No, it’s not a joke.

Stephen Yagman, a high-profile lawyer who was involved in numerous cases against police thinks that he shouldn’t go to prison for his convictions on tax evasion and bankruptcy fraud. He says that would be too harsh a punishment, and he also says he will be in physical danger in prison because of all the work he did examining claims of excessive force by police for the Christopher Commission.

As a general rule, communications between an auditor and client are private. The information given to an auditor can generally only be disclosed with the permission of the client, or in situations involving SEC filings.

But the protection of communications between auditors and clients isn’t anywhere near that of the attorney-client privilege. And this is causing some interesting things to happen.

Take for example, the lawsuit filed by Shaw Group against AES Coporation for almost $100 million in unpaid fees. AES was granted access to Shaw’s auditing records by the court.

This type of thing is causing angst all around. Companies are becoming concerned that auditors could be forced to turn over confidential documents that could expose the companies to lawsuits from shareholders and whistleblowers. In light of this, some companies are reluctant to turn over information to the auditors, especially regarding pending litigation and internal investigations. Yet without some of this documentation, auditors may be unwilling to give clean audit opinions.

Attorneys are advising companies that anything they give to the auditors could be subject to disclosure at a later date if a court requires documents to be turned over, like in the Shaw case.

A research report published by the Final Four accounting firms details how to create a “fraud score” for public companies which can help predict which companies may be engaging in accounting manipulations.

Using the model outlined in “Predicting Material Accounting Manipulations,” a company that has a fraud score above 1.00 has a “red flag.” The model looks fr abnormal patterns in the following areas which are more susceptible to fraud:

• accrual quality (number of accruals booked)
• financial performance (earnings growth, cash margins, transaction management)
• nonfinancial performance (order backlog, employee headcount)
• off-balance-sheet activites (operation leases, pension assumptions)
• market-based measures (valuations, P-E ratio)

The model attempts to find problems in relationships between numbers. The more a measurement deviates from the normal parameters, the more likely it is that the company is manipulating the financials in relevant areas.

This model was developed after examining 2,191 Accounting and Auditing Enforcement Releases issued by the SEC between 1982 and 2005. These releases identify accounting manipulations, and the authors of the report drew the following conclusions from their research:

• Revenue is the most commonly misstated account, overstated by 55$ percent of the sample companies.
• Reserve manipulation is common, occurring in 10% of the sample.
• Inventory manipulation occurred in 25% of the sample.
• Manipulations are most common in certain industries, including computer services, retail, and general services.
• Large companies are more likely to manipulate earnings.

The findings in this report are not absolute, and further research would likely be helpful.

Earlier this month, a jury found Brian Adley, former chairman, CEO, and controlling shareholder of defunct Chancellor Corporation liable for creating false accounting documents. Chancellor was a transportation equipment leasing company in Boston.

The jury found that from 1998 through 2000, Adley used false accounting documents inflate the company’s assets and revenues. The company also improperly paid about $1 million in fees to another company Adley controlled, and those fees improperly funneled money out of Chancellor.

The SEC’s complaint in the case alleged that Adley directed the fabrication of documents that were given to the auditors, and that he directed the filing of false financial statements with the SEC. He was ultimately found responsible for the antifraud and record-keeping provisions of federal securities laws, for making false statements to Chancellor’s accountants, and for aiding and abetting Chancellor’s reporting and recordkeeping provisions of the securities laws.

No criminal charges have been brought against Adley.

I am often asked by other professionals if they should start a blog, and the answer is almost always, “it depends.” And it really does. I think the most important variable is whether or not the person is committed to blogging for the long-term. And a close second is whether or not the person is committed to blogging regularly.

Long-Term
When I say long-term, I really mean it. It can take a year or more to see real results from blogging, so it’s important to be committed for the long haul. If you’re not, then it’s just a waste of time. Why spend your time blogging regularly for three months and then quit?

I do know of a handful of bloggers who saw results within the first few months of blogging, but that is very rare. People need time to find your blog. It’s not just “if you blog it they will come.” It really takes time for people to realize you’re there and to become regular readers.

I am still settling in from my office move and upacking some odds and ends. Today I came across a billing rate card from Arthur Andersen. The rates are from 9/1/96 to 8/31/97 for the Milwaukee office, and they are interesting. Notice this is over ten years ago.

These are the “Standard Rates” which were for non-busy-season times:

Partner $315
Director $305
Senior Manager $280
Experienced Manager $265
Manager $230
Senior $145
Experienced Staff $100
Staff $75

And during the busy season there were “Surcharge Rates”:

Partner $378
Director $366
Senior Manager $336
Experienced Manager $318
Manager $276
Senior $174
Experienced Staff $120
Staff $90

I wonder what today’s rates look like?

Sure, it’s easy to blame rising audit fees on Sarbanes-Oxley. But could there be more sinister forces in play? Witness this recent discussion between a senior partner and an audit client:

Audit partner: “I’m sorry sir, but we’re going to have to raise your audit fees!”

Client: “You don’t say? What is the cause of this action?”

Audit partner: “Well, sir. The firm needs more money to pay for its film festival.”

Sounds crazy, doesn’t it? Well it’s happening. Granted, audit firms can charge whatever they want for audits. Clients are welcome to decline to participate (to an extent, anyway). And audit firms can spend their money however they choose.

But I suspect you didn’t think they’d choose to fund a “film festival” for auditors. And no, they’re not just watching movies. The auditors are making their own movies.

Deloitte even has a special place on YouTube for the best movies, with the following description:

The first-ever Deloitte Film Festival invited all people of the Deloitte U.S. Firms to make short videos that answered the question “What’s your Deloitte?”. Teams comprised of one to seven people submitted films about their lives and experiences at the organization. Nearly 400 submissions were received and more than 2000 participated in the filmmaking process.

The videos were posted on an internal “You-Tube” like site and then rated by the filmmakers’ peers and colleagues. From there, a diverse panel of judges chose the finalists and Deloitte’s employees picked the winners. The top videos, seen here, will be integrated into the organizations recruiting efforts.

Precisely what does that have to do with auditing? Well…. nothing.

But audit firms are doing crazy things to try to attract and retain employees. CFO Magazine reports that Deloitte & Touche recently had a “Deloitte Film Festival” in which employees created over 400 short films on the assigned theme, “What is Your Deloitte?”

Please tell me I’m not the only one that thinks this is an utter waste of time and money. Professional development? No! Making amateur films! Figuring out a way to make audits actually mean something? No! Making amateur films! Educating auditors about fraud so they are more likely to detect it? No! Making amateur films!

I’m sure someone at Deloitte thought this was a good idea. I wonder if the firm’s clients will agree. I hope they had a group hug at the end of the festival.

The fines levied by the Securities and Exchange commission have fallen to their lowest level since 2002. Bloomberg reports that “fewer billion-dollar accounting-fraud cases” and “new policies for fining companies” are to blame.

For the year ended September 30, the SEC issued $1.6 billion in fines, compared to $3 billion in each of the two previous years.

One expert says this is because the cases being investigated by the SEC are smaller and that the SEC has adopted a new stance on penalizing companies, since the penalties ultimately hurt the investors.

Two of the larger fines in 2006 were issued against American International Group (AIG) and Fannie Mae, at $800 million and $400 million, respectively. 2007′s fines include $50 million against Freddie Mac, $45 million against ConAgra Foods, $81 million against HealthSouth founder Richard Scrushy, and $208 million against Deutsche Bank.

It is also reported that the SEC brought 656 cases in 2007, which was a 14% increase over 2006.

Google Search:

Mary Kay scam

Answer:

Why yes, I believe it is. Mary Kay Cosmetics is a product-based pyramid scheme in which almost no one makes any money. About 99% of women who get involved in Mary Kay ultimately lose money. More information can be found on my consumer education site, Pink Truth.

Did I ever mention that the Attorney General of Utah, Mark Shurtleff publicly endorsed Usana Health Sciences (NASDAQ:USNA) and said the company operates in a legal fashion? Oh yeah, that’s right… I did. Well then, let’s review.

Usana executives have been caught making numerous misrepresentations about the “business opportunity,” company executives, and other company representatives. The company has recently been exposed for violating the laws of China – where company employees at the company’s Hong Kong office teach people exactly how to violate the Chinese laws against multi-level marketing.