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Tag: Los Angeles

The Ethics Sage, KPMG Insider Trading Scandal Damages the Reputation of the Accounting Profession

(I honored to have the Ethics Sage, Steven Mintz, write a post for my blog. Please visit his blog at Ethics Sage.)

KPMG Insider Trading Scandal Damages the Reputation of the Accounting Profession

What possesses an audit partner to trade on inside information and violate the accounting profession’s most sacred ethical standard of audit independence from one’s client? Is it carelessness, greed, or ethical blindness? In the case of Scott London, the former partner in charge of the KPMG’s Southern California’s regional audit practice, it was some of each that motivated him to violate ethical standards and, in the course of doing so, causing the audit opinions signed by London on Skechers and Herbalife to be withdrawn by the accounting firm.

This case has a local twist as pointed out by Stephen Nellis in his column “Deckers, PCBC were victims of auditor leaks” in the April 19-25 Pacific Coast Business Times. Nellis notes that two companies affected are Goleta-based Deckers and Pacific Capital Bancorp, the former parent of Santa Barbara Bank & Trust now part of Union Bank.

Overall, Shaw is charged with leaking confidential information to his friend, Brian Shaw, about Deckers, Pacific Capital Bancorp, Manhattan Beach-based Skechers, and Los Angeles-based Herbalife. The leak of information about quarterly earnings information led to Shaw’s unjust enrichment of $1.27 million. Shaw, a jewelry store owner and country club friend of London repaid London with $50,000 in cash and a Rolex watch, according to legal filings.

The leaking of financial information about a company to anyone prior to its public release affects the level playing field that should exist with respect to personal and business contacts of the leaker and the general public. It violates the fairness doctrine in treating equals, equally, and it violates basic integrity standards. The KPMG scandal concerns me because a pattern of such improprieties may be developing.

In 2010, Deloitte and Touche was investigated by the SEC for repeated insider trading by Thomas P. Flanagan, a former management advisory partner and a Vice Chairman at Deloitte. Flanagan traded in the securities of multiple Deloitte clients on the basis of inside information that he learned through his duties at the firm. The inside information concerned market moving events such as earnings results, revisions to earnings guidance, sales figures and cost cutting, and an acquisition. Flanagan’s illegal trading resulted in profits of more than $430,000. In the SEC action, Flanagan was sentenced to 21 months in prison after he pleaded guilty to securities fraud. Flanagan also tipped his son, Patrick, to certain of this material non-public information. Patrick then traded based on that information. His illegal trading resulted in profits of more than $57,000.

The KPMG case is a particularly egregious one because it involves insider trading by an auditor of client stock. This incident jogged my memory and I came up with a characterization of London’s actions as “stupid is as stupid does.” Scott London, the partner in charge of audits of Herbalife Ltd. and Skechers USA Inc., traded on inside information for personal gain.  KPMG resigned as the auditor of both companies after learning that London provided non-public information about the companies to a third party, who then used the information in stock trades. The firm fired London.  

In resigning the two audit accounts, KPMG said it was withdrawing its blessing on the financial statements of Herbalife for the past three years and of Skechers for the past two. KPMG stressed, however, that it had no reason to believe there were any errors in the companies’ books. Both companies said they are moving to find new auditors.

In a statement that should raise red flags for all CPA firms that audit public companies, KPMG stated it had concluded it was not independent because of alleged insider trading. Independence is the foundation of the accounting profession and the cornerstone of an audit conducted in accordance with generally accepted auditing standards. The public (i.e., shareholders and creditors) relies on auditors’ independence, objectivity, and integrity to ensure that the audit has been conducted in accordance with such standards and that the financial statements are free of material misstatements.

I’m having a hard time understanding the stupidity and moral blindness of London in this case. Surely he knew of his ethical obligations. All audit firms supposedly have been carefully assessing independence in the aftermath of financial frauds in the late 1990s and early 2000s (i.e., Enron and WorldCom). Firms generally have quality controls in place to prevent compromises to audit independence.

Trading on insider information for cash and gifts is bad enough, and when done by an audit partner it is unforgiveable. Even more baffling to me is that the quid pro quo for passing along stock tips about clients to a friend for London was to receive cash and gifts in return. According to London, he received a discount on a watch, and the friend bought him dinners from time to time and on a couple of occasions gave him $1,000 to $2,000 in cash. A cynic might say he sold himself cheap.

So, what happens next? Both Herbalife and Skechers will need to have their financial statements re-audited, not an inexpensive proposition. Even though the companies were not at fault, the public may misunderstand and think the companies were complicit in the matter.

For KPMG, the insider trading investigation is a setback. The accounting firm has worked hard to rehabilitate its reputation after coming under scrutiny last decade in a wave of corporate accounting scandals and the firm’s role in the marketing of fraudulent tax shelters. KPMG paid large nine-figure settlements to resolve lawsuits related to accounting scandals at the drugstore chain Rite-Aid and Oxford Health Plans. In 2005, the firm paid a $456 million penalty to the government related to tax fraud.

I have to wonder whether insider trading by partners at Deloitte and KPMG portends a larger scandal on the horizon. It seems every ten years or so the accounting profession finds itself in a “pickle” and hauled before Congress to explain its actions. It is about that time following financial frauds at Enron, WorldCom and a host of other companies. I don’t know how to get the message across to those in the profession that every time such incidents occur, and now insider trading, the public loses patience with the profession and doubts begin to surface about whether the profession truly acts to protect the public interest.

Blog Posted by Steven Mintz, aka Ethics Sage, on April 12, 2013

 

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Actress in “Innocence of Muslims” Says Director Lied to Her

Actress in “Innocence of Muslims” Says Director Lied to Her

 

Innocence of Muslims Actress Speaks “says film is nightmare” – YouTube

This film is very much like screaming fire in jam-packed movie house with one small door. This was designed to provoke violence. Whether or not it is protected speech under the first amendment is highly questionable. Remember, fighting words are an exception to free speech protections.

It would be a mistake to consider Moslems to be particularly violent compared to other racial and religious groups. We can offend dozens of religious groups around the world by destroying their symbols and literature, by alleging that their leaders and holy men are frauds and that their religion is based on nothing more than lies and deceit. Many of them can be expected to take to the streets under that kind of provocation.

What would happen Americans burned national flags or symbols, attacked their customs, and insulted their past? I suspect we could see some serious mob action, diplomatic problems and possibly military action.

And consider what would happen if such a film were made about head of the Christian religion and his followers in America. Would many people find charges of sexual misconduct offensive? What would worshippers do if confronted with a film alleging that Christianity is a bundle of lies and its followers deluded fools?

Patriotism and religion have always been sources of violence and conflict in spite of many great and reasonable men who have tried to seek peace and reconciliation.

What “Innocence of Muslims” does and is designed to do is to incite hatred for the United States and violence against its citizens, to disrupt the Moslem world and damage the reputation of their religion.

 

There are a billion and half followers of Islam on the earth. Very few are interested in damaging American institutions or killing Americans. If so many as 1/10 of 1 percent were devoted to the destruction of America, that would be one million and five hundred thousand Anti Americans. There are 5.62 million Americans overseas. Don’t you think we would we suffer some injuries and death on a daily basis if that number of enemies chose to take any kind of action?

Let’s keep our views of violence in perspective and realize that words have consequences. You may have the right to speak your mind in this country (and that is questionable in this case) but should you do it?

If any amount of rational judgment had been a factor in this matter, it would never have happened.

James Pilant

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Wall Street Protests, the 99 percenters, Spread Around the Globe

NEW YORK, NY - SEPTEMBER 26: A demonstrator ho...

Image by Getty Images via @daylife

It seems the winter of our discontent is spreading around the world. A small movement, the 99 percenters, continues to catch fire. I wonder if the great corporations are having studies done on the globalization of dissent?

Social media is not limited geographically to the United States, and that is increasingly important. The multinationals could organize for decades both on a national and international basis with little competition from dissent but that advantage is gone.

James Pilant

From Radio Netherlands Worldwide

Occupy Wall Street, the US protest against the financial elite and the banking sector, is spreading around the world. There are demonstrations planned for London’s financial district – and also for The Hague and Amsterdam. Occupy The Hague is demanding attention for a gamut of economic and political problems.

The Wall Street protests, which began last month, against “corporate greed and corrupt politics” have not only been repeated elsewhere in the country, in cities like Chicago, Los Angeles and Boston, the movement has spread to Canada and Europe. Demonstrations are planned for 15 October in The Hague and  a day later in Amsterdam. But Occupy The Hague goes beyond a protest against the financial system.

“The protest has scope for a range of opinions and interests,” spokesperson Robin van Boven says, “varying from the economic crisis to the Libyan uprising.”

“All these things are cause for concern. The point is that we want people to be aware of the problems that exist, and join us in looking for a solution. We think that at the moment politicians haven’t taken enough action.”

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Ten Worst American Cities for Murder – from the Star-Telegram

I have criminal justice students and they tend to believe that the cities like Los Angeles or New York are the leaders in murder. Their television induced wisdom is a problem. It disguises the developing geographic picture of crime, and that picture is of the most violent crimes moving more toward the South and Central United States.

The data, in particular the top cities for murder list below, surprises most people. I was shocked by the ranking of Anchorage. I went and had a look at the overall stats and while murder is bad compared to much of the United States, the rate of forcible rape is much, much worse than the rest of the country.

Here you are presented for your information – the top ten –

No. 1 – Detroit

No. 2 – Memphis

No. 3 – Springfield, Ill.

No. 4 – Flint, Mich.

No. 5 – Anchorage, Ak.

No. 6 – Lubbock

No. 7 – Stockton, Calif.

No. 8 – Tallahassee, Fla.

No. 9 – Las Vegas, Nev.

No. 10 – Rockford, Ill.

Read more: http://blogs.star-telegram.com/crime_time/2011/10/which-texas-city-do-you-suppose-made-the-forbes-list-of-most-dangerous-in-the-us.html#ixzz1aGVKxCO7

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