SEC Charges Rio Tinto with Accounting Fraud

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The U.S. Securities and Exchange Commission has filed a complaint in the Southern District of New York alleging violations of the Securities Act and the Exchange Act for an accounting fraud related to the valuation of a coal business in Mozambique, Africa. Rio Tinto settled the investigation of the UK Financial Conduct Authority for $35.6 million (USD). Australia is also reportedly investigating the allegations. Rio Tinto is one of the world’s largest metals and mining corporations with headquarters in London, England and Melbourne, Australia.

Eric Young on Accountant Whistleblowers in Pennsylvania CPA Journal

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The Pennsylvania CPA Journal published a piece by McEldrew Young Purtell Merritt Partner Eric L. Young in its Winter 2017 edition on the changes to the International Ethics Standards Board for Accountants (IESBA) Code of Ethics. The new ethics guidelines greatly clarify the steps for accountants to take when they confront suspected noncompliance with laws and regulations (NOCLAR) during the performance of their duties for clients.

Another Example of the SEC Accounting Fraud Pursuit: Weatherford

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The SEC has announced a $140 million settlement with Weatherford International over the use of deceptive income tax accounting to inflate its earnings. Weatherford is one of the largest oil and natural gas companies internationally and is now a repeat player in settling government investigations. They were fined a few years back by the SEC for a violation of the Foreign Corrupt Practices Act.

Ethics Code Now Guides Accountant Whistleblowers


The International Ethics Standards Board for Accountants (IESBA) has revised the Code of Ethics for Professional Accountants to address ethical concerns about how to handle a client’s suspected non-compliance with laws and regulations (frequently referred to as “NOCLAR”). The changes to permit whistleblowing in the Ethics Code, which serve as guidance for professional accountants around the world, will be effective on July 15, 2017, although early adoption is permitted.

Another SEC Whistleblower in Accounting Emerges

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Bloomberg has reported that the Securities and Exchange Commission is investigating the accounting of costs and sales at Boeing of two popular aircraft after a tip by an informant to the SEC whistleblower program. In the article, Bloomberg generally suggested that program accounting might allow the aerospace industry to “smooth earnings and obscure potential losses”.

Monsanto Pays $80 Million to SEC for Accounting Issues after Whistleblower Tip

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Monsanto, the multinational agriculture company headquartered in the St. Louis area, has agreed to pay the Securities & Exchange Commission an $80 million penalty and retain an independent compliance consultant to resolve charges it misstated company earnings and violated accounting rules.

Overview of SEC Issues with Financial Disclosures and Auditors

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In a speech this week, SEC Enforcement Chief Andrew Ceresney discussed the types of wrongdoing the SEC has seen over the past few years in financial disclosures and auditing. As the securities regulator has been winding down its prosecution of the financial crimes from the Great Recession, or lack thereof according to some, the SEC has returned to its fight against accounting fraud. The SEC has more than doubled its enforcement actions for issuer reporting and disclosure since fiscal year 2013.

Accounting Fraud Continues with Bankrate Settlement, Toshiba Announcement


At the beginning of this year, the Wall Street Journal wrote an article about how the Securities and Exchange Commission was investigating a surge of cases involving accounting fraud. It looks like we might be seeing the outcomes of some of those cases soon, as suggested by the Bankrate settlement today. Bankrate, best known for its online comparison tool for mortgages and other types of bank lending, agreed to settle charges of accounting fraud brought by the SEC for $15 million.

The allegations by the SEC involved a scheme to meet analyst estimates by inflating revenue and underbooking expenses in the second quarter of 2012. The insurance and credit card divisions were asked to book additional, unjustified revenue. When the credit card division balked at the full amount, additional revenue was booked to two mortgage clients. Bankrate also had an expense account to manipulate financial results for at least a year.

Bankrate is by no means the largest company to have announced problems with its books right now. Toshiba, although a Japanese corporation, is also undergoing scrutiny by investors around the world. In fact, it has been the prime example since May, when the company withdrew its net profit estimate of $1 billion for the last fiscal year, ultimately posting a net loss of $318 million. Toshiba announced revised earnings statements for seven years today, noting that it overstated revenue by approximately $1.9 billion and profits $1.3 billion over the time period at issue.

The Japanese conglomerate’s accounting issues reportedly stemmed from divisions within the company fudging numbers in order to meet the high quarterly targets set by Toshiba’s management. There has been speculation by at least one commentator that if the practice is going on at the company, which had an excellent reputation, then it may also be going on at other companies in Japan. Some of those may be listed on a U.S. stock exchange and subject to a possible fine by the SEC for providing materially misleading information to investors.

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SEC Investigations into Navistar, ETFs while Investment Advisors fined $21.5 million

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The SEC has been busy this week with a few different news items breaking. It issued a Wells Notice to trucking company Navistar, settled charges against Taberna Capital Management for $21.5 Million, while starting its investigation into the ETF debacle and Rule 48 that may have caused the recent 1000+ point market crash on open.

Navistar Wells Notices

Navistar manufactures commercial trucks, diesel engines, school buses and chassis for motor homes, among other things. The company was previously involved in a settlement with the SEC over alleged accounting fraud from 2001 to 2005. The company was accused of overstating its pre-tax income by $137 million.

The SEC has now issued two Wells notices to the company. Wells notices, for those not familiar with them, are an announcement to the company that the SEC has concluded its investigation and is recommending an enforcement action. However, it doesn’t mean that the SEC will necessarily take action.

The precise scope of the investigation in this case is still a bit obscure as different media outlets are reporting the investigations into different violations of the law. Among the various investigations reported are:

– false or misleading statements during its quest to get EPA approval of its new engines.
– disclosures related to Chairman and CEO Daniel Ustian’s retirement in August 2012.
– potential violations of the 2010 settlement agreement.

The DOJ is also investigating Navistar on behalf of the EPA for selling engines in 2010 that did not meet EPA standards. The company claims the engines were made in 2009 and did not need to meet higher standards.

Taberna Capital Settlement

The SEC reached a settlement with Taberna concerning the diversion of client funds in a case concerning allegations that they fraudulently retained fees from collateralized debt obligations. The investment advisory firm did not disclose the conflict of interest related to the funds and their retention was not disclosed or permitted by the governing documents, according to the SEC.

Conflicts of interest and fee disclosures to investors have been a bit of a hot topic lately, with the Department of Labor considering imposing a fiduciary standard on ERISA advisors and the SEC looking into the fees and disclosures of hedge funds. This case appears to be along a similar vein.

ETFs and Rule 48

SEC Commissioner Dan Gallagher also confirmed that the SEC will look into exchange traded funds and the operation of Rule 48 in light of the panicked opening in the market last week. Rule 48 has been blamed for exacerbating the “flash crash” in ETFs last week as the market opened down on Monday. It’s unclear that there was any misconduct occurring but as the CFTC enforcement action in the 2010 flash crash shows, the securities regulators will go after market manipulation when it leads to disruption in the normal operation of trading.

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Following the Toshiba Accounting Fraud, More Scandals in Japanese Companies Expected


An article in Bloomberg View suggests that the accounting issues at Toshiba and Olympus are just the start of what could be equivalent to the more than dozen accounting frauds revealed in the United States after the Tech bubble burst in 2000. The article expressly indicates that there will probably be more revelations of problems due both to corporate governance and culture in Japanese businesses.

According to the article, most boards of Japanese public companies are made up of employees of the company. The lack of external oversight encourages them to expand employee perks instead of maximize shareholder value. The stagnant economy has allegedly led them to fake profitability in order to keep their lifestyle and bank loans going. The conclusion of this section of the article is that if one of the shining stars of the Japanese economy has been cooking the books, then the less successful companies are likely doing so as well.

The U.S. response to the scandals was the Sarbanes-Oxley Act. Japan’s Prime Minister Shinzo Abe has apparently introduced a new corporate governance code requiring outside directors on boards. The opinion piece indicates it is an important but encourages the Japanese Government to take additional action.

We were contacted last week from a reporter in Japan asking for our opinion of whistleblower law in Japan and the Toshiba scandal. The essential question was why an individual had not come forward to report this scandal before now.

Japan has a law protecting whistleblowers from retaliation that was enacted in 2006. According to our research, the fines in the law are so small that companies would rather just pay the fines than comply with the law.

Japan also hasn’t historically treated its whistleblowers well, so there was probably reluctance to come forward. The whistleblower who brought a case against Olympus under this anti-retaliation law did not fare well. This was the first to reach Japan’s highest court. Additionally, Michael Woodford, the whistleblower in the Olympus accounting scandal, was also fired after blowing the whistle. Until Japan is able to reassure whistleblowers that they will be protected, they won’t come forward to stop scandals like the one at Toshiba.

However, there are options. Employees in Japan of companies listed on a U.S. stock exchange may decide instead to avail themselves of the confidentiality of the Dodd-Frank whistleblower program instead of reporting to either the company or the Japanese government. The SEC whistleblower reward program has provided a financial incentive encouraging thousands to come forward every year to report violations of US securities laws. If the SEC takes action and recovers a monetary penalty of more than $1 million, an eligible whistleblower is due between 10 and 30 percent of the recovery.

There are nineteen examples already of whistleblowers coming forward to this program and helping to put a stop to problems before investors lost all of their money, and receiving an award. The US has received tips from around the globe about violations but since the program is still new, people are still being educated about it. Four people from overseas have received rewards.

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