fraud - The Pros and The Cons!

Transcription

Training, Writing and Consulting in:
Fraud and Audit Failures
Leadership Skills and Strategies
Productivity Performance Measures
10356 Wellington Blvd., Suite D
Powell, OH 43065
Phone 614-761-8911
[email protected]
www.TheProsAndTheCons.com
FRAUD
2005
HOT
TOPICS
GARY D. ZEUNE
The Pros & The Cons
10356 Wellington Blvd Suite D
Powell, OH 43065
Office
Fax
614-761-8911
206-202-0880
[email protected]
TRAINING AND CONSULTING
sing 35 years of experience in auditing, corporate
finance, and investment banking, Gary D. Zeune,
CPA, provides CPAs, attorneys and executives with
hands-on experience in fraud and corporate strategy
performance improvement. Mr. Zeune instructs courses for:
U

FBI National Training Academy
Office of the U.S. Attorney
The SEC Institute
National Association of Securities Dealers
North American Securities Administrators Association
American Society for Industrial Security
Over 35 state CPA societies and bar associations
American Institute of CPAs
American Management Association
Institute of Management Accountants
Entrepreneurship Institute
Treasury Management Association
Private classes for numerous companies and
accounting firms.
Mr. Zeune has instructed Strategy Formulation and
Implementation in the Executive MBA Program and
Accounting and Honors Finance at The Ohio State
University. He is also a member of the Education Executive
Council and is past chairman of the Education Marketing
and Public Relations Committees of The Ohio Society of
CPAs. His other memberships include: the American
Institute of CPAs, and the Regulation of Public Offerings
Committee of the Ohio Division of Securities.
Prior to forming his consulting practice in 1986, Mr. Zeune
was an Assistant Vice President of Corporate Finance at
The Ohio Company, a Columbus, Ohio investment banking
firm. He also spent more than five years in Treasury and
Finance at Wendy's International, where he was
responsible for mergers and acquisitions, financial and SEC
reporting, and corporate finance. He was on the audit staff
of Ernst & Ernst from 1973 to 1977; and taught accounting
at Ohio University from 1970 to 1973, where he received his
bachelors in mathematics and masters in accounting, with
honors.
ARTICLES AND BOOKS
Mr. Zeune is also widely published. He has published more
than 40 professional articles and is the author of The CEO's
Complete Guide to Committing Fraud and Outside the Box
Performance. He has been a member of the Editorial
Advisory Boards of the Journal of Working Capital
Management and The Ohio CPA Journal.
For Deloitte & Touche, he authored Financing Business
Growth and has completed the first draft of The Complete
Guide to Buying or Selling a Closely Held Business, two
books in the firm's Entrepreneurial Series. He has authored
chapters for two books published by Warren Gorham
Lamont, the world's largest financial publisher: Accessing
the Capital Markets and Options for Raising Capital.
WHITE COLLAR CRIMINALS
Mr. Zeune has the ONLY speaker's bureau in the country
specializing in white-collar criminals — The Pros & The
Cons. Mr. Zeune's speakers tell their stories of how and
they committed their crimes. Their frauds range from
$18,000 to $350 million. Speakers include CPAs, attorneys,
and business people. The frauds include:
Mark Morze created 10,000 phony documents to steal
$100 million in the infamous ZZZZ Best Carpet
Cleaning fraud (86% of the revenue was fake and no
one found it)
Fred Shapiro defrauded nearly every major financial
institution in the City of Philadelphia to the tune of
$8.6M. He is a former attorney, accountant, educator
and inmate. Fred worked undercover with the U.S.
attorney's office and the FBI in a drug and money
laundering operation in an effort to minimize his
sentence.
Nick Wallace committed a $350 million fraud as the
President of ESM Government Securities resulting in
the collapse of the Ohio Saving & Loan Guarantee
Fund, and the bankruptcy of 69 Ohio S&Ls
Dunlap Cannon was the largest real estate closing
attorney in Memphis. He went to prison for 32 months
for stealing $5 million from his clients.
Suffering from medical expenses and family deaths,
bookkeeper Teri Lynn Norwood stole $18,000,
promising to pay it back. She ran out of time.
100% No-Risk Guarantee
Mr. Zeune’s executive education training is consistently
rated at least a 4.7 on a 5-point scale. If you are not
satisfied for any reason, if you don’t learn at least 10 new
things you can use the following day, there are no fees or
expenses. PERIOD.
Training, Writing and Consulting in:
Fraud and Audit Failures
Productivity Performance Measures
Leadership Skills and Strategies
Powell, OH 43065
Phone 614-761-8911
[email protected]
ACTION STEPS FROM GARY’S CLASS
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Action Item
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Thanks for attending. Don’t hesitate to call or email if you have questions. . . .gdz
Outside the Box Performance: How to Beat Your Competitors' Brains Out is packed with the
techniques small and mid-size world-class companies use to become and stay competitive, and
make a ton of money. Learn the secrets to unlock the multitude of new techniques which "drive"
your profitability. This book compliments the class and provides new ideas to incorporate in
your business. For example, do you know what the basis of competition will be in the next 10
years? It’s around you ALL the time. You expect it everyday as a customer. Or, how to beat your
competitors by asking your customers two simple questions? If not, sit back and learn how to
"beat your competitors'brains out!"
Don'
t you want to know how Barry Minkow and Mark Morze
stole $100 million from investors in the ZZZZ Best Carpet
Cleaning fraud, right under the noses of auditors, underwriters
and lawyers? The first chapter of 100 pages in The CEO's
Complete Guide to Committing Fraud tells you. It also has 8
chapters on other frauds: computer, real estate, fake financial
statements, public company frauds, and a chapter by an auditor who became the target of a
fraud investigation, just 4 weeks after becoming the engagement partner.
Risk-Free Lifetime Guarantee: Gary Zeune’s books are fully guaranteed. If
they ever fail to meet your expectations, even after you'
ve written in them, marked
them up, torn pages out, return for a full refund.
I need the following copies of Mr. Zeune'
s books. Price: 1 @ $19.95: 2 to 5 @ $15.95 6+ @ $12.95
The CEO's Complete Guide to Committing Fraud (300 pages)
Outside the Box Performance (200 pages)
Number of books ordered
1 @ $19.95
Checks make payable to:
2 - 5 @ $15.95 each
Gary Zeune
Powell, OH 43065
Office 614-761-8911
Fax
801-751-6283
Email [email protected]
Web
www.bigfoot.com/~gzfraud
6+ @ $12.95 each
Postage/Shipping
$5.00
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Zip ______
Fax __ _____________________
Phone
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Home
v2
Fraud: 2005 Hot Topics
Gary Zeune, CPA
The Pros & The Cons
10356 Wellington Blvd, Suite D
Powell, OH 43065
Phone 614-761-8911
Fax
206-202-0880
[email protected]
Required Legal Stuff
These materials were developed by Gary D. Zeune. The following
policies govern their use:
1.
These materials are intended for use in group study situations and were not developed for self
study or reference uses. These materials are copyrighted. Reproduction of the manual or any
portion of it is prohibited unless written permission has been obtained from Gary D. Zeune.
2.
These materials were prepared solely for the purpose of continuing professional education. They are
distributed with the understanding that Gary Zeune is not engaged in rendering legal, accounting, or
other professional services. If legal advice or other expert assistance is required, the services of a
competent professional should be sought.
3.
Participants are advised that the Statement on Standards for Formal Continuing Education (CPE)
Programs places responsibility on both the individual participant and the program sponsor to
maintain a record of attendance at a CPE program.
4.
The information the participant should keep on each program is (a) sponsor's name, (b) title and/or
description of content, (c) date(s) of the program, (d) location, (e) number of CPE contact hours.
This information is found in the printed program for most courses or conferences and/or in a CPE
attendance record form. Either or both of these documents should be kept for an appropriate period
to enable regular periodic reporting to jurisdictional board(s) and to professional organizations
requiring such reports.
2
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1.“Just wanted to let you know that I appreciate being on your distribution list.
I have found that there are many items that you refer to me that are helpful.”
. . .Mike McGlynn
3
Manual Posted Online
This manual is posted at
www.TheProsAndTheCons.com/manuals.
It can be printed but not downloaded, edited or
saved on your computer.
4
Today’s Topics
1.
2.
3.
4.
5.
6.
7.
8.
9.
Small business, big losses
New rules of business
Industries under attack
Fraud training increasing
Selecting and retaining clients
Materiality redefined
Zero tolerance environment
Corporate identity theft
I didn’t know
5
Today’s Topics
10. Integrity and aligning goals to deter fraud
11. Prosecutors secret weapon
12. Companies that can’t count
13. What’s happenin’ in firms
14. Why managers break the rules
15. 11 questions to hire ethical employees
16. AICPA/FBI fraud partnership
17. T&E fraud
18. Selecting and retaining the right clients
6
Fraud Training Increasing
FIRSTGlobal Investigations, a division of BDO Seidman LLP,
predicts that fraud prevention will top priority lists for many corporate
boards in the coming year. Boards focused on internal control
requirements of the Sarbanes-Oxley Act last year. But the SarbanesOxley Compliance Journal reported fraud prevention training programs
increasing this year since the Organizational Sentencing Guidelines made
fraud prevention the responsibility of the board of directors.
FIRSTGlobal also foresees that both private companies and nonprofit organizations will step up their fraud prevention activities. Venture
capitalists and independent directors will pressure private companies to
improve fraud detection, while major donors will do the same at nonprofits…… AccountingWEB, Feb 23, 2005.
7
Association of
Certified Fraud Examiners
www.CFEnet.com
800-245-3321
8
ACFE Findings
1. $660 Billion total
2. Internal controls detected smallest frauds
3. Organizations with anonymous tip lines frauds were
½ the size of those without them
4. Small organizations suffered disproportionately the
largest frauds
5. Private companies suffered largest losses
6. Median recovery is 20% with 40% getting nothing
7. Owners and executives less likely to be prosecuted
9
ACFE Findings
8. Most fraudsters are first time offenders
9. Victim organizations revenue from $25,000 to $80
billion with average of $26 million
10. 1 in 6 financial statement frauds at least $10 million
11. 90+% of frauds were asset misappropriations but
smallest average loss at $93,000
12. 8% of frauds were cooking the books but highest
average loss at $1,000,000
13. Oldest/most educated commit biggest frauds
10
Cost of Fraud
11
3 Types of Frauds
12
Who the Victims Are
13
Most Fraud at Small Organizations
14
Small Organizations Suffer More
15
How Frauds are Detected
16
Hotlines Prevent Fraud
17
Internal Audits Prevent Fraud
18
External Audits Have Little Effect
19
Men vs Women
20
Older Fraudsters Steal More
21
More Education BIGGER Frauds
22
What Would You Do???
23
Applying Going-Concern
1. Clean opinion covers not just the past
but __________________
2. Says ‘everything will be fine’ for next __________
3. How many of you look at next year’s __________
24
New ‘Rules’ You Need to Know
1. New Cops Will Walk the Mutual Funds Beat
2. Putnam targets its cutthroat culture
3. A Whole New Look at Mutual Funds: Due to Scandal,
Long-Accepted Practices Get Closer Scrutiny
4. Fund Probe Broadens to IPO Allocations by Money
Managers
5. Behind the Mutual-Fund Probe: Three Informants
Opened Up
6. Hidden Loans May be Rife Among Insurers
7. Insurers May Face Heat via Inquiry
25
8. Two Insurance Brokers Are Sued Over Commissions
9. Insurers Reel From Bust of a ‘Cartel’
10. Insurance Fees Are Scrutinized
11. How Coke Officials Beefed Up Results of Marketing
Tests: Consultant gave kid’s clubs $9,000 to buy
Value Meals in Burger King promotion
12. Bait and switch: Study finds red snapper mislabeled
13. Charities Start to Grade Themselves
14. SEC Prohibits ‘Directed Brokerage’
26
15. NASD Wants Street CEOs to Certify Compliance
16. The New Accounting: Companies face a paradigm
shift in how they conduct business
17. “Why Ask?” You Ask, Because it’s part of your job
and you may uncover fraud
18. In Fight for Ads, Publishers Often Overstate Their
Sales
19. Lawsuits Challenge Charity Status of Hospitals on
Care for Uninsured
27
Legal Environment Changing
1. Price-Fixing Investigations Sweep Chemical Industry
2. FDIC changes ID theft rule
3. Tom Trauger, E&Y Partner, Sentenced To 1 Year for
Destroying NextCard Audit Workpapers
4. Spitzer Calls for Markup Curbs on Auto-Dealership
Car Loans
5. As Hospitals Battle for Patients, A Prosecutor Alleges
Bribery
6. Solicitations concern watchdog
28
Industries Under Attack
1.
2.
3.
4.
5.
6.
7.
Credit rating companies
Insurance
Investment banking
Newspaper circulation
Title insurance companies
Data merchants
Radio companies
29
Credit Ratings Overhaul Might
Detect More Fraud, Earlier
1. “For years, the nation’s credit rating agencies have thrived,
booking mouth-watering profits from operations that are
riddled with conflicts of interest and shielded from
competition.” NYT
2. “I think it’s fair to say oversight of the industry is insufficient.
We want firms to meet certain standards.…on conflicts of
interest and solicitation of ratings. Right now we don’t have
that at all.” Annette Nazareth, Dir. of Market Regulation, SEC
3. Straight debt $1.2 trillion v. $146 billion common stock
4. + $1.4 trillion mortgage and asset-backed debt
5. Minimum credit ratings required for investments by pension
funds, banks, money market funds
30
1. Certified by the SEC
1. Standard & Poor’s
2. Moody’s
3. Fitch
4. Dominion Bond Rating
2. Uncertified
1. Egan-Jones
3. Who Pays for the ratings
6
Do Investors Care Who
Pays for the Rating?
4
2
3.8%
Upgrades
0.5%
0
-2
-4
-6
-2.8%
Downgrades
-6.1%
-8
Moody's EganJones
31
1. Big-3 moving into other consulting
2. Congressional hearings
3. Why did big-3 rate Enron investmentgrade until 4 days before bankruptcy but
Egan-Jones blew the whistle months
before
4. Debt-ratings are opinions protected by
First Amendment
Sen. Richard Shelby
32
“We do not link analyst compensation, including
bonus compensation, to the ratings they have on
the companies they follow or to the amount of fees
they receive from those companies. Beyond that,
we have a collection of business conduct policies
and codes of practice and behavior which the entire
Moody’s population is required to adhere to.”
Raymond W. McDaniel, President, Moody’s
Corporation
33
Marsh & McLennan
1. World’s largest insurance broker
1. Contingent commissions
2. Bid rigging
2. Changes decades-long practices
3. “B quotes”
4. Settlement
1. $850 million to customers
2. Secret payments + Compensation
3. Apology: “shameful” and “unlawful”
34
Marsh + AIG Execs
Plead Guilty
1. Joshua Bewlay, Marsh senior vice
president and managing director
2. AIG scheming to defraud
1. Underwriter Carlos Coello
2. Karen Radke and Jean-Baptist
Tateossian
3. Marsh significantly understated the
amount of revenue it got from
placing insurance
John Mohs, AIG VP,
pleaded guilty, Feb. 15,
2005 to felony scheme to
defraud, up to four years in
prison. (AP/Julie Jacobson)
35
Title Insurance Companies
1.
2.
3.
4.
5.
Fidelity National Financial
First American
LandAmerica Financial Group
Citibank
Wells Fargo…”We do not use any title underwriter
on an exclusive basis nor do we have any
contractual provisions guaranteeing any future
business for any title underwriter.”
6. Widespread
36
Title Insurance Kickback Scheme
Ti
tle
Reinsure Policy
FORM
Po
lic
y
Independent
Title
Company
Reinsurance
Company
37
Ad Execs Go to Jail
1. Senior execs at Ovilgy & Mather
2. Convicted of 1 count of conspiracy and 9 counts of
false claims to overbill U.S. Gov’t
3. Defrauded U.S. Office of National Drug Policy
4. $1 billion ad campaign
5. Cover $3 million shortfall
6. Ordered employees to alter time sheets
38
Ad Execs Go to Jail
1. Firm paid civil fine of ________________
2. Demand advertising “Audit Rights”
3. Define terms in advertising contracts
1. Salary/Profit/Overhead
Judge Richard M. Berman read more than 70 letters
of support that characterized Seifert as a "hugely
successful, high-level executive," but noted that
"success in business is illusory unless it is grounded
in ethical business practices and those need to be ...
instilled in all of the workforce from the top to the
bottom."
Shona Seifert
18 months
2 years probation
$125,000 fine
400 hrs
Code of conduct
Thomas Early
14 months
$10,000 fine
2 years probation
39
Radio in Trouble
1. Ownership rules changed 1996
1. Vast consolidation via mergers
2. Competitive threats
1. Mp3/Napster/iPod/satellite/internet
2. Late upgrading to digital music
3. Programmed ‘corporate’ music
4. Changes
1. 30 seconds ads
2. Expanded playlists
40
Blackout Could Have Been Avoided
No clear, consistent vegetation clearance system
Tree branch on a 345,000-volt line
Promptly shut down just 1500 megawatts would prevent
62,000 megawatt failure for 50 million
46 recommendations to all power generators
Local power covered by state requirements
41
Blackout Could Have Been Avoided
North American Electric Reliability Council rules for
power grid are voluntary
Control room operators inadequately trained
“did not recognize or understand the deteriorating
condition of its system” and did not conduct voltage
analysis to know what was needed to keep system up
NAERC was not properly overseeing First Energy
42
Space Shuttle
Little Events
BIG Impact
Space Shuttle Columbia
What happened ____________________
43
9/11
Little Events
BIG Impact
44
Materiality Redefined
A little number is material when it
gets you or your company or firm
on the front page of the paper
45
Little Numbers That Are Material
Bank loan covenant requires minimum income
$1,000,000
1st pass at income
$980,000
Reduced bad debt expense
+$31,000
Income
Company
gets clean
opinion
$1,011,000
Goes
bankrupt
Bank sues
Firm
‘conspired’
with
borrower
Little numbers are material if they accomplish a _________________________
46
Zero
Tolerance
Environment
What used to be OK
isn’t any longer….
Example:_________
_________________
_________________
_________________
_________________
47
Ohio State Cracks Down on File Sharing
1. Downloading
1. Suspend
2. Expulsion
2. File-sharing
1. $250,000
2. Jail time
http://resnet.osu.edu/article.asp?id=8
48
Zero Tolerance for CEO
1. Nutrisource willfully mislabeled as fat-free
1. Label: 3 grams of fat and 135 calories
2. Actual: 18 grams and 530 calories
2. Bought doughnuts, cinnamon rolls and cookies
relabeled as First Health and sold to __________
3. Customers complained to FDA that doughnuts
_______________ and they ______________
4. Prior warnings from FDA about mislabeling
5. Sentenced to _____________
6. Banned from selling any food regulated by any agency
49
Zero Tolerance Examples
Janet Jackson
COVER: Photo illustration
by Michael Elinsfor for
NEWSWEEK, head shot
by Mark Bryan-Brown ―
WIREIMAGE.
Radio shock-jock
Howard Stern
Gift cards
50
No more late fees
1.
2.
3.
4.
5.
6.
7.
$630,000
47 states and DC
Deceived customers
Better explain the ‘fine print’
Extra week to return movie before charged full price
Insufficient disclosure which stores
Limitations to be made in writing
51
Zero Tolerance: Martha
Too
harsh
24%
Too light
53%
Just
right
14%
No jail
9%
Online survey, Columbus Dispatch, 7/27/04
52
Zero Tolerance: Quattrone
1.
2.
3.
4.
5.
6.
7.
8.
Tech banker at First Boston
2000 income __________
Single email to “clean up those files”
“Crystal clear” he lied testifying he didn’t intend to obstruct
justice
Obstruction of IPO ‘spinning’ investigation
Probation said 10 months:
5 jail + 5 house arrest
Sentenced to 18 months
Ask for lighter sentence to care for family who have trust funds
53
Boeing CFO Sentenced to Jail
1.
2.
3.
4.
Illegal recruiting of Druyun
Druyun oversaw billions of AF contracts
“I know what I did was wrong.”
“You are a person who had everything and
in a blink of an eye you jeopardized
everything,” Judge Gerald Lee
5. Compensation _____________
6. Est cost to Sears _____________
Michael Sears
Boeing CFO
Darleen Druyun
Dept of Defense
54
Boeing CFO Sentenced to Jail
1.
2.
3.
4.
Wealth worked against him
Home $5 million
“Soaring Through Turbulence” withdrawn
Sentences
1. Sears 4 months + $250,000 + 200 hours
2. Druyun 16 months
5. Why did she steer business to Boeing?
Michael Sears
Boeing CFO
Darleen Druyun
Dept of Defense
55
Boeing CEO Forced to Resign
Harry C. Stonecipher
CEO to rebuild company
Poor judgment that impaired
his ability to lead
Office romances have serious
legal complications
It's not the relationship, it's
the lack of judgment
56
Can’t Even Trust Academics
University of
Wisconsin Oshkosh
A large portion of the materials
on plagiarism on the University
of Wisconsin Oshkosh Writing
Center website was revealed in
February to have been taken
verbatim from Purdue
University’s web page on
plagiarism.
57
Check Your
Gift-Card Rules
1. NY AG Eliot Spitzer sued claiming terms misleading
2. Maintained since issued by Bank of America Corp.
and therefore governed by federal banking laws
3. 2004 sales increased 20% to 6.3 million cards
totaling $400 million
4. Settled for $125,000 and changes
5. Suits continuing in Mass, NH and Conn
6. Conn. pursuing since fees/rules violate state law
7. 25 other states pursuing gift-card policies
58
Paid Plugs Undisclosed
59
Flower Pot Fraud
1.
2.
3.
4.
5.
6.
Cheater pots/”trade gallon”
Started after WW II with fruit cans
6” pot is just the _____________
Accepted practice for 50+ years
Penn customer complained about 10” pot
Federal labeling laws overseen by local weights and
measures authorities
7. Result: standardized sizes and volumes
60
Tippy Toes Learning Academy
1.
2.
3.
4.
Private Memphis day care center
Killed 4 children, severely injured 2
Driver Wesley Hudson killed
“This was a shocking accident that did
not need to occur. That driver should not have been
driving,” NTSB Chairman Ellen Engleman Conners
5. Driver marijuana convictions
6. NTSB: warned only experienced drivers should
operate 15-person vans
61
Tippy Toes Accident Details
1. Primary causes…NTSB
1. Day-care negligence
2. Driver lost control
2. Contributing factors
1. Day care ignored parents
2. Absence of Tenn oversight
3. 15 passenger van specs
4. No commercial driver’s license
5. Undiagnosed sleep disorder
6. Smoked marijuana
62
Tippy Toes Aftermath
1. Camelia Gibson and Sandra Gordon,
principals of Tippy Toes
2. Sentenced to two years on four counts
of reckless homicide and two counts
of aggravated assault
63
Credit-Card Warning
1. Office of Comptroller of Currency letter
2. Unfair and/or deceptive practices
1. Credit limits “up to”
2. Promotional rates without disclosing restrictions
3. Raising interest rate without disclosing what
triggers the increase
3. Targeting customers with limited or poor credit
64
Direct-to-Consumer Drug Advertising
$10 - $20 Billion liability
Yes
5%
Percent of patients who
doctors say actually
understand risks and
side effects of drugs.
No
95%
65
Glaxo-SmithKline Disclosures
Paxil is anti-depressant
Didn’t disclose negative
data about suicide effect on children
NY AG sued for fraud
$2.5 million to NY
Eliot Spitzer
Will disclose negative data on safety and NY Atty General
effectiveness of its drugs by Dec 31, 2005
“The immediate impact is sending a signal to other
drug companies this is the new standard for
disclosure. We will continue until this industry has
stopped this practice.”
66
J&J Talks Straight
1. Disclose benefit and risks of DTC ads
In a new ad for J&J's
2. CEO tells other CEOs to follow
Ortho Evra birth
control patch, a
3. Chairman of Pharmaceutical Research
physician urges a
and Manufacturers of America
woman to carefully
4. Why the change ________________
consider the risks.
5. “Lie of omission”
6. Ortho Evra birth control and smoking
7. “Here we are with a doctor stating factual
information, with no cover-up,” House Ways and
Means Chairman Bill Thomas, drug industry critic
67
Hospital Identity Thieves
Location
Number of cases
University of Chicago Hospital
85
Iowa
15
Minnesota
30
Indiana
50
Michigan
20
68
Identity Theft
1.
2.
3.
4.
27 million or 13% of Americans since 2000
$60 billion cost to businesses and consumers
8% of companies budget 10%+ of IT on security
75% of 163 U.S. companies surveyed 12 months
end Feb 2005 reported significant stolen data
1. 27% included customer data
69
Hospital Identity Thieves
1.
2.
3.
4.
5.
Rogue employees
HIPAA
Bar coding wrist bands not SSN
SSN available only to billing office
Don’t trust other patients
1. Michigan cancer patient stole
identity of 9 other cancer patients
2. Teach patients not to give out SSN
Eric Drew
Identity stolen by
lab tech at Seattle
Cancer Care
Alliance.
70
Fake Mutual Fund
1.
2.
3.
4.
Pax World $1.3 billion
FairPax Inc. used Pax World’s web site
Outlandish returns
www.paxworld.org
71
Avoiding Fake Mutual Funds
1. High pressure emails
“Your account will be shut down.”
2. Secure web pages: https, not http
3. Suspicious web address
http://www.paxworld349.com
4. Review account statement for
Missing trades or executed by someone you don’t
know
Late or missing statement
72
Avoiding Fake Mutual Funds
5. Keep browser up to date
and apply patches
6. Report suspicions to:
1. Fund company itself
2. FBI Internet Fraud Complaint Center
1. www.IFCCFBI.gov
3. SEC at [email protected]
73
Corporate
Identity
Theft
Data Merchants
1.
2.
3.
4.
5.
6.

ChoicePoint
145,000 records
LexisNexis
300,000 records
DSW Shoe
1,400,000 records
Ralph Loren
180,000 records
Bank of America 1,200,000 records
Boston College 120,000 alumni records
Nearly anyone can buy records with SSN
Direct Marketing Assn “Members use SSN to make
sure they’re sending mail to the correct individual.”
75
ChoicePoint
1. 19 Billion records
2. 50,000 customers
1. FBI, IRS, Homeland Security
2. Insurance companies
1. 115 million new policies or renewals
3. 300,000 criminal records
4. Criminals posing as businesses stole 170,000 files
5. 3-person privacy committee met twice in 2003
6. Calif law required disclosure
76
ChoicePoint Changes
ChoicePoint to Exit Consumer-Sensitive Data
Markets; Shift Business Focus to Areas Directly
Benefiting Society and Consumers, March 5, 2005
“….discontinue the sale of information products that
contain sensitive consumer data, including Social
Security and driver's license numbers, except where
there is a specific consumer-driven transaction or
benefit, or where the products support federal, state
or local government and criminal justice purposes.”
$15-$20 million revenue = $.10-$.12 per share
77
Discount Shoe Warehouse
1.
2.
3.
4.
5.
6.
7.
Theft over 90 days indicates an __________
100,000+ thousand records
Credit-card customers __________
Hired Ubizen to assess damage
Company can’t contact customers
Had to ask credit card companies and media to alert
www.dswshoe.com
78
Secure Credit Card
Transactions by 6/30/05
1.
2.
3.
4.
5.
6.
7.
8.
9.
Companies keeping things working not secure
Established in 2001
Most small companies unaware
Hackers use bots to scour for weak systems
Will focus on small companies
20,000+ charges company must certify compliance
Digital Resources Group LLC
Qualys Inc.
Check Point Software Technologies Ltd.
79
Secure Credit Card
Transactions by 6/30/05
1. Checkout software required to purge credit
card info
2. Many systems retain info including 3-digit
secret code needed to counterfeit cards
3. BJ’s Wholesale Club suing IBM over 40,000
accounts lost
80
Check Fraud
1. How much _________
2. UCC Section 3-406
1.Comparative negligence
2.Know bank’s requirements
for ordinary care
3. Positive pay program
4. Reverse positive pay program
81
Physical Check Security Controls
1. Watermarks
2. ‘Void’ pantographs
3. Chemical ‘Voids’
4. High-resolution
microprinting
5. Reflective holograms
6. Security inks
82
Ordinary Care to
Limit Liability
1. Physical safety features
2. Timely reconciliation
3. Safeguard check stock and
signature devices
4. Signature verification for paid
checks
5. Segregation of duties
6. Prompt reporting of check fraud
83
Corporate ID Theft
1.
2.
3.
4.
5.
6.
7.
8.
9.
Phoebe Nicholson, 39
Honeywell paralegal for 7 months
$600,000 Jan 8 to March 25, 2003
Fish & Neave
Boss signed 7 phony bills
Convinced A/P to give her the ______
Business Certificate as Fish Neave
Opened bank account
Spent on __________
84
Should ID Theft be Reported???
No
3%
Should companies be required to inform you
immediately if your sensitive information has
been lost or stolen?
2107 people voted
WSJ online survey, March 14, 2005
Yes
97%
85
Secure Your Information
"A lot more numbers can be stolen through this very
sophisticated kind of fraud compared to the kind a few years
ago. If there is a message that can be derived from all this,
it's that companies need to be aware and invest in the
necessary network safeguards. If they don't, they'll pay
eventually. They might as well pay at the front end.”
Kurt Douglass, special agent, Secret Service, Cincinnati
86
Does Guilt Require a Direct Connection?
“It would be a rare case where it could
be shown that a person wrote, or
states, that as of a given time in the
past, he committed an act with
fraudulent intent. Such direct proof is
not required.“
Judge Barbara S. Jong of United States
District Court in Manhattan instructing
the jury.
87
Does Guilt Require a Direct Connection?
Jurors could find Ebbers guilty if they
thought he strongly suspected fraud,
but intentionally avoided finding out by
turning a blind eye.
Included when Ebbers repeatedly testified
__________________________________
Judge Barbara S. Jong of United States District Court
in Manhattan instructing the jury.
88
“Aw Shucks” Defense Doesn’t Work
Jury didn’t believe CFO Sullivan or CEO Ebbers
Jury reviewed boxes of exhibits
Extra-large ‘green-bar’ paper including
“management budget variance reports”
‘Line costs’ were very high, then big drop-off
“If we could see the adjustments, how could he
not see them?” Salina Strong, juror 4
“Ignorance at this level can not be excused”.
89
Prison Time Ebbers Should Get….
1 year
5%
1-10
years
24%
10+
years
71%
Source: TheLadders survey
of 838 executives making
$100,000 to $500,000.
90
Should Bernie Ebbers
Have Been Convicted
1. Absolutely yes. If he wasn't found guility,
you could throw out the entire integrity of
publicly traded companies. — Victor Connor
2. His conviction should send a message to all
presidents and CEOs across corporate
America that the buck stops with you, not
the accounting department. — David Glass
3. I voted no, only because I never saw
anything proving his guilt. — Jason Taub
Source: WSJ online survey March 16, 2005
91
“I Didn’t Know” Defense Doesn’t Work
Willful
blindness
A person tries to avoid knowing something
that will incriminate him. Defendant “knows”
anyway because of the high probability of its
existence.
Deliberate
ignorance
People who, recognizing the likelihood of
wrongdoing, consciously refuse to take
basic steps to discern the truth.
Conscience If a defendant claims a lack of knowledge,
avoidance and the facts suggest a conscious course to
avoid learning the truth, then the defendant
may be charged with knowledge
“Good
soldier”
Doesn’t work
92
Earnings Management Defined……
Did you hear about the company that
needed a CFO? Five finalists were given
financial information and told to
compute net earnings. The first 4 got
the right answer, but not the job.
The last candidate got the job when he
asked, __________________________
93
When Does Juggling the
Numbers Become Fraud????
1. Do you manipulate the numbers _______
2. Not all GAAP is high quality
94
When Does Juggling the
Numbers Become Fraud????
c
M Kesson
Empowering Healthcare

Cease and desist
$1,000,000 fine
Stashed earnings in
reserves to _____________

Premature revenue
Many contracts that hadn’t
been finalized
“the accounting stuff that’s required to smooth things out causes
management to mislead itself,” Peter Lewis, CEO, Progressive Insurance.
95
Earnings management
Selecting and applying GAAP to report desired results
instead of reality
Inventory
Depreciation
Performance timing
Maintenance
Inventory obsolescence
Sales period
GAAP sometimes doesn’t reflect economic reality
R&D
96
Cultural Audit
1. “A corporation’s culture is what
determines how people behave when
they’re not being watched,” Tom
Morris
2. Ethics is doing the right thing even
when no one’s looking…..gdz
97
Is Ethical Behavior Enough?
1. Profitability is not optimized by only ethical
compliance and codes of conduct
2. Cannot force people to behave ethically and for
benefit of stakeholders
98
Integrity
“Integrity must be accompanied by
ethical values, and must start with the
chief executive and senior management
and permeate the organization. Control
systems cannot rise above the integrity
and ethical values of the people who
create, administer and monitor them,”
COSO report.
99
Goal Discongruence
When the ‘system’ puts the
decision-maker in a position of conflict.
100
Goal Congruence
When the ‘system’ puts the
decision-maker in win-win position.
101
Goal Discongruence
Management has set the target.
They expect me to achieve it.
My future, my job could be on
the line. I want to succeed, and
I want to please my boss,
management, and the company.
I want to look good when
compared to my peers.
102
Goal Discongruence Sales Force
1. Managers accountable for regions’
sales goals
2. Established by _____________
3. Company policy was ‘team work’
4. Primary motivators were individual
quotas and rewards
5. Result: ‘team members’ were in
competition with ______
6. Example: who should get credit for a
sale
103
Goal Discongruence Revenue
1. Software company management set very
aggressive sales targets
2. Sales recorded when product shipped
3. End of month Î call customers to _______
4. Shipments to customers who hadn’t _____
1. What do customers then do _________
5. Not enough? Ship to ____________
6. Company went bankrupt because
management didn’t understand the ______
104
Secret Weapon Section 1001
Crime to lie to ANY federal agent
Don’t have to be under oath
No other crime necessary
Martha
Convicted of lying to FBI/SEC
Not charged with insider trading
Cover-up worse than the crime
105
Remarkable trap
Criminalizes behavior most
don’t think it illegal
Agents usually don’t tape
record
Agents CAN lie
106
“Any casual conversation … you
can be convicted of lying.”
“You have an absolute right not to
talk to the government, but if …
you open your mouth … choose
your words wisely.”
“With the government, you’re
always on the record.”
Seth Taube
Baker Botts
30 Rockefeller Plaza
New York, New York 10112-4498
Phone: 212.408.2655
Fax: 212.259.2455
[email protected]
107
Milestones in Federal Sentencing
1987
Federal sentencing guidelines adopted
1991
Add guidelines for companies, cooperate for leniency
1999
DOJ says waiving privilege may indicate cooperation
2002
Sarbanes-Oxley increases criminal penalties
2003
‘Thompson memo’: paying employees’ legal costs may
show company isn’t cooperating
2003
Increase in penalties if many victims
2004
Compliance and ethics training for reduced sentence
108
Prosecutors’ Tough New Tactics
1. Federal grand (NY) criminal probe of abusive tax
shelters
2. CFO Richard Rosenthal resigns (at 48)
1. Vice chair for tax operations
3. Deputy Chair Jeffery Stein retires
1. Email tying Stein to marketing shelters
4. KPMG star tax partner Jeffery Eischeid ‘resigns’
1. Read Eischeid’s Congressional testimony
2. Won’t pay legal costs unless he cooperates
109
Old: “If you let our employees go, we’ll plead guilty.”
Now: “We’ll give you our employees, so long as we
don’t have to plead guilty.”
1.
2.
3.
4.
5.
IRS: KMPG shelters caused $1.4 Billion in lost taxes
KPMG has waived privilege
No joint defense agreement
KPMG gives same documents to DOJ
Will set standard for ‘cooperation’
110
1. 3 Computer Associates executives pleaded guilty to
obstruction for lying to company attorneys
2. Lucent’s accounting fraud fine increased $25 million
because it paid employee legal costs
111
Warning: Honesty is the Best Policy
The truth will keep you free
Far-reaching change in expectations on truthfulness
Dot com late 90’s environment
Facts were not material
Opinions were not actionable without direct proof
Puffery was acceptable
NOW skewed or deceitful comments that mislead
will be pursued
Even if legal no deals that mislead
112
Raising a Red Flag Isn’t Enough
1. Either quit or join the conspiracy
2. Prosecutors are going after anyone complicit or who
participates, even under protest
3. If raise questions, nothing is done, and continue
working, shows criminal intent

WorldCom CPA mid-level manager
“I was very concerned about being ordered to make the adjustments.”
General accounting department in financial statement preparation
Ordered to falsify earnings and testified against CEO Ebbers
Pleaded guilty to securities fraud and agreed to cooperate
Turned herself in to late after Cynthia Cooper _______________
15 years max
Betty Vinson
113
FTC Gets Tough

Graco Children’s Products $4 million fine
Failure to notify FTC 1991 to 2002
6 deaths and hundreds of injuries
Consumer Product Safety Act requires immediate reporting
Relies on company data and few rules
Graco “did not knowingly violate CPSC’s [rules]”
…failures occurred before the current system that will
insure this will not occur moving forward.
WalMart $750,000 fine and model reporting system
Weekly spreadsheet of complaints to FTC
114
Companies Can’t Count
1.
2.
3.
4.
5.
Three Newspapers Are Sanctioned
SEC probing newspaper circulation
SEC Probes Hazy Notion of ‘Customer’
SEC Dials 411 on Telecom Math
Will Apollo's Bad Report Card Get Its Shares
Grounded?
6. Can For-Profit Schools Pass an Ethics Test?
7. TV Networks May Not Be ‘Upfront’
115
What’s Happenin’ with Firms
116
Small and/or Risky Clients Getting ‘Fired’
1. Vascular Solutions
1. E&Y auditor since 1997 IPO
2. ‘Fired’ 3 months before filing
3. $20 million and declining loss
4. No wrongdoing
2. Molex Inc.
Howard Root CEO
Vascular Solutions
117
Molex Fires CEO+CFO
1.
2.
3.
4.
5.
6.
Electronic components
D&T: Inventory problem
Must fire CEO + CFO
Fired D&T, hired E&Y
E&Y: Fire ___________
$5.8 million write-off
118
Big-4 ‘Firing’ Public Clients
1. PWC reduced July 2003 to
2004 = 660,000 client
hours
2. E&Y fired 88 in 2004 vs. 52
in 2003
3. BDO 40 – 100% fee
increase
Public Clients Fired
by Big-4
210
152
78
2002
2003
2004
119
Firms Settle Travel-Billing Suits
1. Firms
1. Retained lump-sum rebates on travel expenses
2. Said rebates offset costs they otherwise would
have billed to clients
2. E&Y pays $18 million
3. KPMG pays $34 million
4. PWC pays $54.5 million
120
PwC Travel-Billing
1.
2.
3.
4.
5.
6.
Neal Roberts complains
Filed False Claims Act suit against Big-4
If not retained, would have billed higher rate
Thousands of firm documents now public
Jan 1999 internal slide presentation
“While I appreciate the importance of managing a
tight fiscal ship, I somehow feel we are being a bit
greedy,” Barbara Kipp, Ethics PIC
7. Stopped taking rebates in late 2001 but didn’t _____
121
E&Y Gets 6-Month Ban
1. Jointly marketed consulting and tax
2. Customer of PeopleSoft and allegations are
“outrageous”
3. E&Y is an “Implementation partner” in _________
4. PIC of Independence Ed Coulson who was __________
5. Culture of big firms was to use audits as ___________
122
“The overwhelming evidence is that Ernst’s day-today operations were profit-driven and ignored
considerations of auditor independence….committed
repeated violations….by conduct that was reckless,
highly unreasonable and negligent.” Conduct
“reckless, highly unreasonable and negligent….
Virtually no systems in place to ensure compliance
and disregarded what few guidelines it had.”
123
“This was not isolated or confusion over a
complicated technical issue. These violations
occurred over an extended period. They were
committed by professionals throughout the firm who
exhibited no caution or concern for the rules of
auditor independence in connection with business
relationships with an audit client.” Brenda Murry,
SEC chief administrative judge.
124
6-month ban from accepting new public company
clients
1998 E&Y earned $150 million implementing
PeopleSoft and audit fee of $372,000
$500 million in licensing and marketing fees 94 to 99
$1.7 million fine (________) + $800,000 interest
Hired outside monitor
No assertion audit was faulty
125
Grant Thornton Settles Case
1.
2.
3.
4.
5.
6.
7.
8.
MCA Financial Corp
SEC charged GT aided and abetted securities fraud
GT and Doeren Mayhew jointly audited MCA
SEC charged they issued clean opinion knowing
“that MCA failed to disclose several million dollars of
material, related party transactions.”
$1 million fraud training + $1½ million fine
Disgorge audit fee
5-year ban on joint audits
www.sec.gov/news/press/2004-106.htm
126
Doeren Mayhew
1.
2.
3.
4.
5.
Voluntarily discontinued conducting public audits
6-month ban on public company audits
Agreed to improve public company audit practice
Disgorge $115,126
Partners Peter M. Behrens (GT) and Marvin J. Morris (DM) and
Manager Benedict P. Rybicki (DM) did not adequately plan the
1998 MCA audit, did not act with sufficient skepticism in
conducting the audit, and did not obtain enough evidence to
support their conclusions and, thus, engaged in improper
professional conduct.
6. Barred for Behrens 5 years, Morris 3 years, Rybicki 1 year
127
GT and Doeren Mayhew
1.
2.
3.
4.
5.
MCA bought distressed real estate and resold to LPs
LPs were controlled by MCA principals
Doeren brought in GT for public bond offering
Auditors questioned transactions in work papers
Kentucky Derby, hockey games, Michigan football
tail-gate party
6. Bean Counters Bash
7. 6 MCA officers plead guilty
The Bean Counters Bash?
Corporate Governance News
128
History of SEC Bans
1975
Peat
Marwick
6-month ban on failed audits of 5 clients
including Penn Central Railraod
1978
E&E
6-month ban but full SEC reduced to censure
1976
Seidman
6-month ban over failed audits including Equity
Funding
2004
Grant
Thorton
6-month ban over MCA Mortgage audit
129
New Legal Tactic to Battle Fraud
1. “Deferred” prosecution agreements
2. Companies:
1. Prudential
2. WorldCom
3. Computer Associates
4. Merrill Lynch
5. Monsanto
6. American International Group
7. AOL
130
“Deferred” Prosecution Agreements
1.
2.
3.
4.
Go after people, not the company
Used by Feds and state AG’s
Partly result of Enron/Andersen
“Granting a corporation immunity or amnesty or
pretrial diversion may be considered …. in exchange
for cooperation,” Deputy U.S. AG Larry Thompson
5. Reduces investment and job losses
6. Does it let companies off too easily
7. Judges usually don’t have to approve
131
“Deferred” Prosecution Agreements
1. BIG goal: encourage companies to cooperate
2. Companies were
1. Shielding key executives
2. Failing to disclose records/documents
3. Dragging feet
3. Factors to get deferred prosecution
1. Top executives
2. Witnesses
3. Internal investigations
4. Waive privilege
132
Why Managers Bend the Rules
=
=
=
=
1. CEO/Owner/Founder larger
than life
2. Most are locals
3. Status to work there
4. Compensation structure
5. Cook-the-books
1. Hit the numbers
2. Make the numbers
3. Help the numbers
133
1. Starts as one-time, temporary, fix
2. Snowballs and becomes __________
3. Loyalty to the ‘boss’
Franklin C. Brown
Vice Chairman/General Counsel
Counsel to Rite Aid CEO for 40+ years
76 years old
Backdating contracts + $25,000 to secretary
Sentenced to 10 years
134
135
Compilations and the
Duty to Detect Fraud
1. No duty to actively hunt for fraud.
2. Liable if ignore obvious problems or fail to report to
right party.
3. Don’t place undeserved trust in management.
136
Compilations and the
Duty to Detect Fraud
Facts
1.
2.
3.
4.
Issues
1. Any duty to detect the fraud?
2. Expert “Firm should have looked.”
3. Firm “Only a compilation.”
Resolution
1. Settled for $375,000.
Thoughts
1.
2.
3.
4.
5.
Compilations for 5 years.
3rd year saw problem with deposits.
Controller ”It’s just a timing issue.”
Controller embezzles $750,000.
LOTS of checks in transit.
Firm knew no segregation of duties.
Firm knew signatures stamps open.
Firm detected and reported, but to wrong person.
Should have reported higher up.
137
FRAUD—AICPA/FBI PARTNERSHIP
1.
2.
3.
4.
5.
6.
7.
8.
Expanded cooperation with law enforcement
Deep and wide-ranging partnership
20,000 accountants watched joint webcast
CPAs are an essential part of winning the fight
FBI is actively recruiting CPAs
FBI SAYS CPAs STAND AS A SOLID LINE of defense
Hotline 888-622-0117
A Joint Effort to Fight Corporate Fraud, J of A, 4/04
138
Hiring Ethical Employees
Your hands aren’t tied _____________________
Best predictor of future behavior is ___________
Background and reference checks
People will voluntarily talk about ethics
Everyone who interviews should share,
crosscheck and evaluate
People with low integrity tend to think
everyone does it and will brag
Key: multiple examples
Show understanding, not ____________

139
11 Questions to Hire Ethical Employees
1. We often have to choose between what
is right and what is best for the
company. Tell me about when that’s
happened to you.
2. Tell me about the ethics of your
company. What are you comfortable
and uncomfortable with?
3. Tell about an ethical decision you had to
make. How did you make a decision?
Just
Just 22
or
or 3,
3,
not
not all
all
11.
11.
140
4. Why would someone at your company
stretch the rules? What did you think?
5. Have you ever had to bend the rules or
exaggerate a little to get a sale?
6. Have you ever had to make something
seem a little better than it really was?
7. Tell me about a situation where you had
to go around company rules to get
something done?
141
8. We’ve all done things we later regret.
Tell me about one and what you’d
do differently today.
9. Have you ever had someone mislead the
company or a client significant? How’d you handle it?
10. People think regulations, rules, and policies are either
to be followed to the letter or to be broken. You?
11. Have you ever gotten credit for work someone else
did? How’d you handle it?
142
T&E Fraud – Issues
Little time reviewing
Why might employees think it’s OK with
management ________________________
Often symptom of larger schemes and frauds
Average T&E thief
Valued, works hard, unsupervised, no suspicion
Likely married and church-going and no arrests
Post high school and socially adept
Acts alone 70% of the time
143
T&E Fraud – 1st Way
Mischaracterizing personal expenses as business
Gray: children’s video tape
Business dinner really personal
Fuel for personal car
Business gifts to family and friends and ______
Golf when play with friend or spouse
144
T&E Fraud – 2nd Way
Overstating expenses
Add or alter amounts on legit receipts
Non-existent cash expenses
Inflate mileage
Too many per diem days
Taxi drivers increase amount
145
T&E Fraud – 3rd Way
Fictitious expenses
Requests reimbursement for fake expense
University tuition, office supplies/equipment
146
T&E Fraud – 4th Way
Multiple reimbursements
Claim same expense
Duplicate hotel or airline bills
Same expense on different form
147
Selecting and Retaining Clients
Statement on Quality Control Standards (SQCS) 2
System of Quality Control for a Firm’s Accounting
and Auditing Practice
Audit, attest, accounting, review and other services
Policies and procedures for reasonable assurance
Only engagements to be reasonably completed
with professional competence
Consider risk of providing service
148
Audit failures are
your greatest risk
1.
2.
3.
4.
5.
Law firms specialize
Deep pockets
Settle if damages > insurance
Third party suits
Just complying with GAAP+GAAS not enough
Client acceptance
1.
2.
3.
4.
Screen clients
Understand the client
Identify high-risk clients
Are you qualified
I had a _____ feeling
about that client.
149
Interview client
1.
2.
3.
4.
5.
6.
Interview 3rd
parties
1. Other professionals, attorney and credit sources
2. Business assn, vendors, customers, Google
Contact
predecessor
accountant
1. Management integrity and disagreements
2. Why fired
3. RPTs
Why client needs an service and for whom
Deadlines and other services
Does client understand engagement
Do you understand client + industry trends
Why client needs new firm
Conflicts of interest
150
151