No single red flag may be telling, but when waving together,
speak volumes.
Slide 3
Slide 4
1.Pressure to Maintain Those Numbers 2.Fear and Silence 3.Young
Uns and a Bigger- than-Life CEO 4.Weak Board 5.Conflicts of
Interest 6.Innovation Like No Other 7.Goodness in Some Areas Atones
for Evil in Others
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1. Pressure to Maintain Those Numbers
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Pressure to Maintain Those Numbers
Slide 7
Pressure to Maintain Those Numbers Healthsouth -27 Consecutive
Quarters -Continued hype of stock -Tremendous pressure on
management to meet unrealistic revenue targets -Earnings growth
defied logic of reimbursement changes
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Pressure to Maintain Those Numbers WorldCom: Bernie Ebers- Our
goal is to be the No. 1 stock on Wall Street. Enron: Earnings
growth targets of 15-20% annually, all business units given targets
derived from working backwards from EPS forecasts Tyco: Targets of
20% annual growth. Massive earnings manipulation through
acquisitions Baptist Foundation of Arizona: 11,000 members lost
$590,000,000 in a faith-based Ponzi scheme
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Pressure to Maintain Those Numbers Most earnings manipulations
come through revenue recognition issues. Q: Are you faced with an
obsession of meeting the numbers? Q: Has long-term vision been
replaced with short-term objectives?
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1. Pressure to Maintain Those Numbers 2. Fear and Silence
Slide 11
Fear and Silence
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Healthsouth: Everyone- board members, officers, employees and
auditors were treated with a stick and a carrot Monday morning
beatings Backstabbing by the CEO Spying and blackmail by the CEO
Enron: CEO Ken Lay had a hair-trigger temper WorldCom: A rather
simplistic fraud. The less clever the fraud, the more oppressive
the culture must be because executives are asking employees to go
above and beyond the call of duty in playing dumb. Tyco: Use of Key
Employee Loan Program and Relocation Loans to intertwine employees
loyalty
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Fear and Silence Q: Is disagreeing, or just asking questions,
so unpleasant that its easier to just go along? Q: Does the culture
promote submissive attitudes? Q: Employees: Do you ever feel that
your job is on the line for simply doing whats right? Q: Auditors:
Do you receive pushback from clients on routine issues?
Slide 14
1. Pressure to Maintain Those Numbers 2. Fear and Silence 3.
Young Uns and a Bigger than Life CEO
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Young Uns and a Bigger than Life CEO
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Healthsouth: of all the companies, the officers in HS were the
youngest with the least amount of experience AIG: Hank Greenburg
& two sons Enron: Ken Lay surrounded by young uns WorldCom:
Flamboyant CEO with young officers Tyco: Dennis Kozlowskis $6000
shower curtain Adelphia: John Rigas & 12 family members Young
Uns and a Bigger Than Life CEO
Slide 17
Young Uns and a Bigger Than Life CEO United Way: William
Aramony, former CEO -Ostentatious lifestyle at the expense of
United Way - Convicted on 22 counts of fraud
Slide 18
Young Uns and a Bigger Than Life CEO Q: Does the experience and
wisdom of key employees match their responsibilities? Q: Is
management composed of Yes-Men? Q: Who is being promoted- the
Company or Executives?
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1. Pressure to Maintain Those Numbers 2. Fear and Silence 3.
Young Uns and a Bigger than Life CEO 4. Weak Board
Slide 20
Weak Board
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Healthsouth takes the prize for the board with the most
negative factors Original investors Large ISO grants Joint
investments w/ Richard Scrushy Self-dealing Common directors on
spin-offs Directors were manipulated, ridiculed, and one even
blackmailed
Slide 22
Weak Board Enron: Highly paid, significant conflicts of
interest WorldCom: Bernies Board, Loans to a director, personal
benefits, and significant stock holdings Tyco: Asleep at the wheel,
8 of 12 were current or former Tyco employees, 4 had served >10
years on board, loan programs Adelphia: Family members dominated
the board
Slide 23
Weak Board Q: Is your Board qualified to deal with the
responsibilities of the position? Q: Are they effectively
fulfilling those responsibilities?
Slide 24
1. Pressure to Maintain Those Numbers 2. Fear and Silence 3.
Young Uns and a Bigger than Life CEO 4. Weak Board 5. Conflicts of
Interest
Slide 25
Conflicts of Interest
Slide 26
Are decisions being made, or money being spent, solely for
Officers personal gain or ego?
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Conflicts of Interest Investment Firms: There are tremendous
conflicts between the research side and the sales side of the
house. Smith Barneys analyst, Jack Grubman, issued glowing reports
on Worldcom until the eve of its collapse. Smith Barney would have
earned $21,000,000 in fees had the WorldCom-Sprint merger been
approved. The housing market collapse can be heavily blamed on
conflicts of interest by lenders, appraisers, and investment firms
Conflicts in the Auditing Profession
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Conflicts of Interest Q: Are there any related party
transactions? Q: Is there any sign of self-dealing? Q: Is there an
effective conflicts policy? How do you know that its working?
Slide 29
1. Pressure to Maintain Those Numbers 2. Fear and Silence 3.
Young Uns and a Bigger than Life CEO 4. Weak Board 5. Conflicts 6.
Innovation Like No Other
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Innovation Like No Other
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Innovators actually reach a point where they begin to believe
and publicize the hype about themselves, as if repeating how
innovative they are will somehow preserve the status quo, if not
improve upon it. Healthsouth: Financial indicators were
substantially better than their competition Tenet: CEO comment
months before revelation of abusive Medicare outlier payments: Were
just better than everyone else Enron: Jeffrey Skilling - We are the
good guyswe are on the side of angels
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Innovation Like No Other Apple- They do have innovation like no
other. But they have proven themselves!
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Innovation Like No Other Q: Auditors- Are your clients falling
within the norm of the industry, or are they exceptionally strong
or weak? Why?
Slide 34
1. Pressure to Maintain Those Numbers 2. Fear and Silence 3.
Young Uns and a Bigger than Life CEO 4. Weak Board 5. Conflicts 6.
Innovation Like No Other 7. Goodness in Some Areas Atones for Evil
in Others
Slide 35
Goodness in Some Areas Atones for Evil in Others
Slide 36
Goodness in Some Areas Atones for Evil in Others
Slide 37
Goodness in Some Areas Atones for Evil in Others Watch out for
false prophets. They come to you in sheeps clothing, but inwardly
they are ferocious wolves. Matthew 7:15