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1 Copyright 2015, Confirmation.com
Fraud Directly Related to
Confirmations Brian Fox, CPA, MBA – Founder of Confirmation.com
July 30, 2015, 12:45-2:30pm
2
Brian Fox, CPA, MBA
• Founder and Chief Marketing Officer,
Confirmation.com
• Former Professor at Vanderbilt University
• Multiple “Top 40 CPA Under 40” in the U.S.
awards
• Received the first six patents on Electronic Audit
Confirmations
• Co-authored Guide to Electronic Confirmations
• Often seen on or written about in:
–Fox Business News
–Forbes
–Fortune
–New York Times
–The CPA Journal • Speaker at professional conferences and
business schools
Copyright 2015, Confirmation.com
7
72% Non-Public Companies
28% Public Companies
Where Does Fraud Occur?
Source:
ACFE 2012 Report
Copyright 2015, Confirmation.com
• Private Companies
• Not-For-Profits
• Governmental Entities
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Majority of Frauds
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100+ Confirmation Fraud Examples Over 50 in the Last 11 Years!
Shepherd Major Play Option Fund 2013 Universal Travel 2011 Parmalat 2004
Boshiwa 2012 Electronic Game Card 2010 Powerball International 2004
Centro 2012 Rino International 2010 Suprema Specialties 2004
Hontex International 2012 Canopy Financial 2009 Vista 2000 2004
Peregrin e Financial Group (PFGBest) 2012 Satyam 2009 Warnaco 2004
Advanced Battery Technologies 2011 International Commercial Television 2008 Barings 2003
Chaoda Modern 2011 Quest 2008 California Micro Devices 2003
China Biotics 2011 Take-Two Interactive 2007 MicrosStrategy 2003
China Integrated 2011 Daisytek International 2006 Northface 2003
China Intelligent Lighting & Electronics 2011 Lipper Holdings 2006 Safescript 2003
China MediaExpress 2011 Refco 2006 Ahold/U.S. Food Services 2002
China New Century Media 2011 Charter Communications 2005 Aura Systems 2002
Focus Media 2011 Del Global Technologies Corp. 2005 Cronos 2002
G.C. China Turbine 2011 e-Safetyworld 2005 Ebix 2002
Longtop 2011 First American Health Concepts 2005 Endocare 2002
NIVS Intellimedia Technology Group 2011 Just for Feet 2005 PictureTel 2002
Olympus 2011 Kmart 2005 R.T.I.N. 2002
ShengdaTech 2011 Royal Ahold 2005 TV Guide 2002
Sino-Forest 2011 Amicom 2004
Copyright 2015, Confirmation.com
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2001 and Earlier
Adelphia 2001 Livent 1999 Crazy Eddies 1987
Allfirst Financial 2001 Sunrise Medical 1999 ZZZZ Best Carpet Cleaning 1987
American Bank Note Holigraphics 2001 Financial Asset Management 1998 Flight Transportation 1985
Healthsouth 2001 YBM 1998 Alpex Computer Corporation 1984
I&J Bagel/Manhattan Bagel 2001 Hybrid Networks 1997 J.B. Hanauer & Company 1983
Madera International 2001 Physician Computer Network 1997 AIG
Purchase Pro 2001 Cambridge Biotech 1996 Auto Firm Rotation
Quintus 2001 Pathe Communications 1996 Gold Wo International
Clarent 2000 Bio Clinic 1995 Guggenheim
Computer Associates 2000 Happiness Express 1995 Healthcare Management Resources
Digital Lava 2000 Kurzweil Applied Intelligence 1995 Hong Kong Stock Exchange
Finance Credit 2000 Northstar Health Services 1995 Jaguar Financial
Pier 1 Imports 2000 Standard Oil & Exploration of DE 1995 Merge Quest
Safety Kleen 2000 Datamag 1991 Office Max
Three Point Digital 2000 Refco 1991 …McKesson & Robbins 1930’s
CF Foods 1999 BCCI Bank 1990
Just for Feet 1999 RSI 1988
Laser Photonics 1999 18 Utah Companies 1987
100+ Confirmation Fraud Examples
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On Monday, July 9, 2012…
Regulators discovered
nearly $215 million missing
in customer funds from
PFGBest accounts.
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On Monday, July 9, 2012…
Russell Wasendorf, Sr.
CEO of Peregrine
Financial Group
Russell Wasendorf, Sr.,
attempted suicide
leaving behind a signed
statement that begins to
explain the $215 million
shortfall in customer
accounts.
Copyright 2015, Confirmation.com
• Fraud uncovered in July 2012 and took place over
a 20-year period.
• $215 million shortfall in PFGBest customer money.
• CEO Russell Wasendorf Sr. was arrested on
charges of lying to federal regulators.
• October 3, Wasendorf Sr. entered a guilty plea to
charges including lying to regulators,
embezzlement and mail fraud.
Peregrine Financial Group Fraud
14 Copyright 2015, Confirmation.com
• Sentenced to 50 years in prison.
• Former clients are still unable to access more than
60% of the funds frozen since PFG’s bankruptcy.
Peregrine Financial Group Fraud
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I have committed fraud. For this I feel constant and intense guilt. I am very remorseful that my greatest
transgressions have been to my fellow man. Through
a scheme of using false bank statements I have
been able to embezzle millions of dollars from customer accounts at Peregrine Financial Group,
Inc. The forgeries started nearly twenty years ago
and have gone undetected until now. The Bank
statements were always delivered directly to me when they arrived in the mail. I made counterfeit
statements within a few hours of receiving the
actual statements and gave the forgeries to the
accounting department.
“
”
Russell Wasendorf wrote in part:
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On Friday, July 13, 2012…
Russell Wasendorf was
arrested for making
false statements to
regulators.
Russell Wasendorf, Sr.
CEO of Peregrine
Financial Group
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• Falsified bank statements and forged official
letters and correspondence from the bank, as
well as all transaction confirmation statements.
• Ordered that all US Bank statements were to be
delivered directly to him.
• Used Photoshop, Excel, scanners, laser and ink jet
printers to create bogus bank statements and
forgeries of nearly every document that came
from the bank.
• Rented a P.O. Box to intercept bank confirmation
requests and forged the documents to conceal
missing money.
How Wasendorf Hid the Fraud
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Bogus US Bank Mailing Address
U.S. Bank National Association
PO Box 706
Cedar Falls, Iowa 50613-0030
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This Manual Process Worked So Well…
that the external auditors
and the NFA auditors never
suspected that Wasendorf
had been skimming
customer accounts for
20 years.
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25
• National Futures Association, the regulator for
PFGBest, began using Confirmation.com.
• NFA regulators began requesting that
Wasendorf give their auditor’s permission to
confirm PFGBest customer account
information using Confirmation.com.
• For months Wasendorf adamantly resisted
authorization in using Confirmation.com to
confirm the company’s bank balances.
• On Sunday, July 8, he relented.
How the Fraud was Discovered
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How the Fraud was Discovered
Within 24 hours, the NFA began receiving
confirmations through Confirmation.com
confirming:
The US Bank account had a balance of
approximately $6 million instead of approximately
$220 million that was reported on their US Bank
statement as of December 31, 2011.
Copyright 2015, Confirmation.com
• $1 billion inflated cash balance
• Used false invoices and forged bank
statements
• Former senior managers created
more than 6,000 phony invoices –
used in general ledger and financial
statements
• Created bogus bank statements to
reflect payment of phony invoices
Satyam
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“ The reliability of global capital markets depends
on auditors fulfilling their obligation to investors to
perform robust audits, resulting in well-founded
audit reports.
Two of the PW India firms, PW Bangalore and
Lovelock, repeatedly violated PCAOB rules and
standards in conducting the Satyam audits.
These confirmation deficiencies contributed
directly to the auditors’ failure to uncover the
Satyam fraud. d
– James R. Doty
PCAOB Chairman
”
28 Copyright 2015, Confirmation.com
• March 21, 2011 – stock was delisted by the NYSE
• Accounting firm MaloneBailey (MB) LLP formally
resigned its engagement:
– Discrepancies noted on customer confirmations
– Inability to directly verify China Century’s bank records
– Can no longer support its opinions related to financial
statement as of December 31, 2009 and 2008
• SEC has initiated a formal investigation
concerning material misstatements
China Century Dragon Media
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Kmart Fraud
Eastman Kodak ‒ VP (Sales)
•Coca Cola – National Dir. of Sales
•Pepsi-Cola – National Sales Dir.
•Frito-Lay – Dir. of Sales
•Frito-Lay – National Account Mgr.
Just For Feet Fraud
Adidas – Dir. of Apparel Sales
Fila – President & CEO
Converse – VP of U.S. Sales
Confirmation Fraud Examples
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Ahold Fraud
Sara Lee Foods ‒ Sales Mgr.
Con Agra Foods – Account Mgr.
Sara Lee Bakery Group – Sales Mgr.
Sugar Foods – VP of Sales
Koch Poultry – Owner
Heritage Bag – CEO
Citrus World – Account Mgr.
Hunt-Wesson Foodservice – VP Bus. Dev.
Confirmation Fraud Examples
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Vendor: Just for Feet
Responder: Timothy R. McCool, Director of Sales
Apparel for Adidas America
Plead: Guilty
• McCool an audit confirmation letter, requesting that
McCool, on behalf of Adidas, confirm to Deloitte & Touche that Adidas actually owed JFF $2.2 million for advertising
that ran or merchandise sold prior to January 30, 1999.
• McCool, knowing that the information contained in the
audit confirmation letter was false, signed it and sent it to Deloitte & Touche.
SEC vs. Adidas
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Vendor: The North Face
Responders: Two Customers
• Todd Katz, Vice President of Sales and Richard Tyrer, Vice
President of Western Region Sales persuaded a customer
of the company to lie to the internal investigators and
senior management, and to sign false documents,
knowing that the information would be relied upon by
the auditors.
• SEC noted in its settlement.
• Tyrer and Katz persuaded a second customer to sign a false confirmation letter, which also was relied upon by
the auditors.
SEC vs. North Face
Copyright 2015, Confirmation.com
Vendor: Kmart
Responder: Darrell Edquist, Eastman Kodak Vice
President – Kmart Account
Circumstances:
1) Wal-Mart recently signed a long-term contract with Fuji,
Kodak’s archrival. Therefore, maintaining good relations with Kmart was top priority.
2) Kmart threaten to sell exclusive rights to Fuji for end of aisle
displays.
3) Edquist was newly in charge of the Kmart relationship.
Action: Signed a false $7million confirmation
34
SEC vs. Eastman Kodak
Copyright 2015, Confirmation.com
Vendor representatives participated in:
False or misleading third party confirmations to Kmart's
independent auditor, PricewaterhouseCoopers LLP.
As a result, Kmart's net income for the fourth quarter and
fiscal year ended January 31, 2001, was overstated by approximately $24 million or 10 percent, as originally
reported. The company restated its financial statements
after filing for bankruptcy to correct these and other
accounting errors.
35
SEC vs. Eastman Kodak
Copyright 2015, Confirmation.com
Vendor: Kmart
Responder: David C. Kirkpatrick, Coca Cola National Director of Sales – Kmart Account
Circumstances:
1) Kmart contacted Kirkpatrick and asked for a favor.
2) Kmart offered additional sales and promotional activities in return.
3) Kmart agreed to sell targeted amounts of Coke
throughout the year
Action: Signed a false third-party confirmation letter pulling forward $3 million worth of allowances.
36
SEC vs. Coca-Cola
Copyright 2015, Confirmation.com
Vendor: Kmart
Responder: David M. Bixler, Pepsi-Cola National
Sales Director – Kmart Beverage Acct
Circumstances:
1) Kmart called and pressured Bixler, who initially
resisted.
2) Kmart threatened to give an additional 10 million cases of business to Coca-Cola.
3) Kmart threatened to break the Pepsi contract.
Action: Initially was reluctant to sign the confirmation in writing.
Instead, he met with PwC and falsely confirmed $3 million worth of allowances verbally.
37
SEC vs. Pepsi-Cola
Copyright 2015, Confirmation.com
Vendor: Kmart
Responder: Thomas L. Taylor, Frito-Lay Director of Sales – Kmart Snack Account
Circumstances:
1) Kmart asked for Taylor’s help.
2) Kmart agreed to favorable placement of Frito-Lay products.
Action: Signed forms that falsely pulled forward $2.8
million.
38
SEC vs. Frito-Lay
Copyright 2015, Confirmation.com
Vendor: Ahold/U.S. Foodservice
Timeframe: 2 Year Period, 2001 & 2002
Fraud: $700+ million of fake revenue
39
Ahold/U.S. Foodservice
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Responders
1. Carl A. Allen – CEO, Heritage Bag
2. Donald Childers – Sales Mgr., Sara Lee Food
3. John Crowder – Account Mgr., Con Agra Foods-
Poultry Group
4. Chris Jakubek – Sales Mgr., Sara Lee Bakery Group
5. John King – Independent Food Broker
6. Steve LeBarron – Independent Food Broker
7. Patrick Penderghast – Dir. of Corporate & National
Accounts
40
Ahold/U.S. Foodservice
Copyright 2015, Confirmation.com
Responders
8. Frank Riggio – VP for Corporate Accounts
9. Richard Vecchia – VPof Sales, Sugar Foods
10.Gary Bell – Business Dev. Hunt-Wesson Foodservice
11.Anthony Holoman – Sales Rep. C.F. Sauer Foods
12.Joseph Grendys – Owner, Koch Poultry
13.Michael Smith – Corporate Accounts, Citrus World
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Ahold/U.S. Foodservice
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• Aided and abetted a massive financial fraud by
signing and returning materially false audit
confirmations sent to them by the auditors of the U.S.
Foodservice, Inc. subsidiary of Royal Ahold
(Koninklijke Ahold N.V.).
• U.S. Foodservice personnel contacted vendors and
urged them to sign and return the false confirmation letters. In some cases U.S. Foodservice pressured the
vendors; in other cases they provided side letters to
the vendors assuring the vendors that they did not
owe U.S. Foodservice the amounts reflected as
outstanding in the confirmation letters.
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Ahold/U.S. Foodservice
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• Each of the individuals aided and abetted the
fraud by signing and sending to the company's
independent auditors confirmation letters that they
knew materially overstated the amounts of
promotional allowance income paid or owed to
U.S. Foodservice. The amounts overstated in the
confirmations were often inflated by millions of
dollars and by more than 100 percent.
43
Ahold/U.S. Foodservice
Copyright 2015, Confirmation.com
Between 2001 – 2011…
U.S.-Listed Chinese
Companies Cost
Investors
~$18 billion
Copyright 2015, Confirmation.com
Alibaba IPO
• Largest e-commerce company in the world
• In 2013, Alibaba had $248 billion in sales –
more than eBay and Amazon combined.
Copyright 2015, Confirmation.com
• Reignites debate over Chinese listings in
the U.S.
• Biggest challenges with Alibaba’s IPO:
– SECs decision to ban the Chinese affiliates
of the world’s largest accounting firms from
operating in the U.S. for six months
– Making sure everything runs smoothly
between the SEC, PCAOB and External
Auditors.
Alibaba IPO
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• Prompt a new wave of listings from China
• Chinese companies listed on the U.S. Stock Exchange don’t undergo the same scrutiny
because the SEC and PCAOB don’t have
access to the work files of the audit
companies in China
• Fraudsters waiting to capitalize
• Could see a second round of frauds like we
saw in 2009, 2010 and 2011.
Alibaba IPO
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• Analysts value Alibaba at $200 billion
• Biggest IPO in internet history.
Alibaba IPO
Copyright 2015, Confirmation.com
Creating a Fraudulent − Legitimate Street Address is Easy: UPS Store Brochure
Fake Address
51 Copyright 2015, Confirmation.com
Illegitimate Website Ownership Information on WhoIs Fake Website
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• New: legal confirmations
• More than 60 confirmation types – cash,
debt, AR, AP, EBP, investments and more
• Global network of over 1,000 financial
institutions
• Security-assured platform
– SOC 1, 2 & 3
– ISO 27001
– TRUSTe
Helping Auditors Control the Process and Save Time
Confirmation.com
69 Copyright 2015, Confirmation.com
• Accounting Today’s 2013 Top New
Audit Product
• Ranked #169 in 2011 Inc. 500 List
• 2011Award for Best Audit Service
• 2010 Reader’s Choice Award The
CPA Technology Advisor
Exclusively Endorsed by:
An Award-Winning Solution
Confirmation.com
70 Copyright 2015, Confirmation.com
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