Accounting Fraud and the new Task Force by SEC


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A presentation we did for our Accounting class at the University of San Francisco. Made by Mackenzie O'Donnell, Winsy Wong and myself - Malvika Jain. Pretty fugly but hope you can get the necessary information from it if needed.
The ppt is divided into
Major Accounting Frauds around the year 2000 - Enron, Worldcom, Tyco
Introduction and analysis of Sarbanes Oxley Act
Dodd Frank Whistleblower initiative
Introduction and benefits of the Task Force
Steps for management to take to steer clear of accounting fraud

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Accounting Fraud and the new Task Force by SEC

  1. 1. Accounting Fraud & the New SEC Task Force Malvika Jain Winsy Wong Mackenzie O’Donnell MBA 6011: Financial & Managerial Accounting A background look at “New Fraud Crackdown Looms” by Emily Chasan Wall Street Journal, July 9 2013
  2. 2. “Asking Tough Questions, Delivering the Truth” -Emily Chasan, WSJ, on her aggressive reporting style Always investigate the backgrounds of the folks who bring you the news! Senior Editor at the Wall Street Journal’s CFO Report on accounting & auditing. Former Senior Hedge Fund Correspondent for Reuters in NYC & Stock Market. Former team leader of the Reuters bankruptcy and restructuring team, leading coverage of the bankruptcies of Lehman Brothers, General Motors and Chrysler. Reuters Company News Reporter of the Year, 2008 NewsBios 30 Under 30 Award, 2007 Newswomen's Club of NY Front Page Award, 2007 Newswomen's Club of NY Front Page Award, 2006
  3. 3. Fat Cigars & Private Jets: Recent Financial Fraud Who’s In Charge Here? The SEC and Sarbanes- Oxley 2010 Whistleblower Amendment A New SEC Task Force What Factors are in Play Now? Advice for Corporate Management Overview
  4. 4. Fat Cigars & Private Jets
  5. 5. Jeffrey Skilling, CEO ENRON – Gas & Energy $138.7bn to bankrupt in 2001 ‘America’s Most Innovative Company’ • Hid debts & losses in Offshore accounts • Mark to Market revenue recognition Counted unearned rev • Used Merchant Model. Reported sales price as rev instead of just the middle- man’s cut. • Snowballed. Recorded flop ventures as making profits.
  6. 6. Bernie Ebbers, CEO, Worldcom – Long distance phone calling Former Sunday School Teacher & basketball coach. Worldcom lost $11bn in accounting fraud in 2002  Recognized revenue from unallocated accounts  Capitalized ‘line costs’ instead of expensing
  7. 7. Dennis Kozlowski, Tyco International – Security systems Cost company $600 million with Swartz & Belnick, 2002 Sentenced 25 years in jail.  Took personal loans, not revealed to stockholders  Spring loaded. Concealed positive news for future benefits.
  8. 8. MAJOR & minor
  9. 9. So Who’s in Charge Here?
  10. 10. THE ENFORCEMENT AUTHORITY: UNITED STATES SECURITIES & EXCHANGE COMMISSION Since 1934 the SEC has overseen key participants in the finance & securities sectors: securities exchanges, securities brokers & dealers, investment advisors, mutual funds. Each year the SEC brings hundreds of civil enforcement actions against individuals & companies for violation of security laws. Typical infractions about securities and the companies that issue them: -insider trading -accounting fraud -providing false or misleading information
  11. 11. Public Company Accounting Reform and Investor Protection Act, more commonly referred to as Sarbanes-Oxley Act or SOX 2002 Sarbanes- Oxley Act Federal law setting new standards for all public company boards, management & public accounting firms. Management Reporting - Management Certifications -Management Report on Internal Controls Auditor Independence Board Governance Management & Board Conduct Enforcement & Penalties - Audit Committee Standards - Prohibition of loans to Directors & Officers -Accelerated Reporting of Insider Trading -Disclose Code of Conduct for finance officers - Whistleblower Protection -Public Company Oversight Board (PCAOB) -Criminal Penalties for known untrue certifications -Audit Committee pre-approves all auditor services - Lead audit partner limited to 5 year rotation
  12. 12. Janet Dolan President and CEO Tennant Co., Minneapolis Industrial cleaning products "well-intentioned but it was a rush to judgment.... (Congress) just threw something at corporate America and left it to us to figure out.... The legislation was broad on requirement and short on specificity." Richard Breeden Former Chairman of the SEC Director of BBVA, a Spanish bank Court-appointed monitor for WorldCom Inc., now MCI “one of the most important acts passed in decades… but accounting firms see (a) license to audit controls. That means every control has to have a written set of procedures with the need to audit now very costly.” Dan Hale Vice President and Chief Financial Officer Allstate Corp., Northbrook, Ill. " without precise definitions, different auditors may reach different conclusions, even in similar situations.”
  13. 13. Frank Dodd: The 2010 Whistleblower Protection Amendment SEC is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected. Whistleblowers help the SEC identify possible fraud violations early. Assistance from a whistleblower who knows of violations is among the most powerful weapons in the law enforcement arsenal of the SEC. Allows the Commission to minimize harm to investors, better preserve the integrity of the United States' capital markets, and more swiftly hold accountable those responsible.
  14. 14. …despite SOX act, fraud still continues… Companies may still easily be shifting their accounting and that a new crackdown on fraud with new rules may only be providing new loopholes to discover and exploit.
  15. 15. WHY Launch the Task Force NOW? “The next fraud is going to happen, it’s just a matter of time” -James Walker, Former Chairman Institute of Management Accountants’ Ethics Committee
  16. 16. BACKGROUND: Launched on 7/2/2013 Targeting 9,000 publicly traded companies Enforced by an expert committee of attorneys and accountants PURPOSE: Fraud Detection at earlier stage Being Proactive NOT Reactive To increase prosecution of violations involving false or misleading financial statements and disclosures HOW IT WORKS: Ongoing review of financial statement restatements and revisions Analysis of performance trends by industry Insider help - bounties to whistleblowers Technologically advanced software: Accounting Quality Model
  17. 17. Others • Management’s Discussion and Analysis On the Books • Revenue Recognition • Off-Balance Sheet Transactions • Capitalized VS Noncapitalized Expenses • Financial Reserves • Acquisition Accounting
  18. 18. Protection from Accounting Frauds On-going Process • Internal Accounting Control (GAAP Standard) • External Accounting Control • Consult SEC for Rules • Increase Transparency
  19. 19. What Factors Are In Play Now? Watch Out! Whistleblowers can come from within your company Watch Out! SEC will detect when you make changes to your statements Watch Out! Auditors will not necessarily on your side doing you a favor
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