The document highlights the evolving landscape of financial fraud, with a focus on prominent cases and regulatory responses from organizations like the SEC. Notable events discussed include insider trading allegations against Raj Rajaratnam and the collapse of accounting firms due to improper practices. Additionally, it emphasizes the importance of compliance and ethics in financial reporting, as well as the introduction of monitoring guidelines and the increasing enforcement of fraud prevention measures.

1. AICPA National CFO Conference
InterContinental Boston
Understanding the Latest Developments
in Financial Fraud
Stephen G. Austin, CPA, MBA
Firm Managing Partner
Swenson Advisors, LLP
May 20, 2011
7:00 am – 7:50 am

2. Stephen G. Austin, CPA, MBA
Over 35 years of public accounting experience as an Audit Partner with Price
Waterhouse, McGladrey & Pullen, LLP, and Swenson Advisors, LLP
Certified Public Accountant ‐ California and Georgia
Audit Committee Chairman ‐ Avanir Pharmaceuticals,
World Trade Center San Diego, The Rock Church, and
Santa Fe Christian Schools
Serves on twenty Boards and related Committees
Author of “Rise of the New Ethics Class”
2

3. PCAOB registered accounting firm
Offices in San Diego, Riverside County and Hong Kong
SEC/SOX ‐ audit, tax, compliance, Asia Pacific compliance services, IFRS
consulting, forensic and dispute resolution services
SOX consulting services with SWENTRACKTM automated web based solutions
Top 5 accounting firms – Riverside County – 2010
Top 30 accounting firms – San Diego – 2010
Member of Integra International ‐ 175 offices, 60 countries
Focus on “Tone at the Top” and Ethics Compliance
x
www.SwensonAdvisors.com 3

4. We Caught Our Breath From...
4

5. And Now – Look Who’s in the News!
5

6. “Lose money and I will forgive you, but lose even a shred
of reputation and I will be ruthless”
Warren Buffett
David Sokol allegedly traded Lubrizol Corp. stock prior
to Berkshire Hathaway’s acquisition of Lubrizol Corp.
Sokol “pocketed” a $3 million profit?
Some believe Buffett
missed the opportunity to:
“...show moral courage, stand up for principles,
reinforce to his employees what he expects from them,
and, not least of all, to live up to his own public reputation.”
The Daily Transcript | 4/4/11 6

7. “Skilling Loses Key Appeal Battle”
Supreme Court ruled that Skilling’s fraud and
conspiracy conviction was not swayed by federal
prosecutors’ use of the “honest services” test
Case returns to the Fifth Circuit panel to determine whether any of the 19
counts against Skilling should be vacated
Ex‐Enron Chief’s son, John Taylor Skilling, dies of possible overdose
Echoes death of Mark Madoff, the son of Bernie Madoff
Accounting scandals have a serious impact on friends and family
7

8. Raj Rajaratnam ‐ “He is the
central figure in the
government's sprawling,
multiyear investigation of
insider trading on Wall Street”
NY Times | 4/13/11
Former founder of Galleon Group (hedge fund)
Rajaratnam and five others accused of relying on a network of informants to
make more than $63.8 million in profits from 2003 – 2009
14 counts of conspiracy and securities fraud
8

9. “Barry Minkow Turned Over a New Leaf‐
From Accounting Scandals to Insider Trading”
Barry Minkow (ZZZZ Best fame), an ex‐convict who turned his life around a
decade ago and became a minister and
co‐founded a fraud detection firm
In December, 2010 Minkow was found
guilty of securities fraud charges and
in March, 2011 pleaded guilty to
Federal charges of “insider trading”
Minkow has agreed to help federal
investigators, but could face five years
in prison 9

10. ‘Nothing that I say
should be taken as an
excuse for my behavior,
I take full responsibility
for what I did’
_________________
‘I try to piece it
together. Why didn’t I
say, “I cannot do it?
Why didn’t I return the
money and say, “I can’t
do it.” Why?’
_________________
Madoff
10

11. ‘Look, I am not a banker. But I know that billions of
dollars going in and out of a bank account is something that
should alert you to something. [They] got all the financial
statements. [They] could have seen – I was using them as
custodian, and they never questioned it.’
Madoff | Financial Times | 4/9/11
$6.4 billion lawsuit, filed in federal bankruptcy court, claims that the bankers at
J.P. Morgan discussed the possibility that Madoff was operating a Ponzi scheme
“While numerous financial institutions enabled Madoff’s fraud, JPMC was at
the very center of that fraud, and thoroughly complicit in it”
115‐page lawsuit by Irving Picard | Bankruptcy Trustee
11

12. We Are Making Some Progress
But...

13. 2011 Fraud Scorecard
What’s Hot What’s Not
Global financial meltdown investigations Restatements
Insider trading scandals SOX 404 material weaknesses
FCPA violations Accounting scandals
COSO monitoring Weak Audit Committees
Repeat offenders Mild mannered auditors
SEC troubles
PCAOB foreign accounting
firm investigations/fines
13

14. Restatements are on the Decline
630 companies filed 674 restatements in
2009
27% decline from 2008
The number of restatements
peaked in 2006 with
1,795 restatements
Audit Analytics
Report: Financial Restatements –
A Nine‐Year Comparison
Published March 10, 2010
14

15. SOX Has Achieved
Significant Acceptance
A new survey of more than 300
Chief Audit Executives found that
88% do not believe that the SOX
Act should be repealed.
Source: Grant Thorton CAE Survey 2011
70% of more than 400
respondents who have put into
place accounting controls required
by SOX said that the benefits
outweighed its costs.
Source: Protiviti 2010 Sarbanes‐Oxley Compliance Survey
15

16. Global Financial Market Meltdown:
The Investigations and Prosecutions Continue
Who’s to Blame?

17. SEC Settlements/Fraud Allegations
with Wall Street Banks
SEC settlements with major investment banking houses
Largest attempt by enforcement agencies to hold Wall Street accountable
for its role in the toxic subprime mortgage debacle
SEC’s rough road to this enforcement action
17

18. “SEC Levels Case Against Ex‐Officers
of IndyMac”
SEC charged three former senior executives
with fraud
Failure to adequately disclose to investors
information about the Company’s deteriorating financial condition in 2007 and
2008
18

19. “SEC Levies Record Fine Against
India Accounting Firm”
India affiliate of PricewaterhouseCoopers “routinely failed to follow the
most basic audit procedures” – said the SEC
Satyam Computer Services –
falsely reported more than $1 billion in profits
SEC and PCAOB fined PWC India $7.5 million
Largest penalty ever against
a foreign accounting firm
19

20. “Ernst and Young Faces Civil Fraud
Charges for Lehman Accounting”
Lehman’s use of Repo 105 accounting in question
Ernst & Young is fighting charges for allegedly failing to adequately follow up
on a whistleblower’s claim that Lehman was misstating the value and size of
its assets
“Ernst and Young is the only firm left to punish” –Why?
20

21. “Criminal Investigations Against
Auditors, Consultants of Kabul’s
Central Bank Underway”
Afghan authorities plan to prosecute everyone responsible for Afghan’s
central bank’s collapse – including the Afghan nationals and foreign entities
USAID hired BearingPoint and Deloitte Consulting LLP in 2003 to advise the
central bank in developing the financial sector of the country and regulating
commercial lenders
A U.S. government report said this month that at Kabul Bank,
"fraudulent loans were used to divert $850 million to insiders reportedly
representing 94% of the bank's outstanding loans."
21

22. Key Trends
in FCPA Enforcement

23. Key Trends
Increased Enforcement:
2010 saw unprecedented levels of enforcement of FCPA, more than double the
financial penalties levied in 2009
Expanded Enforcement:
Greater resources devoted by the Department of Justice (‘DOJ’) and Securities
and Exchange Commission (‘SEC’) toward dedicated enforcement units
Industry‐wide sweeps; expansion of actions against non‐U.S. Companies
Enforcement actions against individuals being brought with increasing frequency
and volume
23
Source: The Red Flag Group

24. Key Trends, Continued
More Onerous Enforcement:
Trend in cases towards more onerous penalties
 New Tools for Enforcement:
 Dodd‐Frank Wall Street Reform and Consumer Protection Act
 Enacted July, 2010 (‘Dodd‐Frank Act’)
 Provides incentives and protection for whistleblowers
 Non‐prosecution agreements
24
Source: The Red Flag Group

25. Increased Enforcement
“We’re in a new era of FCPA enforcement; and we are here to stay.”
(AAG Breuer; November 16, 2010)
Between DOJ and SEC criminal fines, disgorgements, civil penalties and
prejudgment interest more than $1.8 Billion was recovered in funds from
companies in violation of the FCPA, more than double that in 2009
25
Source: The Red Flag Group

26. Increased Enforcement, Continued
The number of corporate and individual enforcement actions
increased 85% overall in 2010 over 2009;
DOJ and SEC actions totaled 74.
*Source: Gibson Dunn & Crutcher
26
Source: The Red Flag Group

27. Expanded Enforcement
Greater Resources being devoted by DOJ/SEC:
Significant increase in funds and resources being devoted to enforcement of FCPA
provisions
Dedicated enforcement units
New Financial Sector/Banking probe January, 2011
Industry‐wide sweeps:
Significant amount of FCPA actions now part of a multi‐defendant or industry‐wide
investigation
Strong collaboration between FCPA regulators and enforcement agencies
Recent cases suggest expanded and more proactive enforcement of FCPA and a
focus on non‐U.S. companies.
Increasing focus on prosecution of individuals:
So‐called ‘Shot Show’ sting: 22 individuals arrested in largest single investigation
and operation against individuals in history of FCPA 27
Source: The Red Flag Group

28. More Onerous Enforcement
Recent trend in case law towards more onerous penalties for companies:
8 of the top 10 monetary settlements in FCPA history occurred in 2010
Technip, Snamprogetti and BAE cases all imposed combined penalties in excess of
$350 million
Daimler, Panalpina & Alcatel cases all imposed combined penalties around $100
million
First instance of a company being “put out of business” by FCPA enforcement action:
NEXUS Technologies.
Continuing trend in case law towards pursing individuals:
Individuals receiving increasing fines and jail sentences .
Most severe sentence imposed in PECC case of 87 months and $1.1 Million in fines.
28
Source: The Red Flag Group

29. New Tools for Enforcement
Dodd‐Frank Act incentives provide increased protection for whistleblowers
SEC’s finalized rule changes and
guidance under the Act have
just undergone a public comment
period – Ended December 31, 2010
29
Source: The Red Flag Group

30. SEC Proposed Whistleblower Bounty Program
Rewards tipsters with payments ranging from 10% to 30% of any penalties or
disgorgements of $1 million or more.
“How a Whistleblower Conquered Countrywide”
Michael G. Winston, former executive at Countrywide Financial
‐ Won and awarded $3.8 million in damages
30

31. The Need for Continuous Monitoring:
New COSO Monitoring Guidance

32. COSO Monitoring Guidance
 Issued January 2009
 Useful guidance (with many examples) available from COSO)
 Goal: Compliance “365 days a year” versus “last day of the fiscal year”
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Monitoring
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33. New Monitoring Guidance
Source: COSO – Committee of Sponsoring
Organizations of the Treadway Commission
33

34. The New Monitoring Guidance ‐
Four Steps
1. Establish a foundation for monitoring
2. Design and execute monitoring procedures
3. Assess and report results to appropriate personnel
4. Monitoring can be outsourced to others
“COSO continues to provide outstanding tools that should be embraced in order
to sustain an effective reliable U.S. reporting system and provide the kind of
ethical leadership needed in today’s global economy.”
Steve Austin | Turbo Charge Your SOX Program with the New COSO Monitoring Guidance | 7/8/10
34

35. COSO Guidance Tools
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36. New Tools to Keep Fraud Out of your Financials
36

37. January 2010 – National Fraud Authority
published the first Annual Fraud Indicator
37

38. SWENTRACK is a cost‐effective,
web‐based tool to help simplify SOX compliance efforts.
38

39. Looking Forward to the Challenges Ahead
Battle for hearts and minds
U.S. led “Global Reformation”
Reducing excess government interventionism
Maintaining global ethics leadership
39

40. The MBA Oath is a voluntary student‐led pledge that asks graduating
MBAs to make a commitment towards responsible and ethical
behavior
I will refrain from corruption, unfair competition,
or business practices harmful to society
http://mbaoath.org
40

41. Reflections on My Recent Teachings
of SOX, IFRS and Ethics to accounting
professionals in China
41

42. Thank you
Stephen G. Austin, CPA MBA
steve.austin@swensonadvisors.com
Swenson Advisors, LLP
www.SwensonAdvisors.com