Executive Roadmap to Fraud Prevention and Internal Control

Creating a Culture of Compliance

Martin T. Biegelman, Joel T. Bartow

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118235515
• Edition: 2
• Topic: Business
• Subtopic: Auditing
• Index: Business

Now in a Second Edition, this practical book helps corporate executives and managers how to set up a comprehensive and effective fraud prevention program in any organization. Completely revised with new cases and examples, the book also discusses new global issues around the Foreign Corrupt Practices Act (FCPA). Additionally, it covers best practices for establishing a unit to protect the financial integrity of a business, among other subjects. The book has many checklists and real-world examples to aid in implementation and an instructor's URL including a test bank to aid in course adoptions.

CHAPTER 1

Fraud's Feeding Frenzy

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EXECUTIVE SUMMARY

In the first decade of this century, the ongoing “feeding frenzy” of corporate fraud proves that we fail to learn from history. Respected and trusted corporate executives have been revealed to be morally corrupt fraudsters. They became rogue employees: too busy stealing from the corporate “piggy bank” to think of the consequences for their employees, shareholders, customers, or themselves. Corporate powerhouses such as Enron and WorldCom and their executives were swept up in fraudulent financial accounting and a multitude of other frauds. The government reacted strongly in response to the public outcry after billions of dollars in investments evaporated. The President promoted the need for corporate responsibility and promised to arrest any corporate executive with a hand in the corporate coffers. Some indicted CEOs tried to use the “Chutzpah Defense,” claiming they were deaf, dumb, and blind when the frauds were going on at their companies. The outcome has been indictments, followed by “perp walks” as well as convictions, and a change in how the government views corporate fraud prevention. Yet, fraud still rears its ugly head.

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FRAUD'S FEEDING FRENZY STILL GOING STRONG

In the late 1980s, a federal agent investigated a $95 million swindle in New York City involving mail fraud, bank fraud, money laundering, and a host of other crimes. He and his team made arrest after arrest of the many fraudsters involved in this massive scheme. After the arrest of yet another major player in the fraud, this federal agent commented on the defendants’ criminal behavior. He likened it to hungry sharks feeding on their helpless prey and called it a “feeding frenzy of fraud.” Through the years, the expression has often been used to describe various fraud schemes that made the headlines. This snappy, off-the-cuff description of fraud and the people who commit it tells volumes about the damaging effect it can have. Like unrelenting sharks constantly searching for their next meals, fraudsters never stop their search for new opportunities to commit fraud and economic crime.

Fraud has always been a thorn in the side of honest citizens and businesses. The enactment of strong laws and the empowerment of enforcement agents are helpful but certainly do not guarantee an end to fraud, a crime of opportunity that has been with us through the ages. Uninformed people who think that the corporate wrongdoings in recent years comprised the first such instances of large-scale fraud have much to learn. “Thus, all through the country, thousands of innocent and unsophisticated people, knowing nothing about the ways of these city thieves and robbers, are continuously fleeced and robbed.”1 Does this sound like a description of the many victims of Enron, WorldCom, and other corporate frauds? It was said by a congressional sponsor of the United States Mail Fraud Statute2 well over a century ago. The Mail Fraud Statute, the nation's oldest and premier fraud-fighting mandate, was enacted in 1872 after an epidemic of consumer mail-order frauds. Today, consumer frauds of all types are still prosecuted with the Mail Fraud Statute, as are many corporate frauds, large and small. The Mail Fraud Statute is a weapon of choice in prosecuting fraud because it covers any scheme or artifice to defraud as long as the mails are used in some way to further the crime. If e-mail, social media or other electronic communications are used to perpetuate the scam, the Wire Fraud Statute is available.

WHAT A DIFFERENCE A FEW YEARS MAKE

Fraud has had a tremendous impact on the corporate landscape of the early 21st century. Enron, WorldCom, Tyco, Adelphia, HealthSouth, and other companies dominated the headlines with allegations of accounting and other financial crimes. Chief executives were convicted after high-profile trials and sent to prison. Millions of investors lost billions of dollars, millions more lost confidence in Wall Street, and corporate crime remains in the news. In 2002, the government created the Corporate Fraud Task Force “to hold wrongdoers responsible and to restore an atmosphere of accountability and integrity within corporations across the country.”3 Besides prosecuting corporations and their executives for accounting fraud, the task force brought charges for options backdating, insider trading, securities fraud, market manipulation, revenue and earnings management schemes, Foreign Corrupt Practices Act violations, and hedge fund and tax shelter frauds. The Corporate Fraud Task Force has been successful because it brings the full weight of the federal government down on corporate fraudsters by combining “the talents and experience of thousands of investigators, attorneys, accountants, and regulatory experts” from across ten departments.4

The many corporate executives who have faced criminal prosecutions worked for both well-known and lesser known companies. Although the major players have dominated the headlines, defendants came from all types and sizes of business (e.g., a bagel business in New Jersey that created fake sales to fraudulently inflate revenue).5 When it comes to corporate fraud, anyone can be a player. Exhibit 1.1 lists some of the many corporate defendants prosecuted by the Corporate Fraud Task Force.

EXHIBIT 1.1 Significant Criminal Cases Prosecuted by the Corporate Fraud Task Force

Source: U.S. Department of Justice, Corporate Fraud Task Force, Significant Criminal Cases and Charging Documents, www.justice.gov/archive/dag/cftf/cases.htm.

Adelphia

Allfirst

Allou Healthcare

American Tissue

Arthur Andersen

Biocontrol

Cendant

Charter Communications

Computer Associates

Comverse Technology

Credit Suisse First Boston

Dynegy

eConnect

Enron

Financial Advisory Consultants

GenesisIntermedia, Inc.

Golden Bear Golf

HealthSouth

Homestore

ImClone

Informix

Just for Feet

Katun Corporation

L90, Inc.

Leslie Fay

Manhattan Bagel

McKesson

Merrill Lynch

MonsterWorldwide

Network Associates

NextCard, Inc.

Nicor Energy

Peregrine Systems

PurchasePro

Quintus

Qwest

Refco

Reliant Energy Services, Inc.

Rite Aid

SafeNet

Symbol Technologies

Targus Group

U.S. Technologies

Vari-L Company, Inc.

Waste Management

WorldCom

Zurich Payroll

PERSONAL PIGGY BANK CONCEPT OF LEADERSHIP

The corporate scandals in recent years had a common recipe: corporate executives with no integrity, total arrogance, and huge greed, combined with weak boards and accounting firms that failed to fulfill their responsibility for independent auditing. Executives showed complete disregard for shareholders with a belief they could steal huge amounts of money from their respective companies. In the case of former Tyco CEO Dennis Kozlowski, there were multiple reports of his excessive spending of corporate funds for extravagant parties and personal purchases.6 Kozlowski received from Tyco a $19 million no-interest loan and $11 million for art, antiques, and furniture for his New York City apartment, including the now infamous $6,000 floral patterned shower curtain. To top it off, Tyco paid half the cost for a $2.1 million junket for friends and family to the Italian island of Sardinia to celebrate the birthday of Kozlowski's wife.7 Because Kozlowski was the CEO, it was easy for him to take as much money out of the company as he wanted. However, he did not escape justice and was subsequently convicted and sent to prison for his criminal behavior.

Kozlowski was not the only corporate titan to take freely from the corporate coffers. Those executives who allow greed to overcome them can easily abuse the power that comes from absolute control. It is a given that former Adelphia CEO John Rigas never thought he would be arrested and convicted for stealing from the corporate piggy bank. Rigas and other Adelphia executives were accused of looting the company of more than $1 billion. They didn't care that the company's assets belonged to shareholders. Even though they felt they were accountable to no one, their accounting fraud was discovered, and federal authorities arrested them.

Former WorldCom CFO Scott Sullivan also thought he had a personal piggy bank to freely tap. This once well-respected CFO of a telecom powerhouse never believed he would be paraded before the media like a common criminal, but there he was doing the “perp walk” with FBI agents in Manhattan following his arrest for a massive accounting fraud. Soon after, he was helping the government prosecute and convict his boss, former WorldCom CEO Bernard Ebbers.

A culture of noncompliance combined with a lack of accountability and transparency contributed to the wholesale looting of once respected companies by their fraudster CEOs, CFOs, and others. People who commit fraud never think about the consequences, or they believe there will be no consequences because they are above the law. They think the piggy bank is theirs to crack open and spend, not caring or understanding that shareholders are the true owners of the funds. These executives forgot who they really worked for.

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EXECUTIVE INSIGHT 1.1: A MILLIONAIRE CEO GETS GREEDY

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Table of contents

• Cover
• Endorsement
• Series
• Title Page
• Copyright
• Dedication
• Foreword to the Second Edition
• Foreword to the First Edition
• Preface
• Acknowledgments
• Chapter 1: Fraud's Feeding Frenzy
• Chapter 2: Fraud Theory and Prevention
• Chapter 3: The Path to Greater Corporate Compliance, Accountability, and Ethical Conduct
• Chapter 4: The Path to Greater Corporate Compliance, Accountability, and Ethical Conduct
• Chapter 5: Internal Controls and Antifraud Programs
• Chapter 6: Financial Statement Fraud
• Chapter 7: Internal Fraud
• Chapter 8: Former Fraudster and New Man
• Chapter 9: External Schemes and Scams
• Chapter 10: Not Too Big to Fail
• Chapter 11: Designing a Robust Fraud Prevention Program
• Chapter 12: Whistleblowers and Hotlines
• Chapter 13: Time to Do Background Checks
• Chapter 14: Training, Training, and More Training
• Chapter 15: Global Fraud and Corruption Risk
• Chapter 16: The Feds Are Watching
• Chapter 17: A Fraud Prevention Culture That Works
• Appendix: ACFE Fraud Prevention Checklist
• About the Authors
• Index