PREVENTING FRAUDULENT REPORTING: A EUROPEAN …

1 2014 PREVENTING FRAUDULENT reporting : A EUROPEAN perspective One of the objectives of the EU single market financial regulation is to increase investor protection by reducing financial statement fraud. The mandatory adoption of International Financial reporting Standards (IFRS) by the EUROPEAN Commission provides a basis for combatting FRAUDULENT financial reporting in EUROPEAN security markets. This session will provide details on the current status of financial and business reporting in Europe. You will also hear suggestions on how to prevent financial reporting fraud during a discussion of future developments and regulations.

2 KURT RAMIN, CFE, CPA Director KPR Associates Germany Currently a consultant on financial and business reporting issues, Ramin previously worked as a Director at the IFRS Foundation in London, where he introduced International Financial reporting Standards (IFRS) and XBRL to more than 80 countries. Ramin co-authored the book IFRS and XBRL: How to Improve Business reporting Through Technology and Object Tracking and he contributed to World Justice: The Rule of Law Around the World. He has also held roles with PricewaterhouseCoopers, Beiersdorf ( Nivea ), Emery Industries ( Henkel ), and Dow Corning.

3 Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without the prior consent of the FRAUDULENT reporting : A EUROPEAN perspective 2014 ACFE EUROPEAN Fraud conference 2014 1 NOTES Introduction The 2012 Report to the Nations states, Financial statement fraud, which amounts to just 8 percent of reported fraud cases, is the most costly form of occupational fraud, causing a median loss of USD 1 million.

4 These numbers vary a lot year by year, depending on the discovery of reported fraud cases and size of the companies. Famous cases for FRAUDULENT reporting range from Enron ( ) and WorldCom ( ) to Global Crossing (Bermuda), to Polly Peck (UK), Parmalat (Italy), Satyam (India), to Olympus (Japan), just to name a few ( ). Even the Lehman Brothers case can be related to FRAUDULENT financial reporting as there was a failure to disclose Repo 105 to investors. Financial statement fraud is defined as deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particular investors, and creditors (Wells: Principles of Fraud Examination, p.)

5 299). Financial misstatements are manifold, reaching from inflated revenues to overstating assets, understating liabilities, and other improper accounting ( creative accounting and cooking the books ). Most often, top executives and related parties are the engineers of FRAUDULENT financial and business reporting : from Eddie Antar ( Crazy Eddie ), Andrew Fastow, Bernard Ebbers, and Dennis Kozlowski to the most amazing Ponzi scheme of Berrnie Madoff. It is fairly easy for a top executive to reduce the price of his or her company's stock, due to information asymmetry PREVENTING FRAUDULENT reporting : A EUROPEAN perspective 2014 ACFE EUROPEAN Fraud conference 2014 2 NOTES ( one party has more or better information than the other ).

6 Cut-off manipulations and window dressing ( takeovers ) lead to valuable stock options, golden handshakes, and other opportunism. Regulators have tried to create a level playing field through the development of reporting standards (GAAP = Generally Accepted Accounting Standards) and other means to limit accounting scandals. The Securities and Exchange Commission (SEC) has been seen as a leader in the development of these tools and for effective enforcements of these regulations. Europe, for a long time, has lagged behind. This is changing with the introduction and mandate of International Financial reporting Standards (IFRS) and related technology tools, such as eXtensible Business reporting Language (XBRL).

7 The objective of the EU single market financial regulation is, as well, to increase investor protection. Appropriate infrastructures for auditing information and their enforcement are still being built. World capital markets are growing and being integrated at a fast pace. We need global standards and regulations to limit fraud in financial reporting . At the end of the session you will hear suggestions on future developments and regulations for business reporting . We will discuss trends such as the Global reporting Initiative (GRI), integrated reporting and increased use of technology tools as a means to reduce reporting fraud.

8 Examples include global payment, payroll, and expense reporting systems. Capital Markets Data The size of the global capital market is huge when compared to other investments. The market includes stocks (equities), bonds, certificates of deposit (CDs), futures and PREVENTING FRAUDULENT reporting : A EUROPEAN perspective 2014 ACFE EUROPEAN Fraud conference 2014 3 NOTES options, and other investment contracts. Opportunities for fraud are abundant. The World Federation of Exchanges (WFE, ), which moved from Paris to London in January 2014, provides valuable statistics for us to comprehend the importance of the various markets.

9 The WFE is the trade association of 62 publicly regulated stock, futures, and options exchanges. The market operators are responsible for the functioning of key components in the financial world. Let s take a look at key data for 2012. Updated numbers for 2013 are always available by the WFE at the end of January, so you can see the importance of speed for these markets. Equities The total global market capitalization is USD 55 trillion (tn) with 46, 332 global listings. The largest market capitalization is in the Americas time zone (23 tn), followed by Asia-Pacific (17 tn), and Europe/Africa/Middle East (15 tn).

10 Total value of share trading amounted to USD 49 tn. By far the largest exchange is the NYSE Euronext exchange with a market cap of USD 14 tn, followed by NASDAQ and Tokyo and London. The largest ten companies by market cap (at the fourth quarter 2013) totalled USD just over 3 trillion (Apple, Exxon, Microsoft, Google). By revenue: the largest entities are Wal-Mart, followed by most oil and automotive companies. Bonds The total turnover value for bonds (cash markets) was USD tn. By far the largest market is the PREVENTING FRAUDULENT reporting : A EUROPEAN perspective 2014 ACFE EUROPEAN Fraud conference 2014 4 NOTES Europe/Africa/Middle East (23 tn), with nearly half of it traded at the BME Spanish Exchanges.