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2010 - A New Decade... New Directions? Or More of the Same

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Steve Austin outlines some innovative tools, and the need to reward strong ethical behavior in business schools and today's corporate environment.

Steve Austin outlines some innovative tools, and the need to reward strong ethical behavior in business schools and today's corporate environment.

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  • 1. CORPORATE SCANDALS - ETHICS 2010 – A New Decade...New Directions? Or More of the Same? Stephen G. Austin, CPA, MBA Firm Managing Partner, Swenson Advisors, LLP May 14, 2010 7:00 am – 7:50 am
  • 2. Stephen G. Austin, CPA, MBAOver 35 years of public accounting experience as an AuditPartner with Price Waterhouse, McGladrey & Pullen, LLP,and Swenson Advisors, LLPCertified Public Accountant -California and GeorgiaAudit Committee Chairman - AvanirPharmaceuticals and two non-profitorganizationsServes on 20 Boards and related CommitteesAuthor of “Rise of the New Ethics Class” 2
  • 3. • PCAOB registered firm• Offices in San Diego, Riverside County and Hong Kong• SEC/SOX - audit, tax, compliance, Asia Pacific compliance services, IFRS consulting• SOX consulting services with SWENTRACKTM automated web based solutions• #2 Top accounting firm in Riverside County - 2009• Members of Integra International - 154 offices, 53 countries• Focus on “Tone at the Top” and Ethics Compliance www.SwensonAdvisors.com 3
  • 4. Good Morning, Corporate America! How are we doingin the Spring of a New Decade? 4
  • 5. We Just Caught Our Breath From... 5
  • 6. In the Last 18 Months, We Have Been Faced With: “Biggest Recession” since the “Great Depression” Dell Computer – “Wells Notices” Ponzi schemes (Madoff, Sanford, and many others) SEC enforcement failures “CFO Letters” (from the SEC) – Repo 105 transactions Trillions in U.S. debt Record commercial property vacancies WaMu fraud allegations 6
  • 7. 100 Years of Cause and EffectStock market crash 1929Securities and Exchange Commission Established - 1930sPeriods of economic stability 1950 – 1960Sharp rise in financial fraud, illegal corporate acts, 1970sbribes, and kickbacksForeign Corrupt Practices Act 1972Student Marketing/Equity Funding/ZZZZ Best 1970 – 1980AICPA – SEC practice section 1977The Cohen Commission 1977 – 1978 7
  • 8. 100 Years of Cause and Effect, Cont.Era of rapid technology growth 1980s – 2000Rapid rise in personal wealth 1980s – 1990sCOSO established 1985Tort Reform/Class action lawsuits 1996Enron collapses - Arthur Andersen fails 2001 – 2002SOX and the PCAOB established 2002Enron, Worldcom, Adelphia, Peregrine, Quest, 2002 – 2005HealthSouth, Tyco 8
  • 9. 100 Years of Cause/Effect, Cont.Madoff, Stanford, Subprime Mortgages, Complex Derivatives, Asian Corruption What’s next? (Note: Enron – the Broadway play opened April 8th) 9
  • 10. The Meltdown Continues...Fraud and the Financial CrisisAIG bailouts and SOX Material Weakness disclosuresLehman investigationsBig bank bailoutsRecord unemployment ratesTrillions and trillions in U.S. debtOn its way to $15-$20 trillion (150% of GDP)?Global financial recession 10
  • 11. What is thecommon theme?
  • 12. “Short Answer “1. Trading “short-term gain” for “long-term value”2. Ignoring the “Elephant in the Room” 1. Subprime mortgages 2. Material weaknesses 3. Excessive rates on return 4. Trillions of dollars of debt3. Failure in personal ethics and decision making (code: greed!) 12
  • 13. Are wemaking any progress?
  • 14. SOX is Eight Years Old in July, 2010 630 companies filed 674 restatements in 2009 27% decline from 2008 The number of restatements peaked in 2006 with 1,795 restatements*Report title: Financial Restatements – A Nine-Year ComparisonPublished March 10, 2010 14
  • 15. SEC Investigations on the Rise Top SEC officials have undertaken significant reform in the agency’s enforcement division Robert Khuzami named SEC Enforcement Director In 2009, the agency opened nearly 500 investigations, more than double the 2008 level 15
  • 16. Report of the Examiner – Lehman Brothers Key highlights from the report of Anton R. Valukas, Examiner 2,200 pages $38-$50 billion of assets moved on and off the balance sheet at quarter end (REPO 105) Materially misleading accounting Aggressive application of FAS 140 Conducted in London (AIG)? Colorable claims 16
  • 17. Lehman Brothers, ContinuedInternal whistleblower raise questionsE&Y informedSEC with offices onsiteFederal Reserve Bank with offices onsite 17
  • 18. Ernst & Young defends its Lehman work in letter to client Ernst & Young defended its audit work for client Lehman Brothers in a letter sent last week by severalaudit partners to the firms key clients, and vowed to fight any legal action from regulators or creditors. 18
  • 19. Sample Letter Sent to Public Companies Asking for Information Related to Repurchase Agreements, Securities Lending Transactions, or Other Transactions Involving the Transfer of Financial Assets“CFO Letters”In March 2010, the Division of CorporationFinance sent the following illustrative letterto certain public companies requestinginformation about repurchase agreements,etc. 19 http://www.sec.gov/divisions/corpfin/guidance/cforepurchase0310.htm
  • 20. 20
  • 21. My Reading List On the Brink | Henry M. Paulson, Jr.“I had come to Washington to make a difference, and we had, I thought, just saved the country – and the world – from financial catastrophe. The next day, Lehman Brothers began to collapse.” 21
  • 22. How does Toyota fit into this picture?
  • 23. “We are not protecting our customers by keeping this quiet,”wrote Irv Miller, group vice president for environment & public affairs. “The time to hide on this one is over.”
  • 24. Will IFRS help or hinderthe need for global ethics?
  • 25. 25 3
  • 26. Ethics Report Card 2010Signs of Improvement... Financial statement fraud reduced Fewer restatements Stronger Internal Controls/Fewer Material Weaknesses Public accounting firms improve due to PCAOB inspections Ethics focus in business schools 26
  • 27. ETHICS REPORT CARD 2010Areas of Concern... Ponzi schemes Weak credit ratings system “Check the box” approach to ethics/compliance Current government investigations of fraud and the financial crisis Repo 105 transactions and more? Global corruption in a global economy 27
  • 28. My Reading ListCircle of Greed | Patrick Dillon and Carl CannonIn a recent interview, Bill Lerach was asked:Q: Looking back, what would you have done differently?A: “I would not have done anything differently...... I’m proud of the work we did even if I’m not proud of some of the practices that were engaged in.” 28
  • 29. Building“Tone at the Top”
  • 30. Swenson Advisors’ Ethics Pillars PILLARS INITIATIVES PHILOSOPHY We believe in honest and forthright business practices and compliance with all applicable laws and regulations. Ethics/Firm Culture "Tone at the Top" We believe that ethical business practices help us to maintain credibility and a competitive edge. Each of our clients receive the highest level of attention On Time, Accurate, and responsiveness. We seek to be a valuable Client Service and High Quality Work professional services firm meeting your regulatory requirements on a timely and effective basis. Our client base consists of high quality companies Client Base "A" Clients which reflects an extension of the ethical and technical views of our firm. We strive on maintaining a company culture which Integrity Employees promotes balanced lives and places value on Stable - Family Focused professional, family and personal fullfillment. Our firm operates in a fiscally prudent manner Financial Health Zero Debt - we believe in practicing what we preach to our clients. We continue to increase our reach and provide Global - Hong Kong - Integra advantages to our clients worldwide. As globalization Outreach/Stretch IFRS and XBRL continues, the adoption of new standards will take place and our firm will be there to embrace it. We take pride in the caliber of our staff and the quality Layer by Layer of our services that we provide to our clients. Growth 10-20% Year We continually seek out individuals that can bring exceptional credentials and practical experience to our firm. We believe in contibuting to the well-being of society as a good corporate citizen. The Swenson Foundation assistsCommunity Awareness Swenson Foundation non-profit organizations with a focus on health, education and religious needs. We are committed to utilizing the latest accounting and auditing technology to increase our productivity, efficiency and reduce Technology Paperless Environment costs. We believe it is important to conserve natural resources to preserve our environment. We are committed to educating employees through nationally accredited continuing education programs including SEC,Training/Development Staying Ahead of the Curve AICPA and PCAOB programs. In addition, 30 we regularly present at technical seminars and conferences locally and internationally.
  • 31. Understanding theFoundations for Ethical Behavior1. The home (childhood)2. The school (classroom)3. Religious platform (Basis for decision-making)4. Corporate culture/”Tone at the Top”5. Repeat the cycle – by generation6. Breaking the pattern – historical cycles of fraud 31
  • 32. How to Address our Continuing Ethics Issues1. Changing hearts and minds vs. “check the box”2. Establish “Ethics Pillars” in your company3. Communicate your Ethics Pillars at least four times per year – employees, customers, vendors4. Financially reward ethical behavior5. Focus on long-term values6. Enjoy the rewards of an ethical climate 32
  • 33. My Reading List Loving Monday | John D. Beckett“Actually, the whole idea of work has gotten a bum rap in our Western culture. As with so many distortions from the biblical norm, we’ve come to associate work with drudgery and futility, not dignity and fulfillment.” 33
  • 34. ResourcesEthisphere http://ethisphere.comCathedral Consulting www.cathedralconsulting.comConvene www.convenenow.comInstitute for Global Ethics www.globalethics.orgThe Red Flag Group www.redflaggroup.comSwenson Advisors, LLP www.SwensonAdvisors.com 34
  • 35. Contact Information Stephen G. Austin, CPA, MBA Firm Managing Partner Swenson Advisors, LLP Ph: 619-237-3400 steve.austin@swensonadvisors.com :Steve Austin San Diego | Hong Kong | MurrietaA Regional Accounting Firm with Global Outreach www.SwensonAdvisors.com 35