Tag: Fraud

Costa Rican Auditor Admits To Never Actually Auditing

Provident Capital Indemnity Ltd’s former outside auditor admitted in federal court this week to participating in a $670 million fraud in the life settlement bond market, according to the Department of Justice.


56-year-old Jorge Castillo pleaded guilty Monday to one count of conspiracy to commit mail and wire fraud, U.S. Attorney Neil MacBride in Alexandria, Virginia, said in a call with reporters. He could face up to 20 years in prison.

Castillo admitted to conspiring with PCI president Minor Vargas Calvo to prepare false financial statements that reflected contracts PCI held with other reinsurance companies. Castillo admitted to prosecutors that he never audited PCI’s financial statements and that he was aware PCI did not actually enter into the contracts with other reinsurance companies listed on the company’s financials. PCI paid him about $84,000 from 2004 to 2010.

Castillo will be sentenced in a Richmond, VA federal court on May 22.

DOJ: Purported Auditor Of Provident Capital Pleads Guilty In Scheme [WSJ]

Has an Auditor Ever Been Whacked For Snitching on Fraudsters?

I’ve gotten some crazy questions over the years but this one pretty much takes the cake. I’m not saying it’s stupid, nor am I saying it’s all that crazy, it’s just… well… out there, is all. Read on.

Dear Adrienne,

I’m a college student at the University of North Texas. Fraud has been a hot topic in my courses this month. We covered many scandals including Crazy Eddie, Barry Minkow, NextCard, Enron, and Bernie Madoff. This has got me thinking a lot about how I would react if I was in the shoes of the auditor. The students in my class always say to just report the fraud, however they never put themselves in the shoes of the fraudster to determine how the fraudster would act nor do they think about protecting the reputation o watched enough movies to know that if a fraudster finds out that somebody knows “too much,” then that person probably won’t make it home alive that night, unless they cooperate. I remember in that movie, “The Other Guys,” the auditing partner got killed because the fraudsters didn’t want him snitching out any information to authorities.

Another thing is that if it is found out that a partner is involved in fraud, this will ruin the firm’s reputation if this gets reported to the SEC. However, if the firm handles this internally, fire the partner, admit mistake, and let the public know that it doesn’t want anything to do with the partner, then perhaps only the partner would get in trouble and not the firm.

So exactly how are you suppose to act in situations of fraud? Of course AICPA tells us to first report it to your supervisor, then to the audit committee, and then the SEC. But still though, you got to get this out before someone kills you and you’ve got to handle it in a manner that best protects the reputation of the firm. Am I right? Also, have you ever heard of any auditors that were murdered because they knew too much? When you read about Enron or the Bernie Madoff scandal, there are talks about death threats, but you don’t necessarily hear about any murders involved. So it may be something that only happens in the movies.

Well, since you brought up Crazy Eddie, my first instinct was to pose this question to Crazy Eddie’s corrupt CPA, Sam Antar. Thankfully Sam obviously checks his Twitter account every five minutes and had some thoughts for me almost immediately.

“Yes, the potential is there. Depends on the client. Have that person contact me if worried,” he tweeted. Now isn’t that sweet? If anyone out there is feeling the heat, you know who to hit up.

His thought? It’s rare, if not impossible. Why would a fraudster whack the auditor? By the time the fraud is uncovered, it’s too late. The workpapers would likely document said fraud, so the fraudster would then be forced to whack the entire chain on up to the partner and who has time to do all that killing? “No logic in whacking outside auditor unless part of conspiracy,” Sam said.

That being said, does anyone remember Allen Stanford’s sketchy auditor C.A.S. Hewlett (“C.A.S.H.” get it?!)? He apparently kicked the bucket on January 1st (a real accountant would have kicked the bucket on December 31st, pfft), just a month before Stanford was charged with fraud (though he didn’t get arrested until June of that year). The circumstances surrounding his death were, uh, weird to say the least but I don’t think anyone is going to go so far as to say he got whacked.

Or how about Ken Lay? I mean, does anyone really believe he had a heart attack? There is even an entire website dedicated to exposing Ken Lay’s post-mortem life.

Now, here’s where it gets tricky, and I don’t expect you to know this since you haven’t made it out into the real world yet. What is an auditor’s job? Is it to uncover fraud? Or is it to verify with a minimum of certainty (a.k.a. “reasonable assurance”) that the financial information presented by a company is probably legit? If you answered the latter, you win. Forensic accountants dissect fraud, auditors simply check boxes. I’m sorry if this offends any of you hardcore auditors out there but in your hearts, even you guys know I’m right. Auditing is a joke, an intricate dance (read: performance) that exists more for entertainment than functionality. If you don’t agree with me, I’d be happy to name any number of companies that prove my point for me (let’s see… Enron, Worldcom, Overstock, Satyam, Olympus…).

What do you think the odds are that a first or second year auditor would even be able to detect fraud? Don’t you think the criminals behind it are at least clever enough to hide their wrongdoing from a bunch of fresh-faced kids with their SALY checklists? Look at the lengths Crazy Eddie went to – to success until their greed got the best of them and a chick ruined the whole scam. And that’s the thing, the auditors rarely uncover fraud, it’s usually the fraudsters themselves who end up exposing themselves though greed or just plain stupidity.

Whistleblowers don’t make friends but they don’t have to hire armed guards either. Like I said, by the time the fraud is exposed, it’s too late to start killing people to hide the truth.

And thanks to SOX, it is illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against” whistleblowers, so a more likely scenario is that revelations of fraud will come from within the firm, not from the outside auditors who are pissed off to be doing inventory counts on New Year’s Day.

You watch too many movies, kiddo. Just check the list, collect the bank recs and call it a day.

Note: The IRS Does Not Appreciate You Not Reporting Your Embezzlement Gains

Let this serve as a warning to any would-be embezzlers out there, if you steal, you better report it to the IRS.


42-year-old Collette Snyder of Timonium, MD pleaded guilty earlier this month to filing false tax returns in 2007 and 2008 after she neglected to claim over $382,000 embezzled from her former employer, Towson, MD-based Maple Leaf Title.

As part of her duties at the title company, Snyder had signature authority over the company’s operating, settlement and recording accounts, which allowed her to begin embezzling money from MLT accounts starting in 2007. She deposited company checks directly into her personal bank account, as well as made checks payable to her husband without his knowledge, forging his signature to deposit those checks in an account he was not aware of. At that point, Snyder had been an employee of MLT for two years.

Snyder took around $149,560 in 2007 and $232,968 in 2008. These embezzled funds were used to purchase jewelry, a BMW, trips, home improvements and private school tuition.

Because reporting this money to the IRS without it clearly declared on her W-2 (despite her writing “payroll” in the memo section of company checks she wrote out to herself) would have alerted authorities to the fraud, Snyder neglected to mention the ill-gotten gains. This resulted in an estimated tax loss of $115,529.37 for her 2007 and 2008 returns.

Due to the embezzlement by Snyder and MLT President Anthony Weis, MLT was unable to perform its duties as a provider of settlement services. With MLT’s escrow account drained, existing mortgage notes could not be paid off by MLT, meaning clear and free title could not be passed to the new lender and borrower of those notes. An insurance company that had issued title insurance policies to the borrowers guaranteeing clear title ultimately paid out $3.9 million to financial institutions that held mortgage notes.

Weis pleaded guilty to wire fraud, was sentenced to 78 months in prison and was ordered to pay restitution of $4,007,705, which includes the loss to the title insurance company and the expenses of the individual victims. He began his sentence in May of this year. The interesting part of this story is that Weis stole money intended for his clients’ real estate closings. And then Snyder stole from the company. Birds of a feather…

Snyder faces a maximum sentence of three years in prison and a fine of $250,000. U.S. District Judge Catherine C. Blake has scheduled her sentencing for February 3 , 2012 at 11:00 am.

“Mortgage fraud adds to the underground economy that erodes the integrity of our tax system and threatens the financial health of our communities. IRS Criminal Investigation is committed to ‘following the money trail’ to ensure that those who engage in these illegal activities are vigorously investigated and brought to justice,” said IRS – Criminal Investigation Special Agent in Charge Jeannine A. Hammett.

Muddy Waters CEO: There Are Some Big 4 Partners in China Conspiring to Defraud Investors

As you probably heard, the PCAOB officially put out a proposal earlier this week for audit partners to be named in the annual reports of public companies. It would also require “registered firms to disclose the name of the engagement partner for each audit report already requirethe form” and “disclosure in the audit report of other accounting firms and certain other participants that took part in the audit.”

While most Big 4 audit partners are probably feeling a little chapped by this whole proposal, there is at least one person going on record (by way of PCAOB comment letter) that feels that it doesn’t go far enough. That would be Carson Block, the CEO and founder of research firm Muddy Waters. In Block’s letter (in full on page 2) to the Board he writes that not only should the engagement partner be identified but that he or she should be putting their name on the audit opinion because “[it] will decrease investors’ future losses to fraud and gimmicky accounting by billions of dollars.”

That on it’s own is enough to get more than a few people riled up. But as we indicated, there are some conspiracy and fraud accusations as well:

Even the most reputable auditors in China seem to be in a race to the bottom. We believe that there are particularly egregious situations in which some Big Four partners in China offices have actually conspired with their clients to defraud investors. Further, it is a reasonable proposition that the conflict of interest inherent in the Chinese auditors’ business model also affects the quality of US company audits.

Now before your knickers in a twist, don’t forget that this is the guy who called Sino-Forest a “Ponzi Scheme for the 23rd Century” which more or less looks to be accurate. Further, if you consider all the trouble Big 4 firms have had with Chinese companies listed in the U.S. and elsewhere, it doesn’t seem to be that much of a stretch that some partners would just say fuck it and work with their clients to keep a lid on the shenanigans than go through the pain of actually doing their jobs.

Regardless, with these accusations the PCAOB may try to make another run at getting the Chinese to play ball.


Carson Block 102011