accounting fraud

Guilty plea over faked audit report at New Mexico Finance Authority

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The former controller of the New Mexico Finance Authority pled guilty to three felony counts on November 29, 2012. There were two forgery charges and one for securities fraud.

He was sentenced to five years probation.  The sentence includes the provision for a conditional discharge.

A special report from the Office of State Auditor dated December 12, 2012 stated:

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CEO of Peregrine signs plea agreement

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The Wall Street Journal reports that the CEO of Peregrine Financial Group has signed a plea bargain deal with the feds. The article, Peregrine CEO Signs Plea Deal says:

Under the agreement, Russell Wasendorf Sr. would plead guilty to charges of embezzlement and mail fraud alongside two counts of lying to government regulators, assistant U.S. attorneys said in a Cedar Rapids, Iowa, court Tuesday.

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New Mexico Finance Authority fiasco expands into criminal arena and doesn’t just involve a rogue employee

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The mess involving a faked audit report in New Mexico is growing. The former controller wasn’t acting alone and the faked audit report isn’t the only issue.

The controller has been arrested for alleged securities fraud. It is now alleged that the former controller coordinated with the Chief Operating Officer (COO) in misstating the financial statements. The COO has also been arrested.

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Initial analysis on faked financial statements

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If you are an auditor, you really ought to be watching the story unfolding in New Mexico about the allegedly faked 6-30-11 financials for the New Mexico Finance Authority. Is it okay to drop the alleged when the person submitting the report said it isn’t the real audit report? My previous posts here and here.

If you want an evaluation of the quality of the forgery, you can check out Jim Scarantino’s post on July 19:  The Cheap Forgery That May Cost New Mexico Millions. He has an extended discussion of the report.  He’s talking photocopies and whiteout.

One more thing to watch for is the idea of photocopies being present when originals are expected. Look at the visual quality of the accountant’s reports. Typically those would be printed originals, if not electronically generated. In the copy on the web site, the accountant’s reports appear to be a second or third generation copy. The pages in the basic financials are not as ‘dirty’ as the opinion. That should be odd to an auditor’s eyes.

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Accountant who allegedly fabricated audit report appears on camera

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The New Mexico State Auditor claims audited financial statements for the New Mexico Finance Authority were fabricated in their entirety. I mentioned this in my previous post, Faked audit report in New Mexico.

This has been the cause of an uproar in Santa Fe and Albuquerque, as you can imagine.  The local news station, KOB 4, found the controller allegedly behind the fiasco at his home on Friday. They spoke to him before the investigators did.  You can read KOB’s  report at NMFA Comptroller on bogus audit: Not malicious.

His explanation at the moment is that he prepared a draft report for the audit. This would be fine up to a point. The concept is that the client ought to prepare the financial information, including all necessary notes. Even the single audit schedules ought to be prepared by the auditee.

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Select paragraphs of criminal complaint in Peregrine fiasco

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The Wall Street Journal has a copy of the criminal complaint filed against the owner of Peregrine Financial Group. You can find it here.

I’m going to take a shot at developing a fraud case study of the Peregrine fiasco and try to do so in real-time.

Here is what I know so far:

  • Post 1 –  Regulators apparently deceived in PFGBest fraud
  • Post 2 – Peregrine CEO charged – allegation is he ran fraud for 20 years.

I will pull in some of the info provided publicly by the FBI.  This provides more depth of interest to CPAs that is currently visible in the media. 

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Peregrine CEO charged – allegation is he ran fraud for 20 years

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The Wall Street Journal article Peregrine CEO Arrested says that the suicide note left by Mr. Wasendorf claims to have been running a fraud for 20 years.

The article reports Mr. Wasendorf was arrested and arranged on Friday, July 13.

In just one paragraph, here is a very rough outline of the length and depth of the alleged fraud:

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Regulators apparently deceived in PFGBest fraud

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Things are falling apart faster on the PFGBest fiasco than I can read the news articles. So I’ll take this on just one bite at a time.

The Wall Street Journal reports in their article, Red Flags at Failed Broker, that the regulators of Peregrine Financial Group, Inc. were successfully mislead by the company.  Far more details will follow in the near future, I’m sure. Perhaps every few hours.

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Japanese regulators slightly criticize Olympus auditors then say the corrective action plan they require wouldn’t have found the fraud anyway

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Reuters reports that the Japanese regulator, Financial Service Agency, criticized KPMG and Ernst & Young for their audits of Olympus. Then they partially retracted their criticism.

The Reuters article, Japan regulator raps KPMG, Ernst & Young for Olympus work, says the two firms

…lacked operational management systems to ensure proper auditing that would spot and flag dubious transactions.

The regulators didn’t find any “intentional acts of grave negligence” according to the article.

I guess that means they should have had the foresight to develop some unidentified management system that would have identified the fraud.

The two firms have to develop a business improvement plan and report on their progress every six months.

An official then essentially retracted the criticism. Check out this comment:

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How do you overpay for an acquisition but keep the announced sales price? More journal entries to describe the Olympus fiasco.

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Here are some more journal entries that describe how Olympus moved money in their accounting fiasco.

‘Michael’ asked a great question at re: The Auditors about my guest post on the Olympus accounting fraud. 

The full article with my reply can be found at How Do You Hide A Multibillion Dollar Loss? Accounting For The Olympus Fraud.

Here is his question, with slight editing:

If they actually bought the tiny companies for way more than they were worth, this would not fix their problem, they would just have the original losses plus the new losses on the companies that they overpaid for.

The only way this works is if they claimed to pay $1,000,000 for the companies but in reality only paid $100,000. Is this the case?

For example if they paid $1,000,000 for the subsidiary you would.

  • Dr. investment 100,000
  • Dr. goodwill 900,000
  •      cr. cash $1,000,000

There would be no cash in the subsidiary, just goodwill. So how could the subsidiary purchase the financial assets that were seriously underwater? The subsidiary would have to actually pay the inflated fair value for this to work?

A very good question, Michael. 

I’ll go into more detail on how the money was moved and my read on what summarized entries would be.  I posted my reply at re: The Auditors. Francine McKenna has allowed me to reprint my response. Here is my explanation:

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Q: Why are corruption and bribery frauds so difficult to discover?

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A: Because all the documents are outside the organization being defrauded.

When it comes to corruption and bribery, it only takes a little planning for a fraudster to keep all the papers that contain any trace of a fraud outside the organization.  A minimal amount of planning will mean there is no paper inside an organization that contains a hint of a problem.

I’ve discussed this issue using the example of an alleged fraud in the city next to where I live. The alleged part of the story is slowly turning to fact with one participant, the mayor, entering a plea agreement.

Now think about auditing the city.  All the pieces of paper that show any hint of the fraud are outside the city hall.  How would the city’s auditor find that?

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