Arresting Financial Fraud-The Inside Story From The FBI.ppt

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1、“Arresting Financial Fraud: The Inside Story From The FBI”,Slide 2,This program is designed to help you: Understand the U.S. Department of Justices three-part definition of corporate fraud; Understand the scope of the problem; Identify common accounting schemes; Work effectively with law enforcement

2、; and Better understand the impact of recently enacted legislation,Course Objectives,Slide 3,Todays Speakers,Grant Ashley, CPA Assistant Director, Criminal Investigative Division Federal Bureau of Investigation-Gary Dagan, CPA Chief, Economic Crimes Unit Federal Bureau of Investigation,Keith Slotter

3、, CPA Chief, Financial Crimes Section Federal Bureau of Investigation-John F. Hudson, CPA Moderator Hudson Consulting Group, LLC,Slide 4,Corporate Fraud - Background,Following the corporate scandals of 2002, the Department of Justice issued a three-part formal definition which describes the illegal

4、activities that encompass corporate fraud. These three parts are: Accounting Fraud Self-Dealing by Corporate Insiders Obstructive Conduct,Slide 5,Dept. of Justice Definition Corporate Fraud,Part One Accounting Fraud (“Cooking the Books”) The falsification of financial information, including false ac

5、counting entries, bogus trades designed to inflate profits or hide losses, and false transactions designed to evade regulatory oversight.,Slide 6,Restatements by Reason 1997 - June 2002,Per GAO Report on Financial Restatements Figure 3,Slide 7,Why is Revenue Recognition So Important?,In its October

6、2002 Report on Financial Statement Restatement, the GAO concluded that:,Almost 38% of the 919 announced restatements between 1997 and June 30, 2002 involved revenue recognition. Revenue recognition was the primary reason for restatements in each year. Over 50% of the immediate market losses followin

7、g restatements were attributable to revenue recognition related restatements. Approximately 50% of the SECs enforcement cases have involved revenue recognition issues.,Slide 8,Why is Revenue Recognition So Important?,Restatements for improper revenue recognition also result in larger drops in market

8、 capitalization than any other type of restatement: 8 out of the top 10 market value losses in 2000 related to revenue problems. Of the 10 companies, the top 3 lost US$20 billion in market value in just 3 days due to revenue recognition problems.,Slide 9,Some Examples of Revenue Recognition Schemes,

9、Phantom Sales Parked Inventory Sales Swap (i.e., “Round Trip”) Transactions Channel Stuffing Accelerated Revenue Undisclosed Side Deals Undisclosed Contingencies Backdated Contracts,Slide 10,Some Examples of Expense & Liability Recognition Schemes,Capitalizing Expenses Deferring Expenses Unrecorded

10、Expenses “Big Bath” Accounting “Cookie Jar” Reserves Creative Acquisition Accounting,Slide 11,Cooking The Books Selected Recipes,Parked Inventory Sales Recording sales for goods shipped to a site (warehouse, parking lot) controlled by the seller to provide the appearance a valid sale occurred. Swap

11、Transactions A scheme in which two conspiring companies exchange payments and services solely for the purpose of inflating revenues. Channel Stuffing Overselling products to customers with a hidden understanding that the customer will receive deep discounts on the full invoice price at a future date

12、.,Slide 12,Cooking The Books Selected Recipes,Side Deals An arrangement in which the buyer of goods is given the right to cancel the sales contract, return products or receive rebates in future periods. Although the sale is booked, the side deals are hidden from auditors. Accelerated Revenue Imprope

13、rly recording revenues in the current fiscal period which are applicable to future periods. Examples are unshipped merchandise and percentage of completion contracts.,Slide 13,Cooking The Books Selected Recipes,Capitalizing Expenses The improper reclassification of an expense to an asset. This schem

14、e is typically conducted through a series of journal entries at the end of a fiscal period in order to inflate the financial statements. Deferred Expenses Recording expenses applicable to the current fiscal period at some date in the future. Typically, this scheme continues to perpetuate itself in f

15、uture periods.,Slide 14,Dept. of Justice Definition Corporate Fraud,Part Two Self-dealing by corporate insiders (“Me First”), including . . . Insider trading Kickbacks Misuse of corporate property for personal gain Individual tax violations related to self-dealing,Slide 15,The Fundamentals of Corpor

16、ate Governance,Lessons often forgotten . . . A corporation is owned and controlled by the individual shareholders. The corporation is NOT the personal property of the individual executives of the company. Self-dealing places the greed of individual executives ahead of the shareholders.,Slide 16,Exec

17、utive loans with no intentions to ever repay. Extraordinary personal expenses charged to the company. Failure to report forgiven loans or reimbursed personal expenses as taxable income.,Examples of Self-Dealing,Slide 17,Awarding business contracts in return for personal compensation. Receiving share

18、s of stock in other companies in return for business transactions (shares are often placed in the name of another family member to avoid detection).,Examples of Self-Dealing,Slide 18,Insider Trading Buying or selling personally owned shares of stock prior to a major announcement that is expected to

19、affect the stock price (i.e., positive or negative earnings, new products, change in management, mergers & acquisitions).,Examples of Self-Dealing,Slide 19,Dept. of Justice Definition Corporate Fraud,Part Three Obstruction of Justice (“The Cover-up”) Obstruction of justice designed to conceal the pr

20、eviously noted criminal conduct (accounting fraud & self-dealing), particularly when that obstruction impedes the regulatory inquiries of the Securities and Exchange Commission or other agencies.,Slide 20,Obstructive Conduct,Shredding documents Erasing computer files Creating or altering documents t

21、o justify illegal conduct Purposely failing to provide all documents and files requested in a subpoena,Slide 21,Providing false testimony in SEC depositions Lying to criminal investigators Influencing another witness Threatening another witness Failing to maintain records for a prescribed period of

22、time,Obstructive Conduct,Slide 22,Record Retention Expectations of the CPA,In 2002, a new criminal law (title 18, section 1520) was enacted which requires any accountant who conducts an audit of a public company to maintain all audit workpapers from this engagement for a period of five years.,Slide

23、23,Corporate Fraud Victims,Individual shareholders Employee pension plans Mutual funds Financial institutions (lenders) Market stability & reliance,Slide 24,Locations of Corporate Fraud Investigations,New York, NYChicago Los AngelesSan FranciscoSan Diego,BostonDetroitHoustonAnd ,Slide 25,(Continued)

24、 Locations of Corporate Fraud Investigations,Birmingham Charleston (SC) Anchorage Columbus (OH) Honolulu,Omaha Erie (PA) Johnson City (TN) Oklahoma City,Slide 26,Corporate Fraud ,Is A National Problem,Slide 27,Industry Trends In Current Investigations,EnergyTelecommunications RetailMedicalInsurance,

25、SoftwareInternetBankingCable TVCharities,Slide 28,Typical Scenario,In far too many cases, accounting fraud began as a “one time act” to help meet the quarterly revenue targets. However, the “just one time” syndrome perpetuates itself into future quarters until the fraud becomes out of control.,Slide

26、 29,Corporate Fraud: Walter Pavlos Insider Perspective . . .,Case Study Example,Slide 30,Lets look at an interview with Walter Pavlo . . .,Case Study Example,Slide 31,Perspective,Some corporate executives have compared accounting fraud to a gambling or drug addiction. Although they believe it can be

27、 stopped at any time, their circumstances dictate otherwise. Phony accounting from prior periods combined with current losses has a snowball effect.,Slide 32,Motives For Corporate Fraud,Executive bonuses are tied to profits. Executives maintain their prominent positions within the corporation. Stock

28、 value remains artificially inflated based on phony financial performance indicators. Personal greed is the underlying factor.,Slide 33,Impact,Corporate fraud has negatively impacted the financial services sector. Its effect on the banking, insurance, and securities industries undermines the fundame

29、ntal core of the United States economy.,Slide 34,Overall Scope of Corporate Fraud,Not limited to any geographic area or market segment. Despite media attention on several select companies, the FBI is currently pursuing 139 cases of corporate fraud. Many companies are lesser known but effect on share

30、holders is the same.,Slide 35,Corporate Fraud Investigations,At least 16 cases with losses $1 Billion 50 cases with losses $100 Million Since January 2002 187 executives charged with corporate fraud violations.3-6 new cases opened each month,Slide 36,Participants In Corporate Fraud Vary But May Incl

31、ude . . .,Chief Executive Officer Chief Financial Officer Line Accountants Sales Personnel Shipping Personnel Corporate Attorneys Collusive Customers,Slide 37,A Common Myth,I work in a small local CPA firm. Corporate fraud is only a concern for the big, national accounting firms. I have very few (or

32、 no) publicly-traded audit clients. Therefore, the issue of corporate fraud has no effect on my practice.,Slide 38,A Common Myth,Should You Be Concerned About Corporate Fraud . . . Do you conduct audits? Do your clients have employees? Do you prepare tax returns? Do you conduct forensic examinations

33、? Do outside parties rely on your clients financial statements? Do your clients transact business with other companies?,Slide 39,A Common Myth,If you answered “Yes” to any of these questions, you can be affected by corporate fraud. Because . . .,Slide 40,Why You Should Be Concerned . . .,As you cert

34、ainly know, audited financial statements have end users, like investors and creditors, who rely on them. Employee theft and self-dealing is a corporate fraud violation. Individual tax violations from self-dealing is corporate fraud. One company may assist another company in committing accounting fra

35、ud if theres an incentive.,Slide 41,Role of the CPA,Independence remains a crucial element In conducting effective audits Objectivity and professional skepticism are also important CPAs must avoid placing themselves in the position of “protecting” a client under investigation.,Slide 42,Role of the C

36、PA,A major public misperception of the CPA is that if a CPA performs a financial statement audit, he or she will detect any fraud that may exist. While an auditor does have responsibilities for detecting material fraud, audits are conducted to issue an opinion on the fairness of the financial statem

37、ents.,Statement on Auditing Standards No. 99: “Consideration of Fraud in a Financial Statement Audit”,Evolution of the Fraud Standard - Number of Paragraphs,Slide 45,Whats New in the Auditors Fraud Detection Responsibilities?,Evaluating how the entity responds to identified fraud risks More emphasis

38、 on professional skepticism Discussions among engagement personnel Expanded inquiries of management and others within the entity. Reorganized and modified fraud risk factor examples (the “Fraud Triangle”). Expanded fraud risk assessment approach,Slide 46,Expanded guidance on revenue recognition as a

39、 likely risk. Linkage between identified risks and the auditors response. Responses to address the risk of management override of controls. Documentation (expanded requirements).,Whats New in the Auditors Fraud Detection Responsibilities?,Slide 47,The Governments Response To Corporate Fraud,Slide 48

40、,The Sarbanes-Oxley Act: Why & How,Focused on restoring investor confidence by: Placing greater accountability on corporate officers; Forcing timely flow of information (both good new and bad news); Forcing greater separation of duties between auditors, consulting, and management; and Limiting self-

41、regulation of the accounting profession and standards-setting process.,Slide 49,The Sarbanes-Oxley Act: Why & How,Pursues these goals by amending existing laws, or creating new ones, which: Requires officers, under possible civil and/or criminal penalty, to certify accuracy and representation of its

42、 financial conditions, disclosure controls and procedures, and assess its effectiveness on internal control structure and procedures over financial reporting; Requires quarterly review of internal controls; Places limitations on audit firms ability to provide some services and requires board approva

43、l of all non-audit services; and Brings PCAOB into existence.,Slide 50,The Sarbanes-Oxley Act: Why & How,In essence, it endeavors to restore investor confidence by changing the corporate mind-set and actions towards controls and disclosures.,Slide 51,The Sarbanes-Oxley Act of 2002,Major Provisions C

44、reates a new criminal violation (18 USC 1348) for securities fraud schemes. CEOs and CFOs must provide a Statement of Certification that the financial statements fairly present the financial condition of the company. Provides increased jail sentences for executives who engage in corporate fraud.,Sli

45、de 52,Major Provisions CPAs must retain audit workpapers for 5 years. Failure to do so is a criminal violation (18 USC 1520). Several new amendments added to obstructive conduct.,The Sarbanes-Oxley Act of 2002,Slide 53,Corporate Fraud Hotline Initiated February 2003: 888-622-0117 2,000 calls logged

46、to date Callers can be anonymous Several new cases opened based on caller information Several existing cases were enhanced Public cooperation is essential,The FBI Response,Slide 54,The FBI Response,Reserve Team Consists of special agents and financial analysts with accounting skills. Temporarily ass

47、igned to corporate fraud cases across the country to efficiently conduct investigation. Emphasizes timely results through the use of seasoned investigators with strong interview & interrogation skills.,Slide 55,Accountants Are Essential Currently 1,334 FBI Special Agent Accountants 501 are Certified

48、 Public Accountants 336 are FBI Financial Analysts In the upcoming year, 15% of all new special agents hired will be accountants. Since its inception, the FBI has continuously hired accountants for diverse investigative roles.,The FBI Response,Slide 56,Corporate Fraud Investigative Partnerships Secu

49、rities and Exchange Commission (SEC) National Association of Securities Dealers (NASD) U.S. Postal Inspection Service (USPIS) U.S. Department of Labor Internal Revenue Service Commodity Futures Trading Commission (CFTC) Federal Energy Regulatory Commission (FERC) Defense Criminal Investigative Service (DCIS),The FBI Response,Slide 57,The FBI Response,These investigative partnerships were formed to capitalize on agency expertise in areas like: Securities; Pensions; Taxation; Energy regulation; and Government contracts,