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)

How do you lose $1.2 Billion?

Three of MF Global Holdings Ltd.’s top executives said they didn’t know what happened to as much as $1.2 billion in client funds that went missing in the days before the New York-based brokerage filed for bankruptcy. Jon S. Corzine, former chairman and chief executive officer of the broker testified in Congress that he didn’t intend to misuse as much as $1.2 billion in now-missing customer funds and that other employees of the failed brokerage oversaw the money. According to Corzine, a team of people in the cash finance and cash management divisions of the company had the authority to move customer funds from segregated accounts.

Questions:

1. Where does the bankruptcy of MF Global rank among all other U.S. bankruptcies?
2. What was the amount of the quarterly loss that MF Global reported on Sep. 30?
3. Briefly explain why regulators do not think that the auditors could find the problems in MF Global and what transactions were affected.
4. From what you can find out from research about MF Global, what were the weaknesses with the company that led to this crisis?

Source:

Brush, S. (2011) Top MF Global Execs Say They Don’t Know How Funds Went Missing, Dec. 13 (Retrievable online at http://www.bloomberg.com/news/2011-12-13/top-mf-global-execs-say-they-don-t-know-how-funds-went-missing.html)
CNN VIDEO. (2011). No Christmas for Former MF Global Client, CNN, Dec. 8 (retrievable online at www.cnn.com/videos)

Audit Firm Rotation – Coming to a Theater Near You?

On Wednesday, November 30, the Internal Market Commissioner, Michel Barnier, suggested that radical changes are needed for auditing firms. Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus “would strongly suggest that audit is not working as it should”. Under Barnier’s plan, the four top firms will have to separate audit activities from non-audit activities, such as tax and other advisory services — “to avoid all risks of conflict of interest”. It appears that the world’s top four audit firms will have to split up and rename themselves under a far-reaching draft European Union law to crack down on conflicts of interest and shortcomings highlighted by the financial crisis.

Questions:
1. Just four audit firms — Ernst & Young ERNY.UL, Deloitte DLTE.UL, KPMG KPMG.UL, and PwC PWC.UL — check the books of 85 percent of blue-chip companies in most EU states, a situation the Commission said was “in essence an oligopoly”. What is an oligopoly?
2. What does the EU plan propose to ban in relationship to loans? Explain.
3. Barnier, under pressure from some fellow commissioners, has decided to drop which part of the plan? What is the reaction by some, including BDO, an audit firm in the second tier firms?
4. What is your reaction to the proposal and the move by regulators in the U.S. to consider more auditor rotation regulations?

Source:
Jones, H. (2011). Big Four Auditors Face Breakup to Restore Trust, Reuters, Nov. 30 (Retrievable online at http://in.reuters.com/article/2011/11/30/eu-auditors-idINDEE7AT0CQ20111130)

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.

Pharma Bribery Settlements

Pfizer Inc. will pay at least $60 million to settle allegations by the U.S. government that the drugmaker paid bribes to win overseas business, according to The Wall Street Journal. The paper, citing “people familiar with the matter,” said in an article published to its website Sunday that settlements are expected to be made public by the end of the year.

Questions:

1. Under what anti-bribery act were the charges brought?
2. In general describe what Pfizer did.
3. What other large healthcare company recently settled a similar suit and for how much?
4. What was your reaction to this video, given the news in the article? Explain.

Source:
AP Staff (2011). Pfizer to Pay Tens of Millions to Settle Bribery Probe: Report. Huffington Post.com, Nov. 21 (Retrievable online at http://www.huffingtonpost.com/2011/11/21/pfizer-to-pay-tens-of-millions-bribery-probe_n_1104875.html)

MorningStar Video (2011). Why Pharma Stocks Are Set for a Long Term Growth. (Retrievable online at http://www.huffingtonpost.com/2011/11/21/pfizer-to-pay-tens-of-millions-bribery-probe_n_1104875.html)

Expensive Steaks

Fifty diners at some of the better steakhouse restaurants in New York City, including the Capital Grille, Smith & Wollensky, JoJo and Wolfgang’s Steakhouse, became victims of a scam perpetrated by seven waiters using lipstick-size electronic “skimmers” to extract data from the magnetic strips of American Express Centurion, or “black,” cards and other high- and no-limit credit cards. The waiters targeted these customers, typically because their high credit card bills would not be immediately noticed or they would typically not be alerted by card companies to any suspicious activity on their accounts. Stolen funds were used to buy and resell cases of vintage French wine, Louis Vuitton handbags, Cartier jewelry and even a Roy Lichtenstein lithograph of Marilyn Monroe.

Questions:

1.How long did this fraud last and how does it compare to the average length of time of a similar type fraud (according to the Association of Certified Fraud Examiners)? See the 2010 Report to the Nation on Occupational Fraud and Abuse at http://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/rttn-2010.pdf.

2. How much cash and merchandise were the police able to recover? How do you think this compares to what was actually stolen?

3. How long had the Secret Service been working on the case? Who does the article say the real loser in this crime is? Explain why.

Sources:

Rosenberg, N. (2011). 28 Indicted in Theft of Steakhouse Patrons’ Credit Card Data. The New York Times, Nov. 18 (Retrievable online at http://www.nytimes.com/2011/11/19/nyregion/28-indicted-in-theft-of-credit-card-data-at-steakhouses.html?_r=1&hp)

New York Post video. (2011). Steakhouse ID-theft ring, Nov. 18 (Retrievable online at http://www.youtube.com/watch?v=-pqYxZuSW34)

 

Raj Going to the Big House

Raj Rajaratnam is entering the next phase of his insider trading case. A Federal District Court judge, Richard J. Holwell, sentenced Mr. Rajaratnam to 11 years in a federal prison, and he will now try to remain out of prison as long as possible while his lawyers prepare a promised appeal. This is the longest sentence given for insider trading.

Questions:

1.  What did the Henning article mention about the Federal sentencing guidelines and the type of facility that Raj will be placed in?

2. What are the issues regarding bail for Mr. Rajaratnam?  Do you feel the time fits the crime? Discuss.

3.  How did Mr. Rajaratnam acquire his ill-gotten gains according to Lattman and during what period?

 

Sources:

Lattman, P. (2011). Galleon Chief Sentenced to 11-Year Term in Insider Case. New York Times, Oct. 13 (Retrievable online at http://dealbook.nytimes.com/2011/10/13/rajaratnam-is-sentenced-to-11-years/)

Henning, P. (2011). The Road Ahead for Raj Rajaratnam, The New York Times, Oct. 14 (Retrievable online at http://dealbook.nytimes.com/2011/10/14/the-road-ahead-for-raj-rajaratnam/)

The Cost of Financial Ignorance

In Hernando de Soto’s very interesting commentary, he expands Federal Reserve Chairman Ben Bernanke’s thoughts that the U.S. needed to “re-learn some of the lessons” that have led to success among emerging market economies. The bulk of his commentary focuses on the reliability of accounting records that guarantee or make credit trustworthy, including the deeds, titles, liens and other documentation that establish who owns what and how much, and who holds the risks.

Questions:

1. Was there any place in the article where de Soto mentioned something that sounded like the monetary unit assumption that provides a foundation for the accounting process? Were there any other assumptions or principles of accounting that he used in his commentary or could be inferred? Explain.

2. Relate de Soto’s article to the accounting equation.  Based on this what is the premise of his article?

3. Explain what de Soto means by the statement “Information on debts is passed to the ledgers of ‘special-purpose entities’ (SPEs) – think Enron, which had more than 3,000 SPEs — or swept into illegible footnotes. “   What are SPEs? Briefly explain how Enron used them in perpetrating one of the nation’s largest frauds.

Source:

Hernando de Soto (2011). The Cost of Financial Ignorance., Washington Post, Oct. 7 (Retrievable online at http://www.washingtonpost.com/opinions/the-cost-of-financial-ignorance/2011/10/03/gIQAEU3yTL_story_1.html

Food – Beautiful – Food!

Have you ever wondered how restaurant chains get the food to look so good on TV?  This is the work of a micro-niche of advertising.  While you may not know the names of the directors, like your favorite movie, there are five or six major players in this industry that fill the $4 billion in television air time bought by restaurant chains and food conglomerates each year.  Fast-food, casual-dining and pizza chains, as well as what are lumped together as “doughnut and coffee restaurants,” spent $300 million more on TV ads in 2010 than they did in 2007, according to Kantar Media, a market research firm. If patterns hold, the numbers will be even larger this year.  “Generally speaking, restaurant chains spend about 3 percent of revenue on advertising,” says Michael Gallo, an analyst at C. L. King & Associates. “Because these restaurant systems are large and have density, television is an easy way to reach customers in a cost-effective way.”

Questions:

1. Assume you own a drive-in Sonic restaurant that grosses about $250,000 per year.  Based on this article, how much of this would probably go to television advertising of your food?

2.  How did Campbell Soup Company get in trouble with the FTC in the 1970’s regarding food advertisements?  Assume that the fine was $500,000.  How would you as an accountant for Campbell Soup record the journal entry for this fine?

3.  Assume you are a consultant for a restaurant chain.  How would you advise them between the difference of enhancement and fakery if they are trying to film a commercial for a $5.99 pizza? What are some of the issues of concern?

4.  How have the economics of shooting food changed in recent times?

5.  What issue in this article was the most interesting to you?

Sources:

Segal, David (2011) Grilled Chicken, That Temperamental Star, New York Times, Oct. 8 (Retrievable online at http://www.nytimes.com/2011/10/09/business/in-food-commercials-flying-doughnuts-and-big-budgets.html?hp)

 

New York Times video. 2011. (Retrievable online at http://video.nytimes.com/video/2011/10/08/business/100000001098327/steamy-scenes-of-pasta.html)

 

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