Spotting Financial Distortions: A Primer for Attorneys The Web Conference Series For Corporate Counsel January 17, 2007 To ask a question using the question pane � Enter your question into the text area and click Ask. � The presenter will address your question shortly. 1
To answer a polling question: � When a poll is posted… – Click the radio button next to your response choice. Need assistance? � Contact Live Meeting Customer Support – US / Canada: 1-800-893-8779 – International: +1.971-544-3222 – Toll Free International: 00.800.9522.3000 – Email: lmhelp@microsoft.com – Web: www.livemeeting.com/support 2
Addressing Trends… Sharing Solutions � 2006 Year in Review book coming in January � Today’s summary in March InsideCounsel � Advance copy for today’s participants Today’s Moderator Robert Vosper Editor, InsideCounsel InsideCounsel is the leading publication � exclusively for general counsel and other in-house counsel Editorial mission – be the business and � management tool for the corporate legal department Dedicated to the exploration of the � relationship between in-house counsel and the law firms that serve them 3
Today’s Presenters Mark Plichta Senior Counsel, Foley & Lardner LLP Member of Transactional & Securities � Practice Area Practice covers mergers & � acquisitions, and general corporate business law Regularly counsels publicly held � companies regarding compliance matters Today’s Presenters James Pajakowski Managing Director, Protiviti Inc. Member of Protiviti’s Global Business Risk � Services Group Focuses on financial Investigations & � Litigation Consulting practice, e-Discovery and Data Forensics Consulting, Sarbanes- Oxley Compliance Consulting, Financial Risk Consulting, and Operational Risk Consulting Experience includes audit services, � business process improvement consulting, enterprise risk management projects 4
Spotting Financial Distortions: A Primer for Attorneys The Web Conference Series For Corporate Counsel January 17, 2007 Discussion Topics � SOX: Results so far � Recent fraud statistics � Identification and detection techniques � Common fraud scenarios � Client considerations � Protiviti’s 2007 Fraud Risk Management Survey � Accounting issues to watch in 2007 � Areas of focus / key take-aways 5
Results So Far – SOX 404 Compliance Results for Year 1 filers (through May 30, 2006): � – Almost 3,600 filed internal control reports – Over 580 companies, or 16.2 percent, reported material weaknesses Results for Year 2 filers (through May 30, 2006): � – Over 2,900 companies filed internal control reports – 215 ( 7.4%) reported material weaknesses While over 16% of companies subject to Section 404 disclosed � internal control weaknesses in their first year of reporting, more than half of these companies reported in Year 2 that they had corrected them. Year 1 and Year 2 Section 404 Disclosure Stats 6
Live Meeting Poll How many financial restatements has your organization experienced within the last three years? One � Two � Three � Four or more � Changes directly made to this slide will not be displayed in Live Meeting. Edit this slide by selecting Properties in the Live Meeting Presentation menu. Results So Far – Restatement Activity 2000 1800 1600 1400 1200 1000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 (forecasted) Source: Audit Analytics.com – April 25 and June 9, 2006 7
Results So Far – Restatement Activity (cont’d) The number of restatements is expected to increase in 2006 � compared to 2005, however this increase is being driven by smaller companies. Large audit firms’ clients were responsible for 65% of the � restatements in 2005, however they were associated with less than half of public company restatements in the first half of 2006. Meanwhile smaller auditing firms’ clients’ share of � restatements has more than doubled, with 497 restatements in the first half of 2006 compared to 185 restatements in the first half of 2005. History of Restatements 8
History of Restatements (cont’d) History of Restatements (cont’d) 9
Does SOX Have A Positive Impact on Companies? Wall Street Journal – May 8, 2006 Tracking t g the Nu e Numb mber ers / O / Outside A e Audi dit: Chec ecks ks o on I Internal al C Control P Pay Off Off Regulation 27.7% 25.7% Pays Companies reporting Russell 3000 internal-control Share price performance share index weaknesses in both of companies complying 17.7% 2004 and 2005 with internal-control rules Companies that Companies called for under the reported no reporting Down Sarbanes-Oxley Act * internal-control internal-control 5.7% weaknesses in weaknesses in 2004 or 2005 2004, but no weakness in 2005 * From March 31, 2004 to March 31, 2006 Securities Fraud Class Actions Decreased in 2006 In 2006, securities fraud class actions decreased by 38%, while � allegations of specific accounting irregularities in filed complaints increased Cases involving “other” accounting irregularities dramatically � increased – almost 50% related to stock-option issuances Total Disclosure Dollar Loss was $52B in 2006 - a 44% � decrease from 2005 (i.e., market capitalization losses at end of class period, typically time of disclosure of alleged fraud) Maximum Dollar Loss fell from $362B in 2005 to $294B in � 2006 (i.e., shareholder losses measured by largest capitalization decline experienced during class period 10
Securities Fraud Class Actions Decreased in 2006 (cont’d) � Three contributing factors cited: – Strengthened federal enforcement environment / pressure on companies to conduct internal investigations that implicate individual executives responsible for fraud – Strong stock market combined with lower stock price volatility – Majority of securities fraud class actions filed in late 1990s-early 2000s are “behind us” Recent Fraud Statistics 11
Three Perspectives on Fraud Black’s Law Dictionary defines fraud as: � – All means by which one individual can get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning or dissembling, and any unfair way by which another is cheated. Institute of Internal Auditors defines fraud as: � – Any illegal acts characterized by deceit, concealment or violation of trust. These acts are not dependent upon the application of threat of violence or of physical force. Frauds are perpetrated by parties and organizations to obtain money, property or services; to avoid payment or loss of services; or to secure personal or business advantage. Statement on Auditing Standards No. 99 (“SAS 99”) defines fraud as: � – An intentional act that results in a material misstatement in financial statements that are the subject of an audit. Two types of misstatements are relevant to the auditor’s consideration of fraud: (1) fraudulent financial reporting and (2) misappropriation of assets. Common Types of Financial Fraud � Asset Misappropriation (91.5%) – $150,000 median loss � Corruption (30.8%) – $538,000 median loss � Fraudulent Financial Statements (10.6%) – Most costly, median losses of $2 million per scheme Note: The sum of percentages in this chart exceeds 100% because a number of cases involved multiple schemes that fell into more than one category. Source: Association of Fraud Examiners ‘ 2006 Report to the Nation ’ 12
Who Discovers Fraud? � Tips (34.2%) � By accident (25.4%) � Internal Audit (20.2%) � Internal controls (19.2%) � External Audit (12%) � Notification by law enforcement (3.8%) Note: Total exceeds 100% because some survey participants cited more than one method for initial discovery of the frauds Source: Association of Fraud Examiners ‘ 2006 Report to the Nation ’ Occupational Frauds Based On Industry – Sorted By Frequency Industry # Cases Median Loss Banking/Financial Services 148 $258,000 Government and Public Admin 119 $82,000 Manufacturing 101 $413,000 Health Care 89 $160,000 Insurance 78 $100,000 Retail 75 $80,000 Education 73 $100,000 Service (general) 60 $163,000 Service (professional, scientific or technical) 58 $300,000 Construction 35 $500,000 Utilities 34 $124,000 Oil and Gas 32 $154,000 Real Estate 30 $200,000 Wholesale Trade 30 $1,000,000 Transportation and Warehousing 27 $109,000 Arts, Entertain. and Recreation 22 $175,000 Communications/Publishing 16 $225,000 Agriculture, Fishing and Hunting 8 $71,000 Mining 1 $17,000,000 Source: Association of Fraud Examiners ‘ 2006 Report to the Nation ’ 13
Recommend
More recommend
