Tag: They just made the numbers up

Is Madoff’s Auditor Spilling His Guts?

Maybe! David Friehling was supposed to be sentenced last week but apparently it got pushed back again.

On November 3, 2009 Friehling pleaded guilty to various charges ranging from securities fraud to filing false reports to the SEC. He was to be sentenced for these crimes in February 2010 but because of his cooperation with the government, that was postponed until September 2010….that was then postponed until March 15, 2011….now that has been postponed until September 16, 2011. […] So what does a guy know who claims he did not know a lot? Is Friehling working with the Feds and Irving Picard (Madoff Trustee) on strong-arming Mets’ owners Saul Katz and Fred Wilpon? I doubt it. Can Friehling put a finger on one of the Bernard Madoff family members, who have yet to be charged criminally? Maybe.

Of course this could mean that Friehling also knows the location Jimmy Hoffa, the true identities of the participants in the Kenneday assassination and the Coke formula. Oh wait, everyone knows that one now. ANYWAY, the investigators may just be enjoying the anecdotes and would hate to see the poor guy shipped upstate. But most likely, he’s trying to save his ass from a sentence in FPMITAP like his #1 client received.

Giving Friehling the benefit of the doubt, he is cooperating to do the right thing now but he is also trying to get his sentence reduced in the process. With a fraud so large, I do not see how the Federal Sentencing Guidelines keep this guy in prison for less than 20 years.

Madoff Accountant — Now Auditing To Save His A#$ [Forbes/Walter Pavlo]

‘Massive Accounting Fraud’ Du Jour: DBH Industries (nka Point Blank Solutions)

Maybe color blindness is the reason everyone misses the “red flags.”

The Securities and Exchange Commission charged a supplier of body armor to the U.S. military for engaging in what it called “massive accounting fraud.”

The SEC alleges that DBH Industries, now known as Point Blank Solutions Inc. (PBSOQ), “engaged in pervasive accounting and disclosure fraud through its senior officers and misappropriated company assets to personally benefit” its former chief executive, David Brooks.

The regulator also charged outside directors Jerome Krantz, Cary Chasin and Gary Nadelman for their parts in the scheme, saying they were “willfully blind to numerous red flags” signaling the fraud.”

“As the fraud swirled around them, Krantz, Chasin, and Nadelman ignored the obvious and submitted to the directives and decisions of DHB’s senior management while themselves profiting from sales of the company’s securities,” said Eric Bustillo, director at the SEC’s Miami office.

SEC Charges Body-Armor Supplier For ‘Massive Accounting Fraud [Dow Jones]

Apparently There’s a Food Chain for Satyam Blamestorming

The head of the Institute of Chartered Accountants in India seems to feel as though 2009’s massive Satyam failure was not, in fact, a failure of the auditors but levels before the auditors and then the auditors. “There were promoter shareholders, executive directors and directors, and the auditors were the last rung. On the other side, there were independent directors, one of whom was a dean of the Indian School of Business, but nobody questions the role of independent directors.”


Amarjit Chopra feels corporate governance (or should that be complete lack of…) is to blame, not the PwC auditors who somehow missed the following:

• $1.09 billion in artificially inflated cash and bank balances (psst, baby auditors, that’s called a material amount)

• $81.59 million in accrued interest that was accrued out of thin air and never existed

• An understated liability of $266.91 million

• An overstated debtors’ position of $575.27 million that was more like $106.33 million (oops)

Maybe PwC should have waited for Chopra’s comments. Had they done so, they wouldn’t have already come out and admitted they missed a few issues on the September 30, 2008 Satyam balance sheet:

The former [Satyam] chairman has stated that the financial statements of the company have been inaccurate for successive years. The contents of the said letter, even if partially accurate, may have a material effect (which is currently unknown and cannot be quantified without thorough investigations) on the veracity of the company’s financial statements presented to us during the audit period. Consequently, our opinions on the financial statements may be rendered inaccurate and unreliable.

So if that’s the case, someone remind me why we even have auditors then? Sure financial statements belong to management but aren’t auditors there to give everything a good once-over to ensure giant fraud is not staring them directly between the eyes? You’d think at least one of those brilliant Indian first years would have realized that cash was a tad high once they started doing the work.

All Those Frazer Frost Christmas Cards Will Go to Waste Now

Last Friday, we linked to a Reuters article that told the story of Chinese clean-tech firm Rino International Corp. admitting that their books weren’t exactly in tip-top shape.

In fact, Rino has some hella-fraud going on, as the CEO is quoted, “[T]here might be problems with 20-40 percent of [customer contracts],” according to a letter from the company’s auditor Frazer Frost. As is the natural progression of these matters, an 8-K was filed informing anyone who cares to know that restatements are happening and that previously issued numbers are more or less worthless.


Then came the news from Financial Investigator’s Roddy Boyd, that Frazer Frost – the offspring of a merger between Moore Stephens Wurth Frazer and Torbet and Frost PLLC – was not really Frazer Frost:

One day shy of the one year anniversary date, the accountancy is scrapping a “trial merger” and is splitting back into Frost LLP of Little Rock, Ark. and Raleigh, N.C. and Moore Stephens, which is headquartered in Brea, Ca.

“Trial merger” kinda sounds like a two accounting/finance types hooking up for the first time. It’s nothing major, just testing the motion in the ocean. But if you go by the Accounting Today article from last year, there doesn’t appear to be anything “trial” about it.

Anyway, Boyd reports that Frost managing partner Dan Peregrin told him that a ‘culture clash’ led to the break up and that, “There is a lot of [issues] right now in [Chinese reverse mortgage] practice area and we just felt it would be smarter to wish them luck and stick to our practice areas.”

Right. The old, “it’s not you, it’s me” routine. But there’s more! Over at Citron Research, it’s not entirely clear just what is going on:

If you call Frost today in Arkansas, they answer “Frost & Co” and say they’re no longer associated with Frazer. Citron spoke to managing partner Dan Peregrin and twice he told us that the two firms have gone their own way. ….but if you call Frazer, they answer “Frazer Frost” and in a brief conversation with Susan Woo, the RINO auditor, she told Citron that Frazer Frost is still an operating entity.

Really? If you go to the Frazer Frost website, you see a homepage with no content in the about us section.

Which is quite true. This is all very strange/sad/pathetic because everyone else seems to be aware of the situation. It’s like Frazer doesn’t know they’ve been dumped and are just going along like everything is find and dandy.

Could someone let them down gently?

News From Auditorville [Financial Investigator/Roddy Boyd]
Dude! Where’s My Auditor?? The Curious Case of Frazer Frost [Citro Research]

Pressure from CEOs More Likely to Lead CFO Shenanigans Than Monetary Gain

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

A recent study, “Why Do CFOs Become Involved in Material Accounting Manipulations,” by researchers at the University of Pittsburgh and the University of Washington attempts to answer just this question. Their finding? Pressure from the companies’ CEOs, more than the possibility of financial gain, tends to drive the actions of crooked CFOs.

Of course, the researchers couldn’t actually divine the motivations that drove the CFOs who manipulated numbers. Instead, they reviewed a group of firms subject to SEC enforcement, analyzing the role of the CFOs, as well as the costs they incurred and any benefits they gained from their actions.

They found – not surprisingly – that the CFOs involved faced stiff penalties for their actions. More than half of the CFOs (54 percent) employed by the nearly 300 firms in the sample that were charged by the SEC for accounting manipulation were prohibited from serving as an officer, director or accountant with a public company in the future. About 48 percent of CFOs were fined as a result of their wrongdoing, with a median fine of $50,000. A small number – about 4 percent – also faced criminal charges. Clearly, monkeying with the numbers can be quite costly for CFOs.


On the other hand, the CFOs that engaged shady number crunching didn’t have significantly higher equity incentives than CFOs in the control sample. That means the CFOs involved in misstatements took on a lot of risk, yet couldn’t expect to come out much further ahead financially than their counterparts at law-abiding firms.

Conversely, the CEOs of firms in trouble exhibited both greater power and equity incentive than CEOs of control firms. For instance, these CEOs were more likely to be company founders and to serve as chair of their boards than the heads of the other firms. “This evidence is also consistent with the pressured CFO explanation; that material accounting manipulations are more likely in the presence of powerful CEOs,” the researchers write.

What’s more, CFO turnover jumped during the three years before the misstatements occurred. That suggests that at least some CFOs either left or lost their jobs because they refused to participate in the manipulation.

The SEC also seems to have taken note of the larger role that CEOs, rather than CFOs, typically played in the schemes. When the researchers examined 188 companies in which both the CFO and CEO were charged with manipulating numbers, they found that the SEC had charged 18 percent of CFOs with orchestrating the schemes. When it came to CEOs, however, 32 percent were charged – almost double the CFO number.

Moreover, when the SEC charged just the CFO with wrongdoing, 30 percent of them benefited financially. That’s a lot, but it’s significantly less than the 46 percent of CEOs who were charged and also gained financially.

Given these findings, are there changes that could reduce accounting shenanigans? To be sure, the research doesn’t mean that CFOs who cook the books can simply blame their actions on their bosses; clearly they could have acted differently, as difficult as doing so might have been. The findings do suggest, however, that one step to reducing the opportunity for wrongdoing would be to provide CFOs with greater independence from their CEOs. One way to accomplish this would be to expect greater participation from corporate boards or audit committees when it comes to hiring and evaluating their firms’ chief financial officers.

Citigroup Blackballs Analyst Claiming the Bank’s DTAs Should Be Written Down

Fox Business Network’s ace news-breaker Charlie Gasparino reports that Citigroup’s management team, including CEO Vikram Pandit and CFO John Gerspach will not meet with CLSA banking analyst Mike Mayo since he’s been telling investors that the big C should be writing down their $50 billion in deferred tax assets.

Carlito reports that Mayo states that this refusal to write down the DTAs amounts to “cooking the books by inflating its earnings through an accounting gimmick.”

Simple question from Mayo via CG, “I’d like to know why all my competitors get meetings with Pandit and the key people there and I don’t.” It’s not like the guy is one of the top banking analysts in the entire world. It’s not like Citigroup has a solid track record of transparent financial reporting. Or did everyone forget that C has the U.S. Treasury as its backstop?

The KPMG audit team can weigh in on this at any time. Or just email us the details.

Analyst: Citigroup is Cooking the Books [FBN]

Apparently the ‘Wildly Inaccurate’ Accounting at Scott Rothstein’s Law Firm Didn’t Impress Some Miami CPAs

Unless you were born blind and deaf, you may have noticed that South Florida has its share of shady characters. We all know that Berns Madoff frequented the area. Plus there’s the obsessively dapper Lew Freeman, who was Miami’s go-to forensic accountant until he thought he’d just keep his client’s money.

Another model citizen/criminal in FLA is Scott Rothstein. His Ponzi Scheme managed to bring in just over $1 billion and he got 50 years for his trouble. But now the fallout from Rothstein’s little stunt is now raining hell on Miami accounting firm Berenfeld Spritzer Schechter & Sheer.


The trustee overseeing the bankruptcy of Rothstein Rosenfeldt Adler has accused Berenfeld, et al. of funneling $450 million to Rothstein.

As you can imagine, the crew over at BSS&S aren’t thrilled with the accusations and called the suit, “inaccurate and flawed,” and claim that they “conducted [our] duties professionally, conscientiously and in good faith.”

Well, the trustee obviously doesn’t see things that way and laid out several allegations, specifically, the following:

• Berenfeld improperly adjusted RRA’s income by $20 million in 2007 and by $75 million in 2008.

• Berenfeld withheld information from RRA President Stuart Rosenfeldt (who has claimed he had no knowledge of firm finances and couldn’t read a balance sheet).

• Berenfeld prepared tax returns in a way that did not distinguish between RRA operating cash and client trust funds, giving the misimpression that RRA had more available cash than it actually owned.

• Berenfeld did not pursue information about bookkeeping after RRA staff – including CFO Irene Stay and COO Debra Villegas – denied access to information about bank statements, fee income and trust accounts.

• Berenfeld “knew of wildly inaccurate RRA bookkeeping and inadequate accounting personnel evidenced by the way in which books and records were created and maintained, leading to extraordinary adjustments, tantamount to rewriting the books and records of RRA.”

• Berenfeld provided a “nebulous” letter to Rothstein to help cover up $15 million in suspicious transactions in response to an anti-money laundering compliance inquiry from Gibraltar Bank.

Now, we’ve heard that law firms aren’t the best when it comes to running their businesses, but ‘wildly inaccurate bookkeeping and inadequate accounting personnel’ that leads to ‘extraordinary adjustments, tantamount to rewriting the books,’ takes things to a whole new level. Berenfeld employee TerryTracy Weintraub gets special attention in the suit, so we can presume he’s the one responsible for knowing – and not being too concerned – about RRA’s exceptionally shitty books. Oops!

Accounting firm sued over Rothstein work [SFBJ]

One Possible Sign that the Modeling Career Isn’t Working: You’re Claiming Bogus Tax Refunds

We don’t mean to crush anyone’s dreams of walk-offs or eating disorders but sometimes when you’re not sure if things are working out in your modeling career, you have to be able to recognize the signs when they appear.


One sure sign that you won’t be America’s Next Top Model (or the person fetching ANTM’s rice crackers) is that you find yourself claiming to have earned $550,000 working for an “environmental group” and then requesting a $200,000 refund for that “work”:

Nyemah Johnson, who models under the name Nyemah Marxx, falsely claimed he made $550,000 working for an environmental group and was entitled to the six-figure refund, prosecutors said.

He was one of five people arrested last week in a $1.1 million tax scheme that prosecutors said was led by Queens accountant Diana Rabin.

The bright side, of course, is that there is no such thing as bad publicity and assuming Mr Marxx has access to something a step above a public defender, he’ll manage to stay out of jail for too long and maybe then he’ll be able to land the “shirtless bro” gig outside the A&F.

Manhattan model, Nyemah Marxx, is caught in $200,000 tax scam [NYDN]

Filing a Bogus $1 Trillion Lien Against IRS Employees Proved To Be an Ineffective Intimidation Technique

Who knew!?

Oregon attorney Micaela Renee Dutson and her husband Tony Dutson were convicted of defrauding the U.S. Government of over $7 million but not before doing their damnedest to stave off the IRS and DOJ investigating them.


The Dutsons were a creative couple, selling “pure trust” packages to their clients who were told that their income would be tax free if it were placed in trust. They sold these products despite “several warning letters from the IRS, articles in the Oregonian newspaper warning the public against tax shelter scams, and a complstice Department on behalf of the IRS in an effort to stop them from selling their tax shelters.”

The IRS started auditing the Dutsons’ clients who, prior to engaging the dynamic tax duo, were seemingly compliant taxpayers. The IRS informed these clients that the “trusts” were actually illegal tax shelters and that they were being bamboozled.

This was, of course, unacceptable to the Mr and Mrs and they went on a serious offensive:

[T]he Dutsons began a campaign to obstruct the IRS’s audits and investigation, and to harass and intimidate the individual IRS employees who were auditing or investigating them. First, they created and presented dozens of fictitious financial instruments to the IRS purporting to pay off back taxes for themselves and a number of their clients.

Even though they knew the bogus instruments had no financial value and had never been accepted by a creditor, they continued to sell them to their clients with false promises they would pay off their tax liability. The Dutsons also advised clients to use them to pay off commercial debts, including mortgages and court-ordered obligations. Together, the Dutsons and their clients presented over $44 million worth of these bogus financial instruments over a four-and-a-half-year period.

To further obstruct the IRS, and harass and intimidate its employees, the Dutsons advised clients to file frivolous lawsuits against the IRS employees. The Dutsons charged their clients $3,500 each to prepare court documents and help their clients file them. They continued to advise clients to file these lawsuits — even after a federal court had dismissed the first of these suits as frivolous and without merit — without telling their clients about the dismissal.

After the Justice Department filed the complaint for a permanent injunction, and IRS special agents had notified the Dutsons in person that they were under criminal investigation, the Dutsons filed a $1 trillion lien in California against several IRS employees who had attempted to audit or investigate the Dutsons, as well as the DOJ attorneys who filed the complaint. A federal court later ruled that the lien was null, void and without legal basis, but one week later, the Dutsons prepared a $108 million lien for a client against John Snow, who was then Secretary of the Treasury.

The Dutson probably figured the jig was up and since $1 trillion is a nice round number the figured “why the hell not?!?” Back in the early ’00s a trillion was fantastical number (for the most part), not tossed willy-nilly like it is these days. The Dutsons could have filed the lien for $1 gabizillion and it would have made as much sense.

Oh and while they were at it, just file another one against the Secretary of the Treasury. If it was Tim Geithner, sure we can see that happening for a whole host of reasons but John Snow? Wasn’t he one of the most harmless cabinet members of the Bush Administration? If they would have filed the lien against Dick Cheney they could have garnered a little popular support at least.

Oregon Attorney Convicted of Tax Fraud After Filing $1 Trillion Lien Against IRS [Web CPA via TaxProf]

SEC: Diebold Financial Execs Would Step Over Their Own Mothers to Meet Earnings Forecasts

The Diebold CFO, controller and Director of Corporate Accounting had a fairly standard routine back from 2002 to 2007 – 1) get daily “flash reports” 2) look at BS estimates that analysts came up with 3) cook up some ideas for meeting those estimates 4) make up the numbers.

Pretty standard stuff, especially if you buy the idea that “legally cooking the books is a critical skill for attracting investors.”


The SEC presented the accounting hocus-pocus earlier today:

The SEC alleges that Diebold’s financial management received “flash reports” — sometimes on a daily basis — comparing the company’s actual earnings to analyst earnings forecasts. Diebold’s financial management prepared “opportunity lists” of ways to close the gap between the company’s actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold’s financial performance.
…
Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:

• Improper use of “bill and hold” accounting.
• Recognition of revenue on a lease agreement subject to a side buy-back agreement.
• Manipulating reserves and accruals.
• Improperly delaying and capitalizing expenses.
• Writing up the value of used inventory.

Gotta give yourself some options, amiright? Can’t just simply rely on channel stuffing!

But in all seriousness, if you’re a top financial executive at a company and part of your daily routine is finding ways to increase profitability through accounting manipulation, at some point you’d have to think to yourself, “This is one shitty business we’re running.”

At Least One Accountant Thinks “Legally Cooking the Books” Is A-Okay

That accountant is Ren Carlton, CPA, CSMC and “native Michigander.” Although Ren is hesitant to broach the subject because, “this information can be abused to defraud investors and cheat on taxes.” Who knew?!?

Despite that caveat, Ren has decided that sharing this information is too critical to be kept to himself, “I have decided that legas is a critical skill for attracting investors and lenders, as well as satisfying the occasional customer or vendor requests.”

Okay then! So if we understand correctly, the rationale here is that cooking the books is sort of like drinking alcohol. In moderation, it’s fine and sometimes even the right thing to do but if you abuse it, you start making an ass out of yourself and probably some bad decisions that could lead to, ya know, jail.


But wait, do you really even know what “cook the books” means? You may be under the cockamamie notion that it’s a bad thing. Well, it’s not and Ren explains it for us:

Cooking the books (also known as creative accounting and earnings management) are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers toward the interpretations desired by the authors. The terms “innovative” or “aggressive” are also sometimes used.

See? Cooking the books just doesn’t follow the “spirit of those rules,” it’s not breaking the rules. Strangely enough, Ren’s definition is strangely similar to this Wikipedia entry for creative accounting:

Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms “innovative” or “aggressive” are also sometimes used.

Cooking the books, creative accounting – they’re the same right? Close enough, anyway. Now that the semantics are out of the way, what other words of wisdom can we get from Ren? How about an example of acceptable book cooking? Say, revenue recognition:

One example of cooking the books is acceleration of revenue recognition. This tactic is used to recognize revenue before it is considered earned by GAAP (Generally Accepted Accounting Principles). Methods for accelerating revenue include recognizing sales that are not yet earned or complete. Another method is to book sales that are actually earned in another period (e.g., recognizing January 2011 sales on your 2010 income statement). Flagrant abuse of the Revenue Recognition Principle includes backdating sales and fabricating fictitious sales.

How are you going to impress that bank with your revenue numbers if you ram in some revenue from a future period? What if you need another investor to help you reach the next stage of your business? It’s your God-given right to present them with phony numbers in order to get them on board. This is America, people. Don’t let the spirit of GAAP hold you back!

Seems Hard to Believe That a Pre-Loaded Sponge Company Would Have to Resort to Fraud

Today in “they just made the numbers up” news, it’s shocking that a company with this business description:

We design, produce, market, and distribute cleaning products primarily for vehicular use utilizing patented technology relating to sponges containing hydrophilic, or liquid absorbing, foam polyurethane matrices and other technologies. Our products can be pre-loaded with detergents and waxes, which are absorbed in the core of the product then gradually released during use. We have designed and are conducting additional research and development for products and applications using hydrophilic technology and other technologies for kitchen and bath, health and beauty, auto, medial and pet use, which we intend to market and sell as part of our product offering. There is no assurance that we will successfully be able to market and sell products for kitchen and bath, health and beauty, auto, medial and/or pet use.

…would have to make up five customers out of thin air to account for 99% of their revenue:

According to the SEC’s complaint, after several years of relatively little business with a single customer comprising the bulk of Spongetech’s limited sales, Metter and Moskowitz began to paint a more promising and misleading picture of Spongetech’s business. Beginning in approximately April 2007, Spongetech issued dozens of phony press releases touting increasingly larger, yet fictitious, sales orders and revenue. The press releases fraudulently exaggerated the demand for pre-soaped sponges by referencing millions of dollars in sales orders, business, and revenue from five primary customers that purportedly accounted for 99 percent of Spongetech’s business, yet none of those customers actually existed.

Yes, they had an auditor. According to the the last 10-KSB filed it was Drakeford & Drakeford, LLC who has had their own share of trouble.

SEC Charges Spongetech and Senior Executives in Pump-and-Dump Scheme [SEC Press Release]
SEC v. Spongetech, et al. [SEC]