Accounting Fraud Examination October 12, 2011 Introduction As we look back on the first decade of the 21st Century, we see that Corporate America and the Financial Markets were riddled with corruption and fraud. At the beginning of the decade we saw the likes of Enron and WorldCom become insolvent due to accounting frauds of epic proportions. The one case that stands out amongst all of them is the Bernard Madoff case, which is considered to be the largest fraud case of all time. “Madoff managed to lure billions of dollars away from huge charities, as well as wealthy individuals in both the United States and Europe by getting them to invest in his hedge fund. He did so by claiming extraordinary returns (generally in the low double digits).
The ultimate goal is to protect investors. Reason Many acts of corporate corruption in the 1990s and early 2000s brought on this regulation. There were many loopholes that allowed for accounting errors without any legal incentive to correct the problem. Due to the accounting practices at companies such as Enron, Tyco, and WorldCom investors lost billions. The accounting practices created a scandal in which the companies were able to hide information from investors.
Sarbanes-Oxley Act Peggy Baker Liberty University May 1, 2011 Abstract Financial statements are a means of communication between companies and investors. The information provided in financial statements has not always been true. The collapse of companies such as Enron, the scandals that followed, and the distrust from the public caused lawmakers to create the Public Company Accounting Reform and Investor Protection Act of 2002. This act is now known as the Sarbanes-Oxley Act. The Sarbanes-Oxley Act’s (SOX) main provisions include: (1) oversight board, (2) corporate executive accountability, nonaudit services, retention of work papers, auditor rotation, conflicts of interest, hiring of auditors, and internal controls.
3. St. Louis testified that while he had told his manager “there ha [d] been unreasonable delays on Mr. Hallee's part” in responding to the audit, he had refused to sign a letter formally accusing Hallee of the same. St. Pierre, claiming that this left the jury with the mistaken belief that St. Louis felt positively toward Hallee, wanted to cross-examine St. Louis regarding evidence that St. Louis, when asked by IRS personnel for names of tax preparers that they might investigate for misconduct, had recommended Hallee's firm to them as a possible
(AP) Former Rite Aid Corp. chief executive Martin L. Grass was sentenced to eight years in prison Thursday for conspiring to falsely inflate the value of the company his father founded and cover up the scheme. Grass, 50, who headed up the nation's third-largest pharmacy chain in the late 1990s before being forced out in October 1999, also was fined $500,000 and given three years' probation for his role in a billion-dollar accounting fraud that sent the company's stock tumbling. Before U.S. District Judge Sylvia H. Rambo handed down the sentence, Grass apologized to Rite Aid, its stockholders and employees. "For the harm caused to them, I am truly sorry," he said. Grass was indicted by a federal grand jury two years ago.
These scandals cost investors billions of dollars when the share prices of affected companies collapsed, and shook the publics’ faith in the security markets. When examining the SOX act you can see that since 2002 many things have changed in the past eight years. Corporate governance is one of many things that have changed; Public companies must now have a totally separate audit committee composed of entirely independent directors and must contain one financial expert. Security fraud now has much more extreme punishments for those who commit or conspire to commit fraud. Since the introduction of SOX auditors of public companies must keep documentation of an audit for seven years, destruction of any documentation or evidence that someone has committed fraud is now punishable by jail time and fine.
Because this investment scheme was somewhat exclusive, many investors knew Bernie personally. Others were recommended by people, like Bernie’s father in law Saul Alpern, in which they trusted, which seems to be one of the reasons that red flags were ignored. Another factor is that BMIS (Bernie Madoff’s financial management group) went through multiple SEC investigations in 1999 and 2004 (Ferrell, Ferrell & Fraedrich, 2011). Harry Markopolos warned the SEC on 5 separate occasions over a nine-year period with allegations that Madoff was running a Ponzi scheme, but no one acted. Markopolos was given the task to replicate the results of Madoff’s investment strategy; it was then that he concluded Madoff was delivering impossible and very fraudulent results.
Summary of Bigger than Enron In 2001, the nation was rocked by the collapse of Enron, a multibillion-dollar corporation that employed thousands of people and had affiliations right up to and including The White House itself. With all of the fraud and mismanagement that took place under the gilded roof of Enron, the question arises as to the involvement of others in the scandal, not the least of who is the firm of Arthur Andersen. In the 1990s, more than 700 U.S. companies were forced to correct misleading financial statements as a result of accounting failures, lapses, or outright fraud. Together with Enron -- the largest corporate bankruptcy in U.S. history -- these failures have cost investors an estimated $200 billion. What went wrong?!
This is called “sudden wealth syndrome”. Sudden wealth syndrome is a difficult problem for people to overcome. When a sportsperson transitions from playing for a college team to becoming a professional athlete, they will sign a contract that can make the competitor into a millionaire instantaneously. The athlete commonly has limited monetary knowledge, if any. When the athlete receives a check for ten-thousand dollars, they might spend it hastily.