Title: In Conclusion
1In Conclusion
2(No Transcript)
3Baruch 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.
4Todays Topics
- SEC Enforcement
- Focusing on Financial Fraud and Financial
Reporting Matters
5Financial 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
6Fraud 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
7Three 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
8The Slippery Slope of a Financial Fraud
- Starts with making the numbers
- Then, Managing the Numbers
- Ends with making up the numbers
9Rationalization 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
10And, as is frequently predicted --
Well make it up next quarter
11But, even a simple mistake can be turned into a
financial fraud through cover-up efforts.
12Categories 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
16And More . . .
- Tyco International
- Fannie Mae
- Brocade Communications officers
- Comverse Technology officers
- Buca, Inc.
- PBSJ
- Doral Financial Corporation
- Excelligence Learning Corporation
17Common Fraud Schemes
- Improper revenue recognition
- McAfee (formerly Network Associates)
- AremisSoft
- Applix
- Peregrine Systems, Inc.
- Safescript Pharmacies
- Robotic Vision Systems
- eFunds
- (and many more)
18Common 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
19Other 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
20If It Seems Too Good To Be True -- It Probably Is
21FINANCIAL REPORTING AND ISSUER DISCLOSURE
Areas of Focus
22 Financial Reporting Requires Good Disclosure
as Well as Good Accounting
23Individuals Should Be Held Personally Responsible
for Misconduct
Officer Director bars Disgorgement
24Cooperation is Extremely Important in Financial
Fraud Investigations
25The 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
26The 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
27Continued Coordination with Criminal Authorities
28 29- Untested Perception
- Allows for
- Undiscovered Deception
30 Areas of Focus
- Conduct of Gatekeepers Scrutinized
- Attorneys
- Directors
- Audit Committees
- And, of course . . .
31Accountants and Auditors
- Every case STILL raises the question
Where were the accountants and auditors?
32Protecting the Integrity of the Audit Workpapers
33Process Cases
- Tenet Healthcare KPMG Auditors
- EY Audit Partner and Senior Manager (NextCard)
- SmarTalk Teleservices, Inc. and PwC
- American Tissue AA Auditors
34Other Auditor Matters and Settlements
35Basic Audit Failures
- Planning
- Execution
- Analysis
36Basic Audit Failures
- Lack of evidence
- Over reliance on management representations
- Improper confirmation process
- Inadequate testing of internal controls
- Incorrect disposition of identified errors
- Independence
37Facilitating Another Companys Reporting
Violations May Create Liability
38Recent Examples
- Delphi
- Royal Ahold U.S. Foodservice
- Scientific-Atlanta (Adelphia)
39Areas of Focus
- WHO ?
- WHAT?
- WHERE?
- WHEN?
- WHY?
- HOW?
- AND THEN WHAT --- Appropriate remedy ?
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