Fraud

Facebook and Twitter Get Used in a Penny Stock Scam

Before we can get into this particular penny stock scam, it would be wise to define the penny stock scam for the uninitiated. It’s a pile-in, financial porn pump and dump. These particular crooks decided to take to Twitter and Facebook to get new fish to buy into their easy to fill 2×1 matrix. Since Twitter is inundated with all level of bizarre MLM bots and pyramid scheme tweet spam, it’s easy to see how an effective a tool it can be in perpetuating financial fraud.


The Manhattan DA’s office says 11 of the 22 participants used Twitter feeds and websites to lure “investors” (read the fine print, people) to buy a bunch of cheap stocks they’d artificially inflated. They made off with $3 million and “investors” lost $7 million.

I use the word “investor” loosely. If you’re getting your stock picks from some spammy Twitterfeed that isn’t even run by a human being (or solely from one who is, so far you aren’t required to register with the SEC to talk about stocks on Twitter) maybe you had it coming. So far we haven’t seen the offending tweets, if you know where to find them let me know.

Penny stock scams are not limited to Twitter and even former SEC lawyers have been convicted of using them to take advantage of gullible “investors.” Like this guy, who brought civil cases against white collar criminals for 15 years in Fort Worth and ended up getting 8 years in federal prison for his pump and dump activities. It’s unclear if he used social media in his crimes but if he came from the SEC, chances are he’s more into porn than Twitter.

Filed under: doing it wrong

Facebook & Twitter used in stock fraud: U.S. prosecutor [Reuters]

Accounting News Roundup: Investigation of E&Y Over Lehman Begins in UK; Study: Mortgage Interest Deduction Doesn’t Increase Home Ownership; PwC Announces Revenue Numbers | 10.04.10

E&Y auditors investigated over Lehman Brothers [Accountancy Age]
“The Accountancy and Actuarial Discipline Board (AADB) has begun an investigation of E&Y in its role in reporting to the FSA on audit client Lehman Brothers International Europe’s compliance with the authority’s client asset rules, which govern the protection of client money.”

And since they were on a roll, the AADB is also investigating PwC for its role in J.P. Morgan’s misuse of client assets.

Study Finds the Mortgage Interest Deduction to be Ineffective at Increasing Owneref=”http://www.taxfoundation.org/blog/show/26762.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+TaxPolicyBlog+(Tax+Foundation+-+Tax+Foundation’s+%22Tax+Policy+Blog%22)”>Tax Foundation]
“Proponents for the MID often offer the justification that it increases homeownership rates, which they say has positive benefits for society. But most economists seriously question the benefits of MID and many believe homeownership is greatly over-subsidized.”

Visa, MasterCard Antitrust Decision by U.S. Said to Be Near [Bloomberg]
“The U.S. Justice Department may decide as early as this week how to resolve its two-year antitrust probe of merchant restrictions imposed by Visa Inc., MasterCard Inc. and American Express Co., three people briefed on the matter said.

The department still hasn’t decided whether it can reach a deal with the three biggest U.S. payment networks or challenge their policies in court, one of the people said. The department likely will file a lawsuit, and MasterCard and Visa are expected to settle, people familiar with the matter said.

The talks focus on rules that bar merchants from charging extra to customers who use credit cards and steering them to competing cards, and require retailers to accept every type of card banks issue, said the people, who requested anonymity because the discussions are private. The department is leaning toward allowing the companies to maintain prohibitions against surcharging, two of the people said.”

Will KPMG Ever Wake Up and Finally Learn Its Lesson after Being Duped into Completing Crazy Eddie’s Audits Too Early Twenty Three Years Ago? [White Collar Fraud]
Today’s lesson in duping auditors – Sam Antar explains exactly how he fooled KPMG (then Peat Markwick Main) into signing off on incomplete audits back in the 80s.

PwC takes $26.6bn in global revenues [Accountancy Age]
Thanks to the miracle of rounding, $26.6 billion puts P. Dubs in a tie with Deloitte for largest firm in terms of revenues, who reported the same number last month. This obviously will not stand and we will investigate the matter further to the appropriate number of significant digits to determine who the top dog is.


Citi says CEO, CFO “rebutted” Mayo’s criticisms in meeting [Reuters]
On Friday, banking analyst Mike Mayo met with Citi execs including CEO Vikram Pandit and CFO John Gerspach and they discussed, among other things, why Citi hasn’t been writing down their DTAs. Citi says that successfully rebutted the Mayo Man who is issuing a report today with his thoughts on the sit-down.

Accountant gets year-and-a-day in Petters scam [Minneapolis Star-Tribune]
“Harold Katz, the hedge fund accountant who doctored financial statements to hide the Petters Ponzi scheme from investors, was sentenced Friday to 366 days in prison after apologizing to family, friends and investors.

Katz, 43, will be eligible for parole in about 10 1/2 months. He was sentenced for conspiracy to commit mail fraud.

‘I made a colossal error in judgment,’ Katz told U.S. District Judge Richard Kyle. ‘I hope I can use this horrific experience to help others not make the same mistakes as I have.’

Katz created false financial statements at the behest of Gregory Bell, manager of Lancelot Investment Management, a Chicago-area hedge fund, to mislead investors about the stability of Petters Co. Inc., which was defaulting on various promissory notes as its decadelong Ponzi scheme unraveled in 2008. Katz also assisted Bell in making phony banking transactions with Petters Co. Inc. to make it appear the Petters Co. was paying off notes it owed to Lancelot.”

Accounting News Roundup: More Tax Cuts for Small Business?; Scenes from a SaaS Meltdown; SEC Files Charges Against Sachdeva | 09.01.10

No Charges for Moody’s in Ratings Violation [NYT]
“The Securities and Exchange Commission said Tuesday that it had declined to charge Moody’s Investors Service for violating securities laws by failing to comply with its own procedures for rating complex derivative sece decision followed an S.E.C. investigation, and the commission used the opportunity to warn all of the national credit rating agencies that it would use new powers under the Dodd-Frank banking law to take action against similar conduct, even if it occurred outside the United States, as the Moody’s case did.

The S.E.C. said it had declined to pursue a fraud enforcement action in the case because of jurisdictional issues. The securities in question originated in and were rated and sold in Europe, the S.E.C. said.”

Tax Cuts Weighed to Spur Economy [WSJ]
“The Obama administration is considering a range of new measures to boost economic growth, including tax cuts and a new nationwide infrastructure program, according to people familiar with the discussions.

The president’s economic team has met frequently in recent days to list ways to bolster the struggling recovery, according to government officials.

On the list of possible actions: additional tax cuts for small businesses beyond those included in a $30 billion small-business lending bill before the Senate. It’s not clear what those tax breaks would target or how much they might cost in lost revenue to the government.

Also in the mix: a possible payroll tax cut for businesses and individuals, as well as other business tax breaks, according to people familiar with the discussions. Currently, income taxes are scheduled to rise with the expiration of Bush-era tax cuts at the end of this year.”

Lessons from ClearBooks failure [AccMan]
What happens when a SaaS provider has a blow-up? Well, it depends.


“Non-Combat” Troops Remaining in Iraq Will Still Receive “Combat Zone” Tax Treatment [Tax Foundation]
The troops that remain in Iraq will still receive combat zone treatment (i.e. ‘designated hostile fire or imminent danger pay areas’).

Brainiest Cities [The Daily Beast]
Boulder #1; DC #3; Boston #4. Austin comes in at a paltry #16 behind Ames, IA. What’s up with that?

Former Rothstein CFO Stay Gives Up Boat [SFBJ]
Convicted Ponzi Schemer Scott Rothstein’s CFO had to give up her 28-foot 2008 Southport boat in order to settle a claim against her for the $154k loan she received from the firm to buy said boat.

SEC Charges Two Accounting Professionals at Milwaukee-Based Company with Fraud [SEC]
The SEC got around to filing civil charges against Sue Sachdeva. The Commission also charged Senior Accountant Julie Mulvaney with helping S-square conceal the fraud through bogus journal entries.

Which SpongeTech Founder Celebrated Suing Reporters and Critics with a Zurich Hooker?

Back in May, we briefly mentioned the alleged fraud at SpongeTech, a company that specialized in sponges that “can be pre-loaded with detergents and waxes, which are absorbed in the core of the product thd during use.” How this is different from using regular sponge isn’t quite clear (dry sponge + soap + water = sponge ready for use). Maybe it’s the “gradual release”?

But that’s neither here nor there. As you may recall, the allegations brought against founders Michael Metter and Steven Moscowitz include making up five customers that accounted for 99% of SpongeTech’s revenues.

But what’s extra-important today is that investigative journalist Roddy Boyd has some interesting details over at his blog, The Financial Investigator that indicate that either Metter or Moscowitz (not exactly clear which) was looking for a little release themselves:

Dicon Technologies LLC, a company that SpongeTech managed to acquire and run into the ground in about one year’s time, was put into bankruptcy in June. As part of that, its schedule of assets and liabilities (which contains line item details of cash outflows) suggests that one of the two at least got something more out of fleecing their investors than money. On April 22 and then again on April 23, two charges were made using a Dicon-issued debit card for $609.55 and $606.14, respectively, to a Zurich-based escort service. [Ed. note: NSFW but hey, you make your own decisions]

If you’re not willing to check out the site for yourself, we’ll share some of the particulars (this is translated from German):

Super horny girls are looking forward to meeting you. Whether at your home, your office, hotel or some other place. As an escort agency, we offer the full service, and round the clock. Looking for a sexy companion for a fancy party, a dinner or the absolutely thrilling adventure of your sexual performance? Then you are at [the] absolutely right [place]! [Ed. note: we took a stab there] We offer for every taste and every occasion the right girl. We are sure, with us you find your dream girl, who suits you! Wherever you are, in Zurich, Bern, Lucerne, Winterthur and Basel, Aarau and Olten – we come to you and visit – no charge, no hidden costs!

Call us and arrange an appointment with the model of your choice. How fancy your needs may be, our taboos and attractive models are open to many hot games and are looking forward to meeting you.

Ladama Escort has been known for some years on the market and knows the needs of customers. We take the time to advise you on important issues and offer you the opportunity to support the idea to take your request accordingly. Experience unforgettable moments and the absolute kick!

Really the best part of this is when Boyd points out that one of the dates where an unforgettable moment may have taken place – April 23rd – was the same day “[T]he company sued several reporters and critics for a host of now entirely preposterous charges centering around defamation and conspiracy (I am referenced in the suit, but not named.)”

So you’re in Zurich, erroneously sue some reporters and critics of your company’s trumped up numbers and you want some company that can provide an erotic massage, leather or latex, a dildo show that may or may not speak a lick of English.

Who wouldn’t, amiright? After a long day of cooking the books you probably figure you deserve some your choice of [insert]job and since the company you just purchased is passing out debit cards, you best make the most of it.

Update: The Dirty Sponge Men Redefine the Concept of Working Capital [The Financial Investigator]

As to Whether Allen Stanford Knew His CDs Were Worthless

“I think it’s obviously obvious.”

~ Forensic accountant Mark Berenblut, responding in the affirmative that R. Allen Stanford knew he was “misrepresent[ing] the liquidity and soundness of the CDs.”

Accounting News Roundup: Deloitte Poised to Be the Biggest of the Big 4; A Guide to Avoiding Layoffs; Forensic Accountant Testifies That Stanford Skimmed Funds | 08.26.10

~ Sorry about the downtime yesterday. Our best people are on it like ConEd.

Deloitte to be world’s biggest accountant as partners sweep up £590m [Telegraph]
“According to Mr Connolly, when Deloitte publishes its global results in October the firm is set to reveal it has overtaken PriceWaterhouseCoopers to become the biggest of the “Big Four” accountancy houses globally.

However, Mr Connolly, who is set to retire in 2011, predicted the current financial year could prove even more successful despite describing future growth in the wider economy as ‘low and slow.’ ‘We have alrin the first quarter of this year, so I expect we shall return to double-digit growth. The M&A market has started to get much busier and our tax business is growing well again. Changes in regulation also mean good business for us.’ ”

Investors Gain New Clout [WSJ]
“In a decision years in the making, the SEC voted 3-2 in favor of the “proxy access” rule, which requires companies to include the names of all board nominees, even those not backed by the company, directly on the standard corporate ballots distributed before shareholder annual meetings. To win the right to nominate, an investor or group of investors must own at least 3% of a company’s stock and have held the shares for a minimum of three years.

Currently, shareholders who want to oust board members must foot the bill for mailing separate ballots, as well as wage a separate campaign to woo shareholder support. Both are too costly and time-consuming for most. Now, the targeted companies will essentially be footing the bill for the dissidents, including them in the official proxy materials. The new rule will be in place in time for the 2011 annual meeting season next spring.”

Celgene names new chief financial officer [Reuters]
Jacqualyn Fouse will replace David Gryska effective Sept. 27

Herz Resigns As FASB Chair [The Summa]
Professor David Albrecht’s take on Roberto Herz’s decision to step down.

3Par Accepts Dell’s Increased Takeover Offer [Bloomberg]
“Dell Inc. said 3Par Inc. has accepted its increased offer of $24.30 per share in cash, or about $1.6 billion, net of 3Par’s cash.”


Dodging the Ax: How to Avoid Layoffs [FINS]
“As professionals working in financial-services witness the ax drop around their companies, many are living in fear that they could be included in the next round of layoffs. However, there are measures you can take right away to help safeguard your position and make you seem indispensable to management.”

Stanford Used Skimmed $1.6 Billion For Loans To Start-Ups, Witness Says [Bloomberg]
“The $1.6 billion that indicted financier R. Allen Stanford is accused of skimming from the funds of his investors was actually loaned by his Antiguan bank to start-up entities and other businesses he controlled, a fraud examiner testified.

Forensic accountant Alan Westheimer testified before a U.S. judge in Houston today that Stanford Financial Group Cos. comptroller Mark Kuhrt and chief accountant Gilbert Lopez told him they believed the borrowing should have been publicly disclosed.

‘The funds were being passed through as inter-company loans to the entities that were the recipients of the shareholder loans,’ Westheimer said. ‘Within a short period, usually six months, Mr. Stanford would assume those loans and the recipient companies transferred those balances to their underlying capital.’ ”

New Jersey Nets Fans May Have Gotten Ripped Off

“She promises to significantly reduce their IRS tax debts, but instead preys on their vulnerability, taking large up-front payments but providing little or no help in lowering their tax bills.”

~ California Attorney General Jerry Brown isn’t impressed with Roni Deutch’s advertising. And the Nets likely have one less way to try and draw crowds.

Apparently the ‘Wildly Inaccurate’ Accounting at Scott Rothstein’s Law Firm Didn’t Impress Some Miami CPAs

Unless you were born blind and deaf, you may have noticed that South Florida has its share of shady characters. We all know that Berns Madoff frequented the area. Plus there’s the obsessively dapper Lew Freeman, who was Miami’s go-to forensic accountant until he thought he’d just keep his client’s money.

Another model citizen/criminal in FLA is Scott Rothstein. His Ponzi Scheme managed to bring in just over $1 billion and he got 50 years for his trouble. But now the fallout from Rothstein’s little stunt is now raining hell on Miami accounting firm Berenfeld Spritzer Schechter & Sheer.


The trustee overseeing the bankruptcy of Rothstein Rosenfeldt Adler has accused Berenfeld, et al. of funneling $450 million to Rothstein.

As you can imagine, the crew over at BSS&S aren’t thrilled with the accusations and called the suit, “inaccurate and flawed,” and claim that they “conducted [our] duties professionally, conscientiously and in good faith.”

Well, the trustee obviously doesn’t see things that way and laid out several allegations, specifically, the following:

• Berenfeld improperly adjusted RRA’s income by $20 million in 2007 and by $75 million in 2008.

• Berenfeld withheld information from RRA President Stuart Rosenfeldt (who has claimed he had no knowledge of firm finances and couldn’t read a balance sheet).

• Berenfeld prepared tax returns in a way that did not distinguish between RRA operating cash and client trust funds, giving the misimpression that RRA had more available cash than it actually owned.

• Berenfeld did not pursue information about bookkeeping after RRA staff – including CFO Irene Stay and COO Debra Villegas – denied access to information about bank statements, fee income and trust accounts.

• Berenfeld “knew of wildly inaccurate RRA bookkeeping and inadequate accounting personnel evidenced by the way in which books and records were created and maintained, leading to extraordinary adjustments, tantamount to rewriting the books and records of RRA.”

• Berenfeld provided a “nebulous” letter to Rothstein to help cover up $15 million in suspicious transactions in response to an anti-money laundering compliance inquiry from Gibraltar Bank.

Now, we’ve heard that law firms aren’t the best when it comes to running their businesses, but ‘wildly inaccurate bookkeeping and inadequate accounting personnel’ that leads to ‘extraordinary adjustments, tantamount to rewriting the books,’ takes things to a whole new level. Berenfeld employee TerryTracy Weintraub gets special attention in the suit, so we can presume he’s the one responsible for knowing – and not being too concerned – about RRA’s exceptionally shitty books. Oops!

Accounting firm sued over Rothstein work [SFBJ]

The Restatement That Never Ends: KPMG Hasn’t Received Necessary Docs for Satyam

Back in June we told you about Satyam requesting just a wee bit more time to nail down their restatement of their financial statements. It wasn’t because KPMG and Deloitte weren’t working their asses off, it was more of commitment to get things right. Putting good numbers out there, repairing broken trust, so on and so forth.

Well! The three month extension ends next month but as you might expect, there’s a bit of a problem. More specifically, KPMG is now saying that they haven’t received the documentation necessary to finish the job. Unless everyone is okay with some wild-ass guesses, in which case they can proceed.

[F]or all its documents, KPMG had to depend on the [Central Bureau of Investigation (“CBI”), which is investigating the scam.

NDTV has learnt that KPMG’s analysis of the documents don’t match with the CBI’s. There is a discrepancy between the two which amounts to over [$200 million].

CBI has based its calculations on estimates of Satyam’s assets and liabilities while KPMG says they need documentation to base their estimates.

KPMG says that they didn’t get all the documents needed to make a clear assessment which is why the accounts are likely to be re-stated full of riders.

But again, if you’re cool with some double-entry hocus-pocus, that can be arranged. There’s a merger at stake after all, “This confusion in the numbers could hold up Satyam’s merger with Tech Mahindra, which needs the go ahead from market regulators in India and the US, since Satyam is also listed in the US.”

Good luck getting that U.S. approval.

Satyam accounts restatement: KPMG’s analysis differs with CBI’s [NDTV]

Sue Sachdeva Pleads Guilty, Shopaholism Still a Possible Motive

Well gang, the Sue Sachdeva circus has come to an unspectacular end. S-squared pleaded guilty yesterday to the $30-odd million embezzlement at headphone factory Koss. No trial, no media circus (the type we envisioned anyway) and no spectacular cross-examination that could have resulted in a great Law & Order Brewtown spinoff.

Nope. Just a guilty plea, some regret from Suz and the distinct possibility that something might not be right upstairs. Although the MJS reports, “when asked whether she had any mental health issues. [Her attorney, Michael] Hart answered for her, saying there were no issues of mental health that prevented her from understanding the government’s case or the plea agreement,” her statement alludes to some “issues” that led to the thieving:


Sachdeva Release

So while the Sachdeva portion of this program is more or less over (sentencing is October 22), we still have the Koss v. Grant Thornton blamestorming to look forward to. Which will be a for more nerdy exchange but could result in some fun finger-pointing, nonetheless.

Sachdeva pleads guilty, says she regrets fraud [Milwaukee Journal Sentinel]

Accounting News Roundup: Geithner Is Ready to Let Tax Cuts Die; Hayward on His Way Out?; PwC Wants Glitnir Lawsuit Tossed | 07.26.10

No new recession, let tax cuts die: Geithner [Reuters]
“The economy is not likely to slip back into recession but letting tax cuts for tans expire is necessary to show commitment to cutting budget deficits, Treasury Secretary Timothy Geithner said on Sunday.

In appearances on several Sunday talk shows, Geithner said only 2 to 3 percent of Americans — those making $250,000 or more a year — will be affected when tax cuts enacted under former President George W. Bush end on schedule this year.”

BP Said to Prepare Dudley as CEO as Board Looks for Recovery [Bloomberg]
“BP Plc plans to name Robert Dudley to succeed Tony Hayward as chief executive officer as the board looks to recover the company’s position in the U.S., two people with knowledge of the matter said.

Dudley, the director of BP’s oil spill response unit, is ready to be announced as the company’s first American chief and to take the helm Oct. 1, one of the people said, asking not to be identified because a final decision hasn’t yet been made. The decision was reached in discussions with board members about how best to take BP forward and rebuild its U.S. position, the person said.”

Madoff Investors Brace for Lawsuits [WSJ]
“Irving Picard said he could wind up suing about half the estimated 2,000 individual investors he has called “net winners” from their dealings with Mr. Madoff. Such investors withdrew more from Mr. Madoff’s firm than the amount of principal they invested.

‘The people who made money, who got more, have made money at the expense of the people who didn’t,’ said Mr. Picard, who has the power under federal bankruptcy provisions to pursue money withdrawn from Bernard L. Madoff Investment Securities LLC before it collapsed in December 2008 and redistribute the funds fairly among victims.

Mr. Picard must file any so-called clawback lawsuits by December, the two-year anniversary of Mr. Madoff’s arrest and the filing of regulatory proceedings against him. ‘We’re not going to wait until the last minute,’ Mr. Picard said.”


Change the world or go home [AccMan]
Dennis Howlett implores you that if you want your firm or business to really stand out then it’s going to take more than a catchy slogan or a boilerplate email to get people’s attention. You best recognize an opportunity when you see one.

“I’ve lost count the number of times I’ve said but it is worth repeating. When disruption like SaaS comes along, it represents an opportunity. From a professional standpoint it should mean that firms can further commoditize what they do by using accounting dashboards that show them the status of their clients’ activity. It is a short step to seeing how this might be integrated into fees, billing, customer satisfaction measurement and the like.”

If You’re Going To San Francisco…AAA Will Be There [FEI Financial Reporting Blog]
Edith Orenstein has the lowdown on this year’s American Accounting Association’s (AAA) annual meeting. This year’s event is in AG’s backyard (she loves giving directions, btw) from July 31 to August 4th and will feature Francine McKenna and Professor Albrecht on one of the panels.

Join Me For a Nice Little CPA Exam Chat on August 3rd! [JDA]
Speaking of Adrienne, she’ll be over at CPA Exam Club to take your questions on everyone’s favorite test on August 3rd. Yes, that’s one week from tomorrow.

PwC Demands Dismissal of Glitnir Lawsuit [Iceland Review]
PwC’s lawyers argue that Glitnir and the firm agreed to do any legal wrangling in Iceland if the poo hit the fan. Late last week they requested that the lawsuit in New York be tossed.

Saltzman Hamma firm details merger with RubinBrown [Denver Business Journal]
“Saltzman Hamma Nelson Massaro LLP, a century-old Denver accounting firm, is merging with St. Louis-based RubinBrown LLP to form what’s expected to be among the 50 largest accounting firms in the United States, principals were set to announce on July 23.

The new entity, which will operate as RubinBrown, will employ 375 people in offices in Denver, St. Louis and Kansas City, Mo. The merger will be effective Aug. 1.”

District Court Denies Charitable Deduction for Donation of Home to Fire Department [TaxProf Blog]
Just donate a car next time. It’s a far worse investment than a house.

IRS Proposes PTIN Fees [JofA]
$50 for your very own preparer tax identification number! Of course there’s also a ‘reasonable fee’ on top of that from “a third-party vendor that will administer the application and renewal process,” that gets thrown in for good measure.

My Life as a White-Collar Criminal [White Collar Fraud]
Sam Antar went on Canadian TV last week to talk about how much fun it is to be a crook. Except the whole possibility of prison part.

Convicted Forensic Accountant Lew Freeman Will Be Damned if You Think You’re Getting His Suits

Miami’s go-to forensic accountant-turned Ponzi Schemer Lewis Freeman was sentenced to eight years in prison earlier today. While that’s clearly an embarrassment for him and his family (he reportedly told his kids, “I know you’re smart enough not to follow … the horrible example I set for you.”) the man does have a shred of dignity left.

He still has plenty of friends who think that his charity work should have been enough to keep him out of the slammer altogether. Sam Antar – who did the exact opposite metamorphosis – isn’t impressed by this:

It’s hilarious how many people are supporting this guy. As the criminal CFO of Crazy Eddie, I used to do good deeds such as walking old ladies across the street, too. However, my so-called good deeds never made me any less of a cold-blooded criminal.

Good deeds are used by criminals to build walls of false integrity around themselves to increase the comfort level of their victims and to gain an outpouring of support, if they ever get caught.

But on a more superficial level, Lew Freeman was a dapper fellow. So don’t even begin to think that you’ll be getting your filthy mitts on the man’s fine threads.

[Freeman] spent his final moments of freedom Friday saying goodbye to family and stripping down to his jogging shorts before dozens of people in a Miami federal courtroom….“He didn’t want to give his suit to the authorities,” said Freeman’s attorney, Joseph DeMaria. “It was his idea.”

Freeman sentenced to eight years [South Florida Business Journal]

How the ACFE is Promoting CFE Awareness

After Caleb forced me to write a few posts on Credentials for Accountants meant specifically for those of you who still do not know what you want to be when you grow up, I managed to bumble one so badly I was contacted by Scott Grossfeld, CFE CPA and Cttp://www.acfe.com/”>Association of Certified Fraud Examiners. See, it appears I made a typical media mistake in using fraud and forensics as interchangeable fields within the industry and Scott felt compelled to speak up.

This wasn’t exactly wrong (I was being lazy actually) but as CEO of the ACFE, he’s got a responsibility to make sure the media represent the field of fraud examination correctly, especially when it comes to giving forensic accountants credit for what he and his fellow CFEs do out there. Thankfully, we had a nice little chat and cleared up that little point.


Additionally, Scott promised us access to recent salary survey information available shortly that will give us a better idea of what CFEs make. For now, he told us that the data confirms a 22% pay premium for individuals with the CFE compared to individuals in the same position without the CFE. We liked this approach and wish more organizations would take an active role in monitoring and engaging in the conversation, as Scott was obviously doing by reading our series on credentials.

Along the way, however, I discovered that the ACFE is also on top of things by promoting the credential, interacting with their audience and reaching potential new members through new avenues like blogging and social media. The ACFE is excited to be launching a new social media campaign shortly that we can only hope rivals that of the AICPA’s total social media genius (except for that whole Feed the Pig thing, which still creeps us out but is brilliant and weird enough to get a pass).

The strategy of having a CFE on staff is akin to carrying insurance on your home or car, and diversifying a company’s staff can mean the difference between a lawsuit and a slap on the wrist thanks to our favorite unnecessary accounting legislation of all time, Sarbanes-Oxley. “If you look at the CFE, originally the idea behind it was that we had accountants who really didn’t know how to investigate and investigators who don’t know accounting so we were able to bring those two together,” he said. “If you look now, Enron was the big thing that really changed perspective… here’s a big financial risk but you could lose your company if you’re not careful (with SOX) and I think that really raised awareness. Before that fraud work was sort of like insurance, you knew you needed it but you couldn’t always justify it.”

But CFEs do justify their price from a prevention standpoint, assuming fraud to be a risk all companies are exposed to. “5 – 7% of the company’s revenue is lost to fraud, that’s where the fraud examiner pays for themselves,” he told us.

But how does the ACFE promote the usefulness of a 20 year old credential like the CFE? By getting to the kids when they’re still undecided, of course.

“It used to be that the CFE was a secondary credential. [Promoting the credential is the goal of] the higher education partnership we provide to educators. We have 300 colleges and universities in that program. Now it’s part of the discussion; risk is on the radar in terms of what companies are looking for. What we typically see is fraud being an elective type class though there are a few schools that specialize in fraud and or forensics.”

The ACFE also promotes its mission by encouraging those interested in pursuing a career in fraud-fighting to join the organization as a student member for something like $20 a year. Student Associate membership is open to undergraduate students enrolled in 9 semester hours (or equivalent), or graduate students enrolled in 6 semester hours (or equivalent) in an accredited college or university. We agree with this approach, as surrounding yourself with like-minded folks gives you a chance to expose yourself to those already on your desired path. There’s plenty of opportunity for mentorship, commiserating and gaining insight into what the credential actually means for your career.

All in all we approve of what the ACFE is doing and look forward to seeing whatever else they have up their sleeve unfold in the months and years ahead. Let’s face it, they’re pretty much guaranteed a job forever. We like.

Credentials for Accountants: Certified in Financial Forensics

If you’re the type that enjoyed spy shows as a kid and loves scoping out financial statements like CSIs love autopsying dead bodies, you might want to consider a CFF (Certified in Financial Forensics) when you grow up. Anyone considering this designation may want to add CFF to the end of their name with a CFE or CFA. If you’re looking at a CFF, you might want to hurry up and decide before future CFFs are required by the AICPA, starting September 1st, to pass the CFF examination.

In May of 2008, the AICPA introduced the CFF as a professional credential that combines specialized forensic accounting expertise with the core knowledge and skills that make CPAs among the most trusted business advisers.


Education Requirements
Becauential that represents an extensive knowledge base, CPE is an important component to qualify for and renew a CFF designation. New CFFs are required to demonstrate a certain amount of Lifelong Learning (based on the point system below) and must complete 60 hours every 3 years with renewal of the credential.

Professional Requirements
In order to qualify to become a CFF, CPAs must be an AICPA member in good standing, have five years professional experience in the field of accounting and must score at least 100 points on the application (points based on professional experience, knowledge, lifelong learning and forensic accounting credentials already held). Only CPAs can apply as a valid, unrevoked license to practice public accounting is a requirement as well.

The CFF Exam
The exam, which will be introduced as a requirement on September 1, 2010, is a four hour, 100% multiple choice exam administered by the AICPA. It consists of the following areas and weights (check out the CSOs from the AICPA here)

Professional Responsibilities and Practice Management

• AICPA 5%

• CPA Professional Responsibilities in Civil and Criminal Matters 5%

Fundamental Forensic Knowledge

• Laws, Courts and Dispute Resolution 5%

• Planning and Preparation 5%-10%

• Information Gathering and Preserving 10%

• Discovery 5%-10%

• Reporting, Experts and Testimony 5%-10%

Specialized Forensic Knowledge

• Bankruptcy, Insolvency and Reorganization 5%-10%

• Computer Forensic Analysis 5%-10%

• Economic Damages Calculations 5%-10%

• Family Law 5%-10%

• Financial Statement Misrepresentations 5%-10%

• Fraud Prevention, Detection and Response 5%-10%

• Valuation 5%-10%

Career Options
Many with the CFF credential stick to private practice and use the CFF as a way to distinguish themselves as passionate about forensic accounting.

Compensation and Other Benefits
We all know more letters = more money but in the case of the CFF, little real data can be found on the difference in compensation for CFFs versus plain old forensic accountants. We’re guessing this is because the CFF is a relatively new AICPA credential but as time goes on and frauds get larger and more complicated, we trust that this data will be much easier to come by. As a general rule, crendentialed CPAs are more valuable simply because pursuit of a credential in one’s specialty shows a level of professional dedication adored by HR departments and managers alike.

Adrienne Gonzalez is the founder of Jr. Deputy Accountant, a former CPA wrangler and a Going Concern contributor. You can see more of her posts here

Accounting News Roundup: G-20 to ‘Stabilize’ Debt by 2016; Auditors May Be Forced into Whistleblower Role on Banks; Yes, Taxes Are Historically Low | 06.28.10

G-20 Agrees to Cut Debt [WSJ]
“The wealthiest of the Group of 20 countries said they would halve their government deficits by the year 2013 and ‘stabilize’ their debt loads by 2016, a signal to international markets and domestic political audiences they are taking seriously the need to wean themselves from stimulus spending.”

Once you catch your breath from laughing, the President also cited the tax code specifically and his threatening to put some (i.e. Congress) in a tight spot:

“They might have to make deeper cuts in deficits to comply with its pledge. A White House statement said that government debt in the fiscal year15, would be at an “acceptable level.” President Obama said that next year he would present “very difficult choices” to the country in an effort to meet deficit goals.

The president cited his disappointment with the U.S. tax code. ‘Next year, when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, ’cause I’m calling their bluff,’ Mr. Obama said.”

Bank auditors eyed for whistleblower role [FT]
A paper from the UK’s Financial Services Authority puts forth the discussion of requiring auditors to work more closely with regulators on irregularities found during the bank’s audit engagement.

“Experts say bank executives are nervous about the prospect of increased bilateral discussions between regulators and auditors. Auditors have been fearful the paper could thrust the profession into a regulatory spotlight it has so far avoided.”

Koss Fraud: We didn’t bother to look at the endorsements on our own checks, but Grant Thornton should have! [Fraud Files Blog]
Fraud sage Tracy Coenen presents her latest view on the Koss fraud mish-mash and how Koss management has managed to make themselves “look like absolute morons.”


BP Loses $22 Billion in Legacy of Share Buybacks [Bloomberg]
“The sum represents the hole after the 52 percent plunge in BP shares since the Deepwater Horizon exploded and sank, resulting in the worst oil spill in U.S. history. BP bought back more than $37 billion of its stock in a bid to return money to investors between 2005 and 2008. Those shares are now worth $15 billion, excluding dividends.”

Martin Ginsburg, Noted Tax Lawyer and Husband of Justice Ginsburg, R.I.P. [ATL]
Mr Ginsburg was a tax law professor at Georgetown for many years and was known for his great sense of humor, as evidenced by his faculty bio, noted by our sister site, Above the Law:

Professor Ginsburg is co-author, with Jack S. Levin of Chicago, of Mergers, Acquisitions, and Buyouts, a semi-annually updated treatise which addresses tax and other aspects of this exciting subject. The portions of the treatise written by Professor Ginsburg are, he is certain, easily identified and quite superb.

Open Letter to the Securities and Exchange Commission Part 9: Overstock.com’s Excuses Simply Don’t Add Up [White Collar Fraud]
It appears Sam Antar has caught Overstock.com in another disclosure snafu but this time it isn’t really clear whether the company gave the wrong excuse, lied to the SEC or simply doesn’t know what they’re doing, “Overstock.com’s 2008 10-K report claimed that a reportable “gain contingency” existed as of November 7, 2008. However, the company contradicted itself and claimed to the SEC reviewers that reportable reportable ‘gain contingency’ did not exist on November 7, 2008.

If Overstock.com’s 10-K disclosure is true, the company’s explanation to the SEC Division of Corporation Finance can’t be true. Likewise, if Overstock.com’s explanation to the SEC Division of Corporation Finance is true, the company’s 2008 10-K disclosure can’t be true.”

Accounts bodies revise workplan [FT]
Convergence 2.0.

Today’s taxes aren’t too bad [Don’t Mess with Taxes/Kay Bell]
Kay Bell provides some perspective on tax rates over the last century. The following graphic should help clear up any confusion.


A Lifetime Prison Sentence Won’t Prevent You from Qualifying for the Homebuyer Tax Credit

Oh the glorious first-time homebuyer tax credit. Championed by Congressional Leaders, popular with Americans and ripe with fraud.

No legislation is perfect though, amiright? You’ve got to take the good with the bad. The latest of the bad comes courtesy of everyone’s favorite bureaucratic nagging mother-in-law, the Treasury Inspector General for Tax Administration. The TIGTA has come out with a new report that shows that the FTHBTC program hasn’t really gotten any better at weeding out the unscrupulous activity.

TIGTA estimates that 14,132 individuals received erroneous credits totaling at least $26.7 million. These erroneous credits included:

• 2,555 taxpayers receiving credits totaling $17.6 million for homes purchased prior to the dates allowed by law.

• 1,295 prisoners receiving credits totaling $9.1 million who were incarcerated at the time they reported that they purchased their home. These prisoners did not file joint returns, so their claims could not have been the result of purchases made with or by their spouses. Further, TIGTA found that 241 prisoners were serving life sentences at the time they claimed that they bought new primary residences.

•10,282 taxpayers receiving credits for homes that were also used by other taxpayers to claim the credit. (In one case, TIGTA found that 67 taxpayers were using the same home to claim the credit.) TIGTA auditors have not fully quantified the total of these erroneous credits, but all indications are that the total will be in the tens of millions of dollars.

But wait! There’s good news! Inspector General J. Russell George was happy to report that there has been improvements, “The good news is that the IRS has made significant strides resolving problems associated with this program. For example, no minors received the Credit, according to our report.”

Progress! They’ve managed to keep the under-eighteen crowd under control. But do we prefer this to prisoners doing life getting our tax dollars? Seems like a toss-up.

Errors, Fraud Still Occur in First-Time Homebuyer Credit Program [TIGTA]

Crowe Horwath Audit Partner Uses “The Tax Department Is on Another Floor” Defense

Auditors and audit firms have few options when it comes to defense strategy when they are sued for missing a fraud. If fraud occurs and an auditor partner claims to know everything that one should about his/her client, then the partner was probably in on it. That’s a little tricky.

However, if fraud occurs and the partner claims that he/she had no knowledge of any unscrupulous activity, then that means the audit sage is really just a two-bit glad-hander that couldn’t tell a debit from a credit.


And that appears to be the case of William Brizendine, a Crowe Horwath partner, who is claiming that he didn’t know about the relationship between executives of Peoples Bank of Northern Kentucky and Bill Erpenbeck who were engaged in scheme that artificially inflated the purchase price of model homes. Brizendine claims that he couldn’t possibly known that his client was involved with such a shifty character A) the bank’s execs didn’t tell him until after the shit hit the fan and B) this Erpenbeck character’s name only came up on the tax returns and why on Earth as an audit partner, would he look at those?

The bank’s lead attorney, Ron Parry, tried to establish that Brizendine was in a unique position to expose the fraud before it became large enough to take down the bank. Parry said auditors had to be aware of the business relationship because they also did the taxes of the company Finnan and Menne created with Erpenbeck.

[…]

Brizendine claimed he didn’t know of the relationship because he was just involved in the auditing of the bank and that JAMS tax returns were done by the tax department on another floor of the company’s offices.

Parry was able to show, however, that JAMS tax documents were sometimes sent directly to Brizendine. Brizendine claimed he never looked at those documents since his department didn’t prepare taxes.

Brizendine also admitted on the stand that he was the person who brought in the contract to do JAMS taxes.

Our Hopes for Sue Sachdeva’s Trial to Be a Circus Are Slowly Fading

The latest out of Brew Town is that a plea deal is in the works for alleged headphone bandit Sue Sachdeva. Rich Kirchen of the Milwaukee Business Journal reports that the U.S. Attorney confirmed that prosecutors were working with S-squared’s defense attorneys on a deal.


As far as all that loot is concerned, Kircher writes that the proceeds from the auction of said loot will go back to Koss.

We would humbly suggest that they get moving on this auction thing ASAP since Koss seems to be running short on time to get their restatements out. They’ve got 13 days and counting before the Nasdaq delists them like Lehman. Get an army of temps to whip that shit out so you can get back to running a ginormous, nepotistic headphone manufacturer.

Satyam: Does Anyone Mind if We Take Another Three Months to Finish Our Restatements?

With just a couple weeks until the June 30 deadline for the company to issue its restated financial statements, Satyam is requesting just a little more time to get this mulligan nailed down. Three months to be precise.

Yes, they’re completely aware that it’s been nearly 18 months since the shit hit the fan. And yes, this is the third time they’ve asked India’s Company Law Board (“CLB”) for an extension on the filing but at this point they figure expectations are so low, no one will get too worked up over it.


Except for an “analyst with a leading brokerage house.” who is quoted in the Business Times, “There is no clarity on what is happening within the company. They should have at least provided the current sales figure or the bench strength. How is the shareholder supposed to rate their stock?”

Since more than a few people might be caught up in “sales figures” and whatnot, Satyam went to the trouble to let everyone know that they’re working hard, ordering in, etc. etc. so you can rest your pretty little heads:

A Satyam official said, “The records have been under the custody of investigating agencies and we recently got a court clearance. Also, our auditors (KMPG and Deloitte) told us they need some more time for the restatement. It’s only a matter of a quarter.”

See? It’s just a matter of a quarter. Plus, you can’t really blame them – KPMG and Deloitte are the ones saying they need more time. Satyam has likely been bugging them for months about wrapping up but KPMG and Deloitte are probably complaining, saying things like, “we can’t find any documentation to supports these numbers” and “this doesn’t add up.”

So, TFB if some whiny analysts don’t like it. We’ll just find out just how big of nightmare these financial statements will be in due course.

The Nasdaq Would Like to Know When Koss Is Going to Get Around to Submitting Some Financial Statements

Remember last month when Koss decided to file their 10-Q without financial statements? At the time the company said it was “due to delays relating to certain previously disclosed unauthorized transactions.”

In other words, we got ripped off so bad that we’re restating financial statements for half a decade and it isn’t exactly something you can whip up like a batch of maui wowie brownies.


The Nasdaq has taken note of the slight delay and has said if you don’t get us numbers by June 30, you’ll be on the pink sheets with the likes of Lehman Brothers.

CEO Michael Koss has assured everyone that it won’t come to this but obviously we’ll have to wait until the SEC posts the filing. If that doesn’t happen, you’ll be able to add “Koss Delisted by Nasdaq” to Suz’s list of destructive accomplishments.

Koss gets warning from Nasdaq [Milwaukee Business Journal]

Accounting News Roundup: Senate Proposal Would Double Tax on Carried Interest; Take Client Compliments with Skepticism; Agents Honored for Busting Petters | 06.09.10

Showdown on Fund Taxes [WSJ]
The U.S. Senate plan to tax private equity and hedge fund managers who earn carried interest has been rolled out and it would double the rate on this income from 15% to 30% in 2011 and 33% in 2013. Supporters of the bill argue that carried interest is “basically wages” and that the 15% is a “fundamental unfairness in the tax code.”

The industry is not amused by the Senate’s latest rich hating measures. The Journal quotes Douglas Lowenstein, president of the Private Equity Council, “[E]arning carried interest involves taking risks, making long-term investments and exposing yourself tot you’ll have to return your earnings if things don’t work out. No one who gets a paycheck has to face those consequences.”

But that’s not all! Also in the proposal is a “enterprise-value tax” provision that would tax the sale of any private equity fund, hedge fund, or real estate partnership at higher rates than of other businesses including publicly traded oil and gas partnerships.


Ex-CEO and CFO of Duane Reade Convicted in NY [AP]
No matter what Anthony Cuti and William Tennant did (“scheming to falsely inflate the income and reduce the expenses that Duane Reade reported to investors.”), if you bank with Jamie Dimon, you’re grateful for every DR.

How White-Collar Criminals Exploit Your Vanity – Beware of Compliments [White Collar Fraud]
Sam Antar has all but eliminated any possibility of ever getting a date ever again by admitting that any compliment that he gives is may have an ulterior motive, “The more likable and charming that I was as a criminal, the easier it was for me to successfully lie to my victims and deceive them. People are far less skeptical of people who they like and the white-collar criminals know it and exploit it.”

Most of you have never been paid a compliment by Sam but maybe some of you can think of a client that seems to go out of their way to stroke your ego. Or maybe it’s a combination of a compliment here or there (e.g. “you’re looking buff” or “nice ass”) from the controller and the hot junior accountant that keeps inviting you out to lunch for no discernible reason.

The lesson here is be skeptical of things being a little too good to be true for an audit. If your client doesn’t particularly like you and they look like they came from deep inside the ugly forest you might be able to rest easy. Otherwise, stay on your toes.

EBay’s Whitman Faces Brown for California Governor [Bloomberg]
A former auctioneer will face off against a failed Presidential candidate for the arguably the worst job in the country.

Four who took down Petters honored [Minneapolis Star-Tribune]
Swashbuckling industrialist-cum-Ponzi Scheme architect Tom Petters is doing 50 years for his crimes but the four investigators – FBI special agents Brian Kinney and Eileen Rice, FBI forensic accountant Josiah Lamb and Kathy Klug of the IRS’ Criminal Investigation Division – were honored yesterday for their efforts with a 2009 Law Enforcement Recognition Award by the Minnesota U.S. Attorney.

Of course, they couldn’t have done it alone (plus it’s honor just to be nominated), as they were assisted by more than 100 other agents who brought down Petters. Then someone made a Bernie Madoff joke and the fun ended right there.

Bernie Madoff Doesn’t Sound Particularly Remorseful

“Well, that’s what I did.”

~ Bernie Madoff’s to a fellow prisoner telling him that taking advantage of old ladies was “kind of fucked up.”

SEC: Diebold Financial Execs Would Step Over Their Own Mothers to Meet Earnings Forecasts

The Diebold CFO, controller and Director of Corporate Accounting had a fairly standard routine back from 2002 to 2007 – 1) get daily “flash reports” 2) look at BS estimates that analysts came up with 3) cook up some ideas for meeting those estimates 4) make up the numbers.

Pretty standard stuff, especially if you buy the idea that “legally cooking the books is a critical skill for attracting investors.”


The SEC presented the accounting hocus-pocus earlier today:

The SEC alleges that Diebold’s financial management received “flash reports” — sometimes on a daily basis — comparing the company’s actual earnings to analyst earnings forecasts. Diebold’s financial management prepared “opportunity lists” of ways to close the gap between the company’s actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold’s financial performance.

Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:

• Improper use of “bill and hold” accounting.
• Recognition of revenue on a lease agreement subject to a side buy-back agreement.
• Manipulating reserves and accruals.
• Improperly delaying and capitalizing expenses.
• Writing up the value of used inventory.

Gotta give yourself some options, amiright? Can’t just simply rely on channel stuffing!

But in all seriousness, if you’re a top financial executive at a company and part of your daily routine is finding ways to increase profitability through accounting manipulation, at some point you’d have to think to yourself, “This is one shitty business we’re running.”

GAO Audit Uncovers Fraud at Head Start Programs

The Head Start Program, under the Department of Health and Human Services, provides child development services to mostly low-income families and their children. Up to 10% of Head Start-enrolled families can be over-income, with an income 130% above the poverty line.

Of course, things don’t always work out as they are supposed to and the GAO has discovered problems with about half of the centers it examined through the investigation, just a small sample of the 1,600 nonprofit centers running 3,000 Head Start programs.


From the GAO:

GAO received allegations of fraud and abuse involving two Head Start nonprofit grantees in the Midwest and Texas. Allegations include manipulating recorded income to make over-income applicants appear under-income, encouraging families to report that they were homeless when they were not, enrolling more than 10 percent of over-income children, and counting children as enrolled in more than one center at a time. GAO confirmed that one grantee operated several centers with more than 10 percent over-income students, and the other grantee manipulated enrollment data to over-report the number of children enrolled. GAO is still investigating the other allegations reported. Realizing that these fraud schemes could be perpetrated at other Head Start programs, GAO attempted to register fictitious children as part of 15 undercover test scenarios at centers in six states and the District of Columbia. In 8 instances staff at these centers fraudulently misrepresented information, including disregarding part of the families’ income to register over-income children into under-income slots. The undercover tests revealed that 7 Head Start employees lied about applicants’ employment status or misrepresented their earnings.

GAO managing director for special investigations Gregory Kutz told a House education committee last month that “the system is vulnerable to fraud.” No kidding.

While unable to determine the motivation of Head Start employees to commit fraud by adjusting income levels on applications, Kutz theorized that management of nonprofit agencies receiving Head Start funds pressured staff to fudge, fiddle with, or straight up fake figures on applications in order to keep federal funds coming in.

Head Start has served over 25 million children since 1965 and there are currently over 1 million children enrolled in Head Start programs.

Adrienne Gonzalez is the founder of Jr. Deputy Accountant, a former CPA wrangler and a Going Concern contributor . You can see more of her posts here.

Barry Minkow Isn’t Buying Anthony Weiner’s Report That Says Goldline International Is More or Less a Fraud

Last time we saw Congressman Anthony Weiner, he was attempting to discuss the IRS’ role in the enforcement of healthcare with spin-hater Bill O’Reilly. While that particular encounter was quite fun (especially Weiner’s huffing and O’Reilly’s eye-rolling) the video of the Congressman’s recent appearance on Fox Business News is quite good.

But what we’d really like to see him have a conversation with Barry Minkow about how that Barry thinks the Congressman’s report on Goldline International is unmitigated bullshit:


Friend of GC, Tracy Coenen participated in the Minkow’s investigation and she presents the findings over at Fraud Files Blog. Here’s a sample:

Allegation: Weiner criticizes Goldline because of complaints on the website Ripoff Report lodged by consumers who say Goldline representatives improperly hold themselves out as investment advisors.

What Weiner didn’t tell you: Ripoff Report says (in response to the consumer complaints) that you can feel completely confident doing business with Goldline. Weiner gave us only half of the story in his report.

Allegation: Goldline grossly overcharges for its products

What Weiner didn’t tell you: Our sampling of coins listed in the Weiner report showed that Goldline’s prices were very comparable to those of six competitors. He also forgot to mention that companies are free to set whatever prices they like for their products.

Allegation: Goldline says they’ll buy back your gold and silver, but doesn’t “guarantee” that

What Weiner didn’t tell you: It is against the law for Goldline to offer a buyback guarantee. If they offered such a guarantee, they would be in violation of securities laws because their salespeople are not licensed broker dealers.

Regardless of how you feel about Glenn Beck, gold coins, or Anthony Weiner’s Fox News-esque ability for interrupting, it kinda sorta sounds like the Congressman’s investigators don’t know a non-fraud when they see one. Besides, we’ll take the word of a convicted-felon-turned-fraud-buster over any report that comes out of Congress. Especially in an election year.

A message left with Congressman Weiner’s spokesperson was not immediately returned.

Goldline International: An In-Depth Look at Congressman Weiner’s Allegations, And How He Got It Wrong [FDI]
Barry Minkow debunks the Glenn Beck and Goldline International fraud connection [Fraud Files Blog]
Weiner Takes on Goldline and Fox Business — At The Same Time [Weiner.house.gov]

Accounting News Roundup: Tipsters Expose Fraud More Often Than Most Controls; What if the PCAOB Is Unconstitutional?; BDO Could Question Forensic Accountant’s Credibility | 06.01.10

Something Wicked This Way Comes [CFO]
A recent Association of Certified Fraud Examiners (ACFE) study discovered that “[o]f the top eight controls ranked by effectiveness, only one — surprise audits, which cut fraud losses by 51% — is part of the traditional accounting-based control structure. Financial-statement review, internal audits, and Sarbanes-Oxley-mandated certifications by CEOs and CFOs all ranked below the nonaccounting controls in terms of effectiveness in preventing fraud.”

Controls have no match for good old human conscience, “tips expose fraud three times as often as do management reviews, internal audits, or account reconciliations.”


The problem however, is that employees may not be getting the training about how to report fraud if they know it’s happening, “an unsupportive corporate culture and poor employee training leave potential whistle-blowers unsure of whom to talk to.” Plus the baddies are doing their best to dissuade them, as Sam Antar told CFO, “[They] don’t go down without a fight, they don’t fight fairly, and they are going to intimidate whistle-blowers — that’s the nature of their game.”

Accounting for Crisis [Portfolio.com]
Gary Weiss writes over at Portfolio about the impending decision in Free Enterprise Fund v. PCAOB and he’s not impressed with the FEF’s argument, “claiming that the board would give our Founding Fathers heart attacks because its members are appointed by the Securities and Exchange Commission and not the president and can’t be removed except for cause.”

That despite the PCAOB’s lack of fireworks in its daily activities, “The PCAOB has not exactly rocked our world—and obviously its existence did nothing to keep Lehman from its Repo 105 book-cooking scheme. But getting rid of it, particularly on specious Constitutional grounds, would be a blow to the cause of more accurate financial statements.”

The odds say that the SCOTUS will affirm the lower court’s decision but just in case, Gary agrees with Interim PCAOB Chairman Dan Goelzer that Congress needs to act fast if the Court surprises us and reverses the decision.

Clifton Gunderson buys Stockton Bates [Philadelphia Business Journal]
Philadelphia-based Stockton Bates will join Clifton Gunderson’s 1,900 employees and 300 partners effective today. Stockton has 32 employees between three offices in Philadelphia, Lancaster, PA and Haddonfield, NJ.

BDO Seidman fights claims brought by fraudster Lew Freeman [South Florida Business Journal]
Convicted forensic accountant Lewis Freeman testified in the case of ES Bankest and BDO. So it’s not outside the realm of possibility that Freeman’s conviction could call his credibility as a witness into question as well as the Bankest bankruptcy proceedings, where Freeman acted as the court-appointed receiver.

IRS, SEC Put a Stop to the Latest Money Manager Ripping Off the Most Important People in the World

What the hell is gonna to take for a celebrity to get an honest money manager around these parts?

IRS agents arrested Kenneth Starr (not this guy) today who has managed money for celebrities including Martin Scorsese, Uma Thurman and financial shitshows Annie Leibovitz and Wesley Snipes.


The SEC has frozen his assets alleging that Starr “made unauthorized transfers of money in client accounts that ultimately wound up in Starr’s personal accounts.” But it was for a good reason – the man needs roof over his head, according to the complaint “Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without any authorization. The transferred funds were ultimately used to purchase a $7.6 million apartment on the Upper East Side in Manhattan on April 16.”

Former New York City Council President Andrew Stein was also named in the complaint, and “is charged with lying to the IRS and federal agents about his involvement with Wind River.” Wind River being a company that Starr allegedly syphoned money to, that Stein used for personal expenses. However we’re mostly shocked to learn that Stein briefly dated Ann Coultershudder.

Financial whiz busted for duping celebs clients Wesley Snipes, Martin Scorsese in $30M Ponzi scheme [NYDN]
Celebrity Investment Adviser Charged With Ponzi Scheme [Gawker]
SEC Files Emergency Charges Against New York-Based Financial Advisor for Defrauding Clients [SEC Press Release]

COSO Study Finds Accounting Frauds Getting Larger, Execs Named in Nearly 90% of Cases

If you could sum up the years of 1998 to 2007, how would you do it? Promising career crushed in a millisecond? A seemingly endless loop of awkward moments? Various forms of experimentation?

If you’re the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) you’re more or lessway: Financial reporting fraud is getting bigger. Financial reporting fraud causes businesses to fail. CEOs and CFOs are usually the ones blamed.


If you’ve been paying attention at all, this probably doesn’t surprise you one iota but it is nice that COSO took it upon themselves to wrap it up in a nice little package entitled, Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies.

The report examined cases of alleged accounting fraud that were investigated by the SEC for the period. Some of the more interesting findings:

• Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.

• The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.

• The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.

• Revenue frauds accounted for over 60 percent of the cases.

• Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.

• Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.

• Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.

Lot of takeaways: bogus revenue is still popular, switching auditors is usually not a good sign (*ahem* Overstock.com), oh and if you cook the books, investors run away from you like a band of lepers.

Further, Compliance Week reports that the 347 cases reported is an increase from the 294 reported for the 1987-1997 period as well as tripling the average size of the fraud from $4.1 million to $12.05 million. The median assets and revenues of $100 million jumped from $16 million in the ’87/’97 range.

While this suggests that frauds are getting bigger, occurring at larger companies and as a result, destroying more wealth, the successful criminal prosecution of the people in charge of the companies doesn’t appear to be keeping up.

COSO Chair David Landsittel said, “All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting,” although if the CEO or CFO (who certify the financial statements) are involved in the fraud, this statement doesn’t mean much. Sam Antar doesn’t think so either, telling us,

[W]e needed a study to find out that financial fraud leads to bankruptcy? Where have these guys been?Until we move away from the process oriented “check the box and fill in the blanks” routine in audits and start understanding criminal behavior, there isn’t much any auditor can do to deter fraud. Former Speaker of the House of Representatives Tip O’Neill once said, “All politics is local.” Similarly, we need to learn that “All fraud is personal.”

And since the SEC names a CEO or CFO in 90% of these cases, yet only 20% of those cases actually result in indictment within two years, does this indicate that the naming of said CEO/CFO is largely a photo op for the SEC/DOJ et al? Even if 60% of those executives are convicted it appears that finding fraud is (relatively) easy part; successfully blaming someone in the court of law is something else entirely.

One of the authors of the study, Mark S. Beasley of North Carolina State University noted that there is work still be done, “We need to determine if there are certain board-related processes that strengthen the board’s oversight of risks affecting financial reporting.” This seems to indicate that there is some significant high-level processes that are still not in place that could keep tabs on the Andy Fastows of the world but for now, we still seem to be going with the honor system.

COSO Press Release [COSO]
Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies [COSO]
COSO Fraud Study Catalogs Latest Decade of Incidents [Compliance Week]

Accounting News Roundup: Strange Letter Disrupts Ernst & Young’s Iraq Plans; Allen Stanford Is the Worst; Debunking a Tax Preparer Regs Conspiracy Theorist; Medifast Gets the Bird | 05.20.10

Mysterious letter rattles E&Y’s Iraq ambitions [Accountancy Age]
Ernst & Young has been trying to get its audit on in Iraq shortly after Saddam Hussein’s party ended in 2004. The firm has been providing services there, however not yet been approved to perform auditing services. E&Y has been claiming that it was making headway, “on the verge of obtaining an accounting license” but now a letter from somewhere within the dense Iraqi bureaucracy seems to have delayed those plans.

It came as a shock when the firm learned of a letter sent to the Iraqi Supreme Court, the Central Bank of Iraq, the Commission of Integritygistrar and the Iraqi Banks Union, among other senior institutions, from the Iraq Union of Accountants and Auditors, which claimed the firm had been banned.

“It has been decided to forbid the accreditation of any financial statements audited by Ernst & Young (E&Y) company and forbid its operations in accountancy and auditing for governmental and private sectors in Iraq,” the letter stated.

The letter, in Arabic and signed by the Union Secretary Dr Rafed Obaid Al Nawwas, said the union reserved the right to go to “legal authorities to stop non-Iraqis from conducting audit and accountancy in Iraq”.

So in case you missed it, E&Y did not actually receive this purported letter but heard of it second-hand and then responded that the Iraq Union of Accountants and Auditors has no authority on the matter, since it’s just an “association of Iraqi accountants.” So it sounds like the AICPA of Iraq basically tried to tell the Iraqi version of the SEC, PCAOB, et al. that E&Y was not fit to be in country (if you’ve got another idea, by all means).

Iraq’s chief accounting regulator claims to not knowing about the letter and that E&Y is “just about to obtain its license” so this may be a nuisance more than anything else.

How Stanford is worse than Madoff [Fortune]
Mostly because CDs are the basic financial instrument that is usually held by little old ladies and other common folk. Not Kevin Bacon.

Unenrolled Tax Preparer: Preparer Regulation is a CPA Plot to Put Me Out of Business [Tax Lawyer’s Blog]
Naturally, there are some unlicensed tax preparers that are taking the IRS’ proposed regulations a little personally. Peter Pappas at TLB tells us about one unlicensed preparer who did some bellyaching to the Service. This sage of taxes challenges anyone to question his expertise:

1. “I prepare my returns accurately and would challenge anyone to find errors.

2. “I have seen numerous returns prepared by CPAs and other similar preparers that were incorrect. [the man strives for perfection]”

3. “I am willing to take some courses or some certification, but to become an enrolled agent or CPA would cause an undo burden on my business. [i.e. require me to work more than 8 hours a day]”

And that’s just a sampling. Mr Pappas kindly debunks all of these (and more):

1. “A self-serving declaration by an unenrolled tax preparer that the returns he prepares are 100% accurate is about as valuable as an NBA player announcing that nobody can guard him.”

2. “This is utterly irrelevant and, if anything, an argument for more regulation, not less…[This] is dumber than texting while driving.”

3. “Becoming an enrolled [preparer] would force Mr. Jamieson to make expenditures of time and money he does not wish to make, therefore, because he is not prepared to make those sacrifices he believes that people who have made them should get no benefit from it whatsoever.”

Barry Minkow Gives Medifast the Middle Finger [White Collar Fraud]
At this point we’re assuming it’s only the figurative bird, by way of a report that states that Medifast’s business model is effectively a multi-level marketing scheme.

Despite Being a ‘Wreck of a Man,’ Allen Stanford Managed to Fire Another Attorney

Things are not going so well for the Stan as he awaits trial in H-town.

For starters, he managed to fire another lawyer, which is not going to go over well with Judge David Hittner. Judge Hittner warned Stan about his Steinbrenner-ish ways last month, “You’ve had 10 attorneys attempt to enter this case on your behalf. I will not entertain any further substitutions.”

And secondly, Al doesn’t seem to be very good at making friends:

When Mr. Stanford surrendered to authorities, he was a healthy 59-year-old man,” Stanford’s Houston-based lawyer, Robert Bennett, wrote in a brief on which Harvard Law Professor Alan Dershowitz consulted.

“Mr. Stanford’s pretrial incarceration has reduced him to a wreck of a man: he has suffered potentially life-impairing illnesses; he has been so savagely beaten that he has lost all feeling in the right side of his face and has lost near-field vision in his right eye,” Bennett said.

Naturally, AS’s lawyers want him out and placed on house arrest ASAP since his trial doesn’t start until January but so far no one is convinced that Al won’t bolt the second he gets outside the prison walls.

“Savagely beaten” Stanford asks to be freed [Reuters]

Seems Hard to Believe That a Pre-Loaded Sponge Company Would Have to Resort to Fraud

Today in “they just made the numbers up” news, it’s shocking that a company with this business description:

We design, produce, market, and distribute cleaning products primarily for vehicular use utilizing patented technology relating to sponges containing hydrophilic, or liquid absorbing, foam polyurethane matrices and other technologies. Our products can be pre-loaded with detergents and waxes, which are absorbed in the core of the product then gradually released during use. We have designed and are conducting additional research and development for products and applications using hydrophilic technology and other technologies for kitchen and bath, health and beauty, auto, medial and pet use, which we intend to market and sell as part of our product offering. There is no assurance that we will successfully be able to market and sell products for kitchen and bath, health and beauty, auto, medial and/or pet use.

…would have to make up five customers out of thin air to account for 99% of their revenue:

According to the SEC’s complaint, after several years of relatively little business with a single customer comprising the bulk of Spongetech’s limited sales, Metter and Moskowitz began to paint a more promising and misleading picture of Spongetech’s business. Beginning in approximately April 2007, Spongetech issued dozens of phony press releases touting increasingly larger, yet fictitious, sales orders and revenue. The press releases fraudulently exaggerated the demand for pre-soaped sponges by referencing millions of dollars in sales orders, business, and revenue from five primary customers that purportedly accounted for 99 percent of Spongetech’s business, yet none of those customers actually existed.

Yes, they had an auditor. According to the the last 10-KSB filed it was Drakeford & Drakeford, LLC who has had their own share of trouble.

SEC Charges Spongetech and Senior Executives in Pump-and-Dump Scheme [SEC Press Release]
SEC v. Spongetech, et al. [SEC]

Accounting News Roundup: Would IFRS Prevented Repo 105?; The Crazy Eddie Movie Hits a Snag; JP Morgan May Bolt Tax-Refund Loan Business | 04.29.10

Lehman case “backs” accounting convergence [Reuters]
Philippe Danjou, a board member at the IASB has been quoted as saying that Repo 105 would not have been allowed under IFRS, “From an IFRS perspective I would suspect that most transactions would have stayed on the balance sheet. It makes a case for convergence, it makes a case that we should not have different outcomes under different accounting standards when you have such big amounts.”

The G-20 asked the sages at both the FASB and the IASB to converge their rules by June-ish 2011 but some people don’t sec, as there are too many disparities on treatment of key issues between the two boards.


The Real Reason Behind Danny DeVito’s Crazy Eddie Movie Project Meltdown [White Collar Fraud]
Danny DeVito wants to make a movie based on the Crazy Eddie Fraud, which was perpetrated by, among others, Eddie and Sam Antar. The project has run aground primarily because of Eddie Antar’s life rights and the potential profit he would reap from the making of the movie. Danny D is disappointed by the developments and has sympathy for Eddie, discussing it in s recent Deadline New York article:

“He’s gone through tough times, and he’s not the aggressive tough guy they paint him to be,” De Vito said. “He’s in his 70s and the past has come back to bite us all in the ass. Peter [Steinfeld] and I told him we think there is a terrific story there, but we can’t do it with you involved, in any way. We’ve taken a breather, but we’re figuring out how to jump back in.

Sam Antar is not amused by this and chimed in with his side of the story:

Eddie Antar is plainly still in denial about his cowardice towards his own family and investors. There actually is a “family dynamic” that “explains Antar’s fall” as DeVito claims. However, Eddie Antar and other members of his immediate family are simply unwilling to give a truthful account of what really happened at Crazy Eddie, while Danny Devito is willing to accept Eddie Antar’s bullshit excuses for his vile behavior.

As Chipotle Sizzles, CFO Sells Stock [Barron’s]
Ten thousand shares at $144 and change will buy a bunch of burritos.

Medifast Lawsuit: Anti-SLAPP motions filed [Fraud Files Blog]
Back when we discussed forensic accounting, the aforementioned Sam Antar said that forensic accountants can look forward to “making many enemies in the course of their work and must be unhinged by the retaliation that normally follows uncovering fraud and other misconduct.”

Tracy Coenen, no stranger to this retaliation, is now fighting back against Medifast who has sued her and others for saying not so flattering things about the company:

Anti-SLAPP motions have been filed in the Medifast lawsuit by me and by my co-defendant, Robert FitzPatrick. My motion can be read in its entirety here, and Fitzpatrick’s can be read here.

SLAPP stands for Strategic Lawsuit Against Public Participation. It’s basically when a big company tries to shut up a little guy with expensive litigation. In my opinion, Medifast sued me and others in an attempt to get us to stop publicly analyzing or criticizing the company and it’s multi-level marketing business model.

In filing an anti-SLAPP motion, we are essentially asking the court to rule in our favor and in favor of free speech. Consumers should have the right to discuss, analyze, and criticize companies without the fear of expensive lawsuits.

JPMorgan May Quit Tax-Refund Loans, Helping H&R Block [Bloomberg BusinessWeek]
Bloomberg reports that JP Morgan may discontinue its financing of 13,000 independent tax preparers, a move that will benefit H&R Block, according to a competitor:

“Block is the biggest winner in this,” said John Hewitt, chief executive officer of Liberty Tax Service, a privately held company in Virginia Beach, Virginia, that also may benefit…

The reason HSBC is exiting this industry, even though they’re making $100 million a year in profit from it, is because of reputation risk,” Hewitt said in an interview. “Bankers don’t like the consumer advocacy groups picketing outside their offices.”

Refund anticipation loans (RALs) are attractive to clients that need cash immediately, based on their anticipated refund. The business is controversial because the high interest rates can drive people further into debt and consumer groups oppose them vehemently.

Funding for smaller shops that offer these loans will likely lose the business altogether as large banks like JP Morgan discontinue the financing, thus driving the business to franchise tax prep shops like H&R Block, Jackson Hewitt, and Liberty.

Accounting News Roundup: Ernst & Young Settles with HealthSouth Bondholders; SEC Accountant Tried to Access Porn 16,000 Times in a Month; The Best Accounting Rules Won’t Fix Everything | 04.23.10

UBS to Pay $217 Million to Settle HealthSouth Case [Bloomberg BusinessWeek]
After the better part of a decade, Ernst & Young has finally settled with the bondholders of inpatient service provider HealthSouth. Bloomberg is reporting that the firm agreed to pay the Company’s bondholders $33.5 million after settling with shareholders last year for $109 million. HealthSouths’ investment bank, UBS settled with shareholders and bondholders for $117 million and $100 million respectively.

The $2.7 billion fraud resulted in guilty pleas from 15 executives, including five former CFOs but an acquittal of CEO Richard Scrushy. Scrushy managed to wind up in prison on bribery charges instead and is currently serving 6 years and 10 months. As is typical in these matters, both UBS and E&Y ponied up yet denied any wrongdoing.


GOP ramps up attacks on SEC over porn surfing [AP]
The official SEC porn report has been leaked and some interesting things that are new include:

• One guy had so much porn on his computer that he had to bring in CDs and DVDs to help expand the collection. He thought it wise to keep these at the office.

• “An accountant” was blocked from accessing sites 16,000 times yet still amassed a “collection of ‘very graphic’ material on his hard drive by using Google images to bypass the SEC’s internal filter.” He refused to ” testify in his defense” and was suspended for fourteen days.

• Seventeen employees were “at a senior level” with the highest salary reported over $222k.

Darrell Issa (R-CA) is not amused by this porn bonanza, saying, “[it is] disturbing that high-ranking officials within the SEC were spending more time looking at porn than taking action to help stave off the events that put our nation’s economy on the brink of collapse,” according to the AP. Based on this response, it wouldn’t be surprising to find Issa ensnarled in a porn scandal of his own before this year’s election.

Best accounting rules are not enough [FT]
A reader responded to the epic article published by the Financial Times, raising the notion that “one set of high quality accounting standards” will not solve the world’s problems.

Those who prepare and use accounts very often have a different perspective on accounting questions from accountants as such, whether or not they have had an accounting qualification in the past…

[T]he report on Lehman explicitly did not address the question of accounting arbitrage. This was because Lehman used an accounting rule to disguise from the markets the weaknesses in the balance sheet in a way which, as the examiner reported, was invalid even if the rule itself was completely valid in all jurisdictions.

This points to the fact that the best accounting rules possible are not enough – the financial reporting chain has other links: corporate governance, auditing and regulation.

Cuomo: Espada’s Looting of Nonprofit ‘Reprehensible’

In the largest nonprofit fraud case we’ve ever seen, State Senator Pedro Espada, Jr is getting it from NY Attorney General Andrew Cuomo for perpetrating a $14 million scam using his non-profit as an ATM. Ouch.

Soundview Comprehensive Community Development Corp., a Bronx-based health care non-profit, appears to be little more than a vehicle for Espada’s extravagant lifestyle and Cuomo doesn’t find any of it to be entertainment.


“Siphoning money from a charity would be egregious under any circumstances, but the fact that this was orchestrated by the State Senate Majority Leader makes it especially reprehensible,” Cuomo said in a statement.

Espada’s charity allegedly paid $100,000 for campaign literature, $80,000 on meals for Espada (including $20,000 for sushi – one of JDA’s weaknesses but hey, at least I pay for my own), vacations for the family and $2,500 a month for a co-op rental in the Bronx in which Espada supposedly lives. Double ouch.

If you’re into that sort of thing, you can check out the summons from the AG’s office here.

To date, Cuomo’s complaint is merely a civil one but he has left the door wide open for criminal charges against Espada and 19 others, including family members installed on the charity’s board. Taking a page from the Crazy Eddie fraud handbook, I see.

Espada also allegedly used the nonprofit’s corporate credit card to cover up to $450,000 in expenses that he’s now admitted may have been personal. Snicker snicker, everyone knows the corporate card should only be used for personal expenses if one is trying to fund an affair and hoping the wife doesn’t find out. Duh.

Because being a nonprofit looting Senate majority leader is hard work, Espada took the first 14 weeks of the year off and charged the paid leave to – you guessed it – Soundview. Since its board is packed with friends and family, they approved a $75,000 payout for personal expenses associated with this respite in a lump-sum payment at the beginning of the year.

Espada has responded by claiming Cuomo’s accusations amount to little more than a “witch hunt” meant to advance the AG’s political career. Whatevs.

Meanwhile, Espada’s Senate homies are praying for him. For $14 million bucks, he needs all the Hail Marys he can get, especially since the FBI and IRS raided the clinic this morning. Good luck with that.

Some People Would Like to Know Why PwC Is Mum on The Alleged Morgan Keegan Fraud

Last week, the SEC continued its “Bustin’ Up Fraud” tour by charging Memphis-based Morgan Keegan & Company, Morgan Asset Management, and two employees, James C. Kelsoe, Jr. and Joseph Thompson Weller with “fraudulently overstating the value of securities backed by subprime mortgages.”

The long/short of it is that SEC’s Enforcement Divish alleges that Kelsoe “arbitrarily instructed the firm’s Fund Accounting department to make ‘price adjustments’ that increased the fair values of certain portfolio securities.” Weller didn’t do a damn thing to remedy this, Morgan published fraudulent net asset values (NAVs) based on these valuations and investors ended up losing something like $2 billion. Typical stuff in this day and age.


While Khuzhami and Co. gave the usual spiel about “lies” and whatnot, Jonathan Weil over at Bloomberg is wondering why PricewaterhouseCoopers is being totally left out of this ordeal (our emphasis):

Now that the Securities and Exchange Commission has accused Morgan Keegan & Co. of fraudulently overvaluing subprime-mortgage bonds in several of its mutual funds, there’s still one major player in this saga that hasn’t uttered a peep.

That would be PricewaterhouseCoopers LLP, the Big Four auditor that blessed the funds’ year-end financial statements for fiscal 2007. Funny thing is, officially at least, PwC is still clinging to its position that there wasn’t anything wrong with the funds’ numbers. That’s a lot harder to believe now than it might have been before last week.

Not to take issue with Jonathan Weil (who we think is great, btw) but we aren’t surprised at all that PwC is standing by their audited numbers. “Deny ’til you die” is Big 4 101, even if that denial is through complete and utter silence. They’re better at holding out on guilt than Pete Rose.

JW ends up addressing his own inquiry saying, “Perhaps PwC is awaiting the final outcome of the SEC’s case, which might take years to litigate. While the SEC didn’t name PwC as a defendant, the firm is being sued in court by fund investors. So PwC has a clear incentive to avoid acknowledging that any of its audit conclusions may have been wrong.” Jackpot! And if there’s one advantage that PwC and the rest of the Big 4 have on the road to failure, it’s time.

Ultimately, this detecting fraud. The public want auditors to find it. Auditors claim that’s not their job. The “expectations gap” as the leadership likes to say. And while Big 4 leaders cling to this “gap” like a security blanket, Weil brings up the question that more people have been asking lately, “if auditors can’t detect fraud, what good are they?”

Bond-Fund Fraud Suits Leave Auditor Speechless [Bloomberg/Jonathan Weil]
SEC Charges Morgan Keegan and Two Employees With Fraud Related to Subprime Mortgages [SEC Press Release]
SEC Complaint

Quote of the Day: From ‘Rockstar’ CFO to Mowing Lawns | 04.12.10

“Before the fraud broke, people would ask me what I did before I retired and I’d say I was founder and former CFO of HealthSouth. But today when people ask me what I did before I retired I kind of look away and say I was an accountant and hope they don’t ask me any other questions.”

~ Aaron Beam, former CFO of HealthSouth and current lawn-care business owner, at the University of Texas-Dallas Fraud Summit, earlier this month.

KPMG Survey: India is a Hotbed for Fraud Due to Competition, Diminishing Ethical Values

In this morning’s Roundup, we told you about the ICAI belly-aching about the Big 4 circumventing the rules in India to the point of extreme annoyance but technically not breaking said rules.

Strangely enough, BusinessWeek has a story today that cites a KPMG report that found that fraud is on the rise in India due not to shifty international accounting cooperatives but rather to, among other things, the pressure of increased competition in the last two years.


As you might expect, fraud due to financial reporting is the biggest problem. The report cited, “weak rules and the inability of authorities to enforce regulation.” Other things mentioned as opportunities for chicanery:

• “Volatile economic conditions”
• “Increasing business and technological complexities”

So does that mean opportunities for fraud are ubiquitous? Do the respondents really believe that India is the only place where this is happening?

And the attitude/lack of self-control part of your triangle:

• “Diminishing ethical values”
• “Failure on part of managers to act against deviations from established policies and processes”

Diminishing ethical values? Deviating from established policies? Again, the respondents can’t think this is unique to India so shall we just assume that it’s more widespread there?

Some other contributing factors cited were “executives vying for higher pay, weak internal controls and increasing competition…for market share.” But wait! KPMG’s survey said that there were “’encouraging signs’ that mechanisms for detection of fraud through internal audits had improved.” That’s nice despite the fact that sounds similar to something that Overstock management said in their earnings call yesterday.

If you have “weak rules” accompanied by spineless bureaucrats that won’t even enforce those rules, of course you’re going to have some problems. ICAI seemingly wants to blame everything on the Big 4 probably because that’s the going trend these days. We’re not saying you can’t throw some blame towards PwC for missing the phantom $1 billion at Satyam but if your financial reporting regulatory infrastructure is akin to the something out of Deadwood, circa 19th Century, then maybe you should be more consider making some fundamental changes.

Fraud Rises in India as Competition Increases, KPMG Study Says [Bloomberg BusinessWeek]

Holiday Weekend Accounting News: KPMG Bolts Iran; Financial Statement Reader App for iPad?; IRS Job Creation; Another Koss Fraud Theory; Toni Braxton Tax Trubs; Illegals Bilk IRS for $13 mil; Job of the Day | 04.02.10

See you Monday, capital market servants. It’s okay, tax warriors – Just think, two weeks from today and you’ll be sleeping in.

KPMG severs Iran ties [FT]
T Fly and Co. has pulled the plug on Iran after big pressure from the UANI, “Tom Wethered, KPMG International’s general counsel, wrote to UANI on Thursday that the accountancy network had terminated the membership of Bayat Rayan, one of Iran’s biggest accountants.” The FT reports that the firm cited “serious and escalating concerns,” about the country’s government.

Imagine: iPad App l Statements [XBRL Business Information Exchange via CPA Trendlines]
Someone make this happen ASAP. “Imagine it. Everyone connected by the Web, not the current Web but the Semantic Web. iPads, iPods, iPhones, Androids, Smartphones; maybe a few PCs will still be around. IFRS used globally. Financial information in XBRL making it dynamic like a pivot table, rather than static like the legacy paper statements.”


Is Hiring More IRS Employees ‘Job Creation’? [The Atlantic]
There’s a lot of hysteria over the 16,000-some odd new IRS agents that will be running around the country trying to steal your freedom. Those are real jobs though.

Koss Fraud: Unrecorded revenue? [Fraud Files Blog]
Tracy Coenen kicks around another theory of how alleged shopaholic Sue Sachdeva hid her embezzlement from Grant Thornton, “I’ve heard from a few sources who I consider to be very reliable that Sachdeva hid her theft by not recording revenue. This would mean that Koss’s revenue was understated by $31 million during the time she was committing her theft.” Tracy points out that this method would be “messy” but “There is almost no chance that the auditors will discover the theft and the cover-up. The bulk of the auditors’ work is spent on the balance sheet. So long as transactions related to the theft don’t show up in the ending balances of the balance sheet accounts, she’s pretty safe there.”

Singer Toni Braxton bobbles tax bill [Tax Watchdog]
Toni Braxton really needs help. She now owes the IRS nearly $400k after a $71k tab from last summer. We’ll say it again – Get Ludacris on the phone.

10 illegal aliens in S.C. admit to bilking IRS out of $13 million [Greenville Online]
Who do the teabaggers get mad at for this one? Don’t they hate the IRS and illegal aliens equally? We can only hope that this will cause their heads to explode. Oh, and because it’s in South Carolina we can probably expect a lynching of everyone involved.

Job of the Day: Fannie Mae Needs a Experienced Accountant [GC Career Center]
Four to six years experience, CPA required. Responsibilities include: Compile, review, analyze, and record financial information to the general ledger. Complete monthly closings. Prepare balance sheet and profit and loss statements, consolidated financial statements, and other accounting schedules and reports. Located in DC Metro. You!

A Wisconsin Non-Profit Learns an Important Lesson in Internal Controls

Presented by Serenic Software. Download our free whitepaper – “5 Key Reasons Why Great Financial Management is So Important for Your Nonprofit Now”

What is in the water up in America’s Dairyland? We’ve been going on and on about the internal control failures at Koss in Milwaukee but now there’s more of it at a non-profit organization just up the road. Let’s hope everyone at UW Madison is taking notes.

The latest tale of non-profit fraud stars 56 year-old Leonard V. Lauth of Beaver Dam.

Wings Over Wisconsin bills itself as a conservation organization dedicated to natural resource preservation and education through youth and community involvement. Spelling errors and obvious lack of updates since 2006 on its website aside, WOW manages nearly 1,300 acres of land and provides mostly young hunter education to the future gun-toting blue-stater babes in Wisconsin.


While it prides preservation of Wisconsin’s precious wetlands, internal controls do not appear to be high on WOW’s priority list. Hopefully this changes that.

It’s a textbook fraud case, starting with the mounting medical bills and the poor internal controls that allowed its Treasurer to lift $16,875 since 2005. Lauth’s advanced methods of fraud include writing checks to himself labeled “office supplies” in the books and taking home banquet funds after the event insisting he’d deposit them at the bank in the morning.

While typically WOW practice to require two signatures, Lauth had been with the organization for 24 years, leaving the “trust” issue totally taken care of. Opportunity, motive, what else do we need?

Rationalization, of course! Lauth told Beaver Dam Police Lt. Joel Kiesow he thought he’d taken $788 from the organization in the four year period in which he executed his fraud. When informed it was more like $17,000, Lauth was shocked. I guess he didn’t realize how expensive “office supplies” can be these days.

“Maybe I was robbing Peter to pay Paul on different things,” said Lauth in regards to using WOW funds to pay off family medical bills. Actually, he was robbing the little Dustins and Bobbys with their baby shotguns and wildlife of Wisconsin who counted on the funds to which he so sloppily helped himself. Shame shame.

Let this be a lesson to all you non-profits: cash management and financial literacy (including fraud prevention measures) are not only best practices for public companies and private industry. If anything, non-profits need sharper internal controls – without shareholders to answer to, money can easily slip into the fraud vacuum undetected for years, as in the case of Mr Lauth and WOW.

Calls to WOW left after business hours were not returned.

Man accused of taking funds from non profit [Beaver Dam Daily Citizen]

Maybe Deloitte Should Give Up Doing Business in Italy

Deloitte has managed to get itself into more trouble in Italy. After settling the lawsuit with freakishly long-life milk company Parmalat, the firm may be facing charges of “market manipulation, false accounting and obstruction of justice, as well as fraud,” according to Bloomberg.


In this particular Italian job, Deloitte is lumped in with a couple of Deutsche Bank employees, who were allegedly complicit in losses at Banca Italease SpA, “Milan prosecutors are probing Italease after potential losses accumulated by clients on interest-rate swaps swelled in 2007 and the bank’s unprofitable positions ballooned. The Bank of Italy fired the company’s board in July 2007 for lack of internal controls.”

While zee Germans are standing behind their two boys, Francesco Giuliani and Dario Schiraldi, Deloitte didn’t comment for the article but the firm is certainly familiar with the tenacity of the Italians are not be trifled with. The Parmalat case dragged on for over six years before investors finally received a settlement from the firm so you can expect that the screwed investors of Italease will be equally as determined.

Deutsche Bank Employees, Deloitte Said to Face Charges in Milan [Bloomberg BusinessWeek]

Koss Fraud May Have Been Due, in No Small Part, to Michael Koss Holding Five Executive Positions

[caption id="attachment_3471" align="alignright" width="150" caption="Hi. I\'m Sue and I\'m a shopaholic "][/caption]

It’s been nearly three weeks since we last picked up the Koss/Sue Sachdeva beat, when we told you about Michael Koss resigning as the audit committee chair of Strattec Security Corp. At that time, Strattec had also elected to give Grant Thornton the boot as its auditor.

Over the weekend, the Milwaukee Journal Sentinel posted a lengthy-ish piece on the “relaxed oversight and lax controls” as the opportunity for the chronic shop ’til you dropper Sue Sachdeva to make off with $31 million. These particular issues (i.e. incestuous management and virtually no internal controls) are a matter of record although it’s interesting to note the new details that come to light.


The article mentions how Michael Koss managed to “serve” in five executive roles at the company: vice chairman, chief executive officer, chief operating officer, president and chief financial officer. PLUS, the aforementioned audit committee chairmanship at Strattec.

Now, we’re not entirely sure what the responsibilities would be for each of the positions at Koss but at a regular company, one of these jobs would result in some or possibly all of the following: insomnia, workaholism, a drug problem, an ugly divorce. Throw in the responsibilities of an audit committee chairmanship and one would assume that Michael Koss walked across Lake Michigan to get to work.

Oh, and just so you’re aware, the Journal Sentinel brings up that MK was an anthropology major. You may have some opinions about that.

The JS also spoke to one of the women that was fired along with Suze, Tracy Malone, who “still speaks highly of the company, although it fired her and objected to her claim for unemployment compensation.” Koss fired Malone because they allege that she “she knew of the misappropriation of funds but failed to report it to superiors.” Ms Malone’s attorney has stated these allegations are false.

So hang on a minute. Your lawyer says you were fired under “false allegations”, the company rejects your claim for unemployment comp, and you still speak highly of said company? Yeesh, have some self-respect lady.

Theft at Koss blamed on relaxed attitude, lax oversight [Milwaukee Journal Sentinel]

The Latest Developments in the Overstock Accounting Mess

In case you haven’t been paying attention, this has been a banner week for the alleged but fairly obvious and ongoing Overstock.com accounting drama (aka “The Quarterly Lie”) and now’s your chance to get caught up. Thank me later (unless you are Patrick Byrne, in which case you are welcome to trash me later out of pure, outraged butthurtedness).

Gross violations of the sanctity of GAAP are not the largest of Overstock’s numerous accounting issues. I know, how could it get any worse? Sam Antar discovers GAAP violations both new and old in this, the latest hilariously fraudulent SEC filing by our friends at OSTK. What makes it even funnier is that they apparently attempted to slip in the new violations with old ones in the hopes that the SEC (and those of us paying attention) may not notice.

Overstock.com nonchalantly lumped in its latest GAAP violations with other GAAP violations previously disclosed by the company on January 29, rather than separately disclosing them. Those newly identified GAAP violations add to a long laundry list of other violations.

Well that’s cute. Now I may not be an SEC filing savant like some among us but, um, something smells wrong here. I’d say I can’t put my finger on it but I can, the only problem is I can’t seem to wash the stink off my finger.

Gary Weiss is also all over it (naturally) and is equally shocked that OSTK would attempt to casually insert new, previously undisclosed accounting violations in with the old, previously disclosed accounting violations as if, you know, it’s a good idea to just lump them all in together while we’re on the subject of violating GAAP accounting. I’m no CPA but if I were advising Overstock on its accounting practices, I might warn against netting its creative accounting in SEC filings for starters. Separately stated items, people, come on.

Do you think it’s merely a coincidence that Overstock has burned through two audit firms in a year’s time? Perhaps not and maybe KPMG has the magic touch that will turn Overstock’s straw financials into gold but if we were the betting type, we’d put our money on indictments and a really messy fall for the Salt Lake City outlet.

We’re all calling bullshit, Overstock. Your turn.

Five Questions with Tracy Coenen

If you’re currently engaged in fraudulent activity at your company, eventually you’re going to find yourself in Tracy Coenen’s Fraud Files Blog. She has published two books on the subject, Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud and more than a 100 articles in industry publications.

When she’s not writing about all things fraud, Tracy runs Sequence, Inc., providing forensic accounting and fraud examination services. The Sue Sachdeva/Koss fiasco happened in her backyard of Milwaukee and she’s been all over it, providing fine quotes on the matter.


Why do you blog?
Somebody has to expose the frauds and scams!

Why should you accountants read your blog?
Because I have interesting insights and I’m not afraid to state my very strong opinions.

Who is your favorite blogger?
Mike Masnick at Techdirt

Best thing about blogging for accountants?
There is a wide open market for accounting bloggers to be thought leaders (and to market themselves) because so few accounting and finance professionals are blogging about their profession.

The biggest issue facing accountants today is…
Truly understanding how fraud happens and how to find and prevent it.

The Latest Homebuyer Tax Credit Scam: Now with HUD!

That the First-time Homebuyers Credit is riddled with fraud is old news. Like all refundable credits, where the government writes you a check if the credit exceeds the tax shown on your return, it’s a magnet for grifters. What’s new is cross-agency efforts enable First-Time Homebuyer Credit fraud, with video.

James O’Keefe, notorious for donning pimpwear and taping ACORN officials happily facilitating tax fraud and child prostitution, and then for getting arrested in Louisiana, took his act to Detroit and Chicago offices of the U.S. Department of Housing and Urban Development posing as a tax credit scammer. One conversation went like this:

The law says that the tax credit maxes out at $8,000 for an $80,000 home. On the tape, O’Keefe asked a staffer, “What if I bought a place for $50,000, but the seller and I agreed to write down $80,000 as the purchase price?”

“Flip it any way you want,” the staffer replied.

What if the place is worth much less — like only $6,000?

“Yup, you can do that.”

This version of the Homebuyer Credit scam can get around the checks the IRS has in place to prevent fraud. The primary IRS anti-fraud check for the homebuyer credit is a requirement that a copy of an HUD-1 form or settlement statement be attached to the 1040 claiming the credit. If the buyer and seller collude to dummy up a HUD-1 form, the “buyer” is reasonably likely to get the credit as long as there isn’t some other item on the return that flags it – such as an address that’s different from the one for the “home” on the settlement statement.

The scammers wouldn’t be out of the woods by any means. The IRS might well catch up with the scammers. But then again, they might not, or if they did, the money could be long gone. For someone living in in a Detroit neighborhood where houses sell for as little as $1,000, splitting $8,000 with a scammer might be one of the less-risky opportunities at hand.

Sacramento Accountant Pleads Guilty; Anyone Looking Need a Fleet of Limos?

William “Don’t Call me Carl the Groundskeeper” Murray pleaded guilty in Sacramento late yesterday to thieving more than $13 million from his clients for nearly a decade. Murray used the funds mostly on himself including “a fleet of limousines, 10 hand-woven Persian rugs, expensive celebrity art, luxury cars, a wine locker at Morton’s, The Steakhouse, sports memorabilia and jewelry.”


Okay, so we’re not terribly impressed with Carl’s loot. Rugs that tie the room together? Fine. Celebrity art? Fine. Sport memorabilia is fine if that’s your thing (Chris Webber jock straps?).

But no homes? Boats? Tahoe is 90 minutes away for crissakes. And why on Earth would you buy a fleet of limos? In Sacremento? Does the Governator ride around in stretch Hummers? Is part of California’s perpetual budget nightmare due to members of the legislature splurging on luxury transportation to go to Starbucks?

And a wine locker at Morton’s? Seriously bad choices, Carl. Apparently accountants are good at stealing money (temporarily of course) but only so-so when it comes to spending it.

Sacramento accountant pleads guilty in $13M fraud case [Sacremento Business Journal]

Hotel Doesn’t Like Being Duped by a Phony IRS Agent; Manages a Nonviolent Response

About a month ago we briefly mentioned Sheryl Lynn Vertoch who had been “staying at the Inn Marin Hotel in Novato, California for over seven years telling the staff there that she was an IRS agent.” Her cover was blown, not by hotel pool boys turned crack-squad investigators, but by the hotel calling the IRS to complain about their lack of support for this public servant that worked on important cases such as Enron.

Probably feeling a tad sheepish, the hotel is firing back by suing SLV for the $55,175.25 that she owes the hotel.


The hotel, being very thorough of its records (but not necessarily multi-year guests) attached a 24 page invoice to show the charges that Vertoch racked up for “guest fees, expenses and pet charges” from January 21, 2008, to January 26, 2010.

Somehow the hotel’s management/owners/lawyers came to the conclusion that A) the actual IRS wasn’t the cause of the problem and B) the use of a plane, bulldozer or firearm were simply not the best course of action.

Personally, we’re shocked but at the same time relieved that there is a sliver of sanity left in this country.

Novato hotel wants IRS imposter to pay $55,000 tab [Mercury News]
Earlier:
Phony IRS Agent Racks Up $55k Hotel Bill

Luxembourg Court Ruling Nullifies Madoff Investors’ Claims Against Ernst & Young, UBS

Of course the investors are appealing but one win at at time, amiright?

The suits were filed in the fall by investors who lost millions in the LuxAlpha Sicav-American Selection fund which had 95% of its fund invested with Bernie Madoff. The fund claims that it had $1.4 billion in net assets a month prior to Madoff’s arrest.


UBS acted as the custodian while E&Y was the auditor and were sued for “seriously neglecting” their supervisory duties for the fund. Investors in the fund filed more than 100 lawsuits against the two companies.

Luxembourg’s commercial court said in a ruling today concerning 10 test cases that investors can’t bring individual lawsuits for damages. The court said it’s up to the liquidators of the funds that invested with Madoff to seek the “recovery of the capital assets.”

In other words, UBS and E&Y, you’re going to get sued by Irving Picard de Luxembourg rather than 100+ pissed off individuals whose life savings went *poof*. Setting legal precedent aside, taking emotion of the equation works wonders for making an argument.

UBS, Ernst & Young Win Bid to Block Madoff Lawsuits [Bloomberg BusinessWeek]

Earlier:
Ernst & Young Is Thankful for Lawyers, Possibly Toblerones

SEC Reminds Us of Past Mistakes; Arrests Madoff Associate

One day after it was reported that fraud detecting superman Harry Markopolos called the Commissioners “idiots” and Mary Schapiro “coldly polite” (that’s a compliment, isn’t it?) the SEC is charging another Madoff associate.

Today the Commission brought charges of “conspiracy, securities fraud, falsifying books and records of a broker-dealer, false filings with the U.S. Securities and Exchange Commission and filing false federal tax returns,” against Daniel Bonventre, according to several reports.


Bonventre was the master of making the internal accounting look legit, as opposed to lying to peoples’ faces directly. He was responsible for accounting entries that “[hid] the scope of the investment advisory operations and understating Madoff liabilities by billions of dollars.”

The Commission also brought civil charges against Bonventre, “alleging he helped disguise Madoff’s fraud and financial losses at Madoff’s firm by misusing and improperly recording investor money to create the false appearance of legitimate income.”

While the rest of the media focuses on the who, the what and the how long will that person be spending in FPMITA prison, “Dirty Diapers” Markopolos probably just wanted remind everyone that A) the SEC missed this by ignoring him several times and B) he still doesn’t think too highly of them. Oh, and he has a book coming out.

DOJ, SEC Announce Charges Against Madoff Exec Bonventre [Dow Jones via WSJ]
Madoff Aide Bonventre Becomes Sixth Charged in Fraud [Bloomberg BusinessWeek]
Madoff Whistleblower Slams Obama’s SEC: ‘They’re A Bunch Of Idiots There’ [HuffPo]

Latest IRS Snafu: Inmates Collect $100k in Refunds

This is getting ridiculous, you guys. As if suicidal pilots and bulldozing protestors weren’t enough of an annoyance, now the Service has been victimized by inmates in a South Florida jail.

According to the AP, about 50 inmates are allegedly responsible for requesting $1 million in fraudulent refunds from the IRS and collecting around $100,000 for their diligent efforts. The report states that the inmates used “a standard IRS form” (we’re guessing Form 843?) most for $5,000 and that some checks were sent directly to the jail. Oh and the best part is that the scheme was foiled by “a how-to note…found in an inmate’s cell,” rather than a crack squad of investigators.


To say that the IRS needed some good press would be a gross understatement, but for crissakes, they need some good press. Sure getting Nicolas Cage to bone up $14 mil is okay and everyone is stoked for Ron Howard to make the Service hilarious but they could use a big break right now. We called the Florida branch to get their ideas but the spokesman told us that the Herald pretty much had it right and that’s all that he was saying.

At this point, nothing short of Doug Shulman capturing Osama Bin Laden (with an IRS-issued Remington no less) while singing God Bless America and apologizing for all the unanswered customer service phone calls will get the American public to looking fondly upon the IRS. If you’ve got better ideas, let us know but that would be our suggestion for an improved image campaign.

Inmates at S. Fla. jail accused of scamming IRS [AP via Miami Herald]

(UPDATE) Ex-Hospital CFO Pleads Guilty to Tax Evasion, Health Care Fraud

In dubious CFO news, Vincent Rubio, the former financial chief at Tustin Hospital and Medical Center, agreed to plead guilty yesterday for paying kickbacks to “marketers” who recruited homeless people from the Skid Row area of Los Angeles.

Rubio pleaded guilty to health care fraud and tax evasion; he was the fifth person to charged in the investigation that is still ongoing. He faces fifteen years in prison After the homeless people were treated, the hospital billed Medicare and Medi-Cal for unnecessary treatments.


The AP piece doesn’t have much to it so we’re got to wondering all sorts of things like: A) Who discovered this fraud? Was it — gasp — the auditors? B) what were these unnecessary treatments? We’re these displaced individuals getting checked for hernias or less intrusive procedures? C) how much was Medicare and Medi-Cal charged? Are we talking Madoff-esque numbers? D) When the homeless were finished up at the hospital did they strap them to a rickshaw and send them back out in the streets or did they try to help them for real?

We called the hospital to find out more and we were connected to a spokesperson, who told us that she could not comment on the matter. She informed us that our message would be relayed to the hospital’s President, James Young. At the time of posting, we had not heard back from him. We’ll update this post with any comment or further information.

Ex-hospital CFO pleads guilty in homeless scam [AP via SF Chronicle]

UPDATE Friday, February 12th: We received the press release from Pacific Health, the owner of the Hospital:

February 11, 2010

Press Release

Pacific Health Corporation learned of the allegation that a third party made improper payments to Vince Rubio on November 30, 2006. Upon receipt of the allegation, Pacific Health Corporation contacted its outside counsel to investigate the allegation.

Within one day of the allegation being received, Pacific Health Corporation took employment action in the matter, placing Mr. Rubio on leave. Within one week, Pacific Health Corporation terminated the employment of Mr. Rubio.

After the completion of the its internal review and taking the employment action, Pacific Health reported the matter to law enforcement officials. That took place in early 2007.

The IRS Has Gotten Wise to Dead People Seeking Refunds

Pulling off tax fraud is a tough proposition. Hell, even the guys that are good at it get busted.

Plus, despite our low expectations, the IRS has managed to get wise to the filing of tax returns with huge refunds. To try and pull such a stunt will not help your burgeoning criminal career.

Another bad jig (seemingly) would be to attempt filing a tax return seeking a refund for a dead person. Despite what some might consider to be a no-brainer, a couple of guys in California still thought it was worth a shot. Web CPA Reports that Haroon Amin and his partner Ather Ali filed tax returns for 250 dead individuals in 2002 and 2003.

The IRS got wise to some of this but still managed to send out a few checks to addresses controlled by the two men. Mr. Amin pleaded guilty today and faces up to five years in prison where hopefully he can get some help improving his criminal instincts.

Man Pleads Guilty to Filing 250 Tax Returns for Dead People [Web CPA]

Grant Thornton Gets Fired (Again)

Grant Thornton is having a helluva time keeping audit clients happy. After getting axed by Overstock.com in November, GT has now been fired by headphone maker Koss after it was discovered — by AMEX — that the company’s former VP of Finance had been embezzling millions of dollars since 2005.

In an 8-K filed yesterday, the Company stated that its financial statements from the past three years should not be relied on:

The Company has now concluded that its previously issued financial statements on Forms 10-K for the fiscal years ended June 30, 2005 through 2009 and on Form 10-Q for the three months ended September 30, 2009 should no longer be relied upon due to the unauthorized financial transactions.

A couple of commenters were debating this particular SNAFU over the Holiday break and while GT may not be responsible for discovering embezzlement, this is a perfect example of why small companies should not be exempt from Sarbanes-Oxley. As Guest 2 notes:

it looks like Koss will become the poster child for internal controls. The company clearly had to have deficient internal controls if the VP of Finance could use millions of dollars in company funds to pay her personal credit cards. We’re talking over $400,000 a month on average (if the $20 million figure is accurate) and that amount is clearly material to the company (i.e. that amount should not have gone unnoticed). My guess is that this will force all other small public companies to become full-pledged into 404 like the majority of public companies are.

We’d love to agree with Guest 2 but the simple fact of the matter is that Congress doesn’t give a rat’s ass about small companies complying with SOx. Most of the members have never even heard of Koss, especially since the company has a budget of around $0 for campaign contributions. Right now the only thing keeping the small company exemption at bay is the inability of Congress to move on financial regulatory reform, which is kinda sorta needed.

Headphone maker Koss fires auditor after firing VP [Reuters]

Preliminary Analytics | 12.29.09

Thumbnail image for PettersSmile.jpgAP: Ponzi collapses nearly quadrupled in ’09 – Thimble-dick Bernie, Allen Stanford, Tom “Cocker Spaniel” Petters, all did their part. [via HuffPo]
The First Annual Jr Deputy Accountant Year in Review Awards (or some h*t) – Somehow we ended up on this list and somehow JDA managed to make it a backhanded compliment (we think). [JDA]
Koss financial records will get more scrutiny in 2010 – With comments from Tracy Coenen at Fraud Files. [Milwaukee Journal Sentinel]
The Man Who Wired Silicon Valley – How Raj got the world by the short and curlies. [WSJ]
GM Plans Pontiac Fire Sale – “GM sent letters to dealers Dec. 23 saying it would pay them $7,000 for every new Saturn or Pontiac on their lot that is moved to rental-vehicle or service-vehicle fleets operated by the dealers.” So yes, they’ll seem extra pushy. [WSJ]
The Big Zero – As in the decade we’re finishing up. Prof. Krugman also quotes Diet Coke fiend Larry Summers stating that GAAP was the most important innovation in history and that it allows investors to make good decisions. According to PK, also a big zero. [Paul Krugman/NYT]
Spurious academic study of the day, Tiger Woods edition – Ball-parking investors’ losses due to TW’s cheating ways is not so easy, nay, ridiculous. [Felix Salmon/Reuters]

Ernst & Young Pays $8.5 Million to Settle Charges with SEC Over Bally Fraud

Thumbnail image for ey8ball.jpgSix current and former partners at Ernst & Young were charged, along with the firm, by the SEC late yesterday in relation to the audits the firm performed of Bally Total Fitness’ financial statements from 2001 to 2003.
Bally settled accounting fraud charges with the SEC in 2008 that were related to its financial statements from 1997 to 2003.
Because everyone and their dog was freaking out over Enron in screws to their clients to follow GAAP, E&Y had identified Bally as “one of E&Y’s riskiest 18 accounts and as the riskiest account in the Lake Michigan Area.”


Floyd Norris:

The firm forced Bally to stop recording revenue in an improper manner that allowed it to claim earnings earlier than was allowed by accounting rules.
But in doing that, the firm allowed Bally to not admit to having violated the rules in the past, an action that would have forced it to restate its accounts and admit that losses in previous years had been much larger.

Mr. Norris also reported that a source of his at the SEC has stated that “he knew of no previous enforcement cases in which a partner of a major firm was cited for his actions as head of a national office.”
The partner in this case is Randy G. Fletchall, the partner in charge of E&Y’s National Office. He along with Mark V. Sever, E&Y’s National Director of Area Professional Practice, and Kenneth W. Peterson, the Professional Practice Director for the Lake Michigan Area office are the current E&Y partners who settled the charges with the SEC.
The former partners include: Thomas D. Vogelsinger, the Area Managing Partner for E&Y’s Lake Michigan Area through October 2003, William J. Carpenter, the E&Y engagement partner for the 2003 audit, and John M. Kiss, the E&Y engagement partner for the 2001 and 2002 audits.
While the news of a current partner of such lofty heights is notable, an extra twist that isn’t being reported in the MSM comes from GC contributor, Francine McKenna, who tells us that Mr. Fletchall served as the former AICPA Chairman from 2007-2008 and Mr. Sever, a former chairman of the Accounting Standards Executive Committee:

What none of the stories that just hit tell you, though, is that at least two of the EY partners charged, Fletchall and Sever, held leadership positions with the AICPA in the past.

Did Mr. Fletchall get off with a slap on the wrist given his AICPA leadership position, AICPA PAC contributions and significant campaign contributions to Senator Christopher Dodd? Mr. Fletchall is used to telling the SEC what it should do. Quite used to it.

These are interesting questions that the SEC probably doesn’t want to address. The connection, in appearance, is shady and we can only speculate as to what happened during the negotiations of the settlement.
The Commission, remaining stoic, gave a standard issue boilerplate statement, saying:

“It is deeply disconcerting that partners, even at the highest levels of E&Y, failed to fulfill their basic obligations to the investing public by not conducting proper audits. This case is a sharp reminder to outside auditors that they must carry out their duties with due diligence. The $8.5 million settlement, one of the highest ever paid by an accounting firm, reflects the seriousness of their misconduct,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

So it appears E&Y is getting sent to their room here, despite the $8.5 million fine being “one of the highest ever paid by an accounting firm.”
The firm also agreed “to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.”
Were the AICPA connections enough to keep them out of really hot water? At the very least, it didn’t hurt anything. If you have any information regarding this story, get in touch with us, and we will update you with any developments.
SEC Charges Ernst & Young and Six Partners for Roles in Accounting Violations at Bally Total Fitness [SEC Press Release]
EY Settles SEC Charges Re: Bally’s Fraud-Lives To Audit Another Day [Re: The Auditors]
Ernst to Pay the S.E.C. $8.5 Million [Floyd Norris/NYT]

Fraud Risk, Staffing Reductions, and OJ Logic at CFO.com

orangejuice_Full.jpgEditor’s Note: Robert Stewart is a former Big 4 auditor and ex-Marine who has since served in several executive management roles in both Internal Audit and Corporate Finance. He is also the founder and chief contributor to the online accounting and audit community, The Accounting Nation. Outside of work, he is a husband, father, brother, writer,uate aspiring triathlete.
You can always count on CFO.com for logic flaws and surface reporting. It’s like drinking that concentrated orange juice in a can when you add three parts too much water and then put ice cubes in it because it’s warm, which makes it even more watery which… Where was I going with this?
Oh yeah. In one of their latest articles, entitled “As Internal Audit Staffs Shrink, Will Fraud Rise?“, the author portends — based on a Deloitte survey and subsequent interview — that the decrease in internal audit personnel somehow increases the risk of organizational exposure to fraud. What? Ever hear the phrase “Correlation is not Causation”? Symptom or cause.


Here’s my $0.02: such staffing reductions may increase the risk that fraud will go undetected (though only nominally given that IA only uncovers about 12% percent of frauds according to the ACFE’s Report to the Nation), but the risk to the organization more than likely remains constant, right? Am I missing something here?
After all, Internal Audit is a downstream event unless you make the argument that the organizational perception of being “watched” has diminished with the reductions in internal audit/compliance staffing, thus emboldening would-be fraudsters (i.e. strengthening the “opportunity” leg of Cressey’s Fraud Triangle). But this article doesn’t make that argument.
The article further states that:

Despite the reduction in compliance personnel, 50% of respondents to the Deloitte survey, who included CFOs, CEOs, board members, and middle managers in finance and risk management, said their compliance and ethics programs are strong. Another 36% said they are adequate. Many public companies and some private companies invested significantly in their compliance programs after the passage of Sarbox in 2002, notes Francis, and they may now feel confident that those programs are effective even with a reduced staff. But that confidence may not always be justified.

Confidence? I would hardly call the above percentages “confidence” on the part of the respondents. If I told you that 50% of the airline pilots felt that their pre-flight checklist procedures were strong, how would you feel about flying? No F*#$ing way I’m getting on that plane.
The words wrapped around the survey results and subsequent interview quotes don’t at all support the conclusion that this article is trying to draw. Perhaps it’s because the survey was designed and administered by a firm (Deloitte) that has a vested interest in drumming up some business through fear tactics? After all, you’re never going to hear a burglar alarm company extolling the improvements in public safety.
And you’re never going to hear a company that sells risk-related services conducting and publicly releasing results that don’t support their strategic objectives. Or perhaps it’s just bad writing at CFO.com in order to satisfy a quota? The World may never know (I think the World will be fine with this). Either way, I’ve wasted double the amount of time that I should have on this topic (i.e. read it and wrote about it). And so with that…I bid you adieu.

Because There is No Shortage of Criminals

fraud.jpgEditor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
Over the weekend, I had the pleasure of speaking with Sam Antar of White Collar Fraud. I won’t give him too many props (lest he think his wily criminal charms got to me) but our conversation was both relevant and disconcerting.
In case you aren’t acquainted with Sam, he’s the ex Crazy Eddie CFO who ripped them off and now does speaking tours talking about, well, crime. But there’s a lot more than that at work here, that’s just his schtick.


So what did I learn?
I believe my editor thinks I’m a doom and gloomer so here’s some good news: besides suggesting we start training more qualified forensic auditors fresh out of school, Sam insists there is a chance for real financial reform.
Do you take your reform advice from an ex-criminal? I remind you here that a tax cheat is in charge of the IRS, do with that information what you will.
Anyway, the point here is that financial statements lack integrity. Without integrity, investors are groping in the dark and criminals are able to execute their schemes. Foreign investors are scrambling to leave US capital markets, could that be because our statements are – generally speaking – unreliable?
So. Sam’s 3 step plan to restoring sanity to financial statements. Take it for what it is.
1. Redefine audit committees as truly independent. No member of the audit committee should derive a salary or other compensation from stock options or stock holdings. Period.
2. Committee members should be qualified. CPAs and securities lawyers are qualified to sit on an audit committee, not marketing managers and other “average” sections of the corporate population.
3. Forensic accounting should be standard curriculum in university accounting programs. Don’t eliminate 404(b), if a corporation can’t afford the audits required to be a public company, then don’t become one.
We’ll have to agree to disagree on that final point, I don’t think tedious audits are the solution. However, perhaps if we had more qualified auditors out in the trenches, I might be inclined to be slightly less skeptical about the effectiveness of more softcore audits.
Stay tuned as we’ll be picking Sam’s brain again soon.
GC Posts Referencing Sam Antar:
Grant Thornton: Patrick Byrne’s Pants Are on Fire
Obvious Sign of Fraud: You’re Having Sex with the Client

Canada Somehow Ranks Ahead of Mexico in PwC’s Global Economic Crime Survey

Flag_of_Canada_jpeg.jpgThat means our neighbor to the north ranks numero uno for North America.* They rank 4th in PwC’s report behind Russia, South Africa, and Kenya with 56% of the Canadian respondents reporting incidents of fraud.
And no, it’s not all because the country is full of crooks, it’s party because Canada has more rats informants:

So does Canada have more thieves in our midst, or are we just better at ferreting out perpetrators?
The study suggests there is a bit of both. Tipoffs from internal or external sources are higher in Canada than in other countries, as is our ability to detect fraud through electronic means. Automated systems used to detect inconsistencies or suspicious transactions accounted for more than 10% of frauds detected by companies in Canada. Thanks to rats and routers, more crimes are being reported in Canada then elsewhere.
By contrast, the PwC report argues that the overall decrease since 2003 in reported crimes elsewhere in the world does not necessarily speak to their better anti-crime fighting abilities, but rather to an “overall breakdown in anti-fraud regime controls which would usually assist in the detection of economic crime.”

So wait a minute, not only does Canada have more tattletales, they also have a superior ability to detect fraud “through electronic means”? Does anyone buy this? That must be the case with the other countries that are keeping Canada company in the top 5, right?
We’re more inclined to go with the notion that Canada doesn’t do such a good job discouraging would-be Mini-Madoffs. According to one expert: ‘We don’t put anyone in jail.’
There you have it. A simple dose of PMITA prison for the Earl Jones and Gary Sorenson types should get The True North out of the top 5.
Canada a fraud nation? [Financial Post]
*We will not be splitting hairs with anyone on whether Mexico is technically part of North America or Central America so don’t even bother going there.

Satyam Would Like the U.S. Lawsuits Moved to India, Oh, and PwC Would Like to be Left Out Altogether

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for pwclogo.thumbnail.jpgSatyam wants the U.S. Courts to kindly BTFO of business that should be handled in India. Specifically these silly fraud lawsuits.
Besides, PW India has already said that they want to bury the hatchet, so they feel that this whole will be best handled in the Eastern Hemisphere:

In a court filing yesterday, the software-services provider said it was joining a motion by its auditors, Price Waterhouse and Lovelock & Lewes, to dismiss the American fraud suits brought by investors.
“This case belongs in India,” the auditors wrote. “Satyam’s alleged billion-dollar fraud, as well as the allegedly improper audit, took place in India. Virtually all of the defendants are India-domiciled companies or individuals.”

P. Dubs India and Lovelock want the whole thing dropped since they were acting on the honor system. Annnnnnnd, since PwC International doesn’t have control over any of the individual firms they’d like it very much if the judge just dropped them out of this thing too:

PricewaterhouseCoopers International Ltd. said it should be dropped from the case because the investors failed to show it had control over its Indian member, Price Waterhouse, as is required by U.S. securities law.

From the looks of it, no PwC firm wants to be responsible for anything that went wrong with Satyam even though they signed the audit report. Fine, so can we agree that audit opinion was worthless? That’d be great.
Satyam Says U.S. Fraud Suits Must Be Moved to India [Bloomberg]

Crowe Horwath Is Amped for International Fraud Awareness Week

Crowe_Horwath_2c_lo.jpgWhat? Your firm hasn’t reminded you that November 8 – 14 is International Fraud Awareness Week? Shameful. Lucky for you, Crowe Horwath is all over this.
Crowe is offering tips to its clients “on how companies can help turn their own personnel into their best fraud preventers and fraud detectors” because they are sick and tired of being the ones finding all of it.
Here’s a taste of their ideas:
Know who you hire &ndash Avoid guys in tracksuits and with short attention spans.
Create an ownership environment &ndash That stapler? It’s yours.
Keep employees informed &ndash Emails about the latest dead-end marriage in the office do not count.
Establish sound internal controls &ndash Unless you don’t have to.
Implement checks and balances &ndash Again, optional.
While we admire Crowe’s attempt to get proactive, we’re concerned that, inevitably, the “Army of Fraudbusters” will start using their newly acquired fraud detection skills for outing their office enemies for petty crimes such as leaving food in the fridge, ass-photo copying and the like.
Create An Army of Fraudbusters Within Your Organization [Press Release]

Madoff Auditor to Plead Guilty Next Week

Reuters:

“The government anticipates that, at the pretrial conference scheduled for Nov. 3, 2009 … David G. Friehling, the defendant, will plead guilty pursuant to a cooperation agreement with the Government,” prosecutors said in a letter to the judge handling the case in Manhattan federal court.

According to the WSJ, “Mr. Friehling is expected to plead guilty to are securities fraud, investment advisor fraud, obstructing or impeding the administration of Internal Revenue laws, and four counts of making false filings with the U.S. Securities and Exchange Commission.” Since he’s flipping, Friehling will likely not face the maximum sentence of 108 years but he still probably shouldn’t make any long term plans.
Friehling will be third person related to the Madoff scheme to plead guilty and this will no doubt be the last time that we hear about an auditor admitting guilt.
Earlier: Judge, Possibly Fearing a TP’d House, Denies Bail for Madoff CFO

Auditors, You’re Just Going to Have Start Finding Fraud, Okay?

overwhelmed.jpgBecause that’s your job, right? The PCAOB is giving consideration to new auditing standards that would presume that certain related party transactions would constitute a fraud risk.
This just serves as another example of auditors’ responsibility for discovering fraud reaching a ridiculously unrealistic level.


According to Web CPA, “Although such standards have been in the talking stage at the PCAOB for at least five years, there is fresh interest in this area now because related-party fraud has been a factor in a number of recent corporate financial scandals.”
Classic reactive measures being employed by the Board here. No sense in developing any kind of standard until after something happens. The Board hasn’t really been doing a bang-up job on much of anything but no matter, the effectiveness of a government regulator is not the issue here.
Auditors, you’re being duped. That’s unacceptable and according to some, the procedures you currently perform over related party transactions just won’t do any more:

But some officials at the PCAOB as well as members of the accounting profession have suggested that these standards may not be sufficient. At least part of the problem involves what some have described as widespread related-party transaction fraud slipping under the radar screen of auditors.

As we’ve mentioned in the past, the PCAOB simply is not satisfied with your ability to follow the current rules, auditors. Accordingly, the PCAOB will make more rules for you to follow until they are proven inadequate and then more rules will be written and on and on. You get the idea. It’ll be routine before you know it, if it isn’t already.
PCAOB Mulls New Related-Party Standards [Web CPA]
Also see: Fair Value, Audit Committes, Related Parties Highlights Of Day 2, PCAOB SAG Meeting [FEI Financial Reporting Blog]

PCAOB: We’re Not Saying Perfect Audits, Just Pretty Perfect Audits

Thumbnail image for epic-failure.thumbnail.jpgThe public understanding of what auditors actually do is, to put it mildly, frustrating. If you were ask the average dude on the street what auditors’ responsibilities were, “Find fraud” would probably be the first thing that you would hear.
With all the public outrage against everything remotely related to finance or accounting, politicians feel like they have to do something. This usually amounts to putting pressure on bureaucrats, who in turn make rules to appease said politicians who can then point to accomplishments.


The PCAOB is no exception, and regardless of its potential extinction, has a go-getter attitude that includes potentially making the public’s perception more of a reality.
FEI Financial Reporting Blog:

Although not part of the PCAOB’s formal standard-setting agenda for the upcoming year, some SAG members argued there was a need for the PCAOB to revisit the fundamental fraud standard (SAS 99) as a standalone or ‘foundational’ standard, in much the same way as the PCAOB is in the process of re-proposing its suite of risk assessment standards as ‘foundational’ standards.

You probably know where this is going:

In response to questions, Silvers said, “We should not expect that every audit is a forensic audit… that’s absolutely not what I’m saying.” However, he added, “I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud.”
“This was subject to some extensive discussion in the Treasury committee (Treasury’s Advisory Committee on the Auditing Profession or ACAP],” said Silvers, adding, “some people, Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don’t find fraud, it’s the auditors fault; but it’s also not my view that looking for fraud is not related to the audit, that doesn’t parse with the public’s [perception] of the audit profession.”

Our emphasis. So not every audit will be a forensic audit, so, just most of them? That’s a relief.
So not only do you need to get way better at auditing fair value, now the brain trust at the PCAOB is considering putting more auditor flesh on the hook when it comes to finding fraud. So not absolute assurance but it’s getting there.
PCAOB Announces Ambitious Agenda; May Be Time to ‘Dial Up’ on Fraud, Silvers Says [FEI Financial Reporting Blog]

McGladrey & Pullen Sued for Helping Bad Guys

fraud.jpgMark this suit in the “Accountants are Crooked” column as opposed to the “Accountants are Stupid” column.
McGladrey & Pullen, its predecessor auditor, and the partner on the audit engagement, G. Victor Johnson, are being sued by the Sentinel Management Group Trustee for being a knowing participant in the fraud put on by Sentinel who collapsed in 2007.
More, after the jump


M&P is accused of “knowingly and substantially assisted and participated in the fraud by [Sentinel], and as a result, committed and are liable for fraud themselves.”
Many suits against accounting firms accuse negligence related to technical mistakes that were made so we’re impressed see a lawyer say “To hell with it, these guys are crooks, I’m taking them down like Arthur Andersen.”
On a more personal level, between this suit and the messy divorce with RSM McGladrey, we’re expecting to M&P to have the CPA firm equivalent of a nervous breakdown any day now. Feel free to speculate as to what that might actually be.
Collapsed Financial Company’s Trustee Claims Accountants Knew About Fraud [Chicago Bar-Tender]

The SEC Doesn’t Care if ‘The Numbers Don’t Work’

magic money.jpgTry to control yourselves, the SEC continues to kick some ass. The Commission has charged Terex Corporation of Westport, CT with accounting fraud:
Check out the details, after the jump

The Securities and Exchange Commission today charged Terex Corporation, a Westport, Conn.-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.

The Commission had previously charged URI executives with fraud back in September when the company paid $14 mil to settle with M. Schape and the gang. Terex is settling for $8 mil.
The complaint alleges that both companies engaged in some shady revenue recognition which enabled them to meet earnings forecasts. It also states that from 2000 to 2004, accountants at Terex couldn’t figure out some of their inter-company transactions so they just decided to RAM some journal entries in there to make it work.
We understand that. Every once in awhile it’s 1 am-ish and you’re looking at a bunch of numbers that are getting blurry and you say “F THIS“. Entry gets made. Done.
Problem is, the SEC doesn’t like that.
SEC Charges Terex Corporation With Accounting Fraud [SEC.gov]

More Madoff Justice Expected Today

As we mentioned last week, Frank DiPascali, the Chief Financial Officer Accounting Officer Number-Maker-Upper is going to be arraigned today on multiple counts of fraud, conspiracy and other bad stuff that will earn him a permanent wardrobe of bright orange or heavy denim jumpsuits. We’ll update you on the sitch after 3 pm EDT.

Colonial Bank Shouldn’t Make Any Late Summer Plans

thumbs down col.gifSo all that fuss over at Colonial Bank? Accounting irregularities, natch. According to Reuters, “Colonial BancGroup Inc (CNB.N) said it faces a criminal probe by the U.S. Department of Justice (DoJ) related to accounting irregularities at its mortgage lending unit, and the struggling lender warned it may be put under receivership.”
The SEC is also taking a peek at the bank’s participation in TARP. Book cooking for taxpayer funds may have its poster child. Top notch, Colonial. Top notch.
Colonial BancGroup faces criminal probe, FDIC action [Reuters]

What is Going on at Colonial Bank?

thumbs down col.gifEditor’s note: Adrienne Gonzalez is founder and managing editor of Jr Deputy Accountant as well as regular contributor to leading financial/investment sites like Seeking Alpha and GoldmanSachs666. By day, she teaches unlicensed accountants to pass the CPA exam, though what she does in her copious amounts of freetime in the evening is really none of your businesures in Fedbashing and CPA-wrangling on Twitter @adrigonzo but please don’t show up unannounced at her San Francisco office as she’s got a mean streak. Her favorite FASB is 166.
The Colonial BancGroup audit group is going to have some ‘splaining to do when all’s said and done. Proof that you really don’t want to mess around when it comes to $700 billion taxpayer injections.
SIGTARP top cop Neil Barofsky said early on “I hope we don’t find a single bank that’s cooked their books to try to get money but I don’t think that’s going to be the case” but evidently forgot to knock on a nearby piece of wood in the Treasury basement when he did as SIGTARP agents have raided two Florida offices in conjunction with possible TARP fraud.
The whole thing, after the jump


Via Florida’s Ocala.com:

“I can confirm for you that our office, the Office of the Special Inspector General for the Troubled Asset Relief Program, has executed two search warrants today in the state of Florida,” said Kristine Belisle, communications director. “It’s our investigation. It’s our agents that have executed search warrants.”

Belisle said the warrants were sealed.
“I can’t provide any further information because of the nature of an on-going investigation,” Belisle said.
While Belisle is hesitant to get into the details, we’d be happy to catch you up for now.
The story, as we understand it, goes something like this: Colonial BancGroup, finding itself under increased pressure by both federal and state regulators including the FDIC, Federal Reserve, and the Alabama State Banking Department to bump up capital, thought it had a $300 million deal in the bag with Florida-based Taylor, Bean & Whitaker. We’d like to point out here that while the author enjoys stirring up trouble wherever possible, it’s never a good idea to do so when Federal regulators are involved, especially when they toss out demands like this:

WHEREAS, on July 15, 2009, the board of directors of BancGroup at a duly constituted meeting adopted a resolution authorizing and directing Simuel Sippial, Jr. to enter into this Order on behalf of BancGroup, and consenting to compliance with each and every provision of this Order by BancGroup and its institution-affiliated parties (blah blah blah)
(a) The consolidated organization’s and the Bank’s current and future capital requirements, including compliance with the Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and D of Regulation Y of the Board of Governors (12 C.F.R. Part 225, App. A and D) and the applicable capital adequacy guidelines for the Bank issued by the Bank’s federal regulator;

Our emphasis/edit. Long story short, the Taylor, Bean & Whitaker deal was never a go and Colonial shares have been in full-on death watch ever since. But wait, there’s more!
As of about 11a EST this fine Monday morning, SIGTARP agents have crawled around both Colonial and TBW offices in search of… well, we don’t know exactly what they were looking for as company reps and regulators have been fairly tight-lipped since this story broke but we’re pretty sure they aren’t trying to track down Michael Jackson’s body.
Not so coincidentally, Colonial (CNB) reported a $606 million loss on Friday. The phrase “going concern doubt” was probably invented just for cases like this, although we have our own phrasing that we like to use including “totally screwed!” and “Just Big Enough to Fail”
This is the first large SIGTARP case that we are aware of and if Colonial is closed by regulators, it will be the largest bank failure of the year. No disclosures, though we will be excited to see what else Barofsky’s office is cooking up (no pun intended).
Feds raid Colonial Bank office in Florida [Reuters]

SHOCKER: Number of Fraud Cases in the Courts is High

In probably the most shocking news of the day, KPMG’s “fraud barometer” reports that the number of fraud cases in UK courts in the first six months of the year are the highest since the firm started issuing the report, 21 years ago.
Here in the states, the big sexy fraud gets all the attention but there is plenty of small fraud to go around. Plus, the bright side is, we’ve haven’t seen anything yet:

“These figures are bad, but the worst is yet to come,” Hitesh Patel, a partner at KPMG, said. “It will be a number of years before the impact of the recession fully feeds through into the fraud statistics.”

So our advice would be for any of you that are nervous about layoffs, look into getting transferred to the forensic accounting practice. You won’t be out of work any time soon.
Record total of fraud cases in court – and worse to come [FT.com]

Someone is Getting Testy

r.jpgAllen Stanford is pissed. How on Earth can a man with those guns not be allowed to invoke his rights to counsel if you don’t let him get his mitts on some cash?
We’re not talking about a public defender here, judge. We’re talking downtown, probably wears a Stetson to the courthouse, Houston representation we’re talking about. Serious scratch.
“‘The government’s unfettered, and thus far successful, attempts to prevent Mr. Stanford from being able to mount a defence in his criminal proceedings amount to a deprivation of both his Sixth Amendment right to counsel and his Fifth Amendment privilege against self-incrimination,’ attorney Dick DeGuerin argued in in the filing.”
The judge is like, IDGAF: “Judge [David] Godbey replied to – and denied – that request last week, saying Sir Allen had ‘not shown that he has $10m dollars, or any lesser amount, in personal assets untainted by potential fraud.'”
Fine, but Stan would just like you to know that selling tickets to the gun show inside the joint doesn’t work the cons like it does the fine Texas ladies.
Stanford lashes out at federal prosecutors [FT.com]

CFO Confession: HealthSouth Edition

It might be a fair statement that we like to talk a little trash here at Going Concern. We do our best to embrace our natural inclination. However, every once in awhile we try to spread some positive news.
Today’s attempt at a positive story comes courtesy of Aaron Beam, a former CFO at HealthSouth. Beam was CFO at HealthSouth when the fraud first began in 1996. Beam describes his decision to make the numbers up this way, “one night, during the second quarter of ’96, I said, ‘OK, let’s do it,’ and we credited revenue that did not exist and we debited assets that did not exist.”
Not exactly the most sophisticated fraud in the world but whatevs. The Street and Richard Scrushy demanded results.
And so it went, until Beam left in 1997. HealthSouth continued to commit accounting fraud until 2002 when it imploded. Beam testified against “Hannibal Lecter” Scrushy but the slimeball walked on the criminal charges only to be found liable for damages to the tidy sum of a shade under $2.9 Billion.
As for Beam, he spent 3 months in a non-FPMITA prison and now speaks to business students around the country about ethics and has a lawn-service business.

I’m trying to turn a big negative into a positive, because there is such a need for ethics in the business world today, and I’m in a unique position to talk about it. If we can teach college students that they’re going to face these kinds of temptations every day in the business world, we can make a difference.

WTG man, and hey, we’re being serious.
“I Should Have Said No.” [CFO.com]

Stanford CFO to Plead Guilty After Pleading Not Guilty

This after speculation earlier about whether Davis would flip. Looks like he’s going to sing:

James Davis, the former chief financial officer of Stanford Financial Group and who is facing charges related to an alleged $7bn fraud at the group, intends to plead guilty to the three charges against him, his attorney told the Financial Times.
Attorney David Finn, who is representing only Mr Davis, told the FT there would likely be a “procedural not guilty plea” entered at his arraignment, but that his client would ultimately plead guilty to the charges against him “once all the details are worked out.” Mr Davis is due to appear in court in Houston on July 13.

You got that ticket to hell stamped, Stan?
Stanford CFO James Davis “intends to plead guilty”, laywer [sic] says [FT Alphaville]

Stanford CFO Flipping?

Chief Financial Officer Bean Counter Number-Maker-Upper Officer at Stanford Financial, James Davis, is appearing in court Wednesday to answer fraud and conspiracy charges.
Davis has spent the last few months cooperating with prosecutors and may flip on Stan the Man regarding the small matter of some money gone missing.
No agreement has been reached yet for Davis but considering the number of years being handed out and Stan’s potential fate of multiple centuries in prison, he may at the very least, consider cooperating.

Stanford CFO to appear in court
[Accountancy Age]

New Bail Hearing for Stanford Set for Monday Because He Just Might Split

Stan the Man will spend the weekend pumping iron in a Houston jail because all signs are kinda, sorta pointing to the possibility of him going on the lam after a judge granted the silver medalist in the Ponzi competition a measly $500,000 bail.
Stanford’s attorney called bullshit because “he had already shown the financier was no flight threat.”
Judge David Hittner didn’t buy it and remanded Stan to jail until Monday based on the evidence presented by prosecutors:

testimony from a pilot who flew Mr. Stanford to Libya and Switzerland before government officials raided his Houston offices; testimony from a friend of Mr. Stanford’s daughter who gave him $36,000 in cash, and claims that $100 million was withdrawn from a Swiss bank account Mr. Stanford controlled

C’mon, your honor, that’s just walking around money! My client can’t be expected to strut around without serious money on hand!

New Bail Hearing Set for Stanford
[WSJ]

SHOCKER: Doesn’t Appear that Stanford Auditors were Doing Any Auditing

allen-stanford_1018295c.jpgLast week’s indictment of Allen Stanford has brought up the always popular question when fraud, occurs: “Who are the auditors that were asleep at the wheel of this disaster?”
Well, in this case, the auditors were a local UK two-person shop, CAS Hewlett, which must be Queen’s English for Friehling & Horowitz.
It doesn’t appear that CAS Hewlett has a website, but they’ve been doing the Stanford “audits” for at least 10 years, so obv they’re legit. PwC and KPMG both have offices on Antigua but Stanford preferred to stay with its “trusted firm”. Totally understandable.
And the best part? The founder of the firm, Charlesworth “Shelly” Hewlett died in January, approximately a month before the story broke on the Ponz de Stanford.
This all adds up to who-the-fuck-knows if audits were even occurring and for us to speculate if Shelly needed to get got because Stan knew that the poo and fan were coming together. Just sayin’.