Not too squeaky clean

A suit called GSP Finance LLC v. KPMG LLC was filed on March 29 with GPS alleging that KPMG “was well aware of the desperate financial condition of Hicks Sports” — specifically, the Texas Rangers and Dallas Stars — when it was hired to conduct the ’08 audit. The suit says Hicks Sports Group suffered losses of $113 million in 2002, $67.8 million in ’03 and $95 million in ’04. Till the Stars are sold, it won’t be clear exactly how much Hicks’s lenders have lost.

Questions:

1. What issues are in question regarding the clean audit?
2. What was the related party issue that is coming to light?
3. Identify all the financial statement users impacted by this clean opinion.

Source:
Wilonsky, R. (2011)KPMG Sued For Giving Tom Hicks “Clean Audit” a Year Before $525-Million Loan Default, March 30 (Retrieved at http://blogs.dallasobserver.com/unfairpark/2011/03/kpmg_sued_for_giving_tom_hicks_clean_audit_a_year_before_525-million_loan_default.php)

Where’s the paper trail?

As more and more Americans face mortgage foreclosure, banks’ crucial ownership documents for the properties are often unclear and are sometimes even bogus, a condition that’s causing lawsuits and hampering an already weak housing market. Docx, and companies like it, were recreating missing mortgage assignments for the banks and providing the “legally required signatures” of bank vice presidents and notaries, signed by minimum wage employees that knew they were signing someone’s   names other than their own.

Docx was owned by a company called LPS, a $2 billion firm that calls itself the nation’s leading provider of mortgage processing services. LPS told us that when it found out about the phony signatures in 2009 being signed in a boiler room environment, it shut Docx down. The FBI and several states are investigating.

Questions:

1.  Based on the article and video, do you think this is a case of fraud?  Discuss in terms of intent.

2. What are all of the costs you think will be litigated in this situation? What was missing in the system that allowed this to happen? Discuss.

3.  Assuming this will be litigated and you are asked to write a financial footnote disclosure regarding contingent litigation against LPS, what would you include? Discuss.

Source:

CBS video. (2011) The next housing shock, April 3(Retrievable online at http://www.cbsnews.com/video/watch/?id=7361572n&tag=related;photovideo)

Anderson, R.  and D. Ruetenik (2011) Mortgage Paperwork Mess: Next Housing Shock?, CBSNews.com, April 1 (Retreivable online at http://www.cbsnews.com/stories/2011/04/01/60minutes/main20049646.shtml?tag=contentMain;contentBody)

The Accountant Did It

A 43-year-old CPA who volunteered to do the books for the Libertyville Boys Club turned himself in after $66,700 of the not-for profit group’s youth football program funds were missing. Jacobsen had been volunteering his services to the club since February 2009 as the treasurer of the club based at Butler Lake Park, Illinois. Libertyville police said Jacobsen had exclusive power to collect monies and pay bills related to the programs. In March, board members became suspicious after Jacobsen refused to bring the financial records to monthly meetings. He finally did so in October.

Questions:
1. What basic premise of internal controls was violated?
2. Why do you think that not-for-profit organizations are so susceptible to frauds like this one?
3. Suggest two or three ways that the Club could have prevented this event.

Source:
News-Sun Staff. (2011). Accountant Accused of Stealing From Libertyville Boys Club. January 8 (Retrievable online at http://newssun.suntimes.com/news/3207508-418/libertyville-club-jacobsen-police-66700.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)

Cooking the Books for Lehman?

N.Y. Attorney General Cuomo filed charges against Ernst & Young on December 21, 2010, alleging that the firm helped Wall Street Investment bank Lehman Brothers conceal its deteriorating financial condition before the bank’s historic collapse in the fall of 2008.  The civil lawsuit, which seeks more than $150 million, is the first law enforcement action to stem from Lehman’s failure. The bankruptcy of the firm, which was an important cog in the machinery of the capital markets, caused immense collateral damage. The allegations center on sham trades that allowed Lehman to window-dress its balance sheet before filing quarterly financial reports, making it seem like it had more cash than it actually did. Cuomo’s lawsuit aims to hold accountable one of the less-mentioned players in the saga – Ernst & Young, Lehman’s auditor, which allegedly turned a blind eye to the accounting machinations. The case does not resolve the fate of senior Lehman executives, such as former chief executive Richard Fuld, who have been under investigation by the Securities and Exchange Commission.

Questions:

1.  Explain the boomerang trade referred to as “Repo 105″ that is at the heart of the allegations.

2.  Explain leverage and what impact it played in the scenario.

3. Based on what you know about the Lehman situation, do you think they should have been included in the government bailout?  Why or why not?

4.  Read Matthew Lee’s letter  and critique it. Do you agree with the way he handled the situation as a whistleblower?  Based on what you know, would you have handled it any differently? 

Source:

Goldfarb, Zachary A. (2010). N.Y. Attorney General Cuomo Sues Ernst and Young, alleging Lehman Accounting Fraud, The Washington Post, December 22 (Retrievable online at http://www.washingtonpost.com/wp-dyn/content/article/2010/12/21/AR2010122103973.html?sid=ST2010122106931)

Lee, Matthew. (2010). The Lehman Whistleblower Letter Everyone Ignored. Hereisthecity.com, December 21, 2010 (Retrievable online at http://news.hereisthecity.com/news/business_news/10215.cntns)  

The Alyona Show,  The Next Arthur Andersen?, Dec. 22, 2010. (Retrievable at http://www.youtube.com/watch?v=5B_esTl9FS8&feature=related) 

Return Fraud

Return fraud costs the retail industry billions of dollars in lost revenues every year. The growing crime is expected to cost retail stores across the nation an estimated $3.7 billion this holiday shopping season alone, according to the National Retail Federation. If that estimate holds true, it will represent 35 percent increase over last year’s $2.74 billion loss for the holiday period.
Questions:

1. What is wardrobing? What factors do you think increase this type of fraud? Discuss.
2. What is price arbitrage? What factors do you think increase this type of fraud? Discuss.
3. What internal controls do you think are the most effective in combating return fraud? Discuss in terms of costs and benefits.  Why don’t all retailers have a no return policy to combat this fraud?

Source:
CNN.com Video. (2010). Fake returns: A $14 Billion Crime, December 18 (Retrievable at http://www.cnn.com/video).
Turner, Kevin. (2010). Merchants Are Watching For Return Fraud. Jacksonville Florida Times-Union, December 19 (Retrievable online at http://jacksonville.com/business/2010-12-19/story/merchants-are-watching-return-fraud)
Six.Wise.com Staff. (2007). The Biggest Crime You’ve Never Heard Of—Return Fraud—And How The Criminals Do It, Six.Wise.Com Newsletter, January 7 (Retrievable online at http://www.sixwise.com/newsletters/07/01/17/the-biggest-crime-youve-never-heard-of—-return-fraud—-and-how-the-criminals-do-it.htm)

Conflict of Interest Leading to a Fraud Investigation

Joel Bondy, executive director of the Office of Payroll Administration in New York City since April 2004, is at the heart of an alleged $80 million information technology fraud scheme. He has been suspended without pay since December 16, 2010, by Mayor Michael R. Bloomberg and Comptroller John C. Liu, pending investigation. Federal prosecutors have alleged a connection between Mr. Bondy and IT several consultants in a scheme that manipulated the city into steering expensive contracts to businesses that they controlled, and of redirecting some of that money for their own enrichment.

Questions:
1. What controls would have helped prevent the alleged allegations?
2. Why is this type of fraud among the most difficult to prevent?
3.  Look at the ACFE 2010 Report to the Nations on Occupational Fraud and Abuse (See http://www.acfe.com/rttn/rttn-2010.pdf).  If fraud is proven, did this fraud span a period less than average, about average, or longer than average?
 
Source:
Chen, D.W. and J. Eligon. (2010). Director of City Agency at Center of Fraud Case Is Suspended. The New York Times, December 16 (Retrievable online at http://www.nytimes.com/2010/12/17/nyregion/17citytime.html?_r=1&nl=nyregion&adxnnl=1&emc=ura1&adxnnlx=1292770876-WsWnBf5l9P1Q04+cdf0vHg)

Did Bernie Madoff Have Help?

HSBC prolonged disgraced financier Bernard Madoff’s ability to burn investors by “engineering a labyrinth” of international sources of funding for his epic Ponzi scheme, a court-appointed trustee alleged Sunday.

Trustee Irving Picard announced a lawsuit in federal bankruptcy court in Manhattan that seeks to recover $9 billion in illicit earnings and damages from the Britain-based bank.

The suit alleges that HSBC ignored warnings from its own accountants that Madoff’s phenomenal investment record was suspect.

Questions:

1. What is Irving Picard’s role in this scandal?

2. What is Irving Picard’s background and why is this important from an accounting standpoint?

3.  What is the alleged motivation of HSBC in this scandal?

Source:

Fox News Video with Robert Gray (2010). Picard Sues HSBC, December 6 (Retrievable online at

http://www.youtube.com/watch?v=cwf7UHRX0-A)

 Hays, Tom (2010). Madoff Trustee Sues HSBC for $9 Billion, HuffingtonPost.com, December 5 (Retrievable online at http://www.huffingtonpost.com/2010/12/06/madoff-trustee-sues-hsbc-_n_792365.html)

New rules for Debt-Relief Services

Starting this week, for-profit companies marketing debt-relief services over the telephone are prohibited from charging a fee before they settle or reduce a customer’s debt to the Internal Revenue Service, credit card company, or other unsecured debt. The new rule by the Federal Trade Commission covers telemarketers of for-profit debt-relief services, including credit counseling, debt settlement, and debt negotiation services. Nonprofit firms are not affected by the rule.

Questions:
1.  What is this ruling meant to prevent?  Explain this in terms of GAAP recognition of revenue.
2. Under the new ruling, providers’ fees for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled.  Assume that John Smith has 3 debts enrolled ($150,000, $450,000, and $300,000) and the company agrees to settle the debts for a charge of $1,200 for settling the debt.  When they settle the $450,000 debt according to the new ruling, how much of this fee can they collect?
3. Under the ruling, if a consumer enrolls multiple debts into one debt relief program and the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts, according to the FTC. Can you think of a possible situation where manipulation of this part of the ruling may be used by debt-relief services to gain greater fees?  If so, how do you think this can be investigated?

Source:
Staff. (2010). FTC rule prohibits debt-relief companies from collecting up-front fees. AccountingWEB, October 27. (Retrievable online at http://www.accountingweb.com/topic/tax/ftc-rule-prohibits-debt-relief-companies-collecting-front-fees)

Hiding The Truth?

Jane Buchan is a rarity on Wall Street. Not only has she built a hugely successful hedge fund investment firm but the firm is also the only one that is, on paper, owned and run by women. Unfortunately, it now appears that the firm Pacific Alternative Asset Management Company (PAAMCO) was bankrolled by some of the biggest (male) names in the business, in order to disguise aspects of the business from customers, partners and federal regulators.

Questions:
1. What is this scandal all about in terms of ill-gotten gains? (Include some red flags of fraud and/or motives to commit this type of fraud.)
2. The case centers on whether Mr. Sussman had the right to convert a $2 million loan he made to Paamco’s founding partners in 2000 into an equity stake in Paamco’s parent company. What journal entry would Mr. Sussman make for this transaction, if credible?
3. What was Mr. Sussman’s previous history with the SEC and why is this important?

Source: Creswell, Julie. (2010). A Hedge Fund Controlled By Women, So It Claimed. The New York Times, October 18 (Retrievable online at http://www.nytimes.com/2010/10/19/business/19hedge.html)

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