Presented  to:  

Montgomery  County  Community  College  

Tom  Hood,  CPA.CITP.CGMA  CEO  

Maryland  Associa>on  of  CPAs  October  8,  2013  

Enron  “As  strongly  as  I  believe  in  a  new  role  for  government  in  the  new  economy,  government  ac>on  alone  cannot  provide  most  of  the  answer.  That’s  because  what  happened  at  Enron  wasn’t  just  a  failure  of  regula>ons  and  law,  it  was  a  failure  of  corporate  culture,  a  failure  of  values,  a  failure  of  heart.”    Senator  Carl  Levin  D-­‐Michigan  Commen>ng  on  his  Planned  Bill  of  Rights  for  Shareholders  

Ken  Lay  convicted  of    Faced  165  years  in  prison  –  but  died  of    Heart  aYack  before  going  to  jail  

"Acts  of  bad  character  must  have  real  consequences.  And  already  we're  seeing  that  as  financial  markets  punish  companies  that  have  displayed  an  inability  to  shoot  straight.  ...  Every  CEO  in  America  now  must  realize  that  accoun>ng  gimmickry  is  a  >cket  to  destruc>on.“    -­‐  Dave  Kansas  -­‐  WSJ  

Jeff  Skilling  convicted  of  19  out  of  29  counts  and  received  a  24  year  sentence  

Enron  

Worldcom  

Bernard  Ebbers  convicted  of  $11  billion  fraud  –  sentenced  to  25  years  in  prison  ScoY  Sullivan  CFO  got  five  years  

"A  business  run  with  character  and  integrity  will  receive  rewards  from  the  market,"  Kansas  writes.  "A  business  run  around  the  edges,  whether  within  the  leYer  of  the  law  or  not,  will  risk  joining  Adelphia,  Global  Crossing,  Arthur  Andersen,  Enron  and  WorldCom  on  the  scrapheap  of  history.“    -­‐  Dave  Kansas  –  WSJ  reporter  

Private  company  owners  and  public  company  management  ofen  try  to  run  their  companies  as  if  there  were  no  one  with  any  outside  interests.  Any  company  that  has  a  bank  loan,  an  outside  shareholder,  or  a  supplier  has  people  who  have  a  vested  interest  in  the  company.  Even  those  companies  without  any  of  those  listed  items  have  employees  whose  livelihood  may  be  dependent  on  the  company’s  con>nues  existence.  Public  companies  and  not-­‐for-­‐profit  organiza>ons  have  a  higher  degree  of  responsibility  to  protect  those  outside  interests.  Yet  so  many  treat  their  organiza>ons  as  their  private  fiefdoms.      

   -­‐Art  Berkowitz  -­‐  ENRON  

Dennis  Kozlowski  convicted  of  $400  million  fraud  –  sentenced  to  eight  years  in  prison  Mark  Swartz    CFO  got  five  years  

Tyco  

Other  Corporate  Scandals  &  Accoun>ng  Frauds  

Enron  –  WorldCom  Era  •  Adelphia  -­‐  Cable  •  Rite  Aid  –  Drug  stores  •  HealthSouth  –  Health  •  AOL  Time  Warner  •  Xerox  •  Bristol-­‐Myers-­‐Squibb  

Classic  Cases  •  Equity  Funding  –  (Insurance  &  

Mutual  Funds)  1973  •  ZZZZ  Best  –  (Carpet  Cleaning  &  

Restora>on)  -­‐  Mark  Minkow  -­‐  1984  •  ESM  Government  Securi>es  –  

1985  •  Lincoln  Savings  &  Loan  -­‐    Charles  

Kea>ng  –  CEO  -­‐  1989  

Current  Scandals  

•  Parmalat  –  Europe’s  Enron  (2003)  •  Satyam  –  India’s  Enron  (2008)  •  Madoff  –  World’s  largest  Ponzi  Scheme  •  +  35  other  scandals  so  far  totaling  $37  Billion  

Why?  -­‐  The  Tone  Has  Been  Set  “I  say  as  plainly  as  I  can  to  CEOs:  if  you  break  the  law,  we  will  hunt  you  down,  we  will  arrest  you  and  we  will  prosecute  you.  

 

President  George  W.  Bush    August  13,  2002  

Dennis  Kozlowski,   former  Tyco  CEO;  Mark  Swartz,   former  Tyco  CFO;  Mark  Belnick,   former  Tyco  Chief  Counsel;   frank  E.  Walsh,   former  independent   Tyco  Director;   Jerry   Boggess,   former   Tyco   fire  &   Security   Services   President;   Paul   Allaire,   former   Xerox   CEO;  G.   Richard  Thoman,   former  Xerox  CEO;  Barry  D.  Romerial,   former  Xerox  CFO;  Philip  D.  Fishbach,   former  Xerox  controller;  Daniel  S.  Marchibroda,  former   Xerox   Assistant   Controller;   Gregory   B.   Taylor,   current   Xerox   Treasurer;   Gary  Winnick,   Global   Crossing   Chairman;   Jim   Gorton,  former  Global  Crossing  Chief  Counsel;  Greg  Casey,   former  Global  Crossing  Sales  Execu>ve;   Jackie  Armstrong,  Global  Crossing  Counsel;  Philip   F.   Anscutz,   former   Qwest   Communica>ons   CEO;   Robin   Szeliga,   former   Qwest   Communica>ons   CFO;   Grant   P.   Graham,   former  Qwest  Global   Business  Unit   CFO;   Thomas  W.  Hall,   former  Qwest  Global   Business  Unit   Senior   Vice   President;   John  M.  Walker,  Qwest  Global  Business  Unit  Senior  Vice  President;  Bryan  K.  Treadway,  Qwest  Global  Business  Unit  Assistant  Controller;  Albert  J.  Dunlap,  former  Sunbeam  CEO;  Russell  A  Kersh,  former  Sunbeam  CFO;  Bernard  Ebbers,   former  WorldCom  CEO;  ScoY  Sullivan,  former  WorldCom  CFOI;  David  Myers,   former  WorldCom  Controller;   Buford   Yates   Jr.,   former  WorldCom  Accoun>ng  Director;  Michael   H.   Salsbury,  WorldCom  General  Counsel;  Susan  Mayer,  WorldCom  Treasurer;  BeYy  L.  Vinson,  Former  WorldCom  Accountant;  Troy  M.  Normand,  former                  WorldCom  Accountant;   John  Rigas,  Adelphia  Communica>ons  Founder;  Timothy  Rigas,   former  Adelphia  Communica>ons  CFO;   James  Brown,   former  Adelphia  Vice  President   for   Finance;  Michael  Mulcahey,   former  Adelphia  Director   for   Internal  Repor>ng;  Kenneth  Lay,  former  Enron  Corpora>on  Chairman;  Jefffery  Skilling,  former  Enron  Corpora>on  President;  Andrew  Fastow,  former  Enron  CFO;  Richard  A.  Causey,  former  Enron  CAO;  Michael  J.  Kopper,  former  Enron  Execu>ve;  Kenneth  Rice,  former  Enron  Broadband  Division  Chief  Execu>ve;  Ben  F.  Glisan   Jr.,   former  Enron  Broadband  Division  Treasurer;  Dean  Boyle,   former  Enron  Broadband  Division  Finance  Execu>ve;  Kevin  Hannon,  former  Enron  Broadband  Division  Execu>ve;  ScoY  Yeager,  former  Enron  Broadband  Division  Execu>ve;  Joe  Hirko,  former  Enron  Broadband  Division  Chief  Execu>ve;  Kevin  Howard,   former  Enron  Broadband  Division  Execu>ve;  Rex  Shelby,   former  Enron  Broadband  Division   Execu>ve;  Michal   Krautz,   former   Enron  Broadband  Division   Execu>ve;   John  Giesecke,   former  Homestore  COO;   Jospph   Shew,  former  Homestore  CFO;  Eric  Keller,  former  AOL-­‐Time  Warner  Execu>ve;  Sam  Waksal,  former  IMclone  Systems  CEO;  Richard  M  Scrushy,  HealthSouth  Chairman;  Michael  Mar>n,  HealthSouth  CFO;  Clark  E.  McLeod,  former  McLeod  USA  CEO;  Stephen  A  Garofalo,  Metromedia  Fiber   Networks   Founder   and   Chairman;   Jack   Grubman,   former   Salomon   Smith   Barney   Analyst;   Schuyler   Tilney,   former  Merrill   Lynch  Execu>ve;  Thomas  Davis,   former  Merrill   Lynch  Execu>ve;  Phua  Young,  Merrill   Lynch  Analyst;  David  Duncan,  Arthur  Andersen  Partner;  Rober  As>,   former  Symbol  Technologies  Vice  President;  Enio  Mon>ni,  Kmart  Vice  President;   Joseph  Hofmeister,  Kmart  Vice  President;  Frank  QuaYrone,  Credit  Suisse  First  Boston  Investment  Bank  Execu>ve;  Charles  W.  McCall,  former  McKesson  Chairman;  Helen  C.  Sharkey,  former  Dynegy  Risk   control  Y  Deal   Structure  Execu>ve;  Gene  S.   Foster,   former  Dynegy  Vice  President  of  Taxa>on;   Jaime  Olis,   Former  Dynegy  Senior  Director  of  Tax  Planning;  and  Martha  Stewart,  Martha  Stewart  Living  Onmimedia  Chairman  

500  convic@ons  or  guilty  pleas  28  were  CEOs  July  9th,  2002  

Bush  and  SEC  established  Corporate  Fraud  Task  Force  

September  2005  

10  

The  Fraud  Triangle  

Then  :  December,  2001   Now  :  December,  2008  

A  Tale  of  Two  Frauds  

Reforms  –  Round  1  

•  Sarbanes-­‐Oxley  Act  of  2002  – Corporate  Governance  – PCAOB  –  Internal  Controls  (Sec>on  404)  

•  Audi>ng  –  SAS  99  Fraud  Standard  •  COSO  Internal  Controls  •  SEC  CIFiR  Report  •  Treasury  ACAP  Report  

MACPA  Accoun>ng  Reform  Task  Force    The  Road  to  Reform  :  ProtecAng  the  Public  Interest  

Strengthening  the  CPA  Profession    •  Government  regula>on  &  oversight  

•  Public  trust  &  confidence  in  the  integrity  of  CPAs  

•  Public  understanding  of  the  auditor’s  role  

•  Corporate  governance  &  responsibility  

•  Importance  of  ethical  behavior  and  doing  the  “right”  thing  

Published  September  2002  

Bernard  Madoff  Law  of  Intractable  Systemic  CorrupAon  

 Any  significant  breach  of  a  syndrome’s  integrity    

(Government  &  Commerce)  –  usually  by  adop>ng  an  inappropriate  func>on  –  causes  some  normal  virtues  to  convert  automa>cally  to  vices,  and  s>ll  others  to  bend  

and  break  for  necessary  expedience.      

Over  the  course  of  >me,  corrupted  organiza>ons  accumulate  in  society.  Without  correc>on,  the  

accompanying  rancid  coopera>on  blurs  more  than  the  afflicted  organiza>ons.    

 -­‐Jane  Jacobs  –  Systems  of  Survival  

Ponzi  scheme  of  $  50  billion  Facing  150  years  in  prison  

Madoff’s  auditor  

David  Friehling,  CPA  faces  105  years  in  prison  For  issuing  false  audit  reports    

•   Sole  Prac>>oner  •   Accused  of  issuing  audits  of  Madoff  Securi>es  •   Lied  on  AICPA  membership  renewal  about  peer      review    

Satyam  +  PWC  

Ramalinga  Raju  –  CEO    created  $40  billion  in  fake  billing  and  cash    PWC  auditors  missed  cash  accounts?  

Recent  example  –  The  Dodd  –  Frank  Wall  Street  Reform  and  Consumer  Financial  Protec>on  Act  of  2010  

Crisis  hits  news  

Consumer    Financial  Protec>on  Bureau  

2,301  pages!  

533  regula>ons  60  studies  94  reports  

HR  4173  

Federal  Laws  &  Regula>ons  –  SEC,  DOL,  Treasury,  GAO,  PCAOB  

CPA  Profession  Standards  –  AICPA  &  FASB,  GASB,  FASAB,  IASB,  IFAC  

State  CPA  Statutes    

police  power  of  the  states  to  protect  their  ci>zens  vs  commerce  clause  

MD  Comptroller  MD  Comptroller  

CAQ  

US  Treasury  

MD  Comptroller  

Courtesy  of  the  Maryland  AssociaAon  of  CPAs  –  2008  ediAon                                                                                                                                                                                                                        Drawing  by  Carol  Kirwan,  CPA  

Our  infrastructure  for  regula>ng  the  US  financial  markets  has  been  created  from  a  series  of  reac>ons  to  crises  and  changes  and  is  in  

need  of  repair.  

Single  audits

 

Audit  quality  

Financial  Regulatory  Reform  

Sarbanes-­‐Oxley  Act  Dodd-­‐Fr

ank  Wall  Street  Reform

 and  Consumer  

ProtecAon  Act  

7  Steps  to  Greater  Ethical  Behavior  1.  Avoid  Conflicts  of  Interest  2.  Stand  Up  for  What  You  

Believe  is  Right  3.  Support  Others  Who  

Speak  Up  4.  Disclose,  Disclose,  Disclose  5.  Carry    a  Big  S>ck  6.  Use  Punishment  Sparingly  7.  Recognize  the  Difference  

Between  What  is  Legal  &  What  is  Right  

Source:  Enron  –  A  Professional’s    Guide  to  the  Events,  Ethical    Issues  and  Proposed  Reforms  by  Arthur  L.  Berkowitz  

Complexity  &  Risk  

Source:  Wired  magazine    17.03  March,  2009  

Guardians  cannot  keep  up  with  Commerce  

 “Even  the  regulators  can't  keep  up.  A  Senate  study  in  2002  found  that  the  SEC  had  managed  to  fully  

review  just  16  percent  of  the  nearly  15,000  annual  reports  that  companies  submiFed  in  the  previous  fiscal  year;  the  recently  disgraced  Enron  hadn't  been  reviewed  in  a  

decade."    

Source:  Wired  magazine    17.03  March,  2009  

Transparency  &  Accountability  “Publicity  is  justly  

commended  as  a  remedy  for  social  and  industrial  diseases.  Sunlight  is  said  

to  be  the  best  of  disinfectants;  electric  light  

the  most  efficient  policeman.”  

 -­‐  Supreme  Court  Jus>ce  Louis  Brandeis  

Source:  Wired  magazine    17.03  March,  2009  

Transparency  Now!  –  A  Wired  Manifesto  

Source:  Wired  magazine    17.03  March,  2009  

The  Whistleblowers  

“All  that  is  necessary  for  evil  to  triumph  is  for  good  men  to  do  

nothing.”    –  Edmund  Burke  

Harry  Markopolis  –  Madoff  Sherron  Watkins  –  Enron  Cynthia  Cooper  -­‐  WorldCom  

What  you  can  do?  •  Publicity  Test  •  Conscience  Test  •  Parent  Perspec>ve  •  Role  Model  Test  •  Universality  Test  •  Golden  Rule  

Source:  Ethics  in  the  Workplace  by  Michael  Josephson  

“Everyone  should  habitually  be  aware  of  the  moral  implica>ons  of  what  he  or  she  is  asked  to  do  and,  each  by  each  ,  should  stand  up  for  the  right  to  be  moral.”  -­‐  Jane  Jacobs  –  Systems  of  Survival  

“The  laws  and  professional  standards  represent  the  floor—the  minimum.    We  should  reach  for  the  ceiling.”  

David  M.  Walker,  CPA  Comptroller  General  of  the    United  States  

Tom  Hood,  CPA.CITP  CEO  

Maryland  AssociaAon  of  CPAs  Business  Learning  InsAtute  

(443)  632-­‐2301  E-­‐mail  tom@macpa.org  

Web  hap://www.macpa.org  Blog  hap://www.cpasuccess.com