Fraud Prevention

David Meade

Description

Recent studies have indicated that the average corporation loses 1-6% per year of their revenue to fraud. The author has put together a book which covers every necessary aspect of protecting a privately-held company, or a publicly-held company, from the risks of fraud. Corporate Governance principles, an analysis of the Enron trial, and practical case studies abound in this volume.

Whether you are a Private Investigator needing a Guide to Forensics, or a business owner looking to protect your financial interests in a growing entrepreneurial company, this book is a must-read. As most of us have found out, there are two ways to learn: experience or having a great mentor. The latter is much more cost-effective.

This book is just that – a great lesson in all aspects of protecting your company. It is nothing less than a treasure trove of information, advice and exposition regarding just about every area of corporate investigations. If you have concerns about privacy, asset protection and anti-fraud measures, this book is for you!

Sujets

• Information Technology
• Computers
• Informatique

Informations

• Publié par: eBookIt.com
• Date de parution: 02 mai 2013
• Nombre de lectures: 0
• EAN13: 9781456615925
• Langue: English

Extrait

Fraud Prevention
 
by
David Meade

Copyright 2013 David Meade,
All rights reserved.
 
 
Published in eBook format by eBookIt.com
http://www.eBookIt.com
 
 
ISBN-13: 978-1-4566-1592-5
 
 
No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems, without permission in writing from the author. The only exception is by a reviewer, who may quote short excerpts in a review.
I. PREFACE
 
The Sarbanes-Oxley Act of 2002 is the most major securities regulation to affect companies since the Securities Exchange Act of 1934. Right now there are about 15,000 listed companies, which have a total market value of approximately $37 trillion and are held by tens of millions of shareholders. Studies have indicated that 1 to 6% of all corporate revenue is lost to fraud. In my consulting practice I have developed close to one hundred templates that I use in protecting companies from the effects of fraud on their revenue stream.
 
The Enron trial ended after four years of federal investigations and 108 days of sworn evidence. The prosecution based its case on evidence provided by executives below the top level, who themselves took plea deals, and on the Watkins letter, which exposed the fraudulent activities of the corporation in August 2001. Judge Lake invoked a common feature in white-collar prosecutions by giving the “ostrich instruction” to the jurors. This allows the jury to find a defendant guilty if they had sufficient notice of problems (like the Watkins letter), but deliberately refused to recognize or act on that information. Former WorldCom CEO, Bernard Ebbers, was convicted by way of a similar ruling.
 
Willful blindness satisfies the knowledge for a conspiracy conviction and the intent (scienter) element of a fraud conviction. The knowledge element refers to an offending party’s knowledge of the wrongness of an act or event prior to committing it. Black’s Law Dictionary defines fraud under common law as involving three elements: (1) a material false statement made with intent to deceive (also known as the element of scienter); (2) a victim’s reliance on those statements; and (3) damages. If the breach of fiduciary duty has no wrongful intent, it is civil fraud, but if it does, it becomes criminal fraud. This treatise does not cover frivolous cases of civil fraud claims, such as the difficulties of Dave Thomas of Wendy’s with an IPO where a footnote disclosure was found inadequate or Ron Howard’s dissolution of his film company whereby investors claimed civil fraud because he walked away from the corporation. These cases cross the line of frivolity.
 
The ostrich instruction is a common feature in white collar crime prosecutions. United States v. Jewell, 532 F.2d 697 (9th Cir. 1976), sets forth the classic instruction in this area: “You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear that he would learn, you may conclude that he acted knowingly.” Judge Posner explained how the ostrich instruction should be understood, and its limitations, in United States v. Giovannetti, 919 F.2d 1223 (7th Cir. 1990):
 
The most powerful criticism of the ostrich instruction is, precisely, that its tendency is to allow juries to convict upon a finding of negligence for crimes that require intent . . . The criticism can be deflected by thinking carefully about just what it is that real ostriches do (or at least are popularly supposed to do). They do not just fail to follow through on their suspicions of bad things. They are not merely careless birds. They bury their heads in the sand so that they will not see or hear bad things. They deliberately avoid acquiring unpleasant knowledge. The ostrich instruction is designed for cases in which there is evidence that the defendant, knowing or strongly suspecting that he is involved in shady dealings, takes steps to make sure that he does not acquire full or exact knowledge of the nature and extent of those dealings. A deliberate effort to avoid guilty knowledge is all the guilty knowledge the law requires.
 
Jurors were quoted after the trial as saying that for a man as knowledgeable as Enron Chairman Ken Lay was, he had to know what was going on at his own company. They found the high level of stock sales unusual compared to his recommendations at the same time to employees of the company to hold and buy stock.
 
Why has the last decade seen such an increase in white collar crime? It has been reflected in dozens of cases involving bribery, conflicts of interest, mail and wire fraud, and securities fraud, to name only a few. My name is David Meade. I consult for privately-held and publicly-held companies and implement anti-fraud strategies. I consult nationwide, and can be reached at [e-mail] . It is the purpose of my book to raise the awareness level for business owners of all sizes that their company can operate in a safe environment, free of concern of government investigations, and internal fraud or inefficiency. By studying the past, and researching what the federal government requires, business owners can see to it that their business is abiding by and following critical principles of strategy that will keep it profitable and secure in this environment.
1. An Overview of Corporate Governance
II. Key Reasons We Need Corporate Governance
 
Events Leading up to Sarbanes
 
A variety of corporate scandals led to the passage of the Sarbanes-Oxley Act, including the Enron failure. David Duncan, the former senior audit partner of Arthur Andersen LLP (Arthur Andersen), participated in the shredding of documents in the Enron case. Andy Fastow, the former CFO of Enron, set up a series of partnerships that were used for self-dealing and had the ultimate purpose of hiding debt transactions from the consolidated financial statements of Enron. He was assisted by Michael Kopper, who was involved in money laundering and wire fraud. Other Enron executives were either being investigated or indicted for securities fraud, making false statements to federal investigators, or fraudulent trading practices. With the collapse of Enron, $60 billion in market value was lost.
 
Bernard Ebbers, the CEO of WorldCom, had enjoyed the rising price of his holdings in WorldCom’s stock. Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses. During 2001, Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls, but this strategy ultimately failed, and WorldCom became the largest corporate bankruptcy in history.
 
Beginning in 1999 and continuing through May 2002, the company used fraudulent accounting methods to mask its declining financial condition. The fraud was accomplished primarily in two manners: (1) underreporting “operational costs” (one of five popular methods of corporate accounting fraud) by capitalizing these costs on the balance sheet rather than properly expensing them and (2) generating revenues with false accounting entries from “corporate unallocated revenue.” WorldCom’s internal audit department uncovered approximately $4 billion of the fraud in June 2002 during a routine examination of capital expenditures and alerted the company’s external auditors. At the end of the day, it was estimated that the company’s total assets had been inflated by around $11 billion.
 
Four former HealthSouth CFOs pled guilty after Sarbanes was passed to a variety of charges, including false certification of financial statements under the Sarbanes-Oxley Act, a federal offense punishable by up to twenty years in prison.
 
After the fact, when the SEC commissioned a study under Section 704 of the Sarbanes-Oxley Act, dozens of corporate governance scenarios were listed, which led to grand jury investigations and investigations by the FBI, Treasury, and SEC, and were followed by indictments and class-action lawsuits against some of the largest publicly held corporations in the world. Almost thirty different bills were proposed in 2002 in Congress before the final version of the Sarbanes-Oxley Act, named after Senator Paul Sarbanes from Maryland and Representative Michael Oxley from Ohio, was accepted and signed into law by President Bush in July 2002.
 
Corporate governance is defined as the relationship between corporate directors, officers, and providers of capital under the rule of law. Corporate directors are responsible to shareholders for the efficient use and stewardship of resources. Self-regulating corporate governance had failed, and the government stepped in to provide direction with the Sarbanes-Oxley Act of 2002. This act replaced the long-standing Financial Accounting Standards Board with a quasi-government (private but accountable to the SEC) body known as the Public Company Accounting Oversight Board. It was to be responsible for auditing and quality control of firms registered to audit publicly held corporations. Title II of the act covered Auditor Independence Issues, including prohibited services that were in the realm of conflicts. Title III included the all-important Section 302 Certifications, which brought the HealthSouth fraud to a complete halt. Title IV included Section 404, which increased audit responsibilities and also increased corporate accountability for solid internal control system reporting. Corporate fraud and accountability in a variety of areas were covered by Titles IV to XI. The section shortly following provides a list of key changes to the ways listed corporations are governed post-Sarbanes-Oxley.
 
PCAOB
 
One of the first responsibilities of the Public Company Accounting Ov