Presented	
  to:	
  
Montgomery	
  County	
  
Community	
  College	
  
Tom	
  Hood,	
  CPA.CITP.CGMA	
  
CEO	
  
Maryland	...
Enron	
  
“As	
  strongly	
  as	
  I	
  believe	
  in	
  a	
  new	
  role	
  for	
  
government	
  in	
  the	
  new	
  eco...
"Acts	
  of	
  bad	
  character	
  must	
  have	
  real	
  
consequences.	
  And	
  already	
  we're	
  seeing	
  that	
  ...
Worldcom	
  
Bernard	
  Ebbers	
  convicted	
  of	
  $11	
  billion	
  
fraud	
  –	
  sentenced	
  to	
  25	
  years	
  in...
Private	
  company	
  owners	
  and	
  public	
  
company	
  management	
  ofen	
  try	
  to	
  run	
  
their	
  companies...
Other	
  Corporate	
  Scandals	
  &	
  
Accoun>ng	
  Frauds	
  
Enron	
  –	
  WorldCom	
  Era	
  
•  Adelphia	
  -­‐	
  Ca...
Current	
  Scandals	
  
•  Parmalat	
  –	
  Europe’s	
  Enron	
  (2003)	
  
•  Satyam	
  –	
  India’s	
  Enron	
  (2008)	
...
Why?	
  -­‐	
  The	
  Tone	
  Has	
  Been	
  Set	
  
“I	
  say	
  as	
  plainly	
  as	
  I	
  can	
  to	
  
CEOs:	
  if	
 ...
Dennis	
  Kozlowski,	
  former	
  Tyco	
  CEO;	
  Mark	
  Swartz,	
  former	
  Tyco	
  CFO;	
  Mark	
  Belnick,	
  former	...
10	
  
The	
  Fraud	
  Triangle	
  
Then	
  :	
  December,	
  2001	
   Now	
  :	
  December,	
  2008	
  
A	
  Tale	
  of	
  Two	
  Frauds	
  
Reforms	
  –	
  Round	
  1	
  
•  Sarbanes-­‐Oxley	
  Act	
  of	
  2002	
  
– Corporate	
  Governance	
  
– PCAOB	
  
– In...
MACPA	
  Accoun>ng	
  Reform	
  Task	
  Force	
  	
  
The	
  Road	
  to	
  Reform	
  :	
  ProtecAng	
  the	
  Public	
  In...
Bernard	
  Madoff	
  
Law	
  of	
  Intractable	
  Systemic	
  CorrupAon	
  
	
  
Any	
  significant	
  breach	
  of	
  a	
  ...
Madoff’s	
  auditor	
  
David	
  Friehling,	
  CPA	
  faces	
  105	
  years	
  in	
  prison	
  
For	
  issuing	
  false	
  ...
Satyam	
  +	
  PWC	
  
Ramalinga	
  Raju	
  –	
  CEO	
  	
  created	
  $40	
  billion	
  in	
  
fake	
  billing	
  and	
  ...
Recent	
  example	
  –	
  The	
  Dodd	
  –	
  Frank	
  Wall	
  Street	
  
Reform	
  and	
  Consumer	
  Financial	
  Protec...
Federal	
  Laws	
  &	
  Regula>ons	
  –	
  SEC,	
  DOL,	
  Treasury,	
  GAO,	
  PCAOB	
  
CPA	
  Profession	
  Standards	
...
MD	
  Comptroller	
  MD	
  Comptroller	
  
CAQ	
  
US	
  Treasury	
  
MD	
  Comptroller	
  
Courtesy	
  of	
  the	
  Maryl...
Our	
  infrastructure	
  for	
  
regula>ng	
  the	
  US	
  financial	
  
markets	
  has	
  been	
  created	
  
from	
  a	
 ...
7	
  Steps	
  to	
  Greater	
  Ethical	
  Behavior	
  
1.  Avoid	
  Conflicts	
  of	
  Interest	
  
2.  Stand	
  Up	
  for	...
Complexity	
  &	
  Risk	
  
Source:	
  Wired	
  magazine	
  	
  17.03	
  March,	
  2009	
  
Guardians	
  cannot	
  keep	
  up	
  with	
  Commerce	
  
	
  “Even	
  the	
  regulators	
  can't	
  
keep	
  up.	
  A	
  ...
Transparency	
  &	
  Accountability	
  
“Publicity	
  is	
  justly	
  
commended	
  as	
  a	
  remedy	
  
for	
  social	
 ...
Transparency	
  Now!	
  –	
  A	
  Wired	
  Manifesto	
  
Source:	
  Wired	
  magazine	
  	
  17.03	
  March,	
  2009	
  
The	
  Whistleblowers	
  
“All	
  that	
  is	
  necessary	
  for	
  evil	
  to	
  
triumph	
  is	
  for	
  good	
  men	
  ...
What	
  you	
  can	
  do?	
  
•  Publicity	
  Test	
  
•  Conscience	
  Test	
  
•  Parent	
  Perspec>ve	
  
•  Role	
  Mo...
“The	
  laws	
  and	
  
professional	
  standards	
  
represent	
  the	
  floor—the	
  
minimum.	
  	
  We	
  should	
  
re...
Tom	
  Hood,	
  CPA.CITP	
  
CEO	
  
Maryland	
  AssociaAon	
  of	
  CPAs	
  
Business	
  Learning	
  InsAtute	
  
(443)	
...
Fraud & Accouting - Montgomery County Community College - 2013
Fraud & Accouting - Montgomery County Community College - 2013
Fraud & Accouting - Montgomery County Community College - 2013
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Fraud & Accouting - Montgomery County Community College - 2013

  1. 1. Presented  to:   Montgomery  County   Community  College   Tom  Hood,  CPA.CITP.CGMA   CEO   Maryland  Associa>on  of  CPAs   October  8,  2013  
  2. 2. Enron   “As  strongly  as  I  believe  in  a  new  role  for   government  in  the  new  economy,   government  ac>on  alone  cannot  provide   most  of  the  answer.  That’s  because  what   happened  at  Enron  wasn’t  just  a  failure  of   regula>ons  and  law,  it  was  a  failure  of   corporate  culture,  a  failure  of  values,  a   failure  of  heart.”     Senator  Carl  Levin  D-­‐Michigan   Commen>ng  on  his  Planned  Bill  of  Rights  for   Shareholders   Ken  Lay  convicted  of     Faced  165  years  in  prison  –  but  died  of     Heart  aYack  before  going  to  jail  
  3. 3. "Acts  of  bad  character  must  have  real   consequences.  And  already  we're  seeing  that   as  financial  markets  punish  companies  that   have  displayed  an  inability  to  shoot   straight.  ...  Every  CEO  in  America  now  must   realize  that  accoun>ng  gimmickry  is  a  >cket   to  destruc>on.“     -­‐  Dave  Kansas  -­‐  WSJ   Jeff  Skilling  convicted  of  19  out  of  29   counts  and  received  a  24  year  sentence   Enron  
  4. 4. Worldcom   Bernard  Ebbers  convicted  of  $11  billion   fraud  –  sentenced  to  25  years  in  prison   ScoY  Sullivan  CFO  got  five  years   "A  business  run  with  character  and   integrity  will  receive  rewards  from   the  market,"  Kansas  writes.  "A   business  run  around  the  edges,   whether  within  the  leYer  of  the  law   or  not,  will  risk  joining  Adelphia,   Global  Crossing,  Arthur  Andersen,   Enron  and  WorldCom  on  the   scrapheap  of  history.“     -­‐  Dave  Kansas  –  WSJ  reporter  
  5. 5. Private  company  owners  and  public   company  management  ofen  try  to  run   their  companies  as  if  there  were  no  one   with  any  outside  interests.  Any  company   that  has  a  bank  loan,  an  outside   shareholder,  or  a  supplier  has  people  who   have  a  vested  interest  in  the  company.   Even  those  companies  without  any  of  those   listed  items  have  employees  whose   livelihood  may  be  dependent  on  the   company’s  con>nues  existence.  Public   companies  and  not-­‐for-­‐profit  organiza>ons   have  a  higher  degree  of  responsibility  to   protect  those  outside  interests.  Yet  so   many  treat  their  organiza>ons  as  their   private  fiefdoms.          -­‐Art  Berkowitz  -­‐  ENRON   Dennis  Kozlowski  convicted  of  $400  million   fraud  –  sentenced  to  eight  years  in  prison   Mark  Swartz    CFO  got  five  years   Tyco  
  6. 6. Other  Corporate  Scandals  &   Accoun>ng  Frauds   Enron  –  WorldCom  Era   •  Adelphia  -­‐  Cable   •  Rite  Aid  –  Drug  stores   •  HealthSouth  –  Health   •  AOL  Time  Warner   •  Xerox   •  Bristol-­‐Myers-­‐Squibb   Classic  Cases   •  Equity  Funding  –  (Insurance  &   Mutual  Funds)  1973   •  ZZZZ  Best  –  (Carpet  Cleaning  &   Restora>on)  -­‐  Mark  Minkow  -­‐  1984   •  ESM  Government  Securi>es  –   1985   •  Lincoln  Savings  &  Loan  -­‐    Charles   Kea>ng  –  CEO  -­‐  1989  
  7. 7. Current  Scandals   •  Parmalat  –  Europe’s  Enron  (2003)   •  Satyam  –  India’s  Enron  (2008)   •  Madoff  –  World’s  largest  Ponzi  Scheme   •  +  35  other  scandals  so  far  totaling  $37  Billion  
  8. 8. Why?  -­‐  The  Tone  Has  Been  Set   “I  say  as  plainly  as  I  can  to   CEOs:  if  you  break  the  law,   we  will  hunt  you  down,  we   will  arrest  you  and  we  will   prosecute  you.     President  George  W.  Bush     August  13,  2002  
  9. 9. Dennis  Kozlowski,  former  Tyco  CEO;  Mark  Swartz,  former  Tyco  CFO;  Mark  Belnick,  former  Tyco  Chief  Counsel;  frank  E.  Walsh,  former   independent  Tyco  Director;  Jerry  Boggess,  former  Tyco  fire  &  Security  Services  President;  Paul  Allaire,  former  Xerox  CEO;  G.  Richard   Thoman,  former  Xerox  CEO;  Barry  D.  Romerial,  former  Xerox  CFO;  Philip  D.  Fishbach,  former  Xerox  controller;  Daniel  S.  Marchibroda,   former   Xerox   Assistant   Controller;   Gregory   B.   Taylor,   current   Xerox   Treasurer;   Gary   Winnick,   Global   Crossing   Chairman;   Jim   Gorton,   former  Global  Crossing  Chief  Counsel;  Greg  Casey,  former  Global  Crossing  Sales  Execu>ve;  Jackie  Armstrong,  Global  Crossing  Counsel;   Philip   F.   Anscutz,   former   Qwest   Communica>ons   CEO;   Robin   Szeliga,   former   Qwest   Communica>ons   CFO;   Grant   P.   Graham,   former   Qwest  Global  Business  Unit  CFO;  Thomas  W.  Hall,  former  Qwest  Global  Business  Unit  Senior  Vice  President;  John  M.  Walker,  Qwest   Global  Business  Unit  Senior  Vice  President;  Bryan  K.  Treadway,  Qwest  Global  Business  Unit  Assistant  Controller;  Albert  J.  Dunlap,  former   Sunbeam  CEO;  Russell  A  Kersh,  former  Sunbeam  CFO;  Bernard  Ebbers,  former  WorldCom  CEO;  ScoY  Sullivan,  former  WorldCom  CFOI;   David  Myers,  former  WorldCom  Controller;  Buford  Yates  Jr.,  former  WorldCom  Accoun>ng  Director;  Michael  H.  Salsbury,  WorldCom   General  Counsel;  Susan  Mayer,  WorldCom  Treasurer;  BeYy  L.  Vinson,  Former  WorldCom  Accountant;  Troy  M.  Normand,  former                  WorldCom  Accountant;  John  Rigas,  Adelphia  Communica>ons  Founder;  Timothy  Rigas,  former  Adelphia  Communica>ons  CFO;  James   Brown,  former  Adelphia  Vice  President  for  Finance;  Michael  Mulcahey,  former  Adelphia  Director  for  Internal  Repor>ng;  Kenneth  Lay,   former  Enron  Corpora>on  Chairman;  Jefffery  Skilling,  former  Enron  Corpora>on  President;  Andrew  Fastow,  former  Enron  CFO;  Richard  A.   Causey,  former  Enron  CAO;  Michael  J.  Kopper,  former  Enron  Execu>ve;  Kenneth  Rice,  former  Enron  Broadband  Division  Chief  Execu>ve;   Ben  F.  Glisan  Jr.,  former  Enron  Broadband  Division  Treasurer;  Dean  Boyle,  former  Enron  Broadband  Division  Finance  Execu>ve;  Kevin   Hannon,  former  Enron  Broadband  Division  Execu>ve;  ScoY  Yeager,  former  Enron  Broadband  Division  Execu>ve;  Joe  Hirko,  former  Enron   Broadband  Division  Chief  Execu>ve;  Kevin  Howard,  former  Enron  Broadband  Division  Execu>ve;  Rex  Shelby,  former  Enron  Broadband   Division  Execu>ve;  Michal  Krautz,  former  Enron  Broadband  Division  Execu>ve;  John  Giesecke,  former  Homestore  COO;  Jospph  Shew,   former  Homestore  CFO;  Eric  Keller,  former  AOL-­‐Time  Warner  Execu>ve;  Sam  Waksal,  former  IMclone  Systems  CEO;  Richard  M  Scrushy,   HealthSouth  Chairman;  Michael  Mar>n,  HealthSouth  CFO;  Clark  E.  McLeod,  former  McLeod  USA  CEO;  Stephen  A  Garofalo,  Metromedia   Fiber   Networks   Founder   and   Chairman;   Jack   Grubman,   former   Salomon   Smith   Barney   Analyst;   Schuyler   Tilney,   former   Merrill   Lynch   Execu>ve;  Thomas  Davis,  former  Merrill  Lynch  Execu>ve;  Phua  Young,  Merrill  Lynch  Analyst;  David  Duncan,  Arthur  Andersen  Partner;   Rober  As>,  former  Symbol  Technologies  Vice  President;  Enio  Mon>ni,  Kmart  Vice  President;  Joseph  Hofmeister,  Kmart  Vice  President;   Frank  QuaYrone,  Credit  Suisse  First  Boston  Investment  Bank  Execu>ve;  Charles  W.  McCall,  former  McKesson  Chairman;  Helen  C.  Sharkey,   former  Dynegy  Risk  control  Y  Deal  Structure  Execu>ve;  Gene  S.  Foster,  former  Dynegy  Vice  President  of  Taxa>on;  Jaime  Olis,  Former   Dynegy  Senior  Director  of  Tax  Planning;  and  Martha  Stewart,  Martha  Stewart  Living  Onmimedia  Chairman   500  convic@ons  or  guilty  pleas  28  were  CEOs   July  9th,  2002   Bush  and  SEC  established   Corporate  Fraud  Task  Force   September  2005  
  10. 10. 10  
  11. 11. The  Fraud  Triangle  
  12. 12. Then  :  December,  2001   Now  :  December,  2008   A  Tale  of  Two  Frauds  
  13. 13. Reforms  –  Round  1   •  Sarbanes-­‐Oxley  Act  of  2002   – Corporate  Governance   – PCAOB   – Internal  Controls  (Sec>on  404)   •  Audi>ng  –  SAS  99  Fraud  Standard   •  COSO  Internal  Controls   •  SEC  CIFiR  Report   •  Treasury  ACAP  Report  
  14. 14. MACPA  Accoun>ng  Reform  Task  Force     The  Road  to  Reform  :  ProtecAng  the  Public  Interest   Strengthening  the  CPA  Profession     •  Government  regula>on  &  oversight   •  Public  trust  &  confidence  in  the   integrity  of  CPAs   •  Public  understanding  of  the   auditor’s  role   •  Corporate  governance  &   responsibility   •  Importance  of  ethical  behavior  and   doing  the  “right”  thing   Published  September  2002  
  15. 15. Bernard  Madoff   Law  of  Intractable  Systemic  CorrupAon     Any  significant  breach  of  a  syndrome’s  integrity     (Government  &  Commerce)  –  usually  by  adop>ng  an   inappropriate  func>on  –  causes  some  normal  virtues  to   convert  automa>cally  to  vices,  and  s>ll  others  to  bend   and  break  for  necessary  expedience.       Over  the  course  of  >me,  corrupted  organiza>ons   accumulate  in  society.  Without  correc>on,  the   accompanying  rancid  coopera>on  blurs  more  than  the   afflicted  organiza>ons.       -­‐Jane  Jacobs  –  Systems  of  Survival   Ponzi  scheme  of  $  50  billion   Facing  150  years  in  prison  
  16. 16. Madoff’s  auditor   David  Friehling,  CPA  faces  105  years  in  prison   For  issuing  false  audit  reports     •   Sole  Prac>>oner   •   Accused  of  issuing  audits  of  Madoff  Securi>es   •   Lied  on  AICPA  membership  renewal  about  peer       review    
  17. 17. Satyam  +  PWC   Ramalinga  Raju  –  CEO    created  $40  billion  in   fake  billing  and  cash     PWC  auditors  missed  cash  accounts?  
  18. 18. Recent  example  –  The  Dodd  –  Frank  Wall  Street   Reform  and  Consumer  Financial  Protec>on  Act  of  2010   Crisis  hits  news   Consumer    Financial   Protec>on  Bureau   2,301  pages!   533  regula>ons   60  studies   94  reports   HR  4173  
  19. 19. Federal  Laws  &  Regula>ons  –  SEC,  DOL,  Treasury,  GAO,  PCAOB   CPA  Profession  Standards  –  AICPA  &  FASB,  GASB,  FASAB,  IASB,   IFAC   State  CPA  Statutes     police  power  of  the  states  to  protect  their  ci>zens  vs  commerce  clause  
  20. 20. MD  Comptroller  MD  Comptroller   CAQ   US  Treasury   MD  Comptroller   Courtesy  of  the  Maryland  AssociaAon  of  CPAs  –  2008  ediAon                                                                                                                                                                                                                         Drawing  by  Carol  Kirwan,  CPA  
  21. 21. Our  infrastructure  for   regula>ng  the  US  financial   markets  has  been  created   from  a  series  of  reac>ons  to   crises  and  changes  and  is  in   need  of  repair.   Single  audits   Audit  quality   Financial  Regulatory  Reform   Sarbanes-­‐Oxley  Act   Dodd-­‐Frank  Wall  Street  Reform  and  Consumer   ProtecAon  Act  
  22. 22. 7  Steps  to  Greater  Ethical  Behavior   1.  Avoid  Conflicts  of  Interest   2.  Stand  Up  for  What  You   Believe  is  Right   3.  Support  Others  Who   Speak  Up   4.  Disclose,  Disclose,  Disclose   5.  Carry    a  Big  S>ck   6.  Use  Punishment  Sparingly   7.  Recognize  the  Difference   Between  What  is  Legal  &   What  is  Right   Source:  Enron  –  A  Professional’s    Guide  to  the  Events,  Ethical    Issues   and  Proposed  Reforms  by  Arthur  L.  Berkowitz  
  23. 23. Complexity  &  Risk   Source:  Wired  magazine    17.03  March,  2009  
  24. 24. Guardians  cannot  keep  up  with  Commerce    “Even  the  regulators  can't   keep  up.  A  Senate  study  in   2002  found  that  the  SEC   had  managed  to  fully   review  just  16  percent  of   the  nearly  15,000  annual   reports  that  companies   submiFed  in  the  previous   fiscal  year;  the  recently   disgraced  Enron  hadn't   been  reviewed  in  a   decade."     Source:  Wired  magazine    17.03  March,  2009  
  25. 25. Transparency  &  Accountability   “Publicity  is  justly   commended  as  a  remedy   for  social  and  industrial   diseases.  Sunlight  is  said   to  be  the  best  of   disinfectants;  electric  light   the  most  efficient   policeman.”     -­‐  Supreme  Court  Jus>ce  Louis  Brandeis   Source:  Wired  magazine    17.03  March,  2009  
  26. 26. Transparency  Now!  –  A  Wired  Manifesto   Source:  Wired  magazine    17.03  March,  2009  
  27. 27. The  Whistleblowers   “All  that  is  necessary  for  evil  to   triumph  is  for  good  men  to  do   nothing.”    –  Edmund  Burke   Harry  Markopolis  –  Madoff   Sherron  Watkins  –  Enron   Cynthia  Cooper  -­‐  WorldCom  
  28. 28. What  you  can  do?   •  Publicity  Test   •  Conscience  Test   •  Parent  Perspec>ve   •  Role  Model  Test   •  Universality  Test   •  Golden  Rule   Source:  Ethics  in  the  Workplace  by  Michael  Josephson   “Everyone  should  habitually  be  aware  of   the  moral  implica>ons  of  what  he  or  she  is   asked  to  do  and,  each  by  each  ,  should   stand  up  for  the  right  to  be  moral.”   -­‐  Jane  Jacobs  –  Systems  of  Survival  
  29. 29. “The  laws  and   professional  standards   represent  the  floor—the   minimum.    We  should   reach  for  the  ceiling.”   David  M.  Walker,  CPA   Comptroller  General  of  the     United  States  
  30. 30. Tom  Hood,  CPA.CITP   CEO   Maryland  AssociaAon  of  CPAs   Business  Learning  InsAtute   (443)  632-­‐2301   E-­‐mail  tom@macpa.org   Web  hap://www.macpa.org   Blog  hap://www.cpasuccess.com    
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