (Introductory) Summarize the fraud purportedly committed by Mr. Mark Hotton. What financial benefit did Mr. Hotton receive? Who paid those funds to Mr. Hotton?

2. (Advanced) What caution does this story give for Broadway shows or other artistic endeavors looking for funding?

3. (Advanced) Define the term "factoring" of accounts receivable. How did Mr. Hotton also allegedly try to use this business practice to fraudulently obtain funds from others?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Broadway Show Was Duped, Prosecutors Say," by Chad Bray and Jennifer Maloney, The Wall Street Journal, October 19, 2012 ---
http://professional.wsj.com/article/SB10000872396390443624204578058220817847906.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

In one of the biggest fraud accusations in Broadway history, a former stockbroker was charged Monday with duping the producers of "Rebecca: The Musical" into believing he had secured $4.5 million from a group of overseas investors—all of whom he had invented, federal prosecutors said.

Prosecutors alleged that Mark Hotton, a 46-year-old living on Long Island outside New York City, created four investors out of thin air, including an Australian named "Paul Abrams" who, in a fantastical twist, was said to have contracted malaria on what Mr. Hotton claimed was an African safari and died just as his wire transfer of funds was due.

In return for lining up these alleged investors as well as a fake $1.1 million loan, the show's producers paid more than $60,000 to Mr. Hotton or entities he controlled, prosecutors said.

Gerald Shargel, a lawyer for Mr. Hotton, declined to comment Monday.

Mr. Hotton wove a complex but sometimes sloppy web of deceit, using several fake email addresses and website domains, according to court records. He used one email address for communications from two different fictitious investors and later from assistants supposedly working for Mr. Abrams, giving updates on the fake investor's rapidly declining health.

Before Mr. Abrams's purported demise, Mr. Hotton received an $18,000 advance from the show's producers supposedly for taking the investor and his son on a safari, prosecutors said.

"Rebecca," based on the 1938 novel by Daphne du Maurier, opened in Vienna in 2006, but suffered setbacks as producers tried to bring it to Broadway, including a canceled production in London last year and a postponement in New York this spring. It had been slated to open on Broadway in November before it was postponed indefinitely Sept. 30, after the money Mr. Hotton had promised failed to show up.

The criminal investigation provides a backstage look into the secretive and sometimes murky relationships behind the funding of Broadway's increasingly expensive shows.

"I think it's a wake-up call to producers to be extra careful," said Steven Baruch, a longtime Broadway producer who wasn't involved in "Rebecca." But, he added, "It's such a unique piece of criminality that I don't think it scares substantial numbers of people away."

Ronald G. Russo, an attorney for lead "Rebecca" producer Ben Sprecher, said that when the producers first met Mr. Hotton, they believed him to be legitimate because he held a Series 7 license, required to be a stockbroker. According to the Financial Industry Regulatory Authority, which regulates the securities industry, he hasn't held that license since May.

"I guess going forward, you need to say, 'I want to meet this investor, I want to shake his hand, I want to see his passport,' " Mr. Russo said.

According to court documents, the show's producers reached out to Mr. Hotton in January after they realized they were about $4 million short of the capital they needed to open. The show had a budget of $12 million to $14 million.

Mr. Sprecher said he is committed to opening "Rebecca" on Broadway. But other producers expressed skepticism he will be able to find the investors he needs after having had trouble locking them down so far.

Continued in article

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

From the Scout Report on October 12, 2012

A report calls on Italy to address widespread government corruption

Italy needs anti-corruption authority: Transparency International
http://www.chicagotribune.com/news/sns-rt-us-italy-corruptionbre8941bb-20121005,0,988805.story 

Italy: open letter to Prime Minister Monti
http://www.transparency.org/news/feature/italy_open_letter_to_prime_minister_monti 

European Commission: Italy --- http://cordis.europa.eu/italy/ 

Italy and the European Union --- http://www.brookings.edu/research/books/2011/italyandtheeuropeanunion 

Reporters Without Borders Press Freedom Index 2011-2012 --- http://en.rsf.org/press-freedom-index-2011-2012,1043.html

Transparency International --- http://www.transparency.org/

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

From The Wall Street Journal Accounting Weekly Review on November 9, 2012

Price Tag Rising in Laundering Case
by: Margot Patrick
Nov 06, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Contingent Liabilities

SUMMARY: HSBC Holdings PLC of London has made provisions totaling $1.5 billion, and warns the total could reach much higher, after previously acknowledging "...some of the findings of a July report published by the U.S. Senate that alleged some of the bank's global operations were used by money launderers and potentially financed terrorism....HSBC's earnings bring to a close a dismal week of reporting from U.K. banks, dominated by charges and fines on activities in the boom years before the financial crisis."

CLASSROOM APPLICATION: HSBC reports under IFRS. The article may be used to highlight the differences between U.S. GAAP and IFRS in accounting for contingent liabilities, including terminology and the requirement to accrue the most likely amount of the liability when a range of possible outcomes exist (as opposed to the acknowledgement in U.S. GAAP that companies may report the minimum amount in a range of estimates).

QUESTIONS: 
1. (Advanced) What are provisions? What is the comparable term for these items in U.S. GAAP?

2. (Introductory) What admitted wrongdoing and current negotiations have led to U.K. bank HSBC recorded estimated liabilities totaling $1.5 billion?

3. (Introductory) Refer to the related article. What was the "good news in HSBC's third-quarter results"? Why must "one-time items" be excluded to find this good news?

4. (Advanced) Again, refer to the related article. What are the implications of these fines for wrongdoing on HSBC's business?

5. (Advanced) What is the difference between the $800 million provision which "overshadowed" the third-quarter results and the $1.5 billion total liability which might yet be exceeded once negotiations between the U.K. bank and the U.S. authorities are complete?

6. (Advanced) Access the HSBC disclosure of its interim report on which this article is based, available at http://www.hsbc.com/1/PA_esf-ca-app-content/content/assets/investor_relations/121105_interim_management_statement.pdf Refer to page 9. What factors were considered by HSBC in developing its accrual for these fines?

7. (Advanced) What is the implication of the amount of $1.5 billion given that HSBC has disclosed that the amounts owed could grow much higher? In offering your answer, cite a reference to authoritative requirements under IFRS, the basis on which HSBC reports.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
HSBC Haunted by Imperfect Past
by Simon Nixon
Nov 06, 2012
Page: C10

"Price Tag Rising in Laundering Case," by Margot Patrick, The Wall Street Journal, November 6, 2012 --- Click Here
http://professional.wsj.com/article/SB10001424052970204349404578100220595694086.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

LONDON—HSBC Holdings HSBA.LN -1.14% PLC on Monday said its provisional bill to settle money-laundering charges has climbed to $1.5 billion and could end up being far higher, as U.S. authorities continue to consider bringing criminal and civil charges against the bank.

HSBC had previously acknowledged some of the findings of a July report published by the U.S. Senate that alleged some of the bank's global operations were used by money launderers and potentially financed terrorism.

On Monday, the bank said it had added $800 million to the $700 million it provisioned in the summer for possible fines, but again warned they could end up being "significantly higher" than that total.

Chief Executive Stuart Gulliver said no settlement has been reached and that the timetable remains unclear. "We are actively engaged in discussions with U.S. authorities to try to reach a resolution, but there is not yet an agreement," he said. He added that the money-laundering allegations have "undoubtedly caused considerable reputational damage to HSBC." Now Reporting

Track the performances of 150 companies as they report and compare their results with analysts' estimates. Sort by date and industry. [image]

The new charges were disclosed as the bank reported a sharp fall in third-quarter net profit, to $2.5 billion from $5.22 billion a year earlier. But both figures are distorted by fluctuating valuations on HSBC's debt. Adjusted pretax profit—a closely watched figure that strips out those accounting items and is seen as a more accurate indicator of the bank's performance—more than doubled to $5.04 billion, from $2.24 billion. Analysts had been expecting adjusted pretax profit of about $5.45 billion. Underlying revenue rose 20%, to $16.13 billion, meeting analyst expectations and helped by a stronger quarter for investment banking. More

The Source: HSBC Cleans Up

The bank is aiming to shave billions of dollars from its cost base by slimming down its global retail banking empire and cutting jobs. Mr. Gulliver said the bank is ahead of schedule on these plans, though its cost-efficiency ratio of 63.7% in the quarter remains well above a target of 52% or lower by the end of next year.

Finance Director Iain Mackay said a stricter global regime around regulation and compliance is adding roughly $200 million to $300 million to HSBC's annual costs.

HSBC's earnings bring to a close a dismal week of reporting from U.K. banks, dominated by charges and fines on activities in the boom years before the financial crisis. In addition to their efforts to rebuild trust with customers and shareholders, the banks are also having to make major business and cultural changes to adapt to a tougher regulatory environment.

HSBC on Monday added more than $350 million to its ongoing bill for payment protection insurance, bringing its payment protection insurance provisions this year to $1.36 billion.

Continued in article

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

Let's Party Instead:  Weak Internal Controls at Northern Illinois University
Eight of the individuals were charged with felony theft, including a former senior administrator, Robert Albanese, who had been NIU's associate vice president for finance and facilities before he resigned in July while under investigation for misconduct.
"9 charged in NIU inquiry into selling of scrap," by Jodi S. Cohen, Chicago Tribune, October 17, 2012 ---
http://www.chicagotribune.com/news/education/ct-met-niu-employees-charged-20121017,0,7006727.story

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

"SEC Pursues Higher Corporate Penalty Caps," by Emily Chason, CFO Journal, October 12, 2012 ---
http://blogs.wsj.com/cfo/2012/10/12/sec-pursues-higher-corporate-penalty-caps/?mod=wsjpro_hps_cforeport

U.S. Securities and Exchange Commission Chairman Mary Schapiro is throwing her support behind a bill that would loosen restrictions on the size of penalties the market regulator can obtain from companies.

At the moment, the SEC can only force individuals accused of wrongdoing to pay a penalty of up to $150,000 per violation, while that penalty figure is up to $725,000 if an entity or corporation is accused of wrongdoing.

In a speech in Boston on Thursday, Schapiro said it is not enough.

“In most cases – particularly those involving large financial institutions – the maximum penalty is equal only to the amount of the wrongdoer’s ill-gotten gains,” Schapiro said. “We are not permitted to base our penalties on how much investors have lost.”

She said the SEC would benefit from a “bigger stick” such as the one proposed in a bill this July by Sen. Jack Reed, a Rhode Island Democrat and Sen. Charles Grassley, a Republican from Iowa.

The bill, called “The SEC Penalties Act of 2012” would raise the penalty per-violation to $1 million for individuals and $10 million for institutions. It would also let the SEC charge a penalty of up to three times the size of any ill-gotten gains, or up to the full amount of investors losses.

“Increasingly, the public believes that the SEC should be levying penalties that send an even stronger deterrent message,” Schapiro said.

The SEC has been recovering penalties at a record clip since the financial crisis, ordering more than $2.8 billion in penalties and disgorgements in 2011. Schapiro cited federal judge Frederic Block’s reluctant approval of a settlement between two former Bear Stearns hedge fund managers and the SEC in June as further evidence that penalty caps should rise. Judge Block had said the $1.05 million being paid to the SEC by the two managers was “chump change” compared to the $1.6 billion lost by the funds’ investors.

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

LIBOR --- http://en.wikipedia.org/wiki/Libor

Interest Rate Swap --- http://en.wikipedia.org/wiki/Interest_Rate_Swap

How to Value and Interest Rate Swap --- http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

"Rigged Libor Hits States-Localities With $6 Billion: Muni Credit," by Darrell Preston, Bloomberg News, October 9, 2012 ---
http://www.bloomberg.com/news/2012-10-09/rigged-libor-hits-states-localities-with-6-billion-muni-credit.html

The Libor bid-rigging scandal is poised to more than double the losses suffered by U.S. states and localities that bought $500 billion in interest-rate swaps before the financial crisis.

Manipulation of the London interbank offered rate cost issuers in the $3.7 trillion municipal-bond market at least $6 billion, according Peter Shapiro, managing director of Swap Financial Group in South Orange, New Jersey. Shapiro, a muni adviser for more than 20 years, specializes in the contracts.

Any taxpayer losses on derivative deals linked to Libor would add to at least $4 billion in payments that localities have already made to unwind backfiring interest-rate swaps sold by Wall Street banks as hedges to cut borrowing costs, data compiled by Bloomberg show.

“This number shows that banks can’t be trusted in this market,” said Marcus Stanley, policy director for Americans for Financial Reform, a Washington group that has pushed for stronger regulation of lenders. “Municipalities would be the group most likely victimized by the abuse of Libor.”

Issuers from New York to California have entered swap agreements, which are bets on the direction of interest rates. They attempted to lower borrowing costs while guarding against increasing rates by exchanging variable-rate loans for fixed ones. The strategy went awry when the Federal Reserve lowered its benchmark rate almost to zero to counter the 18-month recession that began in December 2007.

$500 Billion

Banks sold as much as $500 billion of swaps to municipalities before the credit crisis, according to a report by Randall Dodd, a researcher on the U.S. Financial Crisis Inquiry Commission. Shapiro based his calculation of losses on his estimate that $200 billion of the derivatives were tied to Libor and that banks suppressed the rate by 0.30 percentage points for three years.

Some U.S. municipal interest-rate swap payments were tied to Libor, the basis for more than $300 trillion in securities and loans worldwide, which is supposed to represent what banks pay each other for short-term loans. While traders have said for years that the benchmark was rigged, the suspicions were confirmed in June when Barclays Plc (BARC), Britain’s second-biggest lender by assets, paid a record 290 million-pound ($468 million) fine for manipulating the rate.

Raised Cost

Three-month dollar Libor, the most commonly used of the rates overseen by the British Bankers’ Association, was at 0.35025 percent yesterday, down from 0.58250 percent at the start of the year.

In the derivatives market, setting Libor too low raised what issuers had to pay to their swap counterparties. That drove up their costs and boosted the price of ending the arrangements.

Libor losses may spawn “a wave of lawsuits,” said Michael Greenberger, who studies derivatives at the University of Maryland’s law school in Baltimore. He said civil complaints, settlements with more banks, and, possibly, criminal indictments lie ahead.

“Libor was a bid-rigged rate,” said Greenberger. “Almost all interest-rate swaps begin with Libor.”

Five-State Probe

Since the Barclays settlement, governments around the U.S. have started their own probes, including attorneys general of at least five states, including Florida and Connecticut. Jaclyn Falkowski, spokeswoman for Connecticut Attorney General George Jepsen, and Jennifer Meale, spokeswoman for Florida Attorney General Pam Bondi, each confirmed the investigations. They declined to comment further.

“I have a board and they want to know what Libor is doing to us,” Brian Mayhew, chief financial officer of the San Francisco Bay area’s Metropolitan Transportation Commission, which finances roads and bridges, said in an interview.

The Libor investigations have implications for states and cities that are still contending with the fiscal legacy of the recession, which left them grappling with falling tax revenue and rising costs. States have had to deal with combined deficits of more than $500 billion since fiscal 2009, according to the Washington-based Center on Budget & Policy Priorities.

Baltimore, Maryland, and the New Britain Firefighters’ Benefit Fund, a pension for workers in the Connecticut city, had already sued more than a dozen banks before the Barclays settlement, alleging Libor was artificially suppressed as part of a conspiracy.

Rates Diverge

Baltimore claimed that Libor’s divergence from its historical correlation to overnight swaps showed manipulation. Since the financial crisis, the spread between three-month Libor and three-month swap rates has increased by 95 percent, data compiled by Bloomberg show.

Hilary Scherrer, a lawyer for the plaintiffs at Washington- based Hausfeld LLP, didn’t return a phone call seeking comment.

North Carolina is among states waiting for findings from federal investigations into the abuse of Libor, Treasurer Janet Cowell said in a Sept. 28 interview on Bloomberg Television.

“We don’t know what the manipulation was at this point,” Cowell said. “It’s a lot of analytics and data collection.”

Because each swap is unique in its pricing and structure, it is possible that not all issuers were harmed by the Libor rigging.

Libor Theory

“There’s a theory that the Libor manipulation lowered the interest rate we got paid on our swaps,” said Mayhew. “But the inverse of that is it also then lowered what we were paying on the variable-rate debt.”

Mayhew said he doesn’t expect a quick resolution.

“This is one of those things that won’t be solved in court, it won’t be solved by lawsuits,” said Mayhew. “This is going to be a global settlement where whoever is guilty of whatever gets in a room, makes a global settlement, and then that’s it.”

In muni trading last week, the yield on 10-year munis rated AAA dropped about 0.07 percentage point to 1.65 percent, data compiled by Bloomberg show. The index touched 1.63 percent on July 27, the lowest since at least January 2009, when data collection began. The U.S. bond market was closed yesterday for the Columbus Day holiday.

Following are pending sales:

Continued in article

Bob Jensen's threads on Derivative Financial Instruments Frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

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

"RESTORING CRIMINAL LIABILITY FOR FINANCIAL FRAUD," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, October 1, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/779 

The 2008 financial crisis was brought about by bank managers who finagled various transactions, primarily in the mortgage markets or the market for their securitizations, and obfuscated with accounting cover-ups and opaque disclosures.  Our governments have prosecuted very few of the criminals and have meted out fines at a fraction of the amounts that managers fraudulently.  Furthermore, as Jonathan Weil recently pointed out in his article titled “When Will the SEC Finally Go After Auditors?”, our governments have not brought a single action against an auditor for their involvement in the financial crisis.  What has happened to our institutions?  Is justice dead in America?  Does the current administration care, or is it just incompetent?

An interesting paper came our way recently that addresses these topics.  “Restoring Criminal Liability for Financial Fraud in the United States: A Moral and Legal Imperative” written by Catharyn Baird, CEO of EthicsGame; Don Mayer, University of Denver; and Anita Cava, University of Miami.  They presented the paper at the 2012 Academy of Legal Studies in Business conference and won the “Virginia Maurer Best Ethics Paper” award.  One may obtain a copy of the paper by emailing Kathi Quinn at kquinn@ethicsgame.com.

“Too big to fail” has become a mantra for our times, but frankly the phrase does not capture the essence of this story.  Matt Taibbi has referred to the era as “too crooked to fail,” and this seems more apropos.  Even better in our minds is the slogan “too in bed with government to fail.”  That, at least, provides an explanation for the impotence of our so-called watchdogs.  As Baird, Mayer, and Cava suggest, “Government may have gradually become the chief enabler of ‘too big to fail’ as well as ‘too big to jail.’”

This injustice has to end.  “Some high-level criminal prosecutions for fraud are essential to restore balance in the financial system, a balance that would come from a healthy fear of individual indictment rather than fines paid by the firm [i.e., shareholders].”

The authors of this paper explore the deficiency of various assumptions and theories, such as that of self-interest.  They point to Alan Greenspan’s confession that he relied on the self-interests of corporations to protect themselves and their shareholders.  We disagree with this point.  The real errors by Greenspan are his reification of the firm, thinking it can maximize utility, and that maximization of shareholder wealth is an application of the self-interest principle.  The truth is that CEOs and CFOs are maximizing their own utility and they care about shareholder wealth only to the extent that it coincides with their interests.  Greenspan should have known that managers do not maximize the wealth of shareholders.

We do however appreciate the authors’ discussion about ethical “blind spots,” applying a concept of bounded ethicality.  Business decision-making often must be quick, preventing a deeper analysis of ethical issues.  Individuals often put their ethical principles aside, complying with superiors or trying to win promotions or bonuses based on successful business transactions.  And individuals seldom pay attention to the conflicts of interest that frequently intersect their lives.  The authors illustrate these blind spots in their analysis of the crimes at Ameriquest, Countrywide, Lehman Brothers, Goldman Sachs, and Wells Fargo.

Sam Antar, former CFO at Crazy Eddie, would add the blind spots of auditors.  He says that many young accountants tell him about reprimands received from their superiors for actually “auditing”—even when they are just reading questions from a firm checklist.  They are not allowed to demonstrate any skepticism of their “client.”

Baird, Mayer, and Cava mention that too much faith has been put into self-regulation.  They point to reliance on the efficient market hypothesis instead of government oversight, the repeal of the Glass-Steagall Act, and the inertia that impedes the regulation of derivatives.  We would add that in our experience self-regulation always drifts into no regulation.  We need look no further than the accounting and auditing profession for a current example.

The best part of the paper is the analysis of “why current laws [and regulations] are either inadequate or under-enforced.”  Baird, Mayer, and Cava posit nine possible reasons for this state of affairs:

• “Some deception is accepted as part of marketplace behavior.  Caveat emptor is still a practical ‘default’ position.…the duty to favor the firm becomes almost automatic.”
• “Juries are mystified by the complexities of financial transactions.”
• The hurdle of the reasonable doubt standard is too high as “jurors are generally likely to find ‘reasonable doubt’” which masquerades for their ignorance.
• “Financial wrong-doing at the highest levels often has the protection of corporate attorneys representing the alleged wrong-doers.”  Ironically, these fees are paid by the shareholders who have been injured by the fraud.
• “The FBI’s resources are limited, and the Department of Justice can only prosecute the files that the FBI prepares; in addition, agents are promoted within the ranks based on successful convictions…”  The number of employees at the FBI and the SEC is simply too small to confront these demons.
• “There is the appearance that major civil lawsuits and government-sponsored settlements create sufficient accountability, but individuals are not held accountable as criminal laws would, and the firms themselves often pay just a portion of the monies they ‘earned’ as a result of deceptive practices.”
• “Neither political party has the nerve to alienate the major banks as potential funders of their political campaigns.”
• “Financial fraud detection requires a whole different type of training.  Creating these types of specialized agents takes significant time and money.”
• “It is possible that new criminal statutes need to be crafted that will meet the due process and vagueness concerns of” recent court cases.

Continued in article

Bob Jensen's threads on how white collar crime pays even if you get caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

More Woes for PwC
"New York Attorney General Sues JP Morgan And Raises Question Of What The "Auditor" Knew," by Francine McKenna, Forbes, October 2, 2012 ---
http://www.forbes.com/sites/francinemckenna/2012/10/02/new-york-attorney-general-sues-jp-morgan-and-raises-questions-of-what-the-auditor-knew/

Eric Schneiderman,the New York Attorney General, filed suit yesterday against JPMorgan Chase for the sins of Bear Stearns committed prior to the distressed purchase of Bear Stearns by the bank in 2008. Schneiderman plays a dual role here, as New York AG and co-head of the Obama administration Residential Mortgage Backed Securities Working Group. That task force was peeved, according to Alison Frankel for Thomson Reuters’ On The Case blog, that Schneiderman filed the suit Monday, jumping the gun on a joint federal-state press conference scheduled for Tuesday.

The NYAG complaint rests heavily on work done by others, in particular law firm Patterson Belknap Webb & Tyler, journalist Teri Buhl - who has been following this story since 2010 – and documentary filmmaker Nick Verbitsky. Patterson Belknap represents monoline mortgage insurers Ambac, Syncora and Assured Guaranty in their pursuit of Bear Stearns and now JPM.

Unfortunately, the NYAG complaint rests a bit too heavily on Patterson Belknap’s Ambac complaints (first and second amended versions) when discussing the role and responsibilities of global professional services firm PricewaterhouseCoopers.

From the Ambac Second Amended Complaint:

In August 2006, Bear Stearns’ external auditor, PriceWaterhouseCoopers (“PWC”), advised Bear Stearns that its failure to promptly review the loans identified as defaulting or defective was a breach of its obligations to the securitizations.232 PWC advised Bear Stearns to begin the “[i]mmediate processing of the buy-out if there is a clear breach in the PSA agreement to match common industry practices, the expectation of investors and to comply with the provisions in the PSA agreement.”

The New York Attorney General’s complaint repeats an error made by Patterson Belknap in the Ambac complaints and that was proliferated in many media reports when the Ambac suit was filed: PwC is not Bear Stearns external auditor. The error in the paragraph above and another that says “audit firm” PwC advised Bear Stearns in August of 2006 that “its failure to promptly evaluate whether the defaulting loans breached EMC’s representations and warranties to the securitization participants was contrary to “common industry practices, the expectation of investors and . . . the provisions in the [deal documents],””  misrepresents PwC’s role and the importance of its report, misleading the reader. The error wasn’t caught by the New York Attorney General’s office, potentially affecting its litigation strategy and the public’s perception of PwC.

The PwC report prepared for Bear Stearns is entitled, “UPB Break Repurchase Project – August 31, 2006.” Alison Frankel obtained a copy of the first few pages but that’s enough to see that PwC acted as a consultant to Bear Stearns, not its external auditor. This was not an audit report. It is the summary of recommendations to a client by a consultant who was paid for advice that likely wasn’t followed.

Continued in article

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

Teaching Case from The Wall Street Journal Accounting Weekly Review on October 5, 2012

Tyco's Breen Looks Back on Putting Out Fires
by: Joann S. Lublin
Oct 03, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Changes and Error Corrections, Accounting Irregularities, Cash Flow, Earnings Forecasts

SUMMARY: The article is prepared in an interview format with Edward Breen, who took the reins at Tyco after Dennis Kozlowski was fired and faced trial for taking $600 million in unauthorized compensation and illicit stock sales. The fraud was perpetrated by making accounting entries to reduce employee-loan accounts of three top employees. The resulting investigation led to restatement of many years' financial statements.

CLASSROOM APPLICATION: The article is useful to see the accounting information useful to a CEO and to cover accounting for corrections of errors.

QUESTIONS: 
1. (Introductory) Mr. Breen took over as CEO of Tyco in July 2002 and "faced a liquidity crisis and an accounting mess." Define liquidity. Refer to the related article and explain why the company faced this crisis.

2. (Advanced) Based on information in the article, how long did it take to resolve the "accounting mess"? What was the result of the company's inquiry? What does that result imply about the nature of the "accounting mess" Mr. Breen faced when he arrived at Tyco?

3. (Advanced) What is free cash flow? Why did Mr. Breen focus on that metric in his first year at Tyco?

4. (Introductory) What did Mr. Breen say about management providing information to Wall Street analysts? Answer the question after considering the tumultuous time that he arrived at Tyco and, later, the healthier times at the company.

5. (Introductory) What opinion does Mr. Breen hold about the current state of U.S. corporations and the U.S. economy? What governmental reform does he hope to see after the presidential election?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Tyco's 'Special Bonus' on Trial
by Mark Maremont
Oct 03, 2003
Page: C1

 

"Tyco's Breen Looks Back on Putting Out Fires," by Joann S. Lublin, The Wall Street Journal, October 3, 2012 ---
http://professional.wsj.com/article/SB10000872396390443862604578032374284688146.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

WEST WINDSOR, N.J.—Edward D. Breen stepped down last week after a decade as chief executive of Tyco TYC -0.42% International Ltd., a period in which he oversaw two breakups.

When he took the job, few expected Mr. Breen or Tyco to last. The former Motorola Inc. MSI +0.77% president took charge of the battered conglomerate in July 2002, succeeding L. Dennis Kozlowski, who lost his job amid imminent charges of sales-tax evasion. (He later was convicted and imprisoned for looting Tyco.)

Mr. Breen faced a liquidity crisis and a huge accounting mess. Though he navigated debt issues, he came under criticism for moving too slowly to clean up the books. In July 2003, Tyco restated results back to 1998.

He initially split Tyco into three companies in 2007, spinning off a medical-products company and an electronics-component maker. The latest breakup, unveiled a year ago, transforms a serial acquirer that bought hundreds of businesses over five decades into a $10-billion seller of security and fire-protection systems.

Mr. Breen, a boyish-looking 56-year-old, remains board chairman and says he hopes to run another company. Tyco's new CEO is George R. Oliver, who joined the Switzerland-based conglomerate in 2006.

In an interview at Tyco's operational headquarters here, Mr. Breen shared survival strategies for new CEOs and discussed the corporate-divorce boom. Edited excerpts:

Edward Breen, former chief executive of Tyco International Ltd., on what it's like to spend ten years in the corner office.

WSJ: With CEO turnover climbing, how can someone taking command of a public company keep the job for 10 years?

Mr. Breen: Stay calm and focused. There are big ups and downs. And don't overcommit to numbers you may hit in your first year.

WSJ: What else spurred your longevity?

Mr. Breen: We were very transparent about what was going on—good or bad. You must be totally aligned with the board.

When I got here, it was like a forest fire. I learned to worry about the few big levers. We told employees, "We are going to save the company, fix the company and then grow the company."

I had to get rid of the board and get a new, highly credible one. We also got rid of almost 300 people on the corporate team.

The third important decision was fixing the debt crisis. We paid down debt to $10 billion from $30 billion.

WSJ: What were some of your top priorities for fixing Tyco between roughly 2004 and 2007?

Mr. Breen: We got rid of excess costs. For every dollar of waste we can get out, we said we are going to reinvest about half in growth initiatives and the other half is going to drop to the bottom line.

We then focused on our leadership-development process. As a result, we created five CEOs out of our team, running retained or spun-off businesses. We also sold over 150 companies. Prior management had done about 800 acquisitions.

WSJ: Looking back, how could you have made your life easier?

Mr. Breen: You always wish you moved faster on some people issues. We hired some that were really good for the "save" part, but not necessarily good for the "grow" part.

WSJ: How can a new CEO avoid obsessing over quarterly results instead of long-term shareholder value?

Mr. Breen: There are pressures to do it that way. But you are not really thinking about the long term if you spend too much time focusing on that next report card. It is not the way to manage.

WSJ: Is that why you dropped earnings forecasts during your first year?

Mr. Breen: We focused on generating free cash flow to pay down $11 billion of debt due in my first year. We didn't have any money in the bank. With a very low stock price, we didn't even have stock currency. Our cash flow in fiscal 2002 was $800 million. The next year was over $5 billion. I resumed making quarterly earnings forecasts in 2003.

WSJ: If long-term shareholder growth is their goal, should public-company CEOs skip earnings forecasts?

Mr. Breen: Whether it was your forecast or not, a miss is a miss. You might as well give guidance and at least make sure it is in the ranges you think are appropriate.

WSJ: Why didn't you change Tyco's name? After all, it was associated with a corporate scandal.

Mr. Breen: We looked at changing it. We surveyed employees and customers and learned Tyco was a very strong name around the globe. You think twice about changing a name when you're the market leader.

WSJ: Are the recent flurry of corporate breakups a good or bad idea?

Mr. Breen: There's a lot of logic to it. You have to have a market-leading company to justify a separation. That's a very attractive stock to investors.

We will continue to see breakups. The complexity of the company has a lot to do with it. You must answer the question: 'Can we do better than the form we are in?' It's not easy for a management team to say, 'I am going to shrink the pie.' I view a breakup as expanding the pie.

WSJ: What about corporate breakups that result from activist investor pressure?

Mr. Breen: If activists find a weakness, they jump. It is not the most elegant way to get it done.

WSJ: How do you see the economy and growing federal deficit affecting U.S. businesses' spending?

Continued in article

Bob Jensen's threads on Tyco are at
http://www.trinity.edu/rjensen/Fraud001.htm
Search for Tyco at the above site.
Unlike many companies that failed after their top executives went to prison, Tyco was and remained financially very sound because of successful acquisitions engineered by the top executives that went to prison for criminal activities along the way, including stealing from the company.

Increased Investor Risks Caused by the Jumpstart Our Business Startups Act
"The Data Facebook Didn't Want to Share,: by Karen Wei, Bloomberg Business Week, October 10, 2012 ---
http://www.businessweek.com/articles/2012-10-10/the-data-facebook-didnt-want-to-share

. . .

Today a great story from our colleagues over at Bloomberg News looks at the recently released documents from Facebook’s IPO and finds that the social network fought to keep key risks hidden. The SEC forced Facebook to avoid double-counting mobile users and to disclose that people who accessed the site largely on mobile devices were making up a growing share of its users. This was problematic for Facebook because it derives less revenue for mobile users than for regular ones. Spokesmen for Facebook and the SEC declined to comment for the Bloomberg story.

The SEC also asked Facebook why it didn’t report how much revenue it generated per user. Facebook’s attorney responded that the company preferred to use aggregate numbers. The SEC went ahead and calculated the figures on its own—which showed that per-user revenue was declining. Facebook ultimately included the statistics in its filings.

The Facebook letters show that while there is a push and pull between the SEC and the company looking to launch an IPO, ultimately the SEC has the final word. As Alan Mendelson, a partner at Latham & Watkins, explained to us in February, a company “might have to cave and put something in the document that you prefer not to.” Put another way, had the SEC’s vetting process not existed, investors wouldn’t have known details about the mobile-revenue concerns before the stock hit the market.

But something big has changed since Facebook started its IPO process. In the spring, Congress passed—and President Obama signed—the Jumpstart Our Business Startups Act, a bill that loosened investor protections with the goal of creating more jobs. The bill reduces disclosure requirements for so-called emerging growth companies that want to go public; under the law an emerging growth company can have as much as $1 billion in annual revenue. The bill also opens the way for buyer-beware offerings through crowdfunding. And it allows companies to raise money from as many as 2,000 investors privately, up from the previous limit of 500. When raising money privately, companies are under far less obligation to divulge information. So once the JOBS Act goes in to effect next year, more deals can avoid the SEC process that forced Facebook to show its cards to investors.

Teaching Case from The Wall Street Journal Accounting Weekly Review on October 5, 2012

BofA Takes New Crisis-Era Hit
by: Dan Fitzpatrick, Christian Berthelsen and Robin Sidel
Sep 29, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Contingent Liabilities

SUMMARY: "Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co...." during the financial crisis in 2008. At the time it acquired Merrill Lynch in September 2008, BofA became the biggest U.S. bank; the value of the bank then fell by more than half by the time the acquisition of Merrill Lynch closed 3 months later. These losses were not disclosed by then CEO Ken Lewis and his management team to shareholders before they voted on the merger transaction with Merrill.

CLASSROOM APPLICATION: The article addresses accounting for litigation contingent liabilities. The related video clearly discusses the history of the transactions.

QUESTIONS: 
1. (Introductory) To whom did Bank of America Corp. (BofA) agree to pay $2.43 billion dollars?

2. (Introductory) For what losses did BofA agree to make this payment?

3. (Advanced) How could losses have occurred and a payment of $2.4 billion be required if "Bank of America executives now say Merrill...has become a big profit contributor... [and that] it's clear that Merrill is a significant positive any way you want to look at it..."?

4. (Advanced) What accounting standards provide the requirements to account for costs such as this $2.4 billion payment by BofA?

5. (Advanced) According to the article, BofA has "set aside more than $42 billion in litigation expenses, payouts and reserves...[which] includes $1.6 billion taken in the third quarter [of 2012]...." According to the related video, what period will be affected by $1.6 billion being recorded as an expense related to this $2.43 billion settlement? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
BofA-Merrill: Still A Bottom-Line Success
by David Benoit
Sep 28, 2012
Online Exclusive

"BofA Takes New Crisis-Era Hit," by Dan Fitzpatrick, Christian Berthelsen and Robin Sidel, The Wall Street Journal, September 29, 2012 ---
http://professional.wsj.com/article/SB10000872396390443843904578024110468736042.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co., in the latest financial-crisis aftershock to rattle the banking sector.

The payment is the largest settlement of a shareholder claim by a financial-services firm since the upheaval of 2008 and 2009. It also ranks as the eighth-largest securities class-action settlement, behind payouts like the $7.2 billion settlement with shareholders of Enron Corp. and the $6.1 billion pact with WorldCom Inc. investors, both in 2005.

The deal is a sign that U.S. banks' battle to contain the high cost of the crisis continues to escalate, despite a four-year slog of lawsuits, losses and profit-sapping regulations. Bank of America's total exposure to crisis-era litigation is "seemingly never-ending," said Sterne Agee & Leach Inc. in a note Friday.

Is the era that produced all of this legal exposure "history?" the Sterne Agee & Leach analysts said. "Unlikely."

The settlement ends a three-year fight with a group of five plaintiffs, including the State Teachers Retirement System of Ohio and the Teacher Retirement System of Texas. They accused the bank and its officers of making false or misleading statements about the health of Bank of America and Merrill Lynch and were planning to seek $20 billion if the case went to trial as scheduled on Oct. 22.The size of the pact highlights how hasty acquisitions engineered during the height of the financial crisis by Kenneth Lewis, then the bank's chief executive, are still haunting the company four years later. Decisions to buy mortgage lender Countrywide Financial Corp. and Merrill have forced Bank of America, run since 2010 by Chief Executive Brian Moynihan, to set aside more than $42 billion in litigation expenses, payouts and reserves, according to company figures. The funds are meant to absorb a litany of Merrill-related lawsuits and claims from investors who say Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the crisis.

That total includes $1.6 billion taken in the third quarter to help pay for the Merrill settlement announced Friday and a landmark $8.5 billion agreement reached last year with a group of high-profile mortgage-bond investors.

The company's shares lost more than half their value between when Bank of America announced its late-2008 plan to purchase Merrill Lynch and the date the deal closed 3½ months later, wiping out $70 billion in shareholder value. The shares have fallen further since then, and investors who owned the shares won't be made whole by the settlement.

"We find it simply amazing the sheer magnitude of value destruction over the years," said Sterne Agee in the note issued Friday. And "the bill is surely set to increase" as the research firm expects the bank to reach other legal settlements over the next 12 to 24 months. Bank of America is still engaged in a legal clash with bond insurer MBIA Inc., MBI +3.91% which has alleged that Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the financial crisis.

The move to buy Merrill over one weekend in September 2008 was initially hailed as a rare piece of good news during a week when much of Wall Street appeared to be teetering on the brink. It also vaulted the Charlotte, N.C., lender to the top of the U.S. banking heap, capping a goal pursued over two decades by Mr. Lewis and his predecessor, Hugh McColl.

The Merrill deal, initially valued at $50 billion in Bank of America stock, was the "deal of a lifetime," Mr. Lewis said on the day it was announced.

But the agreement soon became a problem as analysts questioned whether Mr. Lewis paid too much and Merrill's losses spiraled out of control in the weeks before the deal closed. Investor fears stemming from the financial crisis sent shares of Bank of America and other financial companies into free fall, and the deal was worth roughly $19 billion at its completion on Jan. 1, 2009.

Mr. Lewis and his top executives made the decision not to say anything publicly about the mounting problems before shareholders signed off on the merger—a decision that formed the basis of a number of Merrill-related suits, including an action brought by the Securities and Exchange Commission. The bank also didn't disclose that it sought $20 billion in U.S. aid to digest Merrill, or that the deal allowed Merrill to award up to $5.8 billion in performance bonuses. When Bank of America threatened to pull out of the deal because of the losses, then-Treasury Secretary Henry Paulson told Mr. Lewis that current management would be removed if the deal wasn't completed.

The legal scrutiny surrounding the Merrill acquisition contributed to Mr. Lewis's decision to step down at the end of 2009. Mr. Lewis's lawyer declined to comment.

"Any way you slice it, $2.4 billion is a big number," says Kevin LaCroix, a lawyer at RT ProExec, a firm that focuses on management-liability issues.

Bank of America executives now say Merrill, unlike Countrywide, has become a big profit contributor, while the company continues to work to absorb massive losses in its mortgage division. The divisions inherited from Merrill produced $31.9 billion in net income between 2009 and 2011 and $164.4 billion in revenue. Bank of America's total net income over the period was just $5.5 billion, on $326.8 billion in revenue, reflecting in part the hefty losses tied to the Countrywide deal.

"I think it's clear that Merrill is a significant positive any way you want to look at it," said spokesman Jerry Dubrowski.

The settlement doesn't end all Merrill-related headaches. The New York attorney general's office still is pursuing a separate civil fraud suit relating to the Merrill takeover that began under former Attorney General Andrew Cuomo. Defendants in that case include the bank, Mr. Lewis and former Chief Financial Officer Joe Price. A spokesman for New York State Attorney General Eric Schneiderman declined to comment.

It isn't known how much all shareholders will receive as a result of the Merrill settlement announced Friday. The amount shareholders receive will ultimately depend on how long they held the shares and how much they paid. Mr. Lewis, also a shareholder, won't receive a payout because defendants in the suit are excluded from the class that the court certified.

But because the decline in Bank of America stock was so steep—the shares fell from $32 to $14 between Sept. 12, 2008, the day before the Merrill acquisition was announced, and the Jan. 1, 2009, closing—no shareholders can expect to recover their full losses.

Before the settlement was reached, a targeted recovery for at least three million shareholders who were part of the class was $2.52 a share, said a spokesman for Ohio Attorney General Mike DeWine. The State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System, which held between 18 million and 20 million shares, now expect to recover $1.19 per share, or roughly $20 million.

Continued in article

Merrill Lynch had a friend in Hank Paulson, but he was no friend to Bank of America shareholders
The ex-US Treasury Secretary has admitted telling the Bank of America boss he might lose his job if he walked away from a merger from Merrill Lynch. The former US Treasury Secretary says the merger was necessary Hank Paulson warned the bank's chief executive Kenneth Lewis that the Federal Reserve could oust him and the board if the rescue did not proceed. But Mr. Paulson insisted that remarks he made were "appropriate." Bank of America bought Merrill during the height of the financial crisis and suffered severe losses.
"Paulson admits bank merger threat," BBC News, July 15, 2009 ---
http://news.bbc.co.uk/2/hi/business/8152858.stm
 

Jensen Comment
Paulson's claim that his threats were "appropriate" comes as little comfort to Bank of America shareholders who will be losing greatly because of the threats.

Bank of America is now paying a steep (fatal?) price for having purchased the fraudulent Countrywide and Merrill Lynch companies. The poison-laced Countrywide was a lousy investment decision. However, then CEO Kenneth D. Lewis contends that then Treasury Secretary Hank Paulson held a gun to his head and forced BofA to buy the deeply corrupt and poison-laced Merrill Lynch.

Breaking the Bank Frontline Video
In Breaking the Bank, FRONTLINE producer Michael Kirk (Inside the Meltdown, Bush’s War) draws on a rare combination of high-profile interviews with key players Ken Lewis and former Merrill Lynch CEO John Thain to reveal the story of two banks at the heart of the financial crisis, the rocky merger, and the government’s new role in taking over — some call it “nationalizing” — the American banking system.
Simoleon Sense, September 18, 2009 --- http://www.simoleonsense.com/video-frontline-breaking-the-bank/
Bob Jensen's threads on the banking bailout --- http://www.trinity.edu/rjensen/2008Bailout.htm

Bob Jensen's threads on the Bailout's deceptions ---
http://www.trinity.edu/rjensen/2008Bailout.htm

"Forbes Magazine: Lying With Numbers," by Francine McKenna, re:TheAuditors, October 18, 2012 ---
http://retheauditors.com/2012/10/18/forbes-magazine-lying-with-numbers/

I have a new feature article for Forbes magazine, “Lying With Numbers”, on newsstands October 22.

The article is also posted on my blog at Forbes.com today.

The SEC is busy chasing Ponzi schemers and foreign bribers. But bogus accounting remains a bigger danger to the markets. Is another Enron brewing?
http://www.forbes.com/sites/francinemckenna/2012/10/18/is-the-secs-ponzi-crusade-enabling-companies-to-cook-the-books-enron-style/

Enron. Qwest. Adelphia.

Sunbeam. WorldCom. HealthSouth. A decade ago investors knew what those companies had in common: top executives who cooked the books. After their phony accounting was exposed, most went to jail–and hundreds of billions of dollars of shareholder wealth evaporated.

The Securities & Exchange Commission remains quite busy. In fiscal 2011 the agency brought a record 735 enforcement actions. But those looking to see the next Jeff Skilling or Richard Scrushy frog-marched in front of television cameras will be sorely disappointed. Only 89 of those actions targeted fraudulent or misleading accounting and disclosures by public companies, the fewest, by far, in a decade.

So what happened? Call it the Bernie Madoff effect. Embarrassed that it missed the Ponzi King’s $65 billion scheme, the SEC reorganized its enforcement division, eliminating an accounting-fraud task force and adding new units to pursue crooked investment advisors and asset managers, market manipulations and violations of the Foreign Corrupt Practices Act. Since then Pfizer, Oracle, Aon, Johnson & Johnson and Tyson Foods have all paid fines to settle foreign-payoff charges.

That’s all fine and good. But remember this: Foreign-payola charges (absent alleged accounting abuses) have minimal effect on a company’s stock. Accounting fraud risks massive market disruption. Groupon, Zynga and Green Mountain Coffee Roasters are all down at least 75% in the past year, amid doubts about their accounting and prospects. And those examples don’t even carry allegations of illegality.

Is a stretched SEC neglecting accounting fraud? In a statement to FORBES, SEC Enforcement Director Robert Khuzami argued that the task force was no longer needed because accounting expertise exists throughout the agency, and the number and severity of earnings restatements (a flag for possible accounting fraud) has declined dramatically since the mid-2000s. He added: “In a world of limited resources, we must prioritize our efforts. … The reorganization helped to focus us on where the fraud is and not where the fraud isn’t, while allowing us to remain fully capable of addressing cases of accounting and disclosure fraud.”

Accounting experts agree that the Sarbanes-Oxley Act of 2002, Congress’ response to Enron, has reduced abuses. But they worry the SEC is risking those gains. “The SEC enforcement of Sarbanes-Oxley has been minimal,” says Jack Ciesielski, a CPA who sells accounting alerts to stock analysts. “Sarbanes-Oxley may have bought us some peace for our time, but without vigilance through long-term enforcement, it can’t last.”

Anyway, it’s not like all numbers games have ceased. Public company CFOs, responding to a survey last year by Duke and Emory business profs, estimated that 18% of companies manipulate their earnings, by an average of 10%, in any given year–to influence stock prices, hit earnings benchmarks and secure executive bonuses. Most of this finagling goes undetected.

Sarbox aimed to limit accounting shenanigans by requiring companies to set up internal accounting controls and CEOs and CFOs to personally “certify” financial statements, risking civil and even criminal penalties if they knowingly signed off on bogus numbers.

In addition, public auditors were required to flag any “material weaknesses” in a company’s internal controls, presumably providing an early warning to companies, investors and the SEC.

How’s that working? A study by two University of Connecticut accounting professors found auditors have waved the weakness flag in advance of a small and declining share of earnings restatements–just 25% in 2008 and 14% in 2009, the last year studied. There was no auditor warning before Lehman Brothers’ 2008 collapse, even though a bankruptcy examiner later concluded it used improper accounting gimmicks to dress up its balance sheet. And no warning before Citigroup lowballed its subprime mortgage exposure in 2007. (It paid a $75 million SEC fine.)

Continued in article

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

"Accounting Option Facilitates Multinational Earnings Manipulation," by Michael Cohn, Accounting Today, October 12, 2012 ---
http://www.accountingtoday.com/news/accounting-option-facilitates-multinational-earnings-manipulation-64298-1.html

An accounting construct known as permanently reinvested earnings is helping U.S.-based multinational corporations keep tens of billions of dollars in profits overseas, according to a new study.

Not only does it greatly reduce earnings repatriation, but it appears to be used extensively to manipulate corporate earnings and thereby mislead investors. A tax director of a Fortune 500 company has compared permanently reinvested earnings to crack cocaine, explaining that "once you start using it, it's hard to stop."

The accounting tool, known as PRE for short, goes one better than IRS rules that each year permit companies to defer paying U.S. taxes on tens of billions of dollars' worth of earnings by their foreign subsidiaries. PRE gives the multinationals the additional option of omitting from their financial statements entirely, except in footnotes, an admission that any taxes at all are owed to Washington on those profits, which they are able to do by declaring their intention to indefinitely reinvest them abroad. PRE have accumulated over time, and by the end of last year they amounted to more than $1.5 trillion, about 42 percent above their level of two years earlier.

While accounting scholars have for some time agreed that the PRE option lowers the repatriation of foreign earnings, it has remained unclear by how much. New research offers an answer.

A study in the current issue of the journal The Accounting Review, published by American Accounting Association, concludes that the PRE option reduces multinational firms' repatriation of foreign affiliates' earnings (through dividends paid to U.S. parent firms) by approximately 20 percent a year. While acknowledging that high U.S corporate tax rates and the ability to defer payment play a major role in keeping earnings abroad, it finds that "repatriation is more sensitive to the repatriation tax rate in the presence of reporting incentives," so much so that "firms with high reporting incentives repatriate, on average, 16.6 to 21.4 percent less per year than firms with low reporting incentives."

"Our study suggests that companies would repatriate about 20 percent more than they currently do if they didn't have this accounting tool that enables them to put a gloss on their financial statements," said Leslie A. Robinson, an accounting professor at Dartmouth College, who conducted the study with professors Linda Krull of the University of Oregon and Jennifer Blouin of the University of Pennsylvania.

Even though U.S. tax law permits multinationals to defer payment of U.S. taxes due on earnings abroad, Robinson explained, mere deferral does not exempt these firms from recording a tax liability on their financial statements. In contrast, declaring profits to be PRE provides this exemption, which has the effect of enhancing firms' bottom lines.

The accounting standard responsible for PRE, known as APB 23, came under attack last month during a one-day Senate hearing, chaired by Carl Levin, D-Mich., which probed offshore corporate profit-shifting (see Senate Probes Offshore Profit Shifting by Microsoft and HP). Indeed, one expert witness called for abolishing APB 23 entirely, describing it as "provid[ing] enormous potential to call up earnings as needed —or postpone them —in a large multinational operation."

Foreign affiliates' permanently invested earnings, he added, can be “sliced as finely as needed to meet earnings estimates with pinpoint precision.”

Levin commented: "On the one hand these companies assert that they intend to indefinitely or permanently invest that money offshore. Yet, they promise on the other hand to bring it home as soon as it is granted a tax holiday. That's not any definition of' 'permanent'' that I understand. While this may seem like an obscure matter, it is a major issue for U.S. multinational corporations."

While the authors of the new Accounting Review paper do not offer specific policy prescriptions, their findings make clear the special appeal PRE have for U.S. parent companies that, in the study's words, "face reporting incentives to consistently report strong earnings numbers." The study’s authors find that public firms are likely to declare a considerably greater proportion of their assets as PRE than private firms do, since "capital-market pressures vary between public and private firms due to differences in the constituents to which the two types of firms report...Public-firm managers typically have a strong focus on reported earnings because of its effect on both firm value and managerial compensation. In contrast, private firms have high levels of insider ownership and encounter...less incentive to focus on reported earnings."

Among public multinationals, the study suggests, PRE are especially favored by firms highly sensitive to the capital markets, including those whose stock prices have above-average responsiveness to company earnings, those with a consistent record of matching or narrowly beating earnings forecasts, and those with relatively few dedicated investors—that is, institutional investors whose focus is on companies' long-term performance.

In addition, the more PRE that firms accumulate over time, the lower their repatriation of current foreign earnings. The study explains that, if companies designate high levels of undistributed foreign earnings as PRE, they may find themselves in a bind in repatriating current earnings, since their financial statements will have to recognize both higher tax expenses and lower earnings than were recorded for previous periods.

The study's findings derive from a sample of 577 U.S.-based multinational corporations, including 479 public companies with 23,669 foreign affiliates and 98 private firms with 1,790 foreign affiliates. The professors combine data from the U.S. Bureau of Economic Analysis with information from other sources to construct measures of tax-reporting incentives over a six-year period. To isolate the effect on repatriation of tax-reporting incentives, as distinguished from incentives to avoid actual tax payments, the professors "identify and measure firm attributes across which reporting incentives vary while holding the cash payment for repatriation taxes constant." The reporting incentives include whether a company is public or private, how sensitive it is to capital markets, and how much PRE it has accumulated.

Continued in article

Bob Jensen's threads on creative earnings management ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

Fortunately this sort of public dispute has never happened in accountics science where professors just don't steal each others' ideas or insultingly review each others' work in public. Accountics science is a polite science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

"Publicizing (Alleged) Plagiarism," by Alexandra Tilsley, Inside Higher Ed, October 22, 2012 ---
http://www.insidehighered.com/news/2012/10/22/berkeley-launches-plagiarism-investigation-light-public-nature-complaints

The varied effects of the Internet age on the world of academic research are well-documented, but a website devoted solely to highlighting one researcher’s alleged plagiarism has put a new spin on the matter.

The University of California at Berkeley has begun an investigation into allegations of plagiarism in professor Terrence Deacon’s book, Incomplete Nature: How Mind Emerged from Matter, largely in response to the website created about the supposed problems with Deacon’s book. In Incomplete Nature, Deacon, the chair of Berkeley's anthropology department, melds science and philosophy to explain how mental processes, the stuff that makes us human, emerged from the physical world.

The allegations are not of direct, copy-and-paste plagiarism, but of using ideas without proper citation. In a June review in The New York Review of Books, Colin McGinn, a professor of philosophy at the University of Miami, writes that ideas in Deacon’s book draw heavily on ideas in works by Alicia Juarrero, professor emerita of philosophy at Prince George’s Community College who earned her Ph.D. at Miami, and Evan Thompson, a philosophy professor at the University of Toronto, though neither scholar is cited, as Thompson also notes in his own review in Nature.

McGinn writes: “I have no way of knowing whether Deacon was aware of these books when he was writing his: if he was, he should have cited them; if he was not, a simple literature search would have easily turned them up (both appear from prominent presses).”

That is an argument Juarrero and her colleagues Carl Rubino and Michael Lissack have pursued forcefully and publicly. Rubino, a classics professor at Hamilton College, published a book with Juarrero that he claims Deacon misappropriated, and that book was published by Lissack’s Institute for the Study of Coherence and Emergence. Juarrero, who declined to comment for this article because of the continuing investigation, is also a fellow of the institute.

Continued in article

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