Corporate Fraud Forum

3 former WorldCom executives settle with investors

2005-07-28T10:51:00.000+02:00

Three former executives of WorldCom Inc. have reached settlements in a class action lawsuit brought by investors who lost billions of dollars when the telecommunications firm collapsed in an $11 billion accounting fraud, a federal judge said Monday.

Judge Denise Cote, of Manhattan federal court, scheduled a hearing Thursday to discuss preliminary approval of the settlements, reached by former WorldCom finance chief Scott Sullivan, former accounting director Buford Yates and former controller David Myers.

The three former executives were the last remaining defendants in the investor lawsuit.

Former WorldCom CEO Bernard Ebbers, 12 former WorldCom directors, auditing firm Arthur Andersen and major investment banks that underwrote WorldCom securities have reached settlements with the investors totaling more than $6 billion.

The judge, in an order posted on a court Web site, did not indicate how much money Sullivan, Yates and Myers would pay for their parts of the settlements or whether they were likely to forfeit property. She said the details of the settlements would be made public Tuesday.

Lawyers for the three defendants and for the investors were not immediately available for comment by telephone Monday.

In Ebbers' settlement, he agreed last month to forfeit nearly all his personal assets _ a total that could reach $40 million _ including selling his Mississippi mansion. The same week, he was sentenced to 25 years in federal prison for his role in the accounting fraud, which came to light in 2002.

Read on.

Time Warner settles SEC fraud charges

2005-03-22T10:01:00.000+01:00

Time Warner just agreed to pay securities regulators $300 million and restate three years of financial results to settle civil fraud charges stemming from its accounting of online advertising revenues and subscriber counts at its AOL unit.

The settlement with the Securities and Exchange Commission also calls for the world's largest media company to open its books to an independent examiner, which could result in additional restatements.

The settlement closes another chapter in a federal investigation of more than two years into the accounting practices and deal-making at America Online before and after its January 2001 merger with Time Warner.
Time Warner said it had restated financial results for 2000 to 2002 by about $500 million to correct its accounting for deals under scrutiny by the Securities and Exchange Commission (SEC).

The company did not admit or deny wrongdoing as part of the settlement.

The SEC also settled with the company's finance chief, controller and deputy controller, who stood accused of causing false financial reports to be filed in $400 million worth of transactions that Time Warner negotiated with German media company Bertelsmann.
The three men, who were responsible for approving corporate accounting practices, received false information from unnamed insiders and "failed to pursue facts and circumstances" that would have thrown into question the payments in 2000 and 2001, according to court papers.

Chief Financial Officer Wayne Pace, Controller James Barge and Deputy Controller Pascal Desroches are not required to pay fines or face other sanctions as part of yesterday's settlement.

The three men, who did not admit or deny wrongdoing, remain employed at Time Warner, company officials said. Their defense lawyers declined to comment.

SEC enforcement chief Stephen Cutler said the charges in the 29-page complaint detail "a wide array of wrongdoing" at the world's biggest media company, including schemes to inflate advertising revenue and subscriber numbers.

Worldcom-Chief Ebbers found guilty over WorldCom fraud

2005-03-16T14:45:00.000+01:00

A jury has found Bernie Ebbers, the former head of WorldCom, guilty of the biggest accounting fraud in history over his role in the firm's $11bn collapse. After deliberating for eight days, the New York jury found Ebbers guilty on nine counts, one each of conspiracy and securities fraud and seven of false regulatory filings. He faces a possible 85 years in jail when sentenced on 13 June.

In a trial that pitted Ebbers' word against that of his former chief financial officer, Scott Sullivan, it's virtually impossible to know for certain whether Ebbers was responsible for the $11 billion accounting fraud at WorldCom, the largest in U.S. history. The jury clearly believed Ebbers was.

The court heard that WorldCom fixed its corporate figures to the tune of $11bn over 2000 to 2002 in order to keep the share price high. When the company collapsed, investors lost $180bn and 20,000 people were laid off."

The conviction of former WorldCom chief Bernard Ebbers, a former milkman, bouncer and motel manager, underlines the accountability of business leaders, according to legal and corporate analysts.

While his wife and stepdaughter cried, Ebbers, 63, sat impassively and listened to the jury's decision: Guilty of one count of conspiracy, one count of securities fraud and seven counts of false regulatory filings.

Bestselling Books on Corporate Fraud

2004-12-29T14:39:00.000+01:00

Outcome-oriented auditing

2004-12-23T08:48:00.000+01:00

Outcome-oriented auditing - looking at a situation as a whole rather than its individual parts - can help think like a fraudster and find deeply embedded crimes.
Focusing on the whole and not just the parts of a F. audit has helped find F. in numerous situations that probably would have overlooked.
Instead of looking at separate elements (such as each individual internal control in a transaction) and testing each individually, you look at the transaction or activity as a whole. You ask yourself these questions:
- Who are the customers (internal and external)?
- What are the customers' expectations?
- What would happen if expectations weren't met?
- If something were to go wrong, what would you expect to go wrong?
Then look for evidence that someone may have followed this course of action. Once the first indication is found that that someone has, in fact, attempted to perpetrate a F. scheme, dig deeper.
Bonita Warnell explains about a case in which outcome-oriented auditing helped to find thousands of dollars in well-hidden overcharges.

Money laundering and disclosing of confidential client information by accountants

2004-10-26T11:38:00.000+02:00

Plans by home secretary David Blunkett to make the UK 'one of the most difficult environments in the world' for organised crime, could see accountants forced to disclose confidential client information.

A white paper, titled: One Step Ahead: A 21st Century Strategy to Defeat Organised Criminals , will see the Serious and Organised Crime Agency (SOCA) set up, bringing together the responsibilities of the National Criminal Intelligence Service, the National Crime Squad, and sections of the Immigration Service and Customs and Excise.

It is expected to suggest that accountants and other advisers such as bankers and lawyers - normally bound by confidentiality rules - will be forced disclose information about clients that may be involved in organised crime, or face jail themselves.

This will place even more pressure on the profession already reeling from requirements in the Proceeds of Crime Act which force accountants to report any suspicious activities to NCIS or face the threat of prosecution.

Accountants' protests against current legislation to combat money laundering could be paying off as home secretary David Blunkett considers changes to reporting processes.

The Home Office has reportedly opened discussions with professional advisers who are adopting different approaches to deal with the new legislation.

A Home Office spokesman said: 'The Home Office will be looking at the current legislation to make sure we've got the right balance. We are looking at the money laundering reporting processes to make sure they are as effective as possible', reported The Telegraph.

Under new rules accountants, lawyers and other advisers must report to authorities any suspicious transactions carried out by clients. The law was designed to target terrorists and fraudsters but advisers have complained the restrictive laws are hindering their ability to work.

The Audit Committee Handbook, 4th edition is out

2004-09-30T08:32:00.000+02:00

Out now: The Audit Committee Handbook, Fourth Edition. This comprehensive reference fills the need for an up-to-date in depth coverage to help busy professionals perform oversight responsibilities during this time of great financial liability.

Comprehensive in scope and an invaluable professional reference, this timely revision provides in-depth guidance on all functions and responsibilities of today’s audit. Features of the Audit Committee Handbook include:

Checklists and practical guidance to help audit committee members meet their responsibilities in this new era of accountability
The latest guidance for compliance from the SEC and the major stock exchanges
New material addressing the scandals of the past two years and their impact on audit committees
Guidance from the IIA on how to work with internal auditors

The Audit Committee Handbook is a 'must-have' for all audit committee members, board directors, CEOs, CFOs and auditors fighting fraud. Order The Audit Committee Handbook at Amazon

Say It Loud, Say It Proud -- `Shareholder Value!

2004-08-18T10:21:00.000+02:00

According to Orit Gadiesh, chairman of management consultants Bain & Company, in a WSJ article of August 3rd, 2004, fraud cases not only dominate the headlines; their fallout makes senior managers more circumspect and risk-averse.

Gadiesh argues that because of scandals like WorldCom's, many CEOs shy away from bold pronouncements or actions. Instead, they're preoccupied with mounting concerns, some seemingly outside of running the business, that add up to huge distractions for CEOs:

The first is defending themselves against the charge that all senior executives are crooks; crooks, moreover, who justified their crimes by citing shareholder value as their gospel. Many CEOs understand they can't win this debate. So they remain silent. They deal, instead, with the hassles of Sarbanes-Oxley, Congress's attempt to legislate trust, and the Higgs rules in the U.K.
The second, related, CEO distraction is corporate image. CEOs are spending more and more time on the reputational front, promoting good deeds in social responsibility in an effort to be seen as "giving back."
The third CEO preoccupation encompasses geopolitical risks, terrorism and the state of the global economy. For instance, U.S. companies increasingly worry about the "American-ness" of their brands overseas

However according to Gadiesh, CEOs have to reclaim their agenda. They must have the confidence to set long-term goals and the will to communicate those goals clearly. So it's long-term shareholder value creation that matters and CEOs need to earn the public's trust the old-fashioned way -- through performance. Because ultimately, the trust that companies build through continuous, solid performance outshines every other consideration.

***** Websites on Corporate Fraud

2004-08-17T23:29:00.000+02:00

I found this ***** comprehensive website on financial scandals, maintained by Roy Davies. The site has massive fraud contents including:
Classic Financial and Corporate Scandals
BCCI, Barings, Daiwa, Enron, Sumitomo, Credit Lyonnais, Bre-X, Lloyds, NASDAQ, Savings and Loan, WorldCom, Parmalat etc.
Scandals involving Central Banks
Criminal or scandalous activity involving the pillars of the international financial system.
Political Corruption
Corruption in governments and official organisations in Great Britain, Europe, the United States, Japan and other countries.
Organized Crime:
The Cosa Nostra or Mafia, the Yakuza and other major criminal organisations and their role in financial scandals.
Money Laundering
How it is done and what is being done about it.
Bankers Behaving Badly
Cases of sexual harassment, racism, embarrassing e-mails, and outrageous extravagance.
Official Regulatory and Anti-Fraud Organisations
Links to the web sites of official organisations combating fraud.
Other Organisations Fighting Financial Crime
Professional Bodies, Investigative Services and Forensic Accounting.
Plus many links to other sources of information on Financial Schandals.

What are your favorite Websites on Fraud?

Enron Capitalism

2004-08-17T22:40:00.000+02:00

Feudalism: You have two cows. Your lord takes some of the milk.

Fascism: You have two cows. The government takes both, hires you to take care of them and sells you the milk.

Communism: You have two cows. You must take care of them, but the government takes all the
milk.

Capitalism: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

Enron Capitalism: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt-equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred through an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The Enron annual report says the company owns eight cows, with an option on one more.

Free Anti-Fraud guide by E&Y UK

2004-08-17T13:28:00.000+02:00

Fear of F. should force every company director to take responsibility for their company's defenses and ensure that they have strong controls in place. This is the view of a report published by Ernst & Young in the UK.

A Guide titles "F.: Real solutions to a real risk" spells out the most common types of F. and gives guidance on various ways in which their impact can be minimized. The guide spells out the most common types of F. likely to hit businesses, from straight forward asset misappropriation, to false accounting and corruption. It also seeks to dispel the myths surrounding ‘computer F. – in the eyes of Ernst & Young’s fraud investigators, computers are only an additional tool in a fraudster’s scheme.

In common with any crime prevention strategy, the key to minimising the risk of F. lies in understanding why it occurs, identifying vulnerable business areas and implementing procedures to protect these areas.

Matters to be considered and incorporated within a F. contingency plan include:

Agreeing the F. contingency plan
Who leads the investigation
Setting objectives and powers of the investigation team
Conducting the investigation – identifying the suspects, obtaining and preserving evidence
Working with the police
Reporting and publicity

For a free copy of "F.: Real solutions to a real risk" you can call Rukshan Permal of E&Y UK on +44 [0]20 7951 9781.

An explanation of dirty accounting tricks by public companies

2004-08-12T10:19:00.000+02:00

Welcome to the looking-glass world of accounting, where losses are magically transformed into gains and inconvenient financial facts that can’t be explained away are simply ignored. As many board members, especially those on audit and compensation committees, have lately learned to their disgrace, management can overstate revenue or understate expenses, pass off one-time windfalls as recurring gains, or, conversely, disguise recurring losses as singular events. Sometimes even those methods aren’t sufficient to produce the desired results: profits, or at least the appearance of profits. Do unscrupulous managers then simply give up and admit the sad financial truth? Not likely. More often, something other than profitability—something usually called EBITDA or pro forma earnings—becomes the designated measure of a company’s well-being. Even cash flow, which conventional wisdom says can’t be faked, turns out to be vulnerable to distortion and gimmickry.
Read on in this excellent explanation of how numbers are made up and how investors are being misled

Ahold U.S. executives charged with F.

2004-07-30T15:46:00.000+02:00

Prosecutors charged three former executives of Royal Ahold NV's U.S. unit with inflating earnings by more than $800 million at the world's third-largest retailer. Michael Resnick, 42, the former chief financial officer of the unit; Mark Kaiser, 47, its ex-marketing manager; and William Carter, 43, a former vice president, were charged with a F. conspiracy, Interim U.S. Attorney David Kelley said at a press conference in Manhattan. Resnick and Kaiser, members of the unit's executive committee, will appear in federal court tomorrow to enter a plea to charges including securities F. , conspiracy to commit securities F. and filing false statements to the U.S. Securities and Exchange Commission. The three-count indictment alleges that U.S. Foodservice overstated earnings by recording as income promotional allowances that hadn't yet been earned. By doing so, Kaiser and Resnick each earned bonuses doubling their salary, Kelley said. Their alleged F. occurred between 2000 and February 2003, Kelley said. Prosecutors said Kaiser and Resnick were able to dupe auditors by inducing vendors to issue letters attesting to the legitimacy of some promotional allowances. They then issued secret side letters excusing the original letters. "They manipulated income, they accelerated income, and in some instances they just made it up,'' said Linda Thomsen, deputy enforcement director of the Securities and Exchange Commission. Article

Former Enron Chief Pleads Not Guilty

2004-07-10T08:49:00.000+02:00

Former Enron Corporation Chief Executive Kenneth Lay has pleaded not guilty to charges connected to the financial collapse of the energy trading company he headed. Mr. Lay appeared in a Houston federal court Thursday and was released on payment of a $500,000 bond. The case is part of an effort by U.S. authorities to restore confidence in the stock market and U.S. business in general.
The indictment unsealed in federal court charges Kenneth Lay with 11 counts including conspiracy, wire F., securities F. and bank F. In an appearance before reporters in downtown Houston only a couple of hours after his court appearance, Mr. Lay denied any wrongdoing.
"As CEO of the company I accept responsibility for Enron's collapse, however that does not mean I knew everything that happened at Enron and I firmly reject any notion that I engaged in wrongful or criminal activity," he said.
Overall attack against corruption

Independent directors decrease F. risk

2004-07-05T14:22:00.000+02:00

A recent study provides ammunition for current demands for more independence on the part of C. boards, showing a correlation between a higher proportion of independent, outside directors and a lower likelihood of CF.
The study compared 133 companies that were accused of F. between 1978 and 2001, and 133 companies of similar size and from the same industries that were not, searching for significant differences in director independence, board size and other variables. The result showed that the boards of the companies that were accused of F. had fewer non-executive directors and fewer independent directors, and lower levels of independence on their audit, compensation and nominating committees.
The researchers found that, compared to the non-F. companies, companies accused of committing F.:
- had a lower percentage of outside (non-executive) directors
- had a lower percentage of independent directors (directors with no business or personal ties to the company).
- were less likely to have an audit committee of the board
- were more likely to have a compensation committee of the board
- had a lower level of independence on its audit, compensation and nominating committees (measured by the percentage of directors on these committees with no business or personal ties to the company).
The study was published in the June issue of Financial Analysts Journal, a research publication for investment practitioners worldwide published by CFA Institute.

The 10 truths about Fraud

2004-06-29T14:27:00.000+02:00

According to Bonita Peterson and Paul Zikmund (Strategic Finance, May 2004) understanding the following 10 things can help reduce fraud risk:
1.Fraud is everywhere 2.Anyone can commit fraud 3.Understand the circumstances influencing why people commit fraud (motive, perceived opportunity to commit and think they can get away with it, morally acceptable excuse) 4. The best deterrent is to increaese the perception of detection 5. Perpetrators are often employees 6. There are only a limited number of Fraud schemes (asset misappropriations alone count for 60-86% of all frauds) 7. Understand early signs and act upon them 8. Don't rely on auditors to detect fraud (they focus on material fraud only) 9. Have an (anonymous) fraud hotline and use a fraud questionaire now and then 10. Prevention is the best cure.
I would argue that creating and cultivating a high employee moral is also important, do you agree? Who wants to share additional fraud best practises?