Tag Archives: audit

How Are You Confirming Your “Facts”?

Journalist falling for teen claiming M in stock market profits is object lesson for auditors

Journalist falling for teen claiming $72M in stock market profits is object lesson for auditors.

Attestation Update just wrote about a recent hoax, where a teenager claimed to have made $72 million, trading on the stock market. This article got me thinking about a piece I wrote last year on professional skepticism and the importance of knowing who is confirming your information. The least reliable confirmation comes from the party making the claim, in this case, the alleged millionaire teenager. The journalist that he dealt with thought that the bank statement that the teenager showed her was a valid third party confirmation. This is a very easy assumption to make. It appears that the party is coming from a third party, so it is easy to see that as a third, independent, party confirmation. This, however is not the case. In order for a confirmation to be truly independent, the person making the claim cannot have any control over the confirmation process. As we have seen here and in the cases noted by James Ulvog, it is very easy for someone to hand you a fake document that looks very real. There are actually places that will create very realistic fakes for you, for a price, of course.

Ulvog also pointed out several red flags in the boy’s story. An auditor or forensic CPA, coming across these red flags, should seek to further investigate and seek independent confirmation of the claims. For example, there are age restrictions that make it illegal for minors to buy and sell securities. You should look at the piece at Attestation Update and see if you can determine why the items highlighted by Ulvog are red flags. This piece also underlines the importance of using diligent and qualified professionals. It also emphasizes how we, as professionals must consistently practice professional skepticism and be aware of what are truly third party confirmations and how important it is to make them.

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The Sheriff in Town!

When I first went to university, I was unsure what I wanted to major in. I had been considering chemistry, because I fancied that I might be the person to come up with a cure for AIDS. At the idealistic age of 18, I was so sure that I could use the colorful magic of gas chromatography to come up with a solution that many experienced scientists with doctoral degrees had been unable to discover. I signed up for a chemistry class and, I decided to take an elective in economics. I was hooked after my first class and ended up majoring in economics. I was fascinated by various theories and the push and pull between fiscal and monetary policies. I did come away from my class knowing one thing – I wanted to work for the Federal Reserve System, home of US monetary policy. To me, to be part of an organization that was focused on what to do in order to best positively influence the economy of the entire nation was awesome! Federal Reserve Banks issue the money that we use; how cool is that? I remember going to a campus career fair and spending most of my time there chatting with a representative from the Fed. Following that conversation, getting a job at the Fed was my dream. One big obstacle stood in my way; at the time, I was not a US citizen. I was devastated but I still dreamt that one day I would either be a citizen or the Fed would change its policies, whichever came first. At the time, as an economist in training, my dream was to be an analyst.

As time has gone by (I am a citizen now) and I have gone on to add becoming a CPA and then getting Certified in Financial Forensics to my skill set, my interest in the Fed and what it does has grown. After graduating, with my degree in economics and mathematics, I went on to work at a bank, where I was an analyst. I was very excited about the opportunity to apply the theory I had learnt in college. I had not bargained on how people are not very good at following the rules, be they the rules of logic or the rule of law. I mean, how many times have you said, “Who would do that,” or “Why did they act that way? It doesn’t make sense”? Yep, we humans use our free will in the nuttiest ways. Just last week, I read a crazy story about a Georgia woman filing a tax return for a $94 million dollar refund. Every aspect of the story is insane, from her 100 dependents to thinking that she could pick up her refund check at a local Kroger grocery store, and yet she is neither the first or last person to attempt this kind of thing. So, after the monetary policy folks have come up with their ideas about how best to influence the economy, there need to be the people who make sure that people are not breaking the rules and people who create control systems and audit them to minimize the risk of people breaking the rules. This is where forensic accountants come into play at the Fed.

Forensic Accountants, both those Certified in Financial Forensics and those who are Certified Fraud Examiners, can be found in the audit and enforcement areas of the Federal Reserve System. The saying is that love makes the world go around, but we are all aware that money is a big motivator for who many people behave. I have written about the fraud triangle and how people in positions of trust and authority will break the law in pursuit of illicit gain. With this in mind, it is vital to assess and improve control systems to make sure that, starting at the top financial institution, there is little opportunity for those who feel the pressure to commit financial crime. If the top bank cannot keep money safe, what hope is there for the rest of them? The Fed has bank examiners whose goal is to ensure that banks comply with laws such as those governing anti-money laundering and doing business with nations and people that the US government has imposed sanctions upon. The Fed plays an important role as an independent third party that will objectively assess operations at the banks that they supervise to make sure that they are not, for example, helping criminal rings hide their ill-gotten gains.

There are twelve banks in the Federal Reserve System and each bill of paper money that you have incorporates, in its serial number, the letter assigned to bank that issued that bill. Pull out a banknote, be it a dollar or a $100 bill, it will have the letter of the particular Federal Reserve Bank that issued it, be it Boston, San Francisco or any of the ones in between. In the case of the dollar bill, the name of the issuing bank is also noted on the bill. It goes almost without saying that the institution that issues the money that we use should have top notch controls. Each Federal Reserve Bank, therefore, has audit departments that are constantly reviewing it and making sure that the banks are complying with the rules. The auditors also work to improve systems. Every day, people are spending a lot of time and energy trying to figure out how to game the system and so those at the Fed should spend at least as much time and energy working to keep the banks safe and compliant.

Though my focus has changed, my excitement when it comes to the Fed is unabated. Not only are they working on monetary policy, they are also working to make sure that the rules are not being broken and that the opportunity to defraud, steal or abet crime is diminished. Take a look at the money in your wallet and think about what goes into making it worth what it is worth.

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From The Horse’s Mouth

Mister-Ed-Talking-HorseEarly last year, I wrote about Amy Wilson and the lack of controls that existed in the company that she stole from. The complete lack of controls and reliance on trust gave her the opportunity to steal from the company, which she did… for four years. She was actually caught by the fraud department at the credit card company, not by her employers. Anyway, I am talking about her because Jim Ulvog has an excellent post on his website, Attestation Update. Here, Amy Wilson tells us about her fraud, how she was caught and how she got away with things for as long as she did. It is an excellent watch and a great reminder of the very wise words – “trust, but verify.”

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It’s A Good Hurt

This morning, after my run, I pulled out my yoga mat and foam roller and embarked on my post-run stretches. I am yet to come across a runner who looks forward to the stretching – most of us confess to not stretching enough. And as much as we deplore the stretching we tend to do that more often than the foam rolling. This is because, despite the benign name, the foam roller is an instrument of torture. When I have taken yoga classes, teachers have asked me if I am a runner. They ask this, not because my yoga skills are impressive, but because my leg muscles are so tight that touching my toes is a feat; it’s not a good look. These tight leg muscles are what I target with the foam roller. I am terrible at stretching because stretching after a run is mind-numbing tedium. I am atrocious at using my foam roller after a run because trying to loosen up my tight muscles after a run hurts like hell. However, if I don’t loosen up these muscles, I am setting myself up for injuries and pain that will keep me from running for a lot longer than it takes to suffer through the rolling.

The same is true of many aspects of an entity’s financial system. There are many controls that are recommended by accountants and auditors that may seem like overkill or painfully tedious. However, as I have explained in some of my posts regarding aspects of control systems, such as segregation of duties and double entry accounting, being proactive about creating and maintaining a robust financial control system goes a long way to keeping things from going horribly wrong in the future. I will be the first person to tell you that there are many parts of an accounting system that are not fun. For example, it would be so much easier to have checks come into a company and be dumped on an accountant’s desk and have that one accountant deal with recording the check in the books, depositing the check in the bank and then reconciling the bank statement at the end of the month. Way too many companies opt for the easier path and find many ways to justify their decisions – the accountant has been with them for years, the accountant is such a nice person and totally trustworthy and wouldn’t act in an unethical manner. It’s an easy path until the money is stolen and, more often than not, not recovered. Too many stories of beloved staff members who have turned out to be fraudsters and thieves should show people that a great personality is not an acceptable control measure. Way too many times, we discover that the friendly coworkers are able to perpetuate their crime for a long time because they just seem too good to be crooks.

Record-keeping can seem like such a drag. I mean, what fun is there is debits and credits and keep track of income statements and balance sheets. Oh, and don’t get me started on the headaches that a balance sheet that doesn’t balance can bring. Why would anyone want to keep track of order forms, receipts and other elements of an audit trail? When making an adjustment to the ledger, you know that you will totally remember why you processed the change, even ten years from now. You don’t need to provide backup or keep a record of why you made the change. You wouldn’t believe how often I hear this kind of talk from accountants. Six months later, practically none of them can explain a journal entry that doesn’t have backup and this is for the accountants that have not decided to move on to another company, leaving the person who has taken over their position completely in the dark. Especially since we live in an age when people are not married to one job for life, it is essential that anyone looking at a transaction can find out just about everything there is to know about the transaction without having to employ the services of a forensic accountant.

There are times when I start nodding off just at the thought of the some of the processes I need to go through. Sometimes I think – I don’t really need to check this; the accountant has done this a hundred times, so it is probably okay. But then I think about what might happen if I am incorrect. The thought of how much more I will have to do if I don’t perform the check and then have to clean up the mess afterward pushes me to suck it up and do things correctly the first time. When, on occasion, I find an error, I know that it’s good that I decided to do the right thing. Also, the fact that those in the finance department know that work is being reviewed and being given a look-over by others is a great deterrent to those tempted to engage in nefarious behavior. I also remind myself of this when my own work is being reviewed and my ego has to be reminded that even I can make mistakes and that, in the name of outputting a superior product, the checks on work are not only good but necessary.

Running a business is not all fun, games and glamour. There are times when the physically and mentally painful work must be done in order for the business to succeed and minimize errors and fraud. I groan in pain and have to will myself to remain diligent and not cheat on the foam rolling. The neighbors may wonder what is going on but I know that this is how I can minimize injuries and keep on running happy and healthy. Likewise, though I make less noise (at least, I think I make less noise) about some of the work that I have to do, I know that this is what must be done to keep the company happy and healthy. So, do what hurts – it’s good for you.

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Ask, Ask and Ask Again…

James Petrozzello

James Petrozzello

When I was a kid, I asked a lot of questions. Okay, I still ask a lot of questions, but, apparently, back then I really maxed out on the question asking. An aunt once said, “Everything is what, why, where, how! Don’t you know how to say a sentence that’s not a question?” I didn’t see what was wrong with that – how else was I to know the answers to the questions in my head if I did not ask them out loud? But one day someone said to me, “Hey, be careful with all those questions. Don’t you know that curiosity killed the cat?”

Well, no, I did not but that question raised a whole lot of other questions. How did the cat get killed? What was the cat curious about? What did it have to do with me? I had seen many cats in my life as, for example, my grandmother had several. However, I had never seen a cat that seemed particularly curious about anything. I did know enough to recognize, from the tone of voice, that this person did not want me asking any more questions, so the mystery of the cat’s curiosity and its ensuing death remained.

Curiosity killed the cat. This is what I have figured out since then. Do you know who says that? People who don’t want to be questioned. Do you know what kind of people those are? Those are people who are either:

  • People with huge egos who think they are too good at what they do to be questioned; or
  • People who don’t know what they’re doing and don’t want other people to know that; or
  • People who don’t want you to know what they are doing.

All three types of people are dangerous in their own ways.

The first group of people, the big egos, can be difficult to deal with, especially if those people are your supervisors. Somehow you have to convince the egos that it is in their best interest to have a check. The easy route is to become an enabler to the supervisor and to keep your head down and do as you are told. What should keep you from doing that is the thought of the consequences of your silence. Remember that usually the mistakes of people in positions of power tend to have large and far-reaching effects. Sometimes people have been doing their work for many years and believe that they are so good at what they do that no one can tell them better. You just have to find a diplomatic way of asking your questions. You know what, just because you are asking it doesn’t mean that something is wrong, it may just mean that you want to know more about what is going on.

When I worked in audit, I remember being told, a few times, to audit a section of a client’s books by following “last year’s audit papers”. I would read the work papers and sometimes I would have questions about why a particular step was taken. There were occasions when, probably because of time pressures, the audit manager would tell me to just do the work. Now, I am not saying that these managers did not know what they were doing but I will say that their reactions sure made it look as though they did not know what they were doing. As a person who feels that there are too  few hours in a day to waste them doing work for no good reason, I would insist that my questions, about why I had to do something, were answered. At times the explanations made sense and I was able to a better job, knowing what I was doing and why I was doing it. On other occasions, the conversations led to our tweaking the audit approach in order to better achieve our goal. There are times when I ask what people are doing and why they are doing it and they can’t give a reason beyond, “this is what they told me to do, so I’m doing it.” Again, talking through the work with them tends to result in work being performed at a higher level because now the people know why are doing something so they know what to look for and what results to aim for.

The last group of people, the ones who don’t want you to know what they are doing, are the slickest group of all. Their whole approach is to either make you feel as though your questions have been answered or that the explanations are so complicated that you couldn’t possibly understand. They work very hard to keep you from getting answers to their questions. Some employ the tactic of being so scary and standoffish that you don’t even want to ask them how their weekend was, let alone what they are doing and why. Others try to make their work sound super complicated and they scramble your brains with fancy words and technical terms until you say “oh right, okay” and wander off, hoping that you didn’t look too stupid in the conversation. They could also make their work sound so boring that you start to fall asleep in the middle of the second sentence of their explanation, and leave them to do what you couldn’t possibly stay awake long enough to care about. People like this are one of the reasons why frauds can go on for months or even years. They become so practiced at deception and avoiding being properly questioned about their work, that they can just keep on doing what they have been doing with virtually no fear of being caught. Their ideal environment is one where no one is asking questions.

I like to ask questions. When I am at work, one of the biggest reasons I ask questions is to help me do a better job. All too often, questions are not asked and a task ends up being performed several times over. There are times when I ask questions and I end up finding out about documents or other information that make my work much simpler. Also, I love it when I ask questions and I find out that the work has already been done, the information is available and I have time to tackle a new, unresolved issue. Don’t be afraid to ask, and ask, and ask. Your questions could make your work more productive, uncover fraud or error or just make life more interesting because you have learned something new. And, please, don’t sentence a child to years of fruitless wondering about a cat’s curiosity. Please.

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Don’t Put Baby In the Dusty Corner!

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You know who could use a really good PR person? Arizona. Nowadays, every time I read about Arizona, it’s not complimentary. Whether it is a piece about the “right-to-refuse-service” bill, immigration issues or the sheriff of Maricopa County, the articles tend to speak of controversy and a lot of angry people. You would think it was a terrible place to live in or visit, unless you are going to watch the Arizona Wildcats play basketball.

Fortunately for me, my mother in law lives in Tucson, Arizona, and despite the less than flattering news about Arizona, I go out to visit her on occasion. I love it every time I go there. Granted, part of it is that I am solar powered and the sunny warmth of Arizona recharges me. However, there is so much more to that. I honestly could spend every day hanging out in my mother in law’s backyard, chatting – you can’t help but adore a woman who loves art, sport and having fun – but wait, there’s more! I get up in the morning and start my day with an incredibly scenic run and I often end it with a lovely walk in some new and beautiful place. It’s not just the scenery; I meet interesting and interested people, I meet kind and polite people, I just come across some great characters while I am in Arizona. I go there and I think, wow, someone needs to really work on the word on Arizona that gets out.

It got me thinking about my days in audit and when I go on due diligence assignments. When I worked in audit, before assignments, we would often talk about what kind of office our client would decide to put us in. Would the office have a window and would it even be clean? Would they drag their feet, complaining about how difficult we were, in response to our requests? Would they treat us as though we were wasting their time and doing unnecessary, and expensive, work? Often I wondered why clients treated us as though we were Typhoid Marys, bringing a horrible plague to the company.

When a CPA comes in to a firm, whether they are performing an audit or a forensic investigation, they are coming in as a trusted professional to give outsiders a level of assurance about the financial state of the company. If you have a business and tell your mother how well your business is doing, I am sure that she will believe you and perhaps even brag about you to her friends. A random stranger on the street may not be so willing to take you at your word. In the hierarchy of opinions, the least trusted opinion regarding the state of a business’s financials is the opinion of the business owners and the most trusted is that of an independent third party. This is because you, as the business owner, have a vested interest in showing yourself in the best possible light, they are more likely to trust a third party over you, and the word of an independent third party carries a lot of weight. Independence means that the third party has no financial interest in the company, either as an owner or as a customer. The interest of this third party is only in the facts.

CPAs conducting an audit or forensic investigation are held up to the very high standards of the profession. Knowledge of these standards factors greatly into the level of confidence that users have in the results produced by CPAs. The CPA Code of Conduct requires objectivity, independence and integrity from CPAs and it is for these reasons that CPAs are trusted professionals.

CPAs are obligated to serve the public interest, honor the public trust, and demonstrate commitment to professionalism. The goal of CPAs is not to destroy your business or to embarrass you by finding misstatement or fraud. They are objectively carrying out their assignment, which may be to give assurance that your financial statements are fairly stated or to investigate suspected fraud within a business. This means that even if CPAs find misconduct, errors or misrepresentation, they can point it out to the company’s management and even work with management to take adequate steps to resolve matters.

So, when independent CPAs come into your firm to conduct an audit or forensic investigation, don’t see them as the enemy. Even if you give them the airless, cramped office that qualifies as a closet in a Texas apartment, at least get the cleaning service to dust it a little.

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Who’s Toning the Top?

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This week, Scott London, a KPMG ex-partner was busted. It was the getting busted that resulted in him going from partner to ex-partner. It turns out that, for several years, Scott London had been passing on non-public information about at least two of his clients, Herbalife and Skechers, to a golfing buddy, Bryan Shaw. Shaw then used this information to make over a million dollars on the stock market. London was caught during an FBI sting that included a photo of him receiving a bag of money from Shaw in a parking lot. A parking lot. Straight out of the movies. It is a very interesting case that is still unfolding. We are learning a lot about how and what happened and perhaps we shall also learn why it happened. Why did this KPMG partner (at the time) decide to share confidential client information with his friend and take expensive gifts and cash, a fraction of his annual salary, for this information? Discovering the motivations will be interesting but right now, this case has me thinking about another issue.

This case brings up, to me, the issue of “the tone at the top”. This is the example that a company’s management sets that may affect how ethically employees may behave. As a CPA, forensic accountant and a former auditor, I know that ethics are a big part of our education and continuing education. The stress on ethics is part of why CPAs have been found to be the most trusted business professionals, according to surveys. In addition to the required ethics continuing education that credentialed forensic accountants, and CPAs, have to complete, laws and firm policies go a long way to trying to ensure that an accounting professional is objective and, in many cases, independent from his or her client. For example, audit firms practice partner rotation with their public company clients. This means that every five years public firms will have a new partner managing their audit. Also, forensic accountants, before accepting an assignment, will run a check to ensure that there is no conflict of interest. Even the appearance of a lack of independence can result in people not trusting their accountant, whether that accountant is performing an audit or forensic services.

There are many rules and regulations to try to maintain the integrity of the accounting profession but as partners are at the top of the totem pole, it is very important to know who is watching those at the top? What is being done to make sure that those at the top are not abusing their positions of power by compromising their ethics. The evidently casual way that Scott London shared confidential information with his golf buddy implies that he either did not believe that there would be significant consequences if he were caught or that he would not get caught at all. Although he took his actions outside of the control systems created by the audit firms which include the disclosure of investments to prevent a conflict of interests, there were the investigations by other agencies, the FBI in this case, that flagged Shaw’s suspicious trades. That is a comfort. Hopefully, as this case and story unfold we will have the full power of the law descend upon London for his insider trading. In addition to the charges being leveled against London by the FBI and the SEC, KPMG has stated that it will be bringing legal actions against London. It should be more than lip service. KPMG and other CPA firms must realize that how they deal with their most powerful and senior practitioners goes a long way to ensuring that they remain trusted and held in high esteem.

Granted, every profession will have bad apples – unscrupulous people who have little regard for the profession. When it comes to being a CPA, a license where members agree to practice according to very high standards, it is imperative that those who are caught violating the code of conduct and the law are dealt with strictly. Partners of the Big Four accounting firm are more in the spotlight than other accountants and it should be clear that a position of power does not exempt one from discipline – in fact, the position of power should mean that you are more disciplined.

Finally, according to the United States Golf Association, London has a handicap of 10 and Shaw’s handicap is 12. Generally, a lapse in honesty tends to extend beyond just one event. A person who is gaming one system is likely gaming others. It is probably a good idea to check on that handicap, though I doubt either of those two men will be playing golf any time soon (at least I hope they are too busy paying for their behavior to do so).

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