Understanding the Latest Developments in Financial Fraud
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Transcript of Understanding the Latest Developments in Financial Fraud
AICPA National CFO Conference
InterContinental Boston
Understanding the Latest Developments Understanding the Latest Developments
in Financial Fraudin Financial Fraud
Stephen G. Austin, CPA, MBA
Firm Managing Partner
Swenson Advisors, LLP
May 20, 2011
7:00 am – 7:50 am
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Stephen G. Austin, CPA, MBA
Over 35 years of public accounting experience as an Audit Partner with Price Waterhouse, McGladrey & Pullen, LLP, and Swenson Advisors, LLP
Certified Public Accountant ‐ California and Georgia
Audit Committee Chairman ‐ Avanir Pharmaceuticals,World Trade Center San Diego, The Rock Church, and Santa Fe Christian Schools
Serves on twenty Boards and related Committees
Author of “Rise of the New Ethics Class”
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PCAOB registered accounting firm
Offices in San Diego, Riverside County and Hong Kong
SEC/SOX ‐ audit, tax, compliance, Asia Pacific compliance services, IFRS consulting, forensic and dispute resolution services
SOX consulting services with SWENTRACKTM automated web based solutions
Top 5 accounting firms – Riverside County – 2010
Top 30 accounting firms – San Diego – 2010
Member of Integra International ‐ 175 offices, 60 countries
Focus on “Tone at the Top” and Ethics Compliance
www.SwensonAdvisors.comx
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We Caught Our Breath From...
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And Now – Look Who’s in the News!
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“Lose money and I will forgive you, but lose even a shred of reputation and I will be ruthless”Warren Buffett
David Sokol allegedly traded Lubrizol Corp. stock prior
to Berkshire Hathaway’s acquisition of Lubrizol Corp.
Sokol “pocketed” a $3 million profit?
Some believe Buffett
missed the opportunity to:
“...show moral courage, stand up for principles,
reinforce to his employees what he expects from them,
and, not least of all, to live up to his own public reputation.”
The Daily Transcript | 4/4/11
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“Skilling Loses Key Appeal Battle”
Supreme Court ruled that Skilling’s fraud and
conspiracy conviction was not swayed by federal
prosecutors’ use of the “honest services” test
Case returns to the Fifth Circuit panel to determine whether any of the 19
counts against Skilling should be vacated
Ex‐Enron Chief’s son, John Taylor Skilling, dies of possible overdose
Echoes death of Mark Madoff, the son of Bernie Madoff
Accounting scandals have a serious impact on friends and family
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Raj Rajaratnam ‐ “He is the central figure in the government's sprawling, multiyear investigation of insider trading on Wall Street”NY Times | 4/13/11
Former founder of Galleon Group (hedge fund)
Rajaratnam and five others accused of relying on a network of informants to
make more than $63.8 million in profits from 2003 – 2009
14 counts of conspiracy and securities fraud
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“Barry Minkow Turned Over a New Leaf‐From Accounting Scandals to Insider Trading”
Barry Minkow (ZZZZ Best fame), an ex‐convict who turned his life around a
decade ago and became a minister and
co‐founded a fraud detection firm
In December, 2010 Minkow was found
guilty of securities fraud charges and
in March, 2011 pleaded guilty to
Federal charges of “insider trading”
Minkow has agreed to help federal
investigators, but could face five years
in prison
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‘Nothing that I say should be taken as an excuse for my behavior, I take full responsibility
for what I did’_________________
‘I try to piece it together. Why didn’t I say, “I cannot do it?
Why didn’t I return the money and say, “I can’t
do it.” Why?’_________________
Madoff
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‘Look, I am not a banker. But I know that billions ofdollars going in and out of a bank account is something that should alert you to something. [They] got all the financial statements. [They] could have seen – I was using them as custodian, and they never questioned it.’Madoff | Financial Times | 4/9/11
$6.4 billion lawsuit, filed in federal bankruptcy court, claims that the bankers at
J.P. Morgan discussed the possibility that Madoff was operating a Ponzi scheme
“While numerous financial institutions enabled Madoff’s fraud, JPMC was at
the very center of that fraud, and thoroughly complicit in it”
115‐page lawsuit by Irving Picard | Bankruptcy Trustee
We Are Making Some ProgressWe Are Making Some Progress
But...But...
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2011 Fraud Scorecard2011 Fraud Scorecard
Weak Audit CommitteesCOSO monitoring
PCAOB foreign accounting
firm investigations/fines
SEC troubles
Mild mannered auditorsRepeat offenders
Accounting scandalsFCPA violations
SOX 404 material weaknessesInsider trading scandals
RestatementsGlobal financial meltdown investigations
What’s NotWhat’s Hot
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Restatements are on the Decline
630 companies filed 674 restatements in 2009
27% decline from 2008
The number of restatements peaked in 2006 with 1,795 restatements
Audit AnalyticsReport: Financial Restatements –A Nine‐Year ComparisonPublished March 10, 2010
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SOX Has Achieved Significant Acceptance
A new survey of more than 300 Chief Audit Executives found that 88% do not believe that the SOX Act should be repealed.Source: Grant Thorton CAE Survey 2011
70% of more than 400 respondents who have put into place accounting controls required by SOX said that the benefits outweighed its costs.Source: Protiviti 2010 Sarbanes‐Oxley Compliance Survey
Global Financial Market Meltdown:Global Financial Market Meltdown:
The Investigations and Prosecutions ContinueThe Investigations and Prosecutions Continue
WhoWho’’s to Blame?s to Blame?
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SEC settlements with major investment banking houses
Largest attempt by enforcement agencies to hold Wall Street accountable for its role in the toxic subprime mortgage debacle
SEC’s rough road to this enforcement action
SEC Settlements/Fraud Allegations with Wall Street Banks
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“SEC Levels Case Against Ex‐Officers of IndyMac”
SEC charged three former senior executives
with fraud
Failure to adequately disclose to investors
information about the Company’s deteriorating financial condition in 2007 and
2008
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“SEC Levies Record Fine Against India Accounting Firm”
India affiliate of PricewaterhouseCoopers “routinely failed to follow the most basic audit procedures” – said the SEC
Satyam Computer Services –falsely reported more than $1 billion in profits
SEC and PCAOB fined PWC India $7.5 million
Largest penalty ever against a foreign accounting firm
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“Ernst and Young Faces Civil Fraud Charges for Lehman Accounting”
Lehman’s use of Repo 105 accounting in question
Ernst & Young is fighting charges for allegedly failing to adequately follow up on a whistleblower’s claim that Lehman was misstating the value and size of its assets
“Ernst and Young is the only firm left to punish” –Why?
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“Criminal Investigations Against Auditors, Consultants of Kabul’s Central Bank Underway”
Afghan authorities plan to prosecute everyone responsible for Afghan’s central bank’s collapse – including the Afghan nationals and foreign entities
USAID hired BearingPoint and Deloitte Consulting LLP in 2003 to advise the central bank in developing the financial sector of the country and regulating commercial lenders
A U.S. government report said this month that at Kabul Bank,
"fraudulent loans were used to divert $850 million to insiders reportedly representing 94% of the bank's outstanding loans."
Key Trends Key Trends
in FCPA Enforcementin FCPA Enforcement
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Increased Enforcement:
2010 saw unprecedented levels of enforcement of FCPA, more than double the
financial penalties levied in 2009
Expanded Enforcement:
Greater resources devoted by the Department of Justice (‘DOJ’) and Securities
and Exchange Commission (‘SEC’) toward dedicated enforcement units
Industry‐wide sweeps; expansion of actions against non‐U.S. Companies
Enforcement actions against individuals being brought with increasing frequency
and volume
Key Trends
Source: The Red Flag Group
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More Onerous Enforcement:Trend in cases towards more onerous penalties
New Tools for Enforcement: Dodd‐Frank Wall Street Reform and Consumer Protection Act
Enacted July, 2010 (‘Dodd‐Frank Act’)
Provides incentives and protection for whistleblowers
Non‐prosecution agreements
Key Trends, Continued
Source: The Red Flag Group
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“We’re in a new era of FCPA enforcement; and we are here to stay.”
(AAG Breuer; November 16, 2010)
Between DOJ and SEC criminal fines, disgorgements, civil penalties and
prejudgment interest more than $1.8 Billion was recovered in funds from
companies in violation of the FCPA, more than double that in 2009
Increased Enforcement
Source: The Red Flag Group
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The number of corporate and individual enforcement actions
increased 85% overall in 2010 over 2009;
DOJ and SEC actions totaled 74.
*Source: Gibson Dunn & Crutcher
Increased Enforcement, Continued
Source: The Red Flag Group
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Greater Resources being devoted by DOJ/SEC:
Significant increase in funds and resources being devoted to enforcement of FCPA provisions
Dedicated enforcement units
New Financial Sector/Banking probe January, 2011
Industry‐wide sweeps:
Significant amount of FCPA actions now part of a multi‐defendant or industry‐wide investigation
Strong collaboration between FCPA regulators and enforcement agencies
Recent cases suggest expanded and more proactive enforcement of FCPA and a focus on non‐U.S. companies.
Increasing focus on prosecution of individuals:
So‐called ‘Shot Show’ sting: 22 individuals arrested in largest single investigation and operation against individuals in history of FCPA
Expanded Enforcement
Source: The Red Flag Group
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Recent trend in case law towards more onerous penalties for companies:
8 of the top 10 monetary settlements in FCPA history occurred in 2010
Technip, Snamprogetti and BAE cases all imposed combined penalties in excess of
$350 million
Daimler, Panalpina & Alcatel cases all imposed combined penalties around $100
million
First instance of a company being “put out of business” by FCPA enforcement action:
NEXUS Technologies.
Continuing trend in case law towards pursing individuals:
Individuals receiving increasing fines and jail sentences .
Most severe sentence imposed in PECC case of 87 months and $1.1 Million in fines.
More Onerous Enforcement
Source: The Red Flag Group
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Dodd‐Frank Act incentives provide increased protection for whistleblowers
SEC’s finalized rule changes and
guidance under the Act have
just undergone a public comment
period – Ended December 31, 2010
New Tools for Enforcement
Source: The Red Flag Group
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Rewards tipsters with payments ranging from 10% to 30% of any penalties or
disgorgements of $1 million or more.
“How a Whistleblower Conquered Countrywide”
Michael G. Winston, former executive at Countrywide Financial
‐Won and awarded $3.8 million in damages
SEC Proposed Whistleblower Bounty Program
The Need for Continuous Monitoring: The Need for Continuous Monitoring:
New COSO Monitoring GuidanceNew COSO Monitoring Guidance
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Issued January 2009
Useful guidance (with many examples) available from COSO)
Goal: Compliance “365 days a year” versus “last day of the fiscal year”
Compliance
Operatio
ns
Financia
lRep
orting
FUNCTIONS
BUS
UNITS
Control Environment
Risk Assessment
Control Activities
Information and Communications
Monitoring
COSO Monitoring Guidance
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New Monitoring Guidance
Source: COSO – Committee of Sponsoring Organizations of the Treadway Commission
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1. Establish a foundation for monitoring
2. Design and execute monitoring procedures
3. Assess and report results to appropriate personnel
4. Monitoring can be outsourced to others
The New Monitoring Guidance ‐Four Steps
“COSO continues to provide outstanding tools that should be embraced in order
to sustain an effective reliable U.S. reporting system and provide the kind of
ethical leadership needed in today’s global economy.”
Steve Austin | Turbo Charge Your SOX Program with the New COSO Monitoring Guidance | 7/8/10
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COSO Guidance Tools
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New Tools to Keep Fraud Out of your Financials
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January 2010 – National Fraud Authority published the first Annual Fraud Indicator
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SWENTRACK� is a cost‐effective, web‐based tool to help simplify SOX compliance efforts.
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Looking Forward to the Challenges Ahead
Battle for hearts and minds
U.S. led “Global Reformation”
Reducing excess government interventionism
Maintaining global ethics leadership
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The MBA Oath is a voluntary student‐led pledge that asks graduating MBAs to make a commitment towards responsible and ethical behavior
I will refrain from corruption, unfair competition,
or business practices harmful to society
http://mbaoath.org
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Reflections on My Recent Teachings
of SOX, IFRS and Ethics to accounting
professionals in China
Thank youThank you
Stephen G. Austin, CPA MBAStephen G. Austin, CPA [email protected]
Swenson Advisors, LLPSwenson Advisors, LLPwww.SwensonAdvisors.com