Going Concern

Fraud

COSO Study Finds Accounting Frauds Getting Larger, Execs Named in Nearly 90% of Cases

Caleb Newquist
May 24, 2010

If you could sum up the years of 1998 to 2007, how would you do it? Promising career crushed in a millisecond? A seemingly endless loop of awkward moments? Various forms of experimentation?

If you’re the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) you’re more or lessway: Financial reporting fraud is getting bigger. Financial reporting fraud causes businesses to fail. CEOs and CFOs are usually the ones blamed.

If you’ve been paying attention at all, this probably doesn’t surprise you one iota but it is nice that COSO took it upon themselves to wrap it up in a nice little package entitled, Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies.

The report examined cases of alleged accounting fraud that were investigated by the SEC for the period. Some of the more interesting findings:

• Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.

• The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.

• The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.

• Revenue frauds accounted for over 60 percent of the cases.

• Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.

• Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.

• Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.

Lot of takeaways: bogus revenue is still popular, switching auditors is usually not a good sign (*ahem* Overstock.com), oh and if you cook the books, investors run away from you like a band of lepers.

Further, Compliance Week reports that the 347 cases reported is an increase from the 294 reported for the 1987-1997 period as well as tripling the average size of the fraud from $4.1 million to $12.05 million. The median assets and revenues of $100 million jumped from $16 million in the ’87/’97 range.

While this suggests that frauds are getting bigger, occurring at larger companies and as a result, destroying more wealth, the successful criminal prosecution of the people in charge of the companies doesn’t appear to be keeping up.

COSO Chair David Landsittel said, “All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting,” although if the CEO or CFO (who certify the financial statements) are involved in the fraud, this statement doesn’t mean much. Sam Antar doesn’t think so either, telling us,

[W]e needed a study to find out that financial fraud leads to bankruptcy? Where have these guys been?Until we move away from the process oriented “check the box and fill in the blanks” routine in audits and start understanding criminal behavior, there isn’t much any auditor can do to deter fraud. Former Speaker of the House of Representatives Tip O’Neill once said, “All politics is local.” Similarly, we need to learn that “All fraud is personal.”

And since the SEC names a CEO or CFO in 90% of these cases, yet only 20% of those cases actually result in indictment within two years, does this indicate that the naming of said CEO/CFO is largely a photo op for the SEC/DOJ et al? Even if 60% of those executives are convicted it appears that finding fraud is (relatively) easy part; successfully blaming someone in the court of law is something else entirely.

One of the authors of the study, Mark S. Beasley of North Carolina State University noted that there is work still be done, “We need to determine if there are certain board-related processes that strengthen the board’s oversight of risks affecting financial reporting.” This seems to indicate that there is some significant high-level processes that are still not in place that could keep tabs on the Andy Fastows of the world but for now, we still seem to be going with the honor system.

COSO Press Release [COSO]
Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies [COSO]
COSO Fraud Study Catalogs Latest Decade of Incidents [Compliance Week]

Career Center

Credentials for Accountants: Certified Internal Auditor

Adrienne Gonzalez
May 24, 2010

This is the fourth in our series on certifications for accountants. Previously, we’ve covered the CFP, CMA, and CFE so if you’re not sure what you want to be when you grow up, be sure to check those out.

So, what’s the CIA all about?

Education Requirement
CIA candidates must hold a bachelor’s degree. Unlike the CPA exam, which often requires certain coursework or a minimum master’s level education in accounting, the CIA certification has no such requirements. The CIA exam is administered year-round by the Institute of Internal Auditors.

Professional Requirements
Those interested in pursuing a CIA designation must have at least 24 months (2 years) professional experience in internal auditing or its equivalent. Equivalent experience would be in the areas audit/assessment disciplines, including external auditing, quality assurance, compliance, and internal control. Candidates with a master’s degree can substitute their degree for one year of experience. Candidates may sit for the CIA exam before satisfying the experience requirement but will not be certified until meeting this requirement.

Career Options
Certified Internal Auditors can be in public or private industry and experience a diverse workload checking controls, planning the audit process for their company, testing, and compiling reports. Internal auditors may also give feedback on management policies and procedures based on their findings.

Compensation and Other Benefits
CIAs can expect to make a median yearly salary of $55k freshly certified and around $100k with 20 years of experience, making it a cozy career choice for auditors (Payscale). According to the U.S. Bureau of Labor, growth in auditing and accounting positions is expected to rise 18% between 2006 and 2016, which gives CIAs a certain level of job security not seen in other industries. Equally important, executive responsibility attached to Sarbanes-Oxley means CIAs are that much more critical to an organization by isolating incidents of fraud or waste.

Obviously, CIAs are not in it for the money but for fraud-fighters who love information systems, technology and auditing, the CIA is a safe, always-in-need designation worth looking into!

Accounting News Roundup: Cassano Dodges Criminal Charges; Mary Schapiro Acknowledges Some ‘Convergence Gaps’; IRS Audits of Colleges May Look at Coaches Salaries | 05.24.10

Caleb Newquist
May 24, 2010

Crisis Probes Fail to Meet High Bar [WSJ]
Late on Friday, former AIG executive Joseph Cassano learned that he wouldn’t face criminal charges for his actions as the head of the company’s Financial Products division. According to the Journal, prosecutors did come close to filing criminal charges against Cassano and others but it was felt that the high burden of proof that “there was criminal intent behind executives’ decisions and that they intentionally misled investors” could not be met.

The government isn’t quite finished with Cassano, as he still may face civil charges from the SEC, which has a lower standard of proof.

The SEC’s Mary Schapiro on the Myths of GAAP/IFRS Convergence: The Lady Doth Protest Too Much [Re:Balance]
Jim Peterson took a closer look at Mary Schaprio’s speech at the annual conference of Chartered Financial Analysts where she mentioned IFRS but also convergence efforts between the IASB and the FASB. The SEC has maintained that convergence should be the initial goal for reporting standards.

Jim is concerned that the gap between the ultimate goal of convergence and the reality of some of the key issues at stake are no small feat:

There is, indeed, no more eloquent concession of the “convergence gap” than Schapiro’s own admission that “US GAAP and IFRS are currently not converged in a number of key areas,” including “the accounting for financial assets (the very types of securities at the center of the financial crisis), revenue recognition, consolidation principles, and leases.”

Any other problems, Madame Chairman? These on her list are so comprehensively grave that they will keep the international standards standoff alive until the end of time.

Which would put IFRS on a even longer track to adoption.

IRS audits of schools might delve into salaries of coaches [USAToday]
The IRS’ interest in the determination of the highest paid employees for colleges and universities has a few people worried. Not necessarily because anything is wrong but because the IRS is just a scary beast, “John D. Colombo, a University of Illinois law professor who has written about tax exemption and college athletics, says he doesn’t think the IRS action will fundamentally alter college athletics business. But he adds, ‘Audits are never comfortable. Just the IRS being there asking questions makes people nervous.'”

Primarily, the IRS is concerned over the business activities that higher education institutions engage in that aren’t “related to the schools’ primary purpose.” The interest in athletic coaches’ salaries is such that these individuals are often some of the highest paid employees of the school. The IRS is interested in how colleges and universities justify these salaries and to ensure that corporate sponsorships (not considered to be a business activity) are complying with certain rules so they are not considered advertising revenue.

The PCAOB Has a Plan B if the Supreme Court Manages to Make a Huge Mistake

Caleb Newquist
May 22, 2010

“In the event that the PCAOB does not prevail – and the decision requires a legislative change – I would urge Congress to act quickly to fix whatever structural problems the Court identifies.”

~ Interim PCAOB Chairman Dan Goelzer, in testimony today.

News

Koss Files 10-Q Sans Financial Statements, Declares Dividend

Caleb Newquist
May 22, 2010

Somehow this got overlooked earlier in the week but we can’t literally be all-knowing, all-seeing, all the time. Plus, haven’t you missed this mug?

Headphone cobbler Koss filed it’s first quarter 10-Q earlier this week, which ordinarily would be a non-event except for a small matter of missing financial statements.

The Milwaukee Business Journal reports that the company cited the missing financial statements “due to delays relating to certain previously disclosed unauthorized transactions.”

Yes, that’s PR-speak for ueSay achdevaSay.

Koss executives intend to amend the Form 10-Q to include the quarterly unaudited financial statements as soon as possible after Koss Corp. completes restating statements from previous quarters in fiscal 2008, fiscal 2009 and the quarter ending Sept. 30, 2009, the company said. The company said it expects to file amended financial reports with the SEC no later than June 30.

But there’s nothing to be worried about because the company declared a dividend and secured an $8 million credit facility with JP Morgan. Progress!

Koss declares dividend, but yet to report results [Milwaukee Business Journal]
10-Q [SEC.gov]
8-K [SEC.gov]

KPMG

KPMG’s New Paperless Audit Is Going to Be the Best Thing Since Paper

Caleb Newquist
May 22, 2010

[caption id="attachment_10529" align="alignright" width="150" caption="Paperless!"]

[/caption]

How about one more convo with the KPMG leadership this week? As one commenter mused earlier, the lack of past CEO spreadsheet-side chats were too few and far between so we figure we’re doing a you a favor by this passing ��round, John Veihmeyer and Henry Keizer kick around lowballing fees, outsourcing and the firm’s new paperless audit technology:

Inquisitor 1: Can you talk a little bit more specifically about what we’re doing right now to compete with firms that are reducing their fees so drastically that you have to wonder how they are even covering costs?

Keizer: To me, the first and foremost guiding principle is – make sure you’re giving the most absolute best client service. I think to the extent that you do have great service, we’ve got to be able to have very transparent and open discussions with our clients as to what are our economics? Where are we? What is the competitive information? What is market pricing, as opposed to the offer that came in unsolicited? And find a way to meet the objectives of what we need, and what our client needs.

Maybe we will, in fact, have to drop a price in, let’s say, our audit offering. But then are able to say, but why can’t we maintain the same or higher KPMG spend? Let’s look at who’s doing your tax compliance work. Let’s look at who’s doing your SAS70? Those types of discussions do allow us to compete successfully without having a case where it’s just about price.

Not sure who transcribed this thing but it’ll work for a Friday. First off, Inquisitor numero uno is obviously under the impression that KPMG would never lowball its fees. Even though other people have suggested exactly that.

Keizer Soze then reminds his little friend that it’s really not about the money, it’s about providing the best client service imaginable (sacrificing life, limb and/or dignity) which will result in more work for the firm. It’s a self-perpetuating cycle, really.

Inquisitor 2: Is there more plans to outsource positions in the U.S. to India?

Veihmeyer: I think as you look across the entire scope of our activities, and I think the most important one is – how do we serve our global clients – making sure that we are competitive in the marketplace and can think about how we execute a lot of our engagements differently to be successful. I think we will continue to look for opportunities to source talent, source resources, source skills, anywhere in the world it makes sense. I don’t see it as exchanging a position here for something offshore.

I think we see this as a very key strategy to make sure we are as competitive as we can possibly be in the marketplace—which I think will have one primary impact to the U.S. firm and that is create more opportunities for our people here. And why is that the case? Because we will win more work, we will be competitive in situations that we otherwise wouldn’t be competitive in, if we didn’t have that capability. And that’s what creates opportunities for our people.

In a word: Yes. As for why – Dammit, we’re a $20 billion firm (but not really, we’re actually a network of independent firms operating under a global cooperative. Ask Tim Flynn; he’ll tell you) and our competitors play hard ball. We’ve got to create other jobs overseas to keep up with those guys. Will that affect you? No chance, Blanche! If it does, it just means your life will be infinitely better because KPMG has business it didn’t have before.

Inquisitor 3: eAudIT – how is it going? What challenges have we faced? And how are clients, employees, and recruits receiving the deployment?

Keizer: e-AudIT is on track for deployment. We released the software in April, the 2010 version. Training schedules will be rolling out over the next several months.

It is the tool that accomplishes three major things. One, it allows us to do things more efficiently. It moves us from a work paper format to a work flow.

And lastly, there’s always been a great appetite of our professionals, how do I tap into the knowledge that KPMG has? e-AudIT is the platform now, to actually make that knowledge available to our professionals.

I think e-AudIT puts us in front of our competitors in terms of a platform that’s truly the best that’s out there. I believe when we look back, it will be the single most important ingredient to us providing the type of service, meeting our regulatory and professional requirements, and having our people feel good at how we have enabled them to really be high performance professionals.

[Jesus, easy with the rapid fire, Inquisitor tres; Hank isn’t a speed listener]. Paperless auditing has moved into KPMG lock, stock and barrel. We’re only 10 years into the 21st Century and we’re ready to start fixing bugs in this thing for the next ten years.

It’s far superior to anything the other firms have because you’ve been training on it over in Monty and we haven’t heard a single complaint. Someday you’ll be able to tell your grandstaff that this was the absolutely most exciting time to be at KPMG because that was when things got serious.

You Can Forget About Landing That CFO Position at the SEC

Caleb Newquist
May 21, 2010

Mary Schapiro took some time out of her fraud fighting Friday to ask Kenneth Johnson to quit acting as the Commission’s CFO and to take on the official responsibility of running the Office of Financial Management.

Mr Johnson (KenJo?) vehemently accepted the offer and threw in a shout out to the boss, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”

Presumably, the CFO position isn’t a kicking-down-doors type job so Johnson’s first order of business should be to determine the savings on a group rate at one porn site that can appropriate service all tastes.

Washington, D.C., May 21, 2010 — Securities and Exchange Commission Chairman Mary L. Schapiro today announced that Kenneth A. Johnson has been named Chief Financial Officer for the agency.

Mr. Johnson has been serving as acting CFO for much of the past year. The agency’s CFO is responsible for leading its Office of Financial Management, which handles the budget, finance, and accounting operations for the SEC.

“I’m delighted that Ken has agreed to take on this role at the SEC,” said Chairman Schapiro. “His deep experience in the financial arena will be incredibly valuable as we grow as an agency.”

Mr. Johnson added, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”

Mr. Johnson, 37, joined the SEC in 2003 as a Management Analyst in the Office of the Executive Director. In that role, he advised on all aspects of the budget process, developed strategy initiatives, and responded to inquiries from the Office of Management and Budget (OMB) and Congress regarding the SEC’s budget and financial operations. He became Chief Management Analyst in 2006.

Mr. Johnson has served as a valuable staff expert on legislative proposals, and he managed the development of the SEC’s long-range Strategic Plan that would guide agency policy through 2015.

Prior to joining the SEC staff, Mr. Johnson worked as a Commerce Analyst at the Congressional Budget Office. His primary responsibility in that role was to analyze and report on the budgetary effects of committee-approved legislation.

Mr. Johnson earned his Masters in Public Policy from the Kennedy School of Government at Harvard University, and earned his BA at Stanford University.

IRS
Video

Just So You’re Aware: An Ex-IRS Agent Has a Reality TV Show

Caleb Newquist
May 21, 2010

A taste of the June 6th premiere of The IRS (+) Hitman:

And if you think that’s interesting, there’s more:

Is there a complete sentence in there somewhere? Try the next one.

You hear that? How can you live with yourselves IRS? Stealing money from this Jonas Brothers wannabe family that won’t be able to stand around the kitchen eating cheese whiz out of the jar with their hands! No mercy indeed. If you have an IRS injustice story, you better get in touch with this Hitman character.

Wanted by America, the IRS (+) Hitman Reality TV Show is Here [PR]

Career Center

Job of the Day: Arizona American Water Needs a Financial Analyst

GoingConcern
May 21, 2010

Arizona American Water is looking for an experienced professional with an accounting or finance background to fill a Intermediate Financial Analyst position in Phoenix, Arizona.

The position requires 5 – 7 years experience including SOx and U.S. GAAP knowledge with a CPA or CMA credential desirable.

Company: Arizona American Water Company

Title: Financial Analyst II (Intermediate)

Location: Phoenix, AZ

Description: Intermediate Financial Analyst responsible for developing revenue and expense analyses, projections, reports and presentations.

Responsibilities: Compile and analyze financial information for developing revenue/expense analyses, projections, reports and presentations. Ensure accuracy of financial information; identify trends and present findings to senior management. Analyze and assess business performance against goals. Support management in shaping, driving and influencing business performance and continuous improvement.

Qualifications/Skills: Requires BA/BS in accounting/finance related field and 5-7 years related experience including, knowledge of US GAAP, SOX, regulatory accounting and practices and computer expertise. CPA/CMA is desirable. Experience in water/wastewater utility industry is highly desirable.

See the entire description over at the GC Career Center and visit the main page for all your job search needs.

IRS Asked to Crack Down on Church’s ‘Troubling Tweets’

Caleb Newquist
May 21, 2010

You house of worship types are probably used to hearing politically toned sermons coming from your clergy(wo)man but a nonprofit holy house flat out telling its congregation, “Get out there and vote for [candidate soon-to-be caught up in a lurid sex scandal]!” would be venturing into some tricky waters.

Well, the Americans United for Separation of Church and State seems to have caught wind of a church who ventured. The AU claims that the Oasis Church in Los Angeles was openly supporting its Director of Social Justice’s, Alex Jones-Moreno run for reelection to the Greater Wilshire Neighborhood City Council on its website and on Twitter:

Americans United was not amused by this, sending a complaint to the IRS and putting out a press release:

“Oasis Church’s appeals might have been innovative, but they still violate the law,” said the Rev. Barry W. Lynn, executive director of Americans United. “Federal law bars churches and other tax-exempt non-profits from electioneering. The IRS should crack down on these troubling tweets.”

We called the IRS in Los Angeles, who was not aware of the story and we were told the usual yarn of “we can’t comment on individual tax cases,” which we were expecting but the IRS PR folks are always nice people and we like a pleasant voice every now and again.

Anyhoo, we did stumble across the IRS Tax Guide for Churches and Religious Organizations, that says the following on page 5 (our bolding):

Churches and religious organizations, like many other charitable organizations, qualify for exemption from federal income tax under IRC section 501(c)(3) and are generally eligible to receive tax-deductible contributions. To qualify for tax-exempt status, such an organization must meet the following requirements (covered in greater detail throughout this publication):

• the organization must be organized and operated exclusively for religious, educational, scientific, or other
charitable purposes,
• net earnings may not inure to the benefit of any private individual or shareholder,
• no substantial part of its activity may be attempting to influence legislation,
• the organization may not intervene in political campaigns, and
• the organization’s purposes and activities may not
be illegal or violate fundamental public policy.

Now whether Tweeting = “intervene” we’re not sure but Americans United certainly seems to think so. We’d invite any tax-exempt experts to weigh in.

A message left at Mr Jones-Moreno’s Oasis office was not immediately returned.

Americans United Asks IRS to Investigate Los Angeles Church That ‘Tweeted’ Candidate to Victory [AU]

Bonus Watch ’10: “Performers” Getting More Love at Deloitte

Caleb Newquist
May 21, 2010

Last month we told you about some Deloitte partners in the Northeast that were dropping some “Applause Awards” on “strong performers,” possibly to help calm some nerves.

At that time, our sources indicated that “partners have also hinted at more money coming their way.” It now sounds like those hints are resulting in some greased palms:

[S]ome $1,000 [Outstanding Performance Awards] have been circulating in NE AERS for “performers”. Similar to the $100 applause awards for the larger segment of consultants, I think partners are trying to head off a mass exodus; not sure if the 1k will make a difference; but it does seem to be keeping people from quitting prior to hearing about their year-end comp adjustments

So regardless of what some Deloitte HR types might think, there are partners out there that are worried about people leaving and they seem to understand that throwing a little cash around does wonders for cooling some anxious heads.

Three Study Motivators for the CPA Exam During a Blackout Window

Adrienne Gonzalez
May 21, 2010

Blackout months are notorious for inviting procrastination, especially June. The weather is nice, the work is light, and if you’ve been studying for most of the year, the mid-point can be exactly where you lose what little motivation you had to study. Because you have an entire month “off”, it can be easy to fall into a rut of not studying.

So as we go into this month, let’s remember some ways to stay motivated, even when it’s tempting to run off and play in the sun:

Get a study buddy – Sometimes all you need is someone ~~chewing you out~~ encouraging you to keep going. If you’re doing this alone and know you’re slacking, maybe you need to recruit a friend to keep you in check.

Bribe yourself – Yes, bribing yourself is a pretty low tactic but whatever works, right? Promise yourself a splurge when you pass whatever section you are studying for or, if you’ve got a little extra cash to throw around, bribe yourself often with treats like $4 lattes and DVDs or whatever it is you’re into that won’t break the bank. This goes in reverse – if you aren’t studying and know it, punish yourself by taking away the movie tickets or nice dinners out.

Schedule your exam date close to the opening of the next window – This way you know you can’t blow off the entire month. Obviously this isn’t a good idea if you’re taking FAR and don’t plan on studying until June 1st but if you’re planning on taking a smaller section like BEC and have the time to put it, schedule your exam in the first or second week of the window so you know you can’t procrastinate. I guarantee you’ll only lose one exam fee because of not studying before you learn that particular lesson.

Good luck and if you’ve had luck breaking the procrastination habit, do share what worked for you!

Adrienne Gonzalez is the founder of Jr. Deputy Accountant, a former CPA wrangler and a Going Concern contributor . You can see more of her posts here and all posts on the CPA Exam here.

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