A recent article in Bloomberg Businessweek highlighted the work of UT-Austin finance
professor John Griffin, and his work in exposing the Bitcoin—Tether cryptocurrency
connection. He found that when “Bitcoin
fell to certain levels, purchases using Tether would flood in to stabilize
prices” and this “fit a pattern consistent with someone, or a group of people,
trying to manipulate Bitcoin prices.” Griffin also published a paper last year alleging a favorite benchmark of
volatility in the finance industry, the XIV, was rigged. His work has drawn an “eager
readership” among watchdogs, including the Department of Justice and the
Commodity Futures Trading Commission.
Monday, October 15, 2018
Chinese Spies Infiltrate almost 30 U.S. Companies
On
October 4th, Bloomberg published an article detailing how Chinese
spies placed microchips on motherboards produced for Super Micro Computer Inc.,
one of the biggest supplies of motherboards in the world. Supermicro products are used by large tech
companies such as Amazon and Apple. These microchips allow the servers they have been inserted into to be accessed remotely by those that put them there, and gather all the information they want. According to the article, "one government official says China’s goal was
long-term access to high-value corporate secrets and sensitive government
networks. No consumer data is known to have been stolen.” A link to the full article is provided
below.
Wednesday, October 3, 2018
NY Times Investigation digs into possible President Trump tax fraud

Links to a summary article and the full investigation are included below.
Wednesday, January 31, 2018
Auditors and Fraud: Interview with Going Concern
Mark was recently interviewed by Going Concern about auditors' responsibilities to detect fraud. Here are a few highlights:
Wednesday, January 24, 2018
Moral Hypocrisy: The KPMG / PCAOB Scandal
Auditors aren't that great at detecting fraud and sometimes claim their audits aren't designed to detect it. It looks like they may not be that great at committing it, either (though not for lack of effort).
Monday, January 8, 2018
Tuesday, January 2, 2018
PWC Held Responsible for Not Detecting Fraud
The Wall Street Journal published an article explaining that PricewaterhouseCoopers (PWC) was held responsible for failing to detect fraud in their independent audits of Colonial Bank. Colonial Bank collapsed in 2009 and, according to the Tampa Bay Times, was the sixth largest bank failure in history. The articles estimate that PWC may be responsible for damages totaling hundreds of millions of dollars.
This is an interesting case because the audit firm has had some individuals claim, in court, that auditors are not responsible to detect fraud. The court rejected this claim and said auditors who don't design audits to detect fraud are not following their own auditing standards. Here are some details from the FDIC order related to the case:
“While there are numerous auditing standards that are implicated in this case,...the overarching standard that governed the PWC audits is that: “[t]he auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether caused by error or fraud.” AU § 110.02; AU § 316. PCAOB Auditing Standard No. 2 states that “[a]lthough not absolute assurance, reasonable assurance is nevertheless a high level of assurance.” Id. at ¶ 17. To that end, a PCAOB 2007 release clarified that “[t]he auditor should, therefore, assess risks and apply procedures directed specifically to the detection of a material, fraudulent misstatement of the financial statements." (emphasis added). The Engagement Letters between PWC and CBG acknowledged this responsibility by stating that PWC would “design [the] audits to obtain reasonable, but not absolute, assurance of detecting errors or fraud.” See, e.g., A4 at 3. Indeed, Mr. Westbrook, one of the PWC audit partners, testified at trial that PWC had a duty to design audit procedures to detect fraud. Tr. 817:25-818:7 (Westbrook). He further testified that if PWC failed to design its audit procedures to detect fraud, it would be a violation of PCAOB standards. Tr. 822: 19-22 (Westbrook).However, PWC voiced a very different tune just a few years ago with respect to another lawsuit that stemmed from this fraud. TBW’s bankruptcy trustee also filed suit against PWC, alleging that PWC breached its duties when it failed to detect the fraud. That lawsuit proceeded to trial in August 2016 before it settled mid-trial. As part of that lawsuit, many of the same PWC engagement partners, audit managers, and audit staff who are involved in this case gave deposition testimony under oath in the TBW trustee’s case. During that testimony, these individuals repeatedly admitted that PWC did not design its audits to detect fraud. For instance, Mr. Westbrook testified that PWC “audits are not designed to detect fraud.” Tr. 358:6-7 (Westbrook) (quoting Westbrook TBW Dep. at 23:7-12). Likewise, Mr. Jackson, the PWC engagement partner, testified that “I would point out that our audit procedures were not designed to detect fraud.” Tr. 1027:1-10 (TBW Dep. at 31:17-20). Similarly, Wes Kelly, PWC’s audit manager for the 2003-2005 and 2008 CBG audits, testified that PWC “did not design audit procedures to detect fraud.” W. Kelly TBW Dep. 45:608 (Ex. P3120). Finally, Mr. Rivers, a PWC audit associate assigned to the CBG audit, testified that PWC had no obligation to look for fraud. Rivers TBW Dep. at 66:17-23.At trial, PWC attempted to explain away this testimony by arguing that these individuals simply meant that PWC was not a guarantor against the possibility of material fraud because the auditing standards recognize that “even a properly planned and performed audit may not detect a material misstatement resulting from fraud.” Ex. A400 at 7-8 (AU § 316.12); Tr. 821:25-822:24 (Westbrook stating that in order to provide a guarantee against fraud, auditors would “need a lot more tools like lie detector tests and subpoena power and guns and badges and all those kinds of things.”). This Court does not find this explanation credible, nor is it consistent with the previous testimony from the TBW trustee’s lawsuit. This Court heard Mr. Westbrook and Mr. Rivers testify for hours and is convinced that these gentlemen are more than capable of saying what they mean. If they had intended to say that PWC audits were not a guarantee against the possibility of material fraud, they would have testified accordingly. However, that was not their testimony. Instead, they clearly stated that PWC had no duty to detect fraud and did not design its audits to detect fraud. The Court concludes that PWC did not design its audits to detect fraud and PWC’s failure to do so constitutes a violation of the auditing standards.
What I find interesting is that practicing auditors admitted that they don’t design their audits to detect fraud even though auditing standards clearly say that auditors are responsible to provide reasonable assurance that there are no material misstatements due to (error or) fraud. Over the past decade, including as recently as 2016, I’ve asked several audiences of auditors to answer the following true-false question: “Auditors have the responsibility to provide reasonable assurance that there are no material misstatements due to fraud.” These auditors range from staff to partners and, on average, about 50% incorrectly answer false. This is pretty disheartening to me...
Unfortunately, my experience suggests that most auditors don’t put in a lot of effort to detect material fraud. Fraud may be discussed briefly in the required brainstorming session but then quickly forgotten as the audit team gets focused on ticking and tying and trying to get some sleep during busy season.
There are many things that auditors could do but, unfortunately, it's rare to find an auditor who is thinking beyond what they did last year. If I were king for a day, I would require auditors to do interviews with lower level people in an organization with the goal of discovering aggressive accounting or business practices. Combining interviews with strategic reasoning would potentially help auditors provide the reasonable assurance they are responsible for. For example, if strategic reasoning leads the auditors to believe revenue recognition and shipping cutoff is ripe for financial reporting fraud, auditors trained in interviewing could meet with shipping / warehouse personnel about the end of the year. Well designed questions could reveal information that could help identify control weaknesses and potential fraud.
In any case, this case and other experiences with auditors reminds me of the 1980s when auditors put it in their engagement letters that they weren’t responsible for providing assurance for fraud. Back then, and now, the courts don’t appear to share that view. In the end, both the auditing profession and audit users end up suffering when auditors are weak in fulfilling this responsibility.
Thursday, December 8, 2016
Wells Fargo Incentives Lead to Fraud
Wells Fargo, one of the largest banks in America, was fined
$185 million for the company’s fraudulent selling
practices. A Wall Street Journal article1
reports, “Federal regulators announced that Wells Fargo opened as many as two
million deposit and credit-card accounts without customers’ knowledge.” Many former employees of the bank attribute
the widespread fraud to the incentive structure and the pressure received from
managers to reach the company’s ambitious sales targets.
Wells Fargo has been envied by its competitors for its high
return on equity, with greater relative profits than other leading financial
institutions such as J.P. Morgan. This
success is a result of the focus on cross-selling more products (i.e. different
financial services) per customer, a strategy it has faithfully followed since
1999.
However, some managers’ fierce dedication to this strategy led
many lower level employees to create dummy accounts. Sales progress was closely monitored,
requiring updated reports several times a day. Not meeting your targets was not something to be taken lightly, as many
lower and mid-level managers lost their jobs due to their inability to consistently
achieve their goals.
The account
representatives and account managers also felt immense personal pressure to
achieve sales goals due to the monetary incentives attached to their
targets. With low base salaries those
bonuses became very significant and highly desirable. A Harvard Business Review article3
explains how this type of incentive structure entices employees to make minor
ethical compromises which then escalate and spread from there. The article reads:
“Consider the following sequence: A bank account manager, under pressure to make a sales goal to receive his bonus, pushes a customer to add a credit card, even though the account manager knows it’s not in the customer’s interest. Still short of the goal, the account manager asks his friends and family to open accounts. (The accounts are to be closed shortly thereafter.) With the goal still not achieved, the account manager opens accounts without asking customers and transfers a small amount of money. (The accounts are closed shortly thereafter and the money is transferred back.) As soon as the account manager gets away with the first unethical act, it’s not a big step to the fraudulent ones. The justification moves from ‘it’s legal’ to ‘no one is harmed’ to ‘no one will notice.’ When such practices are tolerated, they escalate in severity and spread throughout the organization.”
Wells Fargo’s CEO, John Stumpf, accepted full responsibility
in his congressional hearing last week.2 Over the past five years
the bank has fired 5,300 employees for their involvement in fraudulent
practices and has hired consultants from PriceWaterhouseCoopers and Accenture
as well as several law firms to investigate the situation. However, it seems as though all that effort
was too little, too late.
Mr. Stumpf has received a lot of heat for this scandal,
including requests for his resignation and calls for top executive’s
compensation to be paid back to those negatively affected. Some have even questioned his competency as
the CEO of such a large bank. The WSJ
article1 previously mentioned goes on to state, “In the 2010 annual
report, Mr. Stumpf said he often was asked why Wells Fargo had set a
cross-selling goal of eight retail banking products per customer. “The answer
is, it rhymed with ‘great,’ he wrote. ‘Perhaps our new cheer should be: ‘Let’s
go again, for ten!’”
The bank said it will “scrap all product-based sales goals
in its retail branches starting January 1.”1 It is unclear why they are waiting until next
year to implement this change aimed to alleviate the pressure experienced by
employees that led them to these illegal practices. Hopefully this scandal will help other
companies see more clearly that extreme commitments to aggressive goals can
potentially lead to fraud.
1. http://www.wsj.com/articles/how-wells-fargos-high-pressure-sales-culture-spiraled-out-of-control-1474053044
2. http://www.wsj.com/articles/wells-fargo-ceo-stumpf-i-accept-full-responsibility-for-unethical-sales-practices-1474326173
3. https://hbr.org/2016/09/wells-fargo-and-the-slippery-slope-of-sales-incentives
Saturday, August 27, 2016
Combating Cheating in the Classroom
Online resources students may use for cheating |
Have you ever heard of websites such as Course Hero,
Quizlet, or Koofers? If you have, you may know that while these websites can provide
some advantages for honest students, they also provide an opportunity for some students
to cheat. A recent presentation by a professor at Brigham Young University
(BYU) highlighted several concerns about these study websites. After searching
the websites, thousands of assignments, quizzes, and exams were discovered
posted on the various sites. While it may be okay to post student notes, flash
cards, or even class slides depending on professors’ instructions, posting
assignments, quizzes, and exams is likely a violation of copyright laws.
Monday, August 15, 2016
Whose Job is it Anyway? Are Auditors Expected to Detect Fraud?
A recent
article in The Wall Street Journal
details what could be one of the only legal cases from the great recession to
actually go to trial. Taylor Bean & Whitaker Mortgage Corp. is suing
PriceWaterhouseCoopers LLP (PWC) for $5.5 billion dollars claiming that PWC was
negligent in auditing one of their clients. While PWC didn’t audit Taylor Bean, they did audit a bank with which Taylor Bean did frequent
business--Colonial Bank (Colonial). Taylor Bean overdrew its accounts with Colonial for several years to
cover cash shortfalls, then sold fake pools of mortgages to Colonial in order
to cover up the fraud. Taylor Bean claims PWC was negligent in auditing
Colonial, and that the collapse of Colonial led to them losing
billions of dollars. The real question is how liable should auditors be for detecting
fraud?
Thursday, August 11, 2016
HSBC Holdings Receives Nothing More Than a Slap on the Wrist
A recent
article in The Wall Street Journal
talks about the Justice Department’s decision to not pursue charges against
HSBC for allegations made in 2012. HSBC is a major bank in the UK that admitted
to neglecting to spot proceeds from drug trafficking in Mexico and also did not
flag transactions by countries under economic sanctions. Rather than being
prosecuted, the bank was allowed to admit guilt, improve its controls, and make
a few other minor changes. Both Republican and Democrat lawmakers view the
decision as a slap in the wrist for a company that admitted to engaging in
extreme illegal activity. While former Attorney General Eric Holder says his
remarks were misinterpreted (see below), the fact that HSBC is no longer being prosecuted
lends credence to the idea that the government seems incapable of handling corruption
within some of the world’s largest corporations.
See
this previous
post for a further discussion on companies being too big to fail.
SaveSave
Friday, August 5, 2016
Fraud Prevention in the Banking Industry
According to a recent
article on Bloomberg, banks are
considering using blockchain technology, the same platform used in bitcoin
transactions. This change could prevent losses that are due to one particular
type of fraud. Some companies are applying for and receiving financing from
multiple banks, but are using the same invoice as proof of collateral for all
of the banks. This allows the company to receive much more financing than they
should be able to receive, and the banks lose a lot of money if the company
defaults on their loan. This fraud is similar to if an individual were to receive
several mortgages from various banks for a single house. If the individual were
to default on their mortgage, they would keep a lot of cash, and the banks
would each be left with only a portion of a house as collateral. The losses due
to this financing fraud have been close to $700 million for banks such as Standard
Chartered Plc and JPMorgan Chase.
Saturday, April 23, 2016
Expert Witnesses in the Armstrong Case: Are their Opinions Valid?

It’s been over three years since Lance Armstrong admitted to doping throughout his career, but the lawsuit between the United States Postal Service (USPS) and Armstrong continues. The main question that is still unresolved is whether or not the USPS actually suffered losses due to sponsoring Armstrong with more than $30 million between 1998 and 2004. If the USPS can prove they experienced losses due to sponsoring Armstrong and subsequently learning of Armstrong’s doping, then they will have strong evidence to win the case. On the other hand, if Armstrong can prove that the USPS didn’t experience any loss, he will have a better chance at winning the case. How is the dispute resolved? By hiring expert witnesses at $700 – 900 per hour.
Monday, April 18, 2016
New Detection Method Could Have Caught Lance Armstrong

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