Fraud is so common in the American investment community that it is a wonder that the DJIA trades above 1,000 points. Financial statements are rendered worthless because so many accountants are willing to take bribes and falsely report income and losses (commonly known as cooking the books). So what is an investor to do? Well, based upon the performance of the stock market this year, most have choose to put their money under their mattress and wait and see if someone will ever get serious about stopping the rampant fraud throughout our economy. The following is an excerpt from the SEC blog which tells the tale of a company that allegedly defrauded investors with the help of an accounting firm:
“Washington, D.C., Aug. 9, 2010 — The Securities and Exchange Commission today charged the former chief financial officer of a Seattle-area skin care retailer with fraudulently boosting earnings by reporting sales of anti-aging products promoted through Home Shopping Network infomercials while the products still sat unsold in the company’s warehouse. The agency also separately settled charges against the company and began administrative proceedings against the company’s outside auditors for professional misconduct.
The SEC alleges that Karl Redekopp, the former CFO of International Commercial Television Inc. (ICTV), turned millions of dollars of quarterly losses into profits by falsely accounting for ICTV's sales of the Derma Wand, a skin care appliance that purports to reduce wrinkles and improve skin appearance. Redekopp fraudulently recognized revenue before the Home Shopping Network had actually sold or delivered the product to viewers. He also improperly recognized revenue before a free trial period offered by the company had expired, and failed to reverse revenue from products that had been returned. Redekopp's misconduct caused the company to falsely report millions of dollars in excess revenue in 2007 and 2008.
"Redekopp violated fundamental principles of accounting to fraudulently boost ICTV's bottom line and conceal its true financial health from investors," said Marc J. Fagel, Director of the SEC's San Francisco Regional Office. "Unfortunately, ICTV's auditors turned a blind eye to the company's financial irregularities and failed to fulfill their role in investor protection."
The SEC's complaint against Redekopp, filed in federal district court in Tacoma, Wash., alleges that Redekopp recorded "sales" of products that had not been shipped or that the customer was not obligated to pay for. Redekopp's fraudulent accounting resulted in ICTV adjusting net sales by more than $3.7 million over a five-quarter period in 2007 and 2008, negating all originally reported net income for those periods to restated net losses. For example, for year-end 2007 alone, ICTV restated its originally reported net income of $1.5 million to a net loss of $1.1 million after correcting the fraudulent reporting.
The SEC's complaint charges Redekopp, who lives in Vancouver, B.C., with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. The SEC seeks a permanent injunction, a financial penalty, and an order barring him from serving as an officer of a public company.
In a separate complaint, the SEC charged ICTV for its misleading financial statements. Without admitting or denying the allegations, ICTV agreed to settle the charges by consenting to a final judgment permanently enjoining the company from future violations of the reporting, books and records, and internal control provisions of the federal securities laws.
The SEC instituted administrative proceedings against ICTV's former outside auditors Steven H. Dohan, Nancy L. Brown and their Miami-area firm Dohan + Company CPAs as well as Erez Bahar, a Canadian Chartered Accountant who lives in Vancouver.
According to the SEC's order, Dohan, Brown, and Bahar were responsible for the issuance of an unqualified audit report stating that ICTV's financial statements were fairly reported in conformity with Generally Accepted Accounting Principles (GAAP) and that the audit had been conducted in accordance with Public Company Accounting Oversight Board (PCAOB) auditing standards. The SEC's Division of Enforcement alleges that the former auditors failed to identify the material accounting deficiencies and violations of GAAP that formed the basis of the SEC's enforcement action against Redekopp. The Division of Enforcement alleges that Dohan, Brown, Bahar, and Dohan + Company CPAs engaged in improper professional conduct under Rule 102(e) of the Commission's Rules of Practice. An administrative hearing will be scheduled to determine whether remedial sanctions are appropriate.”
This is another case where the SEC is taking action but, where is the Department of Justice? It seems that white collar crime is legal in the eyes of prosecutors. The theft of investment funds by fraudsters may well be recognized by historians as the reason for our current economic mess and also as the reason for our nation’s long term demise. Printing money to pour into the bottomless pit of Wall Street fraudster's pockets will cure nothing in the long run.
The government can only do so much to stimulate the economy. Before the economy can improve the general population must have a positive attitude toward business. For big business executives to simply blame the government for everything and then rail against any legislation that gets tough on fraudsters’ shows to the American public that business is not to be trusted any more than government. After all, if a business executive is not committing fraud then why is he against prosecuting those who are fraudsters? Perhaps “birds of a feather” do flock together.
For government and business to believe that doing nothing to clean up the horrific fraud in our economy caused by government and business, will somehow make things get better over time is ridiculous. Relying on luck or divine intervention to fix things will fix nothing because it was not a divinity or bad luck that caused this economic fiasco. To misquote Shakespeare, the economic problem that government and big business have isn’t in their stars, it’s in themselves.