![DEVASTATING Millions & Billions Lost ,[object Object],[object Object],[object Object],[object Object]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
More Related Content
What's hot
What's hot (20)
Similar to Corporate Transgression & Financial Gimmickry for National Fraud Conference
Similar to Corporate Transgression & Financial Gimmickry for National Fraud Conference (20)
Corporate Transgression & Financial Gimmickry for National Fraud Conference
- 1. Corporate Transgressions and Financial Gimmickry Jim Davidson , CFE, CPA, CFS Certified Corporate Director
- 17. EARNINGS MANAGEMENT What is it? How is it accomplished? How is detected?
- 48. Corporate Transgressions and Financial Gimmickry Jim Davidson, CFE, CPA, CFS Certified Corporate Director
Editor's Notes
- <number><number>
- Steeply Declining Prices<number>
- Let these scandal-plagued companies serve as billboards as to not what to do.<number>
- Majority Acquisition failuresAOL Time Warner $54 billion write-offFraud potential, earnings managementCendent acquisition- CUC massive fraudAcquisition costs & in-process R&D write-offsValuations and impairment write-downs<number>
- Global Crossing: revenue recognition on exchanges of fiber optics capacity<number>
- <number>
- Costs and ExpensesSunbeam: Expenses not accrued - sales returns, product liability, warrantyRite Aid: COGS/Inventory adjustments, capitalized R&M, understated compensationWaste Management: Pervasive fraud – depreciation, capitalizing interest<number>
- Xerox: immediate recognition from leased contracts – Aggressive RecognitionWaste Management Recorded $1.4 Billion in fraudulent income over a 5 year period. Shareholders lost more than $6 BillionEliminated & deferred expenses with “top-level adjustments” to meet pre-determined earnings targetsFailed to record expenses Improperly capitalized expensesSet up inadequate reserves for taxes & other expensesAvoided depreciation expenses<number>
- <number>
- <number>
- <number>
- Internal Control Limitations: Internal controls break down Senior executives can circumvent controls Financial statement fraud is often perpetrated by desperate people with extremely large egos They often think rules don’t apply to them<number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- LEGITIMATE PURPOSESGeneral Motors to redevelop closed factories with environmental problems Airlines to hold airplane leases Mortgage companies to consolidate and sell mortgages to investors AOL and Microsoft for synthetic leases GE to resell credit card receivablesFinancing –SPE with higher rating & lower rates than parentSecuritize mortgages, credit cards & other receivablesSynthetic leases—sale-leaseback & tax benefitsR&D risk & liability transferTransfer, contain, wall off, or mitigate risk. Insurance, joint ventures to share risk. Oil, exploration projects, costly R & D with possible litigation Dow’s silicon breast implants and so many product liability exposures.Leases are good examples of off-balance sheet financing transactions. Certain other long term commitments, legitimately unaccrued contingencies that are possible of loss but not probable. <number>
- <number>
- <number>
- <number>
- <number>
- Financing –SPE with higher rating & lower rates than parentSecuritize mortgages, credit cards & other receivablesSynthetic leases—sale-leaseback & tax benefitsR&D risk & liability transfer<number>
- Fit to business strategy—MD&ATransparency and disclosuresSpecial Purpose Entity (SPE)--Contain risk --leasing or project developmentStructured financing—Contract to achieve specific purpose, including joint ventures <number>
- Derivatives named because their pricing is derived from some other underlying security or commodity, index, interest rate, or exchange rate. Includes forwards, futures, options, swaps, etc. Bank of International Settlements has annual trading volumes exceeding $400 to $500 trillion annually. Commodity—changing prices – Energy/petroleum company would lock in a future price of fuel at a certain minimum amount/floor to avoid declining fuel prices which would adversely affect profits. On the other hand, an airline would lock in a ceiling of prices to mitigate increasing prices. The purchase of a derivative achieves this for both companies.Price of oil could be hedged. Currencies could be hedged. Interest rate—fluctuationsForeign exchange—currency fluctuationsEvent—uncertaintiesCredit—default, bankruptcyDerivatives should be used to hedge risk as a safety net, not a profit center.<number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- <number>
- Many feel:They don’t have a problem in their organizationThe cost of implementing a compliance program exceeds the benefits derivedAvoid Criminal Penalties: Failing to comply with Sarbanes-Oxley Cost: $5MM 10 years in prison<number>
- <number>
- So, let’s note and heed the lessons learned from the financial scandals of the recent few years. Think about the underlying ingredients that went into the recipe for these scandals. The main ingredient was greed. Add to that a large dose of conflicts, a large helping of complacency, and a dash of complicity, sift out the transparency, and the end result was disastrous.So as you – the fraud detection and deterrence community – interpret these “lessons learned” for your firms, companies, and clients encourage to avoid making the same mistakes. The last thing investors, employees, and our economy and society needs is another breach of investors’ trust. On this point and given this audience, I know I’m preaching to the choir. In light of the changed environment, it is in all of our best interests to promote ethics, honesty, and transparency in financial reporting. Practices that take place out of the bright sunlight of transparency are usually practices that require scrutiny.