Monday, December 21, 2009

EY settles with the SEC

This week, the NY Times reported that the SEC reached a settlement with EY for its audits of Bally Total Fitness. The article reports that "Six current and former Ernst partners, including Randy G. Fletchall, the partner in charge of the firm’s national office, were ... sanctioned by the commission in one of its most sweeping actions against auditors involved in a failed audit." The SEC's $8.5 million settlement is reported as "one of the highest ever paid by an accounting firm.”
Here are a few quotes:
“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."

"Mr. Fletchall, who remains with Ernst, was in charge of resolving technical accounting issues in the United States ... was censured by the commission."
"A veteran S.E.C. official ... said 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."
"Ernst was reacting in 2002 to a growing number of accounting scandals, including Enron, and decided to get tough with clients who had previously been allowed to take aggressive accounting positions. The firm forced Bally to stop recording revenue in an improper manner that allowed it to claim earnings earlier than was allowed by accounting rule. 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."
"The case could provide support for reformers who have said companies should be forced to periodically change accounting firms, a change that Congress considered but rejected in passing the Sarbanes-Oxley law in 2002."

Thursday, December 10, 2009

Internet Urban Legends and Fraud

I'm always amazed at how many urban legends fly around cyberspace. Today I got one that had a video that purportedly showed President Obama being snubbed by a Russian delegation. The email said:
For those of you who haven’t seen this already – I hope you can all get it. Pretty amazing! Could it be that the bloom is leaving the rose with this Nobel Peace Prize Winner? Watch this 10-second video where a lineup of leading Russians refuse to shake his hand. Did you see this on ABC, CBS, NBC, CNN or MSNBC?
This is "hard ball", Soviet Style. After the third handshake refusal,,, it becomes obvious. The facial expression is priceless. "I guess we're no longer in Chicago ".
And, how in the world did Katie Couric, Charlie Gibson, Diane Sawyer, miss this? If it had been Bush, think the media would cover it? Anyone ever seen a Head of State snubbed like this? Speaks volumes.
Attached to the email was this video. From looking the statistics on the YouTube variations of this video, it appears that this "evidence" of Obama's snubbing has been viewed on YouTube over 1 million times. However, since I received the video as an email attachment -- not a link -- it's very likely that the video has been viewed many times more from email.

I wonder how many people believe Obama was snubbed by the Russians. I've decided he wasn't. Let me explain.

After watching the snubbing video I decided to look for other news about it. I searched Google and found the email was right in that the mainstream media was not making a big deal out of this. However, I found other videos that said the snubbing did not happen. These videos asserted that Obama was holding out his hand to introduce Medvedev to an American congregation.

After watching several videos, I came to the same conclusion--Obama was simply holding out his hand to introduce Medvedev. I reported this to my friend and sent him some videos. However, he still believed Obama was snubbed.

It's interesting how the lens we look through can influence what we see. Psychology research calls this a "confirmation bias." I believe that the many people passing on this email were looking through a distorted lens caused by frustration, fear and maybe a little paranoia. I believe my friend is a great guy with good intentions but because he doesn't like what is happening to the world under President Obama, he has an easy time confirming that there is a scandal happening around Obama. When someone paints a picture that suggests a scandal exists around Obama, he sees that picture--even if the picture is distorted and taken out of context.

I've found my own views are not free from these distortions and that I need to be very honest with myself or I won't recognize the distortions. I've also found that many times others are not open to reason or challenging their views and they refuse to clean their lens when it's pointed out to them that it might have some dirt on it.

I saw another video recently that purportedly showed Obama had admitted to being Muslim. The scandal was that this was kept out of the news and that Obama had lied about it. However, Aaron pointed out to me that all the quotes were very short and no context was given around them.

As I studied the video again I found there was only one quote that really could be evidence that President Obama was a Muslim. I then found a longer version of this interview where it appeared he admitted to being Muslim and it was clear that he had a simple slip of the tongue and corrected himself.

You might be asking, what does this have to do with fraud? Well, the thing that is most amazing to me is that so many of these legends are being fabricated by taking pictures and quotes out of context. It would take real effort to take these quotes and clips out of context and put them all together to paint a fraudulent picture of President Obama. What kind of fraudster is trying to find video and audio that can be used to discredit the President?! Amazing!

Now, just for clarification, I did not vote for President Obama and I disagree with many of his policies. However, I hope that I can be unbiased enough to see clearly when someone sends me some bogus information on him.

With that said, I believe the press does this in a more subtle way all the time. Some say it's in the President's favor, others say the press is distorted against the President. I believe the truth is that each report we watch is going to be biased. The key is for us to be very honest with ourselves and to be open to reason when new information is found.

In the end, I found a link to my favorite place to investigate urban legends: Snopes. I should have gone to Snopes first! Snopes is the best place to start when you receive any email with some amazing new fact that hasn't been in the mainstream media!

Lessons learned: 1) be skeptical of any email with news that never made it to the mainstream media; 2) be doubly skeptical of any audio or video clips that are short and out of context and 3) check out before wasting too much time!

Wednesday, December 9, 2009

New Stimulus idea: Promote fraud to create jobs!

This is the idea that a delegate from Russia seemed to espouse as he commented in a meeting yesterday.

I was asked by the Marriott School to speak to a small group of delegates from Russia who were interested in understanding fraud and corruption. As we talked about the effects of fraud and corruption on an economy, one of the delegates (a lawyer) kept smiling and commenting that unethical business conduct leads to job creation!

It's true that when people are unethical in business, you need to increase controls including people and systems to monitor, prevent and detect the conduct. However, this does not lead to economic gain overall. After several explanations of how corruption creates friction in an economy, I was amazed that he persisted in this thought. He continued to smile and espouse this job creation from unethical business conduct over and over again even though we tried to explain how corruption can cripple an economy.

I tried to explain how corruption in an economy has crippled many third world countries such as Haiti. I've been to Haiti and seen people who are willing to work hard for $3 a day but who can't find work because viable businesses can't survive there because the costs of bribes and corruption are so extreme. As a result 90% of the people are out of work.

The argument of this lawyer is about like saying we ought to promote violent crime so we can create more jobs for police officers, builders of jails, jail keepers, emergency room workers and so on!

I've tried to imagine what our economy would be like if people had a high standard of ethics. If people followed the golden rule to treat others how you want to be treated, the economy would be very different. I must agree with the Russian lawyer that many people would find their jobs were not in demand. This includes police officers, auditors, fraud examiners, virus detection software programmers, alarm system companies, lawyers, etc. The list goes on and on. Unfortunately, I think the future is only getting brighter for careers in these areas.

I believe that the drain on the economy from all the economic effort needed to protect us from being exploited and hurt by one another is tremendous. I also believe that the drain is getting bigger with time. I can only imagine that a high standard of living could be accomplished for all with much less work if we didn't need to spend so much energy protecting ourselves from one another.

Yes, it's true that unethical business conduct leads to job creation. In fact, it also leads to a lower standard of living for every economic input. So, if we now have to work 50 or 60 hours a week to have a reasonable standard of living, I believe the same standard of living would probably require about 10 hours a week of working in a society that lives the golden rule. If corruption increases, either we will need to work more or our standard of living will decrease in order to support all the jobs needed to protect ourselves from the corruption.

That's not the stimulus package I want to see!

Madoff victims, SIPC and a zero-sum game...

How would it be to be in charge of deciding which Madoff victims get protection under SIPC and can receive up to $500k in government insurance? That's what Stephen B. Harbeck does as the head of SIPC. A New York Times article today gives some details on how SIPC goes about this process. Here is a quote from Mr. Harbeck:
“Nobody likes to say no to people who are, without question, victims,” Mr. Harbeck said in an interview. “That’s been hard for me. That’s been hard for my staff. But this is a zero-sum game — a dollar we give to someone who is not eligible is a dollar we do not have for someone who is.”