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Presentation on Fraud & Coporate Scandals and the impact on accounting profession to the beta alpha psi and IMA accounting students at Salsibury University in Maryland.
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FraudPresented to:
Salisbury UniversityBeta Alpha PsiInstitute of Management Accountants
Tom Hood, CPA.CITPCEO
Maryland Association of CPAsMarch 25, 2009
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-MichiganCommenting 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
"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
Enron
Worldcom
Bernard Ebbers convicted of $11 billion fraud – sentenced to 25 years in prisonScott Sullivan CFO got five years
"A business run with character and integrity will receive rewards from the market," Kansas writes. "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
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 prisonMark Swartz CFO got five years
Tyco
Other Corporate Scandals & Accounting Frauds
Enron – WorldCom Era• Adelphia - Cable• Rite Aid – Drug stores• HealthSouth – Health• AOL Time Warner• Xerox• Bristol-Myers-Squibb
Classic Cases• Equity Funding – (Insurance &
Mutual Funds) 1973• ZZZZ Best – (Carpet Cleaning &
Restoration) - Mark Minkow - 1984• ESM Government Securities – 1985• Lincoln Savings & Loan - Charles
Keating – CEO - 1989
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
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
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
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 Chairman
500 convictions or guilty pleas 28 were CEOs
July 9th, 2002Bush and SEC established Corporate Fraud Task Force
September 2005
11
How & Why
The Fraud Triangle
Then : December, 2001 Now : December, 2008
A Tale of Two Frauds
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
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
Bernard MadoffLaw 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 billionFacing 150 years in prison
Madoff’s auditor
David Friehling, CPA faces 105 years in prisonFor issuing false audit reports
• Sole Practitioner• Accused of issuing audits of Madoff Securities• Lied on AICPA membership renewal about peer review
Satyam + PWC
Ramalinga Raju – CEO created $40 billion in fake billing and cash PWC auditors missed cash accounts?
What is under the CPA Profession?
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
SECFASB FASB IASB
IFRS
PCAOB AICPAASB IAASB
AICPAPEEC
AICPAPEEC IFAC
Public Company Private Company Int’l Company
FinancialReporting
Attest PerformanceStandards
Code of Conduct
Another View
State Oversight & Enforcement of CPA LicenseCPALicensure
MD ComptrollerMD Comptroller
CAQ
US Treasury
MD Comptroller
Courtesy of the Maryland Association of CPAs – 2008 edition Drawing by Carol Kirwan, CPA
Reforms – Round 2What will the new normal look like?
Timothy Geithner,Secretary of the
Treasury
Mary Schapiro,SEC Chief
Paul Volcker,Chair, Economic Recovery
Advisory Board
Gary Gensler,Chair, Commodity Futures
Trading Commission
Ben Bernanke,Chair, Federal Reserve Board
Sheila Bair,Chair, FDIC
The Obama CabinetThe year of the REGULATOR
Massive Changes in our Regulatory Structure
First PCAOB now FAOB?
New 5 member oversight board proposed by Congress – March 6th, 2009
Fair Value Accounting under fire?
7 Steps to Greater Ethical Behavior
1. Avoid Conflicts of Interest2. Stand Up for What You
Believe is Right3. Support Others Who
Speak Up4. Disclose, Disclose, Disclose5. Carry a Big Stick6. Use Punishment Sparingly7. 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
Complexity & Risk
Source: Wired magazine 17.03 March, 2009
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."
Source: Wired magazine 17.03 March, 2009
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
Transparency Now! – A Wired Manifesto
Source: Wired magazine 17.03 March, 2009
The Whistleblowers
“All that is necessary for evil to triumph is for good men to do
nothing.” – Edmund Burke
Harry Markopolis – MadoffSherron Watkins – EnronCynthia Cooper - WorldCom
What you can do?• Publicity Test• Conscience Test• Parent Perspective• Role Model Test• Universality Test• Golden Rule
Source: Ethics in the Workplace by Michael Josephson
“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
“The laws and professional standards
represent the floor—the minimum. We should reach for the ceiling.”
David M. Walker, CPAComptroller General of the United States
Tom Hood, CPA.CITPCEO
Maryland Association of CPAsBusiness Learning Institute
(443) 632-2301E-mail [email protected]