Fraud - Salsibury University Accounting Students

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Presentation on Fraud & Coporate Scandals and the impact on accounting profession to the beta alpha psi and IMA accounting students at Salsibury University in Maryland.

Presentation on Fraud & Coporate Scandals and the impact on accounting profession to the beta alpha psi and IMA accounting students at Salsibury University in Maryland.

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  • 1. Presented to: Salisbury University Beta Alpha Psi Institute of Management Accountants Tom Hood, CPA.CITP CEO Maryland Association of CPAs March 25, 2009
  • 2. Enron “As strongly as I believe in a new role for government in the new economy, government action alone cannot provide most of the answer. That’s because what happened at Enron wasn’t just a failure of regulations and law, it was a failure of corporate culture, a failure of values, a failure of heart.” Senator Carl Levin D-Michigan Commenting on his Planned Bill of Rights for Shareholders Ken Lay convicted of Faced 165 years in prison – but died of Heart attack before going to jail
  • 3. Enron quot;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 accounting gimmickry is a ticket to destruction.“ - Dave Kansas - WSJ Jeff Skilling convicted of 19 out of 29 counts and received a 24 year sentence
  • 4. Worldcom quot;A business run with character and integrity will receive rewards from the market,quot; Kansas writes. quot;A business run around the edges, whether within the letter 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 Bernard Ebbers convicted of $11 billion fraud – sentenced to 25 years in prison Scott Sullivan CFO got five years
  • 5. Tyco Private company owners and public company management often 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 continues existence. Public companies and not-for-profit organizations have a higher degree of responsibility to protect those outside interests. Yet so many treat their organizations 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
  • 6. Other Corporate Scandals & Accounting Frauds Enron – WorldCom Era Classic Cases • Adelphia - Cable • Equity Funding – (Insurance & Mutual Funds) 1973 • Rite Aid – Drug stores • ZZZZ Best – (Carpet Cleaning & • HealthSouth – Health Restoration) - Mark Minkow - 1984 • AOL Time Warner • ESM Government Securities – 1985 • Xerox • Lincoln Savings & Loan - Charles • Bristol-Myers-Squibb Keating – CEO - 1989
  • 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. 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. 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 Executive; Jackie Armstrong, Global Crossing Counsel; Philip F. Anscutz, former Qwest Communications CEO; Robin Szeliga, former Qwest Communications 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; Scott Sullivan, former WorldCom CFOI; David Myers, former WorldCom Controller; Buford Yates Jr., former WorldCom Accounting Director; Michael H. Salsbury, WorldCom General Counsel; Susan Mayer, WorldCom Treasurer; Betty L. Vinson, Former WorldCom Accountant; Troy M. Normand, former July 9th, 2002 September 2005 Bush and SEC established 500 convictions or guilty pleas 28 were CEOs Corporate Fraud Task Force WorldCom Accountant; John Rigas, Adelphia Communications Founder; Timothy Rigas, former Adelphia Communications CFO; James Brown, former Adelphia Vice President for Finance; Michael Mulcahey, former Adelphia Director for Internal Reporting; Kenneth Lay, former Enron Corporation Chairman; Jefffery Skilling, former Enron Corporation President; Andrew Fastow, former Enron CFO; Richard A. Causey, former Enron CAO; Michael J. Kopper, former Enron Executive; Kenneth Rice, former Enron Broadband Division Chief Executive; Ben F. Glisan Jr., former Enron Broadband Division Treasurer; Dean Boyle, former Enron Broadband Division Finance Executive; Kevin Hannon, former Enron Broadband Division Executive; Scott Yeager, former Enron Broadband Division Executive; Joe Hirko, former Enron Broadband Division Chief Executive; Kevin Howard, former Enron Broadband Division Executive; Rex Shelby, former Enron Broadband Division Executive; Michal Krautz, former Enron Broadband Division Executive; John Giesecke, former Homestore COO; Jospph Shew, former Homestore CFO; Eric Keller, former AOL-Time Warner Executive; Sam Waksal, former IMclone Systems CEO; Richard M Scrushy, HealthSouth Chairman; Michael Martin, 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 Executive; Thomas Davis, former Merrill Lynch Executive; Phua Young, Merrill Lynch Analyst; David Duncan, Arthur Andersen Partner; Rober Asti, former Symbol Technologies Vice President; Enio Montini, Kmart Vice President; Joseph Hofmeister, Kmart Vice President; Frank Quattrone, Credit Suisse First Boston Investment Bank Executive; Charles W. McCall, former McKesson Chairman; Helen C. Sharkey, former Dynegy Risk control Y Deal Structure Executive; Gene S. Foster, former Dynegy Vice President of Taxation; Jaime Olis, Former Dynegy Senior Director of Tax Planning; and Martha Stewart, Martha Stewart Living Onmimedia
  • 10. 11
  • 11. How & Why
  • 12. The Fraud Triangle
  • 13. A Tale of Two Frauds Then : December, 2001 Now : December, 2008
  • 14. Reforms – Round 1 • Sarbanes-Oxley Act of 2002 – Corporate Governance – PCAOB – Internal Controls (Section 404) • Auditing – SAS 99 Fraud Standard • COSO Internal Controls • SEC CIFiR Report • Treasury ACAP Report
  • 15. MACPA Accounting Reform Task Force The Road to Reform : Protecting the Public Interest Strengthening the CPA Profession • Government regulation & 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
  • 16. Bernard Madoff Law of Intractable Systemic Corruption Any significant breach of a syndrome’s integrity (Government & Commerce) – usually by adopting an inappropriate function – causes some normal virtues to convert automatically to vices, and still others to bend and break for necessary expedience. Over the course of time, corrupted organizations accumulate in society. Without correction, the accompanying rancid cooperation blurs more than the afflicted organizations. -Jane Jacobs – Systems of Survival Ponzi scheme of $ 50 billion Facing 150 years in prison
  • 17. Madoff’s auditor • Sole Practitioner • Accused of issuing audits of Madoff Securities • Lied on AICPA membership renewal about peer review David Friehling, CPA faces 105 years in prison For issuing false audit reports
  • 18. Satyam + PWC Ramalinga Raju – CEO created $40 billion in fake billing and cash PWC auditors missed cash accounts?
  • 19. What is under the CPA Profession?
  • 20. Federal Laws & Regulations – 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 citizens vs commerce clause
  • 21. Another View Public Company Private Company Int’l Company SEC IASB Financial FASB Reporting FASB IFRS Attest AICPA PCAOB IAASB Performance Standards ASB AICPA AICPA Code of IFAC Conduct PEEC PEEC CPA State Oversight & Enforcement of CPA License Licensure
  • 22. US Treasury MD Comptroller MD Comptroller MD Comptroller CAQ Courtesy of the Maryland Association of CPAs – 2008 edition Drawing by Carol Kirwan, CPA
  • 23. Reforms – Round 2 What will the new normal look like?
  • 24. The Obama Cabinet The year of the REGULATOR Timothy Geithner, Paul Volcker, Mary Schapiro, Secretary of the Chair, Economic Recovery SEC Chief Treasury Advisory Board Gary Gensler, Ben Bernanke, Sheila Bair, Chair, Commodity Futures Chair, Federal Chair, FDIC Trading Commission Reserve Board
  • 25. Massive Changes in our Regulatory Structure
  • 26. First PCAOB now FAOB? New 5 member oversight board proposed by Congress – March 6th, 2009
  • 27. Fair Value Accounting under fire?
  • 28. 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 Stick 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
  • 29. Complexity & Risk Source: Wired magazine 17.03 March, 2009
  • 30. 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 submitted in the previous fiscal year; the recently disgraced Enron hadn't been reviewed in a decade.quot; Source: Wired magazine 17.03 March, 2009
  • 31. 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 Justice Louis Brandeis Source: Wired magazine 17.03 March, 2009
  • 32. Transparency Now! – A Wired Manifesto Source: Wired magazine 17.03 March, 2009
  • 33. The Whistleblowers “All that is necessary for evil to triumph is for good men to do Harry Markopolis – Madoff nothing.” Sherron Watkins – Enron Cynthia Cooper - WorldCom – Edmund Burke
  • 34. What you can do? • Publicity Test • Conscience Test • Parent Perspective • Role Model Test • Universality Test • Golden Rule “Everyone should habitually be aware of the moral implications 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 Source: Ethics in the Workplace by Michael Josephson
  • 35. “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
  • 36. Tom Hood, CPA.CITP CEO Maryland Association of CPAs Business Learning Institute (443) 632-2301 E-mail tom@macpa.org