1.

Former E&Y Audit Partner Jailed for SOX Violations

Back in October of 2004, Thomas Trauger pled guilty to falsifying records in a federal investigation in violation of the Sarbanes-Oxley Act. He admitted as part of this plea that he knowingly altered, destroyed and falsified records with the intent to impede and obstruct an investigation by the Securities and Exchange Commission (SEC). This is one of the first cases of document destruction brought under the recently enacted Sarbanes-Oxley Act. U.S. Attorney Kevin V. Ryan said, "This is one of the first cases in which an auditor pleaded guilty to destroying key documents in an effort to obstruct a federal investigation. Our financial markets depend on the integrity of auditors, lawyers and professionals to do their jobs ethically and fairly. The U.S. Attorney's Office remains committed to prosecuting those professionals who participate in the criminal acts they are charged with uncovering." Mr. Trauger was a former partner in the San Francisco offices of Ernst & Young. Mr. Trauger is a certified public accountant licensed in the State of California and is scheduled to surrender into custody on March 30, 2005. As part of his guilty plea, Trauger admitted that on April 30, 2003, he appeared before the SEC in San Francisco to provide testimony under oath regarding the audit work that his audit team performed on NextCard Inc. He was aware that the SEC was conducting an investigation into the collapse of NextCard Inc. During the course of the deposition, Trauger did not tell the SEC that documents related to the annual audit of NextCard and the quarterly working papers for the year 2001 had been altered and that considerable portions of those documents were deleted in November 2001. Trauger admitted that by not informing the SEC of these alterations and deletions that he knowingly concealed and covered up an original version of the documents with the intent to impede, obstruct, and influence an investigation of the SEC. On September 25, 2003, Mr. Trauger was arrested by FBI agents on criminal charges for obstructing investigations by both the Office of the Comptroller of the Currency (OCC) and the SEC. Trauger was originally charged with two counts of conspiracy to obstruct the examination of a financial institution and one count charging falsification of records in a federal investigation in violation of the Sarbanes-Oxley Act of 2002. The prosecution is the result of an 18 month investigation by agents of the FBI along with assistance from the enforcement division of the SEC in San Francisco. Anne-Christine Massullo is the Assistant U.S. Attorney who prosecuted the case

2. Chicago Lawyer Helped Wealthy Clients Dodge Taxes

By Cristina Camara In what is considered the largest tax fraud prosecution in history, a Chicago lawyer has pleaded guilty to helping rich clients evade millions of dollars in taxes.

Donna Guerin, a former partner at the now defunct Jenkens & Gilchrist law firm, is set to be sentenced January 11, 2013, when she may receive up to ten years in prison for conspiracy to defraud the United States and tax evasion. Her role in the scheme was to draft false opinion letters related to illegal tax shelters, which produced more than $6 billion in phony tax losses that customers could use to reduce their tax obligations by tens of millions of dollars. "I knew in my heart then, and I acknowledge to your honor today, that many of our clients were only interested in reducing tax liabilities," Guerin told US District Court Judge William H. Pauley III, according to The Wall Street Journal. She said she came to understand "over time" that what she was doing was illegal. "With her plea today, we continue the process of holding to account a group of professionals who used their training and expertise to facilitate a fraud, the magnitude of which cannot be overstated," US Attorney Preet Bharara said in a statement. As part of the plea, Guerin agreed to forfeit $1.6 million and sell her Elmhurst, Illinois, home to satisfy the judgment, the Chicago Tribune reported. Guerin changed her plea from the first trial in June when she was convicted, but juror misconduct resulted in her being granted a new trial. A juror, who Pauley called "a pathological liar," made up information about her background, her address, and claimed that "most attorneys" were "career criminals," Forbes reported. Two other defendants, Paul Daugerdas and Denis Field, were also given new trials. They both pleaded not guilty and are scheduled for retrial in April 2013. The eleven-week trial in 2011 included forty-one witnesses and 1,300 pieces of evidence in the case, which covered misconduct from 1994 to 2004.

3. Patricia Cornwell Sues Accountant for Financial 3. Mismanagement

By Frank Byrt A high-profile court case in Boston, now in its second week, raises questions about where accountants and financial advisors fiduciary responsibilities for clients end. Popular novelist Patricia Cornwell, author of a series of crime novels about fictional investigator Dr. Kay Scarpetta, is suing a New York accounting and wealth management firm that served as her financial manager for almost five years, alleging negligence and breach of contract which cost her and her company millions in investment losses and unaccounted for revenues. Cornwell, who reported eight-figure annual earnings during the period, said she fired the firm after discovering in July 2009 that her net worth and that of her company, was a little under $13 million, the equivalent of only one year's net income. She also claims in the lawsuit that the firm had borrowed several million dollars and lost millions by moving her from a conservative investment strategy to high-risk one without her permission, and that those financial issues were so distracting they caused her to miss a book deadline that cost her $15 million in non-recoverable advances and commissions.

Anchin, Block & Anchin LLP, a New York accounting and wealth management firm, and Evan Snapper, a former principal in the firm, have denied Cornwell's claims and during opening statements at the trial, their attorney James Campbell described Cornwell as "a demanding client" who "tends to push off responsibility and assign blame when things go off track," according to an Associated Press report. Anchin and Snapper claim there is no money missing from Cornwell's accounts and that any investment losses were caused by the financial and housing crisis at the time. They also claim that the fees they charged her were reasonable for the services they provided, including many personal ones. In the lawsuit, Cornwell acknowledged that she struggles with bipolar disorder, an illness she said has contributed to her belief that she needs other people to manage her business affairs and investments, and said Anchin was aware of her illness. "I do what I do when and how I do it," she allegedly wrote in an e-mail to Snapper and read by Campbell to the jury. Cornwell lives in Concord, Massachusetts, with her longtime partner, Staci Gruber, a neuroscientist who is an assistant psychiatry professor at Harvard Medical School. She has said in interviews that among her collection of vehicles are a helicopter, a Ferrari, and several Harley-Davidson motorcycles. A lawyer for Anchin said Cornwell's spending habits included $40,000 a month for an apartment in New York City, $5 million for a private jet service, and $11 million to buy properties. David Milton, senior lecturer of personal financial planning at Bentley University in Waltham, Massachusetts, said after a reading case reports that in his view, "from a legal standpoint, I'm sure they provided all of the financial statements and all the information they were supposed to," but an advisor can't stop someone from spending his or her own money. "I've run into this in the past with clients who can't control their spending. When they say they want a check for $50,000 you have to give it to them. That's their legal right. "Ethically, if I knew a client was bipolar, I would try to convince them to put their money into an irrevocable trust and appoint someone as a trustee who would make decisions for them to avoid this kind of issue," Milton said. But many CPA firms or financial advisors who manage cash and have check-writing privileges for clients face similar challenges, he said, which ultimately means "anyone can get sued.

4. Former IRS Worker Admits He Hid Records

By AccountingWEB Staff On July 31, former IRS employee Richard Andersen pleaded guilty to concealing records for a private business he owned.

Prosecutors said 46-year-old Andersen of Franklin, Vermont, failed to turn over time cards and other records from a Sears Hometown Store he owned in St. Albans. In early 2011, the state US Department of Labor began looking into Andersen's compliance with wage and hour regulations. It was during the course of that investigation, authorities said, that Andersen hid many subpoenaed records, which he later admitted to in court. At the time of the investigation, Andersen was employed by the IRS as a fuel tax program investigator in Burlington. In February, a federal grand jury indicted Andersen on four charges relating to obstructing a wage and hour investigation. He was suspended from the IRS when charges were brought. Sentencing has been scheduled for November 26. Andersen faces up to twenty years in prison and fines up to $250,000.

5. The Spinner Case

The Spinner case involved a CPA, a certified internal auditor, and certified fraud examiner who worked for David Landau and Associates. Spinner was assigned full-time to provide auditing services to S.L. Green Realty, a publicly traded company. When the accounting firm removed Spinner from the client's account and fired him, he alleged that he was terminated because he reported internal control issues and reconciliation problems at S.L. Green Realty. Spinner filed a complaint alleging violations of the SOX whistleblower provision. David Landau tried to get the SOX complaint dismissed, claiming in part that it was not covered under SOX since it was not a publicly traded company. Initially, a Labor Department administrative law judge agreed and dismissed the case. On appeal, the ARB reversed and remanded the case back to the administrative law judge, ruling that Spinner could make a claim under SOX since he was employed by a contractor of a publicly traded company. "Nothing in the SOX's legislative history indicates that Congress intended to limit whistleblower protection under Section 806 to only employees of publicly traded companies," the board noted in its ruling. "Indeed, denying coverage to employees of contractors, subcontractors, or agents runs counter to the goals of Section 806 and SOX generally. The purpose of the statute is to protect the investing market and the employees who blow the whistle on issuer-related activities contained in Section 806." The board explicitly rejected a ruling by the First Circuit in Lawson et al. v. FMR LLC, which found that SOX's whistleblower protection only applies to employees of publicly traded companies. The Lawson case involved two investment advisors who claimed they were retaliated against, in violation

of SOX. In that case, the court interpreted the language of the law to exclude contractors and employees of contractors. "If we are wrong and Congress intended the term 'employee' in 1514A(a) to have a broader meaning than the one we have arrived at, it can amend the statute. We are bound by what Congress has written," wrote the judges in that ruling

6. Chinese units of 5 big US audit firms charged

WASHINGTON Federal regulators have charged the Chinese affiliates of five of the biggest U.S. accounting firms with impeding the government's investigation of Chinese companies by refusing to turn over documents. The Securities and Exchange Commission said Monday it has started proceedings against the Chinese affiliates of all so-called Big Four accounting firms, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, and a fifth major firm, BDO. Hundreds of Chinese companies trade on U.S. stock exchanges. The SEC has been investigating many of them for possible accounting fraud. The agency says the accounting firms, which audit Chinese companies, have refused to cooperate in investigations of nine companies and to provide documents. The Chinese affiliates of the firms, which are subject to Chinese law, say they cannot hand over the documents because the Chinese government won't allow them to do so and could penalize them if they do. The Chinese government maintains that providing the documents to U.S. regulators would violate Chinese sovereignty and its secrecy laws. In statements Monday, some of the Chinese affiliates said they hoped the issue could be resolved in negotiations between Chinese and U.S. authorities. Ernst & Young Hua Ming LLP said "We hope that an agreement can be reached between U.S. and Chinese regulators that will enable our compliance with all applicable laws and regulations." "While it is unfortunate that the two countries have not yet been able to find common ground on these issues, we remain hopeful that a diplomatic agreement can be reached," Deloitte Touche Tohmatsu said in its statement. Spokesmen for the affiliates of KPMG, PricewaterhouseCoopers and BDO couldn't immediately be reached for comment. SEC Enforcement Director Robert Khuzami said the agency needs to have access to the documents in order to verify the accuracy of the firms' audits and protect investors from accounting fraud. "Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions," he said in a statement. The SEC's case against the firms' affiliates will go before an administrative law judge at the agency. If the jud

7. Health South Corporation Accounting Scandal

Richard Marin Scrushy is an American businessman. He is the founder of HealthSouth Corporation, a global healthcare company based in Birmingham, Alabama Although HealthSouth grew tremendously throughout the 1990s, becoming the largest comprehensive rehabilitative services company in the United States, ethical and financial questions began to arise as early as 1989. An internal auditor alleged that he was fired for drawing attention to HealthSouth's financial problems and that he was pressured to meet certain earnings targets. Two years later, in 1991, HealthSouth was accused by Medicare of illegally adding costs to reports for outpatient physical therapy and inpatient rehabilitation admissions at the corporation's Bakersfield Rehabilitation Hospital.
[28] [21]

In 1998,

Medicare changed its funding arrangements in an attempt to reduce exploitation and payments by $100 billion. Scrushy insisted that the change would not affect HealthSouth's bottom line but profits dropped
[28]

by 93 percent by the end of the year. accusations of fraud.

[28]

Around this same time, HealthSouth began facing additional

An investigation by the insurance company Blue Cross Blue Shield of

[28]

Alabama determined that HealthSouth had "improperly billed Medicare for therapy by students, interns, athletic trainers, and other unlicensed aides".

Additional lawsuits alleged HealthSouth had committed widespread abuse of Medicare by "billing for services it never provided, delivering poor care, treating patients without a formal plan of care, and using unlicensed therapists".
[28]

In March 2003, the U.S. Securities and Exchange Commission filed a civil
[29]

suit against Scrushy and HealthSouth alleging the company had falsified at least $2.7 billion worth of profit between 1996 and 2002. HealthSouth agreed to pay the United States government $325 million

on December 30, 2004, in order to "settle allegations that the company defrauded Medicare and other federal healthcare programs".
[30]

On February 6, 2003, the Federal Bureau of Investigation (FBI) announced that it had begun a criminal investigation relating to the "trading of shares of the HealthSouth Corporation" and possible securities law violations.
[31]

A criminal complaint was filed by the FBI against HealthSouth's Chief Financial
[4]

OfficerWeston Smith and Scrushy had civil charges brought against him by the U.S. Securities and Exchange Commission (SEC). Scrushy became the first CEO to be tried under the Sarbanes-Oxley

Act when he was indicted by the United States Department of Justice in United States of America v.
Richard M. Scrushy on November 4, 2003.

8. WORLDCOM (NEW YORK)

On March 15, 2005, a federal jury in the Southern District of New York (SDNY) found Bernard Ebbers, the former CEO of Worldcom, guilty on all counts, which included conspiracy, securities fraud, and false regulatory filings. These charges relate to Ebber's role in Worldcom's submission of fictitious financial statements to the SEC between October 2000 and June 2002, which resulted in a loss of $11 billion. In addition to the conviction of Ebbers, five additional Worldcom executives have been convicted: Scott Sullivan, Chief Financial Officer (CFO); David Myers, Controller; Buford Yates Jr., Director General Accounting; Troy Normand, Director Legal Entity Accounting; and Betty Lynn Vinson, Director Management Reporting. Worldcom is an international telecommunications company with corporate headquarters in Clinton, Mississippi.

9. ROYAL AHOLD (NEW YORK)

On July 23, 2004 and July 27, 2004, former CFO Michael Resnick and two former Executive Vice Presidents Mark Kaiser and Tim Lee of the U.S. Foodservice (USF), a subsidiary of Royal Ahold (Ahold), were indicted in the SDNY on charges of conspiracy, securities fraud, false filings with the SEC, and maintaining false books and records. These charges relate to their involvement in an accounting and vendor fraud scheme which caused Ahold to overstate its earnings in 2001 and 2002 by over $1 billion. The New York Office also has convicted nine executives who were vendors of USF for conspiracy to commit securities fraud.

10. PEREGRINE SYSTEMS (SAN DIEGO)

On October 5, 2004, a federal grand jury indicted 12 former executives of Peregrine Systems (Peregrine) on securities fraud charges in the Southern District of California, including Stephen P. Gardner, CEO, Gary L. Lenz, President and Chief Operations Officer, and outside parties such as Larry Rodda, Managing Director of KPMG and Daniel F. Stulac, Senior Accountant of Arthur Andersen. These charges relate to the former executives involvement in issuing fictitious financial statements, which resulted in the improper recognition of $250 million in revenue for Fiscal Years 2000 and 2001. To date, 17 subjects have been charged in this case. Six former Peregrine executives have pled guilty and are cooperating. The investigation was a joint effort between the FBI and the SEC.

11. Groundbreaking Tax Fraud Lawsuit against Sprint for over $300 Million
On April 19, 2012, Attorney General Eric T. Schneiderman filed a first-of-its-kind lawsuit against SprintNextel Corporation for deliberately under-collecting and underpaying millions of dollars in New York state and local sales taxes on flat-rate access charges for wireless calling plans. Brought under the New York False Claims Act, the Attorney General's lawsuit requires Sprint to pay three times its underpayment of over $100 million, plus penalties if found liable. All of Sprint's major wireless competitors, including Verizon, AT&T, T-Mobile, and MetroPCS, have followed the law regarding these taxes. "By deliberately evading sales taxes, Sprint cost state and local governments over $100 million that could have been used for critical services and much-needed resources that our state and its citizens need given the challenging economic times we are in," said Attorney General Schneiderman. "The message of our office is clear tax dodging is not acceptable and we will use every tool in our arsenal to make sure that taxpayers' money is protected, and that honest businesses and consumers are not placed at a disadvantage for collecting and paying their fair share of taxes." Since 2002, New York Tax Law has required mobile phone companies to collect and pay sales taxes on the full amount of their monthly access charges for their calling plans. For example, when a customer pays Sprint a fixed monthly charge of $39.99 for 450 minutes of mobile calling time, the law requires Sprint to collect and pay sales taxes on the entire $39.99. According to the Attorney General's complaint, starting in 2005, Sprint illegally failed to collect and pay New York sales taxes on an arbitrarily set portion of its revenue from these fixed monthly access charges. To carry out this plan, Sprint repeatedly and knowingly submitted false records and statements to New York State tax authorities. Sprint concealed this practice from taxing authorities, its competitors, and its customers. Sprint's scheme is ongoing. Sprint did not correct its sales tax practices when it was informed of its illegality, and it has not corrected them even today. As a result of Sprint's unlawful actions, its underpayment of New York sales taxes is growing by about a $210,000 every week, over $30,000 a day. The decision not to collect and pay these taxes arose out of a nationwide effort by Sprint to obtain an advantage over its competitors not by cutting its prices or offering better service but by failing to collect and pay sales taxes its competitors properly collected and paid. Right before deciding to underpay its taxes, Sprint concluded that this practice would position its calling plans as cheaper than competitors' plans by $4.6 million per month, collectively, because of sales taxes not collected and paid. The Attorney General's lawsuit is the first-ever tax enforcement action filed under the New York False Claims Act. The Act is one of the state's most powerful civil fraud enforcement tools because it allows whistleblowers and prosecutors to take legal action against companies or individuals that defraud the government. Fraudsters found liable under the False Claims Act must pay triple damages, penalties, and attorneys' fees. Under the False Claims Act, whistleblowers may be eligible to receive up to 25 percent of any money recovered by the government as a result of information they provide. Twenty-nine states and the federal government have passed False Claims Acts, but only New York's Act expressly covers tax fraud as a result of a landmark law authored by Attorney General Schneiderman. In

2011, as one of his first acts in office, Attorney General Schneiderman created the "Taxpayer Protection Bureau," which is charged to work with whistleblowers and enforce the False Claims Act in tax and other government fraud cases. The Office's investigation of Sprint began with a whistleblower lawsuit also called a "qui tam" action filed in New York State Supreme Court in Manhattan in March 2011, just after the Taxpayer Protection Bureau was created. The Bureau, working with the New York State Department of Taxation & Finance, then conducted an extensive investigation and determined the extent of Sprint's illegal conduct. By filing the complaint, the Attorney General has taken over the action from the whistleblower on behalf of New York's taxpayers. If found liable, Sprint could be required to pay over $300 million to New York state and local governments, including school districts. The Attorney General's complaint also seeks to protect Sprint's current customers to whom Sprint falsely marketed its wireless calling plans. Sprint promised its customers that it would collect and pay the correct amount of sales taxes on their behalf. The Attorney General seeks to ensure that Sprint and not its customers will be liable for any back taxes, and to empower Sprint's current New York customers to terminate their Sprint contracts without having to pay termination fees. On April 19, 2012, Sprint issued the following statement in response to the New York Attorney General Lawsuit alleging Sprint did not collect the proper New York state taxes from Sprint's New York customers: "This complaint is without merit and Sprint categorically denies the complaint's allegations. We have collected and paid over to New York every penny of sales taxes on mobile wireless services that we believe our customers owe under New York state law. With this lawsuit, the Attorney General's office is claiming New York consumers, who already pay some of the highest wireless taxes in the country, should pay even more. We intend to stand up for New York consumers' rights and fight this suit."

12. NASD Sanctions 18 Firms for Order Audit Trail (OATS) Reporting and Supervision Violations
WASHINGTON, Oct. 4 /PRNewswire/ -- NASD today announced it has censured and imposed fines totaling more than $1.2 million on 18 firms for violations relating to NASD's Order Audit Trail ("OATS") rules and supervision. The largest single action was against SG Cowen, LLC of New York, NY, which was censured and fined $800,000 for failing to report millions of orders over a four-year period. "The enforcement actions announced today are against a wide range of firms for violations such as missing reports, inaccurate data, and failure to correct data after it had been rejected," said NASD Vice Chairman Mary L. Schapiro. "These actions are part of NASD's ongoing efforts to ensure that the audit trail is complete and accurate. The information reported to OATS

enables NASD to recreate the life cycle of an order, substantially enhancing the Nasdaq audit trail and ensuring NASD's ability to conduct effective market surveillance." Compliance with OATS rules is critical to NASD's regulation of the Nasdaq Stock Market. Firms are required by OATS rules to report specific data elements related to the handling and execution of customer orders and certain proprietary orders for Nasdaq securities, and to synchronize their business clocks as required by NASD. Regarding SG Cowen, NASD found that the firm failed to report OATS data for approximately 50 million orders received by the firm's equity derivatives desk between October 1999 and March 2004. The firm developed a system for capturing and reporting OATS data for its equity derivatives desk in 1999. But after operational changes to that system were implemented shortly after the firm began OATS reporting, data generated for the equity derivatives desk was never forwarded to NASD -- even though other trading desks at the firm were regularly submitting voluminous OATS reports. Because Cowen did not have an adequate supervisory system, the firm did not discover the problem until late 2003 -- four years later. Once it did discover the problem, the firm investigated its source and scope, and reported its findings to NASD in May 2004. The fine against Cowen consists of $500,000 for inadequate supervision and $300,000 for OATS violations. The sanctions against Cowen reflect the extensive failure to report OATS data, the inadequate supervision, the firm's significant disciplinary history and a substantial credit for investigating the matter and bringing it to NASD's attention. The fines imposed total $1,219,000 and involve the following firms:

* Spear, Leeds & Kellogg, L.P. -- censure and a $75,000 fine for late OATS reporting on its own behalf and on behalf of reporting members, and failing to correct or replace rejected OATS reports on its own behalf and on behalf of reporting members.

* Schwab Capital Markets, L.P. -- censure and a $70,000 fine for failing to correct or replace rejected OATS reports, submitting inaccurate OATS data and supervisory deficiencies concerning OATS compliance.

* Credit Suisse First Boston, L.L.C. -- censure and a $50,000 fine for late OATS reporting, failing to correct or replace rejected OATS reports and submitting inaccurate OATS data.

* Carlin Equities Corporation -- censure and a $35,000 fine for late OATS reporting, failing to correct or replace rejected OATS reports, submitting inaccurate and/or incomplete OATS data and supervisory deficiencies concerning OATS compliance.

* FutureTrade Securities, L.L.C. -- censure and a $35,000 fine for failing to correct or replace rejected OATS reports, submitting inaccurate OATS data and supervisory deficiencies concerning OATS compliance.

* Pulse Trading, Inc. -- censure and a $20,000 fine for failing to submit required OATS data, late OATS reporting and supervisory deficiencies concerning OATS compliance.

* Scottrade, Inc. -- censure and a $16,000 fine for failing to correct or replace rejected OATS reports and supervisory deficiencies concerning OATS compliance.

* Delta Asset Management Company, L.L.C. -- censure and a $15,000 fine for failing to submit required OATS data, late OATS reporting and supervisory deficiencies concerning OATS compliance.

* Deutsche Bank Securities, Inc. -- censure and a $15,000 fine for late OATS reporting and supervisory deficiencies concerning OATS compliance.

* Doyle, Miles & Co., L.L.C. -- censure and a $12,500 fine for late OATS reporting and supervisory deficiencies concerning OATS compliance.

* Quantlab Securities, L.P. -- censure and a $12,500 fine for failing to report OATS data and supervisory deficiencies concerning OATS compliance.

* BNY Brokerage, Inc. -- censure and a $12,000 fine for failing to correct or replace rejected OATS reports and supervisory deficiencies concerning OATS compliance.

* Index Securities, LLC -- censure and an $11,000 fine for failing to correct or replace rejected OATS reports and supervisory deficiencies concerning OATS compliance.

* Mid-Atlantic Capital Corporation -- censure and a $10,000 fine for late OATS reporting and supervisory deficiencies concerning OATS compliance.

* Options Trading Associates, LLC -- censure and a $10,000 fine for improperly formatted OATS data and supervisory deficiencies concerning OATS compliance;

* Transcend Capital, LP -- censure and a $10,000 fine for late OATS reporting and failing to submit required OATS data;

* UBS Securities, L.L.C. -- censure and a $10,000 fine for submitting inaccurate and/or incomplete OATS data.

In concluding these settlements, the firms neither admitted nor denied the charges. Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at http://www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through

effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business -- from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms.

13. Lawsuit Features Accounting Practices of a Nicolas Cage Film

By Ken Berry Nicolas Cage has faced plenty of tax troubles in the past. The IRS has been chasing after the renowned actor for tax debts for years. According to the Business Insider, he currently owes over $14 million. Now a new lawsuit is targeting the accounting practices of one of his films. Cage starred in the Bad Lieutenant: Port of Call New Orleans, a crime drama released in 2009. The film garnered some critical acclaim but wasn't a success at the box office. According to an article posted on December 9 by The Hollywood Reporter, Polsky Films, a film production company founded by brothers Alan and Gabe Polsky, filed a lawsuit in Los Angeles Superior Court against Nu Image and First Look Studios. Here's the gist of what the complaint says: Polsky Films spent $1.3 million to finance and advertise the movie for domestic distribution. As part of the financing agreement, the two studios were required to pay all U.S. proceeds from the film into a separate bank account. The agreement limited deductions to home video packaging, freight, and delivery expenses. Once the funds were funneled into the bank account, the proceeds were supposed to be distributed based on a specific plan. Besides reimbursing its own prints and advertising (P&A) contributions, Nu Image wasn't permitted to pocket any money until residuals, bank financing, and the Polskys' own P&A contributions were recovered. But that's not what happened according to the complaint. The Polskys say that the studios failed to properly establish the collection account, and exhibitors and licensees didn't pay proceeds into it. Instead, they allege that expenses were improperly deducted, proceeds weren't disbursed, and the funds weren't accurately and truthfully accounted for. Avi Lerner, head of Nu Image, and Trevor Short, former CEO of First Look Studios, were named as codefendants in the complaint. The lawsuit also alleges that the defendants fabricated P&A expenses for their own benefit and to the detriment of the plaintiffs. The Polskys are demanding compensatory damages and, as a result of the breach, are also seeking to be awarded the distribution rights to the film.

14. Censured accountant left a trail of violations

When the U.S. Securities and Exchange Commission tells a CPA, Thou shalt not practice, they dont mean maybe. The SEC filed a settled enforcement action January 11 against Michael R. Drogin, of New York and New Jersey. Drogin was ordered by the SEC in 2003 to not appear before or practice before the commission based on his failure to exercise due professional care in the audit of a clients financial statements. The SEC maintains that in spite of that order, Drogin performed work for clients who later submitted that work to the commission, thus creating a paper trail of his violations. According to a 2011 SEC complaint, Drogin was a partner in the Garden City, New York-based firm of Liebman Goldberg & Drogin, LLP, between 2005 and 2008. In that capacity, the SEC states that he performed audit, review, and other accounting work for three companies. Drogin is accused of violating the SEC order in 2005 by participating in the financial statement audit of a small company. That company later filed a registration statement with the SEC, seeking to become a public company. Included with that registration statement was the audit report performed by Drogin. In 2007, the SEC said Drogin participated in the audit of three companies. Those audits became part of various filings by the companies, including registration statements, proxy statements, and an annual report. In addition, the complaint against Drogin states that he reviewed quarterly and other SEC filings for the three companies and also advised the management of those companies regarding the filings. Drogin also is believed to have assisted two of the companies in responding to comments from the SECs Division of Corporation Finance concerning the registration statements. The complaint also alleges that, in 2008, Drogin issued audit reports for all three companies without having completed the audits. In these reports, the statement was made that audits had been performed according to applicable auditing standards, providing in each case a reasonable basis for an unqualified report. The SEC maintains that Drogin knew these companies would include the fraudulent audit reports in correspondence with the SEC. The issuance of these fraudulent audit reports, along with aiding and abetting the infringement of securities law reporting requirements, violate the antifraud provisions of federal securities law, according to the SEC. Though Drogin neither admitted nor denied the charges, he consented to an entry of final judgment which permanently enjoins him from directly or indirectly violating the SECs 2003 order, as it was amended on January 11, 2011. In the January 11 proceedings, Drogin was ordered to pay disgorgement and prejudgment interest of $43,612.04 and a civil penalty of $38,953.17. This settlement is subject to approval of the court. The SEC also amended the 2003 order, removing the time limit that was part of the prior suspension

15. Nortel Networks Accounting restatements

Frank Dunn presided over a dramatic restructuring of Nortel, which included laying off two-thirds of its workforce (60,000 staff) and writedowns of nearly US$16 billion in 2001 alone. This had some initial perceived success in turning the company around, with an unexpected return to profitability reported in the first quarter of 2003. The black ink triggered a total of $70 million in bonuses to the top 43 managers with $7.8 million going to Dunn alone, $3 million to chief financial officer Douglas Beatty, and $2 million to controller Michael Gollogly. Independent auditor Deloitte & Touche advised audit committee chairman John Cleghorn and board chairman "Red" Wilson to look into the suspicious results, who promptly hired the law firm WilmerHale to vet the financial statements. In late October 2003, Nortel announced that it intended to restate approximately $900 million of liabilities carried on its previously reported balance sheet as of June 30, 2003, following a comprehensive internal review of these liabilities. The Company stated that the restatement's principal effects would be a reduction in previously reported net losses for 2000, 2001, and 2002 and an increase in shareholders equity and net assets previously reported on its balance sheet. A dozen of the company's most senior executives returned $8.6 million of bonuses they were paid based on the erroneous accounting. Investigators ultimately found about $3 billion in revenue had been booked improperly in 1998, 1999, and 2000. More than $2 billion was moved into later years, about $750 million was pushed forward beyond 2003 and about $250 million was wiped away completely. The accounting scandal hurt both Nortel's reputation and finances, as Nortel spent an estimated US$400 million on outside auditors and management consultants to retrain staff. Dunn, Beatty, and Gollogly were fired on April 28, 2004 for financial mismanagement, and later charged with fraud by the RCMP. The trial began on January 16, 2012, ending with acquittals for all three.

16. How an embezzler stole millions from a small company

By Curtis C. Verschoor, CMA New details have emerged on the methods used and the outcomes following the case of 47-year-old convicted embezzler Sujata Sue Sachdeva, who was the trusted 15-year veteran vice president of finance, secretary, and principal accounting officer of Koss Corporation. During a span of more than five years, she stole nearly half the companys pretax earnings. The scheme was uncovered when American Express noticed her credit card balances were being paid through large wire transfers originating from a company bank account. Koss is the Milwaukee-based, mostly privately held small company thats a prominent global designer and marketer of stereophonic headphones.

Sachdevas criminal case concluded after she pleaded guilty to embezzling $34 million from her employer, an increase of $2.5 million over earlier estimates. The six felony fraud counts carried a maximum penalty of 120 years in jail, but 15 to 20 years is appropriate under federal sentencing guidelines. Because she cooperated with authorities from the very beginning of their investigation, the judge limited her sentence on November 17, 2010, to 11 years in federal prison, plus restitution to Koss of $34 million. Her physician husband filed for divorce after the sentencing hearing. Federal officials have seized most of her assets, including a 2007 Mercedes-Benz, timeshares, jewelry, shoes, furs, and other luxury items some that were never worn because they were put into storage for lack of space. Sachdevas attorney claims she has a bipolar disease of compulsive shopping disorder and is an alcoholic. Countering the defendants plea for a lenient sentence because of mental illness, Koss CEO Michael Koss asked the judge to sentence Sachdeva to the maximum 15 to 20 years, writing that she stole from the hardworking employees of the company and their families, and ultimately the stockholders of the company. In a presentencing letter, he stated, The full exte nt of the damage to the reputation of the company and its employees caused by Ms. Sachdevas criminal acts cannot be expressed in words. He added that the damage will continue to tarnish Koss and subject it to ridicule long after her sentence ends. In addition to Sachdeva, the U.S. Securities and Exchange Commission (SEC) has charged Julie Mulvaney, former Koss senior accountant, with assisting Sachdeva to conceal the theft on Kosss financial statements by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. The SEC accuses both of them in a civil case of maintaining fraudulent records so that Koss filed materially false current, quarterly, and annual reports with the SEC over a period of years. The theft was accomplished through a variety of means, including fraudulent cashiers checks, fraudulent wire transfers, and unauthorized payments from petty cash. A third person, Tracy Malone, a Koss accountant who was fired because she knew about the theft but said nothing, hasnt been charged.

17. Parmalat
In 1997, Parmalat jumped into the world of financial markets in a big way, financing several international acquisitions, especially in the Western Hemisphere, with debt. But by 2001, many of the new divisions were producing losses, and the company financing shifted largely to the use of derivatives, apparently at least in part with the intention of hiding the extent of its losses and debt. In February 2003, chief financial officer Fausto Tonna unexpectedly announced a new 500 million bond issue. This came as a surprise both to the markets and to the CEO, Calisto Tanzi. Tanzi forced Tonna to resign and replaced him with Alberto Ferraris. According to an interview he later gave Time magazine, Ferraris was surprised to discover that, though now CFO, he still did not have access to some of the corporate books, which were being handled by chief accounting officer Luciano Del Soldato. He began making some inquiries and

began to suspect that the company's total debt was more than double that on the balance sheet
needed]

[citation

The plan for a 300M fundraising effort was dropped in September 2003 and the company's shares depreciated significantly as a result of the publicised concerns raised over transactions withmutual fund Epicurum, another Cayman-based company linked to Parmalat by November. Ferraris resigned less than a week after the public fall-out and was replaced by Del Soldato. Del Soldato resigned the next month, unable to get cash from Epicurum fund, needed to pay debts and make bond payments totalling at least 150M. Enrico Bondi was called in to help the company as it went into administration, while Tanzi himself resigned as chairman and CEO. Parmalat's bank, Bank of America, then released a document showing 3.95 billion in Bonlat's bank account as aforgery. Prime Minister Silvio Berlusconi initiated a fraud investigation and appointed Bondi to administer the company's rescue. Hundreds of thousands of investors lost their money and would never recover it. The company officially went bankrupt, though the Italian government used the legal mean "commissariamento" to save the trademark
[citation needed]

Calisto Tanzi, once a symbol of unlimited success, was detained hours after the firm was declared officially insolvent in late December and admitted that there was a hole of 8bn in Parmalat's accounts, but denied any cover-up. The arrest of five further executives of the company followed. The auditors of the administration eventually determined that the debts amounted to 14.3bn, which was almost eight times the sum originally stated. Several of the company's subsidiaries subsequently went insolvent, including its Brazilian and American operations and its football club in Parma, before Parmalat sued several multi-national banks for huge sums of money
[citation needed]

Tanzi was eventually charged with financial fraud and money laundering. Italians were shocked that such a vast and established empire could crumble so quickly. Among the questionable accounting practices used by Parmalat: it sold itself credit-linked notes, in effect placing a bet on its own credit worthiness in order to conjure up an asset out of thin air. After his arrest, Tanzi reportedly admitted during questioning at Milan's San Vittore prison, that he diverted funds from Parmalat into Parmatour and elsewhere. The family football and tourism enterprises were financial disasters; as well as Tanzi's attempt to rival Berlusconi by buying Odeon TV, only to sell it at a loss of about 45 million. Tanzi was sentenced to 10 years in prison for fraud relating to the collapse of the dairy group. The other seven defendants, including executives and bankers, were acquitted. Another eight defendants settled out of court in September 2008.
[2]

In September 2009, three lawsuits by Parmalat Capital Finance Ltd. and Enrico

Bondi, CEO of Parmalat, against Bank of America and auditors Grant Thornton, were dismissed

18. Deloitte accuses former partner of insider trading

Deloitte has filed a lawsuit against a former partner in its Chicago office, contending the man traded on inside information related to audit clients. Thomas Flanagan, a 30-year Deloitte partner, allegedly bought stock in an unnamed publicly traded company one week prior to Walgreen's July 2007 announcement that it bought Option Care Inc., the Chicago Tribune reported. Flanagan, 61, served as advisory partner, managing the client relationship with Walgreens. He resigned abruptly in September, according to court documents. While the SEC is looking into the matter, federal officials have not filed charges against Flanagan for buying or selling securities on non-public information, which is illegal. Deloitte also accuses Flanagan of trading in securities of 12 or more audit clients between January 2005 and June 2008. He worked with seven of those clients. Walgreens, Allstate Corp., and USG Corp. stated in SEC filings that a Deloitte partner allegedly bought securities in their companies, but they all said the firms auditor independence remained intact. Deloitte is accusing Flanagan of breach of fiduciary duty, breach of contract, and fraud. The firm wants repayment of Flanagan's compensation from the first improper trade until his resignation, damages from losses it says it suffered due to the investigation, and any other damages the courts deem proper, Reuters reported. According to Courthouse News Service, Deloitte said, "Compounding his wrongdoing, Flanagan repeatedly lied to Deloitte about his clandestine trading activities in annual written certifications, going to far as to conceal the existence of a number of his brokerage accounts to avoid detection of his improper conduct." The court papers, filed in Chancery Court in Wilmington, DE, say Deloitte does not know the extent of the alleged inside trading or how much money Flanagan made. Deloitte released a statement on the matter Friday, saying that it "unequivocally condemns the actions of this individual, which are unprecedented in our experience. His personal trading activities were in blatant violation of Deloitte's strict and clearly stated policies for investments by partners and other professional personnel. Further, it appears that he intentionally skirted our system for reporting and tracking investments.

19. Ex-KPMG partner charged in new case

Posted by accountingweb on Mar 24 2008 0 441 printer friendly

Federal prosecutors in New York have charged Robert Pfaff, 57, of Englewood, CO, a former partner at KPMG, with conspiracy to defraud the United States and to commit tax evasion and wire fraud, and obstructing and impeding the Internal Revenue Service (IRS) by concealing fees he and others received for setting up tax shelters for various clients. The indictment charges Pfaff and co-conspirators with hiding millions of dollars in fees by transferring the money from bank accounts in the U.S. and the Northern Mariana Islands into Philippine bank accounts. Pfaff and others later requested that an unnamed coconspirator in the Philippines distribute the money to Pfaff and others at a Saipan company. According to the criminal indictment, Pfaff received more than $3.75 million in fee income for his participation in the shelters. The defendants are also accused of falsifying documents to make it appear that the fee income was actually a series of loans, income that Pfaff did not report on his tax returns. The documents were created after the IRS had launched an investigation into the shelter transactions.

The indictment further alleges that Pfaff made false statements regarding an IRS audit in 2003 and filed false and fraudulent tax returns for tax years 2001 and 2002 according to BusinessWeek. He concealed the income from both KPMG and the Board of Directors of the Saipan company. Pfaff and three others still face charges of conspiracy and multiple counts of tax evasion stemming from a prior case against 19 defendants, 17 of whom were former KPMG executives, related to tax shelters. The case against 13 of these individuals was dismissed last July after U.S. District Judge Lewis A. Kaplan in Manhattan found that prosecutors violated their rights to counsel by putting undue pressure on KPMG not to advance them defense costs. Two others have pleaded guilty to the charges. The new case against Pfaff has been brought before a different judge, The New York Timessays, and if Pfaff is tried and convicted on these charges before the earlier case is brought to trial in September, it could affect the outcome of the earlier tax shelter case. If convicted on both of the new criminal counts, Pfaff could face eight years in prison and fines Reuters reports

20. Networking execs sentenced for accounting fraud

Posted by accountingweb on Jul 6 2007 0 336 printer friendly

Four former executives with computer networking and security vendor Enterasys Networks have been sentenced to prison terms for their roles in accounting fraud at the company that cost investors millions of dollars, the U.S. Department of Justice announced Tuesday. The executives were convicted on conspiracy and fraud charges during a December 2006 trial. At sentencing hearings that began last week in U.S. District Court for the District of New Hampshire, Judge Paul Barbadoro sentenced former Enterasys CFO Robert J. Gagalis to 11 1/2 years in prison. Gagalis was convicted of one count of conspiracy, two counts of securities fraud, one count of making false statements to auditors of a public company and four counts of wire fraud. Bruce D. Kay, a former Enterasys finance executive, was sentenced to 9 1/2 years in prison. The jury found Kay guilty of one count of conspiracy, two counts of securities fraud, one count of falsifying books and records of a public company, one count of making false statements to auditors of a public company and three counts of wire fraud. Robert G. Barber, a former Enterasys business development executive, was sentenced to eight years in prison and fined $25,000. The jury found Barber guilty of conspiracy, two counts of securities fraud, one count of falsifying books and records of a public company and one count of making false statements to auditors of a public company. Hor Chong "David" Boey, former finance executive in Enterasys' Asia Pacific division, was sentenced to three years in prison. Boey was convicted of conspiracy, two counts of securities fraud, one count of falsifying books and records of a public company, one count of making false statements to auditors of a public company and two counts of wire fraud. Starting in mid-2001, the four defendants and other Enterasys executives inflated the company's revenue figures as a way to meet expectations of financial analysts and to maintain or increase the price of the company's stock, the DOJ said. The defendants backdated and falsified documents and concealed terms of business transactions from Enterasys' auditors in order to inflate revenue, the DOJ said. The conspirators also fraudulently created false revenue by secretly investing company funds in other companies and having those companies to use the investment proceeds to buy Enterasys products.

Because of the fraudulent scheme, public investors lost at least $97 million, the DOJ said. The four "will spend years in prison for perpetrating a fraud that cost Enterasys shareholders millions of dollars," Alice Fisher, assistant attorney general in the DOJ's Criminal Division, said in a statement. Several other former Enterasys executives, including former Chairman, President and CEO Henry Fiallo have previously pleaded guilty to felony charges in connection with the scheme. To date, eight former Enterasys executives have been convicted of felonies. An Enterasys spokesman said the none of the four defendants have worked for the company recently. The company is under new management and ownership since the accounting fraud case was filed, and the convictions will not affect the company going forward, said Kevin Flanagan, company spokesman. The accounting fraud case "is very much in the past" for the company, he added. co, Inc. entered crisis on Monday, October 10, 2005, when it announced that its chief executive officer and chairman, Phillip R. Bennett had hidden $430 million in bad debts from the company's auditors and investors, and had agreed to take a leave of absence.

21. Refco
Refco said that through an internal review over the preceding weekend it discovered a receivable owed to the company by an unnamed entity that turned out to be controlled by Mr. Bennett, in the amount of approximately US$430 million. Apparently, Bennett had been buying bad debts from Refco in order to prevent the company from needing to write them off, and was paying for the bad loans with money borrowed by Refco itself. Between 2002 and 2005,
[1]

he arranged at the end of every quarter for a Refco

subsidiary to lend money to a hedge fund called Liberty Corner Capital Strategy, which then lent the money to Refco Group Holdings, an independent offshore company secretly owned by Phillip Bennett with no legal or official connection to Refco. Bennett's company then paid the money back to Refco, leaving Liberty as the apparent borrower when financial statements were prepared. It is not yet clear if Liberty knew it was hiding scam transactions; management of the fund has claimed that they believed it was borrowing from one Refco subsidiary and lending to another Refco sub, and not lending to an entity that Mr. Bennett secretly controlled. On October 20, they announced plans to sue Refco. In April 2006, papers filed by creditors of Refco seemed to show that Bennett had run a similar scam going back at least to 2000, using Bawag P.S.K. Group in the place of Liberty Corner Capital Strategy.
[1]

The law requires that such financial connections between corporation and its own top officers be shown as what is known as a related party transaction in various financial statements. As a result, Refco said, "its financial statements, as of, and for the periods ended, Feb. 28, 2002, Feb. 28, 2003, Feb. 28, 2004, Feb. 28, 2005, and May 31, 2005, taken as a whole, for each of Refco Inc., Refco Group Ltd. LLC and Refco Finance Inc. should no longer be relied upon."

This announcement triggered a number of investigations, and on October 12 Bennett was arrested and charged with one count of securities fraud for using U.S. mail, interstate commerce, and securities exchanges to lie to investors. His lawyer said that Bennett planned to fight the charges. On October 19, trading of Refco's shares was halted on the New York Stock Exchange, which later delisted the company. Before the halt, Refco shares were trading for more than $28 per share, and as of October 19, they had dropped (on the pink sheets) to $0.80 per share. Refco, Inc. filed for chapter 11 for a number of its businesses, to seek protection from its creditors on Monday, October 17, 2005. At the time, it declared assets of around $49 billion, which would have made it the fourth largest bankruptcy filing in American history. However, the company subsequently submitted a revised document, claiming it had $16.5 billion in assets and $16.8 billion in liabilities. Refco also announced a tentative agreement to sell its regulated futures and commodities business, which is not covered by the bankruptcy filing, to a group led by J.C. Flowers & Co.for about $768 million. However, other bidders soon emerged, including Interactive Brokers and Dubai Investments, the investment division of the emirate of Dubai. These offers were for a time rebuffed, as the Flowers-led group had a right to a break-up fee if Refco had sold this business to anyone else. Carlos Abadi, involved in the Dubai bid, said that the Dubai-led group offered $1 billion for all of Refco and was rejected.
[2]

"However, the

bankruptcy judge in charge of the case deemed the break-up fee unjustified, and the Flowers group withdrew its bid. The business was instead sold to Man Financial on November 10. Man Financial kept the majority of the Refco futures businesses after selling Refco Overseas Ltd (Refco's European operation) to Marathon Asset Management who then relaunched the business as Marex Financial Limited. Though of much smaller size, the regulatory impact of the scandal will be larger than for probably any other corporate failure except for Enron. Refco had sold shares to the public in a public offering only two months before revealing the apparent fraud. Their auditors, Grant Thornton (lead partner Mark Ramler), and the investment banks that handled the IPO, Credit Suisse First Boston, Goldman Sachs, and Bank of America Corp., all supposedly completed due diligence on the company, and all missed the CEO's hiding $430 million in bad debts. Their largest private investor was Thomas H. Lee Partners, a highly regarded buyout fund, and the reputation of its managers has been similarly sullied. On October 27, 2005, shareholders of Refco filed class action lawsuits against Refco, Thomas H. Lee Partners, Grant Thornton, Credit Suisse First Boston, and Goldman Sachs. On March 2, 2006, a lawyer representing Refco's unsecured creditors began steps to sue the IPO underwriters for aiding and abetting the fraud, or for breach of fiduciary duty. In April 2006, creditors sued Bawag P.S.K. Group for more than $1.3 billion.
[1]

In April 2006, Christie's auction house sold Refco's prized art collection, which included photographs by Charles Ray and Andy Warhol. On February 15, 2008, Phillip R. Bennett pleaded guilty to 20 charges of securities fraud and other criminal charges. On July 3, 2008, Bennett was sentenced to 16 years in federal prison.

22. Did Ernst & Young really assist financial fraud?

Posted by AccountingWEB on Mar 28 2011

By Curtis C. Verschoor, CMA As the auditor of Lehman Brothers, Ernst & Young approved the use of Repo 105 transactions. These transactions were characterized as sales of assets and created a misleading picture of Lehman's financial position during the financial meltdown. After nearly two years of wondering where the auditors were during the financial meltdown, New York State Governor Andrew M. Cuomo has finally provided some possible answers regarding the activities of the auditing firm for the now bankrupt Lehman Brothers. In September 2008, Lehman's bankruptcy represented the largest such filing in U.S. history and resulted in an immediate 500-point drop in the DowJones Industrial Average. This previously highly prominent global financial services giant was one of the few Wall Street firms allowed to trade directly with the Federal Reserve System, and the group's members continue to be considered the most influential and powerful nongovernmental institutions in world financial markets. When he was New York's attorney general, Cuomo filed a lawsuit in late December 2010 in the New York Supreme Court claiming that Ernst & Young (E&Y), a Big 4 firm, helped hide Lehman's "fraudulent financial reporting." These acts were alleged to have occurred during a seven-year period leading up to the Lehman bankruptcy. What Lehman did and E&Y allegedly specifically approved was to consider some borrowing, done under agreements to later repurchase the notes, as a sale of an asset rather than a short-term borrowing arrangement. According to the attorney general's complaint, E&Y "substantially assisted Lehman to engage in a massive accounting fraud, involving the surreptitious removal of tens of billions of dollars of securities from its balance sheet." The complaint alleges this created a false impression of Lehman's better liquidity, thereby defrauding the investing public and violating New York law. "This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed," Cuomo said. He added, "Just as troubling, a global accounting firm tasked with auditing Lehman's financial statements helped hide this crucial information from the investing public." The specific mechanism used by Lehman and asserted to be approved by E&Y was to engage in what became known as Repo 105 transactions. These deals involved a transfer of liquid fixed income securities by Lehman to European counterparts for cash with the binding obligation they would be

repurchased a few days or weeks later. The volume of Repo 105 transactions increased dramatically at the end of each calendar quarter. Contrary to the usual practice of accounting for repurchase agreements, or "repos," as short-term loans, Lehman characterized Repo 105 transactions as a sale of assets. By using the cash obtained from these "asset sales" at quarter- or year-end to pay down other debts, Lehman reduced the amount of total liabilities it reported and improved its reported leverage ratios and balance-sheet metrics. The firm rapidly accelerated its use of Repo 105 transactions in 2007 and early 2008 as the financial crisis grew and Lehman was facing demands to reduce its leverage. To date, the Securities & Exchange Commission (SEC) has neither taken any regulatory action against Lehman and its officers nor has it accused E&Y of violating any federal rules of accounting or auditing. The SEC did propose new rules on September 17, 2010, requiring public companies to provide increased information in both qualitative and quantitative terms about their short-term borrowings, including those having repurchase obligations. If adopted, these disclosures would be required in the Management's Discussion and Analysis (MD&A) section of their reports to the SEC. According to SEC Chair Mary Schapiro, "misleading 'window dressing' in quarterly reports" was one obstacle to investor confidence. A report issued in March 2010 by Lehman bankruptcy examiner Anton Valukas faults E&Y as well as Lehman senior executives. The report states that Lehman's financial statements were "materially misleading" and that executives engaged in "actionable balance sheet manipulation." The report also cites whistleblowers who attempted to correct what they viewed as improper behavior. Valukas believes that "there is sufficient evidence to support a colorable claim" that certain Lehman officers breached their fiduciary duties and that E&Y was professionally negligent. In a March 2010 letter to its clients, E&Y defended its audit work for Lehman. The letter states that Lehman's bankruptcy resulted from unprecedented adverse events in the financial markets, declining asset values, and loss of market confidence that caused a collapse in its liquidity. The firm believes the bankruptcy wasn't caused by accounting or disclosure issues, as Lehman's financial statements clearly portrayed it as "a leveraged entity operating in a risky and volatile industry." One possible justification for treating repo transactions as sales is contained in the infamous derivatives rule, Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This lengthy document discusses the need for the transferor of securities to relinquish all control of securities in order to consider the transaction a sale. If the transferor receives collateral to secure the transaction at less than 102 percent of the amount transferred, then SFAS No. 140 concludes no real sale has taken place. In its transactions, Lehman believed the additional 3 percent that made the total collateralization 105 percent hence the term "Repo 105" demonstrated excess collateral and thus resulted in a true sale of securities in spite of the binding obligation to repurchase. SFAS No. 140 also calls for disclosure of the nature of any repurchase agreement transactions and the amounts and classification of collateral. But this requirement lacks specificity and led to later revisions to SFAS No. 140 and the very recent SEC requirement noted earlier. Lehman had footnote disclosure of off-

balance-sheet commitments of almost $1 trillion, excluding the amount of Repo 105 liabilities, but no clear disclosure of the extent of repo transactions. In fact, the complaint filed by then Attorney General Cuomo asserts that Lehman reported that all of its repurchase agreements were treated as financing arrangements, not as sales. Another obstacle to calling Repo 105 transactions true sales is the fact that apparently Lehman was unable to get any U.S. law firm to provide a legal opinion that they were in fact true sales. A U.K. law firm did provide such an opinion but added the requirement that it be applied only to U.K. repo instruments. Yet Lehman didn't limit its application of the true sale doctrine to the U.K. Instead, the firm used one of its British subsidiaries to put very significant amounts of U.S. securities into the repo pool. Apparently E&Y didn't object to this stretch of circumstances. The most telling assertion in the complaint concerning E&Y's alleged misrepresentation of Lehman's compliance with applicable accounting standards is that E&Y didn't require the financial statements to reflect economic substance rather than just legal form. In other words, the complaint accuses E&Y of letting Lehman engage in transactions without business purpose in order to achieve a specific financialstatement result. This is similar to assertions made in the Enron case that the auditor, Arthur Andersen, enriched itself by coaching Enron how best to structure transactions so they could remain off its balance sheet. An interesting aspect of the substance-over-form requirement is that it is contained in the auditing standards, specifically AU 411.06, not the accounting literature promulgated by the Financial Accounting Standards Board (FASB). As accounting standards setters work to converge international and U.S. pronouncements, little attention seems to be directed toward global convergence of audit standards. In the U.K., auditor opinions specifically state that the client's financial statements do in fact present a true and fair view, whereas U.S. audit standards only opine that statements are presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP). It would seem that E&Y would have had more difficulty in expressing a U.K.-type opinion on Lehman. In summary, the ethical challenges faced by E&Y in deciding how to address issues with a long-standing and profitable client may be faced by many public accountants. In fact, accountants in all areas of the profession frequently face similar ethical issues of simultaneously complying with their duties for faithful service and loyalty to their employer or client while respecting their responsibilities to other stakeholders. "Doing the right thing" for all concerned may sometimes be an impossible assignment. Guidance such as the overarching principles of honesty, fairness, objectivity, and responsibility contained in the IMA Statement of Ethical Professional Practice will go a long way toward helping all accountants to do the right thing. Doing the right thing is always the best policy in the long run.