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).

Doping in Sports and Financial Statement Fraud

I just read an interesting article titled: "Instead of punishing dirty cyclists, should we reward the clean?" The idea is to certify pro cyclists who are willing to be thoroughly tested for doping. The tests would go beyond what is currently used to look for drugs and involve many mechanisms to detect doping.

Enron CEO, Jeff Skilling, Received Shorter Jail Sentence

Various news agencies reported last week that a federal judge reduced Jeff Skilling's prison sentence by about ten years. If Skilling is found to be on good behavior and take a drug and alcohol rehabilitation course, he could be out of prison within four years. Part of the agreement is for Skilling to quit trying to get his conviction overturned. This new ruling also frees up some money from Skilling's estate that will be used to compensate victims of the fraud, including former Enron employees who lost their retirement when the company went bankrupt. Diana Peters is one of many former Enron employees who was at the latest trial and is quoted as follows:

"I pray that your decision is to give Jeff Skilling the maximum sentence for his crimes." 

Fraud always ends in a sad story as innocent victims deal with the aftermath by experiencing serious devastation, suffering and heartache. My heart goes out to these former Enron employees who had nothing to do with the crazy games Skilling, Fastow, Lay and others were playing...

City Governments Committing Financial Statement Fraud

The Wall Street Journal reported recently that city governments in Pennsylvania, Florida, California, New Jersey and Illinois are increasingly being charged with financial statement fraud in their bond offerings. In the case of Harrisburg, Pennsylvania, the SEC stated that:

...this is the first time the (SEC) has "charged a municipality for misleading statements made outside of its securities disclosure documents."

According to "Anthony Figliola, a vice president at Empire Government Strategies, a Long Island-based consulting firm to local governments. 'Harrisburg is the tip of the iceberg.'"

SEC to Focus more on Financial Reporting Fraud

According to the Wall Street Journal, the SEC is ready to get back to work looking for financial reporting fraud. After the mortgage meltdown, the article states that the SEC turned its attention to cases related to the financial crisis and took its eye off of fraudulent financial reporting. Interestingly, the article identifies one new tool that the SEC plans to use to identify fraudulent financial statements...

Former Enron CEO Working a Deal to Get out of Prison

Mainstream news sources are saying that Jeffrey Skilling, former Enron CEO, is working a deal to cut his prison sentence by more than a decade. The reports say that...

Ernst & Young Corruption Survey Results

Ernst and Young surveyed over 3,000 employees from 36 countries in Europe, the Middle East, Africa and India and found that a large percentage are aware of fraud in their organizations. The percentage admitting they knew of fraud seems to increase as you move up the management ladder of the organization. For example, 42% of board members and senior managers admitted to knowing about financial reporting irregularities. Apparently they admitted that either sales or costs had been manipulated...

Before you're tempted to dismiss this as due to corruption in the under developed nations, it turns out that while the rates are much higher in the third world, even highly developed countries in Europe report significant amounts of fraud (including financial reporting fraud) is going on in their companies. My guess is that the US is probably not as good as the best European nations

So much for fairly stated financial statements, not to mention, bribery and other forms of corruption...

HP Writes Off Nearly $9 Billion Related to Accounting Fraud

Reports are coming out today that Hewlett Packard will take an $8.8 billion writeoff of an acquisition of a software company they purchased for $10 billion. The reason for the writeoff is because the company they acquired, Autonomy, deceived them by using a massive revenue recognition fraud. HP stated that they have turned over the case to the SEC and regulators in the UK. You can read a few more details on Forbes, MSNBC and elsewhere. It seems the reports are still a bit vague though...

According to this article in the WSJ, two of the Big Four, Deloitte and KPMG, were involved in the audit and purchase of Autonomy. Unfortunately, they will undoubtedly be dealing with this mess too.

Fraud and the Mortgage Meltdown

Charles Ferguson, the person who created the documentary on the mortgage meltdown "Inside Job," has written a book on the topic titled "Inside Job: The Financiers Who Pulled Off the Heist of the Century." I can only seem to find it on Amazon's UK website so I don't know if it will be available in the US. In any case, this article in the Guardian, written by Ferguson, has some interesting comments about the fact that the Obama administration and the US Justice Department is not prosecuting anyone. Ferguson also names several banks that he claims were complicit in the meltdown and committed various forms of fraud. He says that It's pretty disheartening to think this much corruption exists in the financial industry and the government isn't doing much to hold anyone accountable for it. Here are a few excerpts:

Catching up on fraud in the news

Olympus Scandal Leads to Arrests: Seven employees have been arrested in conjunction with the alleged financial statement fraud at Olympus.  Whether those arrests will lead to criminal punishment remains to be seen:

Under Japanese securities laws, the men arrested Thursday could each serve up to 10 years if found guilty. But convictions for white collar-crime have been rare in Japan, and courts have been known to hand down suspended sentences even in egregious cases.

Alan Stanford's Ties to Soc Gen Probed: Stanford is alleged to have used a Swiss bank account with Societe Generale as a slush fund through which he bribed regulators and auditors.  Soc Gen is also being accused of having had knowledge of Stanford's dealings and to have profited thereby.  From the article:

“SG Suisse had a special, extensive, symbiotic and nefarious relationship with Stanford from which it greatly benefited,” the lawsuit says, alleging that by December 2008, bank officials “realized the Stanford Entities were insolvent,” and the bank wanted its money bank. 

Olympus is Accused of Massive Financial Statement Fraud

The camera and electronics company, Olympus, is being reported to have engaged in a massive financial statement fraud. Reports are pretty ambiguous right now but this could be one of the largest financial reporting frauds we've seen in a long time. Here are some excerpts from the NY Times article today:

Dodd-Frank and Whistle-blowing to the SEC

I just read an interesting post in the NY Times about how the new Dodd-Frank financial regulations bill will provide an incentive for whistle-blowers to give information about various frauds to the SEC. Apparently, deep in the bowels of the 2,500 page Dodd-Frank bill that overhauls our financial regulatory system is a provision that requires the SEC to award whistle-blowers 10-30% of monetary sanctions collected by the SEC that exceed $1 million.

 The NY Times post also said that while the amount of the award must range from 10-30% of the sanctions, the exact amount awarded is up to the discretion of the SEC. Also, the whistle-blower must meet certain conditions in order to collect under Dodd-Frank.  Here is what the post said about the requirements:

The latest news on the investment banks

If you're tuned into the news these days, you probably have heard today that the SEC has charged Goldman Sachs with fraud regarding the subprime mortgage fiasco that is blamed for the "great recession." Some observers are speculating that this fraud case could be as significant as Enron was. If so, I would expect Goldman's stock to tank over the next few days as a complete picture of the fraud comes to light.

As for now, here is what we know. Both the WSJ and the LA Times reports that Goldman was essentially passing profits to a hedge fund known as Paulson & Co. The LA Times article explains Goldman's fraud as follows:

The SEC's lawsuit alleges that Goldman did not tell investors in the securities that they were based on a portfolio of mortgage bonds selected by a hedge fund. The investment bank subsequently helped the hedge fund, Paulson & Co., place bets against the same bond portfolio, the suit says.

Meanwhile, earlier in the week, The NY Times reported that Lehman's accounting methods are looking shadier by the minute. In particular, the Times article explains:

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

I wonder which investment bank will be in the news for fraud tomorrow?

Richard Scrushy: crime doesn't always pay...

The largest financial penalty ever to be levied against a single executive has been given to 56 year-old Richard Scrushy for his role in the HealthSouth financial statement fraud--$2.88 billion! Scrushy managed to avoid criminal prosecution for the fraud when jurors bought into his claims that subordinates orchestrated the massive fraud without his knowledge.

The WSJ reports that the judge in the civil suit, Judge Horn, rejected those arguments and "said Mr. Scrushy either knew or should have known about the fraud, giving no credence to Mr. Scrushy's repeated insistence that subordinates perpetrated the scheme without his knowledge."

Scrushy is essentially broke now and has five years remaining in jail on a bribery conviction.