In Conclusion
U.S. Securities & Exchange
Commission
Division of Enforcement
The U.S. Securities and Exchange Commission, as
a matter of policy, disclaims responsibility for any
private publication or statement by any of its
employees. Views expressed herein are those of
the presenter and do not necessarily reflect the
views of the Commission or other members of the
staff of the Commission.
Today’s Topic
 Financial
Reporting and Issuer
Disclosure
 Focus
on Financial Fraud
Financial Fraud is:
“…
Intentional or reckless conduct, whether
act or omission, that results in materially
misleading financial statements…”
“…
it may entail gross and deliberate
distortion of corporate records, … falsified
transactions, … [or] the misapplication of
accounting principles.”
Report of the National Commission on Fraudulent Financial Reporting; COSO, October 1987
Fraud is Different than Errors
“Fraudulent
financial reporting differs
from other causes of materially
misleading financial statements, such
as unintentional errors.”
Report of the National Commission on Fraudulent Financial Reporting; COSO, October 1987
Three Conditions are Usually
Present:
Management
has an incentive or is under pressure
The
opportunity exists for a fraud to be perpetrated
The
fraudsters rationalize their fraudulent acts
Statement
on Auditing Standards 99, October 2002
How Does it All Begin?
Answer:

Starts with “making the numbers”

Then, “Managing the Numbers”

Ends with “making up the numbers”
Rationalization includes:

“We need to make our projections…”

“I’m getting pressure from the boss…”

“We need to meet Street expectations…”

“Our acquisition will fall through if we don’t…”
And, Let’s Not Forget the
Popular
“We’ll make it up next
quarter…”
But, even a simple mistake can
be turned into a financial fraud
through “cover-up” efforts.
Annual Caseload by
Fiscal Year
600
500
400
300
200
100
0
19 19 19 19 19 20 20 20
95 96 97 98 99 00 01 02
Fiscal Year
SEC Enforcement: FY 2002
 598
total cases
 Largest categories:
Financial fraud and issuer reporting (27%)
 Offering fraud (20%)
 Broker-dealer (14%)
 Insider trading (10%)
 Market manipulation (7%)
 Investment adviser/company (8%)

Financial Reporting and Issuer Disclosure:
Actions Filed

163 actions filed in FY 2002

Compared to:

112 in FY 2001

103 in FY 2000

94 in FY 1999

79 in FY 1998
Sources of Cases
Other Agencies
 Self-Reporting
 Auditor Reports
 Informants

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Complaint Center
 500-800
complaints a week
 Many concern financial
misconduct
 www.sec.gov
Commission Top Priority
 October
17, 2001: “Financial fraud and
reporting cases are our top priority”
– 216 New financial fraud
and reporting investigations
opened
 69% increase over FY 2001
 FY 2002
Resources
970 Staff Members
 2500+ Open
Investigations
 Half of resources on
financial fraud

Common Fraud Schemes
Premature
revenue recognition
Excess reserves to smooth earnings
Improper capitalized costs
Changing estimates “to make the numbers”
Top-Side Journal Entries
“Earnings Management”
Traditional Fraudulent Revenue
Schemes




Backdating of
contracts
Fictitious invoices
Shipment of
unfinished product
Revenue after the
fiscal period


Revenue recognized
on products not
shipped or not yet
manufactured
Hidden “side letters”
giving customers
rights to return
product
New Types of Cases









Looting
SPE’s
Related party transactions
Undisclosed compensation
Misleading “Pro Forma” releases
Round-tripping
Accommodations
Channel stuffing
Acceleration of revenue in multiple-element
arrangements
Growth in Enforcement
Investigations
In 1998, we had 1733 investigations
 In 2002, we had 2402 investigations


39% increase in investigations
Growth in Financial Fraud
Actions

In 1998, we brought 79 financial
fraud/reporting actions

In 2002, we brought 163 financial
fraud/reporting actions

106% growth in financial fraud actions
Growth in Actions Involving
Fortune 500 Companies

In 1998, 4 of the 79 financial fraud actions
(5%) involved Fortune 500 companies

In 2002, 29 of the 163 financial fraud
actions (18%) involved Fortune 500
companies

625% growth
Actions Brought in the Last 12 Months
Michael Kopper and Andrew Fastow
(Enron)
 WorldCom
 RiteAid and its senior management
 Adelphia Communications and its senior
management
 Microsoft
 Senior management of Waste Management
 Amazon.com
 Xerox

Still More







PricewaterhouseCoopers
Ernst & Young
Top officers of Tyco
Homestore.com officers
Dynegy
KPMG
HealthSouth
FINANCIAL REPORTING AND
ISSUER DISCLOSURE:
Themes and Trends
Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
Coordination with criminal authorities
Close Cooperation with
Prosecutors
 Corporate Fraud Task Force
 US Attorneys want the cases
 State authorities want the cases
 Plenty of cases to go around
Criminal Cases –FY 2002
 17
Federal districts brought
criminal securities fraud cases
 More than 259 people and entities
charged
Enron

Michael J. Kopper held various executive positions at
Enron, most of the time reporting directly to Andrew
Fastow, Enron’s CFO.

In August 2002, the Commission filed a settled action
against Kopper in which he agreed to disgorge and
forfeit $12 million, to be permanently enjoined from
violating the federal securities laws, and to be barred
from acting as an officer or director of public
companies.

On the same day, Kopper pleaded guilty to conspiracy
to commit wire fraud and money laundering, agreed to
forfeit $4 million (included in the $12 million above),
and to cooperate with the government's continuing
investigation.
Enron

Commission filed enforcement action against Andrew
Fastow, former CFO of Enron, alleging violations of
anti-fraud, periodic reporting, books and records, and
internal controls provisions of federal securities laws.

Commission seeks disgorgement of all ill-gotten gains,
including all compensation received subsequent to
commencement of the alleged fraud, civil money
penalties, a permanent bar from acting as a director or
officer of a public company, and an injunction from
future violations of the federal securities laws.

Commission brought action in coordination with DOJ’s
Enron Task Force, which filed a related criminal
complaint against Fastow.
Enron
Commission complaint alleges:
• Fastow involved with three transactions -- RADR, Chewco,
and Southampton – that were part of an alleged scheme to hide
his and Michael Kopper's interest in and control of certain
entities in order to keep those entities off Enron's balance sheet.
• Fastow secretly nominated certain of the owners of these
three entities, funded certain of their investments through
undisclosed loans, collected undisclosed fees, and demanded
and received under-the-table payments, including payments to
himself and his family members disguised as yearly $10,000
non-taxable gifts.
• Purpose of scheme was self-enrichment and to mislead
analysts, rating agencies, and others about Enron's true financial
condition.
Enron
Commission complaint further alleges:
• Fastow participated in two additional transactions that were
essentially sham sales - best described as secret asset-parking
arrangements.
• Fastow and others backdated documents to avoid
diminution in Enron's investment in the stock of a technology
company. Specifically, Fastow and others created documents
that purported to lock in the value of Enron's investment in
that company back in August of 2000, when that company's
stock was trading at its all-time high price.
• Throughout the period of his alleged fraudulent conduct,
Fastow sold millions of dollars worth of Enron securities.
Adelphia Communications

Commission filed charges against Adelphia, its
founder (John J. Rigas), his three sons, and two
other senior executives, alleging one of the
most extensive financial frauds ever to take
place at a public company.

US Attorney for SDNY filed related criminal
charges against several of the same defendants.

Commission’s investigation is continuing.
Adelphia Communications

SEC complaint alleges that Adelphia, at the direction
of the individual defendants:

Fraudulently excluded billions of dollars in
liabilities from its consolidated financial statements
by hiding them on the books of off-balance sheet
affiliates;

Falsified operations statistics and inflated earnings;
and

Concealed rampant self-dealing by the Rigas
Family, including the undisclosed use of corporate
funds for Rigas Family stock purchases and the
acquisition of luxury condominiums.
Adelphia Communications

The Commission is seeking:

Officer and Director bars

Disgorgement of all ill-gotten gains, including:

Compensation received during the fraud

Property unlawfully taken from Adelphia through
undisclosed related-party transactions

Severance payments

Permanent anti-fraud injunctions

Civil penalties from each defendant, including Adelphia.

Penalty against company sought because Adelphia failed
early on to cooperate with the Commission's investigation
and actually allowed the fraud to continue until the Rigas
family lost control over the company's conduct.
Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
2.
Coordination with criminal authorities
Emphasis on personal accountability
 Greater use of O&D bars
 Disgorgement of compensation
Officer and Director Bars
Officer and Director bars sought in all
categories of cases:
FY 2002: 126

FY 2001: 51

FY 2000: 38

Rite Aid

Former CEO, CFO, Vice Chairman charged with fraud
in connection with wide-ranging accounting fraud
scheme that enabled the company to overstate its
income in every quarter from May 1997 to May 1999.


Former CEO also charged with engaging in
undisclosed related-party transactions and
fabricating Board minutes to facilitate the fraud.
Commission is seeking:

Fraud injunctions

Officer & Director bars

Disgorgement of bonuses

Civil penalties
Rite Aid


Commission also brought settled cease and desist
proceedings against the company for reporting and
books-and-records violations, and against the former
COO for fraud and causing the company’s violations.

Rite Aid cooperated in the investigation, including
declining to assert its attorney-client privilege and
voluntarily providing Commission staff with full
access to an internal investigation conducted by
Rite Aid's counsel.

The value of this cooperation was considered in
determining the appropriate resolution of this
matter.
Parallel criminal charges were filed against the three
former officers and directors.
Disgorgement of Stock Options and
Other Compensation
 FY 2002:
Sought from 28
individuals
 FY 2001:
Sought from 18
individuals

55% increase in FY 2002
Tyco International

Commission alleged that 3 former top
executives of Tyco -- L. Dennis Kozlowski,
the former chief executive officer and
chairman of Tyco's board of directors, Mark
H. Swartz, the former chief financial officer
and a director, and Mark A. Belnick, the
former chief legal officer -- failed to disclose
multi-million dollar low interest and interestfree loans they took from the company.
Tyco International

Commission’s complaint alleges:

Kozlowski and Swartz covertly caused the company
to forgive tens of millions of dollars of those
outstanding loans without disclosure to investors.

Kozlowski and Swartz engaged in other undisclosed
related party transactions.

Belnick failed to disclose the receipt of more than
$14 million of interest-free loans from the company.

Kozlowski, Swartz and Belnick sold their shares of
Tyco stock valued at millions of dollars while their
self-dealing remained undisclosed.
Tyco International

Commission is seeking disgorgement of all ill-gotten
gains, payment of civil money penalties, enjoining the
defendants from future violations of the federal
securities laws, and officer and director bars.

Disgorgement sought from Kozlowski and Swartz
includes all compensation they received subsequent
to their fraudulent acts and omissions, including
salary, bonuses, stock options and grants, and any
advances that have not been repaid.

Commission seeks disgorgement by all 3 defendants
of all loans not properly repaid to Tyco as well as
losses avoided from sales of Tyco securities
subsequent to their fraudulent acts and omissions.
Disgorgement of Stock Options and
Other Compensation

Waste Management (Buntrock): Injunctive action
charging founder, Buntrock, and five other former top
officers with fraud in systematic scheme to misrepresent
financial results. Company acknowledged that it had
misstated its pre-tax earnings by $1.7 billion over a fiveyear period.

Commission is seeking O&D bars, disgorgement
of options, bonuses, performance-based
compensation and proceeds from stock sales,
and civil penalties.
Financial Reporting & Issuer Disclosure:
Themes and Trends
2.
Cooperate and coordinate with criminal
authorities
Emphasis on personal accountability
3.
Effort to speed up our investigations
1.
“Real Time” Enforcement
 Take
actions to stop fraud and other
investor harm expeditiously;

Trading suspensions

TROs and orders freezing assets
 Bring
cases in pieces (e.g., issuer, then
officers, then auditors)
WorldCom
 6/25/02
Co. admits it capitalized
$3.8 billion of expenses to meet
estimates during last five quarters
 2001 reported earnings of $2.3
billion
 Actually lost $662 million
 SEC files case in less than 24 hours
WorldCom

Within 48 hours, Commission obtained a court
order preventing destruction of documents,
prohibiting extraordinary payments to current
and former officers, directors and other
employees, and appointing a corporate
monitor.
WorldCom
 Nov.
26, 2002–partial settlement
 Full injunctive relief
 Extensive review of governance
and internal controls
 Employee training
 Penalty reserved
WorldCom
 SEC
has charged four WorldCom
employees and officers
 Criminal charges also filed
 Restatement to exceed $9 billion

Commission’s investigation is continuing,
along with investigation of U.S. Attorney’s
Office for S.D.N.Y.
Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
2.
3.
4.
Coordination with criminal authorities
Emphasis on personal accountability
Effort to speed up our investigations
Hold companies accountable for noncooperation
Xerox

Commission alleged undisclosed accounting
actions that accelerated revenue recognition
of equipment by over $3 billion and
increased pre-tax earnings by $1.5 billion
over a four-year period.

Company settled to a fraud injunction and
other relief.

The Commission’s investigation is
continuing.
Xerox






Goal: show growth in the face of competitive
challenges
Commission alleged scheme was orchestrated by
senior management
Accelerated recognition of revenue into current
periods at the expense of future
1997-2000 accelerated revenue by over $3 billion
and increased earnings by $1.5 billion
One-offs
Cushion reserves
Xerox
 Settled
for $10 million penalty,
restatement and special review of
accounting controls
 Penalty reflects, in part, sanction
for lack of “full” cooperation in
the investigation
Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
2.
3.
4.
Coordination with criminal authorities
Emphasis on personal accountability
Effort to speed up our investigations
Hold companies accountable for noncooperation – but credit meaningful
cooperation.
Homestore

Commission filed charges against John
Giesecke Jr., Homestore's former chief
operating officer; Joseph J. Shew, its former
chief financial officer; and John DeSimone,
its former vice president of transactions, for
fraudulently inflating Homestore’s revenues
by causing the company to overstate its
advertising revenues by $46 million (64%)
for the first three quarters of 2001.
Homestore

Commission announced that it would not bring
enforcement action against Homestore because of its
swift, extensive and extraordinary cooperation.

Cooperation included reporting discovery of possible
misconduct to the Commission immediately upon the
audit committee's learning of it, conducting thorough
and independent internal investigation, sharing
results of that investigation with the government,
terminating responsible wrongdoers, and
implementing remedial actions designed to prevent
the recurrence of fraudulent conduct.
Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
2.
3.
4.
5.
Coordination with criminal authorities
Emphasis on personal accountability
Effort to speed up our investigations
Hold companies accountable for noncooperation
Conduct of gatekeepers scrutinized
Frank E. Walsh, Jr. (Tyco)

Commission filed a settled civil action alleging that Frank E.
Walsh Jr., a former Tyco director, violated the federal securities
laws by signing a Tyco registration statement that he knew
contained material misrepresentations.

According to the complaint, the registration statement filed in
connection with Tyco's acquisition of The CIT Group Inc.
incorporated and attached an Agreement and Plan of Merger
stating that no one other that Lehman Brothers and Goldman,
Sachs was entitled to an investment banking or finder's fee for
representing Tyco in the transaction.

At the time that he signed the registration statement, Walsh knew
that he had been promised a $ 20 million finder's fee for having
arranged a meeting of the companies' CEO's to discuss a
possible merger.
James A. Fitzhenry

Fitzhenry was a Senior Vice President, General
Counsel and Secretary for FLIR Systems, Inc

Commission found that in connection with FLIR’s
1998 year-end audit, Fitzhenry signed management
representation letters to FLIR’s auditors that he
understood contained material misrepresentations
regarding $4.1 million in sales.

In settlement, Fitzhenry agreed to:

Cease and desist from violating the lying-to-theauditors rule of the Exchange Act, and

5-year prohibition on appearing or practicing
before the Commission under Rule 102(e).
KPMG LLP

Commission sued KPMG LLP and four KPMG
partners – including the head of the firm’s department
of professional practice – in connection with the
audits of Xerox Corp. from 1997 through 2000.


The Commission's complaint alleges that the
defendants' fraudulent conduct allowed Xerox to
inflate equipment revenues by approximately $3
billion and inflate pre-tax earnings by
approximately $1.2 billion in the company's
financial results for the relevant years.
Commission’s action charges the firm and four
partners with fraud, and seeks injunctions,
disgorgement of all fees and civil money penalties.
Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
2.
3.
4.
5.
6.
Coordination with criminal authorities
Emphasis on personal accountability
Effort to speed up our investigations
Hold companies accountable for noncooperation
Conduct of gatekeepers scrutinized
Compliance with GAAP not always
enough
Edison Schools

Only three months after initiating inquiry,
Commission instituted settled cease-and-desist
proceeding against Edison Schools.

Commission found that Edison, despite technical
compliance with GAAP, inaccurately described
aspects of its business in its SEC filings, in violation
of the securities laws.

Specifically, Edison failed to disclose that a
substantial portion of its reported revenues consist
of payments that never reach Edison. Funds are
instead expended by school districts to cover costs
of operating schools managed by Edison.
Edison Schools


In settling the action, Edison agreed to:

Cease and desist from committing violations

Add to its management a Director of Internal Audit
to report to the Audit Committee

Create an Internal Audit Department appropriate
for the company's size and business.
Principle: If a company makes filings with the
Commission that mischaracterize its business, or omit
significant information, technical compliance with
GAAP will not insulate it from enforcement action.
PNC Financial Services
 Accounting
or alchemy
SPEs:
PNC Financial Services
 Get
weak loans and investments
off books
 Avoid recognizing further losses
 Keep possibility of gain
 Use SPE’s
PNC Financial Services
Insurance company puts in 3% of equity for
all common stock
 Looks like IC controls business
 PNC gets preferred for weak loans
 SPE buys 30 year zero bond Treasury =
preferred after 30 years

PNC Financial Services
Not GAAP
 IC did not really put in 3%
 PNC really has the risk and rewards
 Fed and SEC blow whistle
 EPS – before restatement $1.91
 Restated: $1.38
 SEC charges fraud

PNC Financial Services
GAAP is not alchemy
 Even if GAAP, must evaluate material
accuracy and completeness of presentation
of financial statements
 Must disclose risks

Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
2.
3.
4.
5.
6.
7.
Coordination with criminal authorities
Emphasis on personal accountability
Effort to speed up our investigations
Hold companies accountable for noncooperation
Conduct of gatekeepers scrutinized
Compliance with GAAP not always enough
Facilitating another company’s reporting
violations may create liability
Accommodations:
Ashford -- Amazon
Resolve dispute
 Amazon will pay $600,000 to Ashford
 Ashford will credit Amazon with providing
11,500 customers
 Ashford asks Amazon to split the deal into
two letters, one referring to 3000 customers
and another for the balance

Ashford -- Amazon
Ashford charged with fraud
 Amazon charged with being a cause of
Ashford’s reporting violation because
Amazon knew or should have known that
the reason Ashford wanted to split the deal
was to allow Ashford to improperly defer
expenses
 Moral – do not be an accomplice

Financial Reporting & Issuer Disclosure:
Themes and Trends
1.
2.
3.
4.
5.
6.
7.
8.
Coordination with criminal authorities
Emphasis on personal accountability
Effort to speed up our investigations
Hold companies accountable for non-cooperation
Conduct of gatekeepers scrutinized
Compliance with GAAP not always enough
Facilitating another company’s reporting violations
may create liability
Auditor independence remains a critical element
of sound financial reporting
Ernst & Young and
Moret Ernst & Young Accountants
 Moret
affiliate has business
arrangement with Baan
 Moret audits Baan
 Moret relies on US E&Y which also
had business arrangement with Baan
Ernst & Young and
Moret Ernst & Young Accountants
 E&Y case
involved joint
business arrangement between
E&Y and audit client
PeopleSoft.
PricewaterhouseCoopers and
PricewaterhouseCoopers Securities

Settled enforcement action against
PricewaterhouseCoopers (PwC) and its broker-dealer
affiliate, PricewaterhouseCoopers Securities (PwCS),
for violations of the auditor independence rules.

The auditor independence violations arise from:

PwC's use of prohibited contingent fee arrangements
with 14 different audit clients for which PwCS
provided investment banking services, and

PwC's participation with two other audit clients,
Pinnacle Holdings Inc. and Avon Products Inc., in the
improper accounting of costs that included PwC's
own consulting fees
PWC and PWCS
 PWC
contingent fee arrangement with
14 audit clients for which PWCS
provided investment banking services
 For two clients, Pinnacle and Avon,
PWC was also a cause of company’s
GAAP violations
PWC and PWCS Remedies
 $5
million civil penalty
 C&D
from violating the
auditor independence rules
 Censured
for engaging in
improper professional
conduct.
Section 10A -- Solucorp
 Company
recognizes licensing revenue
before final deal
 Auditor finds backdated licensing
agreement
 Auditor fails to determine whether act
illegal and fails to inform audit
committee
Andersen --Enron
 October
17, 2001 Enron announces
problems
 Andersen destroys documents
 Andersen indicted
 Clients flee
 Engagement partner pleads guilty
 Firm convicted
Andersen – WMI
The Underlying Fraud
 From
1992 to 1996, Waste
Management overstates earnings
by $1.43 billion and understates
taxes by $178 million
Andersen Enjoined

Andersen and 3 partners
enjoined from future fraud

Andersen fined $7 million

3 partners fined $30,000 to
$50,000 each
102(e) Sanctions
Andersen and 4 partners
charged with improper
professional conduct

Andersen censured

4 partners barred

SEC Action
 First
fraud injunction against a
Big 5 firm in 20 years
 Record penalty against a Big 5
firm of $7 million
 First case against Big 5 firm
Practice Director in 20 years
Andersen Indicted
 Two
months later
 SEC begins Enron inquiry
 In October, Enron problems
surface
 Andersen starts destroying
Enron documents
Special Study Pursuant to
Sarbanes-Oxley Act

Section 704 summarizes financial reporting
enforcement actions over the past five years

Available on SEC website – www.Sec.Gov
What Preventive Measures can
Management Take?
Preventive Measures for Mgmt.

First:

Full disclosure with your auditors
 Don’t wait for auditors to find problems
 Vet novel or complex issues with national
office technical experts
Preventive Measures

Keep audit committee informed at all times
 Discuss significant accounting policies,
judgments and estimates
Preventive Measures

Open discussions with Corp. Fin./OCA
 Pre-clearance program for novel and
unusual accounting questions
 See SECPS Practice Alert No. 2002-1
Preventive Measures

And, last but not least

Assess the “tone at the top”
 Aka – the “pressure from the top”

Take a “fresh” look at your code of ethics
 Ensure it is up-to-date and covers all lines of
businesses
 Reminder: S-O to require disclosure of any
change to or waiver of code
Earnings Releases

Perhaps the better approach is to issue
earnings in close proximity to the filing of
the financial statements
 Accelerated filers
 Caution: Pro forma earnings
Pro Formas: Trump Hotels

SEC’s first pro forma financial reporting
case.

Commission found that Trump Hotels &
Casino Resorts violated Section 10(b) and
Rule 10b-5.

Company was ordered to cease and desist
from violating those provisions.
Trump Hotel – Pro Forma

Financial data that is not GAAP

3Q ’99 Company trumpets results:
“better than estimates;” result of
improved operations

Disclose not counting $83 mil. one time
expense
Trump Hotel





Do not disclose $17 million one time gain is
included
Stock up 7.8%
Would not exceed estimates and would show
revenue decline if excluded one time gain
Truth comes out: stock drops 6%
Settled 10(b), 10b-5 C&D
21(a) REPORT ON
COOPERATION:
The “Seaboard Report”
21(a) Report on Cooperation
 Framework
for evaluating a proposed
defendant’s cooperation
 The carrot: Credit for extraordinary
cooperation
 The stick: Harsher remedies for lack
of “full cooperation”
 No promises -- Not an amnesty
program
21(a) Report on Cooperation
 Wider
range of outcomes
 Finer distinctions between wrongdoers
 Seaboard – No action against company
 Xerox -- $10 million penalty
 Dynegy -- $3 million penalty
Four Principles
 Self-policing
 Self-reporting
 Remediation
 Cooperation
The Meaning of Cooperation

Self-policing prior to discovery of misconduct
Effective compliance procedures
 Appropriate “tone at the top”


Self-reporting misconduct upon discovery
Thorough review of nature, extent,
origins & consequences
 Disclosure to public and regulators

The Meaning of Cooperation

Remediation
Dismissing or appropriately
disciplining wrongdoers
 Internal controls and procedures to
prevent recurrence
 Compensating those adversely
affected


Cooperation with law enforcement
authorities
The Meaning of Cooperation:
Internal Investigation
 Independent
counsel
 Forensic auditors
 Share results with staff
 Waive work product, privileges
 Secure cooperation
Independent Accountants
 Every
case raises the question:
Let’s Get Back to the Basics
Back to the Basics…
Know
your audit client
 Understand the key reports used by management

Understand the budget process

Understand the source of growth
Know
your client’s industry
Back to the Basics…

Don’t over rely on management’s
representations

Don’t get too comfortable with the client

Don’t engage in “Conversational Auditing”
Back to the Basics…

“Professional skepticism is an attitude that
includes a questioning mind and a critical
assessment of audit evidence.”

Statement on Auditing Standards 99, October 2002
Professional Skepticism

Should be displayed by all members of the
team throughout the audit and review
engagements
Back to the Basics…

Vary the audit testing performed

Prepare a detailed audit program

Understand the client’s closing process

Don’t forget the general ledger
The Closing Process

Follow-up on all questionable items during
the final analytical review

Examine all consolidating financial
statements
 Including, all post closing and top-side
entries
Back to the Basics…

Open dialogue with audit committee
 Both proposed and passed audit adjustments as
a result of audit and the reviews
 Troubles encountered during audit or reviews

Ongoing dialogue with “financial experts” on
committee may be necessary
Back to the Basics…
Issues
encountered during the audit ---

Deal with the issue at hand

Don’t try to “paper over” the problem

Management letter comment is not enough

Don’t make the client’s problem your own