Maybe he should have taken an accounting course?

Former Director Tom Wheeler is on trial, charged with several counts of fraud, misconduct in office and conspiracy. Wheeler has pleaded not guilty to the charges.  His defense focuses on his lack of experience, being a bad student in college, and not taking an accounting or law class.

Questions:

1.  Why was Mr. Wheeler charged with fraud? 

2.  From everything you have read, how do you believe he may have committed fraud or benefitted from his position? Discuss his defense.  Is it plausible?

3. Explain some of the internal controls mentioned in the case that were violated, beginning with the hiring of Mr. Wheeler.

 

Sources:

Boshart, R. (2011). Tom Wheeler wanted to leave Iowa Film Office, brother testifies. The Gazette, August 24 (Retrievable online at http://thegazette.com/2011/08/24/tom-wheeler-wanted-to-leave-iowa-film-office-brother-testifies/)

WHO-TV Staff. (2011). WHEELER TRIAL: Minnesota filmmaker Wendy Weiner Runge Testifies During Tom Wheeler’s Fraud Trial. MSNBC.com, August 24 (Retrievable online at http://www.msnbc.msn.com/id/44258762/ns/local_news-des_moines_ia/t/wheeler-trial-minnesota-filmmaker-wendy-weiner-runge-testifies-during-tom-wheelers-fraud-trial/)

KCCI.com Staff (2011). Film Office Director Talks Experience, Budgets, More. KCCI.com, August 24 (Retrievable online http:// www.kcci.com/news/28961656/detail.html)

Staff (2011). Blouin: Former film office manager not qualified. Chron.com, August 26 (Retrievable online at http://www.chron.com/news/article/Blouin-Former-film-office-manager-not-qualified-2142472.php ).

Does Embezzlement Pay?

Bradley Whitsell, chief accountant of SDN Communications in Sioux Falls, SD, pleaded guilty to mail fraud on Monday, August 22.  According to the U.S. Attorney’s office 46-year-old Whitsell used his various oversight positions to embezzle more than $392,000 over a 10 year period beginning in 2000. Whitsell could end up in prison for up to 20 years. Whitsell has agreed to pay back the $392,111.65 and will also pay for the $84,000 cost of the audit that uncovered his theft.

Questions:

1.  According to the article, what specific problems with internal controls allowed Whitsell to commit this fraud?  Also, discuss the fraud triangle as it pertains to the case in your answer.

2. Look up the most recent 2010 Report to the Nation at the Association of Fraud Examiners website.  Was the length of Mr. Whitsell’s fraud longer, shorter or about the same of the average fraud in terms of months before getting caught?  Explain.

3.  Compared to the average fraud committed by a man this age, as reported in the 2010 Report to the nation, did Mr. Whitsell steal more, less, or about the same amount of money? How does this compare to the average amount stolen by a women of the same age?  What is typically the key difference between these amounts?

Source:

Gonzalez, A. (2011). Embezzling Accountant Will Pay Back Stolen Money and Pay for Audit That Caught Him. Going Concern, August 23 (Retrievable online at http://goingconcern.com/2011/08/embezzling-accountant-will-pay-back-stolen-money-and-pay-for-the-audit-that-caught-him/ )

International Auditing Inspections

PCAOB Chairman James R. Doty sees the audit profession as being at a turning point, not just in the U.S., but globally. One of Doty’s greatest priorities is gaining access to China to conduct inspections of PCAOB-registered firms. He said that meaningful progress was made at the May 9 U.S.-China Strategic and Economic Dialogue that took place in Washington. He said it is in China’s interest as an economic power and a participant in the world economy to have the assurance that joint inspections bring to the markets.

Questions:

1. Doty led the team that represented the Board before the Supreme Court in last year’s Constitutional challenge.  Briefly explain what that was all about, why it was important, and the outcome.

2. Doty said that constituents want the audit report to go beyond the traditional binary report of either clean or qualified. What is another term for a clean audit opinion? Explain briefly what these constituents want.

3. Explain the importance of his work with China for the business field and accounting profession. Include in your answer issues about the reluctance from China.
Source:

 

Lamoreaux, M. (2011). PCAOB Set to Expand Under New Mandates, Journal of Accountancy (Retrievable online at http://www.journalofaccountancy.com/Issues/2011/Jul/20113954.htm)

Youtube video (2011). SEC Investigations Impeded.

Negotiating Down Student Loans

According to these experts, it is possible that you can negotiate down your student loans. Outstanding student loan debt is a major problem for many graduates. It is possible to negotiate with your creditors and possibly reduce or even eliminate your student loan debt. If you’re not up to the negotiations yourself, you can hire a company to negotiate with creditors on your behalf. However, if you fully intend and have the ability to pay your debt, it’s usually better to contact your creditors yourself. If you reach the stage where you can’t keep up with the repayments, it’s vital that you contact your creditors as soon as possible and explain your situation.

Questions:

1. What are the key issues to consider in the negotiations? What is the difference between consolidation and forgiveness?  From the loaning entity’s point of view, would the accounting be different for these two options?  

2.  What percentage of student loans did these experts indicate were in default?

3.  Which types of student loans did these experts suggest were easier to negotiate?

 

Source:

CNN.com Video. Negotiating Down Student Loans, July 13, 2011

Staff. (2009). Negotiate your Student Debt. Tidbits and Stuff.com, November 4, 2009 (Retrievable online at http://www.tidbitsandstuff.com/money-matters/credit-debt/82-negotiate-your-student-loan-debt/)

OK, tell me again, how is this NOT a prosecutable felony?

In late June 2004, a plant manager in charge of a Mexican plant of Tyson Foods sent a memo to his headquarters in Springdale, Arkansas about 2 women who did not work for Tyson’s but were being paid from his payroll, the equivalent of $2,700 per month (and had been for years). The women happened to be the wives of two veterinarians stationed at the plants as part of Mexico’s effort to meet high sanitary and processing standards. The veterinarians certified products as suitable for export, a step required by countries like Japan and increasingly sought after by Mexican consumers as an assurance of quality and safety for locally produced processed meats.  The purpose of the payments was “to keep the veterinarians from making problems,” according to a subsequent memo — in short, bribes. 

At headquarters, executives convened, including the president of Tyson International, the vice president for operations, and the vice president for internal audit and  evidently agreed the payments to the wives had to stop. A company lawyer said he was seeking advice on “possible exposure” from the payments, evidently referring to potential liability for maintaining fraudulent records and bribing foreign officials, which are felonies under the Foreign Corrupt Practices Act (FCPA). And then, having identified the serious ethical and legal lapses, and the need to stop the bogus payments, this group of executives “were tasked with investigating how to shift the payroll payments to the veterinarians’ wives directly to the veterinarians,” according to a subsequent statement of facts negotiated by Tyson’s lawyers and the Department of Justice.

The issue of the payments resurfaced in November 2006, and this time, Tyson  retained an outside law firm, who conducted an internal investigation and, under a government program intended to encourage voluntary disclosure of white-collar crime, turned the results over to the Justice Department and the Securities and Exchange Commission. In February 2011, the government’s investigation ended when Tyson was charged with conspiracy and violating the Foreign Corrupt Practices Act . Tyson agreed to resolve the charges with a deferred prosecution agreement in which it “admits, accepts and acknowledges” the government’s statement of facts, and paid a $4 million criminal penalty. The company paid an additional $1.2 million and settled related S.E.C. charges that it maintained false books and records and lacked the controls to prevent payments to phantom employees and government officials.

In the 23-page letter agreement between Tyson and the Department of Justice, the criminal information, and the S.E.C.’s public statement of facts all withheld names, identifying the participants only as “senior executive,” “VP International,” “VP Audit” and so on. The FCPA specifically provides for fines of up to $5 million and a prison term of up to 20 years for individuals, as well as fines of up to $25 million for companies. However, no one will be charged.

Questions:

1. Do you think this agreement without prosecution is sufficient to stop these types of ethical breaches? Discuss.

2. The article mentions that settlement costs would be passed on to the shareholders.  What types of costs would these include?

3. Where would these costs show up in the financial statements? 

4.  Research Tyson Foods on the Internet.  Do you see any other incidents that provide positive or negative evidence as to the “tone-at-the top” and the ethical environment at the company? Discuss.

Source:

Stewart, J.B. (2011) Bribery, but Nobody was Charged. The New York Times, June 24 (Retrievable online at http://www.nytimes.com/2011/06/25/business/25stewart.html?_r=1&hp)

KPMG in the News

Although KPMG LLP, one of the “Big Four” accounting firms, a former female Senior Manager, Donna Kassman, filed a $350 million class action discrimination lawsuit against the company on June 2, since the numbers tell a different story entirely. Women comprise about half of KPMG’s employees, but are conspicuously absent from the top leadership positions. The Company’s 20-member global executive team and 24-member global board each have only one female representative. Similarly, women are only 18% of all KPMG Partners compared to nearly 50% of all employees.

Questions:

1. Where is KPMG headquartered? What were the company’s global revenues for 2010?

2. What is Ms. Kassman seeking in the suit? How long had she been with the firm?

3. Do you think that Ms. Kassman or KPMG will prevail in this suit?  Explain your assumptions.

Source:

Staff (2011). Accounting Giant KPMG LLP Faces $350 Million Gender Discrimination Class Action, PRNewswire, June 2 (Retrievable online at http://www.prnewswire.com/news-releases/accounting-giant-kpmg-llp-faces-350-million-gender-discrimination-class-action-123021028.html)

Troubles for Deloitte

The American government has terminated its contract with an international accounting firm that was providing technical advice to the Afghan banking system here because of the firm’s failure to report signs of trouble at Kabul Bank, the nation’s largest financial institution.

The United States Agency for International Development ended the banking portion of a contract with the firm, Deloitte, which had staff members working as advisers to Afghanistan’s Central Bank, according to a report released Wednesday by the inspector general for the aid agency.

Questions:

1. What was the overwhelming reason for firing Deloitte?

2. Based on the article, how long had Deloitte been on this engagement?

3. Explain how the $850 million fraud was committed.

Source:

Rubin, A. J. and J. Risen. (2011). U.S. Agency Ends Accounting Firm’s Afghan Contract, The New York Times, March 17 (Retrievable online at http://www.nytimes.com/2011/03/18/world/asia/18afghan.html?_r=1&src=un&feedurl=http%3A%2F%2Fjson8.nytimes.com%2Fpages%2Fworld%2Fasia%2Findex.jsonp)

Advising an Elderly Client

Three surviving spouses of reverse mortgage borrowers filed a lawsuit today against the Department of Housing and Urban Development (HUD), alleging that the agency had abandoned long-established federal rules and violated protections for surviving spouses, with the result that the three individuals are now facing imminent foreclosure and eviction from their homes.

The case will have broad national implications, because the outcome will determine whether spouses will be able to stay in homes that are now “underwater” as a result of the housing downturn, a possibility that reverse mortgage borrowers have always paid insurance premiums to protect against.

Questions:
1. What is a reverse mortgage? Explain how they would work in terms of accounting.
2. Assume you have your own CPA firm. After reading this article, if you had an elderly client in a second marriage with a reverse mortgage, what would you advise them? Write out your advice in memo form.
3. What is the HUD rule that is at the heart of this suit? What does “underwater” mean? Summarize the basis of the suit in your own words.

Source:

AARP staff. (2011). HUD Targeted in Suit for Illegal Reverse Mortgage Foreclosure Actions, AARP Press Center Release, March 8 (Retrievable online at http://www.aarp.org/about-aarp/press-center/info-03-2011/hud_targeted_in_suit_for_illegal_reverse_mortgage_foreclosure_actions.html)

Intellectual Property Disputes

The proper valuation and management of intellectual property is an area where accountants add value to their client services.  Often companies engage accountants and other financial experts to defend both plaintiffs and defendants in intellectual property (“IP”) disputes. As this video shows, similarity in names or trademarks can be at the heart of these disputes. 

In this David versus Goliath case, a small software firm, specializing in business management and cost accounting software for bakers got tired of being confused with the popular reality show known as Cake Boss. They had been using the name since 2007, which was well before Discovery Communications, The Learning Channel’s parent company began in 2009.  After co-owners  John and Kelly Masters were ignored by Discovery communications, they filed suit to protect their trademark and in July 2010, a federal court judge in Seattle, Washington issued a temporary injunction that barred the show from using the name “Cake Boss” following the last episode of the show’s third season.  Despite a multi-million dollar investment in the show, it was found that Discovery did not even make a rudimentary attempt to make sure the name was not in use by Masters. At stake was not only the show, but sales of related merchandise.

The case was eventually settled at the end of 2010 so that  ”Cake Boss” Buddy Valastro can use the name on the show and Masters can still use it for its software and other items.   The injunctive relief in this case proved to be quite expensive.  In the end, the case serves to remind accountants and other financial experts concerned with the valuation of trademarks that performing and documenting fundamental internet searches on trademarks, trade names, etc., should be part of the due diligence process for any company.

Questions:

1. What is “reverse confusion” in an intellectual property trademark dispute? 

2. What evidence did the plaintiffs in the case present as documentation?

3. What did the Learning Channel and Discovery fail to do before beginning the show?

4. How should either company report the settlement of this litigation in their financial statements?

Source:

The case cite is Masters Software, Inc. v. Discovery Communications, Inc., No. 10-405 (W.D. Wash. July 16, 2010) (Jones, J.).

YouTube.com Cakeboss vs. Cake Boss Lawsuit – Intellectual Property Lawyer (B), World News- Hoboken Magazine, July 2010. (Retrievable online at http://www.youtube.com/watch?v=VcOUBRzmf5c)

Colaneri, K. (2010) ‘Cake Boss’ will keep his name, settles ‘amicably’ with software company. The Jersey Journal, October 22. (Retrievable online at http://www.nj.com/hobokennow/index.ssf/2010/10/cake_boss_will_keep_his_name_s.html)

2011 Prediction

According to William K Black, the FBI and the DOJ will not be likely to prosecute the elite bank officers that ran the enormous ”accounting control fraudss that drove the financial crisis. While over 1,000 elites were convicted of felonies arising from the savings and loan crisis from the 1980′s and 1990′s , there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.

Black proposes that the U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature — as well as the data on fraud and analytics are all readily available. The FBI must end its “partnership” with the MBA. Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs.

Questions:

1. According to the author, what is the four-part recipe for maximizing fraudulent accounting income in the short-term?

2. According to the author, what is the downfall of the FBI in the role of successful investigation and prosecution of accounting control fraud?

3. What are liar’s loans and what is their role in the financial crisis? 

4.  How do you see this lack of criminal prosecution affecting the accounting and finance profession? Do you agree with Black’s proposals?

Source: Black, W.K. (2010). 2011 Will Bring More de Facto Decriminalization of Elite Financial Fraud, The Huffington Post.com, December 28 (Retrievable online at http://www.huffingtonpost.com/william-k-black/the-role-of-the-criminal_b_802115.html)

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