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Understanding the Latest Developments in Financial Fraud
1. AICPA National CFO Conference
InterContinental Boston
Understanding the Latest Developments
in Financial Fraud
Stephen G. Austin, CPA, MBA
Firm Managing Partner
Swenson Advisors, LLP
May 20, 2011
7:00 am – 7:50 am
6. “Lose money and I will forgive you, but lose even a shred
of reputation and I will be ruthless”
Warren Buffett
David Sokol allegedly traded Lubrizol Corp. stock prior
to Berkshire Hathaway’s acquisition of Lubrizol Corp.
Sokol “pocketed” a $3 million profit?
Some believe Buffett
missed the opportunity to:
“...show moral courage, stand up for principles,
reinforce to his employees what he expects from them,
and, not least of all, to live up to his own public reputation.”
The Daily Transcript | 4/4/11 6
7. “Skilling Loses Key Appeal Battle”
Supreme Court ruled that Skilling’s fraud and
conspiracy conviction was not swayed by federal
prosecutors’ use of the “honest services” test
Case returns to the Fifth Circuit panel to determine whether any of the 19
counts against Skilling should be vacated
Ex‐Enron Chief’s son, John Taylor Skilling, dies of possible overdose
Echoes death of Mark Madoff, the son of Bernie Madoff
Accounting scandals have a serious impact on friends and family
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9. “Barry Minkow Turned Over a New Leaf‐
From Accounting Scandals to Insider Trading”
Barry Minkow (ZZZZ Best fame), an ex‐convict who turned his life around a
decade ago and became a minister and
co‐founded a fraud detection firm
In December, 2010 Minkow was found
guilty of securities fraud charges and
in March, 2011 pleaded guilty to
Federal charges of “insider trading”
Minkow has agreed to help federal
investigators, but could face five years
in prison 9
15. SOX Has Achieved
Significant Acceptance
A new survey of more than 300
Chief Audit Executives found that
88% do not believe that the SOX
Act should be repealed.
Source: Grant Thorton CAE Survey 2011
70% of more than 400
respondents who have put into
place accounting controls required
by SOX said that the benefits
outweighed its costs.
Source: Protiviti 2010 Sarbanes‐Oxley Compliance Survey
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17. SEC Settlements/Fraud Allegations
with Wall Street Banks
SEC settlements with major investment banking houses
Largest attempt by enforcement agencies to hold Wall Street accountable
for its role in the toxic subprime mortgage debacle
SEC’s rough road to this enforcement action
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18. “SEC Levels Case Against Ex‐Officers
of IndyMac”
SEC charged three former senior executives
with fraud
Failure to adequately disclose to investors
information about the Company’s deteriorating financial condition in 2007 and
2008
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19. “SEC Levies Record Fine Against
India Accounting Firm”
India affiliate of PricewaterhouseCoopers “routinely failed to follow the
most basic audit procedures” – said the SEC
Satyam Computer Services –
falsely reported more than $1 billion in profits
SEC and PCAOB fined PWC India $7.5 million
Largest penalty ever against
a foreign accounting firm
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20. “Ernst and Young Faces Civil Fraud
Charges for Lehman Accounting”
Lehman’s use of Repo 105 accounting in question
Ernst & Young is fighting charges for allegedly failing to adequately follow up
on a whistleblower’s claim that Lehman was misstating the value and size of
its assets
“Ernst and Young is the only firm left to punish” –Why?
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23. Key Trends
Increased Enforcement:
2010 saw unprecedented levels of enforcement of FCPA, more than double the
financial penalties levied in 2009
Expanded Enforcement:
Greater resources devoted by the Department of Justice (‘DOJ’) and Securities
and Exchange Commission (‘SEC’) toward dedicated enforcement units
Industry‐wide sweeps; expansion of actions against non‐U.S. Companies
Enforcement actions against individuals being brought with increasing frequency
and volume
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Source: The Red Flag Group
24. Key Trends, Continued
More Onerous Enforcement:
Trend in cases towards more onerous penalties
New Tools for Enforcement:
Dodd‐Frank Wall Street Reform and Consumer Protection Act
Enacted July, 2010 (‘Dodd‐Frank Act’)
Provides incentives and protection for whistleblowers
Non‐prosecution agreements
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Source: The Red Flag Group
25. Increased Enforcement
“We’re in a new era of FCPA enforcement; and we are here to stay.”
(AAG Breuer; November 16, 2010)
Between DOJ and SEC criminal fines, disgorgements, civil penalties and
prejudgment interest more than $1.8 Billion was recovered in funds from
companies in violation of the FCPA, more than double that in 2009
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Source: The Red Flag Group
27. Expanded Enforcement
Greater Resources being devoted by DOJ/SEC:
Significant increase in funds and resources being devoted to enforcement of FCPA
provisions
Dedicated enforcement units
New Financial Sector/Banking probe January, 2011
Industry‐wide sweeps:
Significant amount of FCPA actions now part of a multi‐defendant or industry‐wide
investigation
Strong collaboration between FCPA regulators and enforcement agencies
Recent cases suggest expanded and more proactive enforcement of FCPA and a
focus on non‐U.S. companies.
Increasing focus on prosecution of individuals:
So‐called ‘Shot Show’ sting: 22 individuals arrested in largest single investigation
and operation against individuals in history of FCPA 27
Source: The Red Flag Group
28. More Onerous Enforcement
Recent trend in case law towards more onerous penalties for companies:
8 of the top 10 monetary settlements in FCPA history occurred in 2010
Technip, Snamprogetti and BAE cases all imposed combined penalties in excess of
$350 million
Daimler, Panalpina & Alcatel cases all imposed combined penalties around $100
million
First instance of a company being “put out of business” by FCPA enforcement action:
NEXUS Technologies.
Continuing trend in case law towards pursing individuals:
Individuals receiving increasing fines and jail sentences .
Most severe sentence imposed in PECC case of 87 months and $1.1 Million in fines.
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Source: The Red Flag Group
32. COSO Monitoring Guidance
Issued January 2009
Useful guidance (with many examples) available from COSO)
Goal: Compliance “365 days a year” versus “last day of the fiscal year”
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33. New Monitoring Guidance
Source: COSO – Committee of Sponsoring
Organizations of the Treadway Commission
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34. The New Monitoring Guidance ‐
Four Steps
1. Establish a foundation for monitoring
2. Design and execute monitoring procedures
3. Assess and report results to appropriate personnel
4. Monitoring can be outsourced to others
“COSO continues to provide outstanding tools that should be embraced in order
to sustain an effective reliable U.S. reporting system and provide the kind of
ethical leadership needed in today’s global economy.”
Steve Austin | Turbo Charge Your SOX Program with the New COSO Monitoring Guidance | 7/8/10
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