Fakin' it: IT Factory's Stein Bagger, fooled banks, KPMG, Deloitte, and Ernst & Young

There has been quite a bit of discussion about the concept of trust in the financial world. As the world-wide economy continues to struggle, the fakes are like cockroaches scurrying about to get out of the light.

A recent article in the Wall Street Journal reveals that Denmark's Entrepreneur of the Year, Stein Bagger, was a fake. Bagger's "fake" company, IT Factory, was audited by Deloitte, and later KPMG, and even was named as IBM's Best Partner for software. According to the article, Bagger's company owes IBM about $23 million dollars. Danske Bank may be out $64 million.

Bagger's academic credentials were fake, too. Apparently he hired an artist/actress to "play the role of an official at San Francisco State University, and institution that does not exist", just in case anyone became suspicious.

"The gist of the allegations is that Mr. Bagger used a web of phantom firms to get money from banks and then used these same companies to place big purchase orders for IT Factory software and services. He was buying from himself using other people's money."

For Denmark's Entrepreneur of Year, Something Was Rotten: Stein Bagger Pleads Guilty to Faking Software Deals; His Ph.D. Was Phony, Too. -Andrew Higgins, WSJ 9/17/08
Emails From Bo Svensson to IBM Management
Email to Actress Hired to Play Role of University Official

One good thing about the struggling economy is that the cockroaches will have nowhere to hide when their houses of cards tumble down around them!

KPMG, Enron Visualizations, Fannie Mae, and New Century Financial

Not long after the Enron scandal, questionable practices involving accounting irregularities were discovered at Freddie Mac in 2003, resulting in firing of David W. Glenn, the president, and forced resignations of Leeland C.Brendsel, the chairman and CEO, and Vaughn A. Clarke, the CFO. Initially, the executives were rewarded for bad decision making.

Leeland C. Brendsel's severance package was $24 million, which was eventually protested:
Freddie Mac Severance Pay is Protested
(Alex Berensen, NY Times, 6/13/2003)

" ...Standard & Poor's cut its stock rating on Freddie Mac to avoid from hold. ''We believe the company has been less than forthright in giving investors adequate information regarding recent investigations,'' Standard & Poor's said. ''We are concerned about the magnitude of the investigation and its potential political fallout.'' "

At the same time, Fannie Mae was in trouble. An article in the NY Times, written by Jennifer Lee in 2004, outlined the findings of Federal regulators regarding significant problems in the accounting practices used by Fannie Mae related to amortization and derivatives:

Overseer Says Fannie Mae Due for a Shake-Up

"The accounting techniques used by Fannie Mae effectively resulted in off-balance sheet reserves that were used to smooth earnings to meet the expectations of financial analysts, according to the report."

KPMG was the firm that certified Fannie Mae's books at the time. Fannie Mae fired KPMG, and later sued the company, according to a 2006 NY Times article.

KPMG also certified the books of New Century Financial, which failed in 2007:
Inquiry Assails Accounting Firm in Lender's Fall

"New Century Financial, whose failure just a year ago came at the start of the credit crisis, engaged in “significant improper and imprudent practices” that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department...E-mail messages uncovered in the investigation showed that some KPMG auditors raised red flags about the accounting practices at New Century, but that the KPMG partners overseeing the audits rejected those concerns because they feared losing a client."

I wonder just what data was missing or mis-represented.