Author: npolati

Throughout this quarter I have wrote about multiple large scale financial frauds such as ING, Lehman Brothers, Enron and Tyco.  These frauds have had devastating affects to both shareholders and the company as a whole.  Rather than re-summarize these frauds, I believe it would be more beneficial to explore the factors that made these frauds possible and the ways in which they could have been prevented. In almost all of these cases, at least one of the fraudsters was the CEO.  By holding the position of CEO, they were entitled to all parts of the company, and had the ability to override a lot of the checks and balances in place.  By disregarding segregation of duty and utilizing their power to control others, they were able to manipulate stock prices through misappropriated revenues.  By putting higher revenues on their balance sheet, these well-known companies were able to manipulate stock holders perception of the company.

In the end each of these companies fell hard, leaving thousands unemployed and even more scammed out of their hard earned money.  Although most of the fraudsters received jail time, it in no way makes up for the lives these individuals destroyed throughout their fraudulent schemes.  Overall, I believe that a more standardized set of checks and balances as well as segregation of duty could have prevented these frauds from happening, and saved millions of dollars disappearing from the hands of shareholders.  Crime doesn’t pay.

Financial fraud continues to be a major issue with businesses both large and small worldwide.  In a 2014 report, the “Association of Certified Fraud Examiners (ACFE)” determined that a business loses on average a whopping 5 percent of revenue solely from fraud.  Besides the monetary value of the fraud, the organization will also experience negative psychological affects from said fraud.  Another surprising statistic produced by the  “ACFE” was that smaller companies with fewer than 100 employees were more prone to fraud compared to companies with over 100 total employees.

Contrary to popular belief that small companies produce a more family like environment and reduce the risk of fraud, the fact that small companies oftentimes fail to implement anti-fraud policies and training makes them vulnerable.  The notion that fraud is typically a repeat offense if also somewhat of a myth, given the fact that “87% are first-time offenders with clean employment histories” (Quickbooks).

Fraud will continue to be a major global problem because of people’s inherently greedy nature.  The desire to constantly grow up being told to shoot for the stars has made people go against their morals in an attempt to achieve wealth. Combined with the relatively lenient consequences associated with this white collar crime, has convinced some individuals that the risk is worth the reward.  In what ways do you believe we can change this cultural mindset and reduce the prevalence of financial fraud worldwide?

 

“Fraud Statistics Every Business Should Know.” QuickBooks. N.p., 30 Nov. 2016. Web. 12 Mar. 2017.

Website: http://quickbooks.intuit.com/r/trends-stats/fraud-statistics-every-business-should-know/

AIG also known as “American International Group” is an insurance company that still exists today.  However from 2001 to 2004, the companies CEO Maurice “Hank” Greenberg was responsible for accounting fraud, stock price manipulation and bid-rigging.  Greenberg inflated profits by replacing loans with overall revenue within the financial statements.  Furthermore, he convinced large traders to manipulate the stock price of AIG.  Despite manipulating roughly 4 billion dollars in revenue, Greenberg simply had the option to step down in 2005 at the age of 80.

After stepping down from AI, Greenberg settled with a few companies in regards to the fraud; however it was only in 2016, that his case was finally brought to court.  In the final settlement both Mr. Greenberg as well as CFO at the time Eliot Spitzer acknowledged their role in illegally approving two transactions that in turn manipulated the stock price of AIG from 2001-2004.  Despite the damages they caused to both pension funds and individual investors, both men were merely forced to give up a combined 9.9 million dollars in which they received as performance bonuses!  Greenberg at age 91 did not get away with his crime; however he will receive no jail time.  Do you believe the punishment fits the crime?

Smith, Randall. “Former A.I.G. Executives Reach Settlement in Accounting Fraud Case.” The New York Times. The New York Times, 10 Feb. 2017. Web. 05 Mar. 2017.

Website: https://www.nytimes.com/2017/02/10/business/dealbook/former-aig-executives-reach-settlement-in-accounting-fraud-case.html?_r=0

 

Despite Tyco being a security systems and services company, its CEO Dennis Kozlowski managed to embezzle over 100 million dollars from the company before finally being caught in 2012.  Kozlowski utilized commingling of assets to keep his fraudulent purchases hidden.  He would use Tyco as a secondary bank account in which he could spend at will.  These purchases including millions of dollars in artwork, all of which avoided sales tax in order to not raise any red flags.  Furthermore, Kozlowski spent a whopping 2 million dollars just on his second wife’s birthday party, and much more on various properties he purchased.

Kozlowski’s crime was not solely based around him, but also members of the companies Board of Directors.  By having higher ranking officials commingle funds at a lesser extent, he was able to make the practice a normal aspect of the company.  Furthermore the auditing firms lack of due diligence allowed this fraudulent activity to continue.  When it was all said and done, Tyco had to repay 2.92 billion dollars to investors and Kozlowski was sentenced to 8-25 years in prison.  What do you believe was the biggest financial weakness within Tyco and was there any singular way to prevent this fraud from happening?

 

Romero, Jonathan. “Tyco Corporate Scandal of 2002 (Ethics Case Analysis).” Panmore Institute. N.p., 09 Aug. 2015. Web. 26 Feb. 2017.

Website: http://panmore.com/tyco-corporate-scandal-2002-case-analysis

 

Enron started as a pipeline business in 1985.  However over time, Enron decided to move into electricity and natural gas in the beginning of the 1990’s.  The issue with moving into a new sector of business is that debt can accumulate very fast.

Forbes even named Enron, “America’s Most Innovative Company” for 6 straight years prior to its sudden collapse in 2001.  Enron’s collapse was a result of manipulating the balance sheet in an attempt to keep the stock price rising.  Enron kept large portions of their debt off of the balance sheet to keep the stock price rising by keeping investors optimistic.  Furthermore, Enron inflated their earnings by hundreds of millions of dollars.

However; this financial fraud caused Enron’s stock price to plummet from 84 dollars in the beginning of 2001 into 0 by the end of the year. In total 74 billion dollars were lost, including many people’s retirement accounts.  At the time of Enron’s bankruptcy they were 38 billion dollars in debt.  If it weren’t for internal whistle blower Sherron Watkins, this stock could have maintained its fraudulent activity and been an even bigger disaster.  Both the CEO and former CEO were sentences to 26 years in prison.  How do you believe such a big company can not only get away with this scale of fraud but also be named “America’s Most Innovative Company” without proper do-diligence by Forbes?

 

DiLallo, Matthew. “Enron Scandal: A Devastating Reminder of the Dangers of Debt.” The Motley Fool. The Motley Fool, 21 June 2015. Web. 17 Feb. 2017.

Website: https://www.fool.com/investing/general/2015/06/21/enron-scandal-a-devastating-reminder-of-the-danger.aspx

 

Skimming is a type of fraud where cash is taken prior to being entered into the books.  Typically skimming fraud is a relatively small amount of cash, because of this, it is nearly impossible to detect for this reason.  Small businesses that typically deal with cash are more prone to skimming fraud because of the constant movement of cash.

In the given example, a sandwich shop similar to “Ike’s” is constantly receiving cash.  However an employee pockets this cash when the customer pays with exact change since there is no need to open the cash register and record the sale.  This kind of fraud is nearly undetectable because it seldom sets off any big red flags.  However; there are some safe guards for preventing this kind of small scale skimming fraud.

In the case of the sandwich shop, there are a few small changes that can be implemented in order to make skimming more difficult.  By making prices uneven dollar amounts it will almost always result in the customer receiving change and therefore the transaction to be noted.  However the easiest way to prevent this is to always provide a receipt since the transaction is put in the system.  If a company believes there is some sort of skimming going on, they oftentimes hire a certified fraud examiner (CFE) to look for any wrongdoings.

Wilkinson, Jim. “Skimming Fraud • The Strategic CFO.” ICal. N.p., 10 Dec. 2015. Web. 12 Feb. 2017.

 

Lehman Brothers was created in 1850 and over its 108 year lifespan, was the fourth biggest investment bank in the United States.  As highlighted in films such as “The Big Short” the housing market crash of 2008 significantly impacted Lehman Brothers and caused them to file bankruptcy soon after.  However one topic that’s oftentimes swept under the rug is the financial fraud committed just prior to its bankruptcy.

Following a poor financial showing in the later half of 2007 and the beginning of 2008, Lehman Brothers manipulated its financial statements in order to misinform investors.  This manipulation occurred three times, each time hiding overall losses.  In total, Lehman Brothers hid 138.1 million dollars in debt by temporarily making sales of toxic assets to Banks in the Cayman Islands with the promise of buying them back.  However; rather than classifying these as the loans they clearly were, the accountants recorded them as overall sales and therefore were able to manipulate the overall losses.

This fraud is only possible with the help of many regulators whose job is to prevent this as well as accountants willing to break the law.  If it wasn’t for the lone person who brought this fraud to the public, do you think they would have gotten away with this fraud?

 

http://www.forbes.com/2010/03/19/lehman-brothers-markets-streettalk-dick-fuld.html

Lezner, Robert. “Lehman Lies But Nobody’s In Jail.” Forbes. Forbes Magazine, 19 Mar. 2010. Web. 05 Feb. 2017.

 

 

When it comes to financial fraud, the Bernie Madoff’s Ponzi scheme takes the cake. Madoff began his scheme in the late 1980’s, by promising incredible returns on money invested.  However instead of investing this money like he said he was, he would deposit it into a bank account.  When clients wanted their money back, he could simply withdraw from this account and pay the investors back with the incredible returns.

Obviously this type of fraud is not sustainable and relies on getting more and more clients, so the money continues to flow in.  The second necessity for his scheme was to convince investors to stay invested rather than take out their money.  He would take a commission for his service and could have constant access to all of the money invested.  Finally when investors wanted too much money out, the whole scheme came crashing down around him since he could not pay.

When it was all said and done, he tricked investors out of nearly 65 billion dollars.  Despite claiming to be the sole perpetrator in the heinous crime that ruined many peoples lives, I don’t think it would be possible for one man to trick so many without help.

 

Link:

http://www.businessinsider.com/how-bernie-madoffs-ponzi-scheme-worked-2014-7

Yang, Stephanie. “5 Years Ago Bernie Madoff Was Sentenced to 150 Years In Prison – Here’s How His Scheme Worked.” Business Insider. Business Insider, 01 July 2014. Web. 29 Jan. 2017.

Millions of accounts are made each and every day.  These accounts include social media like Facebook and Twitter, personal financial information like bank accounts and work accounts.  With this many accounts coming at you from every direction, it oftentimes seems like the easy approach to create a universal password for all the accounts.  Yet, if this password were stolen, decoded or just plain guessed; how much damage could a single person be able to inflict if they essentially held your entire life or company’s life in their hands?

This made me wonder what were the common pitfalls in making a password and what steps can be utilized to prevent any of them being stolen in the first place.  Some advice when creating a password includes:

1. Use a different password for each account
2. Use a minimum of 12 characters
3. Replacing I’s with 1’s and a’s with @’s is easily cracked
4. Don’t use personal information such as dog or cats name
5. If possible make a passphrase instead of a password
   1. Example: “goodluckguessingthispassword” instead of “password1234”
6. If you have some variation of these passwords, change it as soon as possible
   1. 123456
   2. password
   3. qwerty
   4. football
   5. baseball
   6. 123456789

Link: https://www.theguardian.com/money/2016/may/21/how-create-perfect-password-hackers-online-accounts-safe

Collinson, Patrick. “How to Create the Perfect Password.” The Guardian. Guardian News and Media, 21 May 2016. Web. 22 Jan. 2017.

 

 

Coming into this class, I had heard of financial fraud within organizations, but had never taken the time to read a case study.  After some browsing of the internet, I stumbled upon an article in the Journal of Accounting titled, “Lessons from an $8 million fraud.”  A series of flaws in the company “ING” allowed an individual to personally embezzle 8 million dollars over 5 years.

Nathan Mueller’s ability to log into his coworkers accounts for the sake of being able to complete the work; automatically put the information system at risk.  Combined with the overarching mistake, allowing Nathan to both request and approve checks of up to $250,000 opened the door for large scale financial fraud.

Despite claiming that he knew that he would someday be caught, he continued to embezzle more and more money in an attempt to continue living his newfound luxurious lifestyle.  When it was all said and done, Nathan was sentenced to 97 months in prison.  These facts made me ask myself two questions.  One being, if Nathan could do it all over again, would he do it differently?  The second being was the risk worth the reward?

Nigrini, Mark J., and Nathan J. Mueller. “Lessons from an $8 Million Fraud.” Journal of Accountancy. N.p., 01 Aug. 2014. Web. 15 Jan. 2017.

Website: http://www.journalofaccountancy.com/issues/2014/aug/fraud-20149862.html