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 tom@macpa.org