Accounting powerpoint presentation
Freescale Semiconductors, Inc.
Advanced Auditing
December 9, 2014
Threat of prison terms deter executives
Wide range in sentencing
Longer prison terms
No perfect answer
Additional laws and harsher penalties on financial fraud can eliminate or mitigate financial fraud.
Does the threat of prison terms deter executives from committing wide-scale financial frauds? In my opinion, yes and no.
An executive engaging in accounting fraud is typically not planning on getting caught. Therefore, stricter sentencing guidelines wouldn’t seem to have much of an impact on an executive’s thought as to not commit fraud. If an executive isn’t planning on getting caught, a potential prison term of 10 years versus five years is no different.
If the goal of sentencing is really punishment over deterrence, the longer prison sentences are meeting that goal. Society needs protection from these criminal minds who cause widespread financial damage to so many.
No perfect answer exists when it comes to white-collar crimes and prison sentences. The system is still evolving and will likely continue to do so for a long time to come. What is important to recognize is that white-collar crimes can have many victims and can cause widespread damage. For that, stiff sentences to punish and possibly deter the fraud perpetrators are necessary, and lawmakers should work to make those sentences fair and equitable.
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SOX protection
Sentencing guidelines have changed dramatically
Is there still fairness
Powerful deterrent
Additional laws and harsher penalties on financial fraud can eliminate or mitigate financial fraud, continued
Since the corporate scandals the SOX Act of 2002 sought to protect retail investors from financial statement fraud. Sentencing guidelines have changed dramatically because of Sarbanes-Oxley. For example, wire and mail fraud previously carried maximum five-year sentences, and that was increased to 20 years under the legislation.
The increase in the length of sentences for white-collar crimes now puts many of these crimes ahead of crimes such as drug trafficking and manslaughter. Some question the fairness of this. While financial crimes can cost millions or billions of dollars, to some it still seems irrational to make those prison sentences harsher than the sentences for violent crimes. Others recognize the widespread financial devastation even one white-collar crime can cause, and hope that lengthy sentences will serve as a powerful deterrent.
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Shallow sentencing should be examined closer
Limited resources tendency to focus on violent crimes
Direct involvement cooperation lighter sentencing
The publicity of fraud
Additional laws and harsher penalties on financial fraud can eliminate or mitigate financial fraud, continued
The fact remains that shallow sentencing should be examined closer. Lawmakers, judges, and prosecutors owe it to consumer and victims to work toward a system that is fair and equitable to all parties.
Although cases of corporate fraud and embezzlement have received a greater share of media coverage in the last five to seven years, only a fraction of all cases are actually investigated by law enforcement. With limited resources and a tendency to focus on violent crimes, white collar criminals are usually only prosecuted criminally for their deeds if the crimes are large enough to warrant scrutiny by law enforcement.
Often, executives who do not have significant direct involvement in the financial crimes receive lighter sentences. Those who choose to cooperate with prosecutors and testify against other defendants also tend to receive lighter sentences.
In general, sentences for financial crimes are much longer and harsher today than they were in the 1980s and 1990s.
Part of the change in sentencing has to do with the publicity of fraud cases and the victims of fraud. In earlier years, stockholders and corporate victims were largely nameless and faceless to the general public. But as more ordinary consumers become involved in the stock market through their retirement accounts, they see a personal connection to fraud.
Investors are now real people, just like them.
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Create an insider trading policy
Take extra precautions
Put top officers on automatic
Have an internal watchdog
Suggest new strategies that government can implement to eliminate or mitigate insider trading.
Create an insider trading policy
Translate the country’s criminal and securities laws on insider trading into clearly defined rules your officers and employees must follow. Be sure to specify blackout dates and spell out the meaning of insider and insider information.
Take extra precautions
For instance, go above and beyond what the law requires by asking senior officers to notify your CFO or legal department before they exercise their stock options.
Put top officers on automatic
To address the tight trading restrictions put on CEOs and other top officers, companies should consider automatic share plans that allow trades on a pre-arranged schedule.
Have an internal watchdog
Assign someone to monitor trades of the company’s stock. It’s also a good idea to form an investigations group that can look into suspicious trading activities.
Have a third party, such as an accounting firm, come in at the end of the year to verify insiders’ holdings against their reported trades throughout the year.
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Insider trading is bad for everyone
investors
businesses
the country
Determine the key internal controls needed over the communication of confidential information to outside parties, and analyze the manner in which these controls act as a deterrent to fraudulent activities.
Insider trading is bad for everyone – investors, businesses, and the country. From a company’s perspective, the business suffers in the sense that people lose respect for their management team, and the company starts losing its investors. This in turn affects the country as a whole. Internal controls need to implement to protect confidential information to outside parties.
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Insider Trading Policy
Definition of an insider
Black out Periods
Top official Trading times
Determine the key internal controls needed over the communication of confidential information to outside parties, and analyze the manner in which these controls act as a deterrent to fraudulent activities, continued
Insider Trading Policy
It makes for good business companies to take their own steps to restrict illegal insider trading. It doesn’t cost much to have an insider trading policy in place – although monitoring compliance to the policy can get expensive – and the benefits are likely to outweigh the costs. A company that voluntarily restricts insider trading would be less likely to come under regulatory oversight and would not suffer the impact that a public enforcement would have.
Definition of an insider
An insider trading policy needs to clearly spell out the definition of an “insider” and “insider information.
Black Out Periods
It should also specify blackout periods when insiders are not allowed to buy or sell stock. A number of market observers have pointed to consistent patterns of trading spikes in the days before an announcement of earnings or a significant business development, such as a merger.
Top Official Trading Times
Top officers should notify the company’s chief financial officer or legal department before making a trade.
Automatic share plans for their senior officers allow top leaders such as CEOs to sell their shares according to a pre-arranged schedule. The concept is that you take away the discretion to trade from the insider, and the trading decision has nothing to do with the insider and is not necessarily dependent on any event.
Automatic share plans also make it easier for senior officers to exercise their stock options. Without such a plan, CEOs and other top officers typically have very limited periods during the year when they can trade; in addition to the usual blackout periods, they're also prohibited from trading during times when they possess non-public material information which, in the case of a CEO, is quite often. There are so few times during the year when CEOs can trade. Automatic share plans address this challenge and help companies avoid the perception of questionable trades.
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External Parties; watchdog
Review Analysts reports
Third Party Verification
Determine the key internal controls needed over the communication of confidential information to outside parties, and analyze the manner in which these controls act as a deterrent to fraudulent activities, continued
External Parties; watchdog
To minimize their risk for insider trading, companies need to keep a close eye on external parties such as advisers and consultants. An internal watchdog is a good idea, recommending at least one employee to monitor the company’s stock trades.
Review Analysts reports
Companies should also take the time to carefully review analysts’ reports for possible information leaks. Be careful that they're not putting out ‘buy, buy, buy’ recommendations to help underwriters sell your company’s stock.
Third Party Verification
While internal monitoring is critical, it’s also important to have third-party verification. An accountant or auditor should check insiders’ holdings at the end of the year and compare these to transactions they reported throughout the year.
The idea that illegal insider trading can be eliminated any effort can go a long way.
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Report the crime to the SEC
Well-thought out manner
With corroborating documents, materials
And a list of potential witnesses
Propose an alternative plan to act on leaked information. Recommend one strategy to communicate the alternative plan and determine who should communicate this plan.
Donna Murdoch could have come forward and reported the crime to the Securities and Exchange Commission. It is critical that information provided to the SEC is complete and appears reliable.
A whistleblower’s information should be presented to the SEC in a thorough,
well-thought out manner,
with corroborating documents, materials,
and a list of potential witnesses
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Under the Dodd-Frank Act
Independent knowledge or analysis
Original Source of information
Not made from an allegation
Propose an alternative plan to act on leaked information. Recommend one strategy to communicate the alternative plan and determine who should communicate this plan, continued
You are not expected to have all the relevant documentation, but should have original information that is not known to the government. Original Information as described under the Dodd-Frank Act should be:
“Derived from the independent knowledge or analysis of a whistleblower.”
“Not known to the SEC other than by the whistleblower as the original source of information.”
“Not exclusively derived from an allegation made in a judicial or administrative hearing, audit, or investigation, or from the news media, unless a whistleblower is the source of the information.”
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Contact and Attorney
Anonymously report the information
Identity is protected
Case presented in best possible light
Propose an alternative plan to act on leaked information. Recommend one strategy to communicate the alternative plan and determine who should communicate this plan, continued
Insider trading carries severe civil and criminal penalties. Donna Murdoch should contact an attorney before speaking to the regulators.
You can anonymously report the information to the SEC if you are represented by a lawyer. Working with an experienced whistleblower attorney will ensure that your identity is protected until payment of the award. It will also ensure that your case is presented in the best possible light that the SEC would deem actionable. If you do not want to remain anonymous you do not need to be represented by a lawyer.
Anonymously report the information
Identity is protected
Case presented in best possible light
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Compare and contrast the different auditor’s responsibilities between audit and consulting engagements.
CONSULTING ENGAGEMENTS
AUDIT ENGAGEMENTS
Coach
Achieve a quality system
Meeting Goals
Examiner
Examines the system in place
Provide Oversight
Coach - Examiner
Consultants help and advise. Good consultants are similar to trainers and coaches. Where a consultant is like a coach, the auditor is the examiner.
Achieve a quality system – Examines the system in place
Consultants work with you to help you understand what is required and do what is necessary for your quality system to reach the required level. They help you get your system ready. Advise you where you have gaps, explain and show you how to fix the gaps, or even do it for you. They advise, teach, guide and help you throughout the process. Prepare you and show you how to meet the various requirements.
An Auditor is someone with the skills and experience to audit the quality of the management system. They decide if the system meets all the requirements of the relevant standards.
Meeting Goals - Provide Oversight
“Owners and managers need the ability to review financial statements and reports to determine if the business is meeting financial goals. Consulting firms analyzes current and prior financial statements to determine not only if finances are in order, but also if the proper reports are being generated.
Auditors review cash management procedures, accounting policies and controls, trial balance accounts and relationships with creditors. If necessary, the auditing firm can provide oversight with capital restructuring or with the complete overhaul or upgrade of the internal accounting system.” (Phillips, 2014)
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Compare and contrast the different auditor’s responsibilities between audit and consulting engagements, continued
CONSULTING ENGAGEMENTS
AUDIT ENGAGEMENTS
Risk Management
Fraud
Poor management
Financial Loopholes
Security breaches
Risk Management
Fraud
Poor management
Financial Loopholes
Security breaches
“A manager or hands-on owner can become so ingrained in the daily operations that he loses sight of the bigger picture. He may be bogged down with details that blind him to obvious pitfalls that need attention. An analysis of the company's accounting system detects possible loopholes that are ripe for fraud by employees. After identifying all possible risks associated with the business, the auditing firm can design plans to shore up the systems and instill tighter security.” (Phillips, 2014)
Consulting services provide risk management guidance in areas of fraud, poor management, financial loopholes and security breaches.
Audit services detect problem areas of the company's accounting system where possible loopholes for fraud, poor management, financial loopholes and security breaches, can be identified as well.
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Theory of prohibition
Investors need to be aware
Who is the judge
Increase or decrease in corporate fraud
Take a position on whether more legislative and/or regulatory agency oversight will increase or decrease corporate fraud.
The theory of prohibition
The theory behind the prohibition on insider trading is that it undermines investor confidence in the fairness and integrity of the securities markets.
Investors need to be aware
All investors must be aware of the potential danger in trading on a "tip" from someone who knows non-public information regarding a security.
Who is the judge
Self-regulation should be the starting point for a decrease in corporate fraud. Companies across the spectrum should put in place insider trading regulations.
Increase or decrease in corporate fraud
When self-regulation has failed I do believe more strict legislation and regulatory agencies should be involved. Only then will there be a consequence stiff enough for prevention of acting on a “tip”.
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References
DMC-Admin. (2007, 12 17). Crime and punishment: Sentencing in financial fraud cases. Retrieved 12 7, 2014, from Wisconsin Law Journal Web Site: http:// wislawjournal.com/2007/12/17/crime- and-punishment-sentencing-in-financial-fraud-cases/
John, M. (2012, 6 11). How to prevent insider trading in your ranks . Retrieved 12 7, 2014, from The Glode and Mail Web Site: http :// www.theglobeandmail.com/report-on- business/careers/business-education/how-to-prevent-insider- trading-in-your-ranks/article4239232/
Phillips, C. (2014). The Three Types of Consulting Services That Audit Firms Have Provided to Their Audit Clients. Retrieved 12 13, 2014, from Small Business:Chron: http :// smallbusiness.chron.com/three-types-consulting- services-audit-firms-provided-audit-clients-35708.html
Whistleblowers Today. (2014). How to Report a Fraud to the Sec. Retrieved 12 10, 2014, from Whistleblowes Today Web site: http :// www.whistleblowerstoday.com/do-you-qualify/how-to- report-a-fraud-to-the-sec
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