Fraud and Other Corporate Investigations

||Fraud and Other Corporate Investigations

The Deepening Crisis of Financial Elder Abuse

October 2018 America’s aging population, who hold trillions of dollars in assets, are a common target for financial abuse.  Every year, millions of American seniors are scammed by fraudsters who exploit their financial vulnerability, or in some cases diminished cognitive capacity, through a variety of financial schemes.  The National Adult Protective Services Association (“NAPSA”) describes [...]

Another Major Vendor Billing Fraud Hits The Entertainment Industry

May 2016 Vendor billing schemes can occur in any industry, but two recent cases demonstrate the particular risks of the entertainment industry, which relies heavily on services whose actual delivery and consumption may be harder to track. A fraudulent billing scheme using a shell company can sometimes be accomplished with little more than a fictitious name [...]

SEC Utilizes Big Data And Statistics To Target Trading Fraud

July 2015 The Securities and Exchange Commission recently announced its first fraud charges involving what some have called an attempt at “Robocop”, derived from tracking behavior using data analytics of large volumes of investment advisors’ trade allocation detail.  The enforcement target is Welhouse & Associates Inc. and its owner Mark P. Welhouse. Mr. Welhouse is [...]

GAO Tells SEC to Look in the Mirror Regarding Internal Control Failures

May 2015 The U.S. Government Accountability Office (“GAO”), a government watchdog group, recently reported the results of its 2014 audit of the Securities and Exchange Commission (“SEC”) financial statements.  The findings included (i) troubling reports of internal control failures at the very agency tasked with policing the reporting activities of others and (ii) warnings of [...]

Fraudulent Revenue Recognition Order Causes Rift At The SEC

September 2014 A settlement agreement has been reached In the Matter of Lynn R. Blodgett, Adm. Proc. File No. 3-16045 (August 28, 2014), but without consensus on the part of the Securities Exchange Committee (“SEC”) as to the appropriate penalty. The underlying circumstances involve a financial fraud action against two executives at Affiliated Computer Services, Inc. [...]

Internal Control Failings At The IRS Contribute to Over $100 Billion in Improper Payments

July 2014 The U.S. Government Accountability Office (“GAO”) recently issued “Management Report: Improvements Are Needed to Enhance the Internal Revenue Service’s Internal Controls”, describing how the Internal Revenue Service (“IRS”) continues to have internal control deficiencies, both new and old. The purpose of the report is to present internal control deficiencies identified during the GAO’s [...]

New Rules Aimed At Increasing Auditor Scrutiny Of Critical Fraud Areas

June 2014 With its new audit standards and amendments aimed at specific transaction types, the Public Company Accounting Oversight Board (“PCAOB”) has targeted three critical areas in its ongoing efforts to combat financial reporting fraud. The new rules are intended to increase heighten auditor scrutiny regarding (i) related-party deals, (ii) significant unusual transactions, and (iii) [...]

Recent SEC Cases Demonstrate A Desire To Hold Audit Committee Members Accountable

April 2014 The Securities Exchange Commission (“SEC”) has set its sights on audit committee chairs who fail to exercise appropriate oversight and stewardship over financial reporting, recently targeting two who allowed ongoing fraud in the organizations they were tasked with overseeing.  Audit committee chairs of two firms with major Chinese operations, L&L Energy (“L&L”) and [...]

CAQ Proposes Audit Quality Indicators To Assist Audit Committees With Oversight

April 2014 Regulators and standard setters, such as the Public Company Accounting Oversight Board (“PCAOB”) and the International Auditing and Assurance Standards Board (“IAASB”) have been working to develop and standardize a framework for evaluating and encouraging audit quality.  After a two year effort, the Center for Audit Quality (“CAQ”), an autonomous public policy organization [...]

The True Cost Of Lowering Audit Fees Is Increased Restatement Risk

March 2014 In association with general cost cutting measures over recent years, many companies have pressured their vendors to reduce fees.  This downward pressure has extended to the accounting firms hired to provide independent audit opinions, resulting in a significant drop in audit fees.  According to Audit Analytics, audit fees in 2012 were $472 per [...]

A Lack Of Internal Controls Allows Repetitive Small Thefts To Really Add Up

October 2013 A recent article in the Los Angeles Times (found here) exemplifies how relatively small repetitive thefts can translate into large dollar amounts when allowed to perpetuate undetected over many years.  In this circumstance a Rialto school district accountant is accused of embezzling between $1.8 and $3.16 million of school lunch money, in weekly [...]

Major Changes In Standard Audit Reports Coming?

August 2013 The Public Company Accounting Oversight Board (PCAOB) is considering changes to the standard auditor's report, which has remained relatively unchanged for decades.  The hope is that these changes will make the standard auditor’s report more informative, relevant and useful to investors and other financial statement users.  The proposed expanded language would require auditors to [...]

New Guidelines To Assist Companies With Fraud Deterrence

June 2013 Internal Control – Integrated Framework, is a new framework for fraud deterrence that was recently released by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  It provides expanded practical advice regarding effective implementation of internal controls.  COSO is a joint initiative of five private sector organizations with a shared interest in [...]

Battling Auditor Involvement In Fraudulent SEC Reporting

May 2013 Even after the increased regulation associated with the Sarbanes-Oxley Act (SOX) in July 2002, the audit profession continues to deal with questions of whether they are truly independent from the companies who employ them and overall audit effectiveness. A recent report commissioned by the Center for Audit Quality (“CAQ”) specifically examines Securities and [...]

Recent Research On Compensation Structure And Fraud Reinforces The Principals Of The Fraud Triangle

May 2013 A recent study in The Journal of Financial Economics suggests that a compensation structure that relies on financial performance measures can be tied to incidences of fraud.  Generally, the study concludes that individuals are more likely to engage in financial misstatements when the there is little downside and high upside.  The implication is that [...]

SEC Hesitating To Impose Internal Audit Function Requirement On NASDAQ Companies

April 2013 On March 4, 2013, NASDAQ issued a proposed new rule (Release No. 34-69030; File No. SR-NASDAQ-2013-032) which would require listed companies to have an internal audit function: “Each Company must establish and maintain an internal audit function to provide management and the audit committee with ongoing assessments of the Company’s risk management processes [...]

PCAOB Issues Second Mixed Report On Audits By Smaller Firms, But Ultimately Puts Them On Par With Larger Firms

April 2013 On February 25, 2013, the Public Company Accounting Oversight Board (PCAOB) issued its summary report on smaller accounting firms. The PCAOB described its inspections and related reporting here as follows: “This report covers domestic audit firms that audit the financial statements of issuers, and that regularly issue 100 or fewer audit reports each [...]

SEC To Utilize Data Analytics To Identify Accounting Irregularities

February 2013 Data is valuable.  The question is once you have it, how can you use it?  Data analytics uses processes to extract and evaluate information from large data sets and identify potential areas of risk, fraud, or error.  Among the often used data analytics activities is benchmarking or trending of data.  Developing these strategies [...]

Government Improves Its Fraud Recovery Results, Mainly Through The Efforts Of Private Citizens

January 2013 The False Claims Act, 31 U.S.C. § 3729 et seq., allows penalties of $5,500 to $11,000 per claim and triple damages against those who knowingly submit or causes the submission of a false or fraudulent claim to the United States government.  In December, the Department of Justice (DOJ) released a statement bragging about [...]

DOJ & SEC Issue Guidance on Foreign Corrupt Practice Act

November 2012 The U.S. Justice Department (DOJ) and Securities and Exchange Commission (SEC) jointly published a much anticipated guidance on the U.S. Foreign Corrupt Practices Act (FCPA).  Entitled “A Resource Guide to the U.S. Foreign Corrupt Practices Act”, the “Guide” is 120 pages long, and is significantly more comprehensive than its predecessor, the “Lay Person’s [...]

PCAOB Initial Inspections Of Smaller Broker Dealers Uncover Significant Audit Failures

September 2012 On August 20, 2012, the Public Company Accounting Oversight Board (PCAOB) released its first report on the progress of the interim inspection program for auditors of brokers and dealers. The inspection program was implemented approximately a year ago in response to new oversight authority given to the PCAOB by the Dodd-Frank Wall Street [...]

Standard Charter Bank Still In Trouble Over Iranian Money Laundering Fraud

August 2012 In a quick settlement over Iranian-related illegal conduct, Standard Chartered Bank (SCB) agreed on August 14 to pay $340 million in a settlement with the New York State Department of Financial Services (DFS). The DFS settlement allows SCB to continue operating in New York, but requires an on-site monitor who will report directly [...]

Europe’s LIBOR Manipulation Is A Big Deal, But The Story Is Probably Different Than You Heard

July 2012 UK-based Barclays is the fourth largest bank in the world, with operations in over 50 countries. Barclays recently received huge publicity pertaining to its manipulated reporting of interest rates that go into the calculation of both Libor and Euribor rates. But, the larger story, which is just unfolding, involves a combination of similar [...]

California’s Business Judgment Rule Offers No Protection For Officers

January 2012 Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles area and the seventh largest mortgage originator in the United States.  IndyMac was the fourth largest bank failure in United States history, and the second largest failure of a regulated thrift.  IndyMac was founded as Countrywide Mortgage [...]

Scienter (Almost) Required for 1933 Act Securities Suits

November 2011 It just got a lot harder to successfully sue preparers of financial statements and their auditors under the 1933 Securities Act.  In Fait v. Regions Financial Corporation, et al., the Second Circuit upheld a District Court ruling that threw out a case having remarkably common facts. The case involves allegations that financial statements [...]

First-Ever SEC Deferred Prosecution Agreement Is Hardly A “Game Changer”

August, 2011 On May 17, 2011, the Securities and Exchange Commission (SEC) announced its first-ever deferred prosecution agreement with a company who voluntarily reported a violation of the Foreign Corrupt Practices Act.  Such agreements are intended to facilitate and reward cooperation in SEC investigations.  The SEC announcement praised the settling company (Tenaris S.A.) for its [...]

Computer Forensics Deserve A Place In Your Human Resource Toolkit

June 2008   Computers contain evidence useful in many human resource circumstances. Allegations of discrimination, sexual harassment, and unfair discharge are serious threats that are better understood by knowing what an employee did. Since computers are such a pervasive part of most employees’ work lives, analysis of data stored on these computers helps address these [...]

California Appellate Court Says Attorney-Prepared Witness Statements Are Discoverable

March 2010 Discovery requests regularly ask (often through form interrogatory 12.3 and a related document production request) for all witnesses interviewed, and to produce copies of any witness statements. Non-producing parties regularly object to such requests based on Nacht & Lewis Architects, Inc. v. Superior Court, 47 Cal. App. 4th 214 (1996). In Nacht, such [...]

Central District of California Case Poses New Requirements For Internal Investigations

April 2009 In an April 2009 written Order following a three-day hearing, federal judge Cormac Carney criticized Irell & Manella for "ethical failures" arising from its internal investigation on behalf of Broadcom (in re: United States v. Nicholas, No. SACR 08-00139-CJC (C.D. CA, April 1, 2009)). The case pertains to criminal stock option backdating allegations [...]

Largest-Ever Ponzi Scheme Should Have Been Obvious To Anyone Who Looked Seriously

January 2009 In mid-December, Bernard Madoff was arrested for operating a giant ponzi scheme. After his two sons reported him to regulators, Madoff admitted that losses could be as much as $50 billion. Bloomberg tallied around $37 billion that is currently invested with Madoff, but the total numbers will obviously include amounts not subject to [...]

Electronic Data Is Always Difficult … If You Don’t Try

November 2008 The Obama campaign shattered all fund-raising records. The President-elect raised approximately twice as much money (approximately $300 million more) than McCain. A surprising amount of this additional money, over $225 million, reportedly came over the internet from U.S. citizens contributing less than $200 per individual. Donations under $200 per person do not have [...]

Delaware Case Alters Existing Practice Regarding Use Of Special Committees

January 2008 The Delaware Chancery Court issued a ruling in Ryan v. Gifford, C.A. No. 2213-CC (Del. Ch. Nov. 30, 2007) that runs afoul of current common practice in dealing with investigations performed by a Special Committee of the Board of Directors. Although the case involves stock option backdating, the rationale applies equally to any [...]

10b5-1 Plans Deserve Greater Scrutiny by Boards of Directors

July 2007 Stock option backdating scandals have grabbed headlines for quite some time. These scandals were initially identified by academic research that noted unexplained stock movements relative to option grant dates. A similar issue may exist with 10b5-1 plans. The volume of potential insider trading is substantial. For example, in late July, the former CEO [...]