GZ Ethics: When CPAs Make the Headlines

Ethics:
When CPAs MAKE the Headlines
Gary Zeune, CPA
10356 Wellington Blvd. | Suite D
Powell, OH 43065
614-761-8911
www.TheProsAndTheCons.com
gzfraud@TheProsAndTheCons.com
4hv3.1

Required Legal Stuff
These materials were developed by Gary D. Zeune.
The following policies govern their use:
 These materials are intended for use in group study situations and
were not developed for self study or reference uses. These materials
are copyrighted. Reproduction of the manual or any portion of it is prohibited unless
written permission has been obtained from Gary D. Zeune.
 These materials were prepared solely for the purpose of continuing professional
education. They are distributed with the understanding that Gary Zeune is not engaged
in rendering legal, accounting, or other professional services. If legal advice or other
expert assistance is required, the services of a competent professional should be
sought.
 Participants are advised that the Statement on Standards for Formal Continuing
Education (CPE) Programs places responsibility on both the individual participant and
the program sponsor to maintain a record of attendance at a CPE program.
 The information the participant should keep on each program is (a) sponsor's name, (b)
title and/or description of content, (c) date(s) of the program, (d) location, (e) number
of CPE contact hours. This information is found in the printed program for most courses
or conferences and/or in a CPE attendance record form. Either or both of these
documents should be kept for an appropriate period to enable regular periodic reporting
to jurisdictional board(s) and to professional organizations requiring such reports.
© Gary Zeune CPA 2

Copyright Notice
This manual is protected by U.S. Copyright
law. You may not reproduce any part of this
manual in any form without written consent
of the copyright owner.
Get up to 10 slides free…email Gary the…
1. Presentation title and v# in the upper right
corner on the first slide and
2. The slide numbers
3. Retain ©
©
NOTE:
© Gary Zeune CPA 3

Taking Notes in Acrobat or Reader
Text box
Highlighter
Free form ‘pencil’
OR
© Gary Zeune CPA 4
Google “To remember more, write it down”
Why: Malpractice liability

Home page
60+ Articles 200+ VideosUse in mgt letter
and funding request.
© Gary Zeune CPA 5

Types of Videos
Videos for….
• Government
• Nonprofits
• Public
• Private
Many types of fraud
30 seconds to
45 minutes
All FREE
© Gary Zeune CPA 6

Gary’s Ethics Articles on Web Site
1. Ethics 7 Ways CPAs Violate the NEW AICPA Requirements
2. Want better internal controls? Tell a story
3. Wrong Strategy + Wrong People = Fraud/Theft/Abuse
4. Auditors And Airport Screeners Have Similar Blind Spots
5. Does your compensation system encourage illegal activity?
6. How to Foster Fraud: Forget Ethics
7. A new regard for ethics on the job
8. Are You Teaching Your Employees to Steal?
9. FRAUD HAPPENS : How an honest employee crossed the line
© Gary Zeune CPA 7

What You’ll Learn
 Complying with AICPA
Ethics Requirements
 CPA Dan Korson
 CPA Steve Claus
 CPA Jeff Bainter
 CPA Fred Weber
 CPA Steve Martinez
 CFO Convicted
 Ethics Controls
 SAS 99
 Tax Ethics
 No Longer Acceptable
 Social Status Ethics
 Why Executives Behave
Unethically
 Best Buy CEO
 Lie of Omission
 E&Y Peter O’Toole
© Gary Zeune CPA 8

What You’ll Learn
 E&Y James Gansman
 Why CFOs Manipulate
Accounting
 False Sign-Off
 BDO False Sign-Off
 KPMG Tax Fraud
 Criminal Brains
 BDO Tax Fraud
 HealthSouth
 Staff join client
 CPA Andrew Miller
 Crazy Eddie CPA CFO
 Boeing CFO
 CPA David Friehling
 PharMor
 GlaxoSmithKline
 Statement on Quality
Control Standards
© Gary Zeune CPA 9

How the Brain Learns Ethics
Analogies
Physical
activity
© Gary Zeune CPA 10

Rationalization
It’s my company, I can do
whatever I want.
True False
Why? __________

Materiality
12
Would you be
upset if ‘your’
team lost 37-36
because of a bad
call? YES NO
Because 1 out of
36 made a
______________
© Gary Zeune CPA

Zero Cost Ethics Control
RISK: Doing the same thing
over and over
TIP: Don’t do more work,
but do it __________
Is 12/31 Material??

Don’t Violate Your
Ethics Requirements
and Lose Your License
Like Today’s Cases

AICPA Code of Professional Conduct
 Code of Professional Conduct
 http://pub.aicpa.org/codeofconduct/Ethics.aspx#
 Effective 12/15/14
 Early implementation permitted
 How to use the revised code (J of A article)
 Sections hyperlinked and cross referenced
 Ethics Exposure Drafts
 Ethics Enforcement

Are You REALLY Independent
AICPA ET Section 100-1.06
Independence of mind — The state of mind that permits the
performance of an attest service without being affected by influences
that compromise professional judgment, thereby allowing an
individual to act with integrity and exercise objectivity and
professional skepticism.
Independence in appearance — The avoidance of circumstances
that would cause a reasonable and informed third party, having
knowledge of all relevant information, including safeguards applied,
to reasonably conclude that the integrity, objectivity, or professional
skepticism of a firm or a member of the attest engagement team had
been compromised.

Is Your Staff Ethical
TIP: Staff signs annual disclosure statement.
Q: What are you doing to check it?
A: Search client records for _______________.
Does staff do
business with clients?
Are there
any negotiations?

AICPA Ethics Requirements
 Ethics interpretations, rulings and definitions are
issued by the AICPA Professional Ethics Executive
Committee (PEEC) to
 Provides guidance, but are NOT limit, scope and
application
 Journal of Accountancy is official notice
 CPA MUST justify departure from “must” and
“should” requirements in ANY disciplinary hearing
RISK: How do you monitor J of A for new requirements
and document _____________?

Famous Last Words
19© Gary Zeune CPA
“It can’t
happen
here.”

CPA Dan Korson
 Muskegon Catholic Schools
 Finance manager 7 yrs
 Embezzled $ 1.5 million
 Muskegon Family Care $ 1.5 million
 Catholic Social Services $ 170,000
 5 years + repay $2+ million
 7 employees + close school
Caught when IRS billed school for unpaid ___________
Risk: Trust is NOT an ________________________
Video: CPA Dan Korson sentenced to prison

Misprision of a Felony
Whoever, having knowledge of the actual commission
of a felony cognizable by a court of the United States,
conceals and does not as soon as possible make
known the same to some judge or other person in
civil or military authority under the United States,
shall be fined under this title or imprisoned not more
than three years, or both.
18 U.S.C. Sec. 4

 Billie Wayne Spradling
 Cotton broker : 24 months : bankruptcy fraud
 CPA Steve Claus guilty of misprision
 False financial statements to bankruptcy
 3 years probation + $500 fine
Video: CPA Steve Claus Guilty of Misprison of a Felony
CPA Steve Claus
CPA Claus

Jeffrey R. Bainter
23
 CPA Deloitte Audit Manager
 Met kids at Holy Infant Church
 Soccer + Baseball coach
 Kiwanis Club of Chesterfield
 Cub Scout Leader passed background check
 Missouri Society Industry Committee Chairman
 BS and MS in Accounting University of Missouri
 4 counts possession + 2 promoting child porn
 15 years + $250,000 bond
© Gary Zeune CPA

Clarence Fred Weber
 Omaha Hayes & Associates
 Director of audit services
 Married + 2 children
 Sent ____ sext messages to a
13 and 14 yr old girl in 1 month
 Asked for ______________
 Reveal alcohol or sex history
 70 emails if they told parents
 Business title in some
24© Gary Zeune CPA

Clarence Fred Weber
 School resource officer reported
 Firm web site said “active member of his church where
he coaches various sports team for church and YMCA”
 Texted girls about sex with his ______________
 Texted girls could drink at his house
 Meet one girl near his home
 Gave her Nike Shirt and $100 gift card
 Arrested Valentine's Day at _________
25© Gary Zeune CPA

Clarence Fred Weber
 Reporter said he sent emails from his work computer
 Pleaded guilty to one count of child enticement by
electronic device
 Prosecutor said “….classic grooming…..”
 Max 5 years jail but got 4 years’ probation
26© Gary Zeune CPA

Clarence Fred Weber
Statements on Quality Control Standards
 Requires compliance with Professional Standards
RISK: Does the firm have any __________________
Read: Child Enticement Case Highlights Warning Signs for Parents
Accountant's Computers Seized in Child Enticement Case
www.iowasexoffender.com/search
Video: CPA Clarence "Fred" Weber arrested for sexting
27© Gary Zeune CPA

Steven Martinez CPA
28© Gary Zeune CPA

Steven Martinez CPA
 51, former IRS agent, with 3 kids
 Goertz & Martinez San Diego for wealthy clients
 49 counts of mail fraud, procuring false tax returns,
Social Security fraud, money laundering, aggravated
identity theft
 False client returns showing large tax due
 Had them write checks to companies he controlled
 Filed false returns with little or amount due 2007
29© Gary Zeune CPA

Steven Martinez CPA
 Stole $____________________
 Multi-million dollar home (pool $500k), airplane,
boat, motor home, 8000sf house in Mexico, multiple
Super Bowl trips (1 was $14k)
 Four clients were to testify
 Pay former employee $100,000 to ____________
 Provided pictures/address, use a different _____
Video: Accountant Sentenced [to 24 yrs] for Fraud
Video: San Diego CPA Accused of Hiring Hitman
30© Gary Zeune CPA

Jose Gomez
 Living above means so borrowed from
 Client ESM Government Securities who’s
 Customer Home State S&L needed to hide
 $350 million trading loss so Gomez set up
 Off balance sheet unconsolidated entity
 Bankrupted 69 S&Ls
 Company 9 went to prison + 2 suicides
 What happened to Gomez _________________
RISK: You have to watch ______________________
Video: Alexander Grant Partner Jose Gomez CPA Explains Why
He Went to Prison
Jose Gomez, Prtnr
Alexander Grant
A&A South Florida
31© Gary Zeune CPA

May Get Indiected

Garfield Don’t Do That Coffee
TIP: The dog BARKed to circumvent the _____________
33© Gary Zeune CPA

Moral Balancing
 “[A]fter doing something ethically sound, people are
more - not less - likely to do something immoral, or
even illegal,” Aditya Chakrabortty, The Guardian
 “[When] you have proven your credentials in a
particular area, you tend to allow yourself to stray
elsewhere," Dieter Frey, University of Munich
RISK: Do clients or staff who do the BIG stuff right
rationalize letting little stuff slide, even if _________?
34© Gary Zeune CPA

Ethics Controls
35© Gary Zeune CPA

Cell Phone Etiquette
 “Don’t Be a Di*k During Meals With Friends”
 Starts once everyone has ordered
 Everyone puts phone on table face down
 First person that picks up phone _______________
TIP: Group enforces the social _______________
36© Gary Zeune CPA

PooPrints
TIP: When pet owners think they’ll get a BIG fine
they ______________

Garfield “Beware of Dog”
TIP: A control is when people think they’ll be __________
38© Gary Zeune CPA

39
SAS 99: Professional Skepticism
1. MUST be unbiased
2. Requires a questioning mind and a critical
assessment of audit evidence
3. Possibility of material fraud is ALWAYS present
4. Can NOT be satisfied with less than persuasive
evidence
5. Can NOT rely on client’s past honesty, integrity,
experience
6. As a practical matter, what management tells
you is NOT audit evidence
© Gary Zeune CPA

Professional Skepticism
If your mother tells
you she loves you,
______________.
40© Gary Zeune CPA

Ski Resorts Lie About Snowfall
 440 North American ski resorts data 2004-08
 Reported 23% more new snow on weekends
 Each 1” of new snow increases web site visits 61%
 2009 SkiReport.com iPhone app reports actual
 Lying at resorts with SkiReport coverage __________
 Resorts without SkiReport coverage ___________
RISK: How is it ethical to work where the entity lies to
______________________________________
41© Gary Zeune CPA

TIP: We see only what we to see to support
the desired ________________
Comic adapted from NON-SEQUITUR March 4, 2012
42© Gary Zeune CPA

Are You Objective
Anaïs Nin
43© Gary Zeune CPA
We don't see things as they are,
we see things as we are. Anaïs Nin
GZ……as we want them ______.

Tax Ethics???
44© Gary Zeune CPA

Tax Ethics
45
© Harley Schwadron for more great cartoons contact
schwaboo@comcast.net and visit www.schwadroncartoons.com
© Gary Zeune CPA

Safe Percentage of
Itemized Deductions
Thoughts?? _______________________________________
46© Gary Zeune CPA

 15% or $385 billion uncollected
 $3 TRILLION over 10 years
 Fake expenses and unreported income
 Code: 1927 was 27 pages Now ___________
 Tax code complexity = easier to _____________
 84% say not OK for other people to cheat
 Everyone does it
 Don’t be a chump
 Businesses hire expensive _______________
Tax Ethics
47© Gary Zeune CPA

Tax Ethics
 Which is worse….underpaying $500 taxes or
stealing $500 at work
 90% who flip coin will cheat to get an easier task
 Everyone can be a moral hypocrite
 Sign return at top reduces cheating
RISK: Anything is legal as long as don’t get _______
YouTube: Our Cheating Ways
48© Gary Zeune CPA

Trash or Taxes???
Which one are Americans more embarrassed about: Trash Tax
49© Gary Zeune CPA

Trash or Taxes???
 The Shelton Group, Knoxville
 Online survey of 1,105 about environmental issues
 Near end asked “How embarrassed would you be if
someone you admire found out that you…..”
 Randomized list of behaviors
50© Gary Zeune CPA

Trash or Taxes???
0 20 40 60 80 100
Run water brushing teeth
Room temp at 73
Mostly use paper plates
Don't recycle plastic bottles
Vehicle gets 13 or 14 mpg
Don't use seatbelt
Smoke
Cheat on taxes
Throw trash from car
Drunk Driving
Shoplifting
% of 1,105 VERY Embarrassed if Caught…..
51© Gary Zeune CPA

No Longer
Acceptable
Don’t put yourself
and firm at risk…..
Adopt
_________________
_________________
Watch: CBS 60 Minutes
Our Cheating Ways

KPMG Tax Fraud
 Federal grand (NY) criminal probe of abusive tax
shelters
 CFO Richard Rosenthal resigns (at 48)
 Vice chair for tax operations
 Deputy Chair Jeffery Stein retires
 Email tying Stein to marketing shelters
 KPMG star tax partner Jeffery Eischeid ‘resigns’
 Read Eischeid’s Congressional testimony
 Won’t pay legal costs unless he cooperates
Should be slide 51

KPMG Tax Fraud
Old: “If you let our employees go, we’ll plead guilty.”
Now: “We’ll give you our employees, so long as we
don’t have to plead guilty.”
 IRS: KMPG shelters caused $1.4 Billion in lost taxes
 KPMG has waived privilege
 No joint defense agreement
 KPMG gives same documents to DOJ
 Will set standard for ‘cooperation’

 Former KPMG staff set up own firm
 Marketed BLIPS
 Bond Linked Issue Premium Structure
 $1+ billion phony tax shelters
 Brazen tax shelter “that didn't pass the smell test
from Day 1”
 7% of amount their clients saved
Tip: People behave the way they’re ________________
Judge Sentences 3 In Massive
Tax Fraud….AP Headline

56
Judge Sentences 3 In Massive
Tax Fraud….AP Headline
Robert
Pfaff
Former tax
partner
58 8+ yrs $3MM Jailed
John
Larson
Former tax
manager
57 10 yrs $6MM Jailed
Ray Ruble Former
Attorney
63 6½ yrs $0 Free on appeal
KPMG signed a plea deal admitting its role in the tax
shelter scheme. The firm avoided criminal prosecution
by cooperating with authorities but was fined $456
million, including $128 million in forfeited fees from sales
of the shelters.
© Gary Zeune CPA

Does Social Status
Affect Ethics?
57© Gary Zeune CPA

Drivers at 4-Way Stop
Aerial view of four-way
intersection used for Study
#1. White arrows depict
highways used by coders
to code driver behavior at
the intersection (image
courtesy of © 2011 Google
Maps)
58© Gary Zeune CPA

 274 cars that stopped at the intersection
 2 teams independently coded
 Car status…Make and model and age
 Driver gender and age
59© Gary Zeune CPA

What % of high status drivers do you think cut in?
60© Gary Zeune CPA

Drivers and Pedestrians
 Independent teams code 152 cars and drivers
 As drivers approach a crosswalk
 “Pedestrian” is 50/50 male/female
 Pedestrian made eye contact with driver
 Then stepped forward into the crosswalk
Outcome: Which cars violated the crosswalk law most
often _____________________
61© Gary Zeune CPA

Candy Jar Ethics
 129 UC Berkeley students rated their status
 Compared themselves to high or low status people
most/least money, education, respected job
 Students were offered a jar of individually wrapped
candy and told that was for children in another study
but they could take whatever they wanted
 Students completed more test then reported how
many pieces they had taken
 Possible bias….self-reporting
Outcome…high status took ________ the candy
62© Gary Zeune CPA

Cheating at Dice
 195 adults played game of chance
 Self-assessed social class
 Told computer would randomly “roll” a die 5 times
 If total exceeds 12 will win $50
 Told testers to self-report the total
 How do you test honesty __________________
 How many reported fewer than 12 ___
 How many reported more than 12 ___
Outcome: High status cheated ___________________
63© Gary Zeune CPA

Stimulate Unethical Behavior
 90 people answered 12 questions to gauge behavior
 Assigned to one of two groups
 Group 1 Lower class listed 3 ways greed is good
 Group 2 Upper class listed 3 activities during an
average day
Outcome: Group 1 _________________________
64© Gary Zeune CPA

Study Combined Outcomes
Why do upper class behave, on average, more
unethically……
 Aware of benefits of cheating
 More resources and more independent
 Fewer structural controls
 More money to deal with cost of unethical behavior
 More trusted so less oversight
65© Gary Zeune CPA

Study Conclusion + Risk
Higher social class, more successful, people
don’t think the rules ___________________.
RISK: “It’s my company, I can ______________
Source: “Higher social class predicts increased unethical behavior”,
Proceedings of the National Academy of Sciences (PNAS) Feb 2012
66© Gary Zeune CPA

High Status = Delusions
67
People who thought of themselves as having high
status saw 19% more smiles on faces of people who
judged their work than people who thought of
themselves as having low status.
RISK: No one is objective about ________________.
Source: The Eyes and Ears of Status: How Status Colors Perceptual
Judgment, Personality and Social Psychology Bulletin
© Gary Zeune CPA

Why Executives Behave Unethically
68© Gary Zeune CPA

 Martha Stewart paid $195,081 in 2006 to settle with
SEC for insider trading in ImClone in 2001…
 Losses avoided $45,672
 Interest $12,389
 Max civil penalty $137,019
 Martha Stewart’s 2001 pay $___________
 2001 net worth was $________________
69© Gary Zeune CPA

 Sample of 52 executives of all executives indicted for
insider trading in 1989 – 2002
 Economically rational if benefits exceed the cost
 If so the ‘poorer’ management the more they would
illegally commit insider trading
 After controlling for company size, industry, growth
prospects, executive age, opportunity, and possibility
of prosecutorial targeting found…
 Indictments are concentrated in ____________
70© Gary Zeune CPA

 Inside traders on average were just as rich, or richer,
than other top executives
 The odds of being indicted for insider trading increased
with compensation and wealth
 If don’t break law because of economic need then
why…
RISK: Some powerful people don’t think the _________
Source: Do They Do It For The Money?, Journal of Corporate Finance, 2/12
71© Gary Zeune CPA

For Better or For Worse
72
RISK: If you want people to do the right thing you have to
make it about ____________.
© Gary Zeune CPA

Best Buy CEO Brian Dunn
73© Gary Zeune CPA

 28 year employee
 Mother was an accountant at BB
 No college
 Started on floor as salesman
 Beer and brats
 True blue
 Married + 3 kids
 Circuit City bankrupt 2009
 Declining big TV sales
74© Gary Zeune CPA

 Customers with smartphones _________________
 Failed to adapt to threat from ________________
 Same store sales dropped 3 of last 4 years
 $1.7 billion quarterly loss March 29, 2012
 Operating income per square foot
 2006 $50
 2008 $36
 2011 $19
 Apple 2011 $___________
75© Gary Zeune CPA

Best Buy Stock Price
2001 2011

 $5 million comp
 $50 Billion company
 29 year old
 Board investigation found “damaged employee
morale” and “employees questioned the company’s
commitment to corporate ethics” but found
 No evidence Dunn used company money …
77© Gary Zeune CPA

Best Buy Founder Resigns
 Richard Schulze founded Best Buy
 Shares down 40% 12 months ended 5/1/12
 Resigned as Chairman because
 Board investigation found that he received written
allegation but didn’t alert the board that his
handpicked successor Brian Dunn had a “extremely
close personal relationship” with a subordinate
 Wants to take company private
RISK: No $, so why were they fired _______________

Frank & Ernest
79
________________
________________
© Gary Zeune CPA

Lie of Omission
80
Everything you say is true
but you don’t tell the
_____________________
© Gary Zeune CPA

Ethics in Court
Do you swear to tell the
truth, the whole truth,
and nothing but the
truth….
Lie of omission

Monkeying Around with Documents
82© Gary Zeune CPA

E&Y Peter O’Toole
83
Peter O’Toole partner
© Gary Zeune CPA

E&Y Peter O’Toole
 PCAOB notified E&Y would inspect workpapers of
client “A” (never disclosed) in 20 days
 O’Toole told senior manager Darrin Estella others to…
 Create, backdate and add documents about
 Valuation of securities (most important audit issue)
 Used flash drive on another employee’s laptop then
 Threw the flash drive away (indicates ___________)
 Caused E&Y to represent no changes to workpapers
84
© Gary Zeune CPA

E&Y Peter O’Toole
 E&Y cooperated and ________ O’Toole and Estella
 O’Toole banned for at least 3 years + $50,000 fine
 Estella banned for at least 2 years
 Both can petition to lift ban after it expires
 PCAOB allows adding workpapers after filing report
 But they violated 2 rules…
1. Date when prepared
2. Explain why added
 WHY: To make it look like work done ___________
85
© Gary Zeune CPA

E&Y Peter O’Toole
 Current Principal at Citisoft
 Past September 1990 – October 2010
(20 years 2 months)
 Executive responsibility for providing team leadership
for multiple audit client relationships. Set strategy for
new & existing relationships, achieving goals &
managing competing priorities. Responsible for value
added process improvement recommendations;
engagement execution, efficiency, and profitability.
 www.linkedin.com/pub/peter-o-toole/6/17b/b54
86
© Gary Zeune CPA

E&Y Peter O’Toole
 http://pcaobus.org/Enforcement/Decisions/Document
s/Peter_C_OToole.pdf
RISK: No allegation bad audit or wrong opinion so why
fired and sanctioned? ___________________
and put the firm _______________
87
© Gary Zeune CPA

E&Y James Gansman
 CPA, atty and partner
 Pleaded to 6 counts of securities fraud for
tipping Donna Murdoch
 Who traded in 7 takeover deals
 She reaped illegal trading profits $596,000
 Gansman made $_______________
 Gansman max ____ years on each count
 Served year + day and released 3/13

E&Y James Gansman
 Appealed that “it [sharing] was as part of a
long ‘relationship of trust and confidence,’
and that he never expected her to trade on
the information”
 Court upheld conviction
 Connect on Linkedin
 Convicted of felony = lose license
Read SEC v. James E. Gansman or
www.sec.gov/litigation/litreleases/2008/lr20603.htm

Why CFOs Manipulate Accounting
90
Why Do CFOs Become
Involved in Material
Accounting Manipulations?
Recipient of the Glen
McLaughlin Prize for Research
in Accounting Ethics from the
School of Accounting, University
of Oklahoma
© Gary Zeune CPA

 On avg stock declines 38% = $100 ___________
 Can’t observe reasoning then behavior so
 2261 AAERs (Accounting and Auditing Enforcements
Releases) 1982-2005
 AAER  egregious GAAP violations
 Compare manipulated firms to non-manipulated firms
 Matched companies 80-120% of assets
 CEO and CFO equity stakes, options, compensation
 CFO turnover
91© Gary Zeune CPA

Some possible reasons…….
 CEO ‘bribes’ CFO
 Personal financial gain
 CEO pressure
 Keep job/get promotion
 Committed to “earnings” target
Q: Which was reason CFOs cooked the books?
92© Gary Zeune CPA

Findings………
 CEOs of manipulated firms had
 Significantly higher equity stakes
 By far largest % of total comp of top 5 officers
 CFOs had same equity and comp as non-manipulated
RISK: CEOs who hire __________ CFOs who will do
__________________
93© Gary Zeune CPA

False Sign-Off
94
The organizational
response to the discovery
of false sign-off
International Journal of
Disclosure and Governance
Data provided by Gary Zeune
© Gary Zeune CPA

False Sign-Off
 Signing off on work when in fact ________________
 Why commit ______________________________
 What to sign off _________________________
 Pay and promotion _______________________
 Why not detected ________________________
 Why assume done___________________________
RISK: What’s a simple procedure to minimize false sign-
off____________________
Come in under budget
Something not expected to change
Keep client and boss happy
Assume the work was done
95
It wasn’t done
© Gary Zeune CPA

False Sign-Off
105 Only big 4
122 Big 4
and/or
National379 Local or
Regional Only
7 Didn’t
answer
613 CPAs Provided the Data
96
Table 2
Avg 13 years in
public accounting
© Gary Zeune CPA

False Sign-Off Survey Results
Profile %
% of all who observed False Sign-off 25
Auditing experience last 10 years 27
Auditors with some Big 4 experience 26
Auditors with only Big 4 experience 25
Auditors with only Big 4 in last 10 years 28
97
Table 3
© Gary Zeune CPA

False Sign-Off Survey Results
Sample slice %
What % do you THINK commit false sign off 26
If HAVE NOT detected false sign-off 17
If HAVE detected false sign-off 32
What was your response
Personally spoke to person 58
Person was terminated 9
98© Gary Zeune CPA

False Sign-Off Items???
Some edited for length….
 Auditor did not complete A/R confirmation process by
examining subsequent cash receipts that were most
likely not material, but happened at least two times.
 Auditor signed off that workpapers tied to originating
documents when the originating invoices had
different [amounts].
 Skipped tracking down some missing pieces of paper
in a sales detail test and marked as ‘ o.k.’ amounts.
 Cash transfer verification – auditor didn’t really know
how, so just signed off that it was done.
99© Gary Zeune CPA

 Did not actually interview management/bookkeeper.
Filled in same info, including side notes, as previous
year.
 The auditor did not perform all of the test counts on
the inventory. Did not trace test counts of some
inventory items to final inventory.
 Auditor copied language from prior year workpaper
without conducting procedure.
 Auditor did not make internal control inquiries of
management and signed off as doing so.
100© Gary Zeune CPA

 The auditor did not examine the full number of [test]
transactions because of time pressures.
 Test counts not tied to inventory records.
 Did not complete Fixed asset steps in audit program.
 Invoices not audited, but indicated as audited.
 The auditor did not think the step was necessary and
just blatant disrespect for following office policy.
 Did not perform the required test to re-compute
depreciation expense, and did not examine the full
sample size of invoices selected for testing.

 Did not perform the required test to re-compute
depreciation expense, and did not examine the full
sample size of invoices selected for testing.
 Cash disbursement test. One check marked as
examined, but the check was missing. The check had
been written to the CEO who embezzled funds.
 Took shortcuts to save time – didn’t perform all math
checks of bank reconciliation, and so on.
 Auditor did not review repairs and maintenance
accounts to search for assets that should have been
capitalized.

 Claimed post balance sheet review of A/P was done
when in fact it wasn’t.
 Account was not reconciled [but] auditor said it was.
 Auditor signed off that he had traced a sample of
inventory items from physical count sheets to final
listing.
 The auditor copied all of the tick marks and steps
from the prior year’s workpaper and didn’t perform
the work.

 Auditor signed off steps without doing work and put
tick marks for doing work not done.
 Auditor did not trace the deposit to the bank
statement as indicated in the audit program.
 Auditor signed off that the client was asked about
held checks and that none were present. In fact
there were held checks and client had never been
asked.
 Auditor did not test cutoff of cash receipts. Failed to
recognize improper cutoff of cash disbursements.

 The auditor did not look at certain of the items on
several invoices that were required by the audit
program.
 The auditor did not examine supporting
documentation for various transactions as signed off
in the audit program.
 The auditor did not have conversation with client
personnel as documented in the workpapers.
 When testing internal control attributes, auditor did
not examine supporting documentation.

106
BDO Seidman False Sign-Off
 Stephen Nardi, Philly assurance practice director
 Hemispherx Biopharma’s 2004 audit
 Field work was completed without supervision and
was never _________ as required by BDO ________
 Nardi authorized release of _________________
which was included in the company’s _________
© Gary Zeune CPA

107
BDO Seidman False Sign-Off
 Nardi told manager to ______________________
 Nardi has been barred from public accounting but
can petition after 1 year
 Manager was censured and resigned
 Google “bdo stephen nardi”
© Gary Zeune CPA

D&T Vice Chairman
 Thomas Flanagan, 30 year partner
 Deloitte sued him October 2008
 250 puts and calls trades January 2005 – 2008
 12 clients and advisory partner on 7
 "The independence policy is really the most important thing to
this business. If you're not independent then you're not going to
be an auditing firm," [D&T attorney Paul] Lockwood said, noting
the collapse of Arthur Andersen
 21 month sentence + paid $1.1 million fine
 Deloitte LLP v. Thomas P. Flanagan, Court of Chancery,
Delaware, No. 4125
 $14 million in retirement + deferred comp

BDO
Convicted at trial May 2011….
 BDO ex-CEO Denis Field
 Jenkens & Gilchrist partners
 Paul Daugerdas atty and former Andersen
 Donna Guerin
 Deutsche Bank’s David Parse sentenced to 42 months
 $6.5 BILLION fraudulent deductions = $1.3 BILLION
 $____ million illegal fees
NOTE: Press reports say all were ___________

BDO
 Dot com wealth in 1990’s
 Tax shelters
 Tax services 28% of 1998 U.S. revenue and by 2002
increased to almost ____
 Field was head of BDO “Wolf Pack”
 We’ll be “swimming in a river of green”
 Rec’d 10% of net profits
 Field’s defense “head showman and marketer”

BDO
 In 2000 Field was 41 and youngest CEO
 “Denis Field….is the equivalent of Bill Gates,” Alan
Kolton, PDI Global
 Andersen indicted and collapses
 BDO withdrew its…..
 Agreement to indemnify and pay defense
 Joint defense agreement
 Multi-million severance

BDO
 Jenkens & Gilchrist 600 attorneys….
 Non-prosecution
 Paid IRS ______________
 2007 firm ______________
 Deutsche Bank….
 Non-prosecution
 Paid ________________

BDO
 “These defendants thought they were
above the law…” U.S. Atty Preet Bharara
 1994 to 2004 marketed fraudulent tax
shelters as cookie-cutter products designed,
implemented, and intended to eliminate or reduce
large tax liabilities for 1,000 wealthy clients, US Atty
 BDO CEO Field received $______________
 J&G partner Guerin made __________
 J&G partner Daugerdas made $_____________ but
using the same shelters reported $_______

BDO
 Adrian Dicker, 56, a former vice chairman, sentenced
to 10 months 6/14
 Michael Kerekes, 48, tax partner, sentenced to 18
months + $85 million resitution
 Charles W. Bee, Jr., 65, a former vice chairman and
board member, sentenced to 16 months 6/14
 Robert Greisman, 60, a tax partner, got 3 months
 Partner Mark Bloom admitted stealing $20 million at
a hedge fund and sold illegal tax shelters

BDO Denis Field CEO
Crime Max
Sentence
Conspiracy to defraud the IRS 5
Corruptly endeavoring to obstruct justice
and impede investigation
3
Multiple counts of tax evasion 5 each
Mail fraud 20
Acquitted on retrial Oct 2013

BDO
BDO status……
 Millions spent on settlements and atty fees but….
 DOJ didn’t indict BDO because…
 Post Enron/Andersen DOJ going after ___________
 BDO fully cooperated in Field’s prosecution BUT
 Is a prior offender….in 2002 agreed to 18 month
deferred prosecution and paid $16 million fine to
settle chargers that St. Louis partners allegedly
helped a client _________ trust funds

BDO
BDO resolution June 14 2012……
 Admitted criminal tax shelters
 Used fraudulent legal opinions from Jenkins &
Gilchrist
 Filed fraudulent tax returns
 Provided false info to IRS
 Agreed to deferred prosecution
 Pay $______________________

119
Goal Discongruence
Management has set the target.
They expect me to achieve it.
My future, my job could be on
the line. I want to succeed, and
I want to please my boss,
management, and the company.
I want to look good when
compared to my peers.
© Gary Zeune CPA

HealthSouth
 Birmingham Alabama
 50,000 people 1,500 clinics in every state and abroad
 $3 BILLION fraud over years
 Capitalizing expenses as ____________
 Every misclassification was less than $5000
 Auditors missed it
RISK: Client knew the ___________________________

HealthSouth
Dozen executives, including 5
CFOs, pleaded guilty ….here are
3…
Richard Scrushy
CEO found not
guilty but
serving 7 years
for bribery.
William
Owens
Weston
Smith
Aaron
Beam

HealthSouth
Owens testified at Scrushy’s trial that in
mid-1996 earnings projections were “several
million dollars short," in spite of years of “aggressive
accounting.” Owens said that Scrushy’s instructions were
clear and unmistakable: “Go back and fix the numbers to
meet expectations of the Street.”
RISK: If no one will stand up to superior and say NO, you
violated the ____________________________

Ethics of Joining Client
 When staff joins client
 What do they take with them
 some ways to minimize risk

124
Managing Partner Andrew Miller
 26 counts including….
 Tampering with Public Records
 Falsifying Business Records
 Tampering with Physical Evidence
 Offering a False Instrument for Filing
 Changed payee on 15 checks
 "He did it to spare himself embarrassment for not having
uncovered the fraud sooner."
 Pleaded guilty 2005 first-degree public record tampering
 Sentenced to 4 months in prison and 5 years' probation
Andrew Miller
© Gary Zeune CPA

125
Crazy Eddie CFO and CPA
Sam E. Antar Says………
 While you can’t legislate competence,
it can be learned.
 The kids who are out on the front lines of auditing,
they know nothing about people like me. It is easy to
fool them.
 Accounting students must take separate in-depth
courses in criminology, securities laws, internal
controls, insurance/risk management, and other 'real
experience' areas they require for the fieldwork they
will encounter on audits.
Video: Crazy Eddie Antar and His CFO/CPA Cousin Sam Antar
© Gary Zeune CPA

Boeing CFO Sentenced to Jail
 Illegal recruiting of Druyun
 Druyun oversaw billions of AF contracts
 “I know what I did was wrong.”
 “You are a person who had everything and
in a blink of an eye you jeopardized
everything,” Judge Gerald Lee
 Compensation _____________
 Est cost to Sears _____________
Michael Sears
Boeing CFO
Darleen Druyun
Dept of Defense

Boeing CFO Sentenced to Jail
 Wealth worked against him
 Home $5 million
 “Soaring Through Turbulence” withdrawn
 Sentences
 Sears 4 months + $250,000 + 200
hours
 Druyun 16 months
 Why did she steer business to Boeing?
Michael Sears
Boeing CFO
Darleen Druyun
Dept of Defense

Madoff Auditor
David Friehling
Friehling & Horowitz
___ CPA
Pres Rockland County Chapter
Executive Board

Madoff Auditor
 "In what was the biggest mistake of my life, I put my
trust with Bernard Madoff" he told Judge
 "At no time was I ever aware Bernard Madoff was
engaged in a Ponzi scheme.“
 Inaccurate personal tax returns for Madoff
 Invested family savings, including kids college
savings (NOT independent)
TIP: Look for STAFF NAMES in ________________

Madoff Auditor
 Admitted that he took the financial records "at face
value," failing to independently verify the assets or
ensure that the bank account records or charts listing
the purchase of securities were accurate
 Pleaded guilty Nov 2009 to 9 counts: securities fraud,
filing false reports with SEC, tax fraud ++++
 $14,000/month
 Max 114 years
 1 yr home confinement + 1 yr supervised release

Madoff Auditor
 33,000 firms in AICPA peer review program
 44 states require peer review, 6 didn’t including ___
 Audited Madoff for 15 years but never peer reviewed
 Why not…wrote AICPA didn’t perform _________
TIP: Peer review failed because it relies on __________
which is same thing as ___________
FIX: Think of peer review “______________ inspection”

Phar-Mor Fraud
Mickey Monus Pat Finn CPA/CFO
YouTube Watch…..
1. Phar-Mor $500 Million Inventory Fraud Full Show 4 parts
2. Phar-Mor Condensed 3 parts
3. Phar-Mor CFO CPA Pat Finn Malpractice Deposition
4. Or search “gzfraud phar mor”
John Anderson

Phar-Mor Fraud
Mickey Monus Pat Finn CFO
What did you see in the fraud videos?
1. Auditors told client count locations
2. Something unpredictable uncovered the fraud
3. CFO slowly sucked in
John Anderson

GlaxoSmithKline Guilty
 Puerto Rico subsidiary pleaded guilty to distributing adulterated
drugs
 GSK Global QC manager Cheryl Eckard lead an inspection team
 Told CBS 60 Minutes “Worst I’ve ever seen”
 Contaminated with bacteria
 Different meds packed in same bottle
 Told VP Quality North American to shut down the plant and
recall the delivery trucks…Nothing happened
 Says GSK filed a false report with FDA
 GSK fired her. She sent FDA same info.

GlaxoSmithKline Guilty
 Eckard filed federal whistleblower suit
 GSK pleaded guilty to a felony
 Paid $750 million fine
 Echard got a $96 million reward
Video: Glaxo Whistle-Blower Lawsuit: Bad Medicine - CBS News
TIP: Someone always knows….
TIP: Mgt and accounting people know what you want to hear
RISK: Failing to talk to non-mgt and non-____________________
Glaxo
Bad
Medicine

DO NOT PRINT THIS SLIDE TO END

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GZ Ethics: When CPAs Make the Headlines

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