Transcript Document 7362700

Lessons Learned from Fraud
Cases
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Can Better International Accounting and Auditing Standards Mitigate Fraud?
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Professor Paul Sheldon Foote
California State University, Fullerton
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ACCOUNTING ACADEMICIANS’ COLLABORATION FOUNDATION
MUHASEBE ÖĞRETİM ÜYELERİ BİLİM VE DAYANIŞMA VAKFI
4th International Accounting Conference, Istanbul, Turkey
November 17, 2007
Lessons Learned From Fraud
Cases
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PricewaterhouseCoopers
• Global Economic Crime
Survey, 2007 Turkey
Report
• Larger frauds: $3.9
million average
• Turkish fraudsters: 31 to
40 year old males, high
school educated, less
than 5 years on job
• Only 21% of 105
companies brought
criminal charges.
November 17, 2007
Lessons Learned From Fraud
Cases
2
SmarTalk TeleServices Fraud
• 2003: PwC agreed to
pay SEC $1 million
for improper
professional conduct
• Approved $25 million
restructuring reserve
to reduce expenses
• Revised, corrected, or
discarded audit work
papers
November 17, 2007
Lessons Learned From Fraud
Cases
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KPMG
• Typical fraudster: longtime employee, top
management, acting
alone, many frauds, over
many years, large
amounts
• Whistle blowers catch far
more than internal
controls
• Theft, fraudulent financial
reports, embezzlement,
kickbacks
November 17, 2007
Lessons Learned From Fraud
Cases
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KPMG: Xerox Audit Fraud
• 2003: SEC charged
KPMG with fraud in
Xerox audits (19972000)
• KPMG approval of
accounting errors
inflated revenues by
$3 billion and pre-tax
earnings by $1.2
billion
November 17, 2007
Lessons Learned From Fraud
Cases
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Deloitte
• Financial institutions
• External: organized
crime rings,
sophisticated threats
• Internal financial fraud
increased 19%
• Disaster recovery:
Business Continuity
Management (BCM)
November 17, 2007
Lessons Learned From Fraud
Cases
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Adelphia Sued Deloitte
• 2002: disclosed $2.3
billion off-balance-sheet
debt, declared bankruptcy
• November 2002:
Adelphia
Communications
Corporation sued Deloitte
& Touche for
“professional negligence,
breach of contract, fraud
and other wrongful
conduct.”
November 17, 2007
Lessons Learned From Fraud
Cases
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Ernst & Young
• 20% of respondents would not
invest in some countries
because of fraud risk,
especially bribes and
kickbacks.
• “The move towards
International Financial
Reporting Standards (IFRS)
will drive changes to
accounting practices,
particularly in emerging market
countries. Where these
standards negatively impact
financial results, the risk of
financial statement fraud may
increase.”
November 17, 2007
Lessons Learned From Fraud
Cases
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Manhattan Investment Fund
• Phony financial
statements certified by
Deloitte (Bermuda, a tax
haven) hiding $300
million short sale losses
of $400 million hedge
fund
• Ernst & Young (Bermuda)
fund administrator
• Settled with investors,
2001
November 17, 2007
Lessons Learned From Fraud
Cases
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Association of Certified Fraud
Examiners (ACFE)
• “According to research
conducted by the Association
of Certified Fraud Examiners
(ACFE), U.S. organizations
lose an estimated 5 percent of
annual revenues to fraud.
Based on the estimated U.S.
Gross Domestic Product for
2006 – $13.037 trillion – this
percentage indicates a
staggering estimate of losses
around $638 billion among
organizations, despite
increased emphasis on antifraud controls and recent
legislation to combat fraud.”
November 17, 2007
Lessons Learned From Fraud
Cases
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United States Army, Vietnam
• Army lieutenant, 1968
-1969
• False Claims Act
(1863) because
American government
fails to prosecute
many fraud cases
• Qui Tam provision:
15% – 25% of
recoveries to
whistleblowers
November 17, 2007
Lessons Learned From Fraud
Cases
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Iraq War (2003 – present)
• Ali Allawi, nephew of
Ahmad Chalabi and
my Harvard Business
School classmate,
has written a book
describing massive
fraud cases in the
Iraq War. A single
fraud case involved
$1 billion.
November 17, 2007
Lessons Learned From Fraud
Cases
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War Fraud Lessons
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Massive increases in fraud and corruption
Whistleblower (informer) system is weak
Vietnam War: military draft
Iraq War: all volunteers; more private
contractors than American military service
members
• Corporate media can distract voters from
important issues
November 17, 2007
Lessons Learned From Fraud
Cases
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Citibank--Lebanon
• 1972: Of more than
200 employees, few
Muslim employees
• Foreign exchange
trader frauds resulted
in millions of dollars of
losses in branches
including: Lebanon,
Holland (The
Netherlands), and in
Hong Kong.
November 17, 2007
Lessons Learned From Fraud
Cases
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Citibank—Lebanon Lessons
• Not hiring based upon merit leads to
incompetent work and audits and to fraud.
• Management training program included
only one week of reading about and
observing foreign exchange trading.
• Employees understand quickly that most
managers are untrained and unfit to serve
as managers.
November 17, 2007
Lessons Learned From Fraud
Cases
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Citibank--India
• 1972-1974: Reserve
Bank of India (central
bank) policy on bank
auditor rotation
• Reserve Bank of India
and Citibank’s
international internal
audit team could find
only 10% of internal
control failures.
November 17, 2007
Lessons Learned From Fraud
Cases
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Citibank—India Lessons
• 2007: Reserve Bank of India and Institute
of Chartered Accountants of India (ICAI),
having failed to mandate audit firm
rotation, are attempting to mandate audit
partner rotation every 7 years.
• External auditors and international internal
audit teams cannot find most fraud.
• If there is fraud in one activity, there is
likely to be fraud in other activities.
November 17, 2007
Lessons Learned From Fraud
Cases
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Singer Sewing Machine--Turkey
• 1974: Store Manager
fraud—fictitious
deposits, non-Singer
repair parts
• Singer accountant in
Istanbul reported
concerns to marketing
manager.
• Store Manager fled
from Turkey.
November 17, 2007
Lessons Learned From Fraud
Cases
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Singer—Turkey-- Lessons
• Even accountants who understand internal
control procedures might permit personal,
political, or cultural considerations to be
more important that fraud losses.
November 17, 2007
Lessons Learned From Fraud
Cases
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Singer Sewing Machine--Lebanon
• Nearly all employees
were Christians
• Employees reported
to me that they were
paying 10% of their
salaries each month
to Lebanese officer
who had hired them.
• Incompetent
employees
November 17, 2007
Lessons Learned From Fraud
Cases
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Singer Sewing Machine--Morocco
• Moroccan
government fine for
bad accounting
• Paying all employees
in cash
• Accounting
employees with high
school bookkeeping
or no training
November 17, 2007
Lessons Learned From Fraud
Cases
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Singer—Morocco--Lessons
• In spite of a French general manager with
a business school degree, accountants
were copying from marketing reports.
• Imposition of voucher system revealed
fake monthly reports to New York.
• Imposition of imprest payroll account
revealed illegal workers using false
names.
November 17, 2007
Lessons Learned From Fraud
Cases
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Gulf Investment Services (GIS)
• 1998: fraud audit in Muscat, Sultanate of Oman
November 17, 2007
Lessons Learned From Fraud
Cases
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GIS—Ernst & Young
• Following financial
audits, Ernst & Young
did not detect any
fraud.
November 17, 2007
Lessons Learned From Fraud
Cases
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GIS—Best Brokerage
• GIS: first brokerage
company in Oman to
receive the coveted
"Best Brokerage"
award instituted by
the Muscat Securities
Market
November 17, 2007
Lessons Learned From Fraud
Cases
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GIS—ISO 9002 Certification
• GIS: first to be an ISO
9002 certified
financial services
company in Oman
• 1998: ISO
representative had no
clue there were
frauds at GIS.
November 17, 2007
Lessons Learned From Fraud
Cases
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GIS—Andersen Consulting
• GIS used a special
software system
developed by
Andersen Consulting
(now Accenture) able
to serve speakers of
Arabic and English.
• System default: all
users can access
entire system!
November 17, 2007
Lessons Learned From Fraud
Cases
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GIS--Omanization
• Since 1988, Oman
has had a policy of
Omanization, an
attempt to increase
percentage of Omani
workers.
• GIS employees:
India, Jordan, United
Kingdom, Oman
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Lessons Learned From Fraud
Cases
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GIS--Fraud
• Focus of my fraud
audit: fraud involving
British and Omani
collaborators
• Collaborators
included a manager
with internal audit
experience and an
accountant with a
CPA.
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Cases
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If you discover one fraud …
• Like discovering a
cockroach, if you
discover one fraud in
an organization, there
are likely to be other
frauds.
• Sometimes, you
discover frauds your
client or employer did
not want you to
discover.
November 17, 2007
Lessons Learned From Fraud
Cases
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