Now just a few weeks ago, at the Macworld Expo in San Francisco Apple announced software upgrades to the iPhone, the AppleTV, and the iPod Touch. As expected, the iPhone and AppleTV owners weren’t charged a dime because that type of upgraded was included in the original purchase price.

However, the software update to the iPod Touch was more significant that the others with the addition of five new mobile apps—Mail, Maps, Stocks, Weather, and Notes. So Apple decided that such a significant software upgrade would require $19.99 to activate. Now I have no problem with Apple charging for the new apps. In fact, I think it adds to the perceived value that the iPod Touch has and adds even more value to the software running the iPod Touch as well as the iPhone. What I do have a problem with is everyone and their dog explaining that Apple was forced to charge for the upgrade, citing GAAP accounting principles or even worse, Sarbanes-Oxley.

Doesn’t anybody remember the $1.99 charged for the 802.11n wireless adapter last year? Everyone blamed the extra fee on accounting rules then, just as they are now. But the more stories I read, the more that this argument appears asinine. Why would any company be forced to charge for a product? Hasn’t anyone heard of Google?

The simple fact is that Apple charged $19.99 because they thought the upgrade was worth it. Whether or not you agree is up to you, but it had nothing to do with accounting principles. In fact, I went back and dug up this quote from Lynn Turner, former chief accountant of the Securities and Exchange Commission, which I thought explained the situation perfectly:

“[generally accepted accounting principles] doesn’t require you to charge squat. You charge whatever you want. GAAP doesn’t even remotely address whether or not you charge for a significant functionality change. GAAP establishes what the proper accounting is, based on what you did or didn’t charge for it.”

In this light, the revenue recognition treatment of the iPhone and AppleTV appears reasonable because the accounting rules apply to how the company dealt with the $500 it had already charged customers. In fact, it is probably in Apple’s best interest to “smooth” the earnings of the iPhone over 24 months instead of recognizing it all up front and then explaining subsequent drops in earnings. In that case, the accounting treatment used is a privilege for Apple, not a requirement.

The Denver Post, however, is reporting that fraud is still to pervasive to roll back SOX - even at the extreme level of time and cost we’re now seeing.

Their reasoning? A new study put out by the Institute for Fraud Prevention (www.theifp.org). The new study of 374 companies accused of securities fraud between 1997 and 2002, found that an average of seven people were implicated in each case, including CEOs, chief financial officers, chief operating officers, general counsels, board directors and auditors.

CEOs were implicated in nearly 90 percent of the cases examined. Next came CFOs, 78 percent. Then board directors, 40 percent; vice presidents, 36 percent; COOs, 20 percent; controllers, 19 percent; and general counsels, 7 percent.

Big accounting firms - including Arthur Andersen, KPMG, Deloitte & Touche, Ernst & Young and Price Waterhouse - were implicated in 18 percent of the cases, the study said. (Grant Thornton, which sponsored the study, is not mentioned, but it has had similar issues.)

The study really had two main points, that are really quite well-known and are the driving forces behind the Sarbanes-Oxley legislation. The first is that fraud on such a large scale is rarely perpetrated by one person. Instead, members of management collude together to commit the fraud and then hide it. The second main point is that the main corporate body put in charge of preventing fraud, the Board of Directors, did not do their job. Instead of being an independent voice of reason, too many times the Board followed whatever management told them.

The combination of collusion and the lack of checks and balances is just like gasoline on a fire.

However, the study and article fail to mention how the current corporate environment justifies keeping Sarbanes-Oxley in place. Maybe they just forgot that point.

The e-mails direct the consumer to a Web link that requests personal and financial information, such as Social Security, bank account or credit card numbers. This practice of tricking victims into revealing private personal and financial information over the Internet is known as “phishing” for information (see previous posts on phishing here and here).

You should know that the IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

The information fraudulently obtained by scammers is used to steal your identity and then your financial assets. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns to obtain refunds rightfully belonging to the victim. Just think what a thief could do with the information you normally provide to the IRS.

“Don’t be fooled by these shameless scam artists. The IRS doesn’t send unsolicited e-mail,” said IRS Commissioner Mark W. Everson. “Always exercise caution when you receive unsolicited e-mails or e-mails from senders you don’t know, and always verify the source.”

Last year, the IRS established an electronic mail box, phishing@irs.gov, to receive copies of possibly fraudulent e-mails involving misuse of the IRS name, logo or Web site for investigation. Since the establishment of the mail box, the IRS has received more than 17,700 e-mails from taxpayers reporting more than 240 separate phishing incidents. To date, investigations by the Treasury Inspector General for Tax Administration (TIGTA) have identified host sites in at least 27 different countries, as well as in the United States. Wow!

In the on-going e-mail schemes that use the IRS name, about which the IRS has warned the public before, the recipients are asked to click on links to take them to the “IRS” Web site. The links appear authentic and connect the victim to sites that resemble the genuine IRS Web site (www.irs.gov). The sites then prompt the victim for personal identifiers, credit card numbers, PIN numbers or similar financial information. The phony sites appear legitimate because most of the images and content are copied from actual pages on the genuine IRS Web site before being modified by the fraudsters to include their loaded questions.

The schemes have a few variations. In one, the bogus e-mail tells the recipient that he or she is eligible to receive a federal tax refund for a given amount (often $63.80) and sends the recipient to a Web site to complete a form to “submit the tax refund request.” The form then asks for the personal and financial information.

The IRS does not notify taxpayers of refunds via e-mail. Additionally, taxpayers do not have to complete a special form or provide detailed financial information to obtain a refund. Refunds are based on information contained on the federal income tax return filed by the taxpayer.

In another scheme, the e-mail states that the IRS’s “Antifraud Comission” (sic) has found that someone tried to pay their taxes through the Electronic Federal Tax Payment System, or EFTPS, using the e-mail recipient’s credit card and that, as a result, some of the recipient’s money was lost and the remaining “founds” (sic) were blocked. The e-mail contains visual elements copied from the genuine IRS Web site in an attempt to make the e-mail appear legitimate. The e-mail includes a link that sends the recipient to a Web site that asks the recipient to enter personal and financial information, such as SSN and account numbers, in order to unblock their funds.

The IRS does not have an Antifraud Commission, does not have the authority to freeze a taxpayer’s credit card or bank account because of potential theft or fraud perpetrated against the taxpayer, and does not use e-mail to initiate contact with taxpayers.

A third, recent scheme asks the recipient to wire thousands of dollars in order to retrieve the winnings on a lottery. One such e-mail instructed the recipient to wire $42,000 to retrieve the winnings on a British lottery. This e-mail used a simulated IRS letterhead with the actual address of an IRS office at 290 Broadway, Manhattan, NYC, in an attempt to persuade the recipient of the legitimacy of the e-mail.

The IRS does not handle lottery distributions and does not initiate contact with taxpayers via e-mail. Additionally, lottery winnings are generally reported by the winner to the IRS with his or her annual federal income tax return, at which time any taxes due must be paid.

Recipients of questionable e-mails claiming to come from the IRS should not open any attachments or click on any links contained in the e-mails. Instead, they should forward the e-mails to phishing@irs.gov (the instructions may be found on IRS.gov by entering the term phishing in the search box) or notify TIGTA’s toll-free hotline at 1-800-366-4484. The IRS and TIGTA work with the U.S. Computer Emergency Readiness Team (US-CERT) and various Internet service providers and international CERT teams to have the phishing sites taken offline as soon as they are reported.

Recently, the IRS has also become aware of commercial Internet sites that bear a striking resemblance to the real IRS site or that contain the some form of the IRS name in their address but with a .com, .net, .org or other designation in the address instead of .gov. Though these sites may not be phishing sites — that is, they may not request private financial data in an attempt to steal the consumer’s identity — the IRS urges consumers not to be misled into thinking such sites are the genuine IRS Web site or have some connection to the real IRS.

The only genuine IRS Web site is www.IRS.gov.

So please… PLEASE be careful when reading emails and browsing the internet. The internet is a wonderful and useful place, but only if you take the proper steps to protect and inform yourself! Be smart!

Right before we left I received my MacWorld magazine in the mail and took it with me to read in the car. One of the interesting little tid-bits I read was a brief review of Mac accounting programs including:

• MYOB’s AccountEdge 2006 ($299)
• MYOB’s FirstEdge 2.0 ($79)
• QuickBooks Pro 2006 ($200)

The only program I have any first-hand experience with is QuickBooks - and interestingly enough it received the worst score among the three Mac accounting programs. AccountEdge received great marks for the ability to be used by larger businesses and its ability to track inventory, time tracking, billing, purchase orders, and even the ability to enter time and billing information for both hourly employees and jobs. FirstEdge, on the other hand, is designed to handle small-business accounting basics - perfect for small business owners who don’t need advanced financial features.

Mac POS software by MerchantOS takes care the technology so you can concentrate on running your business.

Jim Wier’s company, Simplicity, was selling Snapper lawn mowers to Walmart, who had actually asked Wier to visit the Arkansas headquarters to tell him they wanted to sell more of his mowers - a lot more. But Wier concluded that continuing to sell Snapper mowers through Wal-Mart stores was, as he put it, “incompatible with our strategy.”

What strategy was that? Quality. Quality over price. Jim Wier wisely saw that Walmart sold lawn mowers only below $200 and he couldn’t bring himself to lower quality to do that.

That’s the question that motivated Jim Wier to stop doing business with Wal-Mart. Wier is too judicious to describe it this way, but he looked into a future of supplying lawn mowers and snow blowers to Wal-Mart and saw a whirlpool of lower prices, collapsing profitability, offshore manufacturing, and the gradual but irresistible corrosion of the very qualities for which Snapper was known. Jim Wier looked into the future and saw a death spiral.

I think that Jim Wier wisely realized something that many do not. Strategy is more important that short-term gains. Tens of thousands of executives try and convince Walmart to carry their product without thinking of the consequences. There are countless stories of companies that have literally gone out of business because their business revolved around their single biggest customer (Walmart) who then had intense buying power and was able to force prices lower and lower until they literally went out of business.

If you were faced with the situation, would you be big enough to say no to Walmart as well? Are there things more important than short-term profit?

Levitt argues that the federal government is plagued by some of the same problems that have been hurting corporate America, primarily a lack of transparency, accountability and independence. I can’t really do the article justice, but here are a few of my favorite quotes:

Every day the SEC would receive letters from lawmakers opposing some proposed regulatory change � letters that eerily mimicked the rhetoric of one industry trade group or another.

And when all else failed, lobbyists would cash in their chits with members of relevant House and Senate committees to threaten the SEC � an independent regulatory agency � with budget cuts to get what they wanted.

…Accountability must be restored. Currently, Congress’ ethics committees resemble some of the worst corporate boards from the mid-1990s � appointed by management and wholly dependent on it for career advancement.

But ultimately, no rule or regulation can transform an organization on its own. What’s needed is a cultural change in which those who do the bidding of lobbyists, cash in their positions on Capitol Hill for huge paychecks and accept gifts are scorned, not praised. Accomplishing that requires real leadership, and that’s something that only we � as citizens and voters � can give to ourselves.

Levitt makes some great observations from both inside and outside Washington and proposes measures that I think can do nothing but help the situation - but as he says at the end of his article, the change in attitude has to come from the voters who put the politicians there in the first place.

Traditionally auditors have used tools such as Excel, ACL, or IDEA to analyze corporate data sets during an audit; however, these software packages don’t include the tools needed to detect fraud. During the past few years Conan has assembled his own set of fraud detecting tools that he used on various engagements. He recently combined those tools into one software program - Picalo - designed with programs and scripts that can easily detect fraud. There are three things that make this program absolutely essential. First, it’s free. Second, the program has the ability to create “Detectlets” which are customized scripts that are designed to find certain types of frauds - Phantom Vendors for example. These Detectlets can then be shared through the site with everyone else that uses the program. Users can potentially be equipped with hundreds of detectlets that can be used together to detect all types of fraud.

Finally, the program is easy to use but powerful enough to customize. The initial user interface and Detectlets are dummy-proof and walk you through the process - asking where the table that contains vendor information is, for example. However, if you would like to run your own scripts or dig a little deeper into the program’s capabilities the interface easily allows you to do it from the main window.

In summary, if you are in any capacity to detect or prevent fraud, download Picalo. Try it out and come back here to comment on how it went. I can almost guarantee that you will be impressed!

Who Commits Fraud?
This one’s easy… anyone. The truth is, that fraud perpetrators are hardly distinguishable from other people. That’s why most frauds are never uncovered. This is also the reason why most people can’t believe when someone is actually accused of fraud - because most of the time it’s the guy in the next cubicle who talks too loud. In one study of characteristics of fraudsters, the perpetrators were compared with (1) prisoners and (2) college student. Can you guess which group fraudsters are more closely associated with? (if you didn’t get my subtle hint, its college students)

This fact helps us to realize a few things. Most importantly, a fraudster can be anyone - which should prompt you to exercise something accountants like to call “professional skepticism.” Basically, you should always consider any coworker or boss capable of committing fraud. This doesn’t mean that you should constantly be suspicious of everything he/she does - but it does mean that you should not trick yourself into thinking, “Oh, he’s such a great person - I’m sure he’s got a good reason for ____” This also means that it’s almost impossible to identify fraudsters during job interviews.

Why People Commit Fraud?
There are categorically three reasons why someone typically committs fraud - and these reasons make up the fraud triangle (shown here). Pressure usually comes from two places; inside the employee’s company in the form of job pressure or the pressure to meet deadlines and revenue goals, and external pressures such as family life, financial troubles, etc. The opportunity is the way that the fraudsters believe that they can get away with it - and therefore it is primarily this part of the fraud triangle that companies work to eliminate by enforcing certain types of financial controls such as segregation of duties. And rationalization almost doesn’t have to be explained - most of us are very good at it. But most of the time the argument is “My company doesn’t recognize my efforts - they owe me.”

But the interesting thing about the fraud triangle is that a fraudster doesn’t need all three pieces in order to committ fraud - in fact, he only needs one strong piece. If a company does it’s best to discourage fraud and eliminates the opportunities to committ fraud, a fraudster that has enough rationalization will find a way to get his “fair share.”

In conclusion, it is important for each of us to know how to spot a fraudster in order to help our own businesses succeed. We are the people working with these individuals on a daily basis and are more likely to uncover any fraud than any other person or auditor.

Fraud, Fraudster, Criminal, Accounting, Auditor

A Profit Pool can be defined as any point along the value-chain of an industry. In the car industry this can be car manufacturers, new car dealers, used car dealers, insurance, gas, leasing, financing, repair, etc. And by identifying the profit pools in your industry you can potentially find the deepest pool that will make your business money. For example, new car dealers have consistently posted the lowest margins in the car industry (below 5%) whereas leasing has proved to be the pool with the highest margin (over 20%). This is why car dealers will no longer give you a break if you want to pay for your car in cash because they want you to use their financing arm - that’s where the margins - and the profits - are.

Traditionally, managers have focused only on revenue strategies or market growth. However, there are different sources of profit in any business and any industry if you will take the time to identify the profit pools and align your strategy appropriately.

The classic example of this concept is the rental truck industry. The major players always struggled, just like the airline industry and the hotel industry, in making money in such a fixed-cost business. Think about it - after purchasing all those trucks that were sitting unused on the lot - how could the truck rental companies recover their investments? By competing on price. That’s why the industry had very low margins and therefore posted only marginal gains over the years. However, one player took a close look at the entire industry - mapped it out - and found a profit pool that hadn’t been tapped yet.

UHaul looked beyond the truck rental business to the accessories business - boxes, insurance, tape, storage spaces, etc. They quickly realized that after customers aggressively shopped for the lowest-cost carrier, they stopped caring about price and were “captive” to UHaul - quickly buying boxes and storage spaces that had much larger margins. UHaul then quickly bought up cheap land for storage spaces and lowered their truck rental prices - enticing customers in that would make up the rental cost loss by purchasing accessories galore. UHaul saw what others did not and made a significant profit!

However, you might be thinking to yourself, “All of the profit pools in my industry have been tapped out - everyone has found them all.” The story of computer manufacturers such as Dell will tell you otherwise. Although the chip manufacturers (Intel) and software makers (Microsoft) have the highest margins, the hardware manufacturers traditionally have the lowest margins. However, that didn’t stop Dell. Dell looked deeply into its profit pool and found a pocket of profit that it could create or tap. The companies such as Dell that recognize the variability of profit and can exploit the deepest pools will earn superior returns, even amid a sea of seemingly identical customers and products.

“Profit pools can take many shapes, depending on the economic and competitive forces at work in an industry or industry segment. And companies can use their understanding of the pool in many different ways: to identify new sources of profit in low margin industries, as U-Haul has done; to chart acquisitions and expansion strategy, as Merck has done; to decide which customers to pursue and which channels to use, as Dell has done; or to guide product, pricing, and operating decisions, as Anheuser-Busch has done. In fact, an understanding of profit-pool dynamics can help guide important decisions about every facet of a company’s operation and strategy, leading in many cases to the development of new, more profitable business models. ”

The bottom line is that if you are looking for ways to make money - even in industries that you think are exhausted - there is hope. You must use the profit pool lens to identify the profit pools and look for ways to identify unused pools, undiscovered pools, pools that could be dug deeper, or pools that need to be moved to a different location. So even though it seems as though the “Blog Network Industry” has been tapped out and that there are only a few that can make money… think again. Go ahead, take a dive into the profit pool!

This is a fairly large move for accounting firms. Traditionally, accounting firms consist of networks of member partnerships established in the countries in which they operate. For example, there’s a partnership in N. America, S. America, W. Europe, etc. with a CEO serving as a sort of global overseer. However, as the article points out, such a change to a single global partnership would not be easy.

First, liability policies in certain countries would need to be overhauled. The problem with any global company is consistency - and auditing is no exception. Among different countries the quality of auditing services is different depending on the culture, education, and leadership within that country. With a global partnership, however, the level of services would need to be consistent in order to support consistent liability policies to cover mistakes and/or a lack in due dilligence.

Personally, I think a global partnership would be stretched too thin. I believe that if the global leadership can work on improving consitency in auditing standards without consolidation then everyone would be better off. Perhaps forming some sort of global coalition to apply consistent standards could be created. But by combining the partnership structure, the partners would no longer be dealing with issues specific to their geographic area - something that they are overly-consumed with already - but instead need to be worried about the auditing practice in Italy. And that is assuming that the partnership would truly be global. More likely is the scenario that the partners would have some sort of geographic assignment within the partnership - reverting to the old way of doing things under a new organizational structure. In essence - not changing a thing.