Years back, I was commissioned by a Swiss company to write the label texts for a product called Chlorella pyrenoidosa. I should get everything into four sentences in each German, French, and English, whereby the information content in all three languages had to be identical. I still think it was one of the hardest writings I have ever done.

The product was registered under the novel foods act in Switzerland, and therefore I had severe limitations into what I was allowed to say. E.g. words like vitamin or trace element were completely out of bounds, others like health severely limited. What it ran down to were four sentences to convey to the buyer that he bought a product with lots of vitamins and trace elements that were good for your health without saying it in so many words.

As I had to do quite a lot of preliminary study, I came to several conclusions about labels, labelling, and information content of labels. For my own amusement, I also set up four categories of fraudulent labelling which I want to share with you.

Fraudulent labelling by law

This category is the one you will be thinking of when reading fraudulent labelling. It is, in my opinion, a capital crime and should be severely punished. As is, these people usually buy themselves free on the proceeds of the fraud.

Famous cases that I am able to remember without researching them were the German Kebab case, where three year old meat was relabelled as fresh and then sold to the Kebab producers; the Italian Mozzarella case, where parts of mice and other unsavoury ingredients where found in Mozzarella products of most producers; the Argentinean beef case, where beef was shipped from Poland to Argentina, was relabelled as Argentinean and then shipped to Germany.

I haven’t been comfortable eating either Kebab or Mozzarella since. The beef case had an added twist to it, as the Polish producers received money from the EU to export the meat so it would not come onto the European market. None of the persons concerned in either three cases ever went to prison. Just as obviously, these labels were just fraudulent and not artful.

Fraudulent labelling by ethics

Into this section I moved those labels that I thought fraudulent but were in keeping with the law. E.g. a product known as Tyrolean Ham sold mainly in Germany. The pigs are born and brought up in Germany. They are then transported by lorry to the Tyrolean part of Italy where they are butchered and the ham is cured. The finished Ham is then transported back to Germany by lorry.

Into the same category I put chickens labelled as free range. They are brought up in cages as long as possible and then spend an exact amount of time outside. The poor beasts must hear the clock ticking every moment they spend out there.

Fraudulent labelling by morals

Into this section I moved those labels that are built on allusions to a legal labelling process. To stick with the free range chickens, to use that on a label, the producer must follow legal rules set up. In this case the legal rules are minimal, but still, they are there. A producer might now find a catch phrase that gives the impression of his product being free range. Let’s say he claims that his product is produced from freely ranging chickens.

A further example is certain imprints granted by some organisation or other, where a producer might just invent his own organisation and imprint. All these labels have in common that they might or might not be against the law depending on the judges.

Fraudulent labelling by default

This section contains the labels of products that may not show important information as the law forbids them to do so. To get my beloved tomatoes in, a shop is not allowed to write or publish any allusion to lycopene, even though that would be of interest to the consumer.

To get back to the starting point, Chlorella pyrenoidosa have high iron and beta-carotene content. They also make people vomit who suffer from Escherichia Coli. None of this may be printed or published by the producer because it might give the impression that the algae are healthy.

Fraudulent labelling by omission

Yes, I know, I made four categories. The point is, all labels fall into this last section. That’s where art meets fraud. The art is to omit everything negative if legally possible and pile in as much positive hype as laws allow. It’s like drawing a straight line while dodging legal hurdles at the same time.

For the consumer this means that labels are the perfect carrier of false information. If you start really reading the labels on food, you will spend more time figuring out what they didn’t tell you than reading what they tell you. The exercise is good for you as it trains your brain daily at top level.

Perfect examples for artful labelling are all products in the light or diet section. If these products make any claim to a reduction of anything, be it sugar, salt, or fat, they must be able to prove that. On the other hand, they must not tell you what they added as long as it is naturally contained in the product anyhow. Therefore, sugar free products contain more salt and more fat than normal, as otherwise they would taste like the packaging they are sold in. The same principle is used for fat free and salt free products where sugar replaces one or the other. Obviously, the addition of toxic waste like artificial sweeteners must be declared.

I am sure, there are hundreds of examples out there just to be put into my categories. If you haven’t encountered any, start reading the labels really carefully and figure out what they don’t tell you.

CBS reporter Steve Kroft interviewed Jim Grant a leading expert on credit markets and Grant stated the current disaster was, “created entirely by Wall Street itself, during a time of relative prosperity. And they did it by placing a trillion dollar bet, with mostly borrowed money, that the riskiest mortgages in the country could be turned into gold-plated investments.”

Monday, October 7^th saw the stock market decline drastically and markets around the world declined as well. The economy of the U.S. and the world is in a tail spin and the $700 billion bail-out is not stopping it.

How did this all happen? Once again I will admit I am no financial expert, but the 60 minute piece did cause this inquiring mind to dig deeper for answers.

Some people tend to see the current crisis as nothing more than a gamble taken by Wall Street executives. Well this was no ordinary poker game or chance purchasing of a lottery ticket. Wall Street executives earning $50 to $100 million a year made decisions which a first year Wall Street intern would have known was a poor choice. Perhaps it is not so much that they made poor choices as it is they decided to go from taking a gamble to committing a crime.

Check this out, noted economists state the $700 billion bail out will not solve the problem because there is something hiding in the shadows that was not taken into account when congress voted to go ahead with the bail out. The investment banks and insurance giants like AIG were utilizing something called Credit Default Swaps and these “little gems” are actually even more scary than the bad mortgage debts.

Wikipedia defines Credit Default Swaps as - “ A contract in which a buyer pays a series of payments to a seller and in exchange receives the right to a payoff if an associated credit instrument goes into default or on the occurrence of a specific credit event named in the contract such as a bankruptcy or restructuring.” It also notes the CDS was originally used as a form of insurance against bad debt but it became a tool for financial speculators when the Commodity Futures Modernization Act of 2000 specifically banned regulation of these trades.

Now get this - the company or investor, did not have to own the bond or the instrument they wanted to “insure” with the Credit Default Swap. Also, if the bond failed they theoretically would receive payment. Because the CDS is not actually an “insurance” product it is not as insurance products are, regulated by the states or federal government. This means there is no over sight of theses transactions and this allowed speculators to make money by purchasing a CDS on a company’s bonds, then shorting the stock of the company in great quantity and getting a payoff that exceeded their “risk” of shorting if the price of the company’s stocks declined.

The FBI has spent untold money and man power on tracking and bringing down the Organized Crime, it appears to me they need to turn their resources onto this monkey business, which is “Organized Crime” on an even grander and more deadly scale.

The actions which have taken place by these investors appears to be unethical at best and criminal at worst. I mean come on Martha Stewart was sent to jail for insider trading amounting to less than a million dollars. That pales in comparison to what these guys were doing. Their actions could very well lead to the financial ruin of the United States and other countries around the world.

You may be thinking this is an exaggeration. According to various financial resources the Credit Default Swap is the most widely traded credit derivative product in the world. The Bank for International Settlements reported the notional amount on outstanding OTC credit default swaps to be $42.6 trillion in June of 2007. This was up from $28.9 trillion in December of 2006. It was $13.9 trillion in December of 2005. It appears to me these increases reflect the period when questionable mortgages were being dished out to people to purchase homes they could not afford and credit cards were being issued to college students who were spending beyond their means. It is reported by the end of 2007 these was an estimated $45 to $62.2 trillion worth of Credit Default Swap contracts. The Office of the Comptroller of the Currency reported the amount of outstanding credit derivatives from reporting banks for the U.S. alone by the end of March 2008 to be $16.4 trillion.

Now the information does not get any better. The CIA World Fact Book reports the United States Gross Domestic Product which is one of the measures of national income and out put for our nation’s economy shows that in 2007 our GPD totaled $13 trillion. That means the total market value of all of our nations’ final goods and services totals far less than these Credit Default Swaps which were occurring.

The decline on Wall Street continues. Many Americans are seeing funds for their retirement disappearing. But what’s happening to the guys who gambled and lost? They have Credit Default Swaps that are paying them off. Also it appears they can use that money to purchase the stocks that are being sold at rock bottom prices. Oh yes, they also have the federal government “bailing” them out. There is something wrong with this system. The federal government should be investigating this deregulated “insurance” loop hole that is causing the collapse of the American economy and threatening to collapse economies world wide.

Insider trading pales in comparison to this scheme. This needs to be called what it is. It is not a gamble. It is not a swap. It is a crime and we should all call upon our elected officials to address this as such. Make a difference, contact your U.S. Senators and Representatives and let them know what you think about this issue.

1. Shred all pre-approved loan and credit offers that you receive.
2. Invest in a mailbox with a lock.
3. Cut up all expired/invalid identification cards. Don't discard the pieces in the same garbage bag.
4. Conduct all phone business at home - cell phones/on the go and public phones are great ways for people to eavesdrop and gain access to personal information.
5. Insist on presenting your photo identification anywhere that you present your check or credit card.
6. Pay with cash or money order as often as possible. This eliminates other people handling your cards.
7. Never use any part of your social security number as a user ID or password.
8. Never use PIN numbers that consist of birthdays, anniversaries, etc.
9. Use a "prepaid" card credit card, such as the Green Dot to make online purchases.
10. Do not give personal information online, by mail, or over the phone.
11. Notify all of your financial institutions immediately if you see unauthorized charges on your financial   statements. Never be afraid to ask questions about the specifics!  Also, notify all three major credit reporting agencies as well as your local police department. Notify all involved creditors as well.
12. If you have a service that you a pre-paying for with cash, decline if they insist upon having your social security number or other private information. If you are paying for services/items in advance with cash, there is no logical reason for them to have this information or run a credit check.
13. And finally, don't allow anyone out of your sight with your ID, social security, credit card, or other personal information in their hands.  If you believe that someone has taken note of your information while presenting your ID for a non-business related purpose, notify their supervisor right away.

After working in collections and dealing with ID theft cases on a regular basis, these are simple mistakes that I have learned to avoid. I hope that they can help prevent you from becoming a victim, and instead becoming a more wise consumer!

Only the CEO can optimize the company for fraud. He has it invest in assets that have no clear market value. Professionals evaluate such assets-allowing the CEO to hire ones who will inflate values. Rapid growth (as in a Ponzi scheme) extends the fraud and increases the “take.” S&Ls optimized accounting fraud by loaning to uncreditworthy and criminal borrowers (who promised to pay the highest rates and fees because they did not intend to repay, but the promise sufficed for the auditors to permit booking the profits). The CEO extends the fraud through “sales” of the troubled assets to “straws” that transmute losses into profits. Accounting fraud produced guaranteed record profits-and losses.

CEOs have the unique ability to convert company assets into personal funds through normal corporate mechanisms. Accounting fraud causes stock prices to rise. The CEO sells shares and profits. The successful CEO receives raises, bonuses, perks, and options and gains in status and reputation. Audacious CEOs use political contributions to influence the external environment to aid fraud by fending off the regulators. Charitable contributions aid the firm's legitimacy and the CEO's status. S&L CEOs were able to loot the assets of large, rapidly growing organizations for many years. They used accounting fraud to mimic legitimate firms, and the markets did not spot the fraud. The steps that maximized their accounting profits maximized their losses, which dwarfed all other forms of property crimes combined.

While agreeing that the S&L served as both a “weapon” and a “shield,” control fraud theory cast doubt on those metaphors. Weapons and shields are visible; fraud is deceitful. The better metaphors would be camouflage, or a virus. Control fraud theorists rejected the economists' metaphor, “gambling for resurrection” (honest but unlucky risk takers). Gambling cannotexplain why control fraud was invariably present at the typical large failure. There were over 1,000 felony convictions of senior S&L insiders. Accounting fraud made control fraud a sure thing-not a gamble. Control fraud theory predicts the pattern of record profits and catastrophic failure and the business pattern of deliberately making bad loans. Both patterns are inconsistent with honest gambling.

The identification of the S&L “high fliers” as control frauds and understanding that they were Ponzi schemes relying on accounting fraud led to effective regulatory strategies against the wave of S&L frauds. The Federal Home Loan Bank Board reregulated the industry, curbing growth (a Ponzi scheme's Achilles heel) while the control frauds were still reporting record profits and were praised by top economists.

The second use of control fraud theory was to analyze the structures that produced criminogenic environments that led to waves of control fraud. Deregulation and desupervision of the S&L industry, combined with the industry's mass insolvency, optimized accounting fraud and made “systems capacity” limitations critical. The mass insolvency maximized “reactive” control fraud, and the deregulation, desupervision, and mass insolvency maximized entry into the industry by “opportunistic” control frauds.

Fraud waves can cause financial bubbles to hyperinflate (e.g., Texas real estate during the debacle) and cause regional or systemic injury (e.g., during Russia's “shock therapy,” the failures of “the Washington consensus,” and the U.S. high-tech bubble). Control frauds cause indirect losses by corrupting politicians and professionals and betraying trust. When control fraud becomes endemic, it can lock nations in long-term poverty.

Control fraud theory poses a fundamental challenge to the core models of finance and economics. The efficient markets (and contracts) hypothesis requires that markets be able to identify and exclude control frauds, and the dominant law and economics model asserts that they do so effectively and quickly. This claim is largely premised on the view that no top-tier audit firm would give a clean opinion to a control fraud. Control frauds have consistently falsified this claim. Deposit insurance was not the key to S&L control fraud. Control frauds deceive “creditors at risk.” High reported profits allow them to grow rapidly by borrowing and issuing stock.

To date, most of the work in control fraud discusses looting by the CEO. However, it also exists in government when the head of state uses the government to defraud. It can be used to defraud customers (e.g., “lemons” scams, in which quality or quantity is misrepresented, or cartels) and the public (e.g., tax fraud or a toxic waste firm that gains a cost advantage by dumping in the stream). These forms of control fraud create real profits and, absent effective enforcement, create a dynamic that causes fraud to spread. Systems capacity problems can lead to endemic control fraud in an industry.

In theory, the bidding system has a secret reservation price to limit abuses by putting a ceiling on the acceptable bid price. Two facts stand out about the reservation price. First, it is set very high, allowing excessive charges to the public. Second, the winning bids come in extraordinarily close to the reservation price; one survey found that the average winning bid was 99.2 percent of the cap. One can infer that the dango consistently knows the “secret” cap and had no concern about making this obvious through their bids. How does the dango learn what the reservation price is? Senior bureaucrats in Japan generally take early retirement and are provided with a sinecure in private industry or Japan's large quasi-nongovernmental organization (QUANGO) sector. This is known as amakudari (“descent from heaven”)-a revealing phrase that shows the great respect once felt for the bureaucrats. Their primary responsibility once they “descend” is to maintain close ties with their successors. A bureaucrat who refused to leak the reservation price would put his career in jeopardy. Bureaucrats are, effectively, immune from prosecution for leaking the reservation price. The “systems capacity” limitations are not resources, but the unwillingness to prosecute senior bureaucrats (who are far more powerful than their American counterparts). The dango is a cartel, and although the conventional economic wisdom is that cartels cannot exercise effective discipline, the dango has been able to maintain nearly complete discipline for over a half century. Corruption is part of the explanation. Japan's dominant party, the Liberal Democratic Party (LDP), comprises factions are known as zoku (“tribes”). The “construction tribe” is composed of LDP leaders who get a percentage kickback from the winning construction bidders. Faction leaders gain followers by providing campaign funds. The dango kickback ensures that the government does not interfere with the cartel. The faction leaders provide the “voice of heaven” (tan no koe) when necessary to resolve disputes that might threaten the dango's discipline. In addition to entrenching the LDP in power, the dango has major indirect effects. It serves as an informal trade barrier. Foreign construction firms cannot join the dango-and if they did, they could be prosecuted in their home nations for bribery. The dango directly makes construction far more expensive and indirectly creates an inefficient and bloated industry. The kickback creates strong incentives to spend far too much in public works construction. This, in turn, has done great damage to Japan's environment.

While the dango raises prices, it does not necessarily produce excessive industry profits. Domestic entry into construction is fairly easy. Easy entry and bid rigging have led to an industry that is at least twice as large as it needs to be. Many construction firms are insolvent because of their imprudent investments during the twin bubbles.

Japan's overall economic development has been harmed by the indirect consequences of the dango in three major ways. Productivity fell for many years in the construction industry, which is so large that it, in turn, materially lowered the nation's overall productivity. Japan's “main” banks are vital to growth because of the dominant role they play in capital allocation. The collapse of the twin bubbles left the main banks crippled, and Japan covered up their condition rather than “bailing them out.” This means that the banks generally do not collect loans from financially troubled borrowers, for if they demanded payment and were not repaid, they would have to recognize the losses. But Japanese banks cannot fund growth unless their loans are repaid. Many of their worst loans are to construction firms. The political support that the dango enjoys makes it extremely difficult for the banks to demand repayment from troubled construction firms.

Finally, the dango encouraged public works that would make no sense even if the bids were not rigged. As this is written, Americans are deriding the “bridge to nowhere” in Alaska that a Senator was able to demand as part of “pork barrel” politics. Japan is the champion of high-speed rail lines to nowhere and many other “white elephants.” The public works budget became so extreme that Japan's deficit became a barrier to growth. The dango allocates capital to the least productive uses.

Many are not aware of the fact that the issue of business ethics is a happening and on the rise topic these days. This could be because we do not see headlines of business corruption or scandals on the local media that often. However, the former so-called boring subject of studies has become a major and important interest recently. With corporate scandals and multibillion dollar bankruptcies on headlines for more than a year and giant companies that were once considered as successful such as Enron and Worldcom on litigation, making business ethics a matter that have to be looked upon to in detail.

In the case of Enron Corp for example, they have failed to follow the basic principles of accounting for the sake to provide a false healthy view of profit generation in their organization. They had been using inappropriate accounting techniques to an elaborate use of special purpose entities to hide liabilities through off-balance-sheet accounting. This is indeed only one of their schemes. There were more that were obviously misleading and clearly providing only up to their own benefit and not the stakeholders.

On the surface, this topic could be view as universal at first; nevertheless there are still conflicting ideas of what should govern the solution to all business problems. There are parties that states although that the studies of business ethics is undeniably effective and relevant, the business and the internal control should be more focus on the what drives the business and understands it, in order to overcome many business conflicts and problem. In one way or the other, this should not be the issue because business ethics clearly states as an ongoing subject and deals with conduct directly. It is not merely a proxy of guidelines. It has its own grounds and value.

Besides further explaining the importance of business ethics in business organization, it is crucial to confine clearly and state the advantages of business ethics and how it works to combat many business problems. Thus, building the fact that business ethics should be the main tool in reducing company frauds and to restore the confidence of the public.

One issue that could be closely related to business ethics is fraud. The result to the research in the United States by the Association of Certified Fraud Examiners (ACFE) in 1996 and 2002 shows that the estimated losses from fraud and abuse to be 6 percent of annual revenue, approximately about $600 billion. This figure may have increased over the years until today. The truth is that the actual figure of the loss is difficult to quantify due to reasons such as not all frauds are detected and even if it is, not all are reported. There are many other reasons that contribute to this problem. It is believe that fraud is a hazardous problem that occurs in all firms without exception, whether it is direct or indirect. Fraud is indeed an inevitable constantly occurring problem. Fraud is a matter of moral issues, and it can resolve to business ethics for solutions. Hall (2004) stated that:

Fraud denotes a false representation of a material fact made by one party to another party with the intent to deceive and induce the other party to justifiably rely on the fact to his or her detriment. Fraud in the business environment has a more specialized meaning. It is an intentional deception, misappropriation of a company's assets, or manipulation of its financial data to the advantage of the perpetrator. In the accounting literature, fraud is also commonly known as white-collar crime, defalcation, embezzlement, and irregularities. (p. 126)

The most substantial issue here is the relationship between fraud and business ethics. There are claims that stated frauds are of nature and occur nonetheless with or without the existence of business ethics dues to many enduring external factors. These factors are described as opportunities which place a person in a situation that enables them to commit the intended fraud. These opportunities too are of external in nature. Likewise, meaning to say that fraud is something that is out of a person's control and anyone could have done it. However, come to the main concern that fraudulent activities and business ethics are of close relation because both have dealings with moral aspects. Also, moral aspects is part of the build of a person's personal characteristics and in one way or the other, effects how deep a person could be dragged down through situational pressure that may be caused by the external factors mentioned before.

The bottom line is that business ethics initially outline the best of an individual personal integrity as well as ways to overcome business related pressures and influential opportunities. As suggested by Witzel (2002), “That the virtuous businessman was a virtuous man in general.” (p. 4). From his words, it can be extracted that a person who has good grip of business ethics and cautiously monitors his conduct to ensure his own integrity is most unlikely to be committing frauds. Indeed, business ethics may not be able to eliminate thoroughly the issue of fraud. Rather, it is the key feature as a set of control for reducing fraudulent activities in an organization.

Business ethics may have deals with a lot of other matter besides frauds and another importance of it is in its potential in restoring back the confidence of the public. Public confidence is a crucial matter and essential element in the existence of many firms. It is the survival factor of firms and without or lacking of it could cause catastrophe in any business entities.

One factor that has the tendency to erode the confidence of the public is internal conflict. Four main ethical conflicts confront leaders and managers in business as stated in a journal titled why discuss international business ethics? (2001) are:

Conflict of interest: an individual may be able to achieve personal gain from a decision he or she makes. Loyalty versus truth: an individual must decide between loyalty to the company and truthfulness in business relationships. Honesty and integrity: an individual must decide whether to be honest or lie, and whether to take responsibility for decisions and actions or blame someone else. Whistle-blowing: an individual must decide whether to tell others (media or government authorities) about the unethical behavior of the company or institution. (p. 40)

A company with a lot of internal conflict of interest will definitely affect the confidence of the people towards the company itself. Because of the term used is "official duty", the issue of business ethics is able to come into the whole picture. Business ethics deals directly with misconduct in the company and it is usually of the misuse of official rights in the company as well as irresponsible actions taken by the officials themselves. For example, you work for government and use your official position to secure a contract for a private consulting company you own. Another instance is using your government position to get a summer job for your daughter. Thus to say that conflict of interest is in direct relationship to the issue of public confidence and business ethics.

Some parties do question how business ethics could promote public confidence by saying that the matter of people's confidence is very much related to the company's performance itself and not to what extend business ethics they have adopted. But technically, business ethics deals with good ethical behaviours and thus good for a business in overcoming conflict of interest align with the objective of restoring the confidence of the public towards the company. In other words, it is to say that the best medium in promoting and restoring confidence for a company is by properly adopting business ethics.

Business ethics is not merely a current topic since it was discussed about way back hundreds of years ago. There are parties that maintained their bias ideas with regards to business ethics. These groups of people just could not accept business ethics as a solution to any business problems due to the nature of "business" itself. Even to this day, there are parties that feel that business ethics should be looked at as oxymoron; some ideas that is expressed contradictory to what is really happening. In other words, it is to say that business ethics is dysfunctional proxy of morality per se. This is due to their claim that said all commerce involves the exploitation of mankind by mankind. This can be seen from the system that governs business itself. For an example, take capitalism for instance, which promotes free market business that uses monopolizing and manipulating as their tool to gain wealth. it is argued that business ethics itself has deviate from its own purpose, and this is because of the business itself is unethical in nature. In short, business ethics is unable to prove anything as true and fair, what more than to reduce fraud or restore the public confidence.

But, this is simply a wrong assumption. It is true that business ethics can be seen in many different dimensions but to say that business ethics is immoral because business itself is unethical is somehow a shallow conception. There is no immorality in business but rather the acts of human could change it to be immoral. Ethics is needed in controlling and well as reducing these faults, such as fraud. In addition, a person with good moral conduct and ethical in behavior will surely win the trust of other people. That is why, a company that imposes and follows a good set of business ethics is look upon to and trusted by others. Besides that, business ethics is a dynamic subject because it adapts to what is current and what is past. The issue of whether business ethics could or could not be trusted should not in the first place be questioned. However, since there were so many groups of people trying to make business ethics look bad, people should go back direct to what is basic. Business ethics is used as to maintain ethical behavior in business dealings and should not be lop-sided in any case, as in the stakeholders' case. A company, by adopting proper business ethics will surely be able to maintain the stability of their company's existence, and along the way, comply with human values in life.

About the first I can only write in generalities. He regularly hid receipts in his own business so they wouldn't have to be reported as income and he paid people in cash so he didn't have to pay employment taxes. I have vague recollections of other practices that might be considered illegal or, at least, unprofessional and unethical.

In preparation for discussing the second CPA, let me give you some background information. In 1999 I was really in need of work and started with this small mortgage brokerage primarily as their telephone and computer technician. The boss found out that I knew something about bookkeeping and turned over to me the QuickBooks file and I found myself the bookkeeper for the company.

As just a worker bee in a small company I never begrudged my boss the fact that he was living very well and I was just barely squeaking by.

He owned a horse. All the stabling fees were paid by the corporation as rent and all the veterinary bills were paid by the corporation as medical expenses. The trainer was paid by the corporation and charged off as consulting fees or automobile expenses.

He also owned a boat. The slip fees were charged off as rent and all the maintenance was covered under automobile expenses.

Neither the horse nor the boat was corporate property so these expenses could not be considered business expenses. To the best of my knowledge he never had a party on the boat to which he invited clients and he never allowed clients to ride his horse. Thus it would seem the total amounts paid were income for him and unreported to the IRS. This is only conjecture on my part.

His monthly car payments and maintenance expenses were paid by the corporation. The monthly insurance payments were also paid by the corporation and charged off as automobile expenses. None of his cars were ever brought in as corporate assets so these payments all represented unreported income for him.

His home rent was paid by the corporation. His phone, electric, water, trash, and gas were paid by the corporation as corporate expenses. His home association fees were paid by the corporation as building maintenance. None of these were ever reported to the IRS as income.

He claims to have been audited three times by the IRS and twice by HUD, so possibly these income questions have already been addressed. This treatise, however, is not about him, but the corporation's CPA.

The aforementioned were intended merely as an introduction to our accountant, Rxxxxx Lxxxx Dxxxxx, a licensed California CPA, license number 6xxxx (see editorial note at the end). Each year, in order to be certified by HUD, we had to submit audited financials along with our application and the boss retained Dxxxxx to conduct those audits. In all the years we were HUD certified and I was with the company, Dxxxxx never once conducted what I would consider to be an actual audit. He prepared all the HUD required documentation without looking at any of the accounting procedures we followed or any of the supporting paperwork.

His audit consisted of having me send him a trial balance, printed out from QuickBooks, then having me adjust various amounts so certain ratios were not too high. The only paperwork he looked at was the trial balance I sent him and the bank statements with associated cancelled checks. Never once did he ask to see any bills or invoices.

Was he aware that the financials he was preparing for HUD were inaccurate and (in my opinion) fraudulent? Consider these two points. First, one year my boss was thinking about bringing his boat into the corporation as an asset so he had me carry all the expenses honestly as “boat expense.” For whatever reason, at the end of the fiscal year, we had not made the boat a corporate asset so Dxxxxx told me to change all the “boat expenses” to “automobile expenses” and resubmit the trial balance. The second point is that in 2001 our accounts payable were around $22,000 and Dxxxxx said that was too high. The solution? He had me simply delete bills from the books to lower the payables to around $5,200 and resubmit the trial balance.

HUD required that the audit be conducted by an independent CPA. That implies one who is, although paid by the company, working on behalf of the U.S. Government to ensure compliance with “generally accepted accounting principles.” In two years (2000 and 2001) he was paid $4,700 for the preparation of two reports that were used to secure HUD certification for the company. This was in addition to the fees paid to him for the preparation of the corporate tax returns and the boss's personal tax returns.

Both his 2000 and 2001 audit reports reflected the same thing as summarized in the 2001 report, “In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xxxxx, Inc. dba XXX as of April 30, 2001 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.”

Prior to submitting this I showed it to my old boss and his comment was, “Maxi, That is a cute fictional story. FYI an audited financial is what is required by HUD and that is based on canceled checks, reports etc. Dxxxxx never went off of your reports which were usually way off.”

To my way of thinking, the boss made two critical errors in making this statement. First is the fact that paragraph 4.27 of the Government Auditing Standards (July 2007 Revision) says:

“4.27 Under both the AICPA standards and GAGAS, auditors should plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Recognizing the possibility that a material misstatement due to fraud could be present is important for achieving this objective. However, absolute assurance is not attainable and thus even a properly planned and performed audit may not detect a material misstatement resulting from fraud.”

If Dxxxxx didn't use my reports for his audit report, he must have used only the cancelled checks. When I entered the checks into or printed out the checks from QuickBooks I'd put something on the memo line regarding slip number (F34) or the boat's name (Cra Sea Horse). When the boss wrote them manually he sometimes included that information and sometimes didn't. Whether there was anything on the memo line or not, one would have to assume that even a high school bookkeeping student would question one thing. There were many checks made out to Newport Dunes Resort Marina, Super Clean Yacht Service, Ricardo's Boat Service, Newport Landing Fuel Dock, Kanqui Diving Service, Green Willow Quarter Horses, Wild West Trailers, and Pacific Coast Hull, Inc. All of them were charged against rent and automobile expenses. Also, a check made out to Charles Liskey, D.V.M. and carried as a medical expense should have raised a red flag, and didn't.

The second error is that an audit is designed to catch procedural errors in the accounting system of a company. If my reports were “way off” that would indicate that our company had procedural errors. If so, why did Dxxxxx not make some comment regarding the poor bookkeeping procedures used by the corporation? A follow-up question would be if he only reviewed the cancelled checks and not my trial balance, how did he come up with amounts for accounts receivable and accounts payable?

All of these instances beg the question of why a licensed CPA would submit a report he knew was erroneous or (again, in my opinion) fraudulent? Was it just a matter of money or does it go deeper? Is there something wrong with the licensing procedure? Does the California Board of Accountancy just issue a license and then wash their hands of any responsibility for the conduct of its licensees? Yes, there is a complaint procedure, but who, in this case, would use it. Certainly not the company as the CPA's report showed it to be doing everything right. Who else but the government would care? Is the federal government going to file any sort of complaint with the board?

I wish I could say I had an answer. I cannot see any way the board can realistically police its licensees. Maybe the moral fiber of the licensees is at question. Can students be taught morality in school? Can teachers or professors do more to ensure graduates actually abide by the publicly expressed high ideals of board members?

Perhaps it goes even deeper and calls into question the integrity of all California licensed CPAs. Following that line of logic, if other states use the same licensing criteria, does that indicate a failure on the part of every CPA in the United States?

[Editorial note: I had originally included the CPA's actual name and license number as well as the corporate name. I was, however, advised by a friend in the legal community that I probably didn't want to do that. Even though I still have the QuickBooks file and copies of the HUD audits and tax forms, she felt it would be better to blank out some information.]

The Ponzi scheme works by promising seemingly unrealistic returns on investments. Since the con artist has no real experience or a track record for performing, people are naturally hesitant to risk their money despite an assurances that they could get rich if they did. Some will invariably take the chance however, either because they are too naive to understand the risks, or because they figure that it is worth a try. When the stipulated time has passed, these "investors" are often amazed to find that the claims were absolutely true. They really did make a large premium on their initial investment. That gives them confidence in the scheme, so these investors often put more money into it with the expectation of making even more of a profit. They will often tell their friends and family about their good fortune as well, generating important word of mouth for the scheme.

Ponzi schemes work not because those who operate them are such good investors, but because they are good con artists. They are not investing anything. Instead, they are taking money from newer investors to pay the promised returns to the older investors. Nothing of value is being produced, nor is there any actual trading of securities going on. So long as the scheme continues to attract new investors, however, it can continue. Ultimately, however, the scheme falls apart when its operator skips town with as much of the "investment money" as possible, when the operator fails to recruit enough new investors to make the payments to the old ones, or when the police are alerted and put a stop to it. When the scheme comes to a sudden halt, anyone with money in the scheme stands a good chance of losing it.

Ponzi schemes can and do make money for early investors, but it is difficult to tell in the early stages who is operating a Ponzi scheme and who is just trying to simply embezzle money. Anyone who leaves their money in the scheme, however, is doomed to lose it. Within six months, Ponzi had made himself a millionaire, but his investors eventually lost two-thirds of the money they had put into the system. To avoid sharing their fate, make sure you do your homework before making any investments. Make sure your broker is a regulated professional. The most important thing to remember is that if something seems too good to be true, it probably is.

 

Pyramid schemes ensnare potential investors by promising an exponential increase in profits. After all, if you recruited just two people to a pyramid program and they just recruited two and so on and so forth, you would soon have a large base of commissions. Of course, you may be able to recruit many more than just two people, so two people seems like a conservative estimate. This logic is false, however, because simple math will show that the people necessary to sustain a pyramid become exponentially more at ever level.

Although the first couple of groups may be able to make a profit off the scheme, those near the bottom will have to recruit many more people to recoup their initial investment. This becomes difficult, however, because at some point, the people needed to support a level in the pyramid are more than there are people in the country or in the world. Obviously, it does not matter what your product is, you cannot sell it to more people than there are in the world. Before you reach that point, you will probably reach a saturation point when no more people are interested in what the pyramid has to offer.

There are all types of pyramid schemes, many of which are illegal in Western countries. Pyramid schemes are similar to multilevel marketing, however, which is usually allowed since it is usually legitimate. You may want to research multilevel marketing companies before you invest your time and effort into them, however. Not all pyramid schemes are out to take your money, however. Some simply want to make you believe that you can make money with them.

Certain pay-to-use search engines, for example, have a pyramid based commission schedule. The search engine will pay you a small dividend for using their search engine, but will also pay you a little bit when people you refer use the search engine and when people they refer use it, etc. It is unlikely that you will ever see any real money, but the pyramid pay schedule makes it seem that you can make a good income just by promoting the search engine. Obviously, this is what its owners would like for you to think.

But let us start at the very beginning. Accounting is the process of identifying, measuring, recording, and communicating economic information about an organization or entity, in order to permit informed judgments by users of the information. On the other side of the coin is forensic auditing which is a new discipline under the umbrella auditing.

It is crime, and especially economic crime that gave birth to forensic auditing. Economic crime is an unpleasant fact and has escalated into a monster. It touches every country, every industry, and has no signs of stopping. During the past decade, the number of reported cases of fraud and corruption has continued to grow dramatically. Compounding this is the challenges faced by the criminal justice system and a general absence of the necessary skills to gather the proper audit evidence so vital to criminal investigations. Information from law enforcement and criminal justice agencies about corruption and fraud cases is that generally speaking, the success rate for convictions are not satisfactory - the reason being that prosecuting authorities lacked skills and knowledge to provide effective investigation and prosecution of corruption and fraud cases. Enter forensic auditing!

Therefore, forensic accounting draws its name from association with a court of law. It is performed to accomplish an objective that involves a judicial process. Examples of forensic accounting objectives include: computation of asset values in a divorce proceeding; assessment of damages caused by an auditor's negligence; fact-finding to see whether embezzlement has taken place, in what amount, and whether criminal proceedings are to be initiated; and the collection of evidence in a criminal proceeding. Forensic accounting is focused upon both the evidence of financial transactions and reporting as contained within an accounting system, and the legal framework which allows such evidence to be suitable to the purpose of establishing accountability. Forensic accountants are typically Chartered Accountants that specialize in those types of cases where there is a need for such evidence.

Their job is to detect and interpret the evidences of both normal (non- fraudulent) and abnormal (fraudulent) transactions in the books and records of an accounting system and the subsequent effect upon the accounts, inventories, and the presentation thereof. It is imperative; therefore, that forensic accountants first understand what normal accounting procedures and processes are - remember they are first and foremost Chartered Accountants. Just as forensic dentists and forensic anthropologists are dentists or anthropologists first (that is, they are foremost professionals in the underlying discipline and are specialists in its forensic aspects), so too forensic accountants are accountants first.

In conclusion, forensic accounting is sufficiently thorough and complete so that an accountant, in his considered independent professional judgment, can deliver a finding as to accounts, inventories, or the presentation thereof that is of such quality that it would be sustainable in some adversarial legal proceeding, or within some judicial or administrative review.

On a lighter note; never seek advice from a Chartered Accountant - they are trained to find problems not solutions.