Taken for a Ride When Trading in a Car

Under the Dodd-Frank financial reform act, the Federal Trade Commission (FTC) is now going after auto dealers that imply to customer that they have no remaining debt obligation for trade-ins. Five dealers in four states (South Dakota, North Carolina, Connecticut and West Virginia) have already agreed to settlements that order them to stop running ads promising to pay off a customer’s loan on a trade-in.

Questions:

1. Explain the practice that the FTC is putting a stop to by using the journal entries that a dealer would make.
2. What percentage of new-car shoppers in 2011 traded in a car on which they had negative equity? Develop an example of this using T-accounts from the point of view of the car owner.
3. The FTC is accepting public comments on the proposed dealer settlements until what date?

Source: Singletary, M. (2012). Trading in a car? Don’t get taken for a ride. The Washington Post, March 17 (Retrievable online at http://www.washingtonpost.com/auto-dealers-take-trade-in-owners-for-a-ride/2012/03/12/gIQAT2sRJS_story.html)

Traveling Electronically Naked

When Kenneth G. Lieberthal travels to China, he leaves his cellphone and laptop at home.  As an expert at the Brookings Institute, he instead brings “loaner” devices, which he erases before he leaves the United States and then wipes clean the minute he returns. In China, he disables Bluetooth and Wi-Fi, never lets his phone out of his sight and, in meetings, not only turns off his phone but also removes the battery, for fear his microphone could be turned on remotely. He connects to the Internet only through an encrypted, password-protected channel, and copies and pastes his password from a USB thumb drive.  While all of this sounds like a spy thriller, the threat to data security is very real!

Questions:

1. Why does Mr. Lieberthal cut and paste in his passwords from a thumb drive?

2. What was the most interesting point you found in the article that relates to controls for corporations with employees who travel abroad?

3. The article mentions that Federal lawmakers are considering bills aimed at thwarting cybertheft of trade secrets.  Discuss whether you think that this legislation could ever deter problems arising from business dealings abroad.

 

Source:

Perlroth, N. (2012). Traveling Light in a Time of Digital Thievery, Feb. 10 (Retrievable online at http://www.nytimes.com/2012/02/11/technology/electronic-security-a-worry-in-an-age-of-digital-espionage.html?hpw)

YouTube.com (2012). Laptop Anti-Theft: Travel Identity Theft (Retrievable online at http://youtu.be/5d_O-36r9X0)

No More “Neither Admit or Deny”

The Securities and Exchange Commission, in a fundamental policy shift, said Friday, January 6, that it would no longer allow defendants to say they neither admit nor deny civil fraud or insider trading charges when, at the same time, they admit to or have been convicted of criminal violations. This has been a longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting wrongdoing.

Questions
1. In what types of cases will “neither admit or deny” still be allowed?
2. According to the article, who at the SEC decides whether to use relevant facts from the criminal case in its own court documents for the civil case?
3. In November, what high-publicity case was critical of the “neither admit or deny” settlements and who was the judge that made that point?

Source:

Wyatt, E. (2012). S.E.C. Changes Policy on Firms’ Admission of Guilt, The New York Times, Jan. 6 (Retrievable online at http://www.nytimes.com/2012/01/07/business/sec-to-change-policy-on-companies-admission-of-guilt.html?_r=2&hp)

A Feel-Bad Ending: Swell the Music for Rudy

If you look up memorable quotes by Rudy Ruettiger, they exact all the inspirational feelings you can muster about “acting on your dreams.”

One of my favorites does not have such a pretty answer, now:

–If you knew you couldn’t fail, what would your goals be?

Sadly, the answer might be:

–To attempt a “pump-and-dump scheme.

Unfortunately, failure in achieving the goal, although not confirmed or denied, followed former Notre Dame football player, Daniel “Rudy” Ruettiger – the subject of the 1993 underdog movie “Rudy,” who created a sports drink company as a shell for a “classic pump-and-dump scheme.” The Securities and Exchange Commission says that the scheme bilked investors out of more than $11 million.

Questions:

1. What was the penalty imposed by the SEC settlement? Discuss whether you believe this was equitable.
2. How long did the scheme last? Look at the ACFE website (www.acfe.com). How does this compare with the length of the average pump-and-dump scheme, according to the 2010 Report to the Nation?
3. What product did the company claim to be in direct competition with? According to the article, was this the only thing that lured investors into the scheme?

Source:

Divito, N. (2011). Feel-Bad Ending for Hero of “Rudy” Movie, Courthouse News Service, Dec. 19 (Retrievable online at http://www.courthousenews.com/2011/12/19/42343.htm)

Treadway, D. (2011). Rudy Ruettiger Stock Scam: SEC Files Complaint Against Subject Of Famous Sports Movie, Huffington Post, Dec. 19 (Retrievable online at http://www.huffingtonpost.com/2011/12/19/rudy-ruettiger-stock-scam_n_1158017.html)

Accounting Error or Change in Estimate?

On November 21, 2011, independent research firm, Gradient Analytics issued a report that questioned whether j2 Global appropriately treated the measurement of annual contacts with eFax customers as a change in estimate. Based on its examination of the j2 Global’s financial disclosures, applicable accounting rules, and limited feedback from the company, Gradient reported that “…the description of the underlying circumstances sounds more like a correction of an error in prior-period financial results.” If those adjustments are appropriately considered an accounting error rather than a change in estimate, a restatement of j2 Global’s 2010 financial reports may be warranted if such errors are considered material under accounting rules.

Questions:

1. In your own words, briefly explain the difference between the treatment of an accounting error and a change in estimate and why it is important for this company.
2. Who is Sam E. Antar, the author of this blog, and why should an accountant recognize him?
3. Look at other articles in Mr. Antar’s blog and briefly summarize one that interests you.

Sources:

Antar, Sam (2011). Should j2 Global Communications Restate its 2010 Financial Reports?, November 22. (Retrievable online at http://whitecollarfraud.blogspot.com/2011/11/should-j2-global-communications-restate.html)

Michalowisc, M. (2011) Video: Biggest Accounting Mistake #2. (Retrievable online at http://www.toiletpaperentrepreneur.com/videos?tubepress_page=3)

Biggest Accounting Mistake #2 from Obsidian on Vimeo.

Fraudulent Billing Caught by Whistleblower

Maxim Healthcare Services, a privately held company with 360 offices nationwide offering home health care services, has agreed to pay about $150 million to settle civil and criminal charges over claims of false billings to Medicaid and the Department of Veterans Affairs, the Department of Justice announced Monday.

Questions:

1. Since 2009, how many current and former employees of Maxim have pleaded guilty to related felony charges?

2. What types of schemes resulted in these false billings and what types of internal controls would have prevented this?

3. What is a whistleblower and how much will this person receive with respect to this case under the federal False Claims Act?

Source:

Wilson, Duff (2011). Maxim Healthcare Pays $150 Million in Fraud Case. The New York Times, September 12 (Retrievable online at http://prescriptions.blogs.nytimes.com/2011/09/12/maxim-healthcare-pays-150-million-in-fraud-case/)

The Greedy Boyfriend

This week an action was filed by the SEC against Toby Scammell.  The filing centers on the acquisition of Marvel Entertainment, Inc. by the Walt Disney Company, which was announced on August 31, 2009. Prior to the acquisition, Mr. Scammell lived with his girlfriend in Los Angeles. During that period she was an extern at Disney assigned to work on the Marvel acquisition. She worked long hours during the summer of 2009 and periodically discussed the project in general terms with Mr. Scammel but did not reveal the name of the company. Frequently she worked from home where there were papers about the deal. She was aware of the announcement date for the deal and the $50 price. Mr. Scammel had access to her papers and Blackberry. During one conversation, she suggested that the project would be done shortly after Labor Day. Scammel purchased call options on Marvel weeks before the deal and sold them for a 3,000 percent return.

Questions:

1. Why was the action filed against Toby and not his girlfriend? Discuss your answer in terms of the fraud triangle.

2.  What were some of the red flags used by the SEC and mentioned in the article to pursue this action?

3.  What is the name for this type of fraud? What is the potential punishment for this fraud?

Source:

Staff. (2011). Fund manager charged as Marvel insider trader, Thomson Reuters News & Insight, Aug 11 (Retrievable online at  http://newsandinsight.thomsonreuters.com/Securities/News/2011/08_-_August/Fund_manager_charged_as_Marvel_insider_trader/)

Barry Minkow UPDATE

Barry Minkow, a sixteen year old wonder-boy of Wall Street in 1983 created ZZZ Best as a carpet cleaning and later insurance restoration business.  He took the company public in 1986, making him the youngest CEO of a public company and had a net worth exceeding $100 million at age 21.  The only problem was that these millions were part of a fraud, with the boy-wonder indicted in 1988 for various counts of securities fraud, mail fraud, tax evasion, and credit card fraud.

Sentenced to 25 years in prison plus restitution, Minkow was released in 1995.  Upon release he started an anti-fraud business and assisted the FBI and SEC in capturing white collar criminals.  He also became a senior pastor at San Diego’s Community Bible Church and appeared to have redeemed himself. 

However, he recently was accused of securities fraud (specifically insider trading) again involving his dealings with Lennar, a construction company.  He pleaded guilty and his sentencing was to take place on June 16, but was postponed while the judge reviews his objections to the pre-sentence investigation report.    

Questions:

1.  What is a “presentence investigation report”?  Who can waive this in a fraud trial and why?  Find an example by Googling the terms “presentence investigation report” and “fraud.”

2. What were Minkow’s objections?

3. Which of these, if any, do you believe have relevance to his sentencing? Discuss.

 

Source:

Catanach, A.H. and J.E. Ketz (2010). Update on Barry Minkow’s Sentencing, Grumpy Old Accountants, June 27 (Retrievable only at http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/201).

 

Fraud in Medicare Part D

Crooks are taking advantage of lax oversight in Medicare’s Part D prescription-drug program to obtain highly addictive drugs including oxycodone, Ritalin, and methadone, according to results of a federal investigation. Pharmacies and other Medicare contractors are supposed to enter in a form a number that identifies prescribers. But in many cases, that information is being left blank or assigned a dummy number, the report found. The missing information doesn’t always indicate fraud and could include clerical errors, but without prescriber identifiers, it’s hard for investigators to determine.

Questions:

1.     What types of overrides of internal controls are allowing the situation mentioned in the article to happen? What types of overrides of internal controls are allowing the situation mentioned in the video to happen?

 2. The article mentioned that “the CMS paid $20.6 million for 228,000 prescriptions for so-called Schedule II drugs with invalid prescriber IDs in 2007.”  What does this work out as the average price per prescription?

 3. How do you think that pharmacies would record in their accounting records the prescriptions that they fill on Medicare D?

 4. What types of costs do the problems mentioned in the video result in for taxpayers? What types of costs do the problems mentioned in the article result in for taxpayers?

5. What recommendations would you make to eliminate either of these two fraudulent issues related to Medicare Part D? Explain.

Sources:

Kennedy, K. (2011) Lax scrutiny of Medicare Part D tied to drug fraud, The Philadelphia Inquirer-Digital, Feb. 12 (Retrievable online at http://www.philly.com/philly/business/116045359.html)

Kavilanz, Parija (2011). Drug Shortages at All-Time High, CNN.com, June 10 ((Retrievable online at http://money.cnn.com/2011/06/10/news/economy/drug_shortages_fda/index.htm)

Dwelling House is no more

A Pittsburgh woman has pleaded guilty to bank fraud and money laundering for taking advantage of an online glitch that enabled her to make $1.1 million in overdraft withdrawals. Forty-six-year-old Jammie Harris learned of the glitch from another woman. That woman was indicted in January on charges that she stole more than $900,000 from Dwelling House Savings and Loan. Unfortunately, Dwelling House closed down in 2009 because it couldn’t absorb $3 million in fraud losses.

Questions:

1. How was the bank able to recover about $1 million of the stolen funds in 2009?

2. What was the mission of the savings and loan?

3. Prior to the shutdown of Dwelling House, what service was one of the regulator’s major concerns over? Discuss.

4.  In terms of accounting/finance, explain what led to the downfall of Dwelling House.

Sources:

Associated Press. (2011).Woman Admits Million-Dollar Bank Ripoff, WTAE.com, April 6 (Retrievable online at http://www.wtae.com/news/27455532/detail.html)

Grant, Tim. (2009). Dwelling House Savings’ deadline to recover $3 million nears. Pittsburgh Post- Gazette, June 28 (Retrievable online at http://www.post-gazette.com/pg/09179/980186-28.stm).

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