1. Presented
to:
Montgomery
County
Community
College
Tom
Hood,
CPA.CITP.CGMA
CEO
Maryland
Associa>on
of
CPAs
October
8,
2013

2. 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

3. "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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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. 10

11. The
Fraud
Triangle

12. Then
:
December,
2001
Now
:
December,
2008
A
Tale
of
Two
Frauds

13. 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

14. 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

15. 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

16. 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

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

19. 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

21. 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

22. MD
Comptroller
MD
Comptroller
CAQ
US
Treasury
MD
Comptroller
Courtesy
of
the
Maryland
AssociaAon
of
CPAs
–
2008
ediAon
Drawing
by
Carol
Kirwan,
CPA

24. 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-­‐Frank
Wall
Street
Reform
and
Consumer
ProtecAon
Act

25. 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

26. Complexity
&
Risk
Source:
Wired
magazine
17.03
March,
2009

27. 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

28. 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

29. Transparency
Now!
–
A
Wired
Manifesto
Source:
Wired
magazine
17.03
March,
2009

30. 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

31. 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

32. “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

33. 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