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1 National Audit Committee Forum Recent Corporate Fraud Developments John D. Tishler Session 5 Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful. Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA and should not be construed or interpreted as such. The materials contained in this presentation should not be considered to be in the public domain. Speeches and presentation materials contained here are proprietary works protected by copyright to AICPA and/or to the individual or entity who presented the materials at the conference. All rights are reserved. The authorized use of materials on this page is limited to download for personal reference by authorized users of the conference materials download area. Reproduction, redistribution, reuse, reposting or resale by any party in any form, format or media without express permission is strictly prohibited. Permissions requests may be directed to copyright@aicpa.org or to Thomas Robinson, Manager, Rights and Permissions at

2 Recent Corporate Fraud Developments Tuesday, July 31, :00 am 10:55 am Stephen G. Austin, CPA, MBA Partner, Swenson Advisors, LLP John D. Tishler Partner, Sheppard, Mullin, Richter & Hampton, LLP Good Morning, Corporate America! How Are We Doing? 2 5-1

3 We Just Caught Our Breathe From... 3 Then

4 Wait... There s More in BREAKING NEWS Americans Increasingly See Corporate Corruption as the Norm A widening scandal over manipulation of the London Interbank Offered Rate (Libor) comes at a time when Americans are no longer surprised by corporate corruption. A Gallup poll found that 62% of Americans think corporate corruption is widespread nationwide. Another survey found that nearly 75% of Americans think corruption has increased in the past three years. New York Times, July 10,

5 BREAKING NEWS Barclays scandal, tip of iceberg Press TV, July 10, 2012 A Senior Bank of England official has said that the Barclays Bank interest rate rigging scandal is just the tip of the iceberg... Bank of England s deputy governor, Paul Tucker told British MPs that greedy bankers may have been rigging the figures across dozens of other markets as well as the cesspit of the London Interbank Offered Rate (Libor), reported The Sun Fraud Scorecard What s Hot JOBS Act What s Not Restatements Insider trading scandals SOX 404 material weaknesses FCPA violations Accounting scandals COSO monitoring Weak Audit Committees Groupon Material Weakness Mild mannered auditors Coming Jobs War PCAOB foreign accounting firm investigations/fines 8 5-4

6 We Are Making Some Progress, But Years of Cause and Effect Stock market crash 1929 Securities and Exchange Commission Est Periods of economic stability Sharp rise in financial fraud, illegal corporate acts, bribes and kickbacks 1970s Foreign Corrupts Practices Act 1972 Student marketing/equity funding/zzzz Best AICPA SEC practice session 1977 The Cohen commission

7 100 Years of Cause and Effect, continued Era of rapid technology growth 1980s-2000 Rapid rise in personal wealth 1980s-1990s COSO established 1985 Tort reform/class action lawsuit 1996 Enron collapses Arthur Andersen fails SOX and PCAOB established 2002 Enron, Worldcom, Adelphia, Peregrine, Quest, HealthSouth, Tyco Years of Cause and Effect, continued Madoff, Stanford, Gupta, Subprime Mortgages, Complex Derivatives, Asian Corruption Updated COSO framework Barclay s Libor scandal/uk

8 The Meltdown Continues Fraud and the Financial Crisis AIG bailouts and SOX Material Weakness disclosures Lehman investigations Big bank bailouts Record unemployment rates Trillions and trillions in U.S. debt On its way to $15-$20 trillion (150% of GDP)? Global financial recession EU crisis New taxes/more taxes UK London financial problems 13 What is the Common Theme?

9 Short Answer 1. Trading short-term gain for long-term value 2. Ignoring the Elephant in the Room 1. Subprime mortgages 2. Material weaknesses 3. Excessive rates on return 4. Trilions of dollars of debt 3. Failure in personal ethics and decision making (code: greed!) 15 Are We Making Any Progress?

10 Restatements Are On the Decline 630 companies filed 674 restatements in % decline from 2008 The number of restatements peaked in 2006 with 1,795 restatements Audit Analytics Report: Financial Restatements A Nine Year Comparison Published March 10, SEC Investigations on the Rise Top SEC officials have undertaken significant reform in the agency s enforcement division Robert Khuzami named SEC Enforcement Director In 2009, the agency opened nearly 500 investigations, more than double the 2008 level

11 SEC enforcement cases John D. Tishler 19 Will IFRS Help or Hinder the Need for Global Ethics? Stephen G. Austin

12 Source: IASB.org 21 3 Global Internal Control Considerations

13 23 International Federation of Accountants Mission Members PAIB Committee

14 International Federation of Accountants, continued IFAC s mission is to serve the public interest by: Contributing to the development, adoption, and implementation of high-quality international standards and guidance; Contributing to the development of strong professional accountancy organizations and accounting firms, and to high-quality practices by professional accountants; Promoting the value of professional accountants worldwide; and Speaking out on public interest issues where the accountancy profession s expertise is most relevant 25 International Federation of Accountants, continued IFAC is comprised of 167 members and associates in 127 countries and jurisdictions American Institute of Certified Public Accountants Forum of firms Board - Goran Tidstrom, President (Sweden) - Warren Allen, Deputy President (New Zealand) - Tunisia, Spain, Canada, Netherlands, Brazil, Australia, Indonesia, United States, Uganda, Germany, France, India, United Kingdom, Mexico, Japan, Turkey, China

15 PAIB Committee IFAC Serves IFAC member bodies and professional accountants worldwide who work in commerce, industry, financial services, education, and the public and not-for-profit sectors Its aim is to promote and contribute to the value of professional accountants in business. To achieve this objective, its activities focus on: Increasing awareness of the important roles professional accountants play in creating, enabling, preserving, and reporting value for organizations and their stakeholders; and Supporting member bodies in enhancing the competence of their members to fulfill those roles. This is achieved by facilitating the communication and sharing of good practices and ideas 27 Practical Guidance on Implementing the Principles What should the scope of internal control be? Who should be responsible for internal control? How could management s genuine attention on internal control objectives be obtained? How should those involved in the internal control system live up to their responsibilities? What else, beyond their formal responsibilities, should be expected from the governing body and management with respect to internal control?

16 Practical Guidance on Implementing the Principles, continued How should internal control be selected, implemented, and operated? How can internal control be better ingrained into the DNA of the organization? How should internal control be monitored and evaluated? How should the organization report on internal control performance? 29 Building "Tone at the Top"

17 Ethics Report Card Signs of Improvement Financial statement fraud reduced Fewer restatements Stronger Internal Controls/fewer material weaknesses Public accounting firms improve due to PCAOB inspections Ethics focus in business schools 31 Ethics Report Card Areas of Concerns Ponzi schemes Weak credit ratings system Check the box approach to ethics/compliance Current government investigations of fraud and the financial crisis Global corruption in a global economy

18 Understanding the Foundations for Ethical Behavior 1. Changing hearts and minds vs. check the box 2. Establish Ethics Pillars in your company 3. Communicate your Ethics Pillars at least four times per year employees, customers, vendors 4. Financially reward ethical behavior 5. Focus on long-term values 6. Enjoy the rewards of an ethical climate 33 How to Culturally Address our Continuing Ethics Issues 1. The home (childhood) 2. The school (classroom) 3. Religious platform (basis for decision-making) 4. Corporate culture/ Tone at the Top 5. Repeat the cycle by generation 6. Breaking the pattern historical cycles of fraud

19 Discussion question: How do you build ethics into your business environment? 35 Resources Ethisphere AICPA s Fraud Resource Center Convene Institute for Global Ethics The Red Flag Group Swenson Advisors, LLP