In Conclusion

1
In Conclusion
2
(No Transcript)
3
Baruch College The Sixth Annual Financial
Reporting Conference May 3, 2007 Susan G.
Markel Chief Accountant, Div. of Enforcement
The U.S. Securities and Exchange Commission, as a
matter of policy, disclaims responsibility for
any private publication or statement by any of
its employees. Views expressed herein are those
of the presenter and do not necessarily reflect
the views of the Commission or other members of
the staff of the Commission.
4
Todays Topics

• SEC Enforcement
• Focusing on Financial Fraud and Financial
  Reporting Matters

5
Financial Fraud is

• Intentional or reckless conduct, whether
  act or omission, that results in materially
  misleading financial statements
• involving
• . . . gross and deliberate distortion of
  corporate records, falsified transactions,
  or the misapplication of accounting
  principles.
• Report of the National Commission on Fraudulent
  Financial Reporting COSO, October 1987

6
Fraud is Different than Errors

• Fraudulent financial reporting differs from
  other causes of materially misleading
  financial statements, such as unintentional
  errors.
• Report of the National Commission on Fraudulent
  Financial Reporting COSO, October 1987

7
Three Conditions are Usually Present

• Management has an incentive or is under pressure
• The opportunity exists for a fraud to be
  perpetrated
• The fraudsters rationalize their fraudulent acts
• Statement on Auditing Standards 99, October 2002
• Existence of an exit strategy

8
The Slippery Slope of a Financial Fraud

• Starts with making the numbers
• Then, Managing the Numbers
• Ends with making up the numbers

9
Rationalization includes

• We need to make our projections
• Im getting pressure from the boss
• We need to meet Street expectations
• Our acquisition will fall through if we dont

10
And, as is frequently predicted --
Well make it up next quarter
11
But, even a simple mistake can be turned into a
financial fraud through cover-up efforts.
12
Categories of Fraud

• Get rich quick and disappear even faster
• Greed/ego/credibility frauds
• Survival frauds for the good of the company

13
Sources of Enforcement Cases

• Other SEC Offices or Divisions
• Issuers Self-Reporting
• Auditor Reports
• Change in Auditors
• 10A

14
Sources of Enforcement Cases

• PCAOB
• 404 Reports
• Restatements
• Enforcement Complaint Center

15
Recent Actions Brought

• McAfee
• Raytheon Company
• Delphi
• AIG
• Collins Aikman
• Hollinger, Inc.
• RenaissanceRe Holdings

16
And More . . .

• Tyco International
• Fannie Mae
• Brocade Communications officers
• Comverse Technology officers
• Buca, Inc.
• PBSJ
• Doral Financial Corporation
• Excelligence Learning Corporation

17
Common Fraud Schemes

• Improper revenue recognition
• McAfee (formerly Network Associates)
• AremisSoft
• Applix
• Peregrine Systems, Inc.
• Safescript Pharmacies
• Robotic Vision Systems
• eFunds
• (and many more)

18
Common Fraud Schemes

• Excess reserves to smooth earnings
• Improper accounting for vendor rebates
• Improper capitalized costs
• Changing estimates to make the numbers
• Top-Side and Period End Journal Entries
• Earnings Management

19
Other Types of Cases

• Related party transactions
• Undisclosed compensation
• Non-financial metrics
• Variable-length quarters
• Financial products to manage earnings
• False/misleading disclosures/omissions in MDA
  (Reg. S-K -- known trends and uncertainties) and
  in financial statements (Reg. S-X)
• FCPA
• Stock option backdating

20
If It Seems Too Good To Be True -- It Probably Is
21
FINANCIAL REPORTING AND ISSUER DISCLOSURE
Areas of Focus
22
Financial Reporting Requires Good Disclosure
as Well as Good Accounting
23
Individuals Should Be Held Personally Responsible
for Misconduct
Officer Director bars Disgorgement
24
Cooperation is Extremely Important in Financial
Fraud Investigations
25
The Meaning of Cooperation

• Self-policing prior to discovery of misconduct
• Effective compliance procedures
• Appropriate tone at the top
• Self-reporting misconduct upon discovery
• Thorough review of nature, extent, origins
  consequences
• Disclosure to public and regulators

26
The Meaning of Cooperation

• Remediation
• Dismissing or appropriately disciplining
  wrongdoers
• Internal controls and procedures to prevent
  recurrence
• Compensating those adversely affected
• Cooperation with law enforcement authorities

27
Continued Coordination with Criminal Authorities
28

• Perception
• Vs.
• Deception

29

• Untested Perception
• Allows for
• Undiscovered Deception

30
Areas of Focus

• Conduct of Gatekeepers Scrutinized
• Attorneys
• Directors
• Audit Committees
• And, of course . . .

31
Accountants and Auditors

• Every case STILL raises the question

Where were the accountants and auditors?
32
Protecting the Integrity of the Audit Workpapers
33
Process Cases

• Tenet Healthcare KPMG Auditors
• EY Audit Partner and Senior Manager (NextCard)
• SmarTalk Teleservices, Inc. and PwC
• American Tissue AA Auditors

34
Other Auditor Matters and Settlements
35
Basic Audit Failures

• Planning
• Execution
• Analysis

36
Basic Audit Failures

• Lack of evidence
• Over reliance on management representations
• Improper confirmation process
• Inadequate testing of internal controls
• Incorrect disposition of identified errors
• Independence

37
Facilitating Another Companys Reporting
Violations May Create Liability
38
Recent Examples

• Delphi
• Royal Ahold U.S. Foodservice
• Scientific-Atlanta (Adelphia)

39
Areas of Focus

• WHO ?
• WHAT?
• WHERE?
• WHEN?
• WHY?
• HOW?
• AND THEN WHAT --- Appropriate remedy ?

40
(No Transcript)