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TRANSCRIPT
Financial RestatementTrends in the United States: 2003-2012
February 26, 2016
This document is the proprietary and confidential property of Resources Global Professionals.
Presenter
Dave Christensen, CPA
Managing Consultant
RGP
San Antonio, TX
210-841-6111
@usGAAPguy
As a Managing Consultant at RGP, Dave works as a part of RGP’s client service
team focusing on the delivery of multiple engagements in support of its
advisory services. He has extensive US GAAP expertise and is currently
focused on revenue recognition efforts. Prior to joining RGP in 2015, Dave
spent 9 years with United Services Automobile Association (USAA) as the
Assistant Vice President of Accounting Policy and External Reporting, 3 years
with GE Insurance as the Lead Technical Accounting Advisor, 5 years at the
National Association of Insurance Commissioners as the Statutory Accounting
Principles Manager and 6 years as an audit manager at Deloitte & Touche.
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This document is the proprietary and confidential property of Resources Global Professionals.
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Agenda
1. Review of the CAQ Report Financial Restatement
2. 2015 SEC Enforcement Actions
3. FEI Fraud Literacy Quiz
All Figures and Table for Agenda Item 1 were taken from the CAQ Report Financial
Restatement Trends in the United States: 2003-2012
The report can be downloaded here:
http://www.thecaq.org/reports-and-publications/financial-restatement-trends-in-
the-united-states-2003-2012
This document is the proprietary and confidential property of Resources Global Professionals.
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Definition of a Restatement Event
Restatement
• Corrections of errors in GAAP financial statements filed with the SEC
August 2004 – SEC Rule 4.02
• If the company or auditors conclude that “the company’s previously issued
financial statement … no longer should be relied upon because of an error in such
statements”
• Big R
Non Rule 4.02 Filings
• Unreliable disclosure
• Financial statement misclassification
• Cash flow statement errors
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Events Affecting Restatement Activity
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Restatement Announcements
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Restatement by Issue
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Restatement by Issue
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Restatement by Accounting Issue Severity
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Restatement of Restatement on Income
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Industry and Accounting Issue Severity
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Restatement – Company Average Assets
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SEC Enforcement – 2015
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SEC Enforcement – Notable 2015 Cases
May 2015
• ITT Educational Services
• Charges filed
• Used off balance sheet structures for private label student loans
• Didn’t recognize or disclose guaranty arrangements
• Made payments to delinquent student borrower accounts to keep them from
defaulting and triggering guarantees
Feb 2015
• Broadwind Energy
• $1.7m penalty
• Issued an S-1 and went public then recognized a $58m impairment charge to
certain intangible assets
• Privately shared the information with auditors, bankers and lender
Jan 2015
• UBS Securities
• $14.4m settlement - $12m penalty
• Allowed certain investors to place orders in increments of < $.01 in its Dark Pool
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SEC Enforcement – Notable 2015 Cases
June 2015
• Computer Sciences Corporation
• $190m penalty
• Used proposed contract amendments in an accounting model to avoid penalties
because it was unable to meet certain deadlines
• Cookie jar reserves
June 2015
• KKR
• $30m settlement - $10m penalty
• Did not allocate $338m in broken deal expenses to its flagship private equity funds
May 2015
• Deutsche Bank AG
• $55m penalty
• Overvalued a portfolio of derivatives consisting of “Leveraged Super Senior” trades
through which the bank purchased protection against credit default losses
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SEC Enforcement – Notable 2015 Cases
August 2015
• Edward Jones
• $20m penalty
• Instead of offering new municipal bonds to its customers at their “initial offering
price”, Edward Jones put them into their own portfolio and resold them as new
offerings at a higher price
• Customers paid an aggregate of $4.6m more than they should have
August 2015
• BNY Mellon
• FCPA $14.8m settlement - $5m penalty
• Provided internships to family members of foreign officials affiliated with a Middle
Eastern Sovereign Wealth Fund – circumventing their own hiring practices
July 2015
• Deloitte & Touche
• $1m fine
• Violated independence rules by not disclosing relationship with Deloitte Consulting
at ALPS Fund Services
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SEC Enforcement – Notable 2015 Cases
September 2015
• MusclePharm
• $700k penalty
• Didn’t disclose perks to CEO - $224k paid for personal auto, clothes, meals, a golf
club membership and private jet use
August 2015
• Miller Energy Resources
• Charges filed
• Overstated the value of certain Alaskan properties by not using fair value standards
and double counting fixed assets
• Reported value of $480m should have been stated at $80m
September 2015
• BankRate
• $15m penalty
• Managed earnings expectations through the use of management directed on top
adjustments with little to no support
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SEC Enforcement – Notable 2015 Cases
September 2015
• KIT Digital
• Charges filed
• Used own $ to make it look like customer receivables were being paid
• Added $7.85m in cash consideration to an acquisition with a secret
understanding that no cash would be paid – the money was actual wired to
third parties so at least $5m was returned to KIT as customer payments
September 2015
• Trinity Capital
• $1.5m penalty
• Misstated in ALLL by not downgrading trouble loans, extending credit to troubled
borrowers and ignore underwater appraisals
• 2011 reported income $14.9m – actual loss of $24.6m
September 2015
• BDO
• $2.1m fine
• BDO issued an unqualified audit opinion on General Employment after
withdrawing a letter to the client questioning an unsupported transaction
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SEC Enforcement – Notable 2015 Cases
December 2015
• Assisted Living Concepts
• Charges filed
• Created phony patients in the calculation to lessor in order to avoid minimum lease
occupancy minimums and future penalties
February 2016
• Monsanto
• $80m penalty
• In 2009, Monsanto extended generous rebate programs on its product Roundup.
The program significantly raised sales of Roundup in 2009
• Costs of the rebate program were not recognized until 2010
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Detecting Fraud – Internal Audit Resources
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Fraud Literacy Quiz
According to the Association of Certified Fraud Examiners’ 2010 Report to the Nations
on Occupational Fraud and Abuse, the primary kinds of occupational fraud
(occupational or internal fraud is fraud committed by an employee against the
employer) that affect corporations and other organizations are corruption, financial
reporting fraud, and asset misappropriation. Which of these three is the most
frequent?
3. Asset Misappropriation
2. Financial Reporting Fraud
1. Corruption
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Fraud Literacy Quiz
According to the 2010 COSO Fraud Report, the most common motivations for financial
statement fraud include:
3. Need to conceal deteriorating financial condition
2. Desire for personal financial gain, including maximizing bonuses
1. Need to meet short-term internal or external earnings expectations
5. All of the above
4. Both (a) and (c) are correct
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Fraud Literacy Quiz
According to the COSO framework, who has the primary responsibility for the
deterrence and detection of financial reporting fraud?
3. Management
2. Board and Audit Committee
1. Internal Audit
4. External Auditor
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Fraud Literacy Quiz
What is the single greatest risk factor related to financial reporting fraud?
3. Management override of controls
2. Dishonest personnel with access to bank accounts
1. Weak internal controls
4. Bribes from vendors
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Fraud Literacy Quiz
Fraud is discovered most frequently as a result of?
3. Tips
2. Account reconciliation
1. Internal audit
4. Management review
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Fraud Literacy Quiz
The greatest single deterrent to financial statement fraud risk is?
3. Background security checks on employees
2. A robust system of internal controls
1. A strong, ethical tone at the top
4. Discussing fraud risks with the Board and/or Audit Committee
This document is the proprietary and confidential property of Resources Global Professionals.
Questions or Comments?
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