2010 2010 –– A New Decade... A New Decade... New Directions? Or More of the Same?New Directions? Or More of the Same?

Stephen G. Austin, CPA, MBAFirm Managing Partner, Swenson Advisors, LLP

May 14, 20107:00 am – 7:50 am

CORPORATE SCANDALS - ETHICS

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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 GeorgiaAudit Committee Chairman - AvanirPharmaceuticals and two non-profit organizationsServes on 20 Boards and related CommitteesAuthor of “Rise of the New Ethics Class”

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• PCAOB registered firm• Offices in San Diego, Riverside County and Hong Kong• SEC/SOX - audit, tax, compliance, Asia Pacific compliance

services, IFRS consulting• SOX consulting services with SWENTRACKTM automated web

based solutions• #2 Top accounting firm in Riverside County - 2009• Members of Integra International - 154 offices, 53 countries• Focus on “Tone at the Top” and Ethics Compliance

www.SwensonAdvisors.com

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Good Morning, Good Morning, Corporate America!Corporate America!

How are we doing How are we doing in the Spring of a New Decade? in the Spring of a New Decade?

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We Just Caught Our Breath From...

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In the Last 18 Months, We Have Been Faced With:

“Biggest Recession” since the “Great Depression”

Dell Computer – “Wells Notices”

Ponzi schemes (Madoff, Sanford, and many others)

SEC enforcement failures

“CFO Letters” (from the SEC) – Repo 105 transactions

Trillions in U.S. debt

Record commercial property vacancies

WaMu fraud allegations

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100 Years of Cause and Effect100 Years of Cause and Effect

1970 – 1980Student Marketing/Equity Funding/ZZZZ Best

1977 – 1978The Cohen Commission

1977AICPA – SEC practice section

1972 Foreign Corrupt Practices Act

1970sSharp rise in financial fraud, illegal corporate acts, bribes, and kickbacks

1950 – 1960Periods of economic stability

Established - 1930sSecurities and Exchange Commission

1929Stock market crash

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100 Years of Cause and Effect, Cont.100 Years of Cause and Effect, Cont.

2002 – 2005Enron, Worldcom, Adelphia, Peregrine, Quest, HealthSouth, Tyco

2002SOX and the PCAOB established

2001 – 2002Enron collapses - Arthur Andersen fails

1996Tort Reform/Class action lawsuits

1985COSO established

1980s – 1990sRapid rise in personal wealth

1980s – 2000Era of rapid technology growth

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100 Years of Cause/Effect, Cont.100 Years of Cause/Effect, Cont.Madoff, Stanford, Subprime Mortgages, Complex Derivatives, Asian Corruption

What’s next?

(Note: Enron – the Broadway play opened April 8th)

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The Meltdown Continues...

Fraud and the Financial CrisisAIG bailouts and SOX Material Weakness disclosuresLehman investigationsBig bank bailoutsRecord unemployment ratesTrillions and trillions in U.S. debtOn its way to $15-$20 trillion (150% of GDP)?Global financial recession

What is the What is the common theme?common theme?

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“Short Answer “

1. Trading “short-term gain” for “long-term value”

2. Ignoring the “Elephant in the Room”

1. Subprime mortgages

2. Material weaknesses

3. Excessive rates on return

4. Trillions of dollars of debt

3. Failure in personal ethics and decision making (code: greed!)

Are we Are we making any progress?making any progress?

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SOX is Eight Years Old in July, 2010 630 companies filed 674 restatements in 2009

27% decline from 2008The number of restatements peaked in 2006 with 1,795 restatements

*Report title: Financial Restatements – A Nine-Year Comparison

Published March 10, 2010

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SEC Investigations on the Rise

Top SEC officials have undertaken significant reform in the agency’s enforcement division

Robert Khuzami named SEC Enforcement Director

In 2009, the agency opened nearly 500 investigations, more than double the 2008 level

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Report of the Examiner – Lehman Brothers

Key highlights from the report ofAnton R. Valukas, Examiner

2,200 pages

$38-$50 billion of assets moved on and off the balance sheet at quarter end (REPO 105)

Materially misleading accounting

Aggressive application of FAS 140

Conducted in London (AIG)?

Colorable claims

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Lehman Brothers, Continued

Internal whistleblower raise questions

E&Y informed

SEC with offices onsite

Federal Reserve Bank with offices onsite

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Ernst & Young defends its Lehman work in letter to client

Ernst & Young defended its audit work for client Lehman Brothers in a letter sent last week by several

audit partners to the firm's key clients, and vowed to fight any legal action from regulators or creditors.

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Sample Letter Sent to Public Companies Asking for Information Related to Repurchase Agreements, Securities Lending Transactions, or Other Transactions Involving the Transfer of Financial Assets

“CFO Letters”

In March 2010, the Division of Corporation

Finance sent the following illustrative letter

to certain public companies requesting

information about repurchase agreements,

etc.

http://www.sec.gov/divisions/corpfin/guidance/cforepurchase0310.htm

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My Reading ListOn the Brink | Henry M. Paulson, Jr.

“I had come to Washington to make a difference, and we had, I thought, just saved the country – and the world – from financial catastrophe. The next day, Lehman Brothers began to collapse.”

How does Toyota fit into this picture?How does Toyota fit into this picture?

““We are not protecting our customers We are not protecting our customers by keeping this quiet,by keeping this quiet,””

wrote Irv Miller, group vice president for environment & public wrote Irv Miller, group vice president for environment & public affairs.affairs.

““The time to hide on this one is over.The time to hide on this one is over.””

Will IFRS help or hinder Will IFRS help or hinder the need for global ethics?the need for global ethics?

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Ethics Report Card2010

Financial statement fraud reduced

Fewer restatements

Stronger Internal Controls/Fewer Material Weaknesses

Public accounting firms improve due to PCAOB inspections

Ethics focus in business schools

Signs of Improvement...

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ETHICS REPORT CARD2010

Ponzi schemes

Weak credit ratings system

“Check the box” approach to ethics/compliance

Current government investigations of fraud and the financial crisis

Repo 105 transactions and more?

Global corruption in a global economy

Areas of Concern...

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My Reading ListCircle of Greed | Patrick Dillon and Carl Cannon

In a recent interview, Bill Lerach was asked:

Q: Looking back, what would you have done differently?

A: “I would not have done anything differently......I’m proud of the work we did even if I’m not proud of some of the practices that were engaged in.”

Building Building ““Tone at the TopTone at the Top””

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PILLARS INITIATIVES PHILOSOPHY

Ethics/Firm Culture "Tone at the Top"

We believe in honest and forthright business practices and compliance with all applicable laws and regulations.

We believe that ethical business practices help us to maintain credibility and a competitive edge.

Client Service On Time, Accurate, and High Quality Work

Each of our clients receive the highest level of attention and responsiveness. We seek to be a valuable

professional services firm meeting your regulatory requirements on a timely and effective basis.

Client Base "A" ClientsOur client base consists of high quality companies

which reflects an extension of the ethical and technical views of our firm.

Employees Integrity Stable - Family Focused

We strive on maintaining a company culture which promotes balanced lives and places value on professional, family and personal fullfillment.

Financial Health Zero Debt Our firm operates in a fiscally prudent manner - we believe in practicing what we preach to our clients.

Outreach/Stretch Global - Hong Kong - Integra IFRS and XBRL

We continue to increase our reach and provide advantages to our clients worldwide. As globalization

continues, the adoption of new standards will take place and our firm will be there to embrace it.

Growth Layer by Layer 10-20% Year

We take pride in the caliber of our staff and the quality of our services that we provide to our clients.

We continually seek out individuals that can bring exceptional credentials and practical experience to our firm.

Community Awareness Swenson Foundation

We believe in contibuting to the well-being of society as a good corporate citizen. The Swenson Foundation assists non-profit organizations with a focus on health, education and

religious needs.

Technology Paperless Environment

We are committed to utilizing the latest accounting and auditing technology to increase our productivity, efficiency and reduce costs. We believe it is important to conserve natural resources

to preserve our environment.

Training/Development Staying Ahead of the Curve

We are committed to educating employees through nationally accredited continuing education programs including SEC,

AICPA and PCAOB programs. In addition, we regularly present at technical seminars and

conferences locally and internationally.

Swenson Advisors’ Ethics Pillars

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Understanding the Foundations for Ethical Behavior1. The home (childhood)

2. The school (classroom)

3. Religious platform (Basis for decision-making)

4. Corporate culture/”Tone at the Top”

5. Repeat the cycle – by generation

6. Breaking the pattern – historical cycles of fraud

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How to Address our Continuing Ethics Issues

1. Changing hearts and minds vs. “check the box”

2. Establish “Ethics Pillars” in your company

3. Communicate your Ethics Pillars at least four times per year – employees, customers, vendors

4. Financially reward ethical behavior

5. Focus on long-term values

6. Enjoy the rewards of an ethical climate

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My Reading List Loving Monday | John D. Beckett

“Actually, the whole idea of work has gotten a bum rap in our Western culture. As with so many distortions from the biblical norm, we’ve come to associate work with drudgery and futility, not dignity and fulfillment.”

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Resources

Ethisphere http://ethisphere.com

Cathedral Consulting www.cathedralconsulting.com

Convene www.convenenow.com

Institute for Global Ethics www.globalethics.org

The Red Flag Group www.redflaggroup.com

Swenson Advisors, LLP www.SwensonAdvisors.com

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Contact Information

Stephen G. Austin, CPA, MBAFirm Managing PartnerSwenson Advisors, LLP

Ph: 619-237-3400steve.austin@swensonadvisors.com

:Steve Austin

San Diego | Hong Kong | MurrietaA Regional Accounting Firm with Global Outreach

www.SwensonAdvisors.com