Fraud Directly Related to Confirmations -...

1 Copyright 2015, Confirmation.com

Fraud Directly Related to

Confirmations Brian Fox, CPA, MBA – Founder of Confirmation.com

July 30, 2015, 12:45-2:30pm

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Brian Fox, CPA, MBA

• Founder and Chief Marketing Officer,

Confirmation.com

• Former Professor at Vanderbilt University

• Multiple “Top 40 CPA Under 40” in the U.S.

awards

• Received the first six patents on Electronic Audit

Confirmations

• Co-authored Guide to Electronic Confirmations

• Often seen on or written about in:

–Fox Business News

–Forbes

–Fortune

–New York Times

–The CPA Journal • Speaker at professional conferences and

business schools

Copyright 2015, Confirmation.com

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72% Non-Public Companies

28% Public Companies

Where Does Fraud Occur?

Source:

ACFE 2012 Report


• Private Companies

• Not-For-Profits

• Governmental Entities

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Majority of Frauds


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100+ Confirmation Fraud Examples Over 50 in the Last 11 Years!

Shepherd Major Play Option Fund 2013 Universal Travel 2011 Parmalat 2004

Boshiwa 2012 Electronic Game Card 2010 Powerball International 2004

Centro 2012 Rino International 2010 Suprema Specialties 2004

Hontex International 2012 Canopy Financial 2009 Vista 2000 2004

Peregrin e Financial Group (PFGBest) 2012 Satyam 2009 Warnaco 2004

Advanced Battery Technologies 2011 International Commercial Television 2008 Barings 2003

Chaoda Modern 2011 Quest 2008 California Micro Devices 2003

China Biotics 2011 Take-Two Interactive 2007 MicrosStrategy 2003

China Integrated 2011 Daisytek International 2006 Northface 2003

China Intelligent Lighting & Electronics 2011 Lipper Holdings 2006 Safescript 2003

China MediaExpress 2011 Refco 2006 Ahold/U.S. Food Services 2002

China New Century Media 2011 Charter Communications 2005 Aura Systems 2002

Focus Media 2011 Del Global Technologies Corp. 2005 Cronos 2002

G.C. China Turbine 2011 e-Safetyworld 2005 Ebix 2002

Longtop 2011 First American Health Concepts 2005 Endocare 2002

NIVS Intellimedia Technology Group 2011 Just for Feet 2005 PictureTel 2002

Olympus 2011 Kmart 2005 R.T.I.N. 2002

ShengdaTech 2011 Royal Ahold 2005 TV Guide 2002

Sino-Forest 2011 Amicom 2004


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2001 and Earlier

Adelphia 2001 Livent 1999 Crazy Eddies 1987

Allfirst Financial 2001 Sunrise Medical 1999 ZZZZ Best Carpet Cleaning 1987

American Bank Note Holigraphics 2001 Financial Asset Management 1998 Flight Transportation 1985

Healthsouth 2001 YBM 1998 Alpex Computer Corporation 1984

I&J Bagel/Manhattan Bagel 2001 Hybrid Networks 1997 J.B. Hanauer & Company 1983

Madera International 2001 Physician Computer Network 1997 AIG

Purchase Pro 2001 Cambridge Biotech 1996 Auto Firm Rotation

Quintus 2001 Pathe Communications 1996 Gold Wo International

Clarent 2000 Bio Clinic 1995 Guggenheim

Computer Associates 2000 Happiness Express 1995 Healthcare Management Resources

Digital Lava 2000 Kurzweil Applied Intelligence 1995 Hong Kong Stock Exchange

Finance Credit 2000 Northstar Health Services 1995 Jaguar Financial

Pier 1 Imports 2000 Standard Oil & Exploration of DE 1995 Merge Quest

Safety Kleen 2000 Datamag 1991 Office Max

Three Point Digital 2000 Refco 1991 …McKesson & Robbins 1930’s

CF Foods 1999 BCCI Bank 1990

Just for Feet 1999 RSI 1988

Laser Photonics 1999 18 Utah Companies 1987

100+ Confirmation Fraud Examples


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Confirmation Fraud

Examples


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On Monday, July 9, 2012…

Regulators discovered

nearly $215 million missing

in customer funds from

PFGBest accounts.


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On Monday, July 9, 2012…

Russell Wasendorf, Sr.

CEO of Peregrine

Financial Group

Russell Wasendorf, Sr.,

attempted suicide

leaving behind a signed

statement that begins to

explain the $215 million

shortfall in customer

accounts.


• Fraud uncovered in July 2012 and took place over

a 20-year period.

• $215 million shortfall in PFGBest customer money.

• CEO Russell Wasendorf Sr. was arrested on

charges of lying to federal regulators.

• October 3, Wasendorf Sr. entered a guilty plea to

charges including lying to regulators,

embezzlement and mail fraud.

Peregrine Financial Group Fraud


• Sentenced to 50 years in prison.

• Former clients are still unable to access more than

60% of the funds frozen since PFG’s bankruptcy.

Peregrine Financial Group Fraud


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Russell Wasendorf’s Suicide Note:


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I have committed fraud. For this I feel constant and intense guilt. I am very remorseful that my greatest

transgressions have been to my fellow man. Through

a scheme of using false bank statements I have

been able to embezzle millions of dollars from customer accounts at Peregrine Financial Group,

Inc. The forgeries started nearly twenty years ago

and have gone undetected until now. The Bank

statements were always delivered directly to me when they arrived in the mail. I made counterfeit

statements within a few hours of receiving the

actual statements and gave the forgeries to the

accounting department.

“

”

Russell Wasendorf wrote in part:


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On Friday, July 13, 2012…

Russell Wasendorf was

arrested for making

false statements to

regulators.

Russell Wasendorf, Sr.

CEO of Peregrine

Financial Group


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How Wasendorf Hid

the Fraud


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For Years PFG Looked Financially Sound

$218,660,650.98


• Falsified bank statements and forged official

letters and correspondence from the bank, as

well as all transaction confirmation statements.

• Ordered that all US Bank statements were to be

delivered directly to him.

• Used Photoshop, Excel, scanners, laser and ink jet

printers to create bogus bank statements and

forgeries of nearly every document that came

from the bank.

• Rented a P.O. Box to intercept bank confirmation

requests and forged the documents to conceal

missing money.

How Wasendorf Hid the Fraud


Bogus US Bank Mailing Address

U.S. Bank National Association

PO Box 706

Cedar Falls, Iowa 50613-0030


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This Manual Process Worked So Well…

that the external auditors

and the NFA auditors never

suspected that Wasendorf

had been skimming

customer accounts for

20 years.


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How the Fraud was

Discovered


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• National Futures Association, the regulator for

PFGBest, began using Confirmation.com.

• NFA regulators began requesting that

Wasendorf give their auditor’s permission to

confirm PFGBest customer account

information using Confirmation.com.

• For months Wasendorf adamantly resisted

authorization in using Confirmation.com to

confirm the company’s bank balances.

• On Sunday, July 8, he relented.

How the Fraud was Discovered


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How the Fraud was Discovered

Within 24 hours, the NFA began receiving

confirmations through Confirmation.com

confirming:

The US Bank account had a balance of

approximately $6 million instead of approximately

$220 million that was reported on their US Bank

statement as of December 31, 2011.


• $1 billion inflated cash balance

• Used false invoices and forged bank

statements

• Former senior managers created

more than 6,000 phony invoices –

used in general ledger and financial

statements

• Created bogus bank statements to

reflect payment of phony invoices

Satyam


http://www.topnews.in/files/Satyam Logo

“ The reliability of global capital markets depends

on auditors fulfilling their obligation to investors to

perform robust audits, resulting in well-founded

audit reports.

Two of the PW India firms, PW Bangalore and

Lovelock, repeatedly violated PCAOB rules and

standards in conducting the Satyam audits.

These confirmation deficiencies contributed

directly to the auditors’ failure to uncover the

Satyam fraud. d

– James R. Doty

PCAOB Chairman

”


• March 21, 2011 – stock was delisted by the NYSE

• Accounting firm MaloneBailey (MB) LLP formally

resigned its engagement:

– Discrepancies noted on customer confirmations

– Inability to directly verify China Century’s bank records

– Can no longer support its opinions related to financial

statement as of December 31, 2009 and 2008

• SEC has initiated a formal investigation

concerning material misstatements

China Century Dragon Media


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Kmart Fraud

Eastman Kodak ‒ VP (Sales)

•Coca Cola – National Dir. of Sales

•Pepsi-Cola – National Sales Dir.

•Frito-Lay – Dir. of Sales

•Frito-Lay – National Account Mgr.

Just For Feet Fraud

Adidas – Dir. of Apparel Sales

Fila – President & CEO

Converse – VP of U.S. Sales

Confirmation Fraud Examples


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Ahold Fraud

Sara Lee Foods ‒ Sales Mgr.

Con Agra Foods – Account Mgr.

Sara Lee Bakery Group – Sales Mgr.

Sugar Foods – VP of Sales

Koch Poultry – Owner

Heritage Bag – CEO

Citrus World – Account Mgr.

Hunt-Wesson Foodservice – VP Bus. Dev.

Confirmation Fraud Examples


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Vendor: Just for Feet

Responder: Timothy R. McCool, Director of Sales

Apparel for Adidas America

Plead: Guilty

• McCool an audit confirmation letter, requesting that

McCool, on behalf of Adidas, confirm to Deloitte & Touche that Adidas actually owed JFF $2.2 million for advertising

that ran or merchandise sold prior to January 30, 1999.

• McCool, knowing that the information contained in the

audit confirmation letter was false, signed it and sent it to Deloitte & Touche.

SEC vs. Adidas


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Vendor: The North Face

Responders: Two Customers

• Todd Katz, Vice President of Sales and Richard Tyrer, Vice

President of Western Region Sales persuaded a customer

of the company to lie to the internal investigators and

senior management, and to sign false documents,

knowing that the information would be relied upon by

the auditors.

• SEC noted in its settlement.

• Tyrer and Katz persuaded a second customer to sign a false confirmation letter, which also was relied upon by

the auditors.

SEC vs. North Face


Vendor: Kmart

Responder: Darrell Edquist, Eastman Kodak Vice

President – Kmart Account

Circumstances:

1) Wal-Mart recently signed a long-term contract with Fuji,

Kodak’s archrival. Therefore, maintaining good relations with Kmart was top priority.

2) Kmart threaten to sell exclusive rights to Fuji for end of aisle

displays.

3) Edquist was newly in charge of the Kmart relationship.

Action: Signed a false $7million confirmation

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SEC vs. Eastman Kodak


Vendor representatives participated in:

False or misleading third party confirmations to Kmart's

independent auditor, PricewaterhouseCoopers LLP.

As a result, Kmart's net income for the fourth quarter and

fiscal year ended January 31, 2001, was overstated by approximately $24 million or 10 percent, as originally

reported. The company restated its financial statements

after filing for bankruptcy to correct these and other

accounting errors.

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SEC vs. Eastman Kodak


Vendor: Kmart

Responder: David C. Kirkpatrick, Coca Cola National Director of Sales – Kmart Account

Circumstances:

1) Kmart contacted Kirkpatrick and asked for a favor.

2) Kmart offered additional sales and promotional activities in return.

3) Kmart agreed to sell targeted amounts of Coke

throughout the year

Action: Signed a false third-party confirmation letter pulling forward $3 million worth of allowances.

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SEC vs. Coca-Cola


Vendor: Kmart

Responder: David M. Bixler, Pepsi-Cola National

Sales Director – Kmart Beverage Acct

Circumstances:

1) Kmart called and pressured Bixler, who initially

resisted.

2) Kmart threatened to give an additional 10 million cases of business to Coca-Cola.

3) Kmart threatened to break the Pepsi contract.

Action: Initially was reluctant to sign the confirmation in writing.

Instead, he met with PwC and falsely confirmed $3 million worth of allowances verbally.

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SEC vs. Pepsi-Cola


Vendor: Kmart

Responder: Thomas L. Taylor, Frito-Lay Director of Sales – Kmart Snack Account

Circumstances:

1) Kmart asked for Taylor’s help.

2) Kmart agreed to favorable placement of Frito-Lay products.

Action: Signed forms that falsely pulled forward $2.8

million.

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SEC vs. Frito-Lay


Vendor: Ahold/U.S. Foodservice

Timeframe: 2 Year Period, 2001 & 2002

Fraud: $700+ million of fake revenue

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Ahold/U.S. Foodservice


Responders

1. Carl A. Allen – CEO, Heritage Bag

2. Donald Childers – Sales Mgr., Sara Lee Food

3. John Crowder – Account Mgr., Con Agra Foods-

Poultry Group

4. Chris Jakubek – Sales Mgr., Sara Lee Bakery Group

5. John King – Independent Food Broker

6. Steve LeBarron – Independent Food Broker

7. Patrick Penderghast – Dir. of Corporate & National

Accounts

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Responders

8. Frank Riggio – VP for Corporate Accounts

9. Richard Vecchia – VPof Sales, Sugar Foods

10.Gary Bell – Business Dev. Hunt-Wesson Foodservice

11.Anthony Holoman – Sales Rep. C.F. Sauer Foods

12.Joseph Grendys – Owner, Koch Poultry

13.Michael Smith – Corporate Accounts, Citrus World

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• Aided and abetted a massive financial fraud by

signing and returning materially false audit

confirmations sent to them by the auditors of the U.S.

Foodservice, Inc. subsidiary of Royal Ahold

(Koninklijke Ahold N.V.).

• U.S. Foodservice personnel contacted vendors and

urged them to sign and return the false confirmation letters. In some cases U.S. Foodservice pressured the

vendors; in other cases they provided side letters to

the vendors assuring the vendors that they did not

owe U.S. Foodservice the amounts reflected as

outstanding in the confirmation letters.

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• Each of the individuals aided and abetted the

fraud by signing and sending to the company's

independent auditors confirmation letters that they

knew materially overstated the amounts of

promotional allowance income paid or owed to

U.S. Foodservice. The amounts overstated in the

confirmations were often inflated by millions of

dollars and by more than 100 percent.

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Remember these U.S.-Listed Chinese Frauds?

Chaoda


Between 2001 – 2011…

U.S.-Listed Chinese

Companies Cost

Investors

~$18 billion


Alibaba IPO

• Largest e-commerce company in the world

• In 2013, Alibaba had $248 billion in sales –

more than eBay and Amazon combined.


• Reignites debate over Chinese listings in

the U.S.

• Biggest challenges with Alibaba’s IPO:

– SECs decision to ban the Chinese affiliates

of the world’s largest accounting firms from

operating in the U.S. for six months

– Making sure everything runs smoothly

between the SEC, PCAOB and External

Auditors.

Alibaba IPO


• Prompt a new wave of listings from China

• Chinese companies listed on the U.S. Stock Exchange don’t undergo the same scrutiny

because the SEC and PCAOB don’t have

access to the work files of the audit

companies in China

• Fraudsters waiting to capitalize

• Could see a second round of frauds like we

saw in 2009, 2010 and 2011.

Alibaba IPO


• Analysts value Alibaba at $200 billion

• Biggest IPO in internet history.

Alibaba IPO


Fraudulent Electronic

Confirmation Processes


Creating a Fraudulent − Legitimate Street Address is Easy: UPS Store Brochure

Fake Address


Fake Website Buying a URL/Website for $168.40


Entering Fake Ownership Information is Simple Fake Website


Fake Website


Illegitimate Website Ownership Information on WhoIs Fake Website


Fake Website


Getting Source Code Fake Website


Fake Website


Sending a Fake Email

Fake Email


Fake Email


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How the Prevent Fraud

from Going Undetected


• New: legal confirmations

• More than 60 confirmation types – cash,

debt, AR, AP, EBP, investments and more

• Global network of over 1,000 financial

institutions

• Security-assured platform

– SOC 1, 2 & 3

– ISO 27001

– TRUSTe

Helping Auditors Control the Process and Save Time

Confirmation.com


• Accounting Today’s 2013 Top New

Audit Product

• Ranked #169 in 2011 Inc. 500 List

• 2011Award for Best Audit Service

• 2010 Reader’s Choice Award The

CPA Technology Advisor

Exclusively Endorsed by:

An Award-Winning Solution

Confirmation.com


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Questions?


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To learn more visit www.confirmation.com

Thank You!


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