In the name of ALMIGHTY ALLAH (swt), the most Beneficent, the most Merciful
Video Transcripts:
MODULE-5: WHISTLEBLOWING:
Video-1: Whistleblowing:
A weakness in many accounting or auditing programs is the fact that fraud is often treated
as something that can be prevented through internal controls. If you think you can
eliminate fraud through controls alone, then you’re wrong. If you think you can always
detect fraud through data analysis, you’re also wrong. No matter how sophisticated your
controls, the clever fraudster can find a weakness. In addition to the individual seeking to
get around controls, you may have management actively overriding existing controls. They
have the ability to steal large amounts of funds at a high level by simply ignoring or ordering
others to override standard procedures. The fraud examiner can’t be everywhere at once.
But you can multiply your eyes and ears by recruiting employees as part of your fraud
detection team. If fraud is occurring, more often than not, someone else is aware of it or
has suspicions. In this segment, we will discuss the impact whistleblowers have on an
organization and how important it is to provide a safe and confidential method of reporting
suspected fraud. An effective reporting mechanism is one of the most important parts of
your anti-fraud program. There is no doubt that fraud costs an organization money. That’s
money that’s not available for benefits, raises, new equipment, or new employees. So
when people steal from the company, they are stealing from everyone at the organization.
And studies show that once the money is stolen, the chances of getting the money back
are not good. According to the surveys conducted by the Association of Certified Fraud
Examiners, about half of fraud cases result in no recovery at all, and the remainder only see
a limited recovery of the stolen funds. That is why it’s important to emphasize that part of
EVERYONE’S job responsibility is to watch for and report suspected fraud. The ACFE began
the Report to the Nations on Occupational Fraud in 1996. It is issued every two years. The
numbers are based on an extensive survey of ACFE members across the globe. One
statistic that has been consistent since the survey started is that most frauds are detected
by tips. In fact, more frauds are discovered by tips than by internal audit, external audit, and
management review combined.
You can see then why it is so important to make employees part of your fraud detection
team and encourage them to report any misconduct they know about. Additionally, it’s also
important to include your vendors and customers in your reporting program. They can
often alert you to employees or even other vendors soliciting bribes, kickbacks, or other
improper payments. So what is a “whistleblower”? A whistleblower is simply someone
who “blows the whistle” on wrongdoing or any type of misconduct. The report can be
made directly to the organization or entity, or the report can be made to some type of
governmental or law enforcement agency.
Video-2: WorldCom Fraud:
Previously we discussed WorldCom, Inc, a classic case of fraud detected by a
whistleblower. WorldCom grew to be a leading telecommunications company in the
1990s. Much of the company’s growth was obtained through acquisitions. Most of that
acquisition activity was accomplished through using WorldCom stock to buy other
organizations. WorldCom used questionable application of accounting rules to reduce
expenses and increase income yielding higher WorldCom stock prices. Similar to the
progression of most frauds, WorldCom looked for additional ways to improve financial
performance. The next phase of the fraud included reclassification of expenses to assets.
In accounting, when a company spends money, there are multiple ways to record that
expenditure. If the money was spend for current period operations, such as
monthly utilities, then an expense is recorded - if spent for a future benefit, such as the
purchase of of a building, then an asset is recorded. Expenses have no future benefit, while
a purchased asset, such as a building, can be used in future years. WorldCom was a large
long-distance company. When a customer made a call that extended beyond WorldCom's
physical network, and was carried on other companies' telephone lines, then WorldCom
had to pay the other company for the use of those lines. The payments, called LINE
CHARGES, are an expense. There will be no future benefit - it is like an individual paying
their monthly phone bill.
In an attempt to reduce expenses, and make the company look profitable;
WorldCom recorded these expenses as assets. The false profitability and assets made
the the company look good to investors. It kept company's stock price high. And
also enabled the possibility of purchasing additional compainies using inflated WorldCom
stock. At the time, WorldCom was the largest financial fraud in history. In this fraud, the
primary purpose was to make it look like the company was growing rapidly. To give this
impression the fraud was focused on making sure income increased significantly each
year.
To provide this consistent, or smooth growth, accounting rules were inappropriately
applied regarding reserve accounts. This part of the fraud related to reserve accounts was
over 950 million dollars. The next major component to reduce expenses which directly
increased income, involved ignoring proper treatment of line costs. While recorded
correctly by the accounting system, management ordered that adjustments be made
to reclassify over 7 billion dollars of these costs and pretening that they were assets with
future value. There were also more than 500 million dollars in adjustments, for which there
was no documentation. We will never know the purpose behind these, but we do know
that the costs to run the company were understated by that amount. The final group, Other
Items, includes a variety of schemes and misrepresentations and totaled more than 400
million dollars.
The entire fraud included over nine and a quarter billion dollars of misstatements over the
four year period. There are many estimates related to the misstatements. Because of the
extent of the fraud and the lack of complete documentation, we may never know the
exact amount of the fraud, although some report amounts in excess of 11 billion
dollars. The numbers presented are from a report available on the Securities and
Exchange Commission’s web site. Many people lost significant money in the WorldCom
fraud. Some of those people lost savings and retirement funds, altering their lives
forever. WorldCom’s top management did not escape punishment.
Bernie Ebers, the company founder and CEO was convicted of Securities
Fraud, Conspiracy, and filing false reports with regulators. Ebers received, and is serving a
25 year prison sentence. If he serves his full sentence, he will be 90 years old when
released. In contrast to Ebers, Scott Sullivan, the CFO, cooperated with prosecutors and
investigators. He admitted to directing the fraud. Sullivan pleaded guilty to charges
of securities fraud, conspiracy, and filing false reports with regulators, but due to his
cooperation, received a sentence of only 5 years. For their roles in the fraud, WorldCom’s
Accounting director and controller each received one year plus 1 day sentences.
Consider WorldCom employee Betty Vinson. According to newspaper accounts, she had a
well-ordered life, played on her high school’s tennis team, married her college sweetheart
and attended her kid’s soccer games. Like most of us, she periodically completed home
improvement projects, taught Sunday school and maintained to-do lists on the refrigerator.
By most accounts, Ms. Vinson is a normal American citizen, going to work to improve her
family’s lot in life. To supplement the family’s income, in 1996, she took a job as a mid-
level accountant at WorldCom. She earns a reputation as diligent and hardworking.
She’s reliable and gets things done. After two years, she is promoted to senior manager in
accounting. Her duties include compiling the quarterly results and analyzing operating
expenses and loss reserves. By mid-2000, the telecommunications industry is in a severe
slump and WorldCom is not immune. WorldCom also has a structural problem. Its line
leasing costs are expected to rise in the future at a time when competition is fierce and
customers’ bills are falling in response that competition. In the 4th quarter, Ms. Vinson
finds herself on an ethical slippery slope.
She is asked to reverse $828 million of bad debt reserves to boost earnings. Ms. Vinson
understands that this is a questionable accounting technique. She suffers pangs of guilt
and considers resigning. Yet she is assured by WorldCom leadership that this is a one-time
fix – it will never happen again. WorldCom simply needed to buy a little time until
its economic environment and financial performance improved. Reluctantly, Betty Vinson
agreed to make the adjustments.
Despite the promises of a one-time event, as Dr. Dull previously explained, the illicit
financial transactions at WorldCom continued to be recorded in the accounting records
and be reflected in the published financial statements. Ms. Vinson rationalizes – she is
“just following orders.” She can’t sleep, she's losing weight. Then, in December of 2002,
she accept a promotion to Director, earning $80,000 annually. Despite the promotion and
raise, she vows to begin looking for a new job.
In contrast to Betty Vinson, consider WorldCom internal auditor Cynthia Cooper. She was a
38 year old, CPA, who was the company’s vice president of internal audit, responsible for a
department of 24 people. Prior to WorldCom, she worked in public accounting, at some of
the largest, most respected firms in the world. Ms Cooper’s WorldCom efforts were
supported by two other auditors, Gene Morse and Glyn Smith. The fraud began to unwind in
March 2002, when a complaint was received from accounts receivable manager, John
Stupka. He was concerned about account transfers that would have a future negative
impact on his department. He saw no valid purpose behind the transfers. As Cooper began
and continued investigation of questionable transactions, she asked about the accounting
treatments of some of the transfers.
Some of her questions were ignored, to others, she was told the treatments were
correct. Not only was Ms. Cooper told that things were okay, and she was also told not
to interfere with Stupka’s business. Cooper ignored the warnings, and kept the investigation
moving forward. She also expanded it into additional areas of concern. She and her team
worked secretly, and at night, so as to not raise suspicions. As the investigation continued,
they found 2 billion dollars in capital expenditures that were not authorized by the board of
directors, and 500 million dollars in computer expenditures that were recorded, but had no
supporting documentation.
June of 2002 brought two very busy weeks for Cynthia Cooper. On June 13, she and Mr.
Smith met with WorldCom’s audit committee chair and told him her findings. The chair
asked Ms Cooper to brief WorldCom’s new auditors on what she had discovered. The new
auditors suggested that Ms Cooper make sure that she was correct. On the 17th, Cooper
and Smith visited Betty Vinson where they discovered that while she made many of the
questionable entries, Ms. Vinson had no supporting documentation for her work. Next they
visited David Myers, WorldCom’s controller, who admitted that he knew the accounting
treatment of the entries were wrong.
On June 20th, the company CFO, Sullivan attempted to defend the treatment of the entries
before WorldCom’s audit committee. He ask for the weekend to prepare his defense. On
June 24, the audit committee gave him and Myers the option to resign or be fired. Mr. Myers
resigned, Sullivan was fired. The next day, WorldCom issued a public announcement that
there had been 3.8 billion dollars of inflated profits over the 5 previous quarters. Ulitmatley,
the final estimates were closer to 11 billion dollars and the actual fraud period covered 4
years (both nearly 3 times the original announcement).
On June 26, the SEC filed a civil fraud suit, and the NASDAC halted trading on WorldCom’s
stock. Betty Vinson versus Cynthia Cooper – the rest of the story. So what happened
to Cynthia Cooper and Betty Vinson? Before we get to that, note the similarities of these
two women – similar lives, seemingly similar all-American values, but two diametrically
differing choices. Betty Vinson, became integral to the fraud. While Cythia Cooper blew the
whistle. Here is how it turned out: Cynthia Cooper becomes one of three Time Magazine
“persons of the year,” joining Enron’s Sherron Watkins and Coleen Rowley of the FBI.
In contrast, Betty Vinson pleads guilty – the judge indicates that she is the “Least culpable”
person in the WorldCom fraud. Her maximum possible sentence under federal law was 15
years. Her actual sentence included 6 months in jail and 6 more in home confinement. In
the end, Ms. Vinson had to tell her 12-year old daughter that she’d be spending the next six
months in jail. Initially, Betty Vinson was assisting the FBI with their investigation of
WorldCom and believed that she would be exonerated as a coerced person. The FBI came
to believe that the evidence suggested she was integral to the fraud act and decided that
she was a person that they would target with their investigation.
Now, Given Vinson versus Cooper it might appear that the choice to become
a whistleblower is easy. If one can choose to either blow the whistle or go to jail – choose
whistleblowing. In fact, the life of a whistleblower is a hard one. Many lose their jobs and
are oustracized by their coworkers and community.
Video-3: The Choice to be a Whistleblower:
As we mentioned earlier, tips from whistleblowers are how most frauds are discovered. But
it’s not easy to make that decision. Harry Markopolos blew the whistle on the Bernard
Madoff’s multi-billion dollar Ponzi scheme. But his pleas were ignored by government
regulators, and he was ridiculed by others for bringing forth such an outlandish charge
against a respected member of the financial community. Despite his protests, no one
would take him seriously. He was also in fear for his personal safety for challenging such a
prominent figure. But despite it all, he stood strong and was eventually vindicated. But it
was a very hard journey. That’s why it is important that employers and others understand
that the choice to come forward should not be based on the hope of a reward, but on the
belief that he or she is doing the right thing.
Not surprisingly, most tips come from employees within the organization. But note that
according to the ACFE’s Report to the Nations, a number of tips come from customers,
vendors, and even competitors. That’s why it’s important to broadcast your reporting
program to everyone the company does business with. The more people who know of the
program, the more likely you are to gather useful information. When developing a reporting
mechanism for whistleblowers, it’s important to take into consideration the following
factors: First, the person must feel safe in reporting the conduct and that confidentiality
will be preserved as much as possible. Next, it must be available not only to
everyone inside the company, but it must also be publicized outside the company. Anyone
with knowledge of wrongdoing should be able to report it, regardless of whom they work
for.
The individual should be able to report any type of inappropriate behavior. This can
include harassment, workplace violations, or any other type of misconduct. Each call must
be taken seriously. If the organization takes the report, it owes it to the caller to conduct as
thorough an investigation as possible. If allowed by law, the individual should be able to
remain anonymous. People are more likely to report wrongdoing if they can remain
anonymous. Many people obviously fear retaliation.
The organization must ensure that there is no retaliation against whistleblowers. Not only is
such conduct potentially illegal, it will end any hope of receiving future reports. There are
four things that are critically important to include in an overall fraud policy. First, you should
explain what fraud is and what is included within that definition. For example, many people
may not consider accepting gifts from vendors to be a form of fraud. The fraud policy is a
good place to explain company policies and lay out what is expected from employees.
Second, the fraud policy should provide examples of behaviors that could be red flags of
fraud. Things such as unexplained wealth, reluctance to allow anyone to help with certain
job duties or to take vacation days, and secretive behavior such as blocking access to
documents or files. Next, you should explain in clear terms what to do if the individual
suspects fraud. It should be emphasized that individuals do not have to report to their
supervisors and that they can remain anonymous. It must also be stressed that the
company will not tolerate any retaliation for making reports.
And finally, you should stress that the policy will be enforced. People must know that
the company takes the policy seriously, it is important to the company leaders that
fraud not be tolerated, and assurance that the offenders will be punished. Thank you for
your interest in this week’s topic, whistle blowing. We began by looking at the importance
of the whistle-blower. We then moved to a discussion of one of the largest frauds in US
history, WorldCom, and some of the company’s key employees. The WorldCom fraud was
brought the board of directors’ and ultimately to the publics attention, by a whistle blower,
Cynthia Cooper, WorldCom's VP of Internal Audit. We looked at some of the details
involved in Ms. Cooper’s investigation, and the timing of the fall of WorldCom. We also
looked at the outcome of the investigation, related to several employees.
As always, you can find more information on this week’s topics on the West
Virginia University and Association of Certified Fraud Examiner websites.
Video-4: ZZZZ Best and Barry Minkow:
I'm Barry Minkow, president of ZZZZ Best Carpet Cleaning. Your carpets deserve the care
and expertise of our licensed, bonded, and insured technicians. So call now. I'll guarantee
the work and the price, in writing. Narrator: At the age of 16, Barry Minkow started a
carpet cleaning service in his garage. It never made a legitimate profit so he decided to
cook the books. Within 5 years, his scheme had unraveled and he was sentenced to 25
years in prison for defrauding investors of over $100,000,000.
BM: Well, basically the fraud was we had a carpet, furniture, and drapery cleaning that was
legitimate. We owed a lot of money to a lot of people, borrowed to expand on the way up. I
couldn't get bank loans a lot very easily and I got caught up in usurous loans, borrowed
from Peter to pay Paul. In the process of getting caught in those usurous loans, I got myself
in debt and began to perpetrate a restoration fraud, a fraud that would say I'm making more
money than I'm making and I need to borrow more money than I would need to borrow if my
company were legitimate. So I needed what we call a built in excuse. Why are you always
short of money? I got these restoration jobs.
And I had to fool accountants and auditors into believing that those numbers were real
before I could perpetrate that fraud. No one loans money to a company that's losing money
so I had to be profitable in the process of needing money. So all that was the crux and the
foundation for the fraud. What I did was I created false vendors, like Marbil Marketing or
Tuftex and created invoices and created literal front companies who I could show money
going to. Well, accounts receivable are a wonderful thing. They are a tool that is used by a
fraudster like me to ask to borrow money mainly and show earnings. So I can borrow
money, hey, look at these receivables and I could show earnings because once you book
the receivable, you're already accounting for the income and you're showing earnings.
So what I need to do is create a receivable and because I had this company that we were
doing these insurance frauds from and I had their letterhead, I could make up any letter
and any invoice saying that they owed me money for doing this job. I could take some
checks from the past and say that they were supplies from the job and I could piecemeal it
together, the detail stuff along the way. Bingo. I have a receivable. You take the checkbook
of the phony setup company, "Interstate Appraisal Services." So you have an invoice, 7727,
$300,000, net 60. You got a check that says 7727, "job well done."
The check's there, here's the check and I tie in a $300,000 deposit off the bank statement
that was deposited on the same day that check dates, there's the deposit, really the
deposit was to do a kite, but it tied together so nicely, what do they know? You know the
restoration business was maybe 80% of the income that I earned, allegedly but 80% of the
due diligence that I tried to get the auditors and the lawyers to look at was the carpet
cleaning end of the business which was legitimate. I'm going to be nice to those auditors. I
had them over for dinner. I went to their houses for dinner. I wanted their wives to know me
so if they had a go against me, they had to hear their wives to say "I think he's such a
nice boy." I wanted to make sure if they were going to go against me they were going to go
against their own wives.
Does he want to go back to his clients and the manager and everybody and say they lost
the ZZZZ best account because they wanted to be petty? Because they set the ground rules
and we abided by them? Do they want to lose the ZZZZ Best account? No, they don't want
to lose the ZZZZ Best account and I leveraged that to the hilt, too. So you got to remember
something. Yes, want to get to know your client, but you want to remain your objectivity and
I believe the auditor's responsibility is to give up the $100,000 a year fee to prevent the
sixteen million dollar fraud. If they're going to mail a confirmation to the bank, fine.
We don't care what it says our balance is, our average balance is, and how much we
owe. That wasn't where the fraud was happening. The fraud was happening with three
banks, kiting checks bank and forth, inflating a false balance. The loan payment, heck. If
you make a loan payment, you know what's the problem there? There's just no
accountability. The auditors are being cheated, I believe, by not getting enough information
from them.
They doubted the financial where with all of ZZZZ Best, I pointed them to the stock
price. Although the auditors are not supposed to look at that, you can't ignore a stock that
goes from 5 cents to 18 dollars. You know, hey, these are Wall Street analysts. They know
due diligence. They know numbers. Don't you think they would have found something out if
there was something to be found out? And by having all these people, the media, lawyers,
Wall Street, the financial analysts, the stock brokers, all hyped about ZZZZ Best, I basically
boxed the accounting firm in a corner and said, you're not going to be the only rotten apple,
are you?
What are you going to need to satisfy yourself and I'll satisfy you to fill your file. Without
putting the pressure on the auditors, you've got to pull yourself away from the numbers and
hindsight is wonderful, you know, to look back and everybody says, how could you have
been fooled by Barry Minkow? How could anyone have fallen for the old fraudulent
building restoration scam? Or an old Ponzi scheme? Well, very easily. The press says I'm
gold. The banks said I was gold.
I had Hughes, Hubbard, and Reed as my lawyers. I was doing well on Wall Street and I
leveraged my auditors. I believe a company that makes a million a year, well, where's the
money going to? If he's making a million a year, why is he continuing to lease his
equipment? I know the answer will be because he wants to expand and use that money for
expansion but that just doesn't make a whole heck of a lot of sense. Either he's reinvesting
it in the company or it's going somewhere. Where's that million going to?
So highly leveraged owned assets and unbelievable growth. It's very rare. You know, the
computer business, perhaps. The software business, maybe, anything else, hardly ever,
that you're going to see a 4 million dollar company go to a 40 million dollar company
overnight unless it's a fad of some kind. Watch that guy with the big ego. Watch that guy
who loves to be on the screen because that's the guy who will do anything to keep his name
in the paper and in print. Watch the guy whose stock's going crazy and very high profile
because that's the guy that will lie on a 10Q rather than suffer his stock going lower
because his earnings were down.
Watch that guy. Watch that guy that has no respect for anyone but himself. A fraudulent
situation is always in need for money. Yes I know that entrepreneurs are growing
businesses out there and they are also in need of money but there's one difference. The
fraudulent man has to have that money because he owes someone else or is holding
something together and he has to expand and he has to grow because that expansion
and growth are excuses for the need of his money. The entrepreneur on the other hand, will
have enough business sense to be able to say, maybe growth is not what I need right now
because the the finances aren't available. The banks aren't looking at me.
I need some more track record. Because his business is real, he can wait a year. If
somebody said wait a year to me, I would have been under.
Video-5: Final Thoughts:
Before the course ends, I would like to leave you with two of my favorite quotes the first is
very old it's from Confucius he reportedly wrote: "To see the see the right and not to do it is
cowardice." I think this is a good lesson to put forth in your whistleblower training. It is very
easy to sit back and not get involved and unfortunately that's what many people do. But it's
not okay to just sit silently by and watch while fraud in other misconduct occurr. To not
report fraud or wrongdoing is cowardice. The second quote is my favorite. Its attributed to
Edmund Burke who was an 18th century Irish philosopher he wrote "The only thing
necessary for the triumph of evil is for good men to do nothing." I think that speaks to all of
us in the fraud prevention profession. Fighting fraud requires a lot of time, effort, and
vigilance. But for those a of us in the anti-fraud profession, standing back and doing nothing
is not an option.
If good people do nothing fraud will triumph. It provides a sense of satisfaction to know that
you are doing what you can to prevent the triumph of fraud in the workplace. On behalf of
the Association of Certified Fraud Examiners I wish you well in your efforts to prevent and
detect fraud. As I close I have two thoughts that I'd like to leave with you. First from my
perspective working as a forensic examiner is sometimes an emotionally challenging job. In
addition to the victims losses, we also see the impact on the lives of the fraudster and his
or her family. Fraud is never a good solution to the pressures and problems faced by an
individual or organization Sophocles the ancient Greek playwright is quoted as
saying: "Things gained through unjust fraud are never secure." One of our jobs as forensic
investigators is to make sure that the quote is true. That the benefits of the fraud are not
secure and fraudsters are not able to keep what they've stolen. The second thought is from
the perspective a businessperson, employee or anyone associated with any organization.
Samuel Johnson English poet critic and writer once said: "Fraud and falsehood only dread
examination. Truth invites it. " If an act you're considering would cause you to dread
examination then rethink the action. Consult with a trusted friend or advisor and determine
why you would not want it to be examined. If it's because the action is fraudulent make a
different decision one that you'd be happy to explain to the public or ultimately to a
judge. Thank you for your interest in our course. I sincerely hope we've left you with ideas to
enrich our understanding of the topic.
Best wishes for your future forensic accounting and fraud examination studies. We've
enjoyed our weeks with you during this MOOC. We close with some final thoughts from
some of the great thinkers across time. I chose to feature to the United States founding
fathers. First, Benjamin Franklin wrote: "Only a virtuous people are capable of
freedom." One of my other favorite founding fathers, Thomas Jefferson suggested that: "In
matters of style, swim with the current; In matters of principle, stand like a rock. …The
price of freedom is eternal vigilance." We have spent several weeks with you and hopefully
exposed you to the: who, what, where and how of fraud. At times we even offered some
insight into why people commit fraud, especially seemingly good persons who make a bad
decision.
Each of us is on the front line in the fight against fraud. It's a tough battle and it's incredibly
hard on the victims, those who directly lose money, as well as the company's coworkers
family and friend who trusted the perpetrator. Best of luck with your own anti-fraud efforts
we hope you enjoyed the fraud related content, and we hope that you feel like you have a
few new skills for your toolbox.
Discussion:
Discussion on Cynthia Cooper & Betty Vinson
Who had the harder choice - Cynthia Cooper or Betty Vinson?