Capital Confirmation Inc.

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Capital Confirmation Inc.
The worlds leading experts in secure electronic
audit confirmations.
214 Centerview Drive, Brentwood, TN 37027 (615)
844-6222 www.confirmation.com
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Why Is Bank of America Mandating the CONFIRM
Service?

• Problems with Paper Confirmations
• Customer complaints on slow response time
  Response times averaged 20-44 days last two years
• 1/3 of all paper confirmations are
  reconfirmations
• 10 Billion lawsuit against Bank of America as a
  result of the Parmalat fraud where a forged Bank
  of America confirmation was not uncovered by the
  auditors
• Using CONFIRM, Bank of American Guarantees
• 100 Response Rate
• 5 Business Day Turnaround or its Free
• Only validated employees who are authorized,
  knowledgeable and free from bias (as SAS No. 67
  requires) will respond

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Paper Confirmations
Order Paper Forms
1. 4 - 6 week turnaround
Order Envelopes
2. 30 steps
3. 40 lost/error rates
4. 120 per confirmation
Client

• Responder not
• validated

Order/Stocking Clerk
Bank Clerk
Supply Room
Fax
Mailroom
Mailroom
Accounting Firm
Accountant
Bank Operations
1st Request 2nd Request Fax Request Phone Call
Relationship Manager
US Post Office
Mailroom
Assistant
Bank Branch
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Current Paper Process
Can be sent to anyone at any location.
Who provides the mailing address?
Who validates the mailing address?
Open System Mailed requests can be sent to
anyone at any location.
Is it the correct department within the responder?
Is the signature from the responder?
Is the response timely?
Do you have the direct contact information for
the specific responder?
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Solution Secure Clearinghouse for Audit
Confirmations

• Responder authenticated by
• independent third party

• Correct department contacted

• Client Data Encrypted
• (128-Bit SSL - Verisign)

• Retraceable Paper Trail

• Timely response

• Contact information validated and easily
  available

• Electronic Storage Real-
• Time Retrieval

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Electronic ConfirmationsThe CONFIRM Service
Accountant
Bank
1. 4 secure steps
2. 24-48 Hour average turnaround
3. Reduces costs and increases realization
4. Validated electronic responders
Audited Company
5. Patented Technology
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The CONFIRM Service

• What CONFIRM Is
• CONFIRM is the secure communication channel
  through which auditors and banks actively
  communicate. It is a secure clearing-house for
  audit confirmations with validated requestors
  (auditors) and validated responders (banks).
• CONFIRM is a delivery channel just like the Post
  Office, FedEx/UPS, and the Telephone.
• What CONFIRM Is NOT
• CONFIRM does not replace either the auditor or
  the bank in the confirmation process
• CONFIRM does not pull data from the bank
• CONFIRM is not an email/secure email service
• CONFIRM is not a data aggregator (i.e. a
  screen-scraper)
• CONFIRM is not the banks online banking service

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CONFIRM
CONFIRM Launched Summer of 2003 Confirmations
Processed 100,000 Audited Entities 30,000
private, public, government not-for-profit
Accounting Firm Users Sole Practitioners
to Big 4 (50 of the Top 100) Banks
(Responders) Top 10 Banks to Local/Community
Banks (12 of the Top 15 60 of the Top 50)
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The ResultsCONFIRM Service
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Parmalat 5 Billion Bank Confirmation Fraud

• 10 year fraud by Executive Management
• Audited every year
• Parmalat acknowledged in a press release dated
  December 19, 2003, that the assets in its 2002
  audited financial statements were overstated by
  at least 3.95 billion (approximately 4.9
  billion)
• Auditors certified the 2002 financial statements
  based upon a false confirmation that the company
  held these assets at Bank of America. The bank
  account and the assets did not exist and the
  purported confirmation had been forged
• Banks lost 2.5 billion in unsecured debt
• U.S. investors lost 1.5 billion in bonds
• Equity investors lost 96 of their value in one
  day

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Bank of America New York Branch is not an
authorized confirmation response center
Fax number is from New Jersey not New York
Balances started off small and eventually grew to
5 billion over 10 years
Signature is a forgery of someone who is an
employee of the bank but not one who is
authorized to answer confirmations
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Parmalats Lawsuits Roll to the Auditors
Auditors 10 Billion
Each Citigroup 10 Billion Morgan Stanley
Banka Intesa 1.96 Billion UBS 355
Million Deutsche Bank 21 Million Bank of
America 10 Billion Shareholder Class
Action Billions
Relied on audited financial statements
Result Will sue the Auditors as well!
Were talking about a fraud that could have
happened anywhere. Umberto Mosetti, Law
Professor The Economist Parma Splat. January
15, 2004
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Sample of Companies with Staff who Responded
Falsely to Audit Confirmations

• Ahold Fraud
• Sara Lee Foods - Sales Manager
• Conagra Foods Account Manager
• Sara Lee Bakery Group Sales Manager
• Sugar Foods Vice President of Sales
• Koch Poultry Owner
• Heritage Bag CEO
• Citrus World Corporate Accounts
• Manager
• Hunt-Wesson Foodservice Vice President for
  Business Development

• Kmart Fraud
• Eastman Kodak - Vice President (Sales)
• Coca Cola National Director of Sales
• Pepsi-Cola National Sales Director
• Frito-Lay Director of Sales
• Frito-Lay National Account Manager
• Just For Feet Fraud
• Adidas Director of Apparel Sales
• Fila President CEO
• Converse Vice President of U.S. Sales

Though the mailing addresses were correct, notice
that the fraudulent responses came from Sales and
Relationship Managers the auditors never
verified that the individual responder was
authorized to respond and free from bias as
SAS 67 requires.
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Sample of Recent Confirmation Frauds
Fraudsters are the most reliable returners of
auditors confirmation letters, completed and
signed without exception. - Toby Bishop, CPA,
CFE
President CEO
Association of Certified Fraud Examiners

Washington D.C.
September 22, 2004
To commit fraud, the fraudster needs the
confirmation and the client provided
documentation to match. Therefore, the true risk
of fraud occurs when the confirmations
tie-out. - Brian Fox, CPA

Founder of Electronic Confirmations
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Common Confirmation Fraud Schemes Auditor's are
at risk because

• Client provides
• Account statement and contact information
• Address and/or fax number for where to send the
  confirmation
• Contact name for who to send the confirmation to
• Phone number of the supposed bank or vendor
• Website address of the supposed bank or vendor
• And
• 6. Impractical if not impossible for auditor to
  validate the authenticity of the signature
  returned from the bank/vendor

Who is the Responder??
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2007 Professional StandardsSupporting
Encouraging Electronic Audit Confirmations

• March of 2007 AICPAs Audit Issues Task Force
  Auditing Standards Board
• Interpretation Number 1 of AU 330 on Electronic
  Confirmations
• properly controlled electronic communications
  may be considered to be reliable audit evidence
• June 2007 AICPAs Practice Issues Task Force
• Updated Practice Alert 2003-1 Confirmations
• An electronic confirmation process that creates
  a secure confirmation environment may mitigate
  the risks of human intervention and misdirection.
  The key lies in the process or mechanism used by
  the auditor and the respondent to minimize the
  possibility that the results will be compromised
  because of interception, alteration, or fraud
  with respect to the confirmation.
• September 2007 (as proposed) IAASB
• Revised ISA 505 External Confirmations
• (A) direct written response to the auditor,
  whether in paper form, or by electronic or other
  medium
• October 2007 The PCAOB reports that
  Confirmations are a Top Priority for 2008
• October 2007 The ASB commissions a Task Force
  to draft a revision to AU 333 The Confirmation
  Process based on the work from the IAASB and
  PCAOB

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Key Benefits of using CONFIRM Service

• 100 Response Rate
• 2 Business Day Average Turnaround
• 15 Minute Online Self-Training
• Manage 100 of Your Bank Confirmations for ALL
  Banks
• Saves Up to 50 of Your Staff Time in
  Confirmation Area
• Improves Fraud Detection
• Go GREEN!

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Accounting Firm Benefitsusing CONFIRM Service
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Accounting Firm Comments

• I have absolutely no complaints! Manager
• Were very pleased with the solution. Using
  it, weve cut our time spent doing confirmations
  in half. - Managing Partner
• efficient way of doing a process we have to
  do that takes professional time. Managing
  Partner
• It saves time Partner
• excellent product that is really needed in the
  present audit environment. Partner
• It has worked great - Manager

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Capital Confirmation Inc.Thank you.
www.confirmation.com
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McKesson Robbins 1920s

• Quotes from Fortune Magazine March 1940 Fall and
  Rise of McKesson Robbins
• When an auditor looks into your books, his
  interest is in figures and documents only (not
  fraud). Take the verification of assets. For
  the cash item, he writes your bank to see how
  much cash you have, and reconciles that with your
  own deposit records and canceled checks.
• (Management) maintained real mailing addresses in
  Montreal and Liverpool for Price, Waterhouses
  sake.
• The offices in Montreal had a full-time secretary
  each.
• Instructions were to forward all mail to
  management.
• The mail consisted chiefly of a semiannual letter
  from Price, Waterhouse, asking for confirmation
  of balances and inventories.
• By an ironic coincidence, the office of Price,
  Waterhouse was less than a block away. But if
  accountants seem easy to fool
• Confirmation procedures havent changed in over
  80 years! And the frauds can still happen the
  same way!

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CONFIRMATION FRAUD CASE STUDYCF Foods Private
Company

• David Burry general partner CF Foods
• Promised returns of 18-30
• Paid early investors with investments from later
  investors
• 25 million in investments
• Used white out, typed in new information, and
  photocopied forged records to look authentic
• Hundreds of fictitious transactions
• Told customers the confirmation requests were
  sent out by mistake and to return them to Burry,
  who confirmed the false balances

CF Foods Sales Reported 1994 8,699,152 1995
19,026,265 1996 40,590,990 1997
83,985,013 1998 142,990,010 Total
295,291,430
97 of these sales never actually occurred!!