On September 18, 2013 a cease and desist order was filed pursuant to the Security and Exchange Commission’s investigation of Medifast Inc. (Medifast’s business includes Take Shape for Life, or TSFL, which is its multi-level marketing division.) Medifast materially overstated income and understated expenses from 2006 through 2009, according to the SEC. This has resulted in the cease and desist order, and has Medifast paying a $200,000 penalty to the government.
You may recall that Medifast sued several people (including me) in 2010 for criticizing their business model and business practices.
One of the issues in the lawsuit was the criticism of Medifast’s auditors, Bagell, Josephs, Levine, and Company.The criticism of the auditors was grounded in a 2008 PCAOB report on an inspection of six of BJL’s audits, which turned up audit deficiencies in three of them. In 2010 Medifast switched auditors. Continue reading
This article was originally printed in Valuation Strategies, a magazine published by Thomson Reuters.
Even with all the publicity surrounding the issue of financial fraud in the last decade, most auditors, investors, and other professionals still do not “get it” when it comes to detecting fraud. Traditional financial statement audits were never designed to detect fraud.
The audit is simply a process by which auditors check the company’s math and application of accounting rules. Auditors examine a very small percentage of transactions. Fraud is rarely detected by financial statement audits because they are not aimed at doing so. However, sometimes fraud is detected by auditors, and they can increase their chances of finding fraud if they are so inclined. There are opportunities during each financial statement audit to find fraud, if only the auditors are diligent. One of the keys to becoming better at detecting fraud is by understanding why auditors so often do not find fraud. Continue reading
In the current issue of Forbes magazine, accounting watchdog Francine McKenna has written an article about the SEC’s failure to take a hard line on accounting fraud in public companies. Despite all of the high profile accounting frauds uncovered in the past decade, the Securities & Exchange Commission appears to be focusing its efforts on going after Ponzi schemes rather than accounting fraud. Francine reports that of the 735 enforcement actions brought by the SEC in 2011, only 89 were related to fraudulent or misleading accounting and disclosures by public companies.
Some people say that Sarbanes Oxley has been doing its job relative to increasing prevention and detection of accounting fraud, but evidence of that is almost non-existent. Auditors would have the public believe that auditors are being more effective in finding and reporting fraud, but the evidence does not back this up. Continue reading