Forensics Beats Fraud

The IRS Role in the Madoff Ponzi

2009-01-12T13:07:00.000-08:00

Since his arrest on December 11, 2008, we’ve been treated to a daily diet of “Bernard Madoff”. Congress is asking the SEC what happened. The SEC is asking itself the same question. Attorneys and forensic accountants for the victims are smelling blood in the water (lots of fee money) and the CPA auditor for Mr. Madoff’s companies is keeping his head down. This is nothing new. All ponzi schemes collapse when the supply of new victims dries up. And, in this case, the supply of new victims is a casualty of the collapse of the U. S. housing market and the use of real estate as ATM machines.

What has not been discussed is the role of the IRS in Mr. Madoff’s scheme. What am I talking about here? I am talking about the IRS computer program that matches items (like interest income, dividends and capital gains transactions) on tax returns filed by U.S. taxpayers with information forms (1099’s & K-1’s) that companies are required file with the IRS. If a taxpayer in Mr. Madoff’s pyramid reported a significant amount of dividend income received from Mr. Madoff, the IRS should have had an electronic record of it to compare with. Fifty billion dollars of investment paying 10% per year is $5 billion. Did the IRS ever ask anybody reporting Madoff scheme income about the source of the income? Had it done so, the scheme might have been uncovered years ago.

It's About Time!

2008-11-14T08:34:00.000-08:00

http://www.mortgagefraudblog.com/index.php/weblog/permalink/us_attorney_launches_mortgage_fraud_task_force/

It’s about time! it seems as if the Department of Justice is taking its time. Perhaps a Certified Forensic Financial expert would be helpful in sorting this out and not wasting taxpayer money prosecuting people under a theory of “knew or should have known” that is not supported by the totality of documents and actual direct in person conversations as evidence. Prosecuting the real fraudsters this way instead of using hearsay and circumstantial evidence is a more direct way to conviction and restitution for victims.

It Is About Time

2008-11-08T12:11:00.000-08:00

http://www.reuters.com/article/governmentFilingsNews/idUSN0747780820081108

It finally seems as if one of the big four public account ing firms, Deloitte & Touche LLP, is seriously enforcing the Sarbanes Oxley and AICPA rules prohibiting conflicts of interest by its partners and professional staff. Deloitte's decision to sue its former vice chairman for trading in securities of the firm's audit clients is a breath of fresh air in what otherwise has seemed to be a stagnating ethical environment. I applaud my professional colleagues for their action.

Possibility of Hyperinflation

2008-10-21T06:55:00.000-07:00

Now that Congress passed, and the president signed, the financial industry bailout bill, don’t breathe a big sigh of relief just yet.

This bill allows the treasury to buy a lot of things, including a stake in major banks when it purchases stock in those companies. But the government won’t be buying into the root of the problem by purchasing land or housing.

The bailout bill plan, with all its pork barrel “sweeteners,” making it a $1 trillion venture, is allowing the treasury to purchase a lot of bad debt. That’s like plugging just one or two holes in a leaky dike.

What many national debt experts are not talking about is the growing debt that is due because of the slight of hand with Social Security funds – the borrowing from the fund, with interest, to boost general funds. Factor the Social Security problem into the national debt and the $10 trillion in current debt may not look so bad.

With total U.S. consumer debt, including credit-card debt and non-credit-card debt (but not including mortgage debt), $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006 (Source: The Nilson Report), the middle class is teetering on financial disaster. Where will the Federal government get the $700 billion to bail out the money lending industry? Where will the government get the trillions to prop up Social Security, Medicaid and Medicare?

One frightening possibility is if the U.S. Department of the Treasury decides to print its way out of the financial services industry and national debt mess that would open the door to inflation and hyperinflation.

In the world of hyperinflation Mr. & Mrs. Main Street could end up paying hundreds of dollars for a loaf of bread. In a worst case hyperinflation scenario, like in 1923 Germany, people could end up burning one hundred bills for heat because it would be more efficient that the small amount of fuel the bills could purchase.

World history has shown that when a government tries to print its way out of economic problems it ends up in economic disaster.

Keep The Fox Out Of The Henhouse

2008-09-26T13:34:00.000-07:00

On September 20, 2008, the text of the “Draft Proposal for Bailout Plan” was released. Divided into twelve sections, it is the latest in a series of Bush Administration actions, which if passed in its proposed form, would further weaken our constitutional protections. Every section, beginning with Section 2, transfers virtual economic dictatorial authority into the executive branch of government in the person of the Treasury Secretary of the United States.

Section 2 gives the Secretary virtually unlimited authority to use $700 billion of taxpayer money for the purchase of mortgage-related assets.

Section 3 directs the Secretary to exercise his authority while taking into consideration prevention of the disruption and stability of financial markets and the banking system and the protection of the taxpayers. This Section provides no details of how this Bailout intends to implement these most important taxpayer protections. But rather, it leaves the methods to the discretion of the Secretary.

Section 4 requires congressional reporting while Section 8 makes any decisions taken by the Secretary under the authority granted by him by this Act not subject to review by our courts or any other administrative agency. In other words, any meaningful oversight or reduction in the authority granted to the Secretary under this Act requires a further Act of Congress.

Nowhere in this proposed Act is a prediction or other estimation of its ultimate beneficial effect. It is a $700 billion reward for bad behavior in an election year. By raising the statutory limit on the public debt, to $11.3 trillion, it puts the country on a faster track to financial insolvency. The same government that did the credit industry a favor by passing the Bankruptcy Act amendment that took effect on October 1, 2005, further encumbering and hurting our taxpayers, wants to apply a less rigorous standard to corporate bad behavior and burden the taxpayers with the bill.

I am against this Bailout. This Draft Proposal for Bailout is flawed by the cynicism and expediency with which it was drafted. It once again puts the fox into the henhouse. Those who advocated for a completely free financial market should pay a free financial market price for their advocacy. The taxpayers should not suffer the consequences.

Link to 9/20/08 Text of Draft Proposal for Bailout Plan:

http://www.nytimes.com/2008/09/21/business/21draftcnd.html?scp=12&sq=Paulson&st=cse

Recession? Don't be surprised!

2008-01-23T12:06:00.000-08:00

In this article –

http://www.cnn.com/2008/US/01/22/Dobbs.January23/index.html -

Lou Dobbs writes that a recession is on its way. According to Dobbs, what’s debatable is exactly how bad the recession will be.

What a surprise! (Sarcasm)

For the past twenty-plus years the "leadership" of the U.S. has squandered more than 100 percent of the dividend that we had from our victory of WW II. The American savings rate is negative for the first time since 1929. What is worse, the effect of organized religion on our educational system has become so pernicious that it realistically threatens our economic and security futures of our nation.

How can Americans make informed economic and educational decisions in an atmosphere where critical thinking skills are not taught, in depth liberal arts subjects are not studied and physical education that affects our concentration is eliminated from primary and secondary education curricula in favor of teaching for exams that "grade" schools?

It seems to me that we would all be better served by leaders who truly had the best interests of this country at heart instead of the leaders who are venal, greedy and caught up in narrow tribal thinking. I strongly suggest eliminating the balkanization of our educational system that is bringing this country into a moribund economic condition and set national best practices standards for everything being taught in a manner that avoids the coddling of special interest groups through financial corruption methods.

I strongly suggest removing the influence of all organized religion from our public educational system so critical thinking and in depth liberal arts education can be encouraged at every point in the educational process. Finally, reinstituting the military draft; raising a five million person Army, Navy, etc., would go a long way toward employing millions of Americans in decent paying middle class income work by supplying the military from U.S. industries while inculcating an otherwise unobtainable work ethic discipline.

Don't Worry About Foreign Investment

2007-12-20T06:59:00.000-08:00

This Associated Press story may give the impression that foreign investment companies are taking over the United States:

http://biz.yahoo.com/ap/071219/morgan_stanley_investment.html?.v=2

For those of you concerned about the infusion of foreign capital into the U.S. banking system and securities firms, don't be very concerned. The countries making the investments are merely returning some of the dollar capital that they've accumulated in their foreign reserve funds to its source.

In other words, it's a way of reducing the effect of our foreign trade deficit. Besides, what are these countries going to do? Allowing the largest banks and investment banking houses in the world to come crashing down, which would further erode the value of the U.S. dollar, would be disastrous for those countries so heavily invested in U.S. dollars as their main reserve currency.

I say, let them invest. They can't take the banks and securities firms with them when they leave and it only binds them more tightly to the U.S.

The danger that I see is the indirect influence that their investments would allow them to exert through these otherwise power house firms. Their influence would be more easily disguised by being used through U.S. citizens working in these institutions.

Perhaps our congress could look into amending the laws governing the activities of foreign agents and lobbyists to include this scenario?

Look At Both Sides

2007-12-07T11:24:00.000-08:00

http://www.miamiherald.com/news/breaking_news/story/333230.html

This Miami Herald story quotes local government officials stepping up to the plate on mortgage fraud. With an ever increasing foreclosure rate in the United States, and a good bit of it caused by out and out mortgage fraud, it seems that every other politician is now crowing about how they will solve and/or clamp down on the problem.

It's about time the penalities for mortgage fraud are increased to be more in line with the devastation this crime brings upon its victims.

There's also a problem on the lending side. Without financial institutions being willing participants in fudging mortgage application numbers, we wouldn't be seeing our economy being dragged down by the real estate debacle. It appears that lenders have been predatory in approving real estate loans based on inflated assessments, incomes and the false belief that housing values would skyrocket forever.

The same politicians hollering about real estate fraud need to take a long look at how lenders have been more than willing participants in what can only be characterized as a fraudulent application and approval process.

Who's Looking Out For Who?

2007-11-30T11:28:00.000-08:00

http://money.cnn.com/2007/11/29/real_estate/foreclosure_activity/index.htm?postversion=2007112908

This story is another example of how the banking system became greedy. Instead of looking to protect depositor’s funds over the long term, adjustable rate mortgages were handed out like candy on Halloween.

The lack of safeguards, which would have avoided this mortgage mess, the rising cases of mortgage fraud and the every increasing number of foreclosures is now quite apparent. The big picture is not pretty. The ripple effect of the anemic real estate market does not bode well for the general economy. There’s a direct correlation between rising foreclosures and talk about the economy going into a recession.

This mess could have easily been avoided if the banking system showed some self-restraint.

Stuck In Reverse?

2007-11-30T11:26:00.000-08:00

It was announced today that the nation’s big financial institutions are working with the Bush administration to freeze subprime rates to slow the foreclosure rates.

(See - http://www.portfolio.com/news-markets/top-5/2007/11/30/A-Subprime-Freeze)

The proposal is an attempt to allow some, as yet uncalculated number of homeowners to temporarily avoid mortgage interest rate re-setting and foreclosure by having additional time to seek other reasonable financing – if they qualify.

If the proposal is enacted it will, in the short term, slow the number of foreclosures. How it will play out in the long term depends if homeowners with adjustable rate mortgages can convert to fix rate mortgages.

Many of the homeowners facing potential foreclosure may not qualify for permanent traditional financing and those that used home equity loans to invest in second properties may be unable to re-finance may possibly lose both their primary residence as well as the investment property.

Who's Minding The Store?

2007-08-23T11:30:00.000-07:00

http://www.sun-sentinel.com/news/local/broward/sfl-flbworkforceone0823nbaug23,0,7290962.story
It seems to me this is another case of the guardians of the public's largesse not adequately doing their job.

Beginning with the amount of the embezzlement of $2.4 million, it equates to an average of $200,000 per year for 12 years. How was she able to divert the checks involved? Where were the organization’s internal controls? Were they adequate?

Where were the organization's auditors?

From the story, it appears to be a "lapping" scheme. Nothing very sophisticated or uncommon. A simple look at the defendant's apparent style of living and her net worth in relationship to her annual salary would have uncovered this scheme.

What was the amount of the annual theft as a percentage of the organization’s total annual revenues? Was it enough to trigger a second look at any time? Was the classic step of simply comparing the endorsements on the backs of a sampling of incoming checks with the correct account endorsements for authorized bank accounts ever taken? In other words, was any auditing "around" the computer instead of "through" the computer undertaken?

Drunk On Subprime Mortgages

2007-07-25T11:32:00.000-07:00

http://www.breitbart.com/article.php?id=070725003528.djzk2x84&show_article=1

I've heard and seen a lot of published "chatter" by some otherwise very well educated sources concerning the limited and almost "benign" effect of the subprime mortgage debacle. What strikes me as shortsighted is the seeming unwillingness of these very public experts to address the wider implications of this issue.

What about the unemployment (construction workers, real estate brokers, mortgage brokers, etc) resulting from the real estate sales and construction downturn in most of the major urban areas of the country? What about the numbers of upside down properties that cannot be sold or refinanced to prevent foreclosure or bankruptcy? What about the ballooning effect of over-building and an exploding foreclosure rate in major metropolitan areas on the available inventory of housing units and the effect of increased consequential foreclosures?

It almost seems as if they are attempting to candy coat the issue and its overall implications. It is as if the country had a countrywide party, consumed all of the alcohol getting really drunk and the hangover has not yet set in.

Pre-Paid Calling Card Blues

2007-07-24T11:31:00.000-07:00

http://www.sun-sentinel.com/business/sfl-flzprepaid0725nbjul25,0,1342002.story

Nothing new here. There have been numerous cases of calling cards with outrageous connect charges impacting the number of minutes available at published rates.

Although this is outrageous and targets those least able to afford these connect charges, the potential for for these cards being used as virtually untraceable tools in other criminal activity and terrorism cases is of more concern to me because the identity of the individual or organization activating and using these cards is not a prerequisite for their use.

Also, these cards purchased in large numbers at numerous locations for cash at the retail level have the money laundering potential for then being re-sold at a small discounted price else where.

Super Rich Pay Less

2007-07-22T11:34:00.000-07:00

www.msnbc.msn.com/id/19762041/site/newsweek

Regarding the Newsweek article entitled “Taxing The Super Rich” - I was both intrigued with and inspired by the attitude demonstrated in the quote attributed to Warren Buffett. It is my opinion that the assessment of Mr. Buffet is correct.

Large private-equity partnerships are capable of generating enormous sums of money. However, the partners of these firms are merely very high paid money managers who receive a percentage of the profits generated from the purchase and sale of the stock of publicly traded companies in exchange for their money management activities. In any other venue, the income that they generate from their money management activities would be treated as ordinary income subject to tax at the highest marginal income tax rate of 35%. It is galling that corruption at the congressional level has created a loop hole in the tax system that treats this ordinary income as long term capital gain income taxed at a maximum tax of 15%.

What is laughable and sad at the same time is the effort being marshaled by Wall Street to cast the closing of this terribly unfair loophole as an attack on the American capitalist system. Our system has never been exactly fair. But, neither is life. It just appears unseemly that a person making a billion dollar income pays tax at a rate that is lower than his own secretary. In fact our history is full of examples of instances wherein the super wealthy lobby for the benefit of paying little or no taxes on the basis that any tax that they pay somehow leads to an increase in impoverishment of those who are not super wealthy.

Apparently Mr. Buffett understands that to remain cohesive, those in power must scrupulously maintain a social contract that in fact if not in image actually supports the dreams and ambitions of those not yet in power.

Making Money Counting Beans

2007-07-16T11:36:00.000-07:00

http://money.cnn.com/2007/07/11/pf/college/starting_salaries/index.htm?postversion=2007071218

As the accounting profession evolves in response to the ever increasing level of business and transactional complications and level and quality of paperwork required to meet regulatory standards both by the profession itself and governmental bodies, it is no surprise that the value of "bean counters" has become more widely appreciated and. as a result, graduating salaries increased.

Trade Gap: We're Our Own Worst Enemy

2007-07-13T11:38:00.000-07:00

http://www.portfolio.com/news-markets/top-5/2007/07/12/Trade-Gap-Swells

Yes, as this article reports, the trade deficit is swelling. It was $60 Billion in May 2007.
The weaker dollar (the currency gap) is not the only reason for a wider trade deficit. Other causes are cheaper overseas labor and manufacturing jobs going to foreign countries where there’s less environmental and workplace regulation. To stay competitive, U.S. firms have moved manufacturing operations overseas where labor costs, including health care and retirement benefits, have less impact on the total cost of making goods.

A significant level of functional illiteracy relating to U.S. high school graduates and differences in the quality of primary and secondary education systems is also encouraging U.S. employers of manufactured goods to move operations and jobs overseas further devaluing U.S. competitiveness and the U.S. dollar. Add to all of this a weak work ethic by both labor and management and you have a recipe for the size of our trade deficit. Without real measurable improvements in U.S. primary and secondary public education, and work ethic, U.S. competitiveness and the value of the U.S. dollar will continue to erode.

Now you might think that continuing erosion of U.S. dollar buying power is somehow good for the trade deficit imbalance because it is supposed lead to more U.S. exports. I disagree! If a weak currency were the primary reason for an increasing level of exports, the diminishing value of the dollar and the increasing value of other currencies would logically lead to export increases. That has not occurred.

In fact, much of the products manufactured in the U.S. are seen by the buying public worldwide as less reliable and technologically inferior than the products of Non-U.S. competitors. I believe that national governmental and corporate managerial arrogance as reflected in engineering and design standards combined with work force inefficiencies have led to most our current situation.