This document summarizes a presentation given by Tom Hood, CEO of the Maryland Association of CPAs, to Salisbury University's Beta Alpha Psi chapter and the Institute of Management Accountants on March 25, 2009 about several major corporate accounting scandals in the early 2000s including Enron and Worldcom. It discusses the role of auditors, regulators, and ethics in preventing future scandals and outlines reforms enacted through laws like Sarbanes-Oxley as well as calls for increased transparency and accountability.

1. Presented to:
Salisbury University
Beta Alpha Psi
Institute of Management Accountants
Tom Hood, CPA.CITP
CEO
Maryland Association of CPAs
March 25, 2009

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 11

12. How & Why

13. The Fraud Triangle

14. A Tale of Two Frauds
Then : December, 2001 Now : December, 2008

15. 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

16. 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

17. 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

18. 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

19. Satyam + PWC
Ramalinga Raju – CEO created $40 billion in
fake billing and cash
PWC auditors missed cash accounts?

20. What is under the CPA Profession?

21. 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

22. 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

23. US Treasury
MD Comptroller
MD Comptroller
MD Comptroller
CAQ
Courtesy of the Maryland Association of CPAs – 2008 edition
Drawing by Carol Kirwan, CPA

24. Reforms – Round 2
What will the new normal look like?

25. 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

26. Massive Changes in our Regulatory Structure

27. First PCAOB now FAOB?
New 5 member oversight board
proposed by Congress – March 6th, 2009

28. Fair Value Accounting under fire?

29. 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

30. Complexity & Risk
Source: Wired magazine 17.03 March, 2009

31. 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

32. 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

33. Transparency Now! – A Wired Manifesto
Source: Wired magazine 17.03 March, 2009

34. 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

35. 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

36. “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

37. Tom Hood, CPA.CITP
CEO
Maryland Association of CPAs
Business Learning Institute
(443) 632-2301
E-mail tom@macpa.org